Welcome to SeaSpine's 2017 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. [Operator Instructions] As a reminder, this conference call is being recorded today, August 3, 2017. I would now like to turn the conference call over to Carrie Mendivil, Investor Relations. Please go ahead.

Thank you, Glenda, and thank you for participating in today's call. Joining me from SeaSpine is CEO, Keith Valentine; and CFO, John Bostjancic. Earlier today, SeaSpine released full financial results for the quarter ended June 30, 2017. During this conference call, we will make forward-looking statements within the meaning of federal securities laws in regard to our business strategy, expectations and plans, our full objectives for the future operations and our future financial results and condition. All statements other than statements of full historical fact are forward-looking statements. Such statements may include words such as believe, could, would, will, plan, intend and similar expressions. You are cautioned not to place undue reliance on forward-looking statements, which are only predictions and reflect our beliefs based on current information and speaks only as of today, August 3, 2017. For a full description of risks and uncertainties that could cause material differences between our actual results and those stated or implied by the forward-looking statements, please see our annual report on Form 10-K filed with the Securities and Exchange Commission on March 3, 2017, which is available on our corporate website www.seaspine.com and at www.sec.gov. I will now turn the call over to Keith Valentine.

Thank you, Carrie. Good afternoon and thank you all for joining us. We are pleased with our second quarter results which reflect ongoing execution of our strategy to drive mid single digit top line growth for the second half of 2017 while focusing on cash conservation. We are continuing to gain traction for recently launched products and our stronger distributor base as our collective efforts of the past 12 to 18 months are culminating to drive forward our results in the 12 to 18 months. With this, we are increasing the bottom end of our guidance for 2017 revenue which we now expect to be in a range of $130 million to $133 million. Total revenue for the second quarter was $34.2 million, up 3% year-over-year, and consisted of orthobiologic sales of $17.6 million and spinal instrumentation sales of $16.6 million. Geographically, U.S. revenue increased 1.1% to $30.4 million while international revenue was up 20.5% to $3.8 million. Global revenue growth generated from spinal instrumentation systems that have been launched since the spin, again outpaced declines in our legacy systems for the quarter. We expect this trend to accelerate in the second half of 2017 driven by our incentives around product innovation and the continued strengthening of our distributor base. Through better collaboration between our marketing and product development teams, we are increasingly executing to a robust and predictable launch schedule. And we remain on track to launch 8 to 10 new or next generation products and product line extensions this year, including the first introduction of new internally developed orthobiologic products in almost seven years. To that end, we recently moved our Mariner modular pedicle screw system from alpha evaluation to a full commercial launch. Additionally, we are on track to transition the modular Shoreline anterior cervical fixation system…

Thanks, Keith, and good afternoon everyone. As Keith noted earlier, total revenue for the second quarter of 2017 was $34.2 million, 3% increase compared to the same period the prior year. Revenue from orthoboilogics products totaled $17.6 million, a 4.8% year-over-year increase while revenue from spinal instrumentation totaled $16.6 million; an increase of 1.1%. Geographically, U.S. revenue increased 1.1% to $30.4 million while international revenue was up 20.5% to $3.8 million. U.S. orthobiologics revenue increased 7.3% year-over-year to $60 million and was driven by growth generated from recently added distributors. Overall, pricing remained stable in the U.S. orthobiologics franchise. U.S. spinal instrumentation revenue decreased 4.9% year-over-year to $14.4 million. Low single digit price declines and decreased demand for our legacy systems outpaced the solid revenue growth contributed by recently launched products, which represented almost 30% of U.S. spine instrumentation revenue in the second quarter. With the recent full commercial launch of our Mariner pedicle screw system and the upcoming full launch of our Shoreline TruProfile anterior cervical fixation system, we anticipate this dynamic to shift in the second half of 2017. We expect that going forward, the growth in U.S. driven by recently launched products and new distribution will outpace any continuing declines in pricing and demand for our legacy systems. However for the remainder of 2017, we expect this growth to be somewhat muted by a continuing decline in revenue from certain lower performing legacy distributors that is a byproduct of the strategic and more committed distribution adds we made in the past 12 to 18 months. Gross margin for the second quarter of 2017 was 59.1% compared to 58% in the same period in 2016. The increase in gross margin was mainly driven by lower manufacturing cost for orthobiologics products manufactured in our Irvine facility. This improvement was…

Thank you, John. In closing, as we move into the second half of the year, our momentum continues across both product portfolios and our strategy to reposition SeaSpine for growth is on track. Progress in 2017 will be defined by continued execution and consistent investment in new products and market development efforts, which we believe will further fuel financial results throughout the year and provide plenty of momentum as we head into 2018. I would like to acknowledge the accomplishments and commitment of our team here at SeaSpine especially the many team members who have successfully moved key products to full launch while also introducing others into alpha launch. I thank them for their continued efforts and for embracing our shared vision to deliver innovative products to our sales channel and to surgeons. We look forward to updating you on our progress on future calls. With that, we will now open it up to questions. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Matthew O'Brien from Piper Jaffray. Your line is now open.

