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spk08: Good day, and thank you for standing by. Welcome to Treece Medical Concepts' third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you'll need to press star 1-1 on your telephone, and you'll then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Julie Dewey. Please go ahead.
spk09: Good afternoon, everyone, and welcome to our third quarter 2023 earnings conference call. We appreciate you joining us. I'm Julie Dewey, Treece's Chief Communications and IR Officer. With me today are John Treece, Chief Executive Officer, and Mark Hare, Chief Financial Officer. During the call, John and Mark will offer commentary on our commercial activity and review our third quarter financial results released after the close of market today, after which we'll host a question and answer session. The press release and supplemental materials can be found in the investor relations section of our website at investors.treese.com. This call is being recorded and will be archived in the investor section of our website. Before we begin, we'd like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information, and Teresa assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. Please refer to our SEC filings, including our Form 10-Q for the third quarter to be filed today and our Form 10-K for the full year 2022, filed on March 8, 2023, for a detailed presentation of risks. With that, I will now turn the call over to John.
spk00: Thank you, Julie. Good afternoon, everyone, and thank you for joining us. I'm going to focus my comments today on our third quarter results, the exciting progress of our speed plate implant launch, and other growth drivers. Following my comments, Mark will cover the specifics of our Q3 results and guidance. We continue to execute on our strategic plan, resulting in year-to-date U.S. revenue growth of 36% that we believe is significantly above foot and ankle peers, encouraging adjusted EBITDA progress, and continued gains across our key operating metrics reaffirming once again that we have the right strategies in place to expand the market penetration of our differentiated technologies. Before I go into details about the quarter, let's start with our market summary on where we stand today. Our disruptive lapoplasty solution was specifically developed to correct the root cause of the bunion and address a large and underserved market. We've identified an estimated addressable $5 billion US market of an estimated 1.1 million annual surgical candidates of which only 450,000 undergo bunion surgery each year, which we believe is mainly due to limitations associated with current standards of care. We believe our proprietary lapoplasty system addresses these limitations by surgically correcting all three planes of the bunion deformity and securing the unstable joint, thereby addressing the root cause of the bunion. As of third quarter 2023, we penetrated approximately 6.3% of the estimated 450,000 annual surgical bunion corrections in the U.S., up from 5% in the third quarter of 2022 and reflecting approximately 2.6% market penetration of the estimated 1.1 million annual U.S. surgical candidates that constitute our $5 billion-plus total addressable market in the U.S. In addition to the large and under-penetrated market for treating bunions, late in the quarter, we also initiated commercialization of several new technologies including our speed plate fixation platform, hammer toe system, and our Lapotome and Razortome sterile instruments. And later in Q4, we'll begin commercialization of our micro-lapoplasty instrumentation. All these new technologies are expected to meaningfully expand our addressable market opportunity and to include additional procedures that complement our proprietary lapoplasty and adductoplasty procedures and fuel strong growth for years to come without diluting our focus. We're particularly excited about the opportunity for our speed plate fixation platform. I'll cover speed plate in more detail later in my remarks, but this is an exciting launch for our company. In fact, I believe this is one of the most important launches to date for Treece. These new product introductions are expected to begin contributing to our growth profile this quarter with a more meaningful contribution expected in 2024 and beyond. Turning now to our Q3 results. Revenue in the third quarter was $40.8 million and grew 23% over prior year and was impacted by prioritized travel and vacations for our patient demographic, which led to lower than anticipated demand for our lapoplasty procedure during the quarter. You'll also recall that we grew 53% in Q3 of last year, and with one less selling day this year, this makes for a tough comp. We continue to advance our key performance metrics in the third quarter, including Substantial gains in the number of new surgeon users, ending Q3 with 2,691 active surgeon users, up 110 for the quarter, and up 21% year-over-year. A year-over-year increase in trailing 12-month surgeon utilization, with an average of 10.6 kits per active surgeon in Q3, up from 10.1 kits a year ago. Record blended average selling price of $6,311 per lapoplasty kit sold in the quarter, up 9% over prior year and driven by continued market adoption of our S4A lapoplasty plates, a ductoplasty, and our other problem-solving complementary products, such as our speed release and tri-tone sterile instruments. We also saw some fairly early impact from speed plate in our two new sterile use osteotomes in the quarter. Our strategic investments and commercial focus have continued to support the growth of our business, giving us confidence that we have a well-defined, proven, and scalable commercial strategy. We are updating our full year 2023 revenue guidance to $182 to $186 million, which is a midpoint reflection increase of 30% over 2022 revenue. There are two main reasons that are driving this guidance change. First, our year-to-date surgeon count is lower than anticipated due to prioritized travel and vacations from our patient demographic that started in the second quarter and continued through most of the third quarter. As a reminder, we typically see a large step up in Q4 bunion procedures, which concentrate heavily at year-end, primarily due to insurance deductibles being met. Second, we also made the strategic decision to further refine our speed plate platform. extending our timeline to achieve full commercial supply until the first quarter of 2024. This decision has enabled us to make a generation two speed plate technology, which is more broadly applicable across a greater range of clinical applications, which we believe will expand our footprint in the foot and ankle market. Shifting to our commercial and market development activities. As we previously discussed, we have continued our targeted investments in 2023 with the goal of increasing our market penetration by expanding the footprint and coverage of our bunion-focused direct sales channel, advancing our patient awareness DTC initiatives, and driving more targeted R&D innovations into the market. We have a highly specialized team at Treece, including a rapidly growing direct sales force, one that's 100% focused