Welcome to SeaSpine's 2018 Second Quarter Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, July 30, 2018. I would now like to turn the conference call over to Carrie Mendivil, Investor Relations. Please go ahead.

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 second quarter ended June 30, 2018. During this conference call, we will make forward-looking statements within the meaning of the federal securities laws in regard to our business strategy, expectations and plans, our objectives for future operations and our future financial results and condition. All statements other than statements of 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 projections and reflect our belief based on current information and speak only as of today, July 30, 2018. For a 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 the news releases and periodic filings with the Securities and Exchange Commission, which are available on our corporate website, www.seaspine.com, and at www.sec.gov. I will now turn the call over to Keith Valentine. Keith?

Thank you, Carrie. Good afternoon, and thank you all for joining us. We are excited to see our momentum continue to build in 2018 with strong revenue results in the second quarter. Our topline growth continues to be driven by increasing market penetration from our recently launched products in both portfolios. By a more engaged and increasingly exclusive distributor network and from a deeper commitment and organization to customer experience and medical education and training. The 6.5% overall growth and 7.5% U.S. growth that we reported in Q2 marks the highest revenue growth rates that we have posted since the spinoff. We are proud to say that we are now a market share taker in spine. With this solid momentum and the expectations we have for our recent and upcoming product launches we are well-positioned to continue to be a market share taker and to accelerate our topline growth rate in the second half of 2018. Accordingly, we are raising the bottom end of our revenue expectations and now expect full year revenue to be in the range of $136 million to $139 million for 2018. As we look ahead, we remain focused on our strategic vision developing surgeon centric cost-effective solutions that combine innovative spinal implant systems with industry-leading orthobiologics that together will drive improved procedural solutions and deliver clinical value to the surgeon, hospital and patient. We are steadfast in executing this vision and look forward to continued progress through the remainder of 2018 and beyond. Turning to our second quarter performance, total revenue was $36.4 million up 6.5% versus the year ago period. U.S. revenue increased 7.5% to $32.6 million with U.S. spinal implants increasing 11.5% to $16 million and U.S. orthobiologics increasing 4% to $16.6 million. International revenue was $3.8 million flat to slightly down compared…

Thanks Keith, and good afternoon everyone. As Keith noted earlier, total revenue for the second quarter of 2018 was $36.4 million, 6.5% increase compared to the prior year. U.S. revenue increased 7.5% to $32.6 million while international revenue decreased slightly to $3.8 million. U.S. orthobiologics revenue increased 4% to $16.6 million and was once again led by growth in our DBM franchise and in particular our recently launched products. U.S. spinal implant revenue increased 11.5% to $16 million and was led by growth from recently launched products which now comprise more than 45% of U.S. spinal implants revenue. We expect growth from these newer products and those we plan to launch in the second half of 2018 to continue to outpace continuing declines in price and usage of our legacy systems. Despite the really strong growth in the second quarter, we remain realistic particularly in the third quarter due to seasonality in setting expectations for growth in spinal implants for the remainder of 2018 and are continuing to target high single-digit growth. Gross margin for the second quarter of 2018 improved 90 basis points to 60% compared to 59.1% for the same period in 2017. The increase was primarily driven by higher gross margins associated with U.S. spinal implant sales which were greater as a percentage of total revenue compared to the same period to the prior year. Operating expenses for the second quarter of 2018 were $29 million, a slight increase compared to $28.4 million for the same period of the prior year. R&D expense decreased approximately $550,000 to $2.8 million for the second quarter of 2018 or 7.7% of revenue with most of that decline driven by lower stock-based compensation. Selling, general and administrative expenses increased approximately $1.2 million to $25.4 million for the second quarter of 2018.…

Thank you, John. Our strategy to reposition SeaSpine for growth remains on track and we believe we are poised to continue taking share in the spine market. We have a terrific team assembled here at SeaSpine and as our operational and commercial capabilities continue to grow we are well positioned to continue our positive momentum. We are energized by the growing success of the innovative and increasingly differentiated products we have brought to market and we are more focused than ever on delivering cost-effective clinical value to the surgeon and hospital to improve the quality of patient lives. Looking ahead, progress will be defined by continued execution of product launches, expansion of our distribution reach and investments in medical education and training for our surgeon and distributor customers. We look forward to updating you on these initiatives on future calls. With that, we will now open it up to questions. Operator?

