II-VI Incorporated

Ladies and gentlemen, thank you for standing by and welcome to the 2-6 Incorporated FY22 second quarter earnings call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to your host, Mary Jane Raymond. You may begin.

Thank you, Kevin, and good morning. I'm Mary Jane Raymond, the Chief Financial Officer here at 2-6 Incorporated. Welcome to our earnings call today for the second quarter of fiscal year 2022. With me today on the call are Dr. Chuck Matera, our chair and chief executive officer, and Dr. Giovanni Barbarossa, our chief strategy officer and the president of the compound semiconductor segment. This call is being recorded on Wednesday, February 9th, 2022. Our press release and our updated investor presentation are available on the Investor Relations tab of the website, ii-vi.com. As a reminder, our remarks today may contain forward-looking statements. These remarks are given in the context of today only. They are subject to various risk factors and subject to change, possibly materially. We do not undertake any obligation to update these statements to reflect events subsequent to today, except as required by law. A list of our known material risk factors can be found in our Form 10-K for the year ended June 30th, 2021, together with our subsequent filings with the SEC. Our remarks today do not constitute an offer to sell, nor do they constitute a solicitation of an offer to buy any securities. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the United States Securities Act of 1933, as amended. Finally, with respect to today's call, we will also present some non-GAAP measures for which the reconciliations to GAAP are found at the end of each document that includes those measures, such as the press release or the investor presentation. With that, let me turn the call over to Dr. Chuck Matera. Chuck?

Thanks, Mary Jane. Good morning, everyone, and thanks for joining. During the quarter, we were once again able to look beyond the well-known challenges of the day and got the job done. Clearly, our application-specific materials, components, and subsystem technologies underpinning multiple growth drivers intersected perfectly with the sustained demand that resulted from the strong market momentum. We delivered a solid second quarter as we helped our global customers accelerate their additions of capacity, and enable the availability of new features for mobile, intelligent, and electric infrastructures. Among those drivers, we are underpinning the convergence of communications, computing, and connected consumer and automotive devices. These are revolutionizing how we interact with each other at work, at leisure, and while learning through the Internet of Things and the metaverse. I will have more to say about how we are enabling the electrification of transportation, as well as our vital contributions to the resolution of the IC shortages later in my remarks. Now, to provide further color on the quarter, for the first time in our history, we booked over $1 billion in orders. Our backlog grew 58% year-over-year to a record 1.7 billion and was up 300 million sequentially and 600 million year-over-year. This backlog is supported by our capacity additions along with the planned launches of new products from both segments. This gives us confidence in our double-digit growth projections beyond this fiscal year that we will refer to in today's call. Our revenues were $807 million within our guidance, and but for increased supply line and COVID related constraints that accelerated throughout the quarter, we would have cleared the high end of our revenue guidance. The two largest drivers of the revenue gaps were from RODEMs and transceivers. our non-gap EPS of 92 cents was at the top end of our guidance. This was enabled by a strong focus on controlling cost increases and on ratcheting up factory utilization and output. This cost control, in turn, required a continuous optimization of the supply chain, including building inventories at strategic points along our vertically integrated supply chain. This resulted in our inventory levels increasing again in the quarter as we continued our focus on serving our customers in the face of COVID and to mitigate the impact of the extended lead times and other related disruptions from the supply chain. In communications, we experienced increased demand for Datacom transceivers and open line systems driven by the cloud and large enterprise customers. We continue to make inroads into serving the hyperscalers with our exceptional progress on 200G and 400G output and our early ramps for 800G for very large and growing strategic customers. We also saw a strong increase in demand from the telecom equipment customers and a clear sign of the start of a Rotem demand ramp that we expect will accelerate during calendar year 22 as the increased availability of ICs materializes from legacy supply lines and new ones that we are collaborating with closely along with our customers to accelerate qualification. The beginning of a multi-year upgrade of the U.S. cable TV infrastructure provided for a large and long-term contract and is also among our exciting growth drivers based on major fiber deep initiatives to improve rural broadband access in the US. Turning to the rest of the business, we believe that we are still in the early part of broad and multi-year adoption cycles across all of our other end markets too. Increasingly, our customers are leveraging our breakthrough solutions, our large and resilient footprint, and our manufacturing expertise at scale. Our ongoing investments in R&D facilities expansions and capital equipment reflect our confidence in the long-term nature of our opportunity and our relentless focus on tying together our strategy with our execution. Our capital allocation of R&D and CAPEX this year is more heavily weighted to the compound semiconductor segment given our growth aspirations for FY23 and 24. Now, in industrial, again this quarter, we experienced sustained increases in orders and demand for our laser components, including for CO2 lasers and fiber lasers. We experienced explosive increases in orders from the semi-cap equipment ecosystem, including from equipment OEMs and their Tier 1 suppliers. Our differentiated position met accelerated demand from the OEMs and the semi-cap equipment front end and back end wafer fab and laser based inspection platforms. These expansions have spurred further increases in our already large manufacturing capacity investments, and these will accelerate throughout calendar year 22. We maintain intimate partnerships with leading companies up and down this ecosystem where we are providing unique and vital components which are sourced solely from two six including and especially for the euv lithography tool supply chain this is helping the leading ic producers have confidence in the returns on their investments as they expand the much needed capacity in order to eventually clear the current ic supply chain shortages let me spend a minute on our recent success qualifying 1200-volt silicon carbide MOSFETs for automotive applications using our substrates in the device technology we licensed from GE. I am excited about this important milestone that we met ahead of an aggressive schedule. I am pleased that we also entered into a new agreement with GE to deepen our relationship in order to accelerate the adoption of our silicon carbide technology and products. We will continue to focus on shortening our time to market and underpinning this platform with capacity and diameter expansions to help position our company as a market leader. The electrification of transportation will contribute substantially to the world's net zero sustainability goals, and as part of our corporate social responsibility, we are proudly positioning ourselves to substantially contribute to it. Looking ahead, we expect the totality of the company's investments to contribute to the sustained growth in FY22, and we expect to significantly drive our target of double-digit organic growth in both 2023 and 2024 by a combination of continued market growth and share gains across our photonic solutions and compound semiconductors customers. We will continue to work tirelessly to mitigate the impact to our customers and differentiate ourselves with capacity additions while we maintain a good balance with our short-term cash management objectives. We expect the stress on our supply chain to continue to constrain our output and will have the effect of increasing some of our costs. Therefore, we have a major initiative across the company to increase prices at least as a partial offset. Finally, on the pending acquisition of Coherent. Nearly a year ago, we announced that our analysis pointed to the long-term value of acquiring Coherent. This was part of a strategy to accelerate our penetration into new markets and sustain our profitable revenue growth. We envisioned a combined company that would have access to complementary growth drivers a broader endowment of innovations in scale, and productivity and efficiency gains captured as going forward synergies. This is only one part of the rewards that I believe lie ahead. Pre-closing planning has proceeded nicely, and we are working the final details necessary for a successful integration. The pending acquisition of Coherent has received the approval or indication of imminent approval from three out of four global antitrust regulatory authorities, which approvals are conditions to the closing of the transaction. In China, the remaining jurisdiction, 2-6 and Coherent, are continuing to work constructively with the State Administration for Market Regulation, or SAMR, and we now anticipate closing the acquisition by the middle of the second calendar quarter of 2022. It is a time of great anticipation and responsibility for us. And we are ready and set to go as we gear up to start our engines. With that, I will turn it over to Dr. Giovanni Barbarossa. Giovanni.