Welcome to the Alphatec Spine's Fourth Quarter 2014 and Full Year 2014 Earnings Call. At this time, all participants are in a listen-only mode until the question-and-answer session. [Operator Instructions] As a reminder this conference call is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce you to your host Christine Zedelmayer, Head of Investor Relations at Alphatec Spine.

Good afternoon and welcome to Alphatec Spine's quarterly update conference call to discuss our fourth quarter and full year 2014 financial and operating results as well as to provide an outlook for 2015. This afternoon our comments will build on the press release we issued earlier this today. Before we begin, I would like to remind you that this conference call contains forward-looking statements that involve risks and uncertainties, including statements regarding the company's expectations, regarding its financial performance, strategies for revenue growth, and operating improvement, development of new products, customer acceptance of the company's products and overall trends and economic conditions in the company's markets. The company undertakes no obligation to update the information presented on the conference call. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. For more information about potential factors that affect our business and financial results, we suggest you review our filings with the Securities and Exchange Commission. Throughout the conference call, the company will reference some financial metrics that are derived in accordance with Generally Accepted Accounting Principles or GAAP, while other metrics are not in accordance with GAAP. This approach is consistent with how management measures the company's results internally. However, non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered as supplement to and not as a substitute for financial statements prepared in accordance with GAAP. Now let me introduce the other members of the Alphatec management team that are here with me today. Jim Corbett, President and Chief Executive Officer; Mike O'Neill, Vice President and Chief Financial Officer; and Ebun Garner, General Counsel. I will now turn the call over to Mr. Jim Corbett.

Thank you, Christine. This afternoon I will spend only a few minutes commenting on our fourth quarter and full year results. More importantly, I want to spend the majority of my time outlining our plan for Alphatec's future, providing the details of our strategy and the supporting initiatives for transforming into a businesses capable of improving shareholder value and strengthening our market competitiveness. Our plan which we refer to internally as the management agenda is well defined and we are executing on it today. Now let me provide some highlights of Q4 and 2014. As detailed in our press release this afternoon, Q4 represent the highest revenue quarter in our history. Revenue for the quarter was $53.6 million, up 4.5% on a constant currency basis. Adjusted EBITDA was $8.3 million fourth quarter, representing 15.4% of revenue and up 10.3% over fourth quarter of 2013. These results demonstrate our continued focus on execution and driving towards our goal of profitable global growth. 2014 was a year of transition for Alphatec where we developed the foundation to accelerate and execute our strategy. We experienced some challenges during our fiscal year including the Orthotec litigation and settlement and the restructure of our French operations. With this behind us, we have strengthened our management team globally and successfully launched Arsenal, the company's new and innovative spinal fixation platform. Through strong leadership and focus, we successfully navigated the change and delivered full year revenues of $207 million, the strongest year of revenue in our history. With 34% of our business being international, foreign currency headwinds negatively affected us by $2.9 million for the year and down $1.3 million in the fourth quarter when compared to our third quarter exchange rates. When adjusted for the foreign currency headwinds in the fourth quarter compared to the third…

Thank you, Jim. As Jim has already provided the key revenue highlights for both the fourth quarter and fiscal 2014, I'll focus the majority of my remarks on the reported operating performance for the fourth quarter and full year 2014. I'll then provide full year 2015 guidance. Before I go into the financial details, I'd like to remind you that were a number of non-recurring expenses in the fourth quarter and full year of 2013, related to the Alphatec legal matter, the French restructuring, and inventory write-offs associated with the discontinuation of the PureGen product. As I review performance in the fourth quarter and full year 2014 compared to prior periods, I encourage you to look at the non-GAAP reconciliation tables accompanying our press release for more detailed information. While Jim covered consolidated revenues for both the fourth quarter and full year, I'd like to provide some additional commentary around the results. Our fourth quarter and full year consolidated revenue grew 6.3% and 5.1% respectively after excluding 2013 revenue from France and well adjusted for currency. Similarly, our international revenues for the fourth quarter and full year grew 19.5% and 12.1%, once adjusted for the above mentioned items. The gross profit and gross margin, I've already noted some of the significant impacts in 2013. After adjusting for these items, the company has maintained a critical focus on managing our cost of goods sold. Our Q4 gross margin was 70.3% and compared to the prior year of 66.4%. After the negative impact of price and mix, the 390 basis point improvement is attributable to 180 basis points from the French restructuring and 210 basis points as a result of better capital utilization and lower amortization. Similarly, on a full year basis, our 2014 gross margin at 69.3% compares to a prior…