[Operator Instructions] Our first question comes from Matthew O’Brien with Piper Jaffray. Your line is now open. Matthew O’Brien: Just one housekeeping I just want to make sure I’m clear on this. The guidance for the year, yes you lowered the bottom end of the range but you beat by more than - we were modeling by about 1.5 million and you’re raising the midpoint of the range by about 0.5 million. Is that just a level of conservatism or is there anything specifically in the market that we should be aware of seasonality et cetera.

Matt we felt it important the third quarter has been challenging in this marketplace for a number of years if you look over the last decade. And even when it's been a bit seasonal in nature, it also has been littered sometimes with natural disasters as it was last year. And so our intent was to make sure how the third quarter is going to play out and then we can have a different conversation at the end of the third quarter our next call that talks about how the fourth quarter will be wrapping up for the year. Matthew O’Brien: Makes total sense. Keith you mentioned the share - you’re now in a share taking position which is I think the first time SeaSpine has been in this position since the spin. Can you talk a little bit about where that share is coming from existing accounts for historically you hadn’t done as well with your hardware business or are you starting to get more and more new customers. I mean can you just talk a little bit more color between where some of that growth is coming from between existing and new accounts?

I think there has been over the past couple quarters and continues to be even for a few more quarters in that some of the larger players have really struggled in the spine space. And so we’re able to take advantage of some of those market share losses. And so I think we are gaining new customers and those new customers are coming from I would say larger spine players. In addition, another great thing is we’re able to go deeper in accounts now. I think with our ability to have more exclusive distribution that’s now been aboard with us for greater than a year meaning they have now been fully trained and are better at selling our product. We’re able to go deeper in the existing accounts that we’re in. Matthew O’Brien: And then just a couple more from me, as far as distributors go, can you talk about coverage across the U.S. at this point that have exclusive distributors versus your legacy distributors. And where they're at as far as adopting SeaSpine across their businesses?

The distributor footprint is pretty similar to where it was earlier in the year Matt, but we're starting to get the outsized growth from the more exclusive distributors which is exactly why we made those strategic decisions in the past. We’re seeing good growth particularly in the Northwest. The Southwest as we move in new accounts so as Keith said we’re going deeper in existing accounts, but as they hire additional folks like in Texas they are able to sort of spread out go deeper in existing accounts, but also find new business. And the strength of the portfolio in having great flagship products like Shoreline and Mariner is a great opening discussion point to attract that interest and ultimately as they get more familiar with that to kind of go deeper into the portfolio. Matthew O’Brien: Make sense, last one from me. John you were talking about the new sets that you’re going to be introducing. Can you give us little visibility on number of sets or how that compares to this time last year because as we all know that's a major factor as far as driving growth in the future?

Yes, so Shoreline and Mariner are making the biggest bets. We launched with little over 40 sets in the third quarter last year and the success of those products really being foundational to picking up new surgeons and distributors and expanding our business. We’re increasing the numbers of sets for Shoreline and Mariner for example by about 20%. We’re going to add another 20 sets or so for our Ventura line extension. So it's really starting to be across the board, but our primary focus has been on Shoreline and Mariner just because of the success we've seen and how well that able to attract new surgeons and distributors. So we're starting there, but plans to increase other of the NanoMetalene interbody sets as well.

Our next question comes from Ryan Zimmerman with BTIG. Your line is now open.

So just want to follow-up on a couple questions that Matt was asking. Could you just provide a little more color on - the hardware was really strong this quarter, it's not something orthobiologics traditionally carried the growth for the company. And so just some more color on kind of what drove those gains specifically on the product category. And then your thoughts on the pull-through with your osteobiologics products OsteoStrand and OsteoBallast, and how we should be thinking about those in the back half of the year?

