Good day, ladies and gentlemen and welcome to the II-VI Incorporated Fiscal Year 2015 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference Mary Jane Raymond, Chief Financial Officer. Ma'am, please begin.

Thank you, Liz, and good morning. I am Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our third quarter earnings call for fiscal year 2015. With me today on the call is Francis Kramer, our Chairman and Chief Executive Officer and Dr. Chuck Mattera, our President and Chief Operating Officer. As a reminder, this call is recorded on Tuesday, April 28, 2015. Any forward-looking statements we may make during this teleconference are given in the context of today only. We do not undertake any obligation to update these statements to reflect events subsequent to today. With that, I’ll turn it over to Fran Kramer.

Thank you, Mary Jane and thank you everyone for joining us. We had a solid quarter. Revenues of $182.7 million grew 5% over the third quarter of last year and 3% sequentially. All growth this quarter was organic. EPS was $0.23 inclusive of $0.015 negative effects as well as restructuring cost. The Laser Solutions segment revenues of $73.3 million grew 16% compared to the third quarter of FY14. The operating margin was 19.2% compared to 6.3% in the third quarter of fiscal year ’14. And the Photonics segment revenues of $64.3 million grew 10% compared to the third quarter of fiscal year ’14 and the operating margin was nine-tenth of a percent compared to three-tenth of a percent in the third quarter of FY14 and includes the cost of restructuring actions including the consolidation of certain facilities which will continue to help the margins improve in fiscal year ’16. In the Performance Products segment revenues were $45.1 million and declined 6% sequentially and 13% compared to the third quarter of ’14. This was primarily due to lower demand in both the military and the semiconductor capital equipment markets. As a result the operating margin of 6.7% is lower than the first half of fiscal year ’15 which averaged 8.4%. However, we are continuing to have very good structure interactions, in fact the book-to-bill revenue ratio in this segment was 1.13 for the quarter. Amid a number of crosscurrents, we made a lot of progress this quarter especially in Laser Solutions, where many of our new products gained share and our existing products continued to make meaningful contributions. Across the company, our people are all engaged in the continuous improvement plans to increase our momentum and as we monitor worldwide activity for signs of economic volatility and currency movement, so we can react accordingly. I’ll now turn the call over to Chuck to discuss some operating highlights.

Thank you, Fran. In the Laser Solutions segment, the sequential revenue increased 8% from Q2 to Q3. While there is some seasonal inventory replenishment in these results, the real progress following a strong Q2 was due to very good execution by our operating teams to satisfy the growing demand for product throughout the segment. We believe that CO2 laser utilization in the North American market remained strong in Q3. While we are aware that the growth in new high power CO2 laser deployments continued to be impacted by the adoption of the fiber laser, the utilization of the high power CO2 laser install base remained solid worldwide and in addition low power applications continue to grow. For example, low power CO2 laser optics revenue increased 13% over Q3 of FY14. We had strong growth in the quarter for fiber laser welding heads and other high power products for automotive applications. High power fiber laser cutting applications also continue to drive demand for HIGHYAG products. In addition, we experienced continued strong demand for our industry-leading high power laser optics products for extreme ultraviolet or EUV applications. We are encouraged by the industry news of a recent order for 15 EUV systems and look forward to continued growth from this market segment. In Europe, Q3 bookings and revenues increased from Q2. Demand for our CO2 laser aftermarket products were strong throughout the region and our EUV customer continues to take as much product as we can currently deliver. Turning to Asia, the material processing market continues to be a growth area for us in Japan, China and Korea. China is moving the fastest towards the adoption of fiber laser technology. We are fielding increased inquiries around the low cost and low power optics and are adding capacity to address additional demand from…