Thanks so much, and thanks for taking the questions. Just to start with, looking at the hardware performance specifically in the quarter, and Keith, you kind of addressed this a little bit in your commentary, but on a two-year stack basis, this is the best performance we've seen in six quarters when you adjust for the comp, so the strength that you're seeing there obviously coming from some new distributors, some new products as well, but is there any reason to think in the back half of the year, you wouldn't see a similar type two-year stack performance where we're seeing an improvement in the hardware business specifically?

Well, a lot going on as we closed out the second quarter, right, Matt. We're closing off the alpha launches. We're expanding the set base for those launches, which was important. Certainly, we got more surgeries out of our alpha launch than we anticipated, which was of course the great news. The challenge is as we transition now and update those sets -- launch all the new sets that were ordered as well, we also have to get momentum with new surgeons, not all the -- I mean, we'll be leveraging the alpha surgeons and then we have to go out for new surgeries as well. So you will see momentum, but that shift will be a gradual shift as we exit '17 and move into '18, right, as we get more and more new surgeons with these additional set builds that we invested in.

Got it. And that kind of dovetails into the other question, or one of the other questions that I have, but that -- on the performance you are seeing in hardware, specifically, is that really a function of just going deeper within your existing account driving a majority of that growth maybe 70%, 80% of that versus getting to new clinicians? Where we're at in that process?

Yes, I think it's both, I wouldn't say it's skewed 78% to 80%. I think we are able to go deeper in some of our accounts and with some of our distribution, and then the other opportunity is our newer distribution coming aboard now has a genuine opportunity for further expansion into their relationships, because they're comfortable that there is enough sets to support that expansion.

Got it, okay. So then as far as the new products go, we've seen historically posterior fixation systems enter marketplaces and drive a lot of growth from some of your competitors. So can you -- can you just give us a sense for how we should frame-up the opportunity for Mariner specifically?

Sure. So Mariner's first launch, the launch that we're working on right now is largely for open. The great thing about Mariner that's been proven in the alpha launch is that it's been able to be used over longer segments as well as short segments. Our next versions of that system will be launching a MIS development work along then to an alpha and then to a launch. You're going to start seeing Mariner become a more versatile system for all indications or all procedures in the lumbar spine and even longer segment as well. And there will be opportunities to go beyond just minimally invasive and if you will shorter to mid-segment lumbar cases and maybe have opportunity for other deformity work as well. And -- but all of those things will be additional line extensions through that product as we move through 2018 and even into '19. So we're anticipating it to be a very comprehensive system that has laid for many years.

Okay, got it. And then that's great to hear. The other -- the other final question that I have is on the expandable side. This is an area that's getting a lot of attention among the investment community. So I'd love to hear, how you think, your technology will stack up with these first, second and even third generation technologies that are on the market today, and knowing that it will take some time before that first impact results. But just how do we think about how you stack up and then what that could bring to the table for SeaSpine going forward?

Sure, I think there's a few ways to look at the expandable market. I mean, one is obviously the whole sagittal balance and the desire to put a smaller device and get -- be able to get expansion, we get expansion and also accommodate the anatomical spine or the chemical limits of spine. So, some sort of lordosis. So the great part about what we invested in with NLT and what we felt strongly about was finding and working with a device that not only gives a great deal of flexibility to the surgeon intraoperatively meaning how they dial in that height, but also gives in the ability to post-pack that device. And we feel like we get the best of both worlds with the technology that we acquired because its internal mechanism still has plenty of space for post expansion packing. And we think, that's an important attribute. The other part to the technology is despite most of the business right now is in this expansion of height. There're also opportunities in surgical techniques for expansion of width and we feel really good about the fact that next generation products will be able to incorporate the additional items that we acquired that open up a new market for expandable devices, which I think also accommodates width as well as height. So I think the issue is you have to be flexible. You have to have both in your offering. You have to have the ability also to offer static devices that can do certain manipulation and expansion and we feel like we have that with future generation NanoMetalene and current generation NanoMetalene. So we feel really good about how that interbody portfolio is going to expand and give us greater leverage in that degenerative space.

Got it. Very helpful, thank you.

Thank you. And our next question comes from the line of Ryan Zimmerman from BTIG. Your line is now open.

Great. Hi, Keith. Hi, John. Thanks for taking the questions.

Hi Ryan. Q – Ryan Zimmerman: Just want to start on orthobiologics for a minute here. The performance in the quarter, particularly in the U.S., I think, was pretty strong and just trying to marry that with the cadence of the Mariner launch going forward in the year. Why couldn't orthobiologics continue on the trajectory given the products that you have going on these mid-single digit growth phases here?

I think there is a couple of things going on that give us strength in the orthobiologics portfolio as well as or will play nicely into these product launches. I mean, one of the items that's transition from last year and John can give maybe some better metrics on it as well is the reality that orthobiologics sales force was generating most of our revenue when you look last year. And now the spinal hardware sales force as well as the orthobiologics are giving us lift, meaning, we're getting a greater percentage with our new exclusive or more exclusive distributors on the hardware side that are also handling the orthobiologics which would speak to your comment that we should get greater leverage with these new products because the new products do require some sort of grafting that plays well into this especially the DBM side of our portfolio. I think, additionally, we're very excited about what's coming forward. I think, the next-generation products will give a great deal of lift to these legacy products that we've had and will round out the portfolio and really help us participate in all the different segments of that DBM space.

