II-VI Inc (IIVI) 2008 Q4 法說會逐字稿

Good morning. My name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the II-VI, Incorporated first fiscal year 2008 fourth quarter and year-end earnings 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, Crystal, and good morning, everyone. I am Craig Creaturo, Chief Financial Officer and Treasurer of II-VI, Incorporated. Welcome to the fourth quarter and fiscal year 2008 II-VI, Incorporated investor teleconference.

As a reminder, this teleconference is being recorded on Tuesday, August 5, 2008. The forward-looking statements we may make during this teleconference speak as of today, and we do not undertake any obligation to update these statements to reflect events or circumstances occurring after today.

Thank you, Craig, for the introduction of today's conference call. I'm Francis Kramer, President and CEO of II-VI, Incorporated. Today, I will address some of the highlights that shaped our fourth-quarter and full-year fiscal year '08 results.

First, I'm pleased to report that for continuing operations at all four of our business segments, revenues and earnings increased on average for the fourth quarter and for the full year as compared to last year 25% to 30%.

I'll talk about the various segments, and in the military and materials segment, this group realized significant bookings during the quarter with completion of negotiations at the Exotic Electro-Optics military infrared optics business, which we call EEO, on a multi-year pricing agreement for accelerated deliveries of the sapphire window shrouds for the Sniper Advanced Targeting Pod, which is flown on the F-15 and F-16 fighter aircraft. Production deliveries are scheduled to increase to 10 shrouds per month plus spares starting in the late fourth quarter fiscal year '09.

Exotic has also won multi-year orders for germanium windows from General Dynamics for the M1 Abrams tank totaling $7.7 million, of which $3 million was included in the fourth quarter bookings, as this is the amount expected to be shipped within the next 12 months in accordance with our booking policy. Another highlight at Exotic in the fourth quarter was the receipt of certification of the quality management system to ISO9001 and AS9000 100B quality standards.

The other half of the military and materials segment, the PRM subsidiary, completed its first full year of operation under II-VI ownership by meeting all of the objectives we set for the unit at the time of the acquisition.

During the fourth quarter, raw material receipts were steady for both tellurium and selenium, and we're well positioned with our raw materials supply. Prices for both tellurium and selenium have eroded 10% to 15% during the fourth quarter. This reduces the cost of our raw material and our product selling price, so it did not have a material impact on our fourth quarter profitability. Demand for our products continues to be strong, and PRM currently has a solid order backlog, with 80% of fiscal year '09 projected tellurium revenues currently under contract.

Also during the fourth quarter, PRM was qualified as a selenium supplier to II-VI infrared optics business unit, and has been awarded a contract for 40% to 60% of the total selenium requirements for fiscal year '09. This will result in a lower net operating cost for the Company, and was one of the main drivers behind our acquisition of this business one year ago.

Meanwhile, over the last two quarters we have seen increases in the cost of process chemicals at PRM. We are working diligently to review manufacturing and procurement processes to offset these increases.

The second business segment to perform well in the quarter and during the entire fiscal year is our near infrared optics, or VLOC, segment. The military and medical bookings in our YAG and optics product lines in fiscal year '08 grew by 29% compared to fiscal year '07. This included strong demand for optics used in medical and cosmetic laser applications.

During the fourth quarter, this was driven by the booking of a $2.5-million follow-on order for production of windows used in conjunction with Lasik eye surgery. As described in prior quarters, we have been able to address this volume demand with our low cost capacity in our Vietnam facility.

The UV filter business at VLOC continued to meet or exceed the required schedule for deliveries of UV filter assemblies to our prime customer. However, as discussed during last quarter's call, our current forecast projects that the delivery rate will reduce during fiscal year '09. We have been adjusting our production capacity accordingly by transferring and consolidating all production to our VLOC Florida operation.

The third business segment that performed well is the Compound Semiconductor Group, which we call CSG. In the CSG unit, the Wide Bandgap Materials Group continues to make progress improving manufacturing yields. During the quarter, we shipped our first engineering samples of semi-insulating 100-millimeter silicon carbide substrates to a commercial customer. This is further evidence that WBG can meet the expectation of the industry roadmap.