on bunion and related midfoot surgery, the only such organization that we're aware of in the U.S. medtech industry. We believe this has contributed meaningfully to our revenue and market penetration over the past years. In the third quarter, 81% of our revenue was generated by our direct sales force, up from 74% in the same period last year. We continue to see increasing productivity from our direct reps that we added during 2022. And as we discussed in the past, our historical data demonstrates that our direct reps typically scale with significant revenue and cost leverage achieved within 24 months. primarily because they're exclusively focused on our expanding offering of technologies and fully utilize our suite of corporate resources and programs. Further, over the past year and a half, we have aggressively invested in our direct sales channel. As of our last earnings call, we achieved our full year target of having 200 quota-carrying direct reps in the end of Q2, which was much earlier than originally planned. We continue to hire more additional reps to ensure that we're prudently balancing growth and delivering modest improvements in expense leverage, all while increasing revenues from our direct sales channel. Demand for our introductory and advanced surgeon education and training programs, both online and in-person, remains robust, and we look forward to executing additional training sessions that we have slated in Q4. These programs play a key role in effective onboarding of new surgeon users through introductory lapoplasty courses, and also importantly, introducing them to our complementary procedures and technology through our advanced training courses. By doing this, we are becoming a broader solution provider to our surgeon customers and expanding our footprint in the foot and ankle market. We're encouraged to see continuing growth in our active surgeon base, with 2,691 active surgeons in Q3, which is up 21% from the prior year period. Notably, new surgeon additions ramped up substantially in September, which match the company's all-time record for the highest number of monthly surgeon ads. As our surgeon base continues to develop and gain tenure, we anticipate utilization gains with increased use of our lapoplasty and adductoplasty systems, as well as further adoption of our growing portfolio of complementary products, all supported by our expanding direct sales channel, differentiating clinical data sets, and patient awareness DTC initiatives. Now I'd like to turn to our new SpeedPlate fixation platform. During September, we announced that we received FDA 510 clearance for our second generation anatomic speed plate design and initiated our early launch activities. Again, our speed plate fixation technology is designed for rapid surgical insertion while providing both stabilization and dynamic compression of the prepared joint surfaces during healing. Early feedback on our Gen 2 speed plate design has been overwhelmingly positive, with users highlighting the speed of application and the dynamic bone compression as well as broad versatility across lapoplasty, adductoplasty, as well as many other common procedures involving stabilization and fusion of the bones in the foot. We believe this technology is now allowing us to attract a new audience of surgeons, those that prefer nitinol staples, which provide dynamic compression of the fusion site. I can't overemphasize how important this launch is for our company and the favorable reception that Speedplate has already garnered from surgeon users. In fact, we've had many surgeons tell us that the speed plate implant is, quote, the biggest thing from trees since lapoplasty and a, quote, total game changer. We expect the speed plate launch to begin supporting our growth in Q4 and to continue to accelerate through 2024 and beyond. We believe our speed plate platform has the ability to set the standard for fixation in bunion and midfoot corrections and over time achieve broad adoption across many other common bone fusion procedures in the foot and ankle. We look forward to bringing this exciting technology to many more surgeons and their patients in the months ahead. Next, our micro-lapoplasty system. This is an advanced instrumentation option designed to further reduce both the incision size and related tissue dissection with the lapoplasty procedure. This exciting evolution of our instrumentation allows the patented lapoplasty procedure to be performed now through a 2-centimeter incision. We anticipate the launch of our microlapoplasty instrumentation to begin late in the fourth quarter and will continue to build during the first half of 2024. We're excited about the potential benefits this microlapoplasty and speed play combination could bring to patients. As with any procedure that involves smaller incisions and less tissue dissection and trauma, we believe this could translate to even faster recovery with less pain and less swelling. We also initiated the launch of our new hammer toe fixation system. This is a sterile pack procedure kit that expands our reach into the high volume hammer toe correction space. With no prior such offering in our portfolio and approximately 700,000 US procedures per year, we believe this launch positions us positively for additional blended ASP growth, surgeon utilization expansion, and continued above peer revenue growth. Though still early in our limited launch, surgeons who have had the opportunity to use it clinically have commented on its ease of use and have expressed a clear willingness to adopt our implant in their trees cases. We estimate that approximately 30% of all bunion procedures involve simultaneous hammer-toe correction, which is why we believe this represents an important addition to our portfolio that will support continued, compelling revenue growth over time. While we're very excited about the growth opportunity that all of these product launches represent, there's even more to come from our robust product development pipeline. In fact, inclusive of the launches I've just discussed, We have 10 new innovation launches slated for over the next 12 months. We'll provide additional updates on our new product innovations as we continue to develop our pipeline centered around our core technologies and IP aimed at improving surgeon user experience, patient outcomes, and supporting continued market penetration. In closing, we've made encouraging progress in the third quarter with solid execution from our talented team of employees. We're at the beginning of what we believe will be a strong cadence of new product launches, as well as cause for real excitement with our new Speedplay platform and our other emerging growth drivers still to come in 2024. With accelerating additions to our surgeon base, increasing productivity of our direct sales channel, and several new technologies that are already starting to make a positive impact on customer demand, I'm confident that we have the right strategy in place to outpace our competitors, drive continued market penetration, and deliver strong top line growth for the remainder of this year and beyond. With that, I'll now turn the call over to Mark to review our financial performance. Mark.
