OrthoPediatrics Corp.

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Orthopediatrics Corp. Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Tran Bui from Luke Group. Thank you. Please go ahead.

Thanks, Operator, and thanks everyone for participating in today's call. Joining me from the company are Mark Throdahl, Chief Executive Officer, Fred Hite, Chief Financial Officer, and David Bailey, Executive Vice President. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of federal securities laws, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve material risk and uncertainties, and the company's actual results may differ materially. For a discussion of risk factors, including, among others, the risk related to COVID-19, the impact such a pandemic may have on the demand for the company's products, and the company's ability to respond to the related challenges, I encourage you to review the company's most recent quarterly report on Form 10-Q, which will be filed with the Securities and Exchange Commission soon. During the call today, management will also discuss certain non-GAAP financial measures which are used as supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period over period. For each non-GAAP financial measure referenced on this call, the company has included a reconciliation of the non-GAAP financial measures and the most directly comparable GAAP financial measures in its earnings release. Please note that non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for orthopediatrics financial results prepared in accordance with GAAP. In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 6, 2020. except as required by law. The company understands, undertakes no obligation to review or update any statements or reflect events or circumstances that take place after the date of this call. With that said, I'd like to turn the call over to Mark.

Good morning, everyone, and thank you for joining us today on our first quarter 2020 earnings conference call. We hope that everyone is healthy and staying safe. We'd like to begin by thanking the entire healthcare community for its skill, empathy, and resilience addressing the global COVID-19 pandemic. I have also been impressed, although I'm not surprised, by the way our organization has stepped up during this crisis. While we saw a strong start to the year before the pandemic hit, we have sustained our momentum on corporate initiatives That will allow us to emerge from the COVID crisis stronger than when we entered it. With the pandemic foremost in everyone's mind, we thought it would be appropriate to give you an assessment of how we're leading orthopediatrics through this crisis as we begin to see elective surgeries rescheduled this month and anticipate approaching normal levels by year-end. Fred will then provide a financial review before we open the call to questions. For the first quarter of 2020, we generated 12% revenue growth, despite the impact of COVID-19. We had a very strong start to the year, with 31% sales growth in January and February, continuing the trajectory achieved in Q3 and Q4 2019. This strong start was also reflected in 30% domestic sales growth for the first quarter 2020, Supported by all product lines, despite the deferral of elective surgeries beginning in March. Internationally, however, sales decreased 32% for the quarter, reflecting the earlier impact of the crisis in Europe, South America, and Asia as stocking distributor orders, set purchases, and set delivery came to a near halt in the month of March. Given the higher mix of domestic revenues, gross margin increased 75% in Q1 2020 compared to 73% in Q1 2019. Trauma and deformity correction sales in Q1 2020 grew 22%. Our scoliosis business declined by 13% in the quarter and was impacted by a complete deferral of surgeries in the last few weeks of March. Sports Medicine Other grew 14% in the quarter. Our trauma and deformity correction growth was, in part, driven by the continued rollout of the Orthex Hexapod external fixation system that we acquired last June. In addition to Orthex, for the balance of 2020, we anticipate expanded rollouts of all our recently launched products. This includes Apifix and its Minimally Invasive Deformity Correction system, which we acquired in early April and is one of only two FDA-approved technologies that potentially allows patients to avoid fusion surgery altogether. In combination with the launch of our large fragment cannulated screw system, and the recent FDA approval broadened indications for our response scoliosis system and other important new products. We look forward to offering a significantly expanded portfolio when elective surgeries resume. As we look forward to the remainder of the year and surgeries approaching normal levels, we believe that orthopediatrics can leverage the impact of the strongest pediatric orthopedic product portfolio on the market. supported by our sales force of 167 domestic consultants. Before I turn to a more detailed update on execution against growth objectives, I'd like to discuss how we are leading the company through the global COVID-19 pandemic as elective surgeries resume this month and grow steadily throughout the year. Although we were on track to deliver our previous annual revenue growth guidance and a third consecutive quarter of 30% plus growth, in late March we withdrew our previously announced 2020 revenue guidance of growth in the range of 22 to 24% and investment in consigned sets in a range of $19 to $21 million. We took this step because of rapidly evolving uncertainties. We