Good morning, and welcome to OrthoPediatrics Corporation Second Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] I would now like to turn the call over to Matt Bacso from the Gilmartin Group for a few introductory comments.

Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer; and Fred Hite, 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, including, among others, the risks related to COVID-19, the impact that pandemic may have on the demand of 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 annual report on form 10-K, which was filed with the Securities and Exchange Commission on March 3rd, 2022. 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 measures to the most directly comparable GAAP financial measures 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 4th, 2022. 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, Matt. Good morning, everyone, and thank you for joining us. We hope you are safe and well. As we start all earnings calls, I'd like to highlight that we helped over 23,000 children in the second quarter of 2022. Since inception, OrthoPediatrics has now helped more than 560,000 children in total when including the accomplishments of MD Orthopedics, which I will provide more detail on shortly. Doing the right thing for children is and always will remain our top priority. In the second quarter of 2022, we generated total revenue of $32.9 million, representing growth of 23% compared to the second quarter of 2021. MD Orthopedics generated global revenue of approximately $2.6 million, where we realized immediate favorable sales synergies post acquisition. Excluding MD Orthopedics, second quarter organic revenue growth was approximately 14% compared to the prior year period. As a reminder, the second quarter of 2021 benefited from the rescheduling of canceled COVID cases, whereas, second quarter 2022, patient volumes were negatively impacted by lingering coded headwinds early in the quarter. When analyzing intra-quarter trends, the business started off slowly with continued procedure cancellations due to lingering COVID headwinds and hospital staffing shortages. As we progress through the quarter, the operating environment begin to normalize, leading to accelerated elective procedure volumes in June, which has continued into the third quarter. Additionally, following a prolonged period of COVID disruptions, growth in the quarter was aided by a strong international recovery. In the second quarter of 2022, we generated record adjusted EBITDA of $2.1 million. Our management team has, for some years, consistently improved profitability, and we have taken seriously our role as financial stewards to prudently invest in sustainable growth initiatives. We are extremely proud to reach this important milestone as we believe it is a leading indicator of…

Thanks, Dave. Our second quarter 2022 worldwide revenue of $32.9 million increased 23% when compared to the second quarter of 2021. Growth in the quarter was driven primarily by continued trauma growth, combined with non-elective procedures increasing throughout the second quarter, resulting in 14% organic growth. In addition, we added $2.6 million of revenue from MD Ortho, which was boosted by multiple EU stocking distributor shipments. In the second quarter of 2022, U.S. revenue was $25 million, a 15% increase from the second quarter of 2021. The growth in the quarter was primarily driven by organic growth across scoliosis and trauma in deformity correction as well as the addition of MD Ortho, which added $1.3 million of incremental revenue. In the second quarter of 2022, we generated total international revenue of $8 million, representing growth of 61% compared to the prior year period. Growth in the quarter was driven primarily by increased procedure volumes, as well as increased set sales to our international stocking distributors in scoliosis and trauma and deformity correction. MD Ortho added $1.3 million of incremental revenue. In the second quarter, trauma and deformity revenues of $22.6 million increased 26% compared to the prior year period. Growth was driven primarily by organic growth from cannulated screws, PD foot and PNP Femur systems as well as nonorganic growth from the MD Ortho of $2.6 million. In the second quarter of 2022, scoliosis revenue of $9.4 million increased 23% compared to the prior year period. Growth was primarily driven by increased sales of [indiscernible], FIREFLY and BandLoc products, as well as increased set sales to our international stocking distributors as they look to respond to increased backlog. Finally, Sports Medicine/Other revenue in the second quarter of 2022 was $939,000, which declined 15% compared to the prior year period. Turning…

Thank you, Fred. I think there are three takeaways from our second quarter performance. First, elective procedure volumes improved in June, and that trend has continued into July, giving us confidence that we will generate 20% or greater organic revenue growth and 30% or greater total revenue growth in 2022. Second, the company's strategic position has been substantially enhanced by the acquisition of MDO and Pega, two companies we have known and admired for some time. Third, it is clear that the competitive strength of our business has never been greater, and the future is bright. With that, I'd like to turn the call back over to the operator to open the line for any questions.

[Operator Instructions] Our first question comes from Matt O'Brien with Piper Sandler.

Hey, good morning. This is Phil on for Matt. Can you hear me all right? Great, thanks for taking the question and congrats on the quarter. Let's just start off with MD Ortho, $2.6 million in the quarter, which is great to see. How should we think about these EU stocking orders versus a more normalized run rate? And then just a quick follow-up with guidance. You took it up about $2 million mostly attributed to that MD Orth number. Am I thinking about this the right way, and if so, where was the remaining delta between the $2 million? And then what was attributable to MD Ortho?

Yes, absolutely. So first of all, yes, you are correct. MD Ortho did $2.6 million in the second quarter. We think that is going to do more like 1.7 million in the third quarter and 1.7% in the fourth quarter. So in that range. That delta is really driven by these onetime stocking orders in the EU that was very strong in the second quarter. The increase in revenue, you are correct that most of it does come from the acquisitions. We continue to see our core business executing as we had planned earlier in the year. And so the organic revenue growth of 20% to 23% is exactly the same as what we had predicted before. The increase is coming from the incremental benefits we're seeing from the acquisitions with the synergies coming into the OP family.

