Good day, ladies and gentlemen. And welcome to the II-VI Incorporated Fiscal Year 2013 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Craig Creaturo, CFO and Treasurer. Please go ahead, sir.

Thank you, Jonathan, and good morning, everyone. I am Craig Creaturo, Chief Financial Officer and Treasurer of II-VI Incorporated. Thank you for participating in the first quarter fiscal year 2013 II-VI Incorporated investor teleconference. As a reminder, this teleconference is being recorded on Tuesday, October 23, 2012. 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. I'm Francis Kramer, President and CEO of II-VI Incorporated. My prepared remarks today will discuss operational results for each of our businesses. During the just completed quarter, we experienced softness in most of the markets we serve and we are responding to orders for shorter time durations and normal. While our first fiscal quarter is normally one of our lighter bookings quarters of the year, the quarter we just completed was even lighter than we had projected. Resulting impact on our backlog drove the reductions to our outlook for the fiscal year. In spite of these market conditions, our businesses did have some bright spots that I’ll highlight in these comments. During the first quarter our Infrared Optics segment, which includes HIGHYAG had bookings of $47.5 million, which is down 7% compared to the first quarter of fiscal year ’12, primarily due to reductions and new laser build especially in Japan. We did not see reductions in bookings from the aftermarket especially in North America, which indicates steady laser utilization. However, military spending is down in the U.S. due to the proposed sequestration and budget cut, and the uncertainty related to the upcoming election. For our Infrared Optics business excluding HIGHYAG in the U.S. orders from domestic OEMs decreased 15% quarter-over-quarter. This was a result of timing of blanket orders from high-power OEM, despite the orders decrease shipments to the high-power OEMs increased 17% quarter-over-quarter. Bookings from power OEMs were flat quarter-over-quarter and shipments declined 32%. The low power market is expected to be weak into the third quarter due to inventory adjustments in global economic conditions. European bookings for the first quarter were down 14% compared to the fourth quarter due to a delay in receiving a large diamond order that will be receive in the…

Thank you, Franc. Here are the items I would like to highlight before we open up the question-and-answer portion of the call. As we announced on October 3, 2012, effective for the beginning of fiscal year 2013, the company’s VLOC business unit is now included in Military & Materials segment for reporting purposes. This business is currently 100% dedicated to military-related products and is now being managed by the leadership of our Military & Materials segment. Prior to July 1, 2012, VLOC was included in the company near-infrared optics reporting segment. All current and prior year information presented in our earnings release has been adjusted to reflect this change. As described in today's press release, consolidated bookings for the quarter-ended September 30, 2012 were $114.4 million, 12% lower than the same quarter last fiscal year. Total company backlog at September 30, 2012 was $161 million, which was down 10% or $18 million from the June 30, 2012 backlog level. The components of the backlog at September 30, 2012 were Infrared Optics at $44.5 million, Near-Infrared Optics at $36 million, Military & Materials at $58.5 million and Advanced Products Group at $22 million. During the just concluded quarter, we saw signs of stability in the index pricing for both tellurium and selenium. In addition, we have taken measures to reduce our inventories of these raw materials. As of September 30, 2012, the index price was $110 per kilogram for tellurium and $43 per pound for selenium. During the current quarter, the company recorded a lower of cost or market adjustments of $0.5 million or $0.01 earnings per share loss. Profitability was also negatively impacted during the quarter from a strategic initiative to penetrate new markets for our tellurium material easing aggressive sale prices. As we disclosed in today's press release, during…

(Operator Instructions) Our first question comes from the line of Jim Ricchiuti from Needham & Company. Your question, please.

On the comment that you made about the aftermarket business in North America and IR Optics, can you characterize that business? It sound like it was relatively stable in the quarter, so it doesn’t sound like you saw much in the way of weakness there, certainly versus the OEM business?

Exactly, right, Jim. We found that steady and the order intake we get in that aftermarket business is such a good indicator of how lasers are being utilized throughout the U.S. and it was steady which is a nice surprise let’s say because with all other factors being a little bit dormant like this year, you might think it would be not that good.

How does that compare with I would assume there was a different scenario in Europe and what you’re seeing in Asia?

