OrthoPediatrics Corp.

Good morning and thank you for standing by. Welcome to the second quarter 2024 Orthopediatrics Earnings Conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session toward the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Tripp Taylor from Gilmartin Group for a few introductory comments. Please go ahead.

Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer, and Fred Height, Chief Operating and Financial Officer. Before we begin today, let me remind you that the company's remarks 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 are subject to numerous risks and uncertainties, and the company's actual results may differ materially. For a discussion of risk factors, I encourage you to review the company's most recent annual report on Form 10-K, which was filed with the SEC on March 8, 2024. During the call today, management will also discuss certain non-GAAP financial measures, which are 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 measure to the most directly comparable GAAP financial measure in its earnings release. Please note that the 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 this live broadcast today, August 6, 2024, except as required by law The company undertakes no obligation to revise or update any statements to reflect events or circumstances taking place after the date of this call. With that, I would like to turn the call over to David Bailey, President and Chief Executive Officer.

Thanks, Chris. Good morning, everyone, and thank you for joining us on our second quarter 2024 conference call. We're extremely proud to begin our call by reporting that we've helped over 32,000 kids in the second quarter of 2024. a 52% increase and another record high for orthopediatrics. Our cause is rooted in the desire to positively impact the lives of as many children worldwide as possible. And the 52% year-over-year increase is a true reminder that we continue to make an impact and are successfully delivering on that cause every day. Orthopediatrics continued our strong performance into the second quarter of 2024 with revenues reaching a record $52.8 million surpassing the $50 million mark for the first time in our history and representing a 33% increase from the same period in 2023. This achievement was fueled by the effective execution of our business strategy and helped deliver top-line revenue growth, produced healthy margins, and positive adjusted EBITDA. We are pleased with the momentum we are generating, and we look forward to continuing to drive results in the second half of 2024. Before diving deeper into the quarterly results, I want to briefly touch on the overall macro trends. At this point, we believe we are working in a normalized surgical environment. Hospital staffing has increased, efficiencies in the operating room have improved, and we've seen minimal disruptions in the busy summer surgery schedule. Going forward, we expect more of the same, barring any major disruptions from future respiratory illnesses. In the quarter, our revenue showed more variability on a month-to-month basis, particularly in the surgical segments of trauma and deformity and scoliosis, which experienced a delayed start to their peak season. However, once the season started, it accelerated rapidly into the close of the quarter and is extending into the balance of the summer season. Case schedules are robust, and we are experiencing the most stable environment in quite some time. Our business is comprised of a large and highly differentiated portfolio of products that continue to take market share across multiple pediatric orthopedic segments and drive our growth. During the quarter, the global trauma and deformity, domestic scoliosis, and our newly formed and rapidly expanding specialty bracing, or OPSB, businesses all contributed to strong growth. Second quarter global T&D was very strong with 37% year-over-year growth, and scoliosis produced substantial 26% year-over-year revenue growth in the second quarter. OPSB contributed to growth in both the T&G and scoliosis businesses as a result of the Boston O&P acquisition, coupled with increased sales from products outside the Boston O&P clinics, such as MDO, DF2, Oralevity, and Rhino. At this early stage, we couldn't be more pleased with the Boston acquisition. The more we work together with the team, and the better we understand the opportunity, the more convinced we are of the large expansion opportunities and the synergies between our implant business and OPSB. Our business has multiple levers from which we can drive value, including continued growth in legacy products, several new product launches, additional international regulatory approvals, several transformational R&D projects, a rapidly expanding specialty brazing business with OPSB, and our expansion into digital health. While some of these efforts may need more investment and time, we believe they are essential for the company's future of driving rapid revenue growth, enhancing our profitability, and improving ROI. With the combination of successful growth drivers we've outlined, and with the anticipated upcoming investments, we have positioned the business to continue growing top line while improving profitability on our way to cash flow breaking. We project to produce eight to nine million in adjusted EBITDA in 2024, and assume a large step up for 2025. Given our bullish outlook, and the multitude of opportunities we have in front of us, we have recently taken steps to recapitalize the business to maintain our aggressive growth and profitability trajectory. Refinancing our credit facility with the convertible offering and term loan from Braidwell provides an improved cost of capital and flexibility that will allow us to invest in higher income opportunities like new OPSB clinics. Leveraging this capital and liquidity will enable us to continue funding these opportunities and