Alphatec Holdings Inc (ATEC) 2014 Q4 法說會逐字稿

Welcome to the Alphatec Spine fourth-quarter 2014 and full-year 2013 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 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.

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 provide an outlook for 2015. This afternoon, our comments will build on the press release we issued earlier today.

Before we begin I'd like to remind you that this conference call contains forward-looking statements and involve risks and uncertainties, including in statements regarding the company's expectations regarding its financial performance, strategies for revenue growth and operating improvements, 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 a supplement to and not a substitute for financial statements repaired 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 sporting initiatives for transforming into a business that is 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 represented 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 for the 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 quarter of 2014, consolidated revenues for the year would've been $208.3 million. We also delivered annual adjusted earnings of $30.8 million, representing almost 15% of revenue, and an improvement of over 20 2% versus prior year. With the solid 2014 behind us, I will now focus my comments on Alphatec's future.

First, I will update you on how we look at the spine market environment, then I will outline the three pillars of our strategy for delivering profitable growth. As I discuss each of these, I will provide you with the details of the key initiatives that are underway today that support each of these three pillars. Following this, Mike will cover the financial results in greater detail and provide detailed guidance for the full year of 2015.

As I outline our plan, it's important to emphasize that this is not a spend ahead strategy. We are executing on this strategy by reorganizing and repurposing both our financial resources and human capital. We remain focused on profitable growth and we are using that frame as we execute key initiatives supporting our plan.

When we look at the spinal fusion market, we believe the pedicle screw business represents the largest segment at what we estimate to be a nearly $4 billion worldwide market. Competing in this business enables competing and in the interbody market, which is the second largest segment at approximately $1.5 billion worldwide. Together the pedicle screw business and the interbody market account for almost 2/3 of the global spinal fusion market. With this backdrop we are refocusing the entire organization on targeting these large market-driving segments, as we believe they offer substantial room to compete and opportunities to accelerate growth.

The three pillars of our strategy are, number one, focused innovation on large market driving segments in spine. Two, commercial expansion in large global markets. And three, transforming operations and distribution for improved profitability.

First, let's discuss what innovation in large market driving segments means to us. Moving forward, we will be narrowing our R&D efforts to focus on large market-driving segments of spinal fusion. We will be allocating resources toward select product development programs that can be extended through additional indications, which is expected to enable a pullthrough of Alphatec's broad established portfolio of spine products and solutions.

So what does this look like when it comes down to execution? As we mentioned last quarter, we have recently launched Arsenal, our newest innovative spinal fixation system, in the United States. The Arsenal platform was thoughtfully designed to provide operational efficiency, support surgeon ergonomic needs and biomechanical strength. Arsenal represents the Company's most significant launch in history, and one that is critical to future growth as we are positioning this system to compete in the $4 billion worldwide pedicle screw market.

We believe that Arsenal will be a key platform that should fuel our future pipeline through follow-on indications, establishing a foundation for innovation in the years to come. During the fourth quarter, we successfully completed the US beta launch of the Arsenal spinal fixation system for degenerative spinal conditions, and in February of this year we initiated full commercial launch.

Feedback continues to remain very positive and we are pleased with the uptake thus far. A key objective for us during the beta launch was to gain over 50% of the uptake from new surgeon users as opposed to converting existing surgeon customers.

I'm pleased to report we met this goal and we remain focused on ensuring the successful commercial launch in driving uptake while managing convergence of our existing customers.

the Arsenal platform commercially established, we are now focusing on launching the first line extension of Arsenal called Arsenal Cortical Bone Fixation, or CBX, in the United States during the second quarter of 2015. This further differentiates the Arsenal platform by providing a less invasive midline approach for cortical bone fixation.

Another example of how we are refocusing our resources is the upcoming US beta launch of Battalion, our latest titanium-coated peak interbody system. The titanium coating provides services believed to facilitate bone integration for improved fusion results. The Battalion system will also be launched with new disc prep instrumentation, new disc prep instrumentation set for interbody procedures that will complement the Arsenal platform instruments, leveraging the same innovative ergonomic instrument design features.

Looking forward, Battalion will be competing in the second largest segment in spinal fusion worldwide with the latest technology and innovation. With the Arsenal degen system, Arsenal CBX and Battalion products being commercially launched in commercial 2015 we are focusing our R&D resources on two other large market-driving segments -- lateral and deformity.

