Conference Call Transcript

PARTICIPANTS Corporate Participants II-VI Incorporated IIVI Q4 2014 Earnings Call Aug. 5, 2014 Mary Jane Raymond Chief Financial Officer & Treasurer, II-VI Incorporated Francis J. Kramer President, Chief Executive Officer & Director, II-VI Incorporated Vincent D. Mattera Chief Operating Officer, Director & Executive VP, II-VI Incorporated Other Participants Avinash Kant Analyst, D.A. Davidson & Co. James A. Ricchiuti Analyst, Needham & Co. LLC Mark Douglass Analyst, Longbow Research LLC Dave Kang Analyst, B. Riley & Co. LLC MANAGEMENT DISCUSSION SECTION Operator: Good day, ladies and gentlemen, and welcome to the II-VI Incorporated Fiscal Year 2014 Fourth Quarter and Year-End 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. [Operator Instructions] As a reminder, this conference call is being recorded. And now, I would turn the conference over to your host, CFO of II-VI, Mary Jane Raymond. Please begin. Mary Jane Raymond, Chief Financial Officer & Treasurer Thank you, Tyron, and good morning. I m Mary Jane Raymond. I m the Chief Financial Officer of II- VI Incorporated. Welcome to our fourth quarter earnings call for the fiscal year 2014. With me on our call today is Fran Kramer, our Chief Executive Officer; and Dr. Chuck Mattera, our Chief Operating Officer. As a reminder, this call is recorded here on Tuesday, August 5, 2014. Any forward-looking statements we may make today during this teleconference are given in the context of today only and we do not undertake any obligation to update these statements to reflect events subsequent to today. With that, I ll hand it over to Fran Kramer. Francis J. Kramer, President, Chief Executive Officer & Director Thank you Mary Jane and thank you everyone for joining us. In our just completed quarter, II-VI bookings reached a record $193 million. This strength in bookings helped us meet our Q4 guidance, with actual revenue of $188 million on a guided range of $175 to $190 million, and actual EPS of $0.20 on a guided range of $0.15 to $0.20. The quarter and the year overall reflect the important strategic and operational steps we took during FY 14. www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet E 1

We have advanced our broad portfolio of products serving the high power laser market, including CO2 lasers and one micron lasers, We have successfully transitioned our HIGHYAG team into II-VI and we see resumption of strong customer demand, We exited the volatile tellurium market and transitioned our business to a profitable reclamation operation, We added and advanced the integration of active optical products into our portfolio for which we are seeing increases in demand, and, We made the decision to move to three segments in FY15, and have begun the work to leverage this simpler structure. As we enter into the FY15 year, we believe the progress made and actions underway will allow us to achieve our minimum 200 bps increase by Q4 FY15 on gross margin, EBITDA margin and operating margin. Now, I ll turn it over to Chuck to provide our segment level commentary. Vincent D. Mattera, Chief Operating Officer, Director & Executive VP In our IR Segment which includes IR Optics and HIGHYAG, Q4 bookings were $63.9M, which is an all-time record and exceeded Q4 FY13 by more than 10%. For the IR Optics business in the Americas on a sequential basis, orders from OEMs were up 9%, and OEM shipments increased 14%. In the North American aftermarket, orders increased 3% and remained flat year over year indicating similar laser utilization overall. European bookings for Q4 were up 20% sequentially driven by a renewed demand for diamond windows and other related products for EUV photolithography systems. European aftermarket bookings were up 11% compared to Q4 2013 reflecting the successful results of a more focused approach to the market. Total Asian bookings increased sequentially with Japan bookings up 13% and in China where bookings were down 11% sequentially primarily due to the timing of a blanket order with a contract manufacturer that was already booked in Q3. We believe that the lower demand in China for high power CO2 laser optics is a result of slowing economic growth overall as well as increased one micron HP laser production, and decreased demand for some specific applications. We believe that the production of low power CO2 laser systems in China remains soft due to increased competition from systems builders outside of China. We will continue executing our plan to expand market presence in China where aftermarket bookings increased 26% year over year. At HIGHYAG, bookings for Q4 were an all-time record, more than double Q3 FY14 and up 63% compared to the same quarter last year. Significant bookings came from Japan during the quarter. Shipments for Q4 were also a record and more than 12% higher than the previous record set in Q1 FY13. We continue to see long-term growth opportunities in 1µ cutting, beam delivery, and welding markets. We are focused on improving our service and support for the automotive market customers, as well as staying ahead of our OEM customers from a technology and production capacity standpoint. In our Near Infrared Segment Q4 Bookings increased by 8% sequentially, while Revenues increased 5% sequentially. The increase was mainly attributable to the increased demand for Contract Manufacturing Services for optical windows and display panels, Fiber Laser Components, and Optical Communication and Data center components. www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 2