Thank you, Mike. Looking ahead, I see great opportunities to compete more effectively and accelerate global growth and increase profitability. Alphatec is a spinal fusion technology company under a new leadership that is driving a business transformation. From a focus on smaller niche products to competing in major market segments, with advanced engineered differentiated technologies which we believe can significantly impact the company’s valuation. Unlike other with narrow product lines or limited market presence, Alphatec’s history as a global provider of diverse and deep product portfolio provides with the ability to scale up its core business to meet the demands of the new product and commercial strategy that I outlined earlier that is focused on big market segments and large global markets. We believe that our focus on spinal fusion and our global presence uniquely positions us to reshape the way we operate and provides us with the nimbleness to move quickly through this transformation. I'm excited about the opportunities that lie ahead for Alphatec. I believe that when we look back in time this transformative period will be a distinguished part of Alphatec’s history where we made bold decisions, moved aggressively and ensured long-term strategic value for our customers, shareholders and employees. In closing, I would like to acknowledge and thank the Alphatec -- employees of Alphatec who’ve made lot of progress in 2014 and positioned us to accomplish even more in 2015. Thank you. Now, I would like to open the call up for your questions.

Thank you. [Operator Instructions] Our first question comes from Josh Jennings of Cowen and Company. Your line is now open.

Hi. Good evening gentlemen and thanks a lot for the download and all the color on the new strategic initiative, Jim. I just I wanted to start on the top-line guidance for next year in conjunction with the fourth quarter performance. Just looking at the U.S. business there was some modest underperformance by our calculation relative to the spine market. In the setting of the Arsenal launch in terms of moving forward into 2015, can you just breakdown – I mean, are you able to divide your expectations, your assumptions baked in -- on U.S. and international businesses in 2015?

All right. I think you've got three questions there, so let me try…

Sorry about them.

I mean, I and Mike’s request, I just want to make sure I address them. So with respect to Q4, let me start with U.S. Arsenal. We were in the first phase, the 25% phase of the limited market release beta launch really into November. And so we executed Phase II November, December and we are right now in full launch capability. So from a revenue contribution, Arsenal wasn’t a significant expectation for revenue for the U.S. in Q4. So as you try to sort out that it’s something you should have some greater expectations for going forward. With regard to the constant currency guidance, currencies have moved around and we've done a lot of analysis on them, and we think that the best, most effective way to clearly communicate quarter-over-quarter, year-over-year is to lock in on a constant currency methodology. And so the prior year one we have is 2014 and so that's how we got to that point. Is that the question you are asking?

Sure. Yeah, I think the mean jest was, just looking 2015 guidance your expectation for the U.S. business and international business, is that kind of balanced between at that level of growth in 3.9 and 7.2 balanced between both business segments or is it – they’re more heavily weighted towards domestic or international business?

Well, we don’t separate our guidance between the two. The international market is – our international business is approximately 35% of the total. So it will grow the different rate presumptively. But we don’t separate them when we give guidance.

Okay. And then just on – you looking into strategy to penetrate 2016 some of the lateral form of the segments just in terms of the timing of those launches in first half 2016, how should we think about the regulatory path here. And it sounds like 510(k) submissions. And how long has these development projects been in play that would suggest product launches within about a year to 18 months?

Well, first of all they are 510(k) approvals, yes. Secondly, both programs have had resources applied to them for some time. What I will say the reason we are focused on and forecasting that time of launch is that we did reorganize our R&D focus to apply more resources towards both of those programs, which meant we don’t do other things that we were doing. And so we think we have sufficient resources on both of them to accomplish those launch timeframes. So – this is of course first time we've talked about them, so we didn’t start them yesterday for sure.

Understood. And then just maybe – just looking at the attack of the Pedicle Screw interbody spaces, some of our competitors have talked about moving away from those two areas and then focusing on exclusive technologies. Should our assumption that you are looking to introduce exclusive technology platforms within those two spaces, has one of the concerns as that’s where pricing pressure is greatest. Thanks a lot guys.

Yeah, first of all, those two segments are what happens in spinal fusion cases every day and one of the challenges we've faced in our past is we have a very broad product platform, but some of them unique, not used on every case. And so to sort of be able to take advantage, you need to be in every case. Now, although there are these pricing pressure in both of those segments there is still a robust market opportunity, gross margin ability in those markets is very significant and, one we are preparing to compete. So we want to be in cases every day and we want to be in cases in every metropolitan, top 100 in United States. So we've got work to do to be sure, but what we know is we’re going after a market that's very clear to define and we can readily address it.

Thank you. Our next question comes from the line of William Plovanic of Canaccord Genuity. Your line is now open.

Hi, can you hear me okay?

We can. Yes.

35.30 :

Our stocking business is down year-over-year. I don’t have the percentage and we don’t disclose it. It’s a much less significant part of that business than it has been historically.

Okay, great. And where OUS in terms of strength, what geographies are you seeing the strength in the quarter?

Well, without exception our Japan business continues to perform very well. In terms of international markets it’s far and away our flagship. And so to answer your question, I’d say Japan is our strength. We are putting a lot of our efforts into expanding our EU presence. I think that's what we will be talking about in the coming quarters along with Japan. But that's how we are thinking about it.