Through our emphasis on continuous quality improvements, we have obtained a qualified vendor status at one of our Asian semiconductor OEM customers. To continue on our trajectory of improving yielded throughput of the factory, we continue to invest in new tools and processes with better process control capabilities in the crystal growth and wafer fabricating area.

During the quarter, our manufacturing operation at Starkville, Mississippi, obtained ISO9001 qualification. We are optimistic about the long-term prospects for the silicon carbide industry. A recent compound semiconductor magazine article reported that the end markets for silicon carbide-based electronic devices are limited today. We believe that much of the demand currently is for R&D and qualification programs and, as a result, we continue to have limited visibility to demand and experience volatility in our order book.

At CSG's Marlow Industries subsidiary, the fourth quarter was the strongest quarter for revenues and operating margin since the telecom downturn in 2001, and the strongest since II-VI acquired the business in December 2004.

Bookings of $8 million during the quarter were flat year-over-year due primarily to the significant accelerated order taking in the record third quarter of fiscal year '08. Overall bookings growth in fiscal year '08 was 22%, driven by significant increases in the industrial market.

Revenues of $16 million for the quarter were up 61% year-over-year and 46% quarter-over-quarter. For fiscal year '08, overall revenue growth was 22%. This was a result of increased sales in defense and medical markets and significant market penetration into the industrial market as a result of our competitive cost structure, based on our Vietnam operations low-cost manufacturing base.

Marlow also launched our Economy TEC line during the fourth quarter, which further increases the breadth of our solutions and our ability to penetrate the low-end market. This capability is made possible through our strategic relationship with Fuxin.

Our largest opportunities for the coming year will be the continued growth in the industrial market and new revenue growth in the automotive and personal comfort markets. We expect to see higher growth in the telecom market as we expand our penetration into Japan and the pump laser markets.

The final business segment to highlight is the flagship IR Optics segment, where fiscal year '08 bookings grew by 20% to $162 million. This figure includes a recently added HIGHYAG subsidiary.

Integration of HIGHYAG into IR Optics continued on schedule. Our U.S. sales group is augmenting the HIGHYAG sales team, and we continue to see significant growth opportunities in the large and growing one-micron laser welding market.

A leading one-micron fiber laser manufacturer feels that the one-micron welding market is possibly as big as the cutting market, but up to now is only 20% covered by laser technology. This should give the one-micron laser system manufacturers considerable growth headroom, and we project HIGHYAG will participate in a sizable portion of this growth.

In regards to growth in II-VI's CO2 optics product lines in fiscal year '08, increases came from all areas of the globe and all segments, including OEMs, system builders and the after market.

The IR Optics unit has a strong market share in peripheral and beam-steering optics for via hole drilling of microelectronics. This year, the unit won additional business driven by strong demand for handheld consumer electronics. Industry leaders have now projected that via hole diameters in printed circuit boards down to as small as 50 microns will not be limited by [cross-talk]. This will extend the reach of carbon dioxide laser systems significantly for this important application, as higher printed circuit board material absorption and the commensurate higher processing speeds allow CO2 laser systems to outperform alternative UV systems.

In the CO2 laser deployment area, the sluggish US and decelerating European economies could impede growth during the next fiscal year. Industrial OEM accounts have reported slower order rates over the past month due primarily to weak economic conditions and lower sales in North America. Some Asian low-power CO2 system manufacturers report dampened sales levels, which contrasts to II-VI's IR Optics bookings increase in fiscal year '08 in China of 49% and in Japan of 26%.

The capacity expansion in our chemical vapor deposition processes for growing zinc selenide and zinc sulfide has started to deliver results. All new furnaces are now in production, and a significant portion of the yield problems encountered in the second half of fiscal year '07 and the early portion of fiscal year '08 have been resolved. Our zinc selenide output increased greater than 40% in the fourth quarter compared to the third quarter.

We expect to leverage this additional capacity as fiscal year '09 progresses with increased material sales for homeland security customers and others. We continue to keep a close watch on our capacity to do optical fabrication in our Asian factories, to diamond turn IR Optics, and to coat all these products. We are working to constantly optimize the CO2 laser optics throughput while watching our economic barometers.