Sure. I appreciate the color there. Outside the U.S., you called out a Latin American distributor pick up and it looks like your hardware business in the outside the U.S. was pretty strong and composing a big portion of growth this quarter. I'm just kind of -- want to make sure that I understood fully -- understand fully the cadence or any expectation for future distributor pickups outside the U.S. that may drive -- may drive some hardware growth internationally.

Yes, the first half of the year, international has really grown strong and as you pointed out Ryan, it's in a large part because of the new distribution adds and some strengthening with existing distributor relationships in Europe. International is pretty volatile, particularly at the dollar size of the revenue. Right now, it's around 10% of the total revenue but I think that volatility side, we expected to continue to grow in the back half of the year, just not as much as the front half of the year because we did benefit a bit from the -- the timing and magnitude of some of those initial stocking orders as you bring new distributors onboard. That being said, we continue to look selectively in new geographic areas to increase our presence in Europe and Latin America. So with that opportunity going forward, but we expect somewhat lower growth in the back half of the year for international. And as I said, it can be volatile from quarter-to-quarter but we think the long-term trends is, it's going to continue to grow as we've demonstrated in the past couple of quarters.

All right, great. Thanks for taking the questions.

Thank you.

Thank you. [Operator Instructions] And our next question comes from the line of Swayampakula Ramakanth from Wainwright. Your line is now open.

Thank you, good afternoon Keith and John. A quick high-level question; from all the commentary from both of you, it certainly looks like the top line is performing really well and chosen the numbers that we have seen it sequentially growing in the first half and but at the same time, you kind of trying to maintain your guidance though you've kind of made it a little bit more narrower. I'm just trying to understand, what are the pushes and pulls on that number for the year-end that makes you feel you still would like to be a little bit conservative?

There's a lot of movement from how are we going to bring new sets on. We have to make sure that the distributor base is comfortable, is trained and properly supporting these new systems. I think, one thing that people may not realize in the background is that when you have a minimum number of sets that you often do in alpha, you're deploying those sets very carefully, you're deploying into largely a number of the surgeons that were part of the development process. So they're very familiar with the systems and the sets. And most importantly because alpha is such an important feedback mechanism in loop, almost all those cases have some sort of expert in the cases, right meaning a marketing or development person or one of our field clinical people. And so the reality is, as you go to full launch, you want to be especially mindful of keeping that same discipline and so we feel it's appropriate that we look to the launch in the second half of the year as being one that's progressive but also being one that is very conscious of bringing aboard larger surgeons that we know we can build momentum with. And so I think, as you exit the year, you start seeing a real inflection in that momentum that will drive that 2018 growth pattern.

And I think, one other thing to add on, Keith, is that we've been seeing since the third quarter of last year that we expect to continue to play out for at least the next two quarters as we brought in new distributors, upgraded distributors to the more high-potential groups that are willing to invest in their business for growth. We have seen some of the lower-performing legacy distributors that haven't invested for growth continue to move away and those are headwinds that are started to become more visible in the back half of 2016. We probably got two more quarters to work through the residual impacts of those lower performing distributors continuing to move away but as we said in the prepared remarks, the growth from new products and the higher quality, higher potential distribution we bring on board, we expect is going to outpace those continuing declines through the rest of 2017. And I think that opens up a little bit more momentum for 2018 as we work through those continuing headwinds in the legacy distributor network.

Thank you both. One last question from me, this is on -- I'm trying to see how much of the international revenues growth could be sustained over the short to mid-term. So as you're putting in new resources into the international business, where are they in your internal trajectory of progress? And do you anticipate adding more resources because it seems to be gaining momentum? And what is your feeling on that growth for now and also for short to mid-term?

Yes, so largely, our international strategy is partnering with stocking distributors. So in this case, there is a good deal of resources that are contained within the distributor from a marketing perspective and from a training perspective within their own distributor team. So that creates an opportunity obviously for us to have leaner resources internationally, but, yes we are stepping up those resources on a number of fronts, one from a sales operation perspective, so the support structure that needs to be here for those groups, and also from a marketing structure and sales support structure in field or in Europe and also in South America. So we will have to step those up and we'll continue to step those up but I would view that as minimal adds right now until we contemplate certain markets that is -- does it make more sense to have a direct presence. But I still think that our direct presence in markets is probably opt in 2019 and beyond and we'll continue with a distributor base structure and I would say, progressive expansion in both South America and in Europe with an eye towards how we're going to expand in Asia-Pacific as we move into '18.

Great, thank you very much both of you, and congratulations on the progress.

Okay. Thank you.

Thank you. And I'm showing no further questions over the phone lines at this time. I'd like to turn the call back over to Keith Valentine for closing remarks.

Sure. Thank you everyone for joining us today, and have a great evening.