Yeah. Europe is a little slower. And I think I made that comment a little slower. Asia holds in there pretty well except for Japan which has been slow now for what three to four quarter, so relative quarter-over-quarter about the same for Japan. But the one that picks up slowly, you think it be going more rapidly is China. It’s going well because they’ve deployed so many lasers. So, for us we’re picking up more and more business. But I think its picking up business that was lasers. So we put out there two and three years ago and now the people are buying the optics as opposed to having them come from their OEMs.

Okay. And just a follow-up, are there trends that you are seeing in that portion of the business, it’s early in the quarter, but what can you say about what you are seeing thus far in Q2?

I think we are about on with what we just guided towards I think it will be an interesting quarter. It’s going to be up and down volatile. Our weeks, good week and a bad week and good week -- that’s been really we’ve been having here in the last two, three months and I think its going to be that way for while.

Okay. Thanks. I will jump back in the queue.

Thank you. Our next question comes from the line of Avinash Kant from D.A. Davidson & Company. Your question please.

Good morning, Craig.

Good morning.

Good morning.

First question, in terms of the guidance that you have given for Q2, could you give us some idea how do you see the different business segment doing like, which one is going to be up and which one is going to be down?

I would say Avinash, we are looking at a quarter that overall is shaping up to be very similar to the quarter we just completed. I would say, when you look at the kind of the outlook that we have. We do see some puts and takes. I think -- and during Franc’s comments, we talked about the continued strength that we are seeing in our telecom businesses, but we do expect that to be relatively flat. We do expect some little bit further strengthening of some of our other businesses for instance HIGHYAG. We also have looked at all the other different businesses as well. And I think we are looking at a quarter that again shaping up to be pretty similar maybe even pretty similar business-by-business from the quarter we just completed.

Little further, which we really done always go describe it but we might have a little bit of improvement in Military & Materials. The rockiness on the price in selenium and tellurium might have bottomed out when we were having that feeling so that might take away that $500,000 hit we took this quarter, we might not have that next quarter. And Advanced Product Group, I would like to think we can do some better there because we really have cut our cost. And we usually don’t go into a big discussion about where we’re cutting costs and a lot of people line up for a big cost program. We try to do a constantly among all of our 11 businesses, so we stay in tune. So, we don’t too much cost compared to our revenue. And we now have to make another couple of adjustments in our Advanced Product Group and both our Marlow in our AP unit and our WBG Group. So I think we do a little better there.

Okay. And if you could comment a little bit about the JSF program, of course what are you seeing at this point and what kind of growth should we expect on a kind of year-over-year basis?

I think Avinash, we’re seeing continued demand there. We continue to be a good provider of the sapphire panels that we are providing to our customers that demand as has been well documented is over the last couple of years has been slower demand. But it isn’t demand what we’re continuing to be the sole provider on that program for the time being. And I would say that our feedback from our performance from the customer is very, very strong and our team at EEO is doing an excellent job of delivering very tight tolerant panels for very critical military component. And so I think we are doing very well there, continuing to ramp that program up although be it at that lower level than what we’re expected, say one or two or three years ago.

I have to say, so we are close to the running rate that we are going to plateau add for a maybe a couple of years. And the dilemma in what’s going to end up being funded after this election in the next big budgeting round, so I think we can say FY '13 and FY '14 and early FY '15 will produce that. And we are close to that rate, after that it’s not able to – we can not project what will happen but it’s not likely it will change. If it does, it won’t be upward.

And final question just checking, I think Franc was saying that you expect Photop business to be up 3% that was on a revenue basis sequentially?

I think we said it, go back check that comment, I think it was that they did grow 3% in Q1, FY '13, Avinash versus Q4 of FY '12 was the comment.

Okay. And what do you expect it to do the next quarter, kind of, stay at these levels?

I think I had a comment in there. Then in the second quarter, expect revenues to be flat as compared to the first quarter and probably the areas that look better because of the combination of Photop with Aegis are optical channel monitors, which were producing more other Photop in the combiners. I think those might be products that might pickup a little bit. It’s hard to predict our optical -- our passive optical component business out of China. We’ve had a nice run here for the last 90 days or so whether that will continue that’s. It might continue, might fall here that’s the part because if it would continue I think we would do a little bit better in Photop.