For 2015 we estimate the lateral market to be about approximately $600 million worldwide and deformity to be approximately $650 million worldwide. By reorganizing and repurposing our resources in R&D to lateral and Arsenal to deformity, we anticipate launching each of these systems in the first half of 2016. This should allow us to strengthen our large market play and increase our competitiveness.

Now let's discuss the second pillar of our strategy, commercial focus on large global markets. As we transform Alphatec, we are taking steps to strategically increase our commercial footprint, both in the US and internationally. T

today, Alphatec markets its products globally with approximately 35% of the Company sales coming from international markets. To drive growth, however, we must expand and deepen our global penetration and we plan on doing this through several key initiatives in 2015.

First, in the United States, we seek to significantly expand our sales force to further strengthen our coverage and share of voice in major metropolitan markets. Currently, we do not have a sales presence and virtually no sales in 40 of the top 100 metropolitan areas, and it is our objective to enter these markets in 2015.

Our commercial focus for the US in 2015 will remain on successfully launching the Arsenal degenerative system, Arsenal CBX and Battalion, squarely targeting the large pedicle screw and interbody market segments as this is where we believe we have the near- and long-term opportunity to accelerate growth.

Second, in Europe, during the first half of 2015, we will focus on establishing new Alphatec distributor relationships in eight EU countries where we currently do not have a well-established commercial presence. In each of these eight markets, Alphatec products have achieved both regulatory and reimbursement approvals so the barrier to entry is low and the opportunity is high. We anticipate entry into these EU markets to be a key driver of future growth. Consequently in the first half of this year, we expect to launch our Zodiac spinal fixation system into this eight EU markets.

Third, we have growth initiatives underway in the three largest markets outside of Europe and the United States -- Brazil, Japan and China. In Brazil, we have recently have received approval for Zodiac and ILLICO MIS system -- our minimally invasive system for posterior fixation solutions. We are launching Zodiac in the first quarter of 2015 followed shortly by ILLICO. This should provide us with a strong foundation in a large market segment within one of the fastest-growing international markets.

In addition, we received early approval for the Arsenal degenerative system in Japan and are currently targeting a launch in Japan in the second quarter of this year.

China also represents another significant opportunity -- significant market opportunity for us. We currently have numerous pending registrations filed with the CFDA. We have expectations to expand our presence in 2015 and look forward to updating you on our progress throughout the year.

As you can see over the next 12 to 24 months we have a focused pipeline of extremely competitive products, many of which already have regulatory reimbursement approval in our international target markets. We are executing on these initiatives by reorganizing and repurposing our resources and not by spending ahead of revenue.

This expansion should help accelerate our growth in market-driving segments within growing geographic markets.

Lastly, let me talk about the third pillar of our strategy, transforming operations and distribution. A key focus of our management agenda is managing for profitability through the accumulation of cash and improving return on invested capital. To accomplish this, we are implementing major steps to enhance the manufacturing process and transform our distribution model.

First, through accumulated cash and improve the return on invested capital we have to invest behind, not in front of, the sales line. What you won't see from us is a sharp spike in revenue as a consequence of us spending ahead, our intent is to grow in a careful and strategic manner. Second, given the pricing pressures of the overall spine market we have to have a relentless effort on lean manufacturing and continuous improvement in order to preserve and improve margins. To maintain margins we actually have to reduce costs in a very continuous and diligent manner. Alphatec has built a strong operational platform over the past couple of years and we will be looking to continually improve our operations, reducing costs and preserving margins.

A key initiative that is underway today that supports this is our focus on reducing instrumentation costs. Our balance sheet today is heavy with long-term inventory and fixed assets of instrumentation, combined with current inventory. We have a very deliberate plan to bring this down and transform the instrument costs. Our objective is to reduce instrument costs by half over the horizon of the next couple of years.

To substantiate this, during the course of the last six months as part of the US beta launch of Arsenal, we were able to reduce the cost of the instrumentation associated with the system by 50%. We are now applying this cost reduction expertise to the development and manufacturing of both legacy and future instrumentation.

Doing this over time should reduce the amount of instrumentation on the balance sheet and should flow into cash. To improve return on capital, we are implementing initiatives to transform our distribution model for instrument sets. A key element of this is improving our asset management process and instruments set utilization. Our goal is to turn all of our instrument sets twice as fast as our current base on a per month basis.