Thanks Chuck and Fran. Our third quarter book-to-bill ratio was 1.07 and that reflects a new backlog record of $241 million. This compares to last quarter’s backlog of 228 million. This $241 million consist of $72 million in Laser Solutions, 62 million in Photonics and 107 million in Performance Products. The currency effect on our revenue was almost $5 million. The euro falling nearly 12% from December 31st and growth in our businesses at HIGHYAG in Berlin and Laser Enterprise in Zurich, both of which have euro-based revenues, really changed the profile of our currency exposure in Q3. The effects were more muted on the EPS since nearly all of HIGHYAG’s costs are in euros and we have reduced the exposure on the intercompany short-term loans since the beginning of this fiscal year. Despite the currency effects on revenue, the gross margin of 36% improved 450 basis points compared to the third quarter of last fiscal year. The year-over-year margin increase is all operating improvements particularly in Laser Solutions. The operating margin of 9.7% improved 470 basis points compared to last year’s quarter. This is also the result of operating improvements with the majority of the progress in Laser Solutions. For example, at Laser Enterprise, last year’s acquisition, the fab is increasing its yield and output partially from increased demand for pumps in Photonics and is generating materially improved margins as a result. The adjusted EBITDA margin percentage of 15.8% which excludes the 7.6 million of income from the settlement we discussed last quarter, improved 220 basis points over the year ago quarter. The material difference between the improvements in the operating margin and those in the EBITDA margin is found in the non-operating expenses this quarter. EBITDA margin includes 1.9 million for trade name write-offs in our Photonics units,…

[Operator Instructions] Our first question comes from the line of Jim Ricchiuti with Needham & Company. Your line is now open. Please go ahead.

Just a question on the consolidation of the facility in Florida into California, where are you now on that? When do you anticipate that being completed?

So the military actions, to consolidate the facilities actually began in the first quarter. We always expected the second half to be the more material part of the charge with respect to movements and equipment. So as I mentioned we had about $300,000 in change of restructure in this quarter and we’ll have in the neighborhood of 600. So I’d say we have begun the move and we’ll then begin to settle the things in place move the final things get them up and qualified in the fourth quarter.

And so as we look out to the September quarter, you should be fully operational there?

I think we will be 80%-90% operational. We will try to get it all done in June but there will be some little lags that will come in July. So we’ll have some first quarter, but not a big deal.

Yes, I think the main things that will happen into the first fiscal quarter are product qualifications, the things in the new location.

Okay. And just if I could switch gears for a second, it looks like within laser solutions, you are seeing very good business overall in HIGHYAG, as well as, it sounds like, in parts of the CO2 business. I wonder if you can comment just in general about your fiber exposure with HIGHYAG.

So I think as we mentioned I think we are making very good progress on the HIGHYAG acquisition. They have had really since the fourth quarter of 2014 year increasingly improved quotes. We continue as Chuck said we continue to see that business growing sequentially. We see it growing quickly year-over-year. The team is not only very engaged, they’ve done a very good job as Chuck mentioned last quarter but I think increasing their yield, increasing their market penetration, increasing their reach outside of Germany all around I think we consider that position that we are building in the aggregate one micron business both from HIGHYAG and other parts of the company is actually good and growing. Do you want to add anything Chuck?

I’d say that we’re aligned with the all of the key OEMs in our addressable markets and the interest there is now also spilling over into China. But I’d say our demand and the enthusiasm for our products remains high.

What is this business growing at? Can you say?

Well, I think Chuck did say…

I may have missed it I apologize.

No, no don’t it’s really fine.

I think, Mary Jane if I could, I think maybe a better way because we like to keep it up at the segment level as much as we can but I think we were addressing the question that we have received last call, which was, how much of our total company revenues that are focused on one-micron, on high power one-micron laser market for industrial materials processing. And I made some comment today on the call about how that business has grown I could add to it and just in turn give you a feel for it today that’s roughly 15% to 20% of our total sales across the company or into this one-micron high power laser market.

And then, presumably, a year ago it was a good deal lower. Is that -- I’m trying to get a sense -- it sounds like this is becoming a bigger part of the business?