spk05: Thank you, John. Good afternoon, everyone. Revenue for the first nine months of 2023 was $124.9 million, representing 36% growth over prior year. Third quarter revenue was $40.8 million, a 23% increase compared to prior year. Growth in the third quarter was driven by increases in procedure volumes and increases in blended average selling price. In addition to the tough comp from last year that John mentioned, this quarter included one less selling day than Q3 2022. We sold 6,459 lapoplasty procedure kits in the third quarter, a 13% increase compared to the same quarter last year, and was impacted by prioritized travel and vacations for our patient demographic, which led to lower than anticipated demand for our lapoplasty procedure in the quarter. Blended average selling price in the third quarter was a record $6,311, up 9% over the third quarter of 2022. This blended average selling price is driven by lapoplasty and the additional contribution from our expanding portfolio of complementary products, such as our adductoplasty system, sterile single-use instruments, and some very early impact from sweet plate and hammer toe. as our direct sales channel continues to increase their procedure access across our surgeon customers. Gross margin was 80.4% in the third quarter of 2023 compared to 81.6% in the third quarter of 2022. The 120 basis point decrease was primarily due to changes in product mix, an increase in inventory provisions and an increase in overhead due to headcount to support the growing business partially offset by lower royalty rates. Total operating expenses were $50.6 million in the third quarter of 2023 compared to total operating expenses of $38.3 million in the third quarter of 2022. The increase in operating expenses reflects strategic investments in our expanding direct sales channel, investments in product innovation, increased capacity requirements, as well as support for other commercial initiatives. Third quarter net loss was $17.5 million or $0.28 per share compared to a net loss of $12.1 million or $0.22 per share for the same period of 2022. Adjusted EBITDA was a loss of $9.2 million in the third quarter of 2023 compared to a loss of $8.6 million for the same period in 2022. Cash, cash equivalents, marketable securities, and investment receivable totaled $128.2 million as of September 30th, 2023. Our total available access to liquidity, including our debt facility, is approximately $214 million. We believe we have a lengthy runway in terms of our current cash level with sufficient balance sheet strength and flexibility to continue aggressively executing on our strategic investments and growth initiatives, as well as a clear pathway to achieve positive adjusted EBITDA. Before concluding, let me turn to our outlook for full year 2023. We are updating our full year 2023 revenue guidance to $182 to $186 million, which at the midpoint reflects an increase of 30% compared to 2022 revenue. With less than two months remaining in the year, this is realistically where we expect the year to land and feel comfortable at the midpoint of the range. As John mentioned, this guidance reflects our year-to-date surgeon count and our extended timeline to achieve full commercial supply of our Gen 2 speed plate technology in Q1 of 2024, both of which are expected to affect our revenue as we enter the fourth quarter, which is historically our highest volume quarter for bunion surgery. Also keep in mind that this year, the fourth quarter has one less selling day, and specifically the month of December, which is typically when we generate our highest average daily sales of the year, has two less selling days. Moving to the rest of the P&L. We are starting to see leverage down the P&L and expect R&D and G&A expenses in Q4 to be roughly in line with Q3 and expect positive adjusted EBITDA in the fourth quarter of 2023. For the full year 2023, we continue to expect to show modest improvements in adjusted EBITDA compared to 2022. One final item. I'd like to provide some directional comments on 2024. As is our normal mode of operation, we will provide formal 2024 guidance on our Q4 call. However, I wanted to provide you with some thoughts to keep in mind as you begin to develop your 2024 models. Overall, we expect our expanding commercial capabilities, continued adoption of lapoplasty, and multiple new product launches will drive strong growth while we also advance our pipeline opportunities. We believe our product portfolio, differentiated and protected technologies, and focused sales force provide us with the advantages that will enable us to grow significantly faster than market and our foot and ankle peers for multiple years. As we look specifically to 2024, we expect to benefit from a positive contribution from a full year of recent new product launches, including Speedplate, microlapoplasty, and hammertoe, continued market adoption of the adductoplasty technology, as well as increased contribution from the sales rep additions that were made throughout 2023. In addition, in the back half of 2024, we anticipate adding preoperative planning and patient-specific instrumentation from our acquisition of Redpoint Medical. We also look forward to launching a significant new product platform that we believe will expand our market opportunity, accelerate our penetration, and further advance our leadership position in the bunion market. We believe both opportunities will complement our business strategy and bolster our multi-year growth plans without losing focus on our core bunion and related midfoot procedure growth. Our