Across the corporation, we expect to spend $20 million in capital expenditures this year. We believe we have the mix of orders and opportunities in fiscal year '09 to set new records again in many business segments. The phrase that describes what we need to do and plan to do in fiscal year '09 is to "focus on doing the things that matter." This has been a keystone of II-VI, and we realize it'll be tougher in fiscal year '09 due to U.S. elections, worldwide economic issues, and the effect all these have on costs.

Craig, I'm very confident II-VI will turn in a solid performance in fiscal year '09. That concludes my prepared comments.

Thank you, Fran. Here are the items I would like to highlight before we move into the question-and-answer portion of the call. The bookings from continuing operations for the quarter, at just over $92 million, were comparable to the record level of revenues from continuing operations of just under $92 million. Our full-year book-to-bill ratio was a healthy 1.09, with bookings outpacing revenues by $29 million.

Our June 30, 2008 backlog from continuing operations has grown to $134.5 million. The components of the June 30, 2008 backlog from continuing operations were infrared optics at $38.5 million, near-infrared optics at $27.5 million, military and materials at $46 million, and Compound Semiconductor Group at $22.5 million.

While our first fiscal quarter usually displays slight seasonality due to slowness in sales to Europe, it nevertheless appears to look like a very good start to fiscal year 2009, with revenues expecting to range between $84 million and $86 million.

The gross margin for manufactured products as a percentage of revenues from continuing operations for the quarter was 41.8%, which was close to the 42% gross margin in the prior year fourth quarter and slightly above the 41.7% gross margin in the third quarter of the just completed fiscal year. The infrared optics and near infrared optics segments showed improved gross margins from the third quarter due in part to higher sales volumes from both of these businesses.

A key contributor to our financial performance in the quarter and year ended June 30, 2008 was the military and materials segment. The Exotic Electro-Optics business within this segment set records for annual bookings and revenues and continued to make operational improvements, which led to a gross margin increase of over 500 basis points from the prior year.

The PRM business within this segment achieved its full-year revenue target of $20 million, and had its best revenue quarter as a II-VI business in the fourth quarter. PRM was accretive in each quarter during the year, and has added nearly $9 million in backlog since the date of acquisition from strong product demand for selenium- and tellurium-based products.

As Fran mentioned in his comments, the Company has been proactive in responding to an anticipated slowdown in our UV filter business and has been actively consolidating operations between our Pennsylvania and Florida facilities. As part of this process during the fourth quarter, the Company identified equipment and infrastructure that would no longer be utilized to serve this business and wrote off approximately $650,000 of capital equipment. This expense was included as part of the "other income and expense" line item on the income statement for the quarter.

The effective tax rate for the quarter from continuing operations was 17.3%, and brought the year-to-date rate to 27.5% including the gain on sale of equity investment from the second quarter and 22.4% when this transaction is excluded. The effective tax rate used for the quarter from continuing operations reflects the continual benefit of increased profitability and lower tax jurisdictions, primarily Singapore, Vietnam, China and the Philippines. This reduced the rate below the rate that was used for the nine months ended March 31, 2008.

In our press release on July 28, the Company announced that it had made a further investment in Fuxin Electronics. This investment was completed in July 2008, and totaled approximately $5 million. This additional investment raises II-VI's total equity ownership in Fuxin up to 20%. The Company anticipates moving the accounting treatment for this investment from the cost method to the equity method during the quarter ending September 30, 2008. We are pleased to take this next step with Fuxin, and believe that this investment will help us towards our goal of market leadership in thermoelectric solutions.

As we first announced on April 4, we are in the process of selling the eV PRODUCTS business and have accounted for this business as a discontinued operation in accordance with FAS-144, Accounting for the Impairment or Disposal of Long-Lived Assets. Historical and current financials and related data in today's press release have been presented on this basis. We continue to work with Roth Capital Partners to sell this business and to interact with potential buyers. This will be the extent we can elaborate on the eV sale process at this time.

Our guidance for the quarter ending September 30, 2008 and the fiscal year ending June 30, 2009 reflects the continuing operations of the Company, excluding the discontinued operations.

Fran, this concludes my prepared remarks for today. 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, 2007.

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

Thank you, sir. (OPERATOR INSTRUCTIONS). We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Pierre Maccagno with Needham.

Congratulations on the quarter, Craig and Francis.

Thanks, Pierre.

Question on the tellurium. I'm wondering if you are selling any tellurium into the solar markets?