are maintaining suspension of our guidance for the full year 2020 and expect that our near-term deformity correction and scoliosis businesses will be significantly impacted following the strong start to the year. We do not expect the pandemic to impact the trauma business to the same degree. Furthermore, So-called elective deformity correction and scoliosis surgeries are critical procedures that cannot be postponed long, and many of our surgeon customers describe a considerable backlog of surgeries. This supports our confidence that surgeries will normalize and perhaps even rebound this year, particularly in the United States. At this time, we cannot estimate the timing or magnitude of the near-term sales recovery or the possible rebound, but we will note that we saw slightly better sales in April than our worst-case financial model suggested and May sales are showing considerable improvement. We are in close communication with our worldwide selling organization and are tracking the outlook at each of our top 100 accounts. Some institutions have announced that their ORs will run seven days a week with extended hours. Some surgeons have been told to cancel their summer holidays. We expect that elective surgeries will accelerate during July, returning to normal levels by Q4 2020 in the United States. It is too soon to comment on the international outlook. We anticipate that freestanding pediatric hospitals unaffected by COVID, particularly those in the U.S., will be the first to return to normal levels of surgery. At this point, however, uncertainties remain, including OR support staff availability, the impact of few patients seen in clinics since mid-March, and parental concerns about bringing their children to hospitals. A key fact to keep in mind is that Orthopediatrics ended 2019 with $72 million of cash. On March 16, the first day we began to work remotely, My colleagues and I reviewed a cash flow stress test model prepared by Fred. This model has served as the basis for the decisions we have made subsequently. It enabled us to assure our employees that there will be no job reductions or base pay cuts, and that assurance has stabilized and motivated our direct workforce. It allowed us to establish a distributor relief fund So that our U.S. sales agencies could draw down very low-interest loans that do not need to be repaid fully until year-end 2021. While this fund may be superseded by the Federal Paycheck Protection Program, we believe that it has stabilized our sales force of independent consultants, most of whom sell nothing but Orthopediatrics products. These actions, together with weekly webcast global town hall meetings, and a personal telephone call by an executive officer to every employee in the company every week have maintained a high level of cohesion and morale. These steps have allowed us to continue advancing corporate initiatives such as intensified Orthex sales training, EU MDR compliance, developing sterile individually packaged products for Europe and working with key suppliers to build inventories of critical products. We have used our industry-leading position and resources to conduct training seminars for young surgeons. We have been utilizing the DocMatter website to host worldwide surgeon discussion groups on treating children during the COVID pandemic and now anticipating the scope of the recovery. More recently, we have worked on establishing investigational review board sites and targeting U.S. surgeries for the Apifix mid-C system. And finally, We have commenced an orderly senior executive succession process. Once the global situation begins to normalize, we will be in a better position to estimate the impact on revenue growth and set deployments. In the meantime, the company continues systematic execution of our 2020 growth initiatives with focus and esprit de corps, which is a testament to our corporate culture that is the foundation for all our success. Let's now turn to these initiatives, starting with new products. In March, we announced the limited launch of a large fragment cannulated screw system, which represents the company's 34th surgical system. The system is designed to address slipped capital femoral epiphysis, or SCFI, cases and trauma procedures of long bones and long bone fragments. Indications for the system include SCFI, Vemoral neck fractures, tibial plateau fractures, sacroiliac joint disruption, intracondylar femur fracture, subtalar arthrodesis, and fixation of the pelvis and iliosectral joint. The system features an innovative screw design to facilitate implant insertion and removal. More specifically, it includes patented thread cannulation to ease implant removal with screws in 2mm increments for greater precision. In March, we also received FDA 510 clearance and expanded indications for our response scoliosis system to include neuromuscular surgery. As further components are added, we look forward to this becoming the basis for our new response neuromuscular system, Response NM, which will feature a complete set of implants and instruments with unique attributes that address extreme hyperlordosis and simplify insertion. This system will be the first of its kind in the industry. We also continued development of enhancements in some trauma and deformity correction systems to further improve screw-to-driver and screw-to-plate interfaces, in addition to progressing our osteogenesis imperfecta nailing system. In tandem, we advanced work on a second-generation, early-onset scoliosis technology with IP licensed from an adult spine company that we're developing