Perfect. Thank you so much.

Thank you. Our next question comes from the line of Jiwon Lee from Sidoti & Company. Your question please.

Thanks.

Good morning.

I just wanted to circle back on your -- around fiscal '13 outlook. Obviously it implies our fairly substantial rebound in the second half and just wanted to know how do we get there?

I think we do have again some use of where the strengthening of our business will be. We coupled -- that we touched on, couple greater spots relative to new products including for instance our various materials that we mentioned at PRM that would be kicking in, in the latter half of the year, continued demand from diamond optics and I think overall just a continuing strength that primarily from our industrial businesses, where we are expecting that to be stronger in second half. I think, we also have viewpoint past second quarter that we should be able to see some further growth from our Photop and Aegis businesses as well. So I think the areas where you’re going to see that strength is primarily in the industrial facing businesses and maybe to a lesser extend within Photop and Aegis.

And staying on the diamond optics, just wanted to get your thoughts, early thoughts on how your diamond window business with Cymer in light of, their acquisition may change positively, negatively over the same?

I think that whole business opportunity is very good for us. We’ve been really closely align with Cymer and their whole supply chain which gets all the way to ASML and Zeiss and others in the chain. So we are well aligned and this bias is probably good. Because the money to do all this is pretty expensive and we have been added for a number of years that we see a very, very good opportunity. We are producing 3 and 4-inch diameter diamond optics. So these are very, very large and the prices are very, very high. And so the amount of money that’s been invested to maybe put out half a dozen of these systems in the next 12 months or 2012. A lot of money and this helps the whole establishment get funded because everybody at times funding themselves, and we’ve been funding ourselves for many times. So I think its going to help. I’m not sure it changes how that money is flows down to us in this part of the food chain right away. But we do have good steady orders and we’ve got a lot of work to do to protect our product a little bit more. And I think everybody in the food chain does because the wafers per hour that can be produced right now are just not where it needs to be. So very, very good opportunity, those, I think, we feel optimistic because of that investment.

Terrific. And Franc, just staying on the IR Optics side, the order decline that you saw and you continued to see into this quarter. How does that sort of a feel to you? Does that feel like your key customers are just temporarily tightening their cost or does that feel like everybody is trying to kind just to sustain lower demand?

I think it’s a just volatility, I mean, because we are so, CO2 lasers that are out there, doing work there, so tuned into the world-wide economy. If the economy is down, there is a less utilization, if it’s up, we are so closely align to consumer spending also that it’s hard to predict. So we have to say, it’s volatile, because it feel right. I’m afraid it feels the way it is with the economy. It feels that way. We don’t have an idea, that there is anything substantially going wrong, just people don’t have the demand for the goods that they run the lasers for and that’s what kind of the OEMs are saying, when they are turning down their assembly line, they are producing less. So that’s what they are telling us. They are going to be producing less. So if suppose the 5000 units a year, they might be turned them to 4. I don’t have that exact number, but we will by the next meeting, how things are being turned down. But so the main assembly line is turning down that’s probably 5% to 10% of our optics demand. The other 90% is from this aftermarket laser utilization and people are starting to see their capacities more than adequate. They are going to stop buying new machines and we are seeing the tip of that.

Okay. Great. Very good. And on the margin front questions. I noticed your SG&A has spiked a little bit during the quarter. I wonder why that is and on the second question on the margin, despite the revenue pressure your margin, although at a smaller base has been ticking up. How should we view that product margins moving forward throughout the fiscal 2013?

Yeah. I would say, we had some SG&A items. More I think from a SG&A perspective and it was just slightly up from where we were running. In the June quarter, we did about $25 million of SG&A in that quarter. We did $26.6 million in the September quarter, the quarter we just completed. I would say there were a few items in there. From a general administrative standpoint, we have been active in several different areas and we have been continuing for acquisitions and spending dollars on those fronts. And I would say that there is nothing too unusual about that again, I think pretty much a consistent level there or down a little bit. The revenues down a little bit, kind of highlighted that as a percentage of sales going up, but still right around that 20%, 18%, 19%, 20% usually you will see that’s where that SG&A level is, and we were right end at the top end of that level right around 20% or so. For the gross margin, we did see an improvement overall in gross margin part of that and part of that is due to a lighter low, if you’ve heard of the lower cost to marketing adjustment we had at PRM. So we were at about 37% this quarter. We do feel like that’s probably about where we will be ranging for the year, maybe a little bit higher than that. I think we go back to our original guidance for the fiscal year, we said that we will be more so in the range of 38%, 39%, so somewhere in that 30%, kind of 37% to 38% to 39% range, I think is where we are going to be for the fiscal year.