I think we could say yes, we are. It's on an indirect basis out of our PRM subsidiary. We sell to an account who is quite a supplier of that into this thin film solar cell side of that market.

So do you see that growing significantly going forward? And also, are you planning to maybe expand the capacity of tellurium?

We're working hard right now to just improve on our yields and our processing. We're trying to get it more under control with the raw materials we're bringing in. Can we be more efficient and get that tuned--let's just say tuned up and reduce our costs? So capacity--yes, we'll move it up slowly, but our bigger effort is to get more efficient with what we are producing. Tellurium is about a 400-metric-ton market, and we have the share that we've had, which we've enjoyed prior to us buying that business, and I think right now we're just trying to get it tuned up.

The new demand for tellurium is just, as you've said, into the photovoltaic industry, and that's coming along nicely. It has had an effect and the price on tellurium raised--went up quite a bit in the January/February time period, and then it fell back about 10%, 15% in the quarter we just completed. So this additional demand for tellurium due to photovoltaics has had an effect on us already with higher prices.

So it's, I mean, positive for you in that sense, right?

Yeah, it's okay, because we buy all our raw materials from refiners who sell their sludges and we pay for the content of tellurium in it at the higher market price. But then we sell at the higher market price also.

I see. And so, just to have an idea of how large is your share here out of the 400 metric tons?

I'd really rather not say. It's a very small market, as you might sense, so there are only a handful of producers around there and it's very competitive. But we're going to work to get a bigger share.

Okay. Congratulations. And then, on the tax for '09, what are you expecting for the tax rate?

Pierre, we're looking for a tax rate probably in the 25%-ish range. We had some favorable things happen in the fourth quarter, and the big driver of that was the benefit we get from the international operations. But on a full-year basis, we're looking more at about 25% for the fiscal year '09.

Okay. Okay, thanks. I might come back later.

Okay.

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

Good morning.

Morning, Jiwon.

Could you--Fran, could you talk a little bit about this opportunity that you see on the high (inaudible) side?

Yes. As these one-micron lasers have been out for a long time, it was always that one-micron laser was a welding tool, but it wasn't as cost effective. Now, in the last three, four years, some high power fiber lasers have come out with a real cost effective beam that's just nice for welding.

So when I said earlier in my comments that the report by one of the fiber laser manufacturers is that they've studied the market and that welding is only 20% served by high-power laser technology and that their thrust will be to penetrate more, take some of the conventional plasma torch welding, all the other welding ideas (inaudible) welding and so on and try to move that towards laser processing, I think it's very credible, and we've seen it in laser cutting years ago.

Now, to pull more of the welding into this tool, this technology, it's so typical of what lasers have done. They penetrate an application, then another application, another. Welding has been penetrated by laser for 20 years, but only to the magnitude that was cost effective at that time. Now, with the fiber laser, which is lower cost operating and the beam quality needed for welding is nowhere near as difficult to achieve as for cutting, so it's a great tool. It really seems to be taking share there.

And HIGHYAG is well positioned. They've probably delivered welding laser systems--I cannot comment on how they stack up in installed base for welding laser systems, but they will be in the top handful, that's for sure.

Okay. So tagging along to that comment, if I look at your new F'09 top line guidance, I think previously you expected about $6 million of revenue contribution from HIGHYAG. Was there an upward revision from the HIGHYAG side? Or, taking it farther, where is this incremental sales opportunity coming from for '09?

Yeah, I think, Jiwon, our overall guidance is probably not granular down to a particular business line. This past year, we've done--we've only had HIGHYAG for two quarters, so we get a little bit of benefit for that in FY'09, but I would say that we haven't probably made any drastic changes or any drastic changes to the HIGHYAG guidance for the full year. I can tell you that for the year that we just completed, HIGHYAG was able to turn in a performance that was right where we expected for the full year. The revenues from HIGHYAG were right around $4 million to $5 million, and that was pretty much what we had expected before we acquired them, so we'll get a full year out of them. So we'll definitely grow from that base.

Okay. And I think investors would appreciate sort of what you see--the colors on the industrial CO2 laser traction out there.

Could you repeat the question, Jiwon:

Your traction, how you see these industrial CO2 lasers this year.

