Welcome to Alphatec Spine Second Quarter 2015 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce your host, Christine Zedelmayer, Head of Investor Relations at Alphatec Spine.

Thank you and good afternoon, and welcome to Alphatec Spine's quarterly update conference call to discuss our second quarter 2015 financial and operating results, as well as provide an update on our outlook for the remainder of 2015. This afternoon, our comments will build on the press release we issued earlier 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 could adversely 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 prepared 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 supplement 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, Chief Financial Officer; and Ebun Garner, General Counsel. I will now turn the call over to Mr. Jim Corbett.

Thanks, Christine. Good afternoon, and welcome to Alphatec's quarterly conference call. Today I'm going to begin with an overview of the results on a high level, followed by an update to our strategic initiatives. Mike O'Neill will then provide more detail on our Q2 financial results. For the quarter, consolidated revenues were $46.6 million as reported down 12% from prior year of $53.2 million. When adjusted for FX total revenue was $50.2 million down 5.6%. In the U.S. we had sales of $27.2 million in Q2 2015, against $34.5 million in Q2 2014, down 21% from prior year and down 13% year-to-date. This is below our expectations and we are going to discuss that more fully on this call including why that is, and what we are doing about it. Internationally, we delivered another strong quarter of $19.4 million up 23% on a constant currency basis and up 4% on an as reported basis. International continues to be strong for the third quarter in a row and we’re really pleased with the progress we are making. We are ahead on many of our growth initiatives that we've been working on internationally. Mark Bullivant our Senior Vice President of International is making quite an impact with his leadership and a rejuvenation of our international management team. Regarding adjusted EBITDA, we delivered $3.2 million behind prior year of 51%. This is a consequence of two issues. The primary driver is our miss on sales in the U.S. Missing sales is obviously going to affect our EBITDA most significantly. We are also affected by FX which given the significant contribution of our international revenue, to our total revenue as a percent of sales has had a significant impact on our year-over-year performance. Before I go into more detail about the quarter, I want…

Thanks Jim. I’m going to focus the majority of my remarks on the reported operating performance for the second quarter that ended June 30, 2015. I will then provide an update on our full year 2015 guidance. I would like to begin with foreign exchange as it relates to our second quarter results. The strong U.S. dollar affects us more than most of our pure play spine peers due to the higher share of international revenue. Approximately 42% of our business as reported this quarter was international. This represents our highest quarter of international contribution to the top line. While the impact foreign exchange is most evident in the revenue line, currency also impact our gross margin and adjusted EBITDA. Ordinarily we deal with and manage currency through the P&L as we would any other expense or exposure. However, the buyers allow revenue to the international regions in this quarter meant that negative impact of foreign exchange coupled with regional mix led to a significant impact in our gross profit and gross margin. This impact could not be covered within the P&L and contributed greatly to the deterioration of profitability this quarter. Our consolidated revenues were impacted by lower U.S. sales and $3.6 million of currency headwinds, primarily related to declines in the value of the Japanese yen and euro against the U.S. dollar. When adjusted for currency, consolidated revenues were down 5.6%. Our consolidated gross profit for the second quarter was $27.5 million, compared to $36.1 million for the second quarter of 2014. The decline of 23.8% over prior year was primarily due to regional mix in volume this includes lower sales volume in the U.S. the effective currency translation and $1.9 million in write-offs associated with manufacturing, quality assurance equipment, and product lifecycle management. Our Q2 consolidated gross…

Thanks, Mike. We took positive steps forward on our strategic initiatives in Q2. We made strides with our go-to-market product portfolio strategy with Arsenal, Battalion, and the addition of Alphatec Neocore. We took bold steps to reduce our cost structure with a transformation of our manufacturing and distribution. Today we’re actively engaged on our commercial execution. We remain focused and committed to our three pillar strategy. We're making progress towards becoming leaner and more competitive organization. With that, I look forward to answering any questions you may have.

[Operator Instructions] Our first question comes from the line of Mark Landy from Northland Capital. Your question please.

So, I guess Jim is right at the back, if you look at the U.S. sales and if you can put them in buckets right, the disruption from the Arsenal launch I guess disruption from the territory lines and expansion i.e. the 40 metro areas. Some product gets, there’s some loss business there than perhaps some other disruption that have been coaching those three buckets. Is it possible just to walk us through those and just get us a sense of where you feel the greatest loss came from and where the opportunity is to most quickly turn it around?

