Good day ladies and gentlemen and welcome to the II-IV Incorporated Fiscal Year 2013 Second Quarter Earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions following at that time. If anyone requires assistance, please press star then zero on your touchtone phone. As a reminder, this conference is being recorded. Now I’ll turn the conference over to your host, Chief Financial Officer and Treasurer, Craig Creaturo. Please begin.

Thank you, Tyrone, and good morning everyone. I am Craig Creaturo, Chief Financial Officer and Treasure of II-IV Incorporated. Thank you for participating in the second quarter fiscal year 2013 II-IV Incorporated investor teleconference. As a reminder, this teleconference is being recorded on Tuesday, January 22, 2013. 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 am Francis Kramer, President and CEO of II-IV Incorporated. As I noted in the press release, our quarter came to an anti-climatic close when we experienced lower sales activity during the last few weeks of the quarter than what we’d anticipated. In spite of this, we can say II-IV had one of its most active quarters ever. It was a quarter in which we completed three acquisitions and each will be a new part of a different business segment within II-IV. Also during the quarter, we significantly expanded our credit facility and settled a contractual obligation that we had been working on since the Thailand flood in October of 2011. I’ll now turn my attention to a review of each of our business segments. During the second quarter in infrared optics, which includes HIGHYAG, we had bookings of $44.6 million, up 2% compared to the second quarter of FY12. There was a significant shift in the composition of our bookings. Japan bookings were $4.5 million for the quarter, down $2 million year-over-year. This was offset by increased bookings in Germany, Taiwan, Korea and North America. North America bookings increased 4% year-over-year, however was down 16% from the first quarter of fiscal year ’13. We feel this is a result of a decrease in laser utilization driven by the holidays in November and December combined with the business cautiousness over the fiscal cliff, sequestration, and worldwide economic concerns. For our IR optics business in the U.S., orders and shipments from domestic OEMs decreased 15% quarter-over-quarter. This was a result of timing of blanket orders from both high and low-power OEMs and softer demand for replacement parts from our high-power OEM customers. After-market bookings declined 16% quarter-over-quarter as a result of the declining machine utilization rates. The outlook…

Thank you, Fran. Here are the items I would like to highlight before we open the question and answer portion of this call. As described in today’s press release, consolidated bookings for the quarter ended December 31, 2012 were 127.1 million, 9% higher than the same quarter last fiscal year. In addition, as a result of our three acquisitions completed during the quarter, we acquired 36 million in backlog. Total company backlog at December 31, 2012 was 199 million, up 23% or 38 million from the September 30, 2012 backlog. The components of the backlog at December 31, 2012 were: infrared optics at 44 million, near-infrared optics at 36 million, military and materials at 79 million, and advanced products group at 40 million. We finalized our settlement during the quarter with the company’s former contract manufacturer in Thailand as a result of the October 2011 flooding. As part of this settlement agreement, the company will receive approximately $5.3 million as a result of damage to our equipment and inventory that was lost in the Thailand flooding event. As of December 31, 2012, we have received 2.8 million in cash and will receive the balance - $2.5 million – no later than April 1, 2013. We recorded $800,000 as a credit to cost of goods sold in the current quarter as the recovery of what was expensed in cost of goods sold in Q2 of FY12 and recognized a balance in other expense in the condensed consolidated statements of earnings. During the current quarter, the company repurchased 4.9 million of its common stock as part of the $25 million Board-authorized repurchase program announced in May 2012. The number of shares repurchased during the December quarter was 300,000. To date, the company has repurchased approximately 919,000 shares for a total of $15.8…

Thank you. [Operator instructions] Our first question is from Avinash Kant of D.A. Davidson & Company. Your line is open.

Good morning Fran and Craig. I just wanted to check a number, then had a question, actually. The first one to verify, if I looked at all the charges that you had during the quarter, excluding the impact the EPS would have been $0.17, right?