I gave a reference point Jim in my prepared comments that compared to the third quarter of fiscal year ’14 that those revenues have increased by about 55%.

Yes, yes okay.

And about 10% sequentially.

Yes got it, okay thank you very much.

Before we take the next question, let me just correct one thing I have said I had talked about the debt, I think paid down at 2.4 in fact obviously as many of you already detected, we paid down $24.5 million of our debt in third quarter, so sorry. There you go.

Our next question comes from the line of Mark Douglass with Longbow Research. Your line is now open.

Fran, I may have missed it -- well, I probably did miss it -- on some of your discussion of Performance Products. It's nice to see the book-to-bill still high, but bookings and sales keep trending lower. I think you said some of the softening is because of -- a lot of it is in defense. Could you just go into that a little bit more?

I made a comment that if with the military and semiconductor capital equipment markets both are -- have been slower in the quarter. Book-to-bill is 1.13, however we have a few good news things certainly and I think Chuck mentioned at this quarter we took a little late in the quarter, Joint Strike Fighter additional add-ons there which was good. And we have a couple of others that look promising here coming in the first quarter. So, military is doing just as we said it's been delaying and we keep on it the semiconductor equipment business is at a down point right now and that net debt is forecast to gradually come back. But it won’t be heavy in the first quarter.

When you look at your semi-cap equipment business, does it lead or lag some of the more visible data, like the semi data, by a quarter or two, or by a few months? Or how can we think about your semi-cap equipment business relative to some of the larger data that's available?

Mark this is Chuck Mattera. Yes, I would say that this is a relatively new business for us, we’ve been watching it for a couple of years we’re getting to know the marketplace better. We are paying a lot of attention exactly to that kind of an insight or an insight that could be delayed from that. I would say based on the latest sets of SIA book-to-bill results that are published every quarter, it would appear to me that we maybe lagging one to two quarters. That is a current view and you go to remember that that market is a huge market. And we have very important niches in that market, maybe that’s about all I could say.

And then looking at Photonics, still struggling on the margin line, what's necessary -- what has to continue to move forward to get at, say, mid-single-digit-type margin level? Is it really a volume effect at this point? Or what kind of steps of vertical integration are still required to get Photonics up and moving?

Well first of all let's be clear in the company like ours that’s vertically integrated volume always matters. So that certainly helps, I mean I would say that probably the biggest challenge that we are now tackling very aggressively and I would say that the team has been tackling for over the last year is really dealing with the little bit more far-flung nature of the places in which the product development is done and also the manufacturing footprint around the world. So the consolidation actions that we took was more vigor this last quarter are really designed to bring the product development team to some more products in closer proximity, to really look at the list of new products that we are working on and be sure that we’re really optimizing the resources in the right place to maximize those the time to market advantage as well as, where we think we have a competitive advantage. And finally from a location point of view, just really looking at the number of places out we are doing things to be sure that we’re not loosing time and efficiency just in the communication around the world. I think that the Photonics team has worked very-very hard on this and I think that as we continue to improve including, improving the efficiency in the fab in Zurich that has the potential to have synergistic effects as well on the Photonics team as we go into next year.

Yes, Mark I just said what Mary Jane had to say and certainly it has to do with pricing and as we fight to raise prices we run the risk of losing volume and you have to know that that’s going on because of the difficulty in that business is how do you get the margins up quickly, volumes doesn’t arrive so we have had and we are continuing to work on the pricing. We will miss an order or two that we counted on because of that that might as well the rate at which we can increase our volume, but that’s our strategy.

Okay. Part of your strategy, too was being seemingly more vertically integrated in that division, particularly the telecom side, right, so you could actually see improved pricing. Is that still a ways off?

No, we’re still working at it but say that we’ve realized those synergies to the extent we’ve expected not yet because it’s a long pipeline to get our own components in and approved before we’ve been really start to produce in volume. So we’re in the pipeline of trying to move our components in but it’s a little longer than you might thing.