Mark, first of all there’s actually one bucket that I talked about and really it's about transformation. So for us, where we lost on execution was focusing on the expansion to new geographies where we didn’t have coverage before. So that took away from management time to recruit to onboard to train and sort of begin getting them up to speed. The two our estimation that's the driver of our execution miss. The current distribution channel wasn't affected as we basically put the 38 in territories where there was no coverage before. So there’s no disruption per say, to our existing channel other than the fact we didn’t adequately focus on them.

But Jim if I look at that just more less grey as more black and white, there is some underperformance within the existing sales channels correct, so I'm trying to quantify relative to the guidance and the expectation, was - what contributed to the overall underperformance and try and put some ranges around the underperformance looking at the existing sales channel, that's underperformance in 38 metros are just two more to come. And then other things that perhaps contributed that we haven’t discussed?

I think that from our point of view the focus on the expansion was the sort of the tax I described in my comments was the effect that contributed to our underperformance. The other elements that you described we really don’t see as being the issue, it was our management attention being focused on the expansion and in fact yes you’re right, our channel did sell less, but not for any of the possible reasons you described that we can determine.

Okay. If I look at the second quarter is it fair to consider that the low points of the year or should we think of maybe the third quarter with the seasonal impact that has been another step down in the actual revenue number and then the fourth quarter begins to build?

Well, for sure we don’t - as you know we don’t give quarterly guidance but our full year guidance is an expectation on our part that we’re up from Q2 in the second half.

Okay. So you’re not going to give me any help later it's a third quarter or the fourth quarter?

It just would change our hope communication pattern so we thought that would be.

Fair enough. And then Mike if you get trying just my arms around gross margin perhaps maybe looking out little bit, there's just a lot of moving pieces there. So you have the geographic mix, which you highlighted and then we get the outsourcing which comes I would think but the inventory build upfront to assist with the transfer of the manufacturing. And then you get the gain from perhaps if there isn’t inventory build, the release of that inventory build towards the system and then the upside from the benefit that you get in the manufacturing reduction cost and the pickup in sales. So can you help us just think perhaps maybe through gross margin as it marches through the second half of 2015 relative to the third quarter. And then how we could think about it - I know you haven’t guidance and we’ll not probably address but that’s not for the first half of 2016. So we can just try and get sense how we get to normalcy and what normalcy could look like?

So I think - our manufacturing transformation is targeted to end at the end of this year and our manufacturing activities here at the end of this year early 2016, was going to impact our margins for the remainder of 2015 is the success of the U.S. business. Our regional mix when their international U.S. business looks at each other and foreign exchange, so what's going to impact 2015 is going to be those items. There's not going to be a significant step function change in margins this year. As we enter 2016, you're right, we've got inventory that was built, we've got inventory that we're purchasing, and so we're going to see a transition throughout 2016, and primarily buyers towards the back-end of 2016. As to when we'll see that the margin improvement flow-through inventory through cost of goods from an outsourced manufacturing standpoint. The other thing to remember, the big win here from a manufacturing transformation is cost reduction, so inventory reduction, and inventory utilization. So it's the balance sheet and tax flow that's the big win. And we will see margin improvement in 2016 as a result of the transformations. But I want to keep pointing home that the balance sheet and the cash flow is where the real significant activity should play out.

So if I just look at 2015, full year projected gross margin versus 2014, is a 500 basis points step down a reasonable assumption, obviously given the largest step down in the second quarter, is that reasonable assumption, a reasonable place to be starting with?

I think you have to look at Q2 and the impact we have of our gross margin, extrapolate a normalized Q3 and Q4. I don't want to get into 500 basis points or what have you. I think, to the point that you are trying to draw is Q2 the low point, we are anticipating improvements throughout the remainder of 2015 into 2016.

Okay. Appreciate the questions guys. Thanks for taking them.

Thank you. Our next question comes from the line of William Plovanic from Canaccord Genuity. Your question, please.

Couple of questions, just on the guidance, just on the you gave us constant currency revenue growth and just kind of running through where the EUR/YEN trade and what we have seen, I'm coming up with about $10 million FX impact for the year. How does that sound to you?