Oh, in fiscal year '09. Yes, I'll make a few comments there certainly, and I tried to allude to that. A couple of our laser OEMs, the major high power people, are seeing a slowing in their order rate. Probably the major driver of that--North America automotive. On the other hand, continued good draw of machines into the agricultural section, the John Deere and people like that that are producing corn for ethanol.

So OEMS, the two or three majors that supply into North America, where there's the most uncertainty at the moment, showing softness. That's the best way to describe it. But remember, for us, 90% or more of what we sell are to the aftermarket--through the OEMs or direct to the aftermarket. And that's such a diverse set of customers out there that we're not on this conference call trying to say that we see a big softness in our CO2 laser optics order book. We do hear from the OEMs that they're seeing a let-up, but, again, the numbers are like 55,000 units out there in the world of CO2 laser systems doing work, and coming down the assembly line has been almost 5,500 a year worldwide of this high power class.

Now, if you said, "Well, what do you think that number is going to be this year," I think people are backing it off to maybe 5,000, 4,800. But that's the assembly line only for new machines. Where we really get our businesses from the machines that are out there doing work. If that slows down, you could imagine that we would get less orders. But at this point in time, just a little softness in our U.S. aftermarket. Maybe it was off in the quarter a slight few percent compared to the prior quarters. But we haven't seen a big 10%, 20% slowdown in aftermarket business, just a slight.

Okay. And then, tagging along, your percentage of international sales for the quarter? And then, also, how about the European and the Japanese market overall?

Craig, do you want to report on the percent international?

Yes, percent international, Jiwon, was almost exactly 50% for the quarter. And again, I think that's coming back to some of the comments that Fran was making. And it's--the other part of your question is we're definitely seeing that--and I'll let Fran elaborate on it, but we're seeing the stronger growth, at least in the last several months, be outside of the US. We're seeing some nice opportunities that are not in the US, but that has kind of pushed the--almost to be somewhat perfectly balanced, with about 50% of our revenues coming from outside of the US.

Fran, go ahead.

Oh, I made the comment earlier and if this is accurate, Asia relative to China --take China as maybe the hottest market, 49% year-over-year growth for us there, and Japan's in the mid-20% range of growth. So both of those economies have been great, and I'm reporting FY '08 and really a stronger comment about the fourth quarter, so those numbers were representative of both.

In Europe, maybe not quite so robust, maybe in the 17%, 18% range growth in the German, Swiss, Belgium, UK and Italy, and those five countries just a slight slowing in our one major OEM who's in that area is one that's really announced, well, that they're going to see a softer July through December than what they've had in the last six months.

The rest of the world, the brick countries-- and I reported about China, but Brazil, India, they're starting to come online. Korea is a good spot for us right now, and Russia so-so. So we kind of have to start -- we always reported on three continents. Now, I know China is part of Asia, but that's a market by itself, and the rest of the brick countries, and so we see growth into that brick area as a nice addition to the markets we've been serving. So we're really trying to be active in those areas, and we're doing well in China.

That's very helpful. Thank you. And then, the final question is on the PRM side. How farther are we along in terms of getting that operation and the efficiency gain aspect of it sort of completely pulled through? Are we more than 50% done?

No, I wouldn't say that. I think we're just early on. We're 20%, 30%. We've really worked on the supply chain and controlling pricing and tying our pricing to our costs. The whole operation, the entire operation, we really have a lot of--over time, we expect we'll invest some capital there, and we're off on that first phase of the capital investment in the year. I think maybe I announced it at one prior meeting where we're spending $1 million just to get our laboratory.

We've got to assay all the incoming raws and certify the purity of our outgoing product, so we're spending our money on that side of it first, knowing--trying to come up with the metrology to know what we're doing. We have that, but we're getting better.

And then, all our processes out in the factory--we'll be going through some quite big changes. So I could only put us at 20%, 30% started on that project.

That's very helpful. Thank you.

Your next question comes from the line of Ian Fleischer with FBR Capital Markets.

Hi. Good morning.

Ian.

Could you just--on HIGHYAG, what specifically do they do for the one-micron market?

Okay, so they would be--really, they build a laser delivery system, laser energy delivery system. They would probably--for a user, a laser system user who has bought somebody else's laser head, a one-micron laser head, they would take their custom design capability, which really is built on a number of different standard modules. They would put these together and be able to give the delivery of whatever the power, energy that's needed at the workplace, and they would design holding fixtures.

