Good day Welcome to the Alphatec Spine's first quarter 2015 conference call. [Operator Instructions] I would like to introduce to you 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 first quarter 2015 financial and operating results as well as provide an update on our 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 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 substitute for financial statements prepared in accordance with GAAP. Now, let me introduce the other members of the Alphatec Spine 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.

Thanks, Christine. Good afternoon, and welcome to Alphatec’s quarterly conference call. I’m going to begin with an overview of the results on a high level, followed by an update to our strategic initiatives, which we have called the three pillars during our quarterly call at the end of February. On the revenue side of the business, we were up 5% in constant currency over prior year, $51.8 million against $49.2 million over prior year. On as reported basis, we were at $48. 6 million in Q1 2015 and $49.2 million in Q1 of 2014. On the geographic breakout, in the U.S. we had sales of $30.5 million in Q1 2015 against $32.1 million in Q1 2014. More about that later in my comments. Internationally, we did $18.2 million as reported against prior period, up $17.1 million. On an operational basis, we had a really strong quarter in international, up 25% in constant currency. I will also have some more comments about that here in a moment. Let’s start with a little color around the U.S. number. The obvious question for us, and I’m sure anyone, is what’s going on? Well, forty, this is an area where we’ve been spending considerable time. As I’ve been formulating a product strategy, what obviously goes with it is a commercial strategy. I’ve been working on our U.S. sales model for the last several months. One of the things that we learned in so doing is that we had a sales person assigned to less than 10% of the surgeons in the U.S. market, which then of course leaves more than 90% of the surgeons available for us to be promoting our new suite of products over the next 24 months. So underlying this Q1 results was the very obvious: When you have under 10%…

Thank you, Jim. As Jim has already provided the key revenue highlights of the first quarter, I will focus the majority of my remarks on the reported operating performance for the first quarter that ended March 31, 2015. I will then provide an update on our full year 2015 guidance. Before I go into the financial details, I would like to discuss currency as it relates to our first quarter results. The strong U.S. dollar affects us more than most of our pure play spine peers due to our higher share of ex-U.S. revenue. Approximately 37% of our business as reported this quarter was international. This represents our highest quarter of international contribution to the top line. While the impact is most evident in our top line, currency and geographic mix also impact our gross margins and adjusted EBITDA. Our consolidated revenues were impacted by $3.2 million of currency headwinds, primarily related to declines in the valuation of the Japanese yen and euro against the U.S. dollar. When adjusted for currency, consolidated revenues were up 5.4%. Our consolidated gross profit for the first quarter was $32.9 million, compared to $33.3 million for the first quarter of 2014. The decline of 1.1% over prior year was primarily due to lower sales volume in the U.S. Our Q1 gross margin of 67.7% was unchanged over prior year. During Q1, we realized margin improvement because of our continued due diligence at managing overall costs and capital utilization. However, those improvements were offset by unfavorable variation in regional mix, where international margins are generally lower, combined with the negative effect of foreign currency translation. Our U.S. gross margin was 70.8% in Q1 compared to 71.9% in Q1 of 2014. In Q1, we realized margin improvements in the U.S. associated with continued underlying improvements in…

Thanks, Mike. 2015 will be a year of transformation for Alphatec. Together with the leadership team, I am focused on our three strategic pillars: one, innovating in large, market-driving product segments; two, expanding and deepening our penetration in large global markets; and three, improving profitability through improvements in manufacturing and our physical distribution model. We believe this refocusing of our product development strategy, combined with the expansion of the company’s U.S. and international commercial footprint, will enable us to compete globally and accelerate revenue growth. At the same time, we are executing on strategies to increase our return on invested capital and accumulate cash through a reduction in the cost of goods sold and the implementation of processes aimed at lowering our capital commitments. The combined effect of these initiatives should yield an improvement in the fundamental quality of the business, leading to achieving our ultimate goal of 20% EBITDA margins within the next three years. We believe this will result in our ability to more efficiently provide products and systems for physicians treating patients who need spinal fusion, increased profitability, and enhanced valuation of the company. With that, I look forward to answering any questions you may have.