Our ability to achieve this is a function of a proactive field inventory management process and excellent customer service. Upon full implantation, the net impact of this will be an increase in the return on invested capital by more efficiently using our instrument sets.

We will make significant strides towards our goal in the coming year. In fact, we have been able to improve our set utilization with Arsenal. I'm pleased to say that the Arsenal we have been able to improve our instrument set terms through this pilot distribution program. Our goal now is to apply this to our legacy business and future new products.

In summary, 2015 will be a year of transformation for Alphatec. We will be focusing on innovating in large market-driving segments, expanding and deepening our penetration in large global markets while continuing to manage for profitability by enhancing manufacturing and transforming our distribution model. We believe this refocusing of our product development strategy, combined with expansion of the Company's US and international footprint, will enable us to compete globally and accelerate revenue growth.

At the same time, we are executing on strategies to increase return on our invested capital and accumulated cash through reduction and the cost of goods and the invitation of processes aimed at lowering our capital commitments. The combined efforts of these initiatives should yield an improvement in the fundamental quality of the business, leading to achieving our goal of 20% EBITDA margins over the next three years. We believe this will result in our ability to more efficiently provide products and systems for physicians, treating patients with spinal disorders, increase profitability and enhance valuation of the Company.

With that, let me turn the call over to Mike to review our financial results in more detail. Mike?

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 there were a number of nonrecurring expenses in the fourth quarter and full year of 2013 related to the Orthotec 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 revenues grew 6.3% and 5.1% respectively after excluding 2013 revenue from France as well as adjusted for currency. Similarly our international revenues for the fourth quarter and full year grew 19.4% and 12.1% once adjusted for the above-mentioned items.

For gross profit and gross margin I've already noted some of the significant impact 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 compares to a 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 year of 60.7%. Of the 860 basis point improvement, 490 basis points are associated with the French restructuring and write-offs taken in 2013. 370 basis points are reflective of our continued focus on manufacturing costs, reduced [depreciation] and amortization ,and the financial benefit of the French restructuring.

Total operating expenses for Q4 of 2014 were $34.7 million, a decrease of approximately 62% compared to the fourth quarter of 2013. When compared to the prior year, Q4 2013 included significant one-time charges including $46 million related to the Orthotec settlement and $3.7 million related to trial-related expenses associated with the Orthotec litigation and $5.6 million associated with the French restructuring.

After these adjustments, favorability and G&A in the fourth quarter of 2014 was offset by increased R&D spending, primarily related to the beta launch of Arsenal. Total operating expenses for the full-year 2014 were $141.6 million, reflecting a decrease of $56.2 million compared to the full year of 2013 of $197.8 million. The decrease of approximately $56 million in operating expenses is essentially the result of the nonrecurring expenses that I outlined previously.

When operating expenses for the year are compared with non-GAAP adjustments for the full year of 2013, total operating expenses were down almost 2% or $2.3 million, primarily attributable to the reduction in G&A expenses offset by an increase in R&D, associated again with Arsenal launch. Please refer to the non-GAAP tables for both 2013 and 2014 that were provided with the press release earlier today for more details.

Adjusted EBITDA, a measure we guide to, was a record $8.3 million in the fourth quarter of 2014 while 15.4% of revenues compared to the $7.5 million or 14.1% of revenues reported for the fourth quarter of 2013. Similarly we achieved record adjusted EBITDA of $40.8 million for the full year of 2014 or 14.9% of revenues compared to the $25.2 million or 12.3% of revenues reported for 2013. This demonstrates our ongoing commitment to improve profitability across all aspects of the business.

Please note that the adjusted EBITDA for the fourth quarter and full year of 2014 excludes the effect of interest and other expenses, taxes, depreciation, amortization, stock-based compensation and in-process R&D. Adjusted EBITDA for the full year of 2014 also excludes the following items.

A nonrecurring expense of $4.8 million associated with the settlement of the Orthotec litigation and trial-related expenses. And $706,000 of expenses related to the French restructuring I've outlined in the reconciliation of non-GAAP financial measures that are accompanying our financial schedules today. Having generated a GAAP operating profit for the third sequential quarter, our GAAP net loss position is primarily a function of our debt structure and the associated interest expense. GAAP net loss for Q4 2014 was $273,000 or $0.00 per share basic and negative $0.03 per share diluted, compared to a GAAP net loss of $60.4 million or negative $0.62 per share basic and diluted for the fourth quarter of 2013.