The beam delivery is very difficult. You're sending two and three and four kilowatts of energy through a fiber optic, getting that to pass into the unit and out properly and then do the work that you want done. So fixturing on both ends of holding the work--moving the fiber-optic-guided beam, probably--maybe a robot sometimes they'll be buying to integrate into the system or use some type of XY table. So they'll put that all together as a bit of a system integrator, but using their standard modules and their know-how on how to deliver that energy.

Okay, that's helpful. And on the military businesses, could you just touch on your visibility there into fiscal '09, and maybe any thoughts on how that business will be impacted by a Democratic administration?

Well, I'll start on it. So military touches us in every one of our segments we reported on, certainly our VLOC UV product business. I mentioned earlier that that'll be ramping down, and we'll be going down from our delivery rates by about, oh, 20%, maybe even 25%, 30%, over this first half of the year. Then the second half, we'll have to see what happens there.

To our Marlow subsidiary, where we have a very nice military business, I think we've been strong all year. Right now I think we have a good backlog, and that looks to have maybe about the same pace. It's not going to be growing, but it's a steady, good business.

The Exotic business, which is 100% military, is growing, and I think I made in my comments or I tried to allude to the fact that they certainly grew this year, and we expect to grow next year. The Joint Strike Fighter is a product that we have a nice opportunity on. Those ATP shrouds for the F-15, F-16, very good, some tank windows I reported on.

Business on that side, which is long-term strategic relative to JSF and ATP, and then some tactical tank stuff, which comes back from the Gulf War, and there's going to be this reset program that looks like it'll run three, four years.

I think the Exotic business has a good visibility into a solid one- to three-year plan there, and that's irregardless, I think, of the administration. We do want to recharge up our armor and so on. We believe that'll happen either way. Now, the speed at which JSF or some of the bigger strategic programs will go on, I think an administration change might slow it down, but it's--we can only judge the first year or so.

The last one would be the fourth group that has military work, certainly is this group here where we're located in Saxonburg, these IR Optics CO2 laser optics. They do have a component of their business, maybe 5%, that's military-related, and that business looks steady to even a pickup because of this desire to reduce the number of optics that one wants to design into a system.

So this site here tends to do difficult diamond turn products for many of the primes--Lockheed Martin and so on. And that's a need that military has in their system design--get the weight down, get two or three optics designed into one optic, and this particular capability that we have at this site has been very good at helping to do that.

Okay. And when I look at your guidance for fiscal year 2009, what do you think the biggest swing factors that would put you at the high or low end of that guidance are?

I would say, Ian, that I think Fran's probably touched on some of them. I think some of the opportunities that we have with utilizing some of our offshore manufacturing, specifically within the Vietnam facility, that sure is a factor that has really helped our growth here in the last, say, 12 to 18 months, and there's definitely some upside there as well.

I think we've talked about the--we've gotten an anticipated downturn in our business for the UV filter business, and we're watching that and monitoring that, and I think we're trying to take all the right steps to make sure we're on the right footing for wherever that program ultimately lands for us. So that's something that we've tried to factor into the guidance.

And then, I would just say overall, I would say it would be kind of the--Fran touched on the infrared optics business and how well we think that that business will continue to grow. We do anticipate continued double-digit growth for that business in spite of some of the challenges that we mentioned as far as slowdown from the laser OEM. But utilization of lasers we anticipate is going to be still very healthy, and that's why we're anticipating that that group will be one of the main contributors to our growth in FY'09.

I could only add HIGHYAG. We're so new at running that business, they could perform better than what we have in our projections. And our order taking in this area of where we sell zinc selenide and zinc sulfide materials, that'd be a second upside opportunity. Maybe we've underestimated how much we'll be able to get as we're back in that market.

Okay. And just lastly, if you could just touch on the acquisition environment, what you're seeing there.

I would say it's--I think we're getting a chance to look at companies that might be compatible to II-VI. We obviously don't have anything that is imminent or that needs to be released at this time, but I think our successes as of late going outside of the U.S. has given us comfort that we should continue to look outside of the U.S. for those types of opportunities.