blended ASP has historically grown mid-single digits and given ongoing surgeon adoption of the lapoplasty complementary products and procedures and future pipeline opportunities, we expect this trend to persist. With regard to new surgeon additions, we believe adding approximately 250 to 300 active surgeons annually is a reasonable baseline over the next few years, with utilization increases expected to drive higher procedure penetration and the tightening sales rep to surgeon ratio should support increased case coverage and adoption. These new surgeon additions and training, our large active surgeon base on new procedures is expected to expand utilization and drive blended ASP increases. We expect elective orthopedic procedure seasonality trends for next year to include the typical seasonal step down in revenue from Q4 to Q1 and a softer Q3 followed by seasonally strong Q4, which is historically the largest revenue quarter of the year. Turning to the middle of the P&L, We expect operating leverage to continue to improve in coming quarters with potential for adjusted EBITDA break even for full year 2024 and positive cash flow in 2025. We will be able to provide more information on our Q4 earnings call. In closing, we made good progress in the third quarter and remain on track to drive strong growth and scale profitability in our business in the years ahead. We believe we are in a great position strategically with best-in-class bunion, midfoot, and related complementary technologies, and expanding TAM with the addition of new technologies such as adductorplasty, hammer toe, and speed plate, and more innovation to follow, backed by differentiated clinical data and a strong focus commercial organization. We look forward to aggressively attacking these significant opportunities to drive the performance of the business the rest of the year and believe we have all the elements in place for a successful 2024. With that, let me turn the call over to the operator to open the line for your questions.
spk08: Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Danielle Antofi with UBS. Your line is now open.
spk06: Hey, good afternoon, everyone. Thanks so much for taking the question. Happy to be back covering trees. So I guess my first question is on the guidance cut by 10 million at the midpoint. And I was just wondering, Mark, if you could give any color on what's What's the impact of the fewer surgeons versus how you were thinking about it entering the year versus delay and speed plate versus the patient travel that you called out? Is there any way to sort of quantify what each of those components make up of the 10 million?
spk05: Yeah. Hi, Danielle. It's good to hear your voice again. You know, we've talked about in the prepared remarks, both of those elements had an impact in Q3 and both of those impacts. will have an impact into Q4. So we're not providing specific detail on which and how much that was in Q3 and Q4. But, you know, candidly, we were surprised by that summer seasonality. It was more pronounced than we had expected. And it's why the case volumes were down in Q3 and why the surgeon ads were down in Q2 and Q3 as well.
spk06: Okay. All right. That's fair. And then maybe my second question, or not maybe, my second question is actually on that point. And the summer seasonality, I mean, is there a way to give us comfort, the investor community comfort on, you know, the sort of rebound? I mean, modeling 45% sequential growth in Q4, I appreciate the seasonality normally, but this was a more meaningful seasonal impact from Q, like in the summer. So what gives you the confidence that the rebound's coming in Q4? Is there something in your conversations with your treating surgeons that you can point to? I guess just, you know, how do you build that level of confidence that there's not something else going on here? Thanks so much.
spk05: Yeah, great question, Danielle. So I think there's a couple things. First of all, September, the first month post-summer, John mentioned that we had a record for our highest surge in ads. And so, you know, we wanted to be thoughtful as we're thinking about Q4, but we've seen that strength in September, and we've had continued strength into October as well. When you think about the fundamentals of our business, they really remain strong. And we've had really nice continued advancements in a lot of our key metrics. So it doesn't seem like that is at all an issue. It's really a strength as we go into Q4. This step up that we have in Q4 is really consistent with prior years. Q4 has always been our highest revenue quarter every year. And so we also have accelerated additions for our surgeon base. Increasing productivity of our direct sales channel and several new technologies that are already starting to make a positive impact. So with all that in mind, you know, we considered our new updated guidance very appropriate and we believe we have accounted for all the puts and takes that are coming into Q4. So we feel really comfortable at the end point of that range.
spk06: All righty. Thanks so much. Oh, sorry.
spk00: No, Danielle. Hi, it's John. I just wanted to add a little bit on top of that. You know, we've gone through this eight years now of concentrated procedures in Q4 and significant step-ups, and I can tell you as we sit here today, halfway through what we refer to as bunion season each year, it feels right, and we're glad to see it again.
spk06: Got it. Thank you.
spk00: Sure thing.
spk08: Thank you. Our next question comes from the line of Robbie Marcus with JP Morgan. Your line is now open.