Compared to Q4 of FY13, overall Bookings were down by 11% and Revenues were down by 14%, driven mainly by the softening of demand for some of our legacy optical components and the reclassification of some of the sales from external to internal as a result of the acquisitions. We are working to launch a new family of transceivers and an integrated coherent receiver as part of our drive to increase our 40G and 100G content with our major Customers. This segment has been the focus of increased investment over the last two years and we expect to begin to see the benefits in FY15. Our Optics business remained strong in Q4 with growing demand for advanced components for fiber lasers and Life Sciences applications. We have signed several new contracts to provide the optical components and assemblies that serve customers in the fiber laser and instrumentation markets, which should support the continuous growth of our advanced optical components. We are seeing an increased interest in a family of newly designed and developed coating filters and related products for Data Centers and Data Network/Applications. In our Military and Materials Segment Q4 bookings decreased 27% sequentially and revenues were up 14% sequentially. Lower defense spending coupled with more intense competition for the available military procurements is the main driver for the downturn in this business. Recently we were notified by a defense prime contractor of a program order that will not be renewed in FY15. The revenue magnitude is $4-5 million. Although there may be some foreign military sales that extend the life of this product line, this is an example of the current market environment. Overall, we remain concerned with the uncertainty in the military market, so we continue to take steps to lower operating costs while improving our technology and product portfolios and our positioning with customers. We are executing on a plan to consolidate our California and Florida operations in light of the lower market demand, and the integration is going well. We are leveraging synergies between our advanced opto-mechanical assembly platform in California and our laser optics capability in Florida to expand our product offerings and we are continuing to actively pursue both military as well as commercial opportunities to diversify our customer base. We believe these actions should allow this business to maintain a solid rate of profitability in a flat market over the long-haul. In the Materials Business, we are making good progress refining a critical rare earth element and continue to achieve positive earnings based on improvements in our operations. This business which is located in the Philippines is performing well and has a solid order backlog for the next 6-8 quarters. In our Advanced Products Group Segment Q4 bookings increased 56% year-over-year, while revenues were flat year-over-year with new products replacing the revenue not recurring from a large order that we received last year. Silicon carbide semiconductor wafer bookings were strong and were derived from several customers demonstrating a high level of interest in migrating to our industry leading 150mm platform. This helped offset declines caused by product launch delays at Marlow Industries in the personal comfort market, and softness at M Cubed in the semi-conductor market demand for new products. In the meanwhile, we have taken measures to adjust operating costs until we see improvement in these two areas. At our Advanced Materials Division, formerly called the Wide Bandgap Division, market acceptance for the 150 mm substrates is being driven primarily by increased demand from customers with commercial applications in the wireless infrastructure and power device markets. This demand growth was forecasted for Q4 and is expected to continue to increase at least through the first half of FY15. We remain focused on utilizing our leadership position in this technology as we work to grow our overall market share. www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 3

At M Cubed Technologies we saw healthy Semiconductor component sales in the quarter of our Precision Products Portfolio driven by demand for products that serve the photolithography, and test and measurement markets. On the Display front, M Cubed saw an increase in sales in the period, driven by improved demand for our advance ceramic material platform products including from LCD OEMs and industrial and military component suppliers. At Marlow Industries for Q4, we saw increased demand for our products from the emerging markets including our system based products for personal comfort and for thermoelectric power generation. We are starting to see repeat orders from customers who are using waste heat to drive new sensor functions in their products. Despite delays in personal comfort shipments in FY14, we are optimistic about our growth opportunity in the personal comfort bedding market in FY15. Our current major customer just recently announced a product enhancement that they expect will significantly expand the market and accelerate the market adoption. Additionally, we expect that others in the industry will come on line during FY15 and that they will drive further demand. Finally, I will turn my attention to our Active Optical Products Group, which is the combination of our II-VI Laser Enterprise business that we acquired on September 12, 2013 and our II-VI Network Solutions Division that we acquired on November 1, 2013. Although the financial performance is not yet up to our standards, we did start to see benefits from our focus on the integration, the improvement in operations, and the cost reduction actions we took earlier in the year. During