Yes, again its Shoreline and Mariner led the growth, but as we rolled out the Ventura line extension we’re seeing good growth from that. The pull-through in the orthobiologics we’re continuing to see a shift in a smaller percentage of that orthobiologics revenue coming from distributors to carry competitive hardware. So that still continuing the trend in the right direction and that's because the more of the newer more exclusive distributors we bring on board tend to carry both portfolios from day one. As I have said earlier that's where we’re getting that critical mass of revenue growth that starting to move the needle. Most pronounced on the implants side, but also as a pull-through orthobiologics revenue as well.

I think also Ryan just keep in mind that the orthobiologics these are new products that haven’t the orthobiologic group and specifically us have not launched a new product in that category for seven years or greater. And so there is some process that still has to go on as the product continues to get traction of getting on contract and getting into hospitals because it is a new product in the orthobiologics portfolio and all of that just kind of takes time to get traction right. So we’re actually really pleased with still the continued strength of the traditional DBM product portfolio and are really encouraged because we continue to knock down getting the new products on a pricing formula at hospitals. So I think you’ll start to see that momentum pick up as we close the year and headed to 2019.

And then I think you mentioned, you called it out that you have a international distributor in Asia Pac coming onboard later this year maybe sooner than in the next few months I don't know. But just your thoughts or the cadence of what we can expect on international distributors may be looking out a little further out and kind of where you want to take your international business over time?

Yes, so the biggest opportunity I think we had mentioned on previous conversations calls was we need to have better penetration in Australia. Australia is a very robust spinal implant market it has common views if you will in philosophies to what we do in the U.S. and even some of what we do in Europe. So that was a logical expansion for us. As we move forward there is a couple things going on that will happen internationally. There is more and more products that will become available. Thanks to regulatory approvals and CE markings for our products so Europe will continue to expand we’ll be able to go deeper with those distributors with new products. And then we do - we’ll continue to have a cadence both in South America and Europe moving forward into 2019 with additional expansion opportunity. So we feel like now that the new product lines are getting good traction, we’re also able to get regulatory approvals in different countries and that’s going to enable us to offer new product lines there as well.

Our next question comes from Craig Bijou with Cantor Fitzgerald. Your line is now open.

And congrats on the quarter again. I will - I just want to start with in the quarter I mean I know you brought on some distributors. So any one-time items or unusual items that you would characterize embedded in the growth during the quarter?

No, what you’re seeing is especially in the spinal implant line we kind of message that couple things go on you bringing exclusive aboard right. The first step is making sure you're engaging them on the education opportunity, getting them up to speed on the products, but additionally they’re getting up to speed in their territories as far as hospital approvals and what have you and I think what you’re seeing in the second quarter is our larger distributor starting to get real traction now. And you're starting to see more experienced reps that are part of those exclusives that are now very focused on our product line. And so the areas of greatest lift for us for those areas that we had the greatest focus in distributor attention and time.

Just a bigger maybe a bigger picture question on the distributors. So obviously you’re bringing on a lot of new ones you’re re-energizing some of the old ones that you had. What kind of insurances explicit/implicit or commitments are you getting from the distributors that they may be willing to invest for the next several years as you guys go through your product cycle and launch new products. Any color on what commitments you’re getting from them?

Yes, I think it’s both mutual commitments I mean part of bringing aboard and exclusive they want to know that this really is a partnership and what we want to know is that when we think about investing in the business what are they doing to commit to hiring the number of new reps that can drive the business and what is their commitment to the education and training process as well. And so, I view I guess more is a two-way street and just getting commitments from them part of it is, we do sit down, explore their business plan we’re obviously always trying to push to bring more reps on earlier than later right. I think that we all know the time lag that's out there that we want to get those aboard and our best partnerships and distributors are the ones that are investing early in getting those reps aboard and that's where we seen I would think the success in the second quarter was largely driven by those groups that are willing to make that investment.