reach our cash flow break-even goal in 2026. Next year, we expect to take a major step towards that goal, as we expect positive adjusted EBITDA levels in 2025 to completely offset our investment and set deployments for 2025, thus limiting operating cash usage to working capital growth. Now, moving on to our revenue set. In the second quarter of 2024, we generated total trauma and deformity revenue of $37.8 million, representing growth of 37% compared to the prior year period. We continue to make substantial market share gains, with this quarter showing robust sales of trauma products, particularly PMP tibia, PEGA, X6, and OPSD, complemented by revenue from the newly included Boston O&P D&D product sales. Within the T&D business, I'd like to highlight a few products and areas that we feel have made important progress this quarter. Across our portfolio, we are really starting to realize the benefits of our prior investments in set allocation and are excited to see the payoff from this stretch. This is particularly true with tech as sales continue to be better than we've ever expected, growing over 50% globally once again. Moving forward for the rest of 2024 and beyond, We expect this growth to continue, at least for a few more years, as we more deeply penetrate our U.S. accounts with a full pay-to-product portfolio, and we ramp international sales now that we have converted to our OP distributors and agencies at OUS. Growing our portfolio remains a critical part of our strategy, and we continue to progress in this area with the advancements of several products. As we discussed last quarter, we are well on our way with the full U.S. market release of BNP Tibian And we are excited to report that in the second quarter of 2024, we launched another 25 sets. Sets will continue to arrive at counts in each of the next several quarters, and PMP Tibia will remain a key catalyst for the next several years. In tandem, we're also executing the full market release of DF2. Demand for this product has been extremely high, and our customers have endorsed the product with brave reviews. While revenue at this stage is small, DF2 is poised for rapid growth for the next several years. The uptake of these technologies is surpassing our projections, prompting us to ramp surge in training for these devices. In addition, I'd like to note that our X6 customer conversion during the quarter was very high. After a great first quarter, we've continued the momentum and followed up with a strong second quarter, both in terms of revenue and new customers and account conversions. On the R&D front, we continue to make solid progress on our new T&D plating system, Pediatric Plating Platform, or P3, and expect the first of a series of plating projects to launch in the first half of next year. P3, combined with our market-leading P&P Femur and Tibia franchise, will ensure we are providing our customers with the highest quality and the most sophisticated IMA and anatomic plating systems ever seen in pediatric orthopedics. As part of our overall strategy to support all areas within the pediatric orthopedic space, we continue to expand our footprint into transformational and underserved areas with larger opportunities. The orthopediatrics non-surgical specialty bracing business, or OPSB, is an opportunity that not only allows us to surround our customers with more solutions to their children, but represents a substantial new source of capital-friendly growth. We have now fully integrated the OPSD assets, and we are starting to fully realize the breadth of synergies with our implant business and the scaling opportunity it presents. This will be a business that can contribute to our growth in the long term and improve profitability. The franchise's swift growth is driven by our three-point strategy of Salesforce expansion, R&D that expands the range of products, and our clinic expansion strategy. Since its inception, the sales force has already grown materially and we are seeing early returns from the investment in an OPSB-specific sales force. Additionally, R&D projects continue to rapidly progress and we expect to launch four to five new products each year as a result. Lastly, while we expect most of the impact to begin in 2025, we have identified numerous opportunities for clinic expansion and are in the final stages of formalizing our plan. Notably, Through applying a small operation in Virginia, we have our first new clinic and expect our next new clinic embedded in nationwide children's hospitals to be up and running in the second half of the year. More details regarding our clinic expansion strategy will be shared at an upcoming investor day, but it is safe to assume as we have learned more, our view of the growth prospects for OPSD is growing more positive by the day. Moving to the scoliosis. In the second quarter of 2024, we generated scoliosis revenue of $13.7 million, representing growth of 26% compared to the prior year. This global growth was led by a strong increase in new users of our spinal implants, especially response, and the addition of Boston O&P revenues. Second quarter domestic sales increased by 37%, led by the addition of the Boston brace from the Boston O&P product portfolio. Domestic scoliosis revenue was strong. but overall scoliosis revenue was somewhat muted by negative international growth in the quarter and a slower than expected start to June. Nevertheless, recent weeks indicate a promising uptake globally, hinting at a record summer post-pandemic. With an expanding base of surgeons adopting our offerings and significant new customer gains, we're bullish about continued scoliosis revenue growth in 2024 and beyond. Our team is constantly exploring ways to expand our and cater to unaddressed needs of children while enhancing aspects of our product portfolio. Currently, we are focused on early onset scoliosis, which is a category that has lacked