the quarter, we specifically made progress in the following integration areas: We successfully completed the cutover to our own ERP systems, ending the reliance on Oclaro for their systems and certain financial and operational processes, We assumed full control of the Shenzhen China laser module assembly and test operation that we described last quarter, We continued to rationalize the high-power semiconductor laser product portfolio by either increasing the price, or by discontinuing the manufacturing of selected low-margin and legacy products, We also continued to review the cost structure of several products and initiated new cost reduction plans to ensure the cost competitiveness of the products throughout their lifecycle, and, We are working to improve our wafer fab utilization by focusing on large addressable markets and leading strategic customers, whose future requirements we believe will underpin increased demand stemming from developments and deployments of new Data centers, mobile handsets, cloud computing and the Internet of Things. With respect to this quarter s top line results, Q4 bookings increased 13% sequentially, while Q4 revenues increased 5% sequentially. During Q4, bookings increased in both the high power laser and high volume component product lines. We saw strong demand for VCSELs and are on track to deploy our new industry-leading high power laser bar products for direct diode applications capable of increasing the power of today s state-of-the art products significantly. During Q4, the 980nm pump laser product line experienced ongoing strengthening of demand for products with new form factors including 10-pin and dual chip products following the successful completion of our final product development gates. We started the formal qualification of the next generation 980nm laser chip, which itself is an infeed element to a number of new products further downstream in our product roadmap. We continue to see increased customer confidence in our long-term product roadmap and global capabilities, including in the high reliability submarine segment of the market which has seen a recent uptick in demand. In our Network Solutions Division, we saw sequential revenue gains driven mainly by continued share recovery at customers that had shifted demand to other suppliers due to the uncertainties of Oclaro s finances, and growth in demand for our amplifiers targeted for 40G and 100G networks. On the new product introduction front, we completed pilot production of our arrayed amplifier which is used in next generation multicast switching applications. We expect this product to be used in www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 4

advanced networks which will start to be deployed in the next year. We see strong early stage engagements with all of our Tier 1 customers in amplifier modules, amplifiers ROADM linecards and advanced monitoring solutions which we expect to transition to revenue beginning in late FY15. We view the significant strengthening in these engagements as a sign that customers have recommitted business to us since we acquired the business from Oclaro. Finally, we are determined to improve the stability and profitability of the business which was for II- VI a strategic acquisition into semiconductor lasers. These products fill a major gap in our roadmap and technology platforms and, we expect them to enhance long-term shareholder value creation by expanding our existing businesses and customer base. I will now turn it over to Mary Jane to walk us through a review of our overall financial performance. Mary Jane? Mary Jane Raymond, Chief Financial Officer & Treasurer Thank you, Chuck and Fran. Year Highlight: The overall summary for the fiscal year of 2014 is $683 million of revenue, $103.3 million EBITDA, $46.5 million operating income and $0.60 EPS. This equates to 24% revenue growth producing a 33.2% composite gross margin, 6.8% operating margin, 15.1% EBITDA margin, and 5.6% return on sales. WITHIN OUR SEGMENTS: IR exited the fourth quarter on a strong note, with 11% increase in bookings compared to last fourth quarter, 8% increase in revenue and about $1 million down on earnings, as you can see in the segment table on page 3 of the press release. That s a nice improvement from Q3 of this year, and reflects HIGHYAG back at full strength as well as new product sales. The income being below prior year, for the quarter and for the year, is due to some higher selenium costs, price pressure particularly in China, and of course for the year, the HIGHYAG move in Q3. We expect IR to be more stable into next year. At NIR, Chuck reviewed with you the major factors, particularly soft demand for our legacy products. Q4 was a fairly strong revenue quarter last year, though we were already seeing some of the pricing pressure. It takes some time to refocus the product efforts, but we do feel, as Chuck already described, that with the work done through this year, plus the addition of pumps and amps, conditions should be more stable next year. Military and Materials orders, revenue and earnings were affected by softening military demand as Chuck said. The main driver however was our change in business model resulting in lower revenues but significantly less volatility from selenium index pricing. As you may remember, we have discontinued Tellurium, but we still sell Selenium at a much reduced level and only for our internal use. Advanced Products saw the benefit during Q4 of increased diamond sales, demand for the 150 mm wafers, and the highly profitable government development contract work received in the third quarter. For the full year, they also had 4 months of additional revenue and earnings from M Cubed. The combination of market demand and cost management produced the improvement. Regarding AOP, we acquired these businesses to establish a semiconductor laser platform from which we could ultimately serve the full scope of our addressable markets. We added $115.2 million of revenue on a $26.3 million reported segment loss. Of this $26.3 million, $10.4 million or roughly in the neighborhood of 40%, was comprised of one-time charges which will not impact future periods. www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 5