I would say that, overall, we are very well positioned to take advantage from a financial standpoint with a balance sheet that is incredibly healthy, with a lot of access to debt that we don't have--we hardly have anything borrowed. We are definitely in a good position to take advantage of the right opportunities.

I don't think we are feeling pressed or pressured to get into a wrong type of an acquisition. But if one comes along and it's sizable and it fits with all the criteria that we look for in an acquisition, I think we'll be--we are in very good shape to react quickly to such an opportunity. But I would say overall that I think the environment is pretty positive, especially if it's a company with the profile that we have right now.

Great. Very nice quarter. Thank you very much.

Thanks, Ian.

Your next question comes from the line of Scott Blumenthal with Emerald Advisors.

Good morning, Fran and Craig. Congratulations.

Thank you.

Craig, just following up on a couple things that Ian asked. Did you give us a CapEx number for all of 2008?

In the press release, at the very back page there, Scott, there's some detail, and we did--Fran mentioned in his prepared remarks we think we'll do about $20 million in '09, and that's coming off of about $18 million of what we did in FY'08.

Okay. Yeah, I did get the $20 million that Fran mentioned, and he did mention that you plan on putting about $1 million into PRM.

That is correct.

Can you talk about where you see the other $19 million for 2009?

I think it's definitely scattered across--I'll try to start it and let Fran add to it. I know specifically in our infrared optics business, one of the items that was mentioned before, our diamond turning business, and that's a business that we have now not only a facility here in Pennsylvania, but also capabilities as well in Singapore. And there is definitely planned investment in that business over the next six months in both of those locations. So that will be one of the areas that we'll be utilizing those capital dollars.

Within the rest of the infrared optics business, just kind of continued investment in coating capability, and again, that's also a dual location, both in Pennsylvania as well as in Singapore.

And I would say, around the Company, there's probably not any real--too many large bricks-and-mortar type jobs that we have going on. We had a few of those within the last 12 to 24 months, especially here in Saxonburg with the CVD--the crystal growth area for our infrared optics business. But most of it is more or less, Scott, equipment and just added capacity within existing operations, not so much too many bricks-and-mortar projects going on.

Fran, did you want to add to that?

I'll just try to give a general overview of it. If you said, "Where's our capital going for that IR segment," it's probably 45% to 50% of our capital.

Right.

Our other three business segments might each take 15%, and that's the way it's going to fall out. Certainly, we find a little bit more of our money going toward IT type equipment, communication equipment. With our eight or nine factories around the world, we're really trying to hone in and optimize and fine tune and be in touch, so IT is taking a little bit more.

Okay, that's really helpful. And I guess I'm going to follow up on one question that Jiwon asked. Can you talk about capacity utilization over at PRM and where you feel you are right now? I understand you're going to put some money in there to improve the operations, but where do you feel you are now? Where do you feel that you'll be able to get to? And I guess a follow-on to that would be talk about any other customer qualifications and interest that you might have in some of the selenium and tellurium recycled products you're putting through there.

Okay. So I would comment that capacity utilization PRM, probably in the 80%, 85%. Could we take and produce more product by adding more machinery? Yes, that's what we would need, but that's not necessarily the limiter. The limiter is the supply line. It's a byproduct material, whether it's copper telluride, for example, that we get from one of our refiners. There's only so much tellurium and selenium raw materials out there, so it's getting a good handle on those raw materials coming into our factory. And because it's been in a long-established industry, one has a rough time jumping in and saying, "I'm going to double my amount of raw material supply coming in."

You're really buying somebody's waste, and when you're buying somebody's waste, they're not in a real big hurry to get it to you, to get yourself expedite--or a higher price won't even move it. It's really managed by the waste side of many of these businesses, so it's a little bit different amount of intensity that you can apply to improve your incoming supply. You can apply a lot of intensity, but it doesn't have much reaction. So what I'm saying is we're quite tied to the amount of raw material supply we can bring in. Our factory could go up another 10%, 15%, 20% in output. We could do that either -- flex rather quickly with more personnel, a little bit more equipment. But at the moment, I think we're trying to be smarter and saying let's just figure this out. Let's tune up our processes. Let's get a little bit better supply line side, and we'll get a little bit more efficiency, not overcome it by adding capital or manpower.