Again, significant nonrecurring expenses negatively affected our GAAP net loss for the fourth quarter of 2013.

GAAP net loss for the full year of 2014 was $12.9 million on negative $0.13 per share basic and $0.16 per share diluted compared to GAAP net loss of $82.2 million or negative $0.85 per share basic and diluted for the full year of 2013.

As we mentioned on our last call the Company completed the final drawdown of $6 million from the Deerfield Credit Facility to service the quarterly Orthotec settlement obligations through mid-2016, which coincides with the needs of the company to refinance its senior secured debt. The Company's right to draw down the Deerfield facility expired on 30 January 2015 and the Company did not make any further drawdowns after the one mentioned above.

Accordingly, the total balance drawn from the facility remains at $26 million. As of December 31, 2014 unrestricted cash and cash equivalents were $19.7 million compared to the $21.3 million reported at December 31, 2013.

Additionally the Company has $6.8 million of restricted cash which must be used for the future payment obligations associated with the Ortho settlement obligation. Over the last couple of years the Company has had to deal with product withdrawals, restructuring activities and material litigation. As we exit 2014, these headwinds are behind us. And the Company can focus clearly on the strategies that Jim outlined earlier.

It's imperative that we continue to be more efficient and effective in all aspects of our business from cost of goods sold, capital consumption and leveraging our operating expenses. With the industrywide challenges of pricing and reimbursement the Company must continue to improve its margins and generate superior cash flow. With the plans and activity that we have highlighted today, we believe the Company is well-positioned to execute -- execute against these pillars.

With that I'd now like to provide our forward-looking guidance for 2015. Our guidance is based on a broad assessment of the macro variables associated with the overall spine market, as well as our strategic focus for the coming year that Jim outlined earlier.

Given the foreign currency headwinds, we are issuing revenue guidance in constant currency versus 2014. In 2015, we expect full-year constant currency growth of 3.9% to 7.2%, which represents constant currency revenue of $215 million to $222 million. As Jim noted in his commentary, there are a number of commercial activities planned for 2015.

As our momentum gains traction, you should anticipate revenue accumulation to be biased to the second half of the year. We anticipate non-GAAP adjusted EBITDA to be in the range of $34 million to $37 million or 10.4% to 20.1% over 214 -- over 2014 and representing 5. -- 15.8% to 16.6% of annual revenue. Our adjusted EBITDA guidance reflects the continuing improvements associated with our international business as well as our commitment to improving the profitability and cash flow of the Company.

In summary we are very pleased to report both record quarter and full-year results for 2014. We've made steady progress as an organization over the past year and we look forward to executing on a clear strategy of profitable growth as we move into 2015 and beyond. With that, I'd like to turn the call over to Jim.

Thank you, Mike. Looking ahead I see great opportunities to compete more effectively and accelerate global growth and increase profit ability. Alphatec is a spinal fusion technology company under new leadership that is driving 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 others with narrow product lines or limited market presence, Alphatec's history as a global provider of diverse and deep product portfolio provides 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 history. We made bold decisions, moved aggressively and ensured long-term strategic value for our customers, shareholders and employees.

In closing, I'd like to acknowledge and thank the Alphatec employees of Alphatec who've made a lot of progress in 2014 and positioned us to accomplish even more in 2015.

Thank you. Now I'd like to open the call up for your questions.

(Operator Instructions). Josh Jennings, Cowen and Company.

Hi. Good evening, gentlemen, and thanks a lot for the download and all the color on the new strategic initiative, Jim. I just wanted to start on the top line guidance for next year, and in conjunction with fourth-quarter performance.

Just looking at the US business, there is some modest underperformance by our calculation relative to the spine market. In the setting of the Arsenal launch, in terms of going forward into 2015, then can you just break out -- are you able to divide your expectations and the assumptions baked in for the US and international businesses in 2015?

I think you got three questions there, so let me (multiple speakers). I don't mind three questions, I just want to make sure I address them.

So with respect, Q4. Let me start with US 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 US business 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 -- 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're asking?

The main gist was looking at 2015 guidance, your expectation for the US business and international business, is that balanced between that level of growth and 3.9% and 7.2% balance between both business segments, or is there more heavily weighted towards the mastic international business?