Quarter Highlight for the fourth fiscal quarter, the company delivered 22% revenue growth over the prior year producing a 33.2% composite gross margin, down 240 bps compared to last year s gross margin of 35.6%, 7.8% operating margin compared to 12.6% last year, 15.6% EBITDA margin compared to 20.1% last year, and 6.7% return on sales compared to 9.4% last year. We have seen our return on sales increase throughout the year. This is primarily due to the stabilization of AOP, the tapering off of one-time charges, and the success of some of our newer products in our IR business. As a result, our return on sales progressed from 4.4% in Q2 to 4.9% in Q3 to 6.7% in Q4. Backlog our book to bill ratio for the quarter was 1.0. Our backlog is $222 million in total at June 30, 2014, and for each segment: $56 million in IR, $33 million in Near IR, $42 million in APG, $59 million in Military and Materials, and $32 million in AOPS. When we move to the new three segments, the backlogs are $73 million for Laser Solutions, $49 million for Photonics, $100 million for Performance Products. Operating Income / Net Income / EPS between our total segment income for the quarter of $14.7 million and net income of $12.7 million, the largest item is tax. This is also true for the full year, where segment income of $46.5 million results in net income of $38.4 million. Our tax rate this quarter was 10.7% for the quarter, and 16% for the year. Two primary drivers affected this year s rate better utilization of the R&D tax credit and a shift in where income was earned. No one particular country swung this materially. For 2015, by the way, I think the rate will be back in the low 20s. Interest expense was $4.5 million for the fiscal year of 2014 and $1.4 million this quarter. The increase in interest expense of $3.3 million compared to last year is due to our increased borrowing for the acquisitions. During the quarter, we paid down $21 million of this debt and $55 million for the year, or about 20% of the total. Net other income of $0.9 million for the quarter and $3.6 million for the year is due primarily from interest income on excess worldwide cash reserves, earnings from our equity investment and offset foreign currency losses. Our net income from continuing operations this quarter was $12.7 million with EPS of $0.20/ diluted share, or 7% return on sales. This compares to $14.5 million in the fourth quarter of last year, or EPS from continuing operations of $0.22 per diluted share and 9% return on sales. Cash / CapEx, our cash at the end of our fiscal year was $175 million compared to $186 million at March 31, 2014 and $185 million at June 30, 2013. Our cash flow from operations was $95 million for the fiscal year. Our total change in cash was a net reduction of $10.8 million compared to an add of $50.5 million last year. We repurchased $8 million of our stock and completed our $20 million program in FY14, though we also bought about $20 million worth of stock last year. We have $69 million available under the credit facility and have $242 million drawn at a rate of approximately 1.9%. Our capital spending for the fiscal year of 2014 was $29.2 million. A couple of Subsequent Events to put out to you, we made a decision to buy the newly constructed HIGHYAG building in Berlin which we see as a good investment, so you will see a little disclosure about that in the 10K. Also, our Fuzhou facility, the headquarters of our NIR, soon to be Photonics in China was in the path of Typhoon Matmo. All told it wasn t significant damage and every one of our staff is okay, but there was damage to a few reactors and a few days lost production. We do not believe there will be disruption in supply, but we are still assessing that situation. And, our insurance carrier is www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 6

involved and we have been a little cautious accordingly in the guidance. Finally, the company announced in our current press release our Share Repurchase Program for up to $50 million on which we plan to use from time to time. This concludes our prepared remarks. As we turn to Q&A, I ll remind you that our answers to your questions may contain certain forward looking statements which are based on our best knowledge and for which actual results may differ materially. www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 7