So another at least year, maybe two years?

Well I wouldn’t go as long as two years but -- we’re trying to set up different facilities so the move from where we’ve been to other facilities it takes time and then qualification as the new facility so it’s lengthy.

Okay. And then final question on your high-powered diodes out of Zurich are you seeing orders outpacing sales? Is it still growing nicely?

I think it’s growing nicely but I wouldn’t say orders are outpacing sales. We have capacity to do this little gain that we’ve had in this past quarter and we can take time to more gains and we do have our fab, as we call it in Zurich drives and produces not just for the HPLs but also for the 980 pumps and so on. So our capacity is nicely utilized. We can handle more but we’re kind of monitoring that too because every time we have to ramp-up a little bit. We haven’t taken steps back but we’re leery of that.

Okay. So most of the strong demand you spoke about in your one-micron high-powered fiber is driven by HIGHYAG?

No, we have them in the semiconductor laser side also.

Mark, it’s made up primarily of HIGHYAG products. A chunk of the laser enterprise business and also from our Photop business inside the photonic segment -- and also in infrared optics as well, we have suite of high-powered one-micron components, even from the infrared optics. So we’re adjusting it -- the bulk of it was a high HIGHYAG Laser Enterprise and the Photop.

I think Mark, your question is also really around book-to-bill in the Laser Enterprise Group I mean it continues to be good I mean I think we’re doing actually the team there is doing a very-very good job on the yield and the output to meet the demand and that’s obviously martially up since last year. So it has not reached the point, I think as Fran was asking, that the orders are so outpacing what we can do not at that point certainly but the best news is over this last year we’re gaining customers but have been lost in the prior year and being able to serve them.

[Operator Instructions] Our next question comes from the line of Ted Moreau with Barrington Research. Your line is now open.

Thanks and congrats on another solid quarter, guys. Just kind of wanted to follow-up on a couple of previous questions, can you remind us on the -- where you had the semiconductor capital equipment exposure? I know on the laser side, you are tied into the EUV programs. But then what kind of exposure do you have on the Performance Products Group? Is it more like front-end, 16-nanometer, 14-nanometer type of leading edge node equipment? Or is it elsewhere within the semiconductor equipment space if you could comment on that?

Okay Ted, this is Chuck Mattera. For sure EUV is a good place to start. It’s an important place to start for us. And next is -- and for EUV we’re making at least four different components for EUV and we’re providing them through the infrared optics business as well as the M Cubed business in our advanced products group. At M Cubed they are also making precision ceramic components for wafer stages, wafer tables, electrostatic chucks, and defectors for the back end and there the normal ebb and flow for the existing products in the market place and growth in those products is what is pulling us along in that segment. Finally in our military materials business part of our strategy to diversify and to leverage the competencies that we’ve developed in precision optical assemblies that over the years in that group we are also leveraging highly opportunities for that exist today for precision metrology equipment including for existing 300 millimeter and the future 450 millimeter applications and we just close on that in our Photop group, Photop are also the key supplier to the semiconductor capital neurology equipment makers that are the leading makers in the world.

So given the EUV announcement last week, is there any way to get a feel for the magnitude of how it could impact you guys from a revenue perspective and what the timeframe could be of that?

That’s pretty hard for us to flow down, you know how there has been such a start and stop on an EUV and in the time and the delay, but we really probably shouldn’t try to speculate on that at this moment, but it is more of a news of that online in the next two, three quarters we’ll share and submit it, but we can say we’re well tuned in on the EUV machine itself and just what Chuck said, greater components the three or four that we make is critical to the machine.

And then one final question, and then I'll switch gears. But is it primarily -- your EUV exposure primarily one player? Or are there other players in that market that you are benefiting from?

Well mostly from one that is for sure, everybody knows that leader and we do have some frontend tools people that we supply to and then another person in the bigger space.