Okay. Great. And then last question here, I will hop back in. Jim, you've in the CEO role almost a year now and just where are you in terms of implementing your plan and how has your vision of the company changed in the past year or so?

Yeah, I'm actually just finishing month nine. So Monday I will be beginning month 10. So, actually, you just heard it. The three pillars of how to transform the company, we've fundamentally during my time focused the R&D pipeline to focus on these larger market segments. And we focused on how we are going to expand our commercial footprint in United States and internationally and further we've implemented a series of transformational cost initiatives to cause us to operate more efficiently and to utilize capital more efficiently. So the combination of those three, I think constitute the – what I might call, the management agenda of the company.

Great. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Mark Landy of Summer Street. Your line is now open.

Good evening guys. Thanks for taking my question.

Hi, Mark.

Hey, Mark.

Jim, maybe this is a bit of unfair question, but I will shoot it out there anyway. Just sitting back and listening to your strategy, obviously not much commentary there. I think it’s a good one and what you believe is right. But this is almost the third or the fourth refocusing that the company has gone through in probably about three years, maybe three and half years. Is there little bit of refocusing fatigue? I mean, what's really the mood right now? People just jazz that his something that they believe in, or is it kind of, here we go again, let’s wait and see?

Well, I think it’s a fair question. Les, when we came out of retirement and was running the company for two – for those two year period, he had a very different set of challenges than I have. There was an Orthotec litigation at the time. There was a need to basically integrate the Scient'x acquisition which involved the restructuring of France, and those are big – kind of big hairy problems. And those are kind of – those were basically solved when I come. And so now what the company needs is, is it needs strategy that transforms the company into a profitable growing enterprise. I can share with you and this is obviously my point of view, the management team, the employees are extremely motivated. They see the possibility around what we are doing. It’s all within the scope of our ability to execute. Certainly, much of it requires, what I would call, more aggressive diligence, meeting new challenges, being more focused, learning some new skills, lot of things. But same time very motivating for them. So I don’t think we have refocused fatigue. I think we have transformational energy.

Hey, Mark. This is Mike. And I couldn’t let -- I cannot let that go without adding some commentary here. I have been here for 4.5 years. I have seen them -- the massive things we have to worry about and cleaning up. This is probably the first time as a company we can focus exclusively on doing the right thing for our business and be focusing on that. As a member of the senior management team, I will tell you, I am pretty jazz. And I can tell you that everybody else on the team is pretty jazz as well. We have a management agenda. It’s clear. It’s articulate. It’s broadly understood within the company, and everything we are doing is driving at the agenda so that we can be successful in 2015 and beyond.

Fair enough and good lot from that. We look forward to good results. Mike, I guess, a question for you. Gross margin has trended up nicely. You have some programs there. As you hit, maybe Josh pointed out it a little bit towards. I don’t want to say this more to commoditize side of spine, but perhaps more the everyday products in spine. Do you think that improvements in gross margin slows down a little bit and then you will get some pickup in 2016, maybe late 2015?

So I think you got -- a couple of dynamics happening in, right? You have got growing international business which is historically has lower overall margins. And we are going continue to see some of the benefit from moving ourselves outside of France. Fundamentally, I think Jim touched on it. You look at that total gross margin, you know, approaching 70%. We are obviously above that in the U.S. You look at some of that standard gross margins, it’s a very healthy business. And there is plenty of margin out there in these segments, both Pedicle Screw and Interbody. And certainly in the areas we are looking to get in 2016 in terms of deformity and lateral. So we still have obviously some other products that we can -- will position the premium pricing. But I believe that we have got opportunities to improve our margins in 2015, 2016 and 2017 and we are going continue to push for that.

And then just lastly on Arsenal, on the better rollout, in terms of the goal of getting, I think it was 50% new surgeon account. You were that just trialing or is that sticky business, or there are peek users. Can you give some clarification there?

We only -- it’s small and at the moment relatively speaking. It was both trial and conversion. So we have had a number of competitive conversions, of course. And we also have some that are -- they have to use -- we have kind of an internal definition for how many months in row, they have to be a user before they can be classified as a conversion. And so if you -- as we move into the full launch, I think I will have a better answer for you next quarter. But we are quite satisfied that we can compete with anybody with the Arsenal system. We have tracked how we performed relative to the different competitors. And so we think this is going to provide us a great lever for growth during the course of the year of 2015.

Thanks for the answer, guys. And thanks for taking my questions.

Thanks Mark.

Thank you. [Operator Instructions] And I am showing no further questions at this time. I would like to hand call back over to Jim Corbett for any closing remarks.

Well, I think that concludes the questions and our time for today. Thank you much for joining and have a good day.