Okay.

Other thing I would add to what Craig is, we had to take the M&A expenses and SG&A and this PRM right-off. But we had another charge you might want to mention. Craig, we took a provision and news that came to us in the last couple days, one of our accounts it’s going to go probably out of business and we had quite a receivable promise. We had to take a provision on that, could you talk about that?

Yeah. We did really towards right at the end of the reporting process here. We did feel prudent to make a reserve for one of our customers for our silicon carbide, WBG business. This company as it was, I believe it was probably announced yesterday by another public company and they will be seizing a winding down operations. The company is [semi filed] and we thought it’s prudent to take some reserves, and that also impacted the SG&A for the quarter as well.

Okay. Thanks for the color and lastly for me, as much as you can, could you turn a little sort of, can actually put the sense for, is opportunity tied to the rare earth business once it starts kind of moving?

Would you repeat the question, please?

The market opportunity or your revenue opportunities tied to this rare earth.

Yeah. Okay. Yeah. And I do think we have put it in our comments that we have to reduce our, we’ll expect to maybe $8 million to $10 million of revenue this fiscal year and we had to reduce that to $5 million to $7 million just because we are now at three and a five months into the year. I do think second half of the year, we will be shipping on that much better. We had some learning curve problems that we are starting to get behind to us, that we can make the product and we can do it in very high purities, which is what we’ve been working hard to do, and now we’ve cleared the hurdle that we can meet specification. Now to ramp that to the volume and we need to ship by month for the next six months, that will be our challenge here in the last couple months. I think it’s a good platform for us and the opportunity is very good. And, can we prolate that into another rare earth product in a few years? Maybe that’s the reason why we are wanting to understand how to produce these products and we are gaining on the understanding.

Very good. Thank you very much.

You are welcome.

Your next question comes from the line of Mark Douglass from Longbow Research. Your question, please.

Hi. Good morning, gentlemen.

Hi, Mark.

Can you talk to the IR Optics margins, is that being impacted just from say pricing out there to a more difficult price environment or actually is it because of diamond windows or investments you are having to making environment windows, is that driving it down temporarily and so you get those profits as figured out. Discuss that a little bit?

Yeah. I can start it and I may be let Franc add to it, Mark. I think you’ve got a couple of factors in there, you touched on one and that is diamond optics and that’s spending dollars on their own and working on that and ramping that product line up. I think every thing you’re starting to see in our Infrared Optics business is that these higher cost selenium starting to roll through the products that we make. We obviously make quite a number of transmissive optics, mostly made out of zinc selenide that we grow here in Saxonburg and the selenium cost inside that zinc selenide has increased quite a bit. And that’s been a phenomenon that we’ve been seeing the increase in pricing of that material over last couple of years, now starting to see a flow through in a heavier way in our production costs. So I think that’s the other component that we have in there as well and I’ll let Franc add to that as well.

Mark, just because how we reported in segment reporting in Infrared Optics, we include in the IR optics segment our HIGHYAG subsidiary or joint venture. And that has a lower margins than IR. So as we progress this year, HIGHYAGs had nice growth and it’s been just a little bit lower margins which does have a weighted effect. And I think maybe in overall IR might be down a percent gross margin from where we’d like to be, something like that.

Okay. Thank you.

Thank you. Our next question is a follow-up question from the line of Jim Ricchiuti from Needham & Company. Your question please.

You touched on the strength you’re seeing at Aegis from the fiber lasers combiners and then I thought you made a comment. And I just wanted to pursue that a little bit about how this is complementary with some efforts that you have to overall broaden the fiber laser offering, the component offering. Can you elaborate a little bit more on that?