spk07: Hi, this is actually Lily. I'm for Robbie. Thanks for taking the question. So the 250 to 300 new surge in ads is a lot lower than what we were thinking for next year and lower than what we've done in the past. So are you expecting that same sort of seasonality with stock ads to continue into next year? And if stock ads are going to be a lot lower, I would think that would imply a big step up in utilization. So what's giving you that confidence to see that step up next year? Thank you.
spk00: Hi, Lily. It's John. Thanks for the question. You know, the 250 to 300, you know, we think that's a reasonable level. You know, the past couple years, if you go back, you know, we added 500 two years ago, 600 a year ago. Both of those years, we more than doubled the size of our sales force, creating a lot of surge in contact. We grabbed a lot of low-hanging fruit, and we're very thankful for that. We've got a lot of loyal customers now because of that. This year, we expanded the Salesforce size by about 20%, and we continue to add docs at a pretty nice pace here. As with any market, you know, the larger the customer base you try to get, you get the low-hanging fruit, and then you have to climb up higher in the tree and reach for that tougher-to-get fruit, and that's what we're doing here. One of the pieces that gives us confidence is we're still continuing to build the customer base at a really nice level through this year, despite not as large of a sales rep increase. The other thing we're doing is we found that we need to be able to appeal to a broader range of surgeons, and Speedplate plays a very important role in that. There's a whole group of surgeons out there that have not come to lapoplasty, not come to a ductoplasty because they believe in a different fixation philosophy, compression, nitinol staples specifically. Speed plate gives us an avenue into some of those docs that we've never had before. And, you know, frankly, to the record new surgeon counts we added in September, speed plate did play a role, even though it was out in limited supply and bringing on some of those new docs. So, For a lot of reasons, we're really confident in our ability to continue to add new surgeons. It's just that it may not be at the blistering pace that it was in the days where we were more than doubling our sales channel.
spk07: Got it. Thank you. Can you just talk a little bit more about the decision to push out the full launch of Speedplate? Is that a supply challenge, regulatory, or is it really just to focus on getting that second-generation product ready? Thank you.
spk00: Sure, Lily. Yeah, that's really the thing. We got out there in our limited market release, had several doctors using it, and very quickly identified things through their feedback and through our observations that we could do that would make this product more broadly appealing to a larger range of surgeons and also be able to treat a larger number of foot and ankle conditions, not just lapoplasty and adductoplasty procedures. So we found that opportunity so attractive that we did extend our timeline. We incorporated these adjustments, worked with our vendors, filed a new 510K with the FDA. It cost us a little time, but I think we stand by that decision. It was the right call. uh you know we saw the opportunity to make a really great product awesome and we took it and we will be very excited and glad that we did that as we enter 2024. great thank you sure thank you our next question comes from the line of rich newiter with tourist securities your line is now open
spk10: Hi, thanks for taking the questions. A couple from me. Maybe, you know, just thinking about the 24 commentary and where you're jumping off from 4Q. You know, I'm getting to a, you know, about 11 to 12% 4Q implied, you know, lapoplasty procedure growth rate, about mid-single digit ASP growth. And, you know, call it something in that run rate to get to 250 to 300. So call it somewhere in the 70 to a hundred, you know, surgeon ads. If I just kind of apply that throughout 2024, I'm getting to about a 20% growth rate with about low teen lapoplasty growth, mid single digit ASP growth. I guess, is that, is that the right way to think of the business right now? Uh, you know, broad strokes or directionally, and, and do we think of, you know, the waiting of the year? you know, with Speed Plate coming next year, you know, is that going to be a slow ramp and it's really not until 3Q and 4Q that we see the contribution?
spk05: Hey, Rich. Hey, great question. This is Mark. Let me try to respond to that. And if I've missed anything, maybe John can help fill in. So with regards to 2024 guidance, you know, as I mentioned in my prepared remarks, you know, we feel like we're positioning ourselves for a really successful 2024 with our growing sales channel, all the new product launches. We're not going to provide specific guidance on 2024 right now, although we can talk about a couple of things that you mentioned. You mentioned something about the surge in ads and how we should be thinking about that. Again, in my preparatory remarks, I was saying as a baseline, you know, 250 to 300. We've already added over 300 year to date this year. So that's one thing. And as we think about next year, you know, we'll have a much, much larger active surgeon base, and so our growth can really come a lot from our existing surgeon base, and it's not as reliant on, you know, adding the incremental surgeons. Now, of course, we will continue to look for and add those important incremental surgeons, but on a larger base, we're going to make sure that all of our new products get into the hands of that existing customer surgeon base. I don't know if I hit any...
spk00: Rich, John here, I think you were asking a little bit about when will speed plate hit its stride?
spk10: Yeah, that's one of the questions. The other two, I do think it would be helpful, just thinking about mid-single-digit ASP increases, it kind of level set off an active surge in ads. I guess, you know, that would imply that you're looking at a low teen's kind of lapoplasty procedure growth rate. Is that correct? And then, yes.