with the inventor and a panel of surgeons who use the system. In addition to our product development pipeline, recent new systems such as PD foot, cannulated screws, and the PNP femur intermedullary nail systems all represent significant near-term growth vehicles. While we announced their launch in 2018 and 2019, These were only initial launches and significant investments in sets have been made this year for these systems following strong demand. Turning to product expansion through acquisitions, in January we announced the divestiture of substantially all the assets related to the adult products of Vilex in Tennessee as well as a license for Orthex in the adult space for $25 million. This divestiture was conducted as a competitive bidding process by a board panel of our independent, non-executive directors. Meanwhile, Orthec sales continued very strong through mid-March with evaluations and surgeon conversions. Currently, our sales organization is being trained on this system with webinars conducted on an almost daily basis with attendance that is threefold greater than before the COVID pandemic. Furthermore, orth-X sales calls and new surgeon commitments continue to take place through virtual meetings where the software can easily be demonstrated. In April, we announced the acquisition of AFIFIX Limited and its mid-C system for non-fusion treatment of progressive adolescent idiopathic scoliosis, or AIS. This has become the company's 35th surgical system. As a reminder, We acquired Apifix for 934,768 shares of OP common stock and $2 million in cash at closing, plus milestone payments and an earn-out over a period of four years. We believe the MID-C system is a game changer. It fills a major treatment gap that potentially allows patients to avoid fusion surgery altogether. The system is implanted unilaterally on the concave aspect of the curvature and acts like an internal brace for patients with Lenke Type 1 and Lenke Type 5 curves of 40 to 60 degrees. Importantly, this solution avoids permanently limiting range of motion and is easily removable. It is one of only two FDA-approved non-fusion technologies. and expands the market for surgical intervention in AIS patients. We know of no other competitive products on the horizon. The MIDSI system is backed by eight years of clinical history with more than 370 patients outside the U.S. Importantly, this acquisition opens a new segment in the continuum of scoliosis care and offers the option to treat patients who are not being successfully treated with bracing. Before these patients can move to fusion surgery, they are often in limbo until their curves progress to 50 degrees or more. The Mid-C solution provides a shorter, less complex, and far less risky surgery than tethering, the other non-fusion technology available. We're pleased to stand tall and advance our strategic initiatives with this major acquisition, even in the midst of the COVID crisis. Turning to operations, to support our new product launches, we continue to consolidate the great majority of our impact supply into the hands of our highest quality and most responsive supplier, which has maintained full employment based on our orders to build sets, inventories of critical products, and vendor-managed inventories. OP orders represent the vast majority of the volume of this contract manufacturer which is located 45 minutes from our Warsaw headquarters and where we also established a quick turnaround prototype cell that significantly reduces lead times in product development. Q2 is typically when we prepare for the summer surgery season and this quarter we anticipate consigning some $7 million of new instrument implant sets after consigning $3.3 million in Q1 Despite the postponement by the European Union of its medical device directive until 2022, we continue to address this major regulatory affairs challenge to ensure that we are fully compliant with these regulations as quickly as possible. Turning to our international and domestic sales organizations, in March we implemented our sales agency model in Italy by converting our stocking distributor in that country Thus bringing us to a total of 38 stocking distributors and 8 sales agencies internationally. In the US, the size of the selling organization is currently 167 sales consultants, which is up 21% from the same period last year. While our discussions with major US pediatric centers about becoming their primary source of trauma and deformity products have temporarily been put on hold, They represent significant future potential and are further supported by the recent addition of Apifex, Orthex, and new surgical systems introduced since our IPO in 2017. This is a time that tests a company's leadership and its culture. We are delighted to see spontaneous demonstrations of leadership, initiative, and selflessness at all levels of the company. Although we have worked remotely since March 16th, We remain cohesive with a high degree of morale and productivity. We're proud of our tangible progress toward becoming the employer of choice in the orthopedic industry, with recognition in February for the fourth year as one of the best places to work in Indiana. Employees at thousands of companies are polled by the Indiana Chamber of Commerce, and fewer than 100 are selected for this honor. Therefore, we are confident that we will retain our employees Our sales personnel and our momentum as we continue to drive competitive advantage even during the COVID crisis. With that, let me now turn the call over to Fred to review our financial results. Fred. Thanks, Mark.