So then on the Photonics group -- I've been under the impression that one of the drivers of possible margin expansion there is pending the introduction of several new products, but I may not have caught it here. Is that still a significant driver for margin improvement? And if so, could you give us a timeframe on when you believe you'll be introducing these new products?

Ted, this is Chuck. For sure new products are a wide part of the business and that’s both for a sustained revenue growth as well as for profit improvement. And at OFC, I think that you maybe more aware and saw a suite of new products which I referred to today including our OCDR modules that performed optical time domain reflectometer measurements in both central office and outside plant allowing carriers to reduce OpEx and bring up advance networks reliably and we should start to generate revenue from prototypes in this current quarter, and we expect the production revenue would begin to kick in by the end of the first-half of next year. And as an example that would be I would expect in FY16 it would be low single-digit million dollars of opportunity. On tunable optical filters that we talk about this is a very compact. In fact it's the smallest tunable optical filter in the market it dramatically reduces the noise from erbium-doped fiber amplifiers that is the amplified spontaneous emission noise. These products or these tunable optical filters will be used in CFP2 100G transceivers. Lead customers have already designed them in and qualified. We expect one of the prototype revenue in the next couple of months and again we might expect by maybe in the second half of ’16 to be on a low single-digit millions in the year run rate. Regarding our high power pump lasers, we will be launching in a couple of weeks that means next month, the industry’s leading one watt 980] laser which has the lower power assumption, the highest power of output and we expect that EDFA manufacturers will be quite interested in designing those in. We expect with even though we watch at beginning sometime in May FY16 again low single-digit millions of sales in ’16. We demonstrated the new nano amplifier platform for next-generation optical amplifiers. That platform that you probably saw it or see generated a lot interest and a lot enthusiasm by both OEMs and some carriers. That's a platform. The products we built based off of that platform that we’ll not be able to generate revenue in ’16, but we expect the revenue will come in ’17 based on core completion of the platform getting it ready to manufacture. So I try to give you a sense for some of the things that are happening of course, in our existing optical communications business, new products with new specs are high-density array iridium-filled fiber amplifiers and the like -- these are considered and expected by our customers to be rolling as part of the price we’re keeping the revenue where it is at and being able to grow it. So it's a kind of replacement as well as growth if you will. I don’t like as you feel Ted.

So final question, Mary Jane, just wondering if you could provide us an update -- are you keeping margin targets that you have previously disclosed for fiscal 2016?

It has been put for a while I think we may take the bottom end down a little bit just overlap more with the end of the ’15 range but having said that we continue to have improvement on margins that an important part of our ongoing strategy.

Okay. And by taking down the lower end just a little bit, is that partially because of the currency issues that are out there? Or is it not really related to that?

It is partially because of the currency. On the last call when we talked about currency I said that’s not really a huge exposure for us and it historically has not been but some of our most recent acquisitions that are also doing beautifully and adding to our product portfolio going forward do have more euro-based revenue and we’re doing as I say has changed the margin profile. So the currency is the main driver, yes.

We have a follow-up question from the line of Jim Ricchiuti, Needham & Company. Your line is now open.

You gave some color on bookings in Europe being up. I wondered if you could just talk in terms of what you are seeing in the various geographies, just from a demand standpoint.

Jim, are you talking about the whole company or you’re talking about…?

Just in general, Chuck, yes. Just because you guys are so diverse, and you’ve got exposure across so many different markets -- this is more of, I guess, a question from a macro standpoint of what you are seeing out there. And if you want to tie it into any specific vertical markets -- but you mentioned that Europe was strong from bookings, where was that being driven from, primarily the industrial area?

Yes.

The comment Chuck made was in Laser Solutions but…

I can take a we certainly don’t have a report today with our revenues broken out by regions but just qualitatively I could take a shot at it…

That would be helpful, yes.

