Good afternoon, my name is Sarah, and I will be your conference operator today. At this time I would like to welcome everyone to the GSI Group's Second Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Robert Buckley, Chief Financial Officer. You may begin your conference.

Thank you very much. Good afternoon and welcome to GSI Group's second quarter 2014 earnings conference call. I am Robert Buckley, Chief Financial Officer of GSI Group. If you've not received a copy of our earnings press release, you may obtain one from the Investor Relations section of our website at www.gsig.com. Please note this call is being webcast live and will be archived on our Web site. Before we begin, we need to remind everyone of the Safe Harbor for forward-looking statements that we've outlined in our earnings press release issued earlier this afternoon and also those in our SEC filings. We may make some comments today both in our prepared remarks and our responses to questions that may include forward-looking statements. Those involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future even if our estimates change. So you should not rely on today's forward-looking statements as representing our views as of any date after today. During this call, we'll be referring to certain non-GAAP financial measures. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP measures in the earnings press release, we'll provide reconciliations promptly on the Investor Relations section of our Web site. I'm now pleased to introduce Chief Executive Officer of GSI Group, John Roush.

Thank you, Robert. Good afternoon, everybody, and welcome to our call. I’m pleased to update you on what I view as another very solid quarter for the company. Customer demand remains very positive across the vast majority of our product lines and applications. Our growth initiatives across GSI are gaining momentum in most areas. In addition we substantially completed the integration of the JADAK acquisition in Q2 and we’re extremely pleased with the JADAK team and the performance of the business which I would say is exceeding our expectations. Since the acquisition we made encouraging progress with our medical technology cross selling initiatives and I’ll also note that we completed the divestiture of our scientific laser business in mid July. In Q2, our revenue, profitability and cash generation, all came in ahead of our own expectations. I'd like to give you a brief summary and Robert will go into more detail in his section. So our Q2 revenue was $96.9 million up 21% versus a year ago. Adjusted EBITDA was $14.5 million up $2 million from Q2 2013. Q2 EPS was $0.10 on a GAAP basis up $0.03 from a year ago. Non-GAAP EPS for the second quarter was $0.19 up from $0.14 a year ago. In the quarter we generated over 17 million of operating cash flows and ended Q2 with net debt reduced to just under $90 million. So on the whole I’m quite pleased with the financial results. So, at this point I would like to give you some commercial updates on our progress across the company. In Q2 we saw continuation of the previously discussed trend with demand improving modestly across the majority of our end markets. As I’ve said in recent calls barring any unforeseen economic turbulence, we expect continued gradual improvement in market conditions…

Thank you, John. After the end of the second quarter, we closed the sales of a scientific laser business. We’ve received 5.5 million in cash proceeds upon closing which will be recorded as cash flow from investing activities in our third quarter. After settling transaction fees, working capital true ups and taxes we expect to receive a net 4 million in cash from this transaction in 2014. However we also expect to receive another 1.5 million of additional proceeds held in escrow following the exploration of the 12 months indemnification period. This transaction represents an important strategic divesture of our noncore business and a step forward in the execution of our strategic initiatives. During the second quarter of 2014, GSI generated revenue of $96.9 million, an increase of 21.5% from $79.8 million in the second quarter of 2013. The JADAK acquisition contributed $15.5 million or 19% of the revenue increase year-over-year. Changes in foreign rates favorably increase revenue by 1%. Excluding the impact of the JADAK acquisition and changes in foreign exchange rates, the Company’s organic growth was approximately 1% compared to the second quarter of 2013. Overall all of our business segments reported growth in the second quarter. Sales of laser products for the second quarter increase 8% to $43.8 million compared to $40.4 million one year ago. We experience solid growth across our all our technologies from our galvanometer-based technologies to our sealed CO2 lasers and fiber lasers. Growth was driven by new product innovations, new customer wins for new applications and an increase capital spending advanced industrial markets and to a lesser degree the medical markets. Sales of medical technologies for the second quarter increased 57% to $34.8 million compared $22.1 million one year ago. The JADAK acquisition added about only 15.5 million this quarter as a…

(Operator Instructions) Your first question comes from the line Lee Jagoda with CJS Securities.

John, can you discuss some of the types of challenges you face for the manufacturing side and possibly quantify the impact it had on the gross margin in Q2?