Around the fiber laser area, just because our CO2 business is straight in the middle of laser processing and our HIGHYAG business is taking output of a fiber laser and directing it to do work and the people who are building fiber lasers are the ones who are coming to us to build these combiners. So we are building combiners for people’s fiber lasers and we look at it say well there are other things around the fiber lasers that we could do. And we’re working hard on one micron focusing optics with multispectral zinc sulfide as a material to that job maybe better and more cost effective if you look how easy it is to make optics with multispectral. So we are looking at all ends of the fiber laser one micron beam delivery, one micron other products that around one micron that are needed. And I think there are some. That’s why we’re trying to be creative but we understand many of these high power issues on CO2 on 10.6 micron. So we are trying to take our knowledge and apply it to one micron. We’re just starting on that but I think we’re coming.

Got it. And then, this maybe a tougher question just in terms of your overall full-year guidance but is there any way you can give us what you’re assuming in terms of your overall military business this year and does that take into account the potential for the sequestration that we’re all hearing so much about?

I think our -- just a kind of step back into your question just a second here, Jim. We’re -- if FY '12 about 18% of our total business which really defined as military and I think as you know that really cuts across all of our segments that some component for the most part of military definitely most center came in our further reportable segment on Military & Material segment. We do have some opportunities for some slight growth in that business. They are definitely looking at programs where we have good orders in hand. We continue to still have good visibility for our military product lines overall. But I think to your point, we have not appended a very doomsday type of an outlook, if there is a significant sequestration reduction or something like that. I think we based to base on where we feel our customers are at again as Franc mentioned in his comments that kind of a more deliberate order pattern, a little more of the deliberate demand that we are seeing from -- demand process that we are seeing from these customers. We’ve taken that into consideration, but we haven’t taken into consideration that, that there is going to be some sudden reduction in a particular product line or particular program that we are on. We are fortunate we are diversified on a lot of different programs covering air and ground and other platforms. So, we try to pick that in the consideration best we can. But again, I think we’ve committed that this will be a tough business for the foreseeable future to grow. But we do have some things that will help foster that growth a little in FY '13, but again, we want to see one of our higher growth rate…

So, Craig just putting that issue aside at sequestration it sounds like you still, you could based on what you are seeing, you see not converging that modest growth in military this year?

I think that’s pretty good. Because one part -- I made it in my comments that are lot of our products are directed or into what I called ISR, which are this Intelligence Surveillance and Reconnaissance and that’s the part that you see the defense willing to still spend money. So, maybe some major programs that are a big plain or something like that might get turned back or slowed down. But the ISR program seem to be on track because that’s where we need these type of systems with all the terrorist activity and -- which we’ve then positioned for a good amount of the ISR stuff and we think we are well-positioned going forward. So, that’s why I said we are little insulated. But what’s happened to us the -- we are down in the food chain and the prime suppliers. They’ve been installing and delaying in the placement of their orders to us. And that’s been going on now for maybe six months to a year at different times. So we are prepared for this, turned it on, turned it off, delayed but we have been experiencing it. So I don’t think it’s going to change FY '13 compared to FY '12 for military. We are going to have it.

Got it. And Franc, you mentioned the strength you are seeing in HIGHYAG coming impart from good strength in automotive, is that sustainable in your view?

Well, it sets your world towards 80 million cars built right now and only 14 in Americas. So a lot of the work that we have done that made a lot of progress, a lot of whelming heads in America maybe 25% of our HIGHYAG businesses, whelming heads here in America and some other countries that do not use this much laser processing in cars. We think we will get into it whether that’s year down the road or two or three, a lot of laser cutting also. So you can’t predict how different cars would be laser processed and it was gone through two or three different deteriorations of a lot of laser processing over the last 20 years, but right now it’s really headed towards one micron as far as we can see.

Okay. Thank you.

Thank you. This does conclude the question-answer-session of today’s program. I’d like to hand the program back to management for any further remarks.

If there are no more questions I would like to thank everyone for participating today. Our next earnings release for the quarter and fiscal year, excuse me, in the quarter ending December 31, 2012 is currently scheduled for Tuesday, January 22, 2013 before the market opens, with the conference call to follow that same day at 9 AM Eastern Time. Thank you for participating in today's conference call.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.