And Mary Jane would like to. I would say that U.S. we have for our broad industrial base it has a feeling of being strong. And so I would say U.S. strong bookings for the business I would say in Europe as I already mentioned strong, not exact distributor but it seems as a lower euro may be make some products more competitive in Asia and that’s exactly be part of what we’re seeing but for sure there is strength in Europe, and Japan is strong and I would say that’s broadly across the company and virtually in all markets that we’re playing in here industrial, communications, semiconductor, capital equipment. And in China, China is an interesting place I would simply say that both from the communications from the industrial market that we have already reported, the fiber laser market is seems to be continued super hot even though there maybe some indications of it being a little less hot than it was 12 months ago this seems to be on every corner somebody else turning up with either a fiber laser or it’s a direct laser business and with the team that we have based there, we’re pretty efficient at tracking and addressing the needs.

Great. That’s helpful. Thank you.

I’d only add one more comment to it, it’s not a big deal but certainly in our wide bandgap materials group a big portion of our business right now is headed into Japan and that business feeds the base station business which is seems to be going some build out in China, so nice business for us right now.

Our next question comes from the line of Zachary Rodenbough with Sidoti. Your line is now open.

I just have a question about the dynamics of the laser solutions operating margins. You might have mentioned this already, so sorry if I am repeating it. But you have mentioned increasing pricing competition for the fiber products, specifically in China; but you’ve continued to grow margins up near 20% in this segment. Are these levels -- are you seeing these levels as being sustainable to the laser solutions group? I guess my real question: are you expecting cost reductions here for these products to kind of continue to outstrip these pricing pressures?

It’s a tricky question and our answer is because we’ve changed our product mix when we started with that business. We have had a product we called a BMU that was built into some custom solutions and now we’ve gone more toward a standard products and the standard product -- it is going to be better for us. We won’t be adding different batches of production that we had. But that’s there and at the same time the foundry that we operate or the fab that we operate is we are getting more volume, it does generate a better margin and we expect that will continue.

Okay. And that wasn’t very committal to any number. Thank you.

We have a follow-up question from the line of Ted Moreau with Barrington Research. Your line is now open.

Just a quick question on the wireless base station business, you mentioned or referenced it's doing pretty well in China. Are you shipping to China, or are the products going into wireless networks that are based in China? And then just kind of curious -- is this a new program, and that's why it's doing well for you? Because it seems like some of the wireless infrastructure suppliers out there have been reporting kind of soft numbers. So if you could just touch on that.

Yes I think I will take that, our silicon carbide substrates enable high performance, high frequency, high power, high reliability, gallium-nitride-based HEMT devices. Those devices go head-to-head with silicon LDMOS in this wireless base station market and they have a value proposition which is allowing as our understanding of the market dynamic through reading of industry reports. Our understanding it is a value proposition for price and performance while allowing the wide bandgap electronics to penetrate the existing market which is growing. But our understanding is that wide bandgap electronics are penetrating the market and growing considerably faster than the SAM is growing. So it's kind of we believe that our customers are in a position to be taking clear from legacy technology LDMOS. That’s one theme, the other theme is 4G wireless base station growth continues and China is a hot market for it, but there are other markets that are expected to follow in that growth. Our understanding again from industry reports is that we could expect both India, Africa and even Latin America in the next couple of three years to follow at a similar trend.

And so then your customers are based in China, or your customers are…

Our customers in China.

So -- and network deployments are in China. Okay. Got it. Thank you so much.

I am showing no further questions on the phone line at this time. I’d like to turn the call back to Mary Jane Raymond, Chief Financial Officer for closing remarks.

All right, thank you very much for joining us today. I’ll just give it to Fran for closing comments.

Well, thank you everybody for joining us and we look forward to meeting again at the end of next quarter which will be the end of our year, which we will complete a very good year we expect. Thanks.

Thanks again, bye-bye.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. And you may now disconnect. Everyone have a great day.