QUESTION AND ANSWER SECTION Operator: Thank you. [Operator Instructions] First question is from Avinash Kant of D.A. Davidson & Company. Your line is open. <Q Avinash Kant D.A. Davidson & Co.>: Good morning, Fran, Mary Jane and Chuck. <A Mary Raymond II-VI Incorporated>: Hi, Avinash. <Q Avinash Kant D.A. Davidson & Co.>: Hi. <A Mary Raymond II-VI Incorporated>: How are you? <A Mary Raymond II-VI Incorporated>: So very good, very good. The first question, actually, you mentioned pretty much just now that in the guidance you do have some impacts from these disruptions. Could you give us a little bit more detail on when did this when do you think these disruptions started happening, and how long could that be, and what percentage of the quarter could be impacted in the guidance. <A Mary Raymond II-VI Incorporated>: With respect to the typhoon? <Q Avinash Kant D.A. Davidson & Co.>: Yeah. <A Mary Raymond II-VI Incorporated>: Okay. Well, I think it s not so continuous. I mean, it happened about two weeks ago. And as I say, we didn t have significant damage to the facility, obviously, a lot of water, affecting a couple of reactions and some few days, may be two or three days, lost production. So while on the one hand, it wasn t weeks and weeks, as I say, we re really still assessing the damage. And it s probably going to take a little bit of time to figure that out. I think, as you know, water damage is kind of notoriously difficult to estimate quickly. <A Fran Kramer II-VI Incorporated>: So these reactors Mary Jane refers to are really coating chambers and they re about $1 million each of three that are down will have to be repaired by the vendor. We don t have the total bill on that, and what product gets interrupted is that repair takes place is being sorted out because we re trying to do them in other areas. So, Avinash, I think Mary Jane s explanation was pretty straightforward, we re assessing it. We do not believe it s significant at this moment, but the insurance will have to play out. <Q Avinash Kant D.A. Davidson & Co.>: Okay. And in terms of tax rate, of course, it seems to be fluctuating quite a bit here. What should we think of for the coming fiscal year as the appropriate tax rate? <A Mary Raymond II-VI Incorporated>: Sure. As I said, I think probably in the low 20%s, call it 21%, 22%, something like that. <Q Avinash Kant D.A. Davidson & Co.>: And since you paid down some of the debt, should we expect the interest expense to come down from the $1.4 million that you had in this quarter? <A Mary Raymond II-VI Incorporated>: Well, I think it should first of all, yes. I don t know that that will be necessarily material. The interest rate depends on two things, one, the level of income, as well as the amount outstanding. So but having said that, we re well aware of the drag of the interest on the P&L and are looking to see that come down as we retire it. But I have to give you a number right this second, probably couldn t quite estimate that for you. <Q Avinash Kant D.A. Davidson & Co.>: Okay. And then one question, did you give out the depreciation and amortization for the quarter, Mary Jane? www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 8

<A Mary Raymond II-VI Incorporated>: I can. So the depreciation for the quarter, the depreciation total is 15.5% and the amortization is sorry, look, restart, the depreciation is 10.6% and the amortization is 3.1%. For the full year, the depreciation is 41.8% and the amortization is 11.3%. <Q Avinash Kant D.A. Davidson & Co.>: Now, coming back to the Infrared Optics business, it looks like most of the regions are doing well on a year-over-year basis, but except for China. Now, you gave out some reasons for the weakness in China, how is the competition have you seen competition from other laser types coming into China? <A Fran Kramer II-VI Incorporated>: Avinash, so this is Fran. The two different pieces I think Chuck commented on would be the CO2 laser high-power builds in China is not strong. It s quite weak. The low-power business goes on well in the aftermarket, very big growth. I think you had 26% quarter-over-quarter. So we re doing well, but it could be better if there was more coming down the assembly line, but we probably don t expect that to happen. China s made a quick jump off from CO2 to fiber laser and they will continue to be strong in the fiber business and we ve captured some good piece of that or a nice piece of it through our HIGHYAG by some systems that we re building for there. So, it will be I think China is the quickest to switch. They were never big in CO2. A lot of the CO2 business came to China from Europe and the U.S. and machines that were shipped into there. So they didn t have the infrastructure built around CO2, but there are certainly many deployed in China in that aftermarket as well. We re working hard to get more of. <Q Avinash Kant D.A. Davidson & Co.>: And could you give us some color on the defense side of the business? You said that there was one order that would not show up next fiscal year. But could you give us what percentage of the business in the quarter or for the year was defense? <A Fran Kramer II-VI Incorporated>: I m not sure. You got it, Mary Jane? Because we don t quite roll it that way always, but it s usually running 25% to 30% overall total company defense, about 20%, maybe 22%, I guess, overall. <Q Avinash Kant D.A. Davidson & Co.>: For the fiscal year, you mean? <A Fran Kramer II-VI Incorporated>: For the year, yes. Yeah. And our comment there is, we ve usually been holding pretty close on defense business. Now we re seeing the softening, and Chuck really laid in there couple of the reasons that we re starting to get pull backs on programs or at least the word that that s not going to renew, and that s not going to renew. So we see later in 2015 not such a good shape, so we ve kind of baked that into our guidance. <Q Avinash Kant D.A. Davidson & Co.>: Perfect. Thank you so much. Thanks for the answers. Operator: Our next question is from Jim Ricchiuti of Needham & Company. Your line is open. <Q Jim Ricchiuti Needham & Co. LLC>: Thank you. I wonder if you could talk a little bit about the seasonality you expect in the Infrared Optics business in the current quarter? <A Fran Kramer II-VI Incorporated>: Yeah. This is Fran again. And we usually book about 25% of our year for IR in the first quarter, probably in the neighborhood of 22% in the second, so that add ends to about 45%, 47% from the first half. So our second half is just like it happened this year, up strong in third and fourth quarter and they re both equal and about the same size. So I d expect it to run that way this year. We re starting off good here so far in the first quarter. And so that makes that our second quarter is the weaker quarter usually. www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 9