Well, I said that we don’t think pricing and market factors really have much of an impact, right. So is there a mix shift a little bit here and there? A small one. But most of what we see in impact really is the manufacturing efficiencies and it’s really when you put new products into the production that they yielded 60% where the thing they're replacing is 90% to 95% or whatever. And so we’re running scrap is high and rework is high which is a labor cost. So we’re just seeing it runs through the variance lines in the factory. It’s not that our new products have a worse standard cost. I think as we are obviously -- when we design them we’re looking at the BOM cost and the economics of the products and I think we’re fine with that. It's just we’re not getting to that standard as quick as we'd like. And that’s something we’re seeing in the laser business. We’re seeing across the number of parts of the Company .it’s really a result of us trying to do a lot more growth facing projects in the Company and you can’t just make what you've always made if you want grow. You have to kind of go where the market is heading and put out new products new functionality for the growing applications. And we just don’t have as much as maturity around that process I would say in our factory. A lot new folks and they bring those skills in but the processes themselves are not matured.

Okay and looking on the lean initiative side, I think you would expect to spend about $5 million in the first half and then see the benefit of that in the second half. How much of that $5 million was actually spent and is there any more expense expected back in the back half for these initiatives?

I would say it’s actually running higher than that because what that investment detail is not only investments of individuals, but it took into accounts some of the yield losses and scrap rates and rework and all those things. So some of that cost is running higher than we initially planned.

And you try to separate the two and say like having brought in more continuous improvement people, I know they’re spending more money on implementing stuff, it’s not really that, it’s really that the impact that they’re having just taking longer, right.

Yes. So to that, you do have a frontend loading of that. We have been putting a significant effort around that and then that snaps back. So as soon as you as you release this you should be producing products at a much better level and that’s the savings element of it.

Got it, switching gears a little bit to NDS, our expectation was that the dual sourcing issue would sort of anniversary post Q1. I guess the question is, what if anything change versus that previous assumption? And then as a follow-up just any additional information regarding that customer and whether you expect to get any of that revenue coming back?

So there is a couple of things there. One is, the notification happened last Q1 and the implementation of the dual sourcing was not immediate, it just not possible. It was a pretty good sized customer and they had inventories and they had a pipelines of products and orders with us. So really the notification was not the proper anniversary of the dual sourcing. I think by the end of Q2, it’s safe to say, it had been implemented. So Q3 and Q4 of last year were more at the fully reduced dual source run rate. So we should see less impact from that. That customer is still a customer. We don’t talk about who they are because it’s confidential in an OEM non-disclosure agreement there. They are important customers to us. We continue to serve them. There is an opportunity gain business with existing products or with new products with that customer. So, I don’t know that they are going to like go back to single sourcing necessary so we kind of get that exactly what we used to have. I don’t think that’s likely but I think we see growth opportunities in that account from where we are now.

(Operator Instructions) Your next question comes from the line of Jim Richiutti with Needham. Jim Richiutti – Needham : I joined a few minutes late but I was wondering John, a lot of did you give that breakdown of the revenues from new products and I’m just wondering if there is a way for us to get a sense as to how much that’s contributing as say in the past quarter versus a year ago that would maybe help to explain some of the issue around gross margins.

Yes, we don’t have a specific measure on that. It’s not something we exclusively track like that. What we can see what we are getting variances slowing for the factory like what’s causing them and then we can trace that for new products but to say X percent of our revenue and are running at it is different margin -- we're not able to drill it down to that level but what we can tell you is we just don’t see deterioration in the pricing environment and we don’t really see a big let’s mix change where division A or business line A has 10 points higher margin than business line B and there was a mix shift. It’s really not that. It’s really the variances in a number of factories our running high and when we look and say well why is that, why we’re seeing rework in labor variances to and are we seeing scrap in material variances, they trace back to new product launches. Jim Richiutti – Needham : Okay, John, in implementing lien it sounds like it sometimes can have a short term negative impact. Some of that is well contributing here?