I think we're knowing that we could sell more, but we're not sure the effort to get more at the moment is the spot to go. We just don't have the yields and the--I mentioned earlier that our chemicals--our processing chemicals cost is going up quite a bit right now. We want to figure that out. So are we in a slight growth mode for PRM? We're not trying to push it at a big rate. I think we'll figure that out in the next six to twenty months or something like that.

Your CapEx at PRM is going to be in equipment that analyzes incoming raw materials or improves yields, or both?

Probably three things. Yes, incoming and outgoing materials, some new processing equipment to improve yields. And third, at our yard down in the Philippines, which -- this factory is more like in a yard. It has a number of different buildings within the yard, each one which we call a different plant, whether it's sodium selenate, sodium selenite plant. We have a handful of plants, and these are rather big two-story buildings in which a lot of processing tanks and so on exist.

We have one new plant that we're building there. It was part of the plan when we bought the business. It was under way at the time, and now it's being outfitted, so the buildings there, the tanks and the processing are moving in. And that will be our objective, to make the plants that we have there--and you could describe them as three or four major plants within the yard--to at least take one of them in the next year and a half and get it into a more efficient operation.

Okay. And is there any reason why a user of tellurium or selenium would need virgin rather than recycled?

I don't know if one could tell the difference. It's just--so many of the selenium/tellurium products are--once processed, you wouldn't be able--we sell return from this site we just got, and I announced that during my comments, that the zinc selenide scraps that come from here go to PRM, turned into selenium, and that selenium will be sold by PRM to whatever customer they want. It's not critical for us to get that back, and it wouldn't be any difference in our process whether we got that selenium back or some selenium that came from some raw -- from a Mexican refinery, for example.

Okay. That's really helpful. And I guess my last question is, Craig, I understand that you aren't able to predict the future, but can you give us an idea in your budgeting and forecasting process kind of what you assumed to be average pricing for tellurium and selenium for the coming year?

I think we--Scott, it's a good question. It's something that's obviously a factor that we look at quite often in that business, because as Fran was describing, that not only impacts the top line but also the bottom line as well. And I would say that kind of we are no great predictors of that business, and I would say that whatever we come up with as far as the end of the quarter and whatever it is right around the quarter time, that's probably what we use. So I don't think we have any great assumptions, either positively or negatively, based on the price of selenium and tellurium. So I think we're anticipating, at least in our guidance--our guidance anticipates that the pricing will be fairly stable from what it ended at the end of June.

Yes, we've kind of taken the idea that we cannot predict that price. It's a minor metal. It's very, very limited trading. A 400-metric-ton market is very small. We'll be smarter to spend our time managing that margin, the difference between the cost and the sell price on either of those two. That's where--we just do not have any way to predict it if photovoltaic takes a moratorium or even selenium. I mean, one of the thin film photovoltaic approaches is called CIGS, C-I-G-S--copper indium gallium selenide, which takes selenium. If that would take some more of the supply out in the marketplace, the selenium will take a run up.

So there are just too many factors for us to predict the pricing, and we're trying to figure out how to protect ourselves, whether it goes up or down, spend our time on that rather than determining where it's going to go.

Okay, understood. That's very good information. Thank you, and congratulations again.

Thank you.

You have a follow-up question from Jiwon Lee with Sidoti & Company.

Hi. One of them was the '09 CapEx upward revision, which has been answered. And the other one, I don't know whether you have an answer on this yet, but one of your [raw] crystal competitors is being bought out by an even larger company. And I understand that their strength was on the military side rather than the commercial side, but is there any sort of an early expectation or indication that the market dynamics may shift a little bit as a result of the acquisition?

I don't think we have seen any change in their behavior. I don't think we--we haven't really assumed that--it is a small division of that company, and I don't think the ownership by another large company would change, reach that far down into the company. But you're right, they supply a lot of the materials. CVD produced chemical vapor deposition-produced materials for military and defense, where we really use our material in this commercial CO2 laser optics area.

Okay, fair enough. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS). At this time, presenters, there are no further questions. Do you have any closing remarks?

Yes, I do. If there are no further questions, I'd like to thank everyone for participating today. Our next earnings release for the quarter ending September 30, 2008 is tentatively scheduled for before the market opens on Tuesday, October 21, with a conference call to fall that same day at 9:00 Eastern Time. Thank you for participating in today's conference call.

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