<Q Jim Ricchiuti Needham & Co. LLC>: Thank you. And just with respect to the overall tone, Fran. You highlighted some of the market conditions in Europe and North America for that part of the business. Just in general, your overall view of the near-term outlook for the Infrared Optics business in both Europe and the U.S., if you would? <A Fran Kramer II-VI Incorporated>: Well, I think we re quite pleased. Certainly that business goes so well when the economy goes well, when consumer spending is strong, and when the auto industries going well and steels reasonable around the world. And so it s so integrated now that you have to take it worldwide. We understand the four different continents that we play in, but right now we re getting good business in all areas. So, economy s good, consumer spending s good, so CO2 laser utilization is good, which drives more needs for our parts and it s in a good state right now. I wouldn t made any comment sooner than Chuck, would you add to it? <A Chuck Mattera II-VI Incorporated>: Yeah. I would just say that we have a great marketing and sales team. They have a full court press on expanding their market share in Europe and in Asia. And I m looking forward to the results. <Q Jim Ricchiuti Needham & Co. LLC>: Okay. And just switching gears for a second just to the Military & Materials segment. Clearly, a lot of headwinds that you ve already alluded to, highlighted. How challenging is it going to be in terms of maintaining profitability levels? Clearly, this was a fairly nice quarter and I m just wondering how you see that going forward? <A Fran Kramer II-VI Incorporated>: In that Military & Materials segment, we have the two different pieces. Certainly, the military piece, nicely profitable, doing well. And now that we ve changed our model down in the Philippines, we had a very good quarter also for what we call the reclamation business. We re recovering selenium out of our zinc selenide and out of those type of materials for our own use within the IR Optics business. So the selenium reclamation and the other material that we re the rare earth that we re doing, I think those will be those will hang in there well, very well in FY 2015. Military business, we think it s okay. We cautioned everybody on some softness that we re seeing on a couple of programs. And well, we can t go far enough ahead to tell you the exact answer because we don t know. We re just getting the primes that are our customers the rumblings of what they re expecting there due to downsize things. So, we re getting a little bit more timid on military in the second half of the year. <A Mary Raymond II-VI Incorporated>: I ll just answer with also a couple questions on that for you. First of all, military sales inside the Military, it s for the whole company are about 12% of the total year s revenue in the quarter and also for the year. So that s the first thing. And second thing is, just to caution you a little bit on a Military & Materials earnings pickup, the way the math actually works on that delivery thing, Fran said, is perfectly right. We disc-ops tellurium as you may remember, but we did not disc-ops selenium because we still use it ourselves. So some of the pickup is the one-time change from the index pricing we had last year. So I don t know that we re going to see basically $10 million pickup year-over-year. But I do think then going back to what Fran said, first of all, the material side of the business now as a reclamation business is very steady and should be a good little business for us. And then, as Fran said, we continue to be very cautious about military. <Q Jim Ricchiuti Needham & Co. LLC>: Okay. Thanks very much. Operator: Thank you. [Operator Instructions] We have question from Mark Douglas of Longbow Research. Your line is open. <A Mary Raymond II-VI Incorporated>: Hi, Mark. www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 10

<Q Mark Douglass Longbow Research LLC>: Good morning, everyone <A Mary Raymond II-VI Incorporated>: Hi. Yeah. <Q Mark Douglass Longbow Research LLC>: I missed a good part of the call, but did you discuss in AOP, when you think you might turn to profitability, what kind of actions are you taking right now to right the ship there? <A Mary Raymond II-VI Incorporated>: I think, first of all, with respect to the timing on the profitability, I think what we said was that we expected that to improve through this year and exit the year at a point where we are not making significant losses. So improvement through the year, not necessarily profitable right from the first quarter, but improving as the year goes on. And then, with respect to the action plans for AOP, Chuck went over that. If you d like to just recap it. <A Chuck Mattera II-VI Incorporated>: Yeah. Mark, we re taking a number of actions in the both in the operations to improve our yields, reduce our costs, rationalize the portfolio, and overall improve our operations, including having taking our reliance from Oclaro down. And I articulated a number of actions. I won