Yes, I mean it’s definitely is. And so how much -- I think more is coming from new products but the lien is sort of that -- it’s a complicating factor. We’re absolutely convinced that it’s where we need to go because the lien is going to enable us not only to get the quality right, reduce lead times but scale. It’s just much more scalable because in our old processes as we’re using way too much space, too much time. It’s where we need to go to be able to scale but what ends up happening as you surface problems that you have been living that all along but they rise to the forefront in lien because you are not running batches of 100 where 20% of them can be bad and you just set those aside right and you keep running. When you're running single piece flow, each piece if it’s bad is more or less sort of shut the sell down and you got to resolve that issue. You don’t just get working around problems in lien. It’s an excellent sourcing device right because it causes finally a root cause and corrective action and a resolution of the issue as opposed to just varying it. Jim Richiutti – Needham : And as you go down this cap in terms of slowing the implementation that’s really not necessarily a good option I guess either is it?

Yes, I mean when you could sort of just punt on the problem little bit and say while doing lien it's just too painful short term, let’s not do it or let’s do it. We are not doing it every single part of the factory. We have made some judgments about where we want to put these cells in. But those are not geared to where do we have the most risk of disrupting production. We're making those decisions basically where do we really see it as a strategic capability, where do we want to grow, where do we need the performance and that’s what we do in lien and in some cases that actually makes the pain level a little bit higher short term because you could go do it often and in significant product line. You would do that if you didn’t have people who know how to do lien. If you are sort of learning how to do it, it’s not bad. We actually have experts who come in here from world class companies and have deployed lien dozens and dozens of times in the past. It’s more the process maturity they are working with, just the underlying consistency and the underlying yields and capabilities for those processes are not that mature. Jim Richiutti – Needham : Got it, and I know you guys don’t give any guidance specifically on gross margins but I’m just wondering under the circumstances can you give us any sense as to -- it doesn’t sound like you are expecting a whole lot of change in Q3 and maybe just some sense as to when this might begin to turn for you? Is it going to be a couple of quarters? It sounds like that’s what you're alluding to.

Yes, I think that is the question and what we try to do is say it could improve faster. When you start to solve improvements aren’t necessarily straight line. What ends up happening is you get out the root cause of the yield loss and then you resolve it and now you get a step change improvement and now you got to work on the next thing on your Pareto and solve that. So you sometimes get step change improvements but it’s sort of hard to predict exactly when they come online. So, we’ve taken the approach that it’s possible. It takes us a couple of quarters here to really get the thing moving upward. It’s entirely possible that happens sooner and that sort of accounts for some of the spread in our profit outlook. Jim Richiutti – Needham : Understood and then I guess you must be encouraged I would say from the reaction or response in the market to the newer products and what is your sense that you -- I assume you’re taking some share here and I am wondering if you can give us a little bit of color in terms of where you think you might be taking some share or possibly if it just the tone of the market is getting better?

Well to some degree, the share we’re taking is really laser processing or other types of processing that's overtaking some traditional method. That’s true more in our laser side of the Company where you’re seeing laser processing come in areas that were mechanical. And then so scanner is needed, a laser source is needed and we can capture both of that. And it doesn’t necessarily come at the expense of another laser company. It with the expense of some other process. And when you look at our medical and some cases we’re adding functionality into medical equipment that wasn’t there at all. So it’s a new part of the markets that’s opening up. That’s very true with some of the JADAK technologies which are error prevention techniques that are being added into equipment and you’re not displacing anything. They’re spending money to put that capability into instruments to reduce medical errors and there is a payback on that for the end user. In a few cases certainly we feel like we’re getting some share. There is no question about that but it’s not really just a share based story. Jim Richiutti – Needham : Okay and just one final question, just because you don’t have a lot of experience with JADAK, is there much seasonality to their business in Q3 at all?

It will likely tick down a little bit in Q3, not that much. What I mean that is on a sequential basis. On the year-over-year basis we’re still expecting some solid growth out of that. Sequentially, they’ll tick down a little bit and then Q4 will actually likely much stronger than obviously Q3 but also Q2. That is more aligned with the overall medical markets. Hospital CapEx spending tends to be heaviest in the fourth quarter. Jim Richiutti – Needham : Just consuming the capital budget for the real and the hospital kind of deal?

You will see that in couple of our business lines.

(Operator Instructions) Your next question comes from the line of Stefan Mykytiuk with ACK Asset Management.

Few questions I guess first off, the growth in laser products was again quite good, but it sounds like from what you’re telling us in terms of the how that’s throughput on the new product wins, that revenue growth actually could have been higher if you didn’t have these kind of throughput challenges? Is that a fair statement?

