Coherent Corp.

Good afternoon and welcome to Coherent's third quarter fiscal year 2020 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to introduce Brett DeMarco, Executive Vice President and General Counsel. Please go ahead.

Thank you, Danielle, and good afternoon, everyone. Welcome to today's conference call to discuss coherence results from its third fiscal quarter into July 4, 2020. All of us here at Coherent hope that you and your family are staying healthy and safe during these challenging times. On the call with me are Andy Mattis, our President and Chief Executive Officer, and Kevin Palatnik, our Executive Vice President and Chief Financial Officer. I would like to remind everyone that some information provided during this call may include forward-looking statements, including, without limitation, statements about coherence future events, anticipated financial results, business trends, global economic trends, and the expected timing and benefits, if any, of such trends. These forward-looking statements may contain such words as project, outlook, future, expects, will, anticipates, believes, intends, or referred to as guidance. These forward-looking statements reflect beliefs, estimates, and predictions as of today, and coherent expressly assumes no obligation to update any such forward-looking statements. These forward-looking statements are only predictions and are subject to substantial risks. Factors that could cause or contribute to such differences include but are not limited to, risks associated with the recovery of global and regional economies from the negative effects of COVID-19 and related private and public sector measures, global demand, acceptance and adoption of our products, including but not limited to, adoption of OLED displays, the demand for and use of our products in commercial applications, continued timely availability of products and materials from our suppliers, our ability to timely ship our products, and our customers' ability to accept such shipments. worldwide government economic policies, including trade relations between the United States and China, and other risks identified in the company's SEC filings. For a detailed description of risks and uncertainties which could impact these forward-looking statements, you should review Coherence periodic SEC filings, including its most recent Form 10-K, Form 10-Q, and Forms 8-K, including the risks identified in today's financial press release. I will now turn the call over to Andy Mattis, our President and Chief Executive Officer.

Thank you, Brad, and thank you to everyone for joining our earnings call today. This was my first full quarter at Coherent, and as you can imagine, I am still on a steep learning curve about our company, our customers, our product portfolio, and our people. I had never imagined how much one can actually get done in a solely virtual world. And I must say I'm extremely excited to see how all our employees are actively embracing the new normal of either getting business done remotely or working in our labs and manufacturing sites by adhering to our strict stay safe and healthy rules. I am pleased to report that both the number of active COVID cases as well as necessary quarantines in our workforce were de minimis. Under the leadership of our COVID Steering Committee, we have been able to safely ramp up our manufacturing readiness from some 80% back in April to over 90% today. Looking at our top line, we were able to improve our revenues sequentially from last quarter although our book-to-bill ratio dropped below 1 as we saw the effects of COVID slowing demand in several markets. To add a little color, Q3 was the first quarter that was fully overshadowed by COVID with substantial headwinds as most of Europe and the U.S. were under shelter-in-place orders. This impact was seen much more on the booking side than on the revenue side. On average, our proposal activity level in Q3 was more than 10% below the previous quarter. The month of April marked the low point with proposal activity more than 40% below Q2 average. We are encouraged to see that both June and now July proposal activity rebounded to levels north of the Q2 average. To be clear, when I say proposal, I am referring to quotes, RFQs, RFPs, and similar activities. If we do not experience another shelter-in-place environment in the months to come, this should be an early sign of recovery that could manifest itself in our Q1 booking. Now let's take a closer look at our market segment. Starting with microelectronics, as you know, This market is made up of three sub-markets, flat panel display, semiconductors, and API. All three markets have been impacted by COVID-19, but there are bright spots. In quarter, flat panel display revenue was aided by increased line beam shipments destined for Chinese customers. Fabularization by our customers was still down in Q3 and our corresponding service revenue was off for a second quarter in a row by more than 20% from our pre-COVID run rate. However, we experienced strong service bookings, which together with consistent reporting of higher FAB utilization in July, votes well for increased service revenues in the future. Reports of many new 5G and flexible OLED-enabled smartphone launches in the next quarters gives us confidence that the recovery should be sustainable as these products are expected to drive an upgrade cycle. If you look at the microelectronics market more broadly, we continue to capture mind and market share in the laser lift-off technology for flexible OLED with our UVBlade 750 which continues to outperform our solid-state laser competitor. And we have one significant repeat ultra-fast business in Korea related to flexible OLED cutting and ultra-thin glass for foldable phones. Semiconductor inspection remains a bright spot with a strong demand across all nodes driven by strength in cloud computing and data centers. our fiscal Q3 saw a historic high demand. In advanced packaging and interconnect, we see 5G driving increased demand in smaller geometry and next-generation PCBs, which is driving strength in our CO2 laser via drilling business. We are well positioned with China's leading equipment supplier, who appears to be taking share from the historical industry leader. With consumer spending and habits worldwide being impacted by COVID, we would expect to see a somewhat quicker recovery for mobile electronics compared to big ticket items such as, for example, cars. We therefore expect a faster recovery across microelectronics than we would for materials processing. Looking at materials processing, machine tool demand remains depressed especially across Europe and to a lesser extent, the US. Bookings are down more than 25% from pre-COVID levels. This trend already started in the German automotive sector before the pandemic, but has been exacerbated by the impact of COVID. With our recently announced exit from the commodity kilowatt fiber laser business, we chose to have a more limited participation in the China materials processing market. However, we continue to see strength in non-metal applications, such as converting, medical device manufacturing, and speciality semiconductor marking. We expect a slow recovery in the overall European and US marking, welding, and cutting markets, given the big-ticket nature of the sector, but we are using the opportunity to retune and invest in our industrial systems and component sales organization ahead of some key new product launches, which we believe will position us for share gains even in a relatively flat market in our upcoming fiscal year. Our OEM components and instrumentation business is made up of three important sub-markets, life science instrumentation, medical diagnostics and therapeutics, and defense. Life science is down more than 15% from pre-COVID run rates, as many non-COVID related research labs have been closed. This was partially offset with reasonably robust demand for clinical applications. In the last few weeks, we've seen some upturn in sales activity, which feels like the beginning of a recovery, but we need another month or two to verify if this is truly the case. In medical therapeutics, we definitely experienced an upturn in sales activity as pent-up demand for mainly elective procedures starts to rise. Similarly, we see many research scientists now returning to their labs, and the proposal pipeline for sales in ultra-fast laser research and ground-based astronomy looks robust after a very weak Q3 when few labs were open. As part of the OEM components and instrumentation and market, defense is emerging as an attractive submarket for us, where we are very well positioned in amplifiers for directed energy, countermeasures, as well as speciality optics for aerospace, and continue to see strong bookings. We see this as a multi-year growth opportunity and will expand further on our plans in this market in future calls. early in the pandemic we recognized the need to enhance our go-to-market approach as the world around us is changing at an unprecedented pace as announced yesterday it was therefore that for the first time in our history we added the position of a chief marketing officer to the executive staff with david g i'm excited to welcome a digital marketing expert to coherent upskilling our leadership builds on multiple levels is one part of our good-to-great initiative that we launched in Q3. Operational excellence, increased efficiencies and best practice sharing across all parts of our global organization is another important pillar of our good-to-great transformation. It is therefore that I ask Mark Sobey, our Chief Operating Officer, to oversee both our ILS and OLS business units. One area that clearly underlines the fact that operational excellence is a team sport and requires ongoing and continuous improvement on all levels of an organization is cash generation. I'm therefore very excited to report that as a company, our focus on cash is starting to manifest itself in a noticeable improvement of our cash position from Q2 to Q3. And with that, I'll turn the call over to Kevin.