t repeat them here today or I won t repeat them at this point. <Q Mark Douglass Longbow Research LLC>: Okay. <A Chuck Mattera II-VI Incorporated>: Yeah. <Q Mark Douglass Longbow Research LLC>: How are you seeing your high-power diode pump business? Is that improving quarter-over-quarter? Are you seeing more opportunity than you did when you first bought the business of potential high-power fiber laser OEMs coming to market? Can you discuss that a little bit? <A Chuck Mattera II-VI Incorporated>: Yeah. I would say that the business is stabilizing in that regard, Mark. We described last quarter and I repeated it here today that for some of the products that had lower than our target profit margins, we started to take action on those early on. In addition to rationalizing those products, we have also experienced an increase in demand and opportunity, including in China, for our products. And for the direct diode application specifically, we ve seen our share come back to the levels that we believe it was before the acquisition. We are investing in a family of higher power laser products for the direct diode market and we believe that we re well positioned there to continue to grow. <Q Mark Douglass Longbow Research LLC>: Okay. So right now, you re fighting a little bit of a headwind because you exited some low margin products, at least on the sales side? <A Chuck Mattera II-VI Incorporated>: Yes. <Q Mark Douglass Longbow Research LLC>: Okay. Okay. Thank you. Operator: Our next question is from Dave Kang of B. Riley. Your line is open. <A Mary Raymond II-VI Incorporated>: Hi, Dave. <Q Dave Kang B. Riley & Co. LLC>: Good Morning. First question is regarding your revenue guide for first quarter. Just wondering if you can just go over some of the assumptions, especially on AOP? www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 11

<A Fran Kramer II-VI Incorporated>: I think, Mary Jane, maybe ought to do that. But we re very similar in the quarter coming up to the one we just exited. And that s really the guidance we ve given. And it is the composite of all our businesses and as usual we don t break it down into any more than that. <Q Dave Kang B. Riley & Co. LLC>: Well, I m just curious about if you look at the mid-point, it s about 5% decline. So what s really driving that 5% decline, I guess? <A Fran Kramer II-VI Incorporated>: $0.14 to $0.20 is about the same as what we had in the guidance this time, $0.15 to $0.20 in our result. <Q Dave Kang B. Riley & Co. LLC>: I m talking about the revenue, top line decline. <A Mary Raymond II-VI Incorporated>: [indiscernible] (41:41) <A Fran Kramer II-VI Incorporated>: Okay. Yeah, okay. Maybe you have a comment there, Mary Jane. <A Mary Raymond II-VI Incorporated>: So, first of all, I think what s making the revenue guidance a little bit wide, let s say, a little bit soft, one, I think we re being very cautious on the military. It s just... <Q Dave Kang B. Riley & Co. LLC>: Okay, okay. <A Mary Raymond II-VI Incorporated>:... try and understand that aspect. And I think the second thing is that the quarter with respect to falling in the summer, particularly with respect to Europe, can cause the first quarter to be a little bit lightish. Sometimes it s on par with Q4, but sometimes it s a little light. So we try to capture these two parts of the volatility. <Q Dave Kang B. Riley & Co. LLC>: [ph] All right (42:15). <A Mary Raymond II-VI Incorporated>: I think also, Dave, with respect to your question about AOP, and I ll actually give a little comment on this in totality in a second. But keep in mind that that the AOP segment as it stands right now is going to be subsumed into the new three segments. So Laser Enterprise will be in Laser Solutions, and pumps and amps will be in Photonics. So while we will lose the visibility on that, the fact remains that we are still seeing the revenue, exactly as Fran says, very much on par with Q4 and continuing to be, let s just say, very good products for us in the revenue mix. The last small topic just to mention is we re also probably a little cautious in the guidance over Matmo, the typhoon that s affecting Photonics. We hope it s not much. The team is very committed to delivering their quarter, but it s a little bit tough to say. <Q Dave Kang B. Riley & Co. LLC>: Got it. Got it. And then just sticking with AOP, so you talked about legacy. I guess there s pricing pressure and all that. First of all, if you can give us more color or quantify the pricing pressure? And how much is legacy in terms of overall AOP sales? <A Mary Raymond II-VI Incorporated>: Well, I think, actually maybe Chuck will help a lot here, I m sure. I think really where we re seeing the pricing pressure on legacy is in Near-IR. <Q Dave Kang B. Riley & Co. LLC>: Okay. www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 12