And with the growth that you guys expect to exit the year high single-digit, low double-digit wondering if you can maybe, do you still see that as a longer-term level of growth that you can do for the next couple of years. And then maybe if you can breakdown or give whatever color you can on spinal implants versus orthobiologics U.S. first OUS when you think about that level of growth?

Yes, so we do. We’re very focused that the product portfolio how we’re approaching innovation, what our next strategic steps will be will ensure that we can maintain this high single-digit low double-digit growth rates. Our hope also is that as these new products continue to be generated that we have the ability to launch them OUS as well. There is a number of opportunities of further penetration OUS. I'd like to see that OUS business starting to approach 15% to 20% in getting a higher growth rate, but to do that it's going to be more significant investments that will come in later years for the organization. I don't view that as something in 19% per se, but I would like to see it maintain at least 10% and then grow out to 15%, 20% as we get into 2020/2021.

Our next question comes from Jeff Cohen with Ladenburg Thalmann. Your line is now open.

So firstly John could you provide a little bit more color as far as margins or what you may expect for the back half of the year I know that you’ve got a fair amount of innovations going on, on both product lines. But any further clarity on hardware versus biologics on the margin side?

No I think the same themes as we’ve so talked about in the past are continuing. We were intentionally cautious in the middle of the year because of some excess and obsolete inventory charges risk from all the new product launches on the implants side which we think is a good thing for the long-term right because we’re continue to launch new products and strategically sunset the legacy system that creates us risks. And on the orthobiologics side we continue to ramp up production of the new fibers and ballast products and we know that there's a learning curve. We’re manufacturing all those products in our Irvine manufacturing facility so it's great to control the development and manufacturing and add capacity to that site, but we know that that ramp up particularly as Keith mentioned we haven’t launched a homegrown new product in seven years in Irvine. So it's something new for them and they're excited by the challenge to be able to produce a new growth oriented product in the orthobiologics side. And we just want to be cautious knowing that there is a learning curve when you are making a dramatic shift like that as we continue to manufacture the legacy portfolio, but also shift our focus and attention to the fibers and ballast products going forward. But really no change in terms of the expectations for this year or even the longer-term expansion which we think will be driven by the gross margins on new products but also increasing the volume going through that Irvine site as we ramp up the newer products production.

And could you provide a little more color, you talked about some more Mariner sets getting out there. Could you talk about the robotics and navigation. Are you seeing pulling from that side towards your products or are you seeing that the hardware is pulling the navigation and robotics and at least for users. And any further colors as far as thoracic or cervical or both would be great? Thanks.

Yes, so the first question on - I don’t think either is pulling I think there's a number of hospitals in larger settings that have big degenerative practices or big degenerative care facility. And their requiring or at least some of the surgeons are requiring that it's compatible with what they already own right. So that's what we were referring to in the call was the ability that we do have compatibility with our instrument sets with leading navigation systems. So and we’ll continue to do that it will be a continual process as we want to keep expanding into different areas we might be faced with them having a proprietary navigation system or a specific navigation system that we have to be compatible with. On the point of - you’re saying on the point of Mariner moving into deformity was that the second part of the question Jeff.

And also just any further general clarity on cervical orthoracic strengths, weaknesses and other risks.

I think what we’re seeing is part of the investments for both Shoreline and Mariner are they’ve been very good launches. They've had good momentum and we also want to enable that as we mentioned the partnerships we’re having with our distributors give them great confidence that they will have sets available as they go out and try to procure new business. I think one of the sticky points with not many distributors and distribution channels are they have a fear of bringing on a new large surgeon and whether they can be supported. And so we feel it's our obligation in this partnership to make sure that for those distributors who have a clear plan of how they want to advance and grow the business, that we’re committed to them to park sets so that they can do that.

Our next question comes from Swayampakula Ramakanth with H.C. Wainwright. Your line is now open.