spk00: how should we think of the ramp for speed plate thank you okay yeah and maybe i'll answer them in reverse order if that's okay because i usually go to mark on on forward guide questions uh but the the speed plate ramp you know as we exit q4 we'll be getting into very good supply and as we go through q1 we'll be at full stride you know within the quarter so we'll be able to satisfy all the customer demand and that's what's got us really excited about how we're going to exit this year and ramp next year because it's a real blockbuster product for us. This is a big deal, and it's very meaningful, both on blended ASP, attracting new customers, and aggregating additional foot and ankle procedures that are outside of lapoplasty and adductoplasty, but don't defocus our sales channels.
spk05: And with regard to lepoplastic growth in next year, we look forward to providing additional details and guidance in our fourth quarter call. So we're just not giving too much there other than giving you an overview of some things to come. Okay, thanks.
spk08: Thank you. Our next question comes from the line of Brick Wise with Stiefel. Your line is now open.
spk02: Good afternoon, gentlemen. You were absolutely right last quarter when you cautioned that you were concerned about seasonality and vacation times. But I wanted to make sure that I'm understanding how we're starting The fourth quarter, I mean, we're obviously a month or a week or so in. Are you seeing the same kind of slower trends from July, August, September, now into November with little change? Is that the major driver of the $10 million midpoint cut? I'm just trying to understand how the pieces all fit together, and that's making you more cautious. I mean, the only reason that I can't believe it's the one less selling day, you knew that before. And the Salesforce, you know, has been expanded. If I remember correctly, Speedplate is delayed, but Micro Laproplasty and some of the other new products are, I think, in full launch this quarter. So I'm just trying to make sure I'm understanding that. What's driving what and to what degree that the $10 million cut at the midpoint is conservatism? Sorry for the long question.
spk05: No, thanks, Rick. This is Mark. And let me respond to a couple of those things. Just first, I think there's a question about some of the other products that have been available. Microlactoplasty is going to come in the fourth quarter, so it's not been launched. And that will utilize Speedplate. And so that is to come. A couple of things that I just wanted to mention, and it's what I've said a little bit before, is we were cautioning about what we were seeing in the summer seasonality. It was much more pronounced than what we had expected, and we were surveying a lot of our surgeon customers, asking them, you know, what are you seeing as far as your volumes, case count, and your patient demographic? And just as a reminder, we have a much more narrow specific patient demographic than a lot of other companies. And so we were asking a lot of those questions. A lot of our guide going into Q3 was based on anecdotal, what we were hearing from our customer surgeon base with hopes and views that some of this softness in the summer was going to turn. Well, it just didn't turn as quickly as we had hoped, but the positives that we take away from it is like what John said, we've had this really strong September new surgeon ads. That means they're doing cases for the first time in September. So that was very helpful and beneficial. And some of that strength has continued into October from the surgeon ad perspective. So we think that's very beneficial. But as we also think about not having the number of surgeons, as you go into the fourth quarter, It was a little bit of a challenge because as we think about it, we want to have the full team, the full complement of the team going into our busiest quarter. And so, of course, not having as many surgeons on the team and using lapoplasty will definitely have an impact. And same thing with not having launched in as aggressive of a way speed plate in the third quarter. So that has pushed into the fourth quarter. And so both of those things are really informing the way we're looking at the fourth quarter. And we feel confident in the midpoint of that guide, given everything that we know so far.
spk02: Okay. And Mark, maybe you'd expand on your comments about gross margin. It was less than we thought, and I'm guessing less than you expected. And talk about the specific mixed drivers and the greater overhead. And I think there's a third one, which I'm not remembering right, the second. But to what extent does that continue into the fourth quarter? And maybe just help us think in general about your gross margin thinking and how you would frame our gross margin thinking going forward. Yeah.
spk05: Great question, Rick. And so, you know, it was 80.4% in the quarter, and it was impacted by product mix, some inventory provisions. And when I say increased overhead, we have a growing business and employees to handle the growing volume that we have. And that was partially offset by some lower royalty rates. And so those were all the puts and takes. This is not – I would not view this as uncommon. Our gross margin will fluctuate quarter to quarter. depending on some of the mix. As we introduce new products, Rick, not only Speedplay, but we have some other sterile instruments and other things. What we've tended to see is when at the beginning of our launches that we may not fully have all the efficiencies in our manufacturing processes available. And so it may take one, two, three quarters before we get all those efficiencies. And so it's somewhat of a mix. Are we selling some of the new products? or which products are being sold or preferred by our customers. Again, we think anything north of 80% is really strong, and we feel really good about that. And we've mentioned previously that we have relatively few sellable SKUs. We have less than 50 sellable SKUs. So a mix does have an impact when you're talking about so few SKUs. But we continue to focus on our gross margins. And we plan to remain at these high levels near or above 80%.
spk02: Great. Thanks, Mark.
spk08: Thank you. Our next question comes to the line of Drew Ranieri with Morgan Stanley. Your line is now open.