I think that’s right; and again, Avinash, that’s one of the reasons we put all of the details in there and tried to spell them out, but I think you’re doing the math correctly.

Okay. And then could you give us some idea about—you know, you’ve done three acquisitions in the current quarter. If you take the combined contribution of all these three – and maybe you can break it down or kind of give us some idea – how much of it is in the guidance that you’re putting out for fiscal year ’13 that is coming in from all these acquisitions, (talkover) EPS terms.

Sure, and maybe just to give you a perspective on it maybe for the just-completed quarter and then we’ll look out into the guidance for the full year. In the just-completed quarter, in our financials we had MCubed in there for two months, we had the business and product line we bought from Oclaro was in there for one month, and the LightWorks acquisition really made no contribution to speak of in the December quarter. So two months, one month and zero months respectively in the quarter we just completed, and that was total sales-wise and bookings-wise, Avinash, for two months worth of MCubed, one month worth of the businesses we acquired from Oclaro. It was approximately $8 million or so in total revenues and bookings. When you look into the full fiscal year guidance, we are still on track to do around a similar run rate to what we had anticipated. We do anticipate that we would have for MCubed somewhere around 32 to $34 million or so. That’s pretty consistent with what we said back in the November 1, 2012 press release, and we do think both LightWorks and the businesses we bought from Oclaro, they will contribute but it will be at a much lower run rate than the MCubed transaction itself. That will be somewhere around the 15 million to $20 million range – again, some things are still a little bit new to us as far as both those businesses go. We don’t have quite a track record yet as to how they’ll contribute, but that should generally give you some expectation there.

So that begs one question, though – if you look at the contribution in the quarter that you had for 8 million or so in revenue terms and if you look at the guidance that you had given prior to this quarter that was 128 to 132 million, where did the shortfall come from in the core business?

Yeah, I think it really came really in a couple areas, and our PRM business specifically was probably the biggest shortfall as far as where our expectations were for the quarter and where they actually ended up for the quarter. And then as Fran mentioned in his comments, we did see some softness especially in our industrial businesses, I would say, as he mentioned, in our HIGHYAG and infrared optics businesses specifically, more so right at the end of the quarter, Avinash. It was relatively strong throughout the quarter but really saw a somewhat unusual finish to the quarter – not a lot of activity in the last couple weeks for many of our industrial businesses. Fran, did you want to add anything?

But have you seen that come back a little bit, the weakness that you saw, or has it stayed at that level from the last quarter?

I would say just one that just adds a little bit of bad news to us in the past quarter. We had the telecom component business a little short in December, so you put the three things together that Craig talked about – PRM, a bit in the IR and a bit in telecom – that’s what hit us, and then looking at coming back, the IR business seems stronger so far, but this is a month-to-month—you know, almost a month into it, so I think the IR might be better. No news yet that I can tell you about on either the PRM except that the problems that we did have at PRM in the quarter, the selenium and tellurium index price thing, it remains volatile. But we haven’t had a big shift yet, and our rare earth product line work, as I stated, we’re making some progress, we’re shipping. It’s not enough yet to get it to the level we expect. So better news in IR, PRM holding its own, and our Photop business, I think it’s going to be about the same. I don’t have a real indicator because telecom has runs on such a short fuse. But we’re in good position with all our customers, and telecom is just I can’t tell you. Our forecast does have a slight improvement as we finish the year at Photop also.

Thanks Fran and thanks Craig. Thank you.

Thank you. Our next question is from Jim Ricchiuti of Needham & Company. Your line is open.

Hi, thank you. So if we look at your full-year guidance excluding the acquisitions, it seems like you’re looking for potentially revenues to be down modestly to flat, and I’m trying to get a sense – are the same factors that contributed to the shortfall, revenue shortfall in the December quarter, are they the same factors that you’re seeing for the full-year? Where are you in terms of more cautious for the full year?