[Operator instructions.] And our first question comes from the line of Josh Jennings from Cowen & Company.

Jim and team, congratulations on the progress in each of your three strategic pillars. It’s only been one quarter into the strategic initiatives that you’ve laid out, at least publicly. And I guess just with the progress that you’ve made, you call out 75% completing the expansion into new metro areas in the U.S., 50% complete sales distribution in the European Union, but how quickly can you complete these initiatives? And then how should we think about those timelines? Could some of these be done by the end of 2015?

That’s actually a great question. Let me try and characterize them for you. Let me take the pillars in order. The product development and the go-to-market strategy is on schedule. So for example, Arsenal is right now in full launch. CVX, we have our first cases scheduled in the limited market release here in the coming weeks. The same is true for Battalion. And those are principally the big product initiatives that we’re expecting for this year. The lateral and deformity systems we’re expecting in the first half of 2016. Those are on schedule. When you move to the commercial footprint, our first stage of the U.S. expansion was to establish representatives in 40 of the top 100 metro areas. And we’re at 32, and we believe that we will accomplish all of those 40 within Q2. So that means through the second half of the year, we’ll be developing those new markets. With regard to the European Union, the additional four markets we plan to enter, we plan and believe we’ll have that also executed in Q2, which will give us the second half to, again, develop those new markets. The fundamental physical distribution transformation, we expect to compete by Q4. And that will have a big effect on our ongoing capital needs for replenishment of instrument sets, because we’ll be managing them much more effectively. With respect to Lean manufacturing, that’s quite an ongoing activity. We’re in a market that has consistent, although not dramatic, price competition in the mid-single digits. For us to constantly maintain margin, we have to, of course continue to improve our manufacturing efficiency, which we expect to continue doing. So we’ll see a lot of things happen. The second half is really when we should see the benefits of these initiatives.

And maybe if I could follow up with just a focus on the U.S. sales force expansion, especially in light of the Q1 performance in the U.S. and thinking about how that can rebound. Can you just give some more color in terms of how you’re building onto these metro areas and maybe if you want to quantify the number of sales rep adds, essentially where they’re coming from and their background? And then when they can potentially star to contribute meaningfully to domestic revenue growth?

As I said, 32 of the 40 will be filled by tomorrow. And in terms of background, virtually all of them are coming from a spine background. So from a training point of view, they will be rather up to speed from an anatomy and physiology and technology point of view. They will be establishing Alphatec in new markets and we do expect that will take some time, although Q2 will be, I would say, probably a modest contribution. Q3 and Q4 is where we should start seeing the impact of those positions. Now, the other eight of the 40, we do expect also to have during Q2, and we are targeting a spine background sales rep. These actually all are employees in virtually every case.

And then last question is just with all the progress you plan on making in 2015, and with some of the, I don’t want to call it restructuring, but with these initiatives in play, 4% to 7% constant currency growth, I know you don’t want to give out your guidance here or 2016 guidance, but maybe directionally how we should be thinking about a revenue growth in the out years? Should we be expecting or modeling revenue growth acceleration?

We aren’t quite prepared to give out 2016 guidance, but it is our strategic goal to achieve double-digit growth over the next three years. So if that can be helpful to you, you might think about that as our goal.

And our next question comes from the line of William Plovanic with Canaccord Genuity.

My first question is, U.S. sales were down about 5% year over year. I think if you look at your strategy, you’re basically taking territories and you’re just cutting them. So you’re taking away what the reps aren’t using. So I wouldn’t have expected the revenues to be down if everything you’re doing is incrementally additive. So my question is, is it pricing? Was it volume? What drove that year over year decrease in the U.S.?

It’s a great question. We studied this issue very deeply. Let me characterize it a couple of different ways for you. First of all, in our previous model, our coverage, our reps, both sales agents, sales distributors, and a few direct reps, did not add new treating physicians on a very consistent basis. That was underlying the sales model. And by going from geographic sales territories to physician-centric defined sales territories, it enabled us to expand. The adds weren’t happening, so it only takes a rather what I would describe as a phenomena of combination of price and caseload. When you’re not participating in a full market… We know the market is growing. It didn’t for us during this quarter, and we had very consistent with market experience in terms of price decline. Our volumes were about the same year over year. And so if you just apply a market price decline, you end up where we were without adding significant new customers. So for us, this transformation strategy, where we are expanding into these 40 metro areas, is going to be a real opportunity for us to increase our top line.