technical innovation over the past decade. At Orthopediatrics, we have pioneered three EOS products, which are in different phases of development and we're pleased with the advancements we've made thus far. After launching the response resin pelvic system in the first quarter of 2024, the surgery response has been quite encouraging. This system represents a novel and distinct technology that addresses a significant gap in care and is now being utilized in facilities where our scoliosis footprint was previously known. This has reinforced our conviction that our strategy of developing products that meet some of the most complex, unending, and pediatric deformity surgery is the right one. Looking ahead, our expectations are high for the impact of our two additional EOS offerings particularly with the upcoming launches of LE and VertiGlide. Currently, VertiGlide is awaiting FDA review, and we hope to have approval in the second half of 2024. The LE electromechanical growing rod, which received the pediatric breakthrough device designation by the FDA, continues to pass critical milestones in the development process, and we are hopeful it will be available in the market in the coming 12 to 18 months. Beyond our EOS suite of products, we're in the late stages of development of our next-generation fusion systems, which we expect to launch in the coming year. Collectively, this suite of innovative products will transform our scoliosis implant portfolio and further strengthen our position, delivering the next wave of growth in scoliosis implants over the next several years to come. Moving on to international. International performance was strong, generating revenue of $11.6 million and delivering 16% year-over-year growth. Growth was primarily driven by over 25% trauma and deformity product growth, including PECA, XFIX, and several legacy devices. General demand across the entire T&D portfolio was strong, but was partially offset by a soft international scoliosis quarter. We continue to expect a very strong international growth rate for Scoliosis on a full year basis as the EU and Canadian agency businesses grow larger and begin to stabilize ordering patterns from our stocking partners in South America. Both the EU and the Canadian businesses are small but growing rapidly, and we're well-positioned for the future as we open new accounts in Ireland, the UK, Germany, France, and several major accounts in Canada. Given the operating environment internationally, and the distinct lack of pediatric orthopedic product launches in Europe over the last four to five years, we see a very large opportunity for our international business. We eagerly await upcoming developments that will only increase our footprint and ability to make more headway. Specifically, we are awaiting the notified body hunt to finalize our EU MDR status, which we expect to be complete in the second half of 2024 or early 2025. This will enable the potential launch of several new products in Europe shortly thereafter. Overall, the international business is set up very nicely, and we believe that the second half will contribute toward an improved 2024. That brings us to surgeon training and education. Orthopediatrics continues to lead industry efforts to offer enhanced educational opportunities within the pediatric orthopedic community. As you know from our last call, we were live from EPOS where we were delighted to reinforce our commitment to POSNA and EPOS through top-level sponsorship of the event. At the annual meeting, we highlighted our growing portfolio of pediatric-specific solutions through sponsored sessions. We're grateful for the opportunities such as this where we can highlight the advancements made in the pediatric orthopedic space, and we'll continue to focus on industry events that align with our mission. Before turning the call to Fred, I'd like to announce that we plan to host an Investor Day in September, where we will take a deeper dive into our growth initiatives and look more specifically at our plans for the specialty racing business, or OPSB. With that, I'd like to turn the call over to Fred to provide more detail on our financial results. Fred? Thanks, Dave. Our second quarter 2024 worldwide revenue of $52.8 million increased 33% compared to the second quarter of 2023. Growth in the quarter was driven primarily by our strong performances across global trauma-informity, domestic scoliosis, and OPSB, as well as the addition of Boston O&P revenue. U.S. revenue was $41.2 million, a 39% increase from the second quarter of 2023. Growth in the quarter was primarily driven by our trauma-informity product line, scoliosis, and OPSB, as well as the addition of Boston O&P revenue. We generated a total international revenue of $11.6 million, representing growth of 16% compared to the second quarter of 2023. Growth in the quarter was primarily driven by trauma and deformity and OPSB, partially offset by soft international scoliosis revenue. In the second quarter of 2024, trauma and deformity global revenue of $37.8 million increased 37% compared to the prior year period. Growth was primarily driven by strong growth across numerous product lines, specifically Pega Systems, PNP Tibia, XFIX, and OPSB, as well as the addition of Boston O&P revenue. In the second quarter of 2024, scoliosis revenue of $13.7 million increased 26% compared to the prior year period. Growth was primarily driven by increased new users of our spine systems and response 5560, offset by negative growth in the international scoliosis revenue. Finally, sports medicine other revenue in the second quarter of 2024 was $1.3 million, compared to $1.2 million in the prior year period. Turning to set deployment, $7.8 million of sets were consigned in the second quarter of 2024, compared to $9.2 million in the second quarter of 2023. Year to date, we have deployed $12.1 million of sets, compared to $12.2 