In laser I would say that’s the margin a little bit true but it was more of case of flow through on the volume we did get, just those sort of startup inefficiency. We had some yield. People used the term yield experience in some of the laser business where -- so in effect if yield drops it really does cap your output a little bit because at a minimum it’s going to take you time to rework that stuff and so it delays in getting it out the door, but it’s more as cost impact that we felt than really.

It’s costing more money to get out the door.

It’s costing more money to get out the door and delayed and if you really get into ultimately scraping that product then you actually kind of reduce the output. I would say that was probably a little bit less of our problem and then just a margin flow through.

Okay and it sounds like that margin impact is pretty hard to quantify as it relates to just the new products and throughput issues?

Well, I would say I mean we can quantify looking backwards fairly well. What’s harder to do is say how quickly does it resolve itself. These are things that are solvable. There is more in more you control. If customers aren’t buying your products you have a different problem, you got to go back to the drawing board. But we have demand for the products and we know sort of -- let’s say the build materials, the basic standard cost of our products is where they need to be it’s more just we got be able to build them the same way we could build the prior generation. And I mean we’ve always experienced -- GSI if you look at its history always had some of these challenges that weren’t doing as many new products and it took that amount of time. We want kind of launch the products on a more regular basis the new products and then get them to the target cost in a more timely kind of manner. We need that skill to be a growing company in order to sustain our growth.

Right, what I am trying to get to is again back I think someone asked the question earlier, originally you talked about spending 5 million on lean in the first half of the year and then getting back that in terms of savings in the second half. It sounds you’re saying in terms of the lean initiatives you’re spending more than the 5 and some of what spending or that impact is dragging into Q3 in the back half of the year, right?

We’re spending more on the first half of the year, that’s absolutely true. Even if you look at the gross margins, the entire drop is a consequence of either inefficiencies in those new launches or the lean efforts that we’re doing.

I guess when I think of spending though I think of like deliberate acts. We are not hiring more people to run the lien programs. We are paying them higher salaries than what we intended to. What’s happening is that the impact on the operations is not as favorable as what we intended.

You are not getting same incremental margin on that growth?

Yes, right and so there was a hit in Q2 on that. As we started to do more of this, we experienced more kind of startup problems on some of this than we expected. Now, when you say -- so we had planned to get whatever those costs were back in the second half, are we still confident we can get every dollar of the savings that we are modeled into second half? I think we can get it, it’s a timing question. I mean we know we can solve these issues but there is some headwinds on it as we head here in Q3 and we’re working pretty hard to improve that way, that’s why we have range around our income. Really most of the range is around this issue. The demand is lining up pretty nicely.

Okay, but however you says that it’s more than 5 million of gross profit impact in the first half of the year and then as we look forward, obviously as you’re saying you’re not going to get it back in Q3 there is potential for Q4. As you get into ’15 do you think these problems are solved or do you think you still could be dealing with those headwinds?

No, I think that they are largely resolved heading into ’15. That’s the line of sight we have. Of course we want to be launching more new products in ’15 so it’s not just resolving the known issues that's important to us. It's getting good at this in general. So, being able to launch new products on a continued basis closer to the targeted cost structure in a more tight timeframe. So we are trying to not only solve any issues we have now but to kind of institutionally have that capability.

(Operator Instructions) And this time presenters, there are no further questions. Do you have any closing remarks?

Yes, I'll wrap up, thank you operator. So just to conclude today’s call I'd like to reiterate that I’m very pleased with the Company’s overall progress this quarter. The growth strategies are clearly paying off, especially in our more significant business line like CO2 lasers, scanning, the optical encoder products, the JADAK acquisition. Our medical cross selling program is sourcing a lot of attractive opportunities. These are already becoming part of our revenue funnel and we're certainly going to help growth next year and beyond. Overall, we're making tremendous progress as an organization, the momentum is building with our OEM customers in key applications and that's very encouraging to me. We have an outstanding management team in place and they are all extremely committed to delivering on our strategy. Like most companies we still have challenges we need to address. The operations and gross margin issues that we discussed on this call are really the biggest area of focus for us now. Good news is, this is really an execution issue and it's ultimately in our control. We have excellent people focused on it in our production side and I’m confident we'll achieve the result we expect. So with that I really appreciate your interest in GSI, your participation in today’s call and I look forward to joining all of you in a couple of months on our next earnings call. So thank you very much. Today’s call is now adjourned.

This concludes today’s conference call. You may now disconnect.