But to clarify that, if you’re down 5%, your volumes are flat, that means your pricing is down 10%. So you would either lose a couple of docs, which is fine, or your pricing was down 10%, per that statement. Where am I wrong?

The pricing wasn’t down 10%, but you’re dissecting something. We had case volume down, broadly, in our population of physicians. And we didn’t add a lot of new physicians during that time. So it had the result it did. That’s one of the consequences of a narrow base. You get accelerated effect of both price and case volume.

So as you’re basically going forward, as the new reps become productive, they add new docs and this all starts to turn around as we head into the back half of the year, is the takeaway?

That is absolutely the takeaway.

And then the next thing is, you were expecting to launch Arsenal in Japan in the third quarter from the timeline you gave us previously. Does that move up with the approval that you have in Battalion in Q2? Do you change and accelerate the launch plans for Japan giving the clearances?

Yes. Well, I may have miscommunicated that. So, Arsenal has been launched in Japan, in April. Is that the question you’re asking me? Mike O’Neill : We have moved up the launch.

But we did move it up, that’s correct. We did move it up. I’ve got the question now. We had anticipated that we would get approval in Q3 and launch in Q4. And what occurred is we received approval in Q1, both for regulatory and reimbursement, and we shipped our first Arsenal sets in early April to Japan and they’ve been trained and we have commenced doing cases.

And then what about Battalion? Is that going into Japan now as well? Or is that delayed?

It isn’t delayed. It wasn’t scheduled until later in the year. And so it is not delayed. We haven’t received approval for it yet.

[Operator instructions.] And our next question comes from the line of Glenn Novarro of RBC Capital Markets.

First, on the revenue guidance for the year, you maintained your constant currency guidance, but the dollar probably has strengthened a bit since you last reported. So what do you anticipate in terms of reported revenues, growth rates or exact numbers? Mike O’Neill : We’re not in the business of forecasting exchange rates, and so we’re sticking with the constant currency approach that we identified with our annual guidance for 2015, and we’re reiterating that. I don’t see value in the company trying to forecast what future exchange rates are going to be.

Okay. Sometimes, companies will say on their calls, you know, if you take current exchange rates today, this is what the reported number would look like. But you don’t even want to go there? Mike O’Neill : No, I really don’t. I think the exchange rate situation is well documented. We went at length to provide constant currency guidance, and we’re sticking with it.

My second question has to do with the Arsenal launch. I wonder if you can give us some more specifics regarding how many surgeons have been trained so far in Arsenal. What percent of these surgeons are new to Alphatec? And then what is the capture rate? In other words, of the new surgeons coming in to be trained on Arsenal, what percent actually, after the training, go back actually to cases and start to become current or consistent users?

Those are great questions, I’ve got to tell you. [laughter] Some of those things we don’t disclose publicly, but here’s the one that we do. Up through February, well over 50% of the surgeons who used Arsenal between July and February were new users for Alphatec. So that’s one element. Now, when we plan forward, we can imagine that the 40 positions that we are filling in 40 of the top 100 metro markets, almost everyone they go to will be new for us. So we do expect and believe that Arsenal is going to be an important contributor to our growth, and that might be a framework that you can use, hopefully.

That’s encouraging, because that’s where incremental growth comes from, picking up new surgeons or surgeons using Arsenal. And then just last, on Arsenal, is this being priced at parity with the older Zodiac system? Is it a premium? Is this going to give an overall lift to your pricing power in 2015?

The answer is, we will price and compete in the market. For us, although it’s a premium to Zodiac, it’s quite a jump in competitiveness. At the same time, we are competing in the market, and we will price competitively to gain share. So for us, gaining share is the core objective. Our margins are quite strong, and we expect them to stay that way. And we will, therefore, be pricing consistent with market.

[Operator instructions.] And I am showing no further questions at this time. I’d like to turn the call back over to Jim Corbett for any further remarks.