<A Mary Raymond II-VI Incorporated>: So, that s the first thing, which also happens to be the same crew that s in the path of a typhoon. And I think if you look at the combination of demand and pricing, that s fairly well reflected in how we see the earnings coming in for this quarter. <Q Dave Kang B. Riley & Co. LLC>: Got it. And then on China, I guess moving to fiber lasers. So that s not really can you quantify that situation about the Chinese market? And if you can just talk about other regions, I mean as far as the trend to moving to the fiber lasers from CO2? <A Chuck Mattera II-VI Incorporated>: Okay. Dave, I ll take that. I ll focus my comments on China. Fran mentioned that China seems to be adopting the fiber laser technology very quickly. And there are a number of, let s call it, early adopters or fast followers, rather. There s a handful of people in this space. They re very aggressive. They re moving very quickly. Our judgment is that from a unit volume point of view, that s increasing at a very significant rate. And we are well positioned across the company, as a critical component supplier, at the Near-Infrared Group, as well as in the AOP business in our high-power laser business and also in HIGHYAG. So I think that we are really a full-line supplier and a primary choice for fiber laser builders in China as a partner. <Q Dave Kang B. Riley & Co. LLC>: So if you can just help us understand the dynamics like your maybe like a dollar content per CO2 versus fiber lasers? What s the drop-off on a net basis? <A Fran Kramer II-VI Incorporated>: We do not have a statistic like that because our business runs more as a merchant supplier to each one of those industries, but not that we can tell you by model, by company how much content we have in a fiber laser versus a CO2. I understand what you d like us to be able to tell you, but we cannot tell you that. But in China, certainly there are six to 10 major fast-moving companies that are going to be fiber laser competition for the likes of which one or two fiber laser companies in the world have not seen. So our position is to be merchant suppliers to them for whether it s a single emitter or whether it s a bar, some way for them to energize their fiber. And that s what these accounts look to be very good prospects for ourselves. <Q Dave Kang B. Riley & Co. LLC>: Got it. All right. Thank you. Operator: Thank you. We have no further questions at this time. I d like turn the call over to management for any closing remarks. Mary Jane Raymond, Chief Financial Officer & Treasurer So this is Mary Jane. I ll just give you a little bit of an update on the progress to the three segments. So you will remember that the company announced in the last quarter that we will move to simplify the reporting structure of the company to three segments: Laser Solutions, Photonics and Performance Products. The company will produce toward to the end of the summer a set of numbers that will give all of you the numbers recast backwards so that you can use those going forward. So, one, just to acknowledge, we know that that would be very helpful to you. We certainly do intend to do that. And because we will file the 10-K on this year s existing five segments, we ll finish that, do the numbers and then produce those for you. So just to let you know that s coming. And with that, we ll have Fran give the closing remarks. www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 13

Francis J. Kramer, President, Chief Executive Officer & Director Well, just thank you, everybody, for joining us and we look forward to next quarter s report. Thank you. Operator: Ladies and gentlemen, thank you for your participation in today s conference. This concludes the program. You may now disconnect. Have a wonderful day. Disclaimer The information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete or error-free statement or summary of the available data. As such, we do not warrant, endorse or guarantee the completeness, accuracy, integrity, or timeliness of the information. You must evaluate, and bear all risks associated with, the use of any information provided hereunder, including any reliance on the accuracy, completeness, safety or usefulness of such information. This information is not intended to be used as the primary basis of investment decisions. It should not be construed as advice designed to meet the particular investment needs of any investor. This report is published solely for information purposes, and is not to be construed as financial or other advice or as an offer to sell or the solicitation of an offer to buy any security in any state where such an offer or solicitation would be illegal. Any information expressed herein on this date is subject to change without notice. Any opinions or assertions contained in this information do not represent the opinions or beliefs of FactSet CallStreet, LLC. FactSet CallStreet, LLC, or one or more of its employees, including the writer of this report, may have a position in any of the securities discussed herein. THE INFORMATION PROVIDED TO YOU HEREUNDER IS PROVIDED "AS IS," AND TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, FactSet CallStreet, LLC AND ITS LICENSORS, BUSINESS ASSOCIATES AND SUPPLIERS DISCLAIM ALL WARRANTIES WITH RESPECT TO THE SAME, EXPRESS, IMPLIED AND STATUTORY, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, ACCURACY, COMPLETENESS, AND NON- INFRINGEMENT. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, NEITHER FACTSET CALLSTREET, LLC NOR ITS OFFICERS, MEMBERS, DIRECTORS, PARTNERS, AFFILIATES, BUSINESS ASSOCIATES, LICENSORS OR SUPPLIERS WILL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, INCLUDING WITHOUT LIMITATION DAMAGES FOR LOST PROFITS OR REVENUES, GOODWILL, WORK STOPPAGE, SECURITY BREACHES, VIRUSES, COMPUTER FAILURE OR MALFUNCTION, USE, DATA OR OTHER INTANGIBLE LOSSES OR COMMERCIAL DAMAGES, EVEN IF ANY OF SUCH PARTIES IS ADVISED OF THE POSSIBILITY OF SUCH LOSSES, ARISING UNDER OR IN CONNECTION WITH THE INFORMATION PROVIDED HEREIN OR ANY OTHER SUBJECT MATTER HEREOF. The contents and appearance of this report are Copyrighted FactSet CallStreet, LLC 2014. CallStreet and FactSet CallStreet, LLC are trademarks and service marks of FactSet CallStreet, LLC. All other trademarks mentioned are trademarks of their respective companies. All rights reserved. www.callstreet.com 1-877-FACTSET Copyright 2001-2014 CallStreet 14