I think you’re right – we are cautious for the full year, and I tried to state that, that the volatility in selenium/tellurium is something we just can’t predict, and we thought we’d gotten ahead of that but it still continues to jump around; and then the uncertainty in the worldwide economy on how it drives consumer consumption, and that’s really a big factor for laser utilization in the IR business. So those two factors kind of taint our third and fourth quarter forecast. I think we’ll do better at our PRM in controlling the selenium/tellurium exposure we have. In IR, it appears to be trending up for how the confidence is happening because some of our belief on how lasers get utilized relative to consumer consumption, there is a lag and then there is a build-up in the supply chain, which causes some changes on how we receive orders for that business. So it’s harder to predict a little bit now with this volatility in the worldwide economies, but I think we’re feeling better. Our numbers might show it a little bit conservative, but we’re affected by what we’ve been through here in the last couple quarters.

Got it. And Fran, you also alluded to just some ongoing issues on the new rare earth production line. Can you talk a little bit about that, and to what extent do you think—what’s the timeline, do you think, to get back on track there?

Boy, we have been really at this now six, eight months, and we keep coming into one bottleneck and then another. We’re working through them. I think we’ve got one idea that’s going to help our output quite nicely, but it’s not enough to get us to the production rate we need. So I can’t give a good, solid answer, but our belief is maybe within the six months we’ll get to the rate we need to be. But we have to take them one problem at the time. It’s a processing line, so if you have a bottleneck in the front part of the process, you never get to touch the back end of the process until you get the front one cleared. We have three or four stages, and we’ve been working them—trying to do them simultaneously, but it just hasn’t worked out. We’ve been bottlenecked at the first stage and at the second, and now I think we’re working well on improving the second stage and then so we have the third and fourth stage of the process that are, I think, really yet to be tested. We’re maybe at—you know, something like maybe half where we want to be on the rate through the line.

Got it. And one final question – just apart from sequestration, you seemed to suggest a little better tone in the second half on the military materials side of the business and your confidence in that. Maybe I’m reading too much into it.

I think for our traditional EEO, VLOC, Max Levy businesses, we’re at the same level of confidence on that military business as we’ve been. It’s okay. It’s not booming, but it’s okay. The one that we are getting more confidence on is LightWorks and that acquisition and the amount of business that we think will come with it, and it’s at least half booked that we were counting on and it’s a foreign military sales opportunity that will carry on for some time, which is for us offsetting or helping with this sequestration and the cut-down in U.S. spending. This will be not affected by that.

Okay, thank you.

Thank you. Our next question is from Mark Douglass of Longbow Research. Your line is open.

Hi, good morning gentlemen. Craig, so just to get some clarification, the full-year guidance is GAAP at this point?

Yeah, the full-year guidance, Mark, it’s in the—on the outlook page or the guidance page, Page 2 or 3 of the press release. That is GAAP information.

Okay, great. Thank you. And then if we look at HIGHYAG, Fran, is some of the drop-off at the end timing? You know, people finished a lot at the end of year rush, and then the last couple months the equipment bookings just kind of fell off as they digest all the new equipment that was installed in 2012? It seemed like there was a lot installed in 2012, and so then how did the projects or RFQs look at this point versus where you were in December?

I think it’s a little bit of just what you said – it’s been very rapid. We’ve ramped up at HIGHYAG very nicely and now we’re getting a little bit of a lull here as people digest and put in the systems that we’ve sold. We’ve sold well into the U.S. for welding applications, and those are automotive. Those might be slowing a little. The rest of the world has done well in some—you know, Japan, certainly Germany where we’re headquartered. But I think it’s kind of the fiber laser deployment rate seems to be flat, and our view of it – and we don’t have a complete view – but our belief is maybe 1,200 high power fiber lasers are going out to the marketplace at the current running rate, which might be consistent with what it was the prior 12 months or so. So we think fiber laser is getting some real traction, but maybe they’re having a lull right now as the first users put those machines out there and they are trying to digest them. It’s happened to us at HIGHYAG, and we took our forecast down in the third and fourth quarter just because of what we’re seeing.