million at this time last year. Touching briefly on a few key metrics For the second quarter of 2024, gross profit margin was 77% compared to 76% for the second quarter of 2023. The increase in gross profit margin was primarily driven by higher domestic growth combined with lower international set sales, as well as favorable purchase price variance. Total operating expenses increased $10.9 million, or 30%, to $46.5 million in the second quarter of 2024. The increase was primarily driven by the addition of Boston O&P, as well as increased commission expense and incremental personnel required to support the ongoing growth of the company. Sales and marketing expenses increased $3.1 million, or 23%, to $16.6 million in the second quarter of 2024. The increase was driven primarily by increased sales commission expense, coupled with additional employees to support the OPSB business. General and administrative expenses increased $8.2 million, or 43%, to $27.3 million in the second quarter of 2024. The increase was driven primarily by the addition of Boston O&P acquisition increased depreciation and amortization, as well as personnel and resources to support the continued expansion of the business. As discussed on the first quarter 2024 earnings call, the addition of Boston O&P includes lighter sales and marketing, as well as R&D expenses, however, heavier G&A expenses. Research and development expenses decreased $0.4 million or 14% to $2.5 million in the second quarter of 2024 due to timing of external development expenses. Total other expense was $0.4 million for the second quarter of 2024 compared to $2.3 million of other income for the same period last year. In the second quarter of 2023, we recognize a $2.3 million favorable adjustment to contingent considerations that did not repeat in the second quarter of 2024, as well as increased interest expense from our $10 million mid-cap loan. Adjusted EBITDA was $2.6 million in the second quarter of 2024, and this compares to $2.3 million for the second quarter of 2023. We ended the second quarter with $30.9 million in cash, short-term investments, and restricted cash. Total cash usage in the second quarter of 2024 was approximately $19 million, which was slightly higher than expected and did include payments of $2.2 million to AppuFix as a final acquisition payment, $1.3 million anniversary payment to MedTech Concepts, and a $2.0 million supplier payment due to volume commitments. In addition, we currently have higher receivables due to the seasonality of our business and higher June volume, as well as increased inventories in support of future SET deployments. We anticipate continuing to invest in our strategic initiatives, but we expect that the cash burn at the level seen in the second quarter will not be repeated in subsequent quarters, and that the cash burn will significantly be reduced in the second half of the year. With that said, we have recently taken steps to better support our capital needs with the closing of a new facility that will offer orthopediatrists more flexibility, increase our firepower, and enable us to continue to grow the business and deliver growth. After evaluating our financing options, we have partnered with Braywell, with whom we have had a long-term relationship and have signed a financing consisting of a term loan and a private placement of convertible notes that will provide up to $100 million of capital. Terms of the financing include both a $50 million term loan and a $50 million of convertible notes. The term loan consists of an initial term loan of $25 million and access to a delayed draw term loan facility for an additional $25 million. In connection with the financing, we have also approved a stock repurchase program of up to $5 million of outstanding common stock. The proceeds will be used to repay outstanding debt of approximately $10 million, transaction fees incurred in connection with the financing, potential stock repurchases, and general corporate purposes and working capital needs, allowing for the pediatrics to continue to operate from a position of tremendous strength. Turning to guidance, we are reaffirming our expectations for full-year 2024 revenue, range of $200 to $203 million, representing year-over-year growth of 34 to 36 percent. We continue to expect to generate between $8 and $9 million of adjusted EBITDA in 2024. And additionally, we continue to expect less than $20 million of new set deployment in 2024. This represents our continued focus on driving the business to cash flow break even by 2026. I'll now turn the call back to Dave for closing remarks. Thanks, Brent. As we reach the midpoint of the year, it's encouraging to see where we stand today. We have established a solid base for continual growth and are looking forward to several upcoming catalysts that could pave the way for further expansion. We are confident that we will carry our momentum into the back half of the year and beyond as we continue to help more children than ever, shatter revenue records, capture share across the entire business, maintain healthy margins, and execute on our EBITDA expectations. We are well-positioned to drive improved operating leverage, all the while making meaningful investments in substantial opportunities from transformational product development, including EOS, EUMDR compliance, as well as OPSB and digital health. Our continued execution will produce an expected $8 to $9 million in adjusted EBITDA this year and an adjusted EBITDA level next year equal to consistent annual set deployments. taking a major step towards cash flow breaking. In closing, I'd like to thank our surgeon partners, my OP associates, our investors, and all of the innovators in pediatric health care for standing together to help kids. And we're looking forward to providing an additional update in September during our investor day. Operator, let's open the call for Q&A.