It sounds little on the low side but not out of the ballpark.

Okay. And then, why wouldn't the U.S. business step down more from here. What’s going to stop that from occurring?

Well, if you look at the this is Jim, speaking if you look at what we did during the first half, as we focused on our transformation which meant improving our coverage in the 90% of the market we don't cover. So, in that event we did it by metro area we targeted 40 of the top 100 where Alphatec sales were zero, and filled 38 of those. So what we have in the second half is those 38 sets of feet on a street beginning their commercial activity and markets we previously didn't contribute, didn't participate in, so we have that on one hand. Secondly, we have the expansion of the Arsenal launch on the product side in our core distribution channel. We have that so the Arsenal goes into both that and our new channel which includes Arsenal CBX and includes the broader launch of Alphatec Neocore. So we have a lot of arrows in our quiver. We have to execute to be sure, but what we have. Is absolute broader coverage and we have strong product flow that is unconstrained at this point.

Okay. And then on the, so your North American business is down 20% year-over-year, you're saying it’s a lack of focus is the reason. Can you give us what the units were, what the pricing impact was year-over-year and if you had any mix benefit on that?

So without getting too much into the specifics, we obviously saw a price impact consistent I think with what we see generally in the marketplace. Mid single digits and below. We also saw a mix impact and it was more of a channel mix for us. It was what I would call our core hospital business where the biggest decline occurred in Q2 and that has more of a margin mix impact than others.

Okay. And then just the last question and I'll let others ask. As you think of the back half of the year, how much of that guidance is driven by new or recently launched products? And how much is distribution?

We don't really - as we give guidance we don't break it up in that manner, I'd like to answer for you , but we don't actually provide guidance on individual products or individual or groups of sales territories within the geographic markets. So, I want to help you but I think I'll have a different question.

I'm done. Thank you.

Okay. Thank you.

[Operator Instructions] Our next question comes from the line of [indiscernible] from Cowen and Company. Your question please?

Hi, good afternoon folks. Thanks for taking the question. Kind of just want to press a little bit more on the guidance side on the topline, as I understand that just on a back paper calculation, my consensus is about $3.5 million to $4 million and your full year guidance on a constant currency basis is down about 12. What is your expectation in terms of kind of revenue directionally on a second half of the year? I just want to get some color on that.

I think if you look at the constant currency guidance and you look at first half, second half, obviously there is growth, and I'll pick the midpoint, so you're looking at probably3% to 4% growth in constant currency, second half over first half, that factors in, and I would say in some parts of the world are traditionally slower Q3 and a stronger Q4.

Got it. And just in terms of obviously, you have noticed that there is a drop in the sales and marketing as a percent of sales. Directionally what is your expectation for that line going forward, I know you don't give quarterly guidance, but just want us help us think through in terms of modeling, how that number is going to trend off going into the second half of 2015 and going into 2016?

So I think what we have demonstrated over not just the first two quarters of 2015, but certainly the back end of 2014, is we've been quite disciplined in our operating expenses in general, and managing by the line-item. We've been very clear that we're not going to get ahead of the expense curve in terms of spending ahead of revenue and you should continue to expect that to be the case, going forward, both in 2015 and into 2016. We made the appropriate adjustments in operating expenses coming into 2015 to allow for example, for the expansion. We'll continue to make those trade-offs very consciously and objectively upfront so that we don't end up spending ahead of revenue line. So, my expectation is that the Company will continue to exhibit discipline in its operating expenses quarter-by-quarter.

Great. And last question from me. Can you talk a little bit, international was strong again this quarter with some really solid momentum. Can you talk about any details around the Arsenal's launch in Japan, any additional color would be appreciated. Thanks guys.

No, what I can tell you is that we have launched it. It's approximate second full month of launch versus early cases on early inventory. They have gone well and we have included the success of Arsenal in our forward guidance in terms of Japan. So it's going quite well.

Great. Thanks.

[Operator Instructions] And this does conclude the question and answer session of today's program. I'd like to hand the program back to Management for any further remarks.

So, I'd like to thank you all for spending your time on our quarterly conference call. Thank you very much. And we'll look forward to next quarter.