Okay, that’s helpful. Any market share issues or shifts?

On HIGHYAG?

Yes.

I’m not able to comment on that. I don’t think we feel we’re losing. You know, we sell at kind of a high-end position on the product we offer into that space, so some of the mid to lower end system applications, there’s a lot of shifting going on. I think a lot of Chinese, Indian, other parts of the world system builders who buy somebody else’s fiber laser and put it on a system are entering the market, but we’re not in that space. We’re watching it.

Okay. And then you mentioned maybe how many high power fibers are getting shipped. What do you think is happening right now in high power CO2, you know, the 2D cutting? Are we closer to 4,500 per year run rate, or what do you see in that market?

Yeah, I think you’re right. Last quarter I reported about 4,800 was the annual running rate of CO2. Right now, we would probably say 4,000. You can see from our customers, they are down and I think that’s 90% due to the worldwide economy, laser utilization not being as much so people aren’t buying new; and maybe 10% due to just other alternatives.

Okay. And then one last question, just a little more clarification. When you ranked the revenue guidance dropping, at least (inaudible) organic basis, PRM is the biggest impact. Is most of that still selenium/tellurium, or is that also just—I mean, it seemed like in the second half you are expecting a pretty good ramp in this rare earth, and I’m reading that that’s a pretty significant impact to the guidance.

For me—Craig might clear me up a little bit. When I looked at the numbers, it’s about 50% due to the rare earth deal of our being off at PRM, and 50% on selenium/tellurium.

Yeah, I would agree with that, Mark. It’s really a combination of both factors, and again, we’ve seen some price stability relatively speaking in both selenium and tellurium. But really where we have not seen a lot of strength has been especially on the tellurium market. That market demand just has not shown itself just yet. We’ve got some challenges on the selenium side as well, but I think to Fran’s point, I think it is kind of somewhat of an even split between the legacy products, selenium/tellurium, and our rare earth product.

Even though the pricing seems fairly stable, the demand continues to fall, at least year-over-year?

Yeah, and I just don’t sense, Mark, that we see a big break-out on the horizon specifically for the tellurium market. It just doesn’t seem like that’s something that’s imminent, at least in the near term here, so.

Okay, thank you.

Thank you. Our next question is from Dave Kang of B. Riley Caris. Your line is open.

Good morning. First, a couple of clarifications. When you said—Fran, when you said Photop was down 8% sequentially, was it revenues or bookings?

Gee, let me check my note on that. So Photop was down sequentially? Yeah – revenues.

Revenues – got it. And then also regarding Photop, you saw a weakness by major OEM or OEMs. Was it singular or plural? I just wanted to clarify that.

I think it was a plural comment, Dave. I think it was just kind of something we were seeing. We saw a bit of softness across more than just one OEM at the end of the (talkover).

Oh, I see. And would you say they are more Chinese-related customers, or--?

I think that mix is pretty spread.

Oh really? Okay. And then I thought you said you expect Photop to be flat, sort of flat this quarter, Q3. I’m hearing China is still soft, so are you counting on some other region, like the U.S., to come back to make up that softness in China, or--?

I think they’re servicing a worldwide customer base, Dave. I think we’ve also anticipated or put into that forecast the recent assets that we acquired from Oclaro and how that will contribute.

Oh, I see. I see. So you’ve got some acquisitions making up the difference, then?

That is correct. I think the broader point is that I think some of the recent acquisition revenues will help to offset a little bit of this softness that Fran was talking about that we’re seeing, so.

Okay, So just wanted to clarify as far as the secular trend is concerned then. Then without acquisitions, apples to apples, would you say Photop business would be down sequentially, then?

No, I wouldn’t do that. I would say third quarter might be looking like the second, but I think the fourth quarter will be up. It’s such a volatile business, the telecom space, and we see having had a couple down, it looks like the fourth quarter will start back up.