spk04: Hi, John and Mark. Just maybe to start on my end, just what What essentially gives you the confidence that this is truly a seasonality aspect? And I appreciate that it might be picking up into the fourth quarter. But why are you so confident that it's seasonality and not any competitive entry or changes in the landscape becoming more of a problem in capturing surge in mind share or any incremental procedures? And I know that we're all trying to get at maybe what utilization could look like in 224, but maybe just help us better understand what you were seeing in terms of same surgeon utilization levels in the third quarter that's giving you confidence that maybe we're not appreciating.
spk00: Hey, Drew. John here, and thanks for the question. I'll try to get to the first one first, and then Mark can remind me of the other parts. You know, what's giving us the confidence is we did a lot of work, a lot of surveying, a lot of work with our surgeons during these summer months to figure out what the root cause of what was going on in the softness in surgery demand and that affected new surgeons coming on. You know, we can train, you know, tons of doctors, but if patients are coming in at a normal rate asking for a surgery, then they'll get counted as a new active doctor. you know, we're certainly going into Q4, which is our bunion season with a different trajectory, you know, combining the bit of delay on the speed plate, you know, full availability and that lower doctor count. But, you know, again, we've been through eight years of this bunion season in Q4. It is very real. And as we sit here today, I can tell you it's back and we're feeling it in the activity. And that's, kind of what's got us, you know, confident that that midpoint is doable and comfortable. So it's a tough, it's a tough point for me to not express my extreme enthusiasm because I can see the other side of this as Speedplay comes into full availability and that continuing ramp on surgeons and utilization and what's going to come. But that's, That's what happened during the summer, and that's how it's affecting Q4.
spk05: And, Drew, I think there's another part of your question with regards to customer utilization. You know, that was 10.6. That's a strong utilization number. It's up, you know, more than 4% over the prior year at the same time. So it really isn't that it's a lack of utilization per se. It was really what John said. talked about is there was a different patient demand for our patient demographic. And that caused a few things. And then with the decision of Speedplate as well, pushing that out just a little bit, which was the right decision. But the combination of those two just had an impact in Q3. And then that's going to set us up for Q4. So that's why we felt that it's an appropriate guide for Q4, understanding those two items.
spk00: Andrew, I think I missed another component of your question about competition. And, you know, we've had competition for the last several years in this space. We kind of expected it. We created a very exciting market. The market's very big, over $5 billion in the U.S. We're way out ahead, and we've got the best technology. New entrants will continue to come into the market, but we've got a pretty powerful offense. you know, our rapid innovation, our focus, our direct sales channel, and then this patient advocacy that we drive through our DTC. So when, you know, will competition be there and continue to be there? Yes, it has been, and it will continue to, but that's not what was driving this shift. That's not what's driving the softness in the summer months. This was a real and dramatic shift in the way our patient demographic, the 30 to 60 year old female in the U.S. behaved, this year and the headlines, you can see it all over the place, international travel. My wife, uh, was quite upset with me because I think we're the only people we don't know that didn't go to Europe at least once this year. And it was bottled up four years of pre COVID plans that all came piling into this year. Once the COVID restrictions left and that demographic behaved differently, probably than other companies demographics.
spk05: I think the final piece on that, Drew, is we stayed really close to our surgeon customer base, and we continue to ask them these questions. So that's what we're telling you is also what we're hearing from them, the same things.
spk04: Got it. And just on Speedplate for a moment, John, you were mentioning in your earlier remarks that this could appeal to a broader range of surgeons that believe in a different fixation system. So when you do think about SpeedPlate going into next year, will these surgeons adopt and also more broadly adopt the Treece portfolio, or do you expect them to be more siloed in one particular area of your portfolio with SpeedPlate? Thanks for taking the questions.
spk00: Yeah, great question. Thank you. Yeah, it, it, it very quickly, uh, in its limited availability found its way to be the now preferred plating system for, or fixation system for lapoplasty and adductoplasty cases for the doctors that have access to it right now. And right now only a small fraction of our doctors have access to it. Um, and, and we're gonna, we're gonna work on that quickly, but pretty quickly we started hearing comments like I can use this all over the foot. There are five or six other procedures that I do very commonly and routinely. with your cases and outside of your cases where your rep can be there or not even have to be there. I love this fixation technology. This is a home run and this is the next big thing, you know, beyond night and all technology, the combination of stability and strength of a titanium plate with the dynamic compression capabilities of a night and all staple is an extremely attractive combination. And it's a unique and first and only for trees again. And that's, that's why we took the extra time with it to get it as great as it possibly could be. So when we go out there with this product, our customers say, wow, lapoplasty, ductoplasty first and only, and now another first and only awesome product from trees. So I think it will be adopted, uh, over time, more broadly across the foot and ankle outside of our, our core procedures.
spk08: Thank you. Our next question comes from the line of Ryan Zimmerman with BTIG. Your line is now open.
spk03: Thank you. I'm juggling a few calls tonight, so I apologize if this has been asked, guys, but I didn't hear as much on your prepared remarks around your DTC investment priorities, and I'm just wondering kind of how you think about that in the context of driving more operating profit or adjusted EBITDA, I should say, and leverage in the model and kind of what needs to be done to continue to maintain your position while balancing maybe on some of those more profitability-oriented metrics.