I have a couple of questions, the first question is just on your guidance and how you view the rest of the year from here. If I look at what you have reported so far for this year and look at the future - look at the guidance, it looks like you cannot assume the similar growth rate what you had seen last year year-over-year and have remained conservative which I can understand. But at the same time the situation is quite different at SeaSpine now that you have a different profile of distributors and you have a different set of products, your momentum is quite better than what you had witnessed so far. So, and already one-third of the quarter is done. So what kind of - what is that that you folks are seeing that the outside the company are not able to see .I'm not talking just only within the company or are you seeing something in the industry that's making you feel let's wait and watch why rush in and be bullish about ourselves for the rest of the year?

Okay, I hear what the direction you’re taking it, but I think it really goes back to the question when we first kicked off the call and that was third quarter. If you look back over the last decade, third quarter has been a challenging seasonal quarter in spine. And I think you can even look back and point out a couple instances where in addition into it being a seasonal quarter, it also sometimes has natural disasters and other challenges that fall on. And so our intent was to kind of look at that be conservative in the stance of how we get through the third quarter we’re still extremely bullish on the fourth quarter. We understand the uptick in the fourth quarter. We also understand the overlap of that uptick with what we have going on from a distribution perspective. What we have going on from a product launch perspective post NAS the biggest meaning of the year coming up in September. And we just want to make sure that that we had a thoughtful progress in third and fourth quarter and with that we certainly feel like the third quarter call will give much greater clarity to how the year is closing up and will give much greater clarity to what that range should be.

Then a question on orthobiologics certainly it seems to be going in the right direction and giving you further momentum. So what are the pulls and pushes for this segment in the second half not only just in the second half, but also how you see yourself for the next couple of years because I would think this is a place where you're spending some energy just to build that portfolio up?

Yes - while we’ve been certainly very rare moving under this launch was making sure that DBM traditional DBM franchise that we have is a very strong franchise. And so, our focus with our distribution channel, our focus as an organization has been wanting to maintain as much of that business as possible. And really use these new product launches to gain additional business and go deeper in accounts right. So the idea wasn't to have these new products necessarily completely obsolete the products that are doing so well, but instead it’s our opportunity to go after additional business to go after other biologics competitively. We feel like the strand material is so good it has done so well in the studies that we have the ability to go after premium orthobiologics at a much more competitive price. And so with that, we also have the task of getting these orthobiologics on to contract and getting them on to the hospital pricing and that does take time. Sometimes it can be weeks and sometimes it can be months, but it is a process to submit new products for pricing. And so we’re doing both of those as we speak which positions us really well I think for a strong fourth quarter and good momentum into 2019. So the second half of your question how it plays out is once we have those contracts, since we have it in hospitals from a pricing perspective, we have a much greater ability than to compete head-to-head I feel with the premium orthobiologics space and will be able to offer it at a more cost-effective price.

The last question from me is just on the other business the spinal implant which currently seems to be benefiting from the increasing exclusive distributor relations that you have developed. Could you tell us like what percentage of all your distributors are closing at this time. And is there some optimal number that you need to get to, as that you can maintain and also grow the market share that you're enjoying at this point?

Yes, the overall number hasn’t changed dramatically from where it’s been. I think we’re on 15 or 16 at this point and they’re getting close to representing half of those revenues on the spinal implants side. And really there is no magic number we want to continue to add to the whitespace and bring on those near exclusive distributors carrying both hardware and orthobiologics, continue to reengage some of our longer tenure distributors and try to push them in the direction of becoming more exclusive. And again as Keith said before, it’s a mutual investment in each other. We’re going to launch the innovative new products and we’re looking for more exclusivity, but there's no magic number we just know that we want to continue to add that dedication to get the sustainability of revenue growth. And we’re pleased with the results of the strategic distribution changes we made over the past three years because in prior years they definitely cost us near term revenue, but it was about the longer term revenue growth and that's where we find ourselves now that we kind of work through those headwinds of the legacy distributors we moved away from. And the newer more exclusive distributors have that critical mass of revenue that not only driving growth but I think service is a good foundation for sustaining that net revenue growth moving forward.

At this time, I’m showing no further questions. I’d like to turn the call back over for closing remarks.

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

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone have a great day.