So why such weakness? I mean, we are hearing all this CAPEX going up and all that, so we were expecting things to improve. Why aren’t the vendors seeing that improvement?

I think it’s the delay and the chain reaction as cutbacks happen. We get it a little bit later, and as things turn up we get it a little bit later. So I think it’s having to do with just-yeah, I understand people think it’s going to head up a little bit in telecom. We’re a little more cautious until we get that order, and so we’re putting it in the fourth quarter.

Mm-hmm, okay. So fourth quarter, June quarter. And then does Photop go through the annual pricing negotiation in early January?

It depends. All their accounts are spread around the world. Some ask for price reductions or price work quarterly, if you know what I mean, so I cannot give you a good comment on that.

I see. So some of your peers are saying 10 to 15%. Where do you think the 2013 annual pricing will be? Still at 10 to 15%, low end, high end? What’s your gut feel?

I couldn’t make a good comment there, Dave.

Okay, great. Thank you.

Thank you. Again, ladies and gentlemen, if you have a question, please press star then one on your touchtone phone. Again, if you have a question, please press star then one on your touchtone phone. Our next question is from Jiwon Lee. Your line is open.

Thank you. Most of my questions were answered, but Fran, I wanted to ask if you could provide some geographic color for your IR optics that you see for the second half of fiscal year.

I think it’s going to come—certainly Japan is off so far, so they are going to come a little bit back, there is no doubt about it. So that’s going to have the biggest percent up. The rest of the world, whether it’s China, which is doing well, I think it will be nice. North America – fine. Europe, that’s probably maybe the laggard on percent that we might have them guided to be up in third and fourth quarter.

Okay. And Fran, on the HIGHYAG side, I wasn’t sure if I heard everything you said on the competition front.

Yeah, on the IR business you’re thinking, or any one of them? I don’t think I—

Specifically on HIGHYAG, please.

Oh, in HIGHYAG.

I think Fran’s comments overall, Jiwon, were we’re kind of serving the high end markets there. I don’t think we’re seeing anything. I think Fran was saying we don’t believe we’re losing market share. I think it’s just a little bit of a slower kind of rate of systems add-on components that we manufacture, I think that’s slowed down. We don’t believe that we’re losing market share necessarily.

Okay, and then on the PRM side of things, just kind of understanding the business environment that you have now, how much would the tellurium pricing have to fall down again for more write-downs?

We’ve kind of marked it down to where—for both the selenium and tellurium, Jiwon, we’ve marked it down to where they ended the quarter and prices were. Again, for tellurium, that was $110 per kilogram, and for selenium that was $40 per pound. So any further changes thereafter, we would need to make adjustments in our inventory, something we do every month, something we’ve been reporting every quarter.

Okay, my last question – it seems to me that you are expecting some revenue upturn in the March quarter from your commercial IR optics, and the combination of that business rising up a little bit and the acquisitions, especially the MCubed, I guess that’s the primary source of your EPS up even though on an organic basis the revenue seems to be rather flat, correct?

I think that’s a good summation of it, Jiwon. I think you’re right on. Again, I think we also believe too that we had a higher than usual tax rate this quarter. We’re kind of sticking to our overall guidance for the tax rate, so we believe Q3 and Q4 tax rates will be lower than what we’ve experience in the average of Q1 and Q2 here. So we think that’s also a contributing factor that will drop down to the bottom line as well.

Okay, that’s helpful. Thank you.

Thank you. I’m showing no further questions at this time. I’d like to turn the conference over to Mr. Creaturo for any closing remarks.

If there are no more questions, I would like to thank everyone for participating today. Our next earnings release for the quarter ending March 31, 2013 is currently scheduled for Tuesday, April 23, 2013 before the market opens, with a conference call to follow that same day at 9:00 am Eastern time. Thank you for participating in today’s conference call.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.