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 at a different rate presumptively. But we don't separate them when we give guidance.

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

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 time frames.

So -- this is of course the first time we've talked about them, so we didn't start them yesterday for sure.

Understood. And maybe just looking at the attack of the pedicle screw interbody spaces, some of your competitors have talked about moving away from those two areas and focusing on exclusive technologies. Should our assumption be that you are looking to introduce exclusive technology platforms within those two spaces? One of the concerns is that's where the pricing pressure is greatest. Thanks a lot, guys.

First of all, those two segments are what happens in spinal fusion cases every day. And one of the challenges we have faced in our past is we have a very broad product platform, but some of them are unique, not used in every case. And so to sort of be able to take advantage you need to be in every case.

Now although there are pricing pressure in both of those segments, it's still a robust market opportunity, gross margin ability in those markets is very significant and one where 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 the 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.

William Plovanic, Canaccord Genuity.

Ryan in for Bill. What percentage of US revenue in the quarter was stock and distributor, and what was that a year ago?

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

Great. And where -- OUS. In terms of strength, what geographies are you seeing strength in, in the quarter?

Without exception our Japan business continues to perform very well. In terms of international markets, it's far and away our flagship. 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.

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

I'm actually just finishing month nine. So Monday will be beginning of month 10. So actually, you just heard it. The three pillars of how to transform the Company, we've very fundamentally during my time focused R&D pipeline to focus on these larger market segments. And we focused on how we're going to expand our commercial footprint in the United States and internationally. And further, we have 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 what I might call the management agenda of the Company.

Great, thank you.

(Operator Instructions). Mark Landy, Summer Street.

Jim, maybe this is a bit of an unfair question but I'll 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 in 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 3.5 years.

Is there a little bit of refocusing fatigue? What's really the mood right now? People just jazzed that this is something they believe in, or is it kind of here we go again, let's wait and see?

I think it's a fair question. Les, when he came out of retirement and was running the Company 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 Science Tech's acquisition, which involved the restructuring of France, and those are big -- kind of big, hairy problems. And those are kind of -- those are basically solved when I come.

And so now what the Company needs is it needs a 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. A lot of things. But at the same time very motivating for them.

So I don't think we have refocus fatigue. Actually I think we have transformational energy.

I can't let that go without adding some additional commentary here. I've been here for 4.5 years, I've seen the massive things we had 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 focused on that. As a member of the senior management team, I'll tell you, I am pretty jazzed and I can tell you that everybody else on the team is pretty jazzed 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 the agenda so we can be successful in 2015 and beyond.

Fair enough, and good luck on that. We look forward to good results.

Mike, I guess the question for you. Gross margin has turned it up nicely, you had some programs there. As we hit maybe Josh pointed it out a little bit towards that I don't want to say it's more the commoditized side of spine, but perhaps more the everyday of products and spine. Do you think that improvement in gross margin slows down a little bit and then you'll get some pickup in 2016 maybe late 2015?

You've got a couple of dynamics happening in, right? you've got a growing international business, which historically has lower overall margins. And so we're going to continue to see some of the benefits from moving ourselves out of France. Fundamentally, I think Jim touched on it. You're going to have total gross margin approaching 70%, we are obviously above that in the US.

You look at some of our standard gross margins, it's a very healthy business. And there's plenty of margin out there in these segments, both pedicle screws and interbodies. And certainly in the areas we are looking to get to in 2016 in terms of deformity and lateral.

So, we'll still have obviously some other products that we can -- we'll position for premium pricing, but I believe that we've got opportunities to improve our margins in 2015, 2016 and 2017 and we're going to continue to push for that.

Lastly on (inaudible) rollout in terms of the goal of getting, I think it was 50% new surgeon -- new surgeon accounts, was that just trialing, or is that sticky business? Are they repeat users? Maybe just get some clarification there?

It's a small in at the moment relatively speaking. It was both trial and conversion, so we've had a number of competitive conversions, of course, and we also had some that -- we have to use -- we have kind of an internal definition for how many months in a 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 2015.

Thanks for the answers, guys, and thank you for taking my questions.

(Operator Instructions). I'm showing no further questions at this time. I'd like to hand the call back over to Jim Corbett for any closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference,. That does conclude today's program. You may all disconnect. Have a great day.