spk00: Sure. Hey, Ryan, it's John. Thanks for the question. You're right. We kind of cut to the core on this script and prepared remarks and thought we'd follow up with a more detailed DTC catch-up in our Q4 call. But In a nutshell, several months ago, we brought on a new head of marketing with strong expertise in consumer DTC. And he's very quickly come in and been able to look at the programs we're running, fast wins, ways to optimize them, reduce even our spend and get higher output. So we're seeing some really great efficiencies on the DTC side. With less spend, we're getting higher levels of deep patient engagement and customer contact. you know, through our website and Surgeon Locator and Call Center. So we're really pleased with what's going on here. We're also right now very actively sponsoring the National Pickleball Championship down in Dallas. So if you're watching ESPN, you may see some.
spk03: I saw that, John. I saw that as a buddied pickleball player. Thank you.
spk00: Yeah, well, this is, you know, Nathan is very savvy and very quickly dialed in on that demographic, which is right up our wheelhouse and a very efficient, low cost way to get a lot of exposure and impact. So these are the kinds of things that Nathan's working on already. And, you know, I have to say three, four months in, he's really on a roll and it's going to bring a lot of value to our DTC initiatives.
spk05: And Ryan, I think you talked a little bit about profitability and, you know, I don't think There was a portion in my prepared remarks that talked about a potential of adjusted EBITDA break even in 2024. And perhaps even positive cash flow in 2025, the following year. So we've definitely started seeing leverage on the P&L already. And for the full year 2023, we continue to expect to show modest improvement in adjusted EBITDA compared to last year. So we expect operating leverage to continue. in the coming quarters and into 2024.
spk03: Got it. And, again, I apologize. I'm juggling through calls, so if there's questions to ask, just stop me. But, John, as you think about the hammer toe product and you're kind of expanding outward beyond lapoplasty, has your view in terms of strategy changed at all to be more expansive in the foot and ankle space? relative to maybe your prior views around kind of really being focused on bunion and then, you know, adding some complementary products. I mean, it almost seems like, you know, you're following this natural pathway, but I'm wondering if kind of your aperture has opened up a bit as you get deeper into the bunion segment and look for new markets and opportunities for growth. Thanks for taking the questions.
spk00: No, no, great, great question. And very timely, you know, we're, We have a high focus still on penetrating the bunion market and we will continue to for future years. That is our sweet spot. That's where we built our direct sales channel. That's where we built our initial surgeon base and loyalty from. But now we're in a wonderful position to leverage this large direct channel that we have and start to lay in some complimentary product technologies that fit into the bunion case or overlap with the bunion case to a high degree. our sterile osteotomes, our hammer toe, our speed plate that can provide fixation in other areas while they're in the case that they didn't want to use a plate. So you will continue to see us expand our footprint more broadly across the foot and ankle market, but keep laser focus on penetrating the bunion market as our spear point and just building around that over time.
spk03: Fair enough. Thank you for taking the questions.
spk00: Sure.
spk08: Thank you. Our next question comes from the line of George Sellers with Stevens. Your line is now open.
spk01: Hey, good afternoon and thanks for taking the question. Could you maybe just help clarify the speed plate launch commentary? Should we read into those comments as it's still sort of a more targeted rollout of speed plate here in the fourth quarter? with full commercialization in the first quarter of 24? Or is the 1Q24 full commercialization comment referring to Gen 2 speed plate? And then how should we think about that relative to micro launching this quarter?
spk00: Sure. Hi, George. Thanks for the question. So speed plate, the only speed plate we will market is the Gen 2 speed plate, just to clarify that. I know it is a little confusing. That is the refined product that we've decided to build large supplies of. We will be ramping our production levels as we go throughout this quarter and then achieving full market availability within the first quarter. So we're working very hard with our vendors to get this done quickly. Just to clarify, this is not a supply chain issue. This is a change in the product configuration that we decided to make. And we had to work with our vendors to figure out how to get it achieved quickly and try not to lose too much of our revenue trajectory that we had planned for the Speedplay platform.
spk01: Okay. Okay. Understood. That's really helpful. And then maybe for the 10 new technologies that you talked about launching over the next 12 months, could you give some additional color on how many of those are maybe new devices that are attacking new foot and ankle deformities versus improving on and updating some of the existing devices that you currently have in your portfolio?
spk00: Yeah, George, I would say the majority of them are new, you know, significant impact products, significant innovations, you know, Redpoint technology, That's one of them. Something that's coming beyond that in the back half of the year that we, Mark alluded to, will, we believe, help us expand and increase penetration into the bunion market. That's a major significant platform. And then we have a handful between call it now and the first half of the year that we'll be introducing as well.
spk01: Okay, great. Thank you all again for the time.
spk00: Sure. Thanks, George.
spk09: I think that's it for today, everybody. Thank you for joining us. We appreciate your time and interest. If you have more questions, please reach out, and we'll look forward to talking to you next quarter. This concludes our call.
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