I guess just with MD Ortho exceeding expectations initially here, are there any additional specific areas you're targeting in this nonsurgical space? I appreciate what you've said on how big the opportunity is there and what's your commentary and the commentary today on M&A.

Yes. I think our goal here is to integrate MDO, as you might imagine. So the focus has been to integrate that business really before we think about what the next stage in our nonsurgical businesses. That said, MDO has about six new products that are in the development pipeline, at least one of which may get to the field globally here before end of the year. There's a number of areas still in club foot treatment where we can expand, and that will be our first step really is to continue to expand in this lower extremity nonsurgical bracing market. And we think that with those 6 products and the synergies we're seeing, MD Orthopedics will be able to really accelerate growth as we look over the next 12 to 18 months. From an M&A perspective, our commentary in the script here has really been that we've got a lot of work to do to integrate MDO and Pega. MDO has gone really well so far. We're obviously ahead of that with Pega, we're just getting started. And so we don't see anything very substantial in the marketplace at this point that really interests us, and we've got work ahead of us over the next 12 to 18 months in integration.

Our next question comes from Rick Wise with Stifel.

Good morning, Fred and David and it’s Han for Rick. Thanks for taking the question. First one on international. Your commentary on increased international purchasing sounded fairly positive and would seem to set the stage for continued growth given the international backlog, but I just want to be clear, have you returned to kind of more normalized levels now? And how do you characterize that aspect of your business to growth? Is it a headwind or accelerator as we look to the rest of the year?

Yes. I think it's very good news to see our stocking distributors internationally start to purchase sets again. As you know, that's been something that has been slow, certainly even as the recovery takes hold here. And so we're very encouraged, and we feel like that's a tailwind. Certainly, they're making investments because they believe that the market adoption of the products is accelerating, and there's a backlog. And we talk about a $2.5 million backlog here in the U.S. It's a little easier to quantify that in the United States, but we feel like internationally, we probably have an 18-month backlog, and we're only now starting to see the surgical environment normalized and us to start picking up on that backlog, which I think is borne out by the fact that our distributors are being more aggressive in their purchasing habits.

That's great perspective. And I noted early, but as you're sizing up things, how should we be thinking about your early perspectives on '23, given the still expanding portfolio, recent acquisitions and new product pipeline. Could we see growth accelerate next year in a return to a more normal environment?

I think with the acquisitions of MDO, Pega, and a very robust R&D pipeline organically, as well as in both of those businesses, we have a really nice setup for 2023 and 2024. Obviously, I haven't given guidance yet on what that looks like, but like I said at the end, our competitive position is extremely strong. And when we improve our competitive position, we certainly believe that at the absolute worst case, we are honoring our commitment to 20% organic growth, and we'll remain a company that grows by 20% organically and likely 25% to 30% with acquisitions. And I think that's what we're set up to do for the several years to come.

Our next question comes from Ryan Zimmerman with BTIG.

Good morning. Thanks for taking our questions. I want to start actually with scoliosis, if I could, Dave. It was pretty good. Some of your peers have commented that the scaling market has been tougher this past quarter. And just would appreciate your perspective on the performance you guys are seeing, not just the cadence, but where you think you're winning share from in scoli versus maybe some of your peers who have given softer commentary about this quarter?

Thanks Ryan. Listen, it's been a tough year so far when we think January 3rd, almost May. And so yes, I know everybody has had some struggles on the scoliosis side, particularly even early into the summer. We saw a nice bounce back here in June, and expect that to continue into Q3. I think that's driven by increased adoption of ApiFix, a number of new users that we had, particularly in the month of June that we're seeing schedule out into Q3. And then the adoption of 7D, we talk about having 7D and then sold a unit here at West Palm. That's great, but we have a number of units right now that are in the process of going through the earn-out process and all of that drives incremental share gain. I think that's why we're so bullish about what the back half of this year could look like really what the next several quarters could look like.

Got it, helpful David. Maybe turning to Pega for a moment. I mean, certainly known about the company, they've been at all the POSNA meetings and so forth. How do you think about the opportunity to grow Pega through your distribution network, similar to what you're seeing with MD Ortho and just going above and beyond the expectations that you've laid out and not to suggest that you're going to exceed the $3 million you've laid out, but curious what you're doing to maybe provide some upside to what those expectations are.

Yes. I think mid to long term is the story for Pega, whereas MDO, we saw immediate synergies because they have their own established distribution, and they were working through a number of distribution adjustments internationally, which I think is going to benefit them in the short run, as well as a benefit of long term. Pega, as you, I believe know, Pega is a great firm when it comes to engineering and very innovative product development, 7 products, the main product, FDrad is really known globally. But access to inventory, access to sales representation has always been fairly weak for Pega, not been their focus. And so you're right, I think once we can transfer this to our selling organization in the United States, which should start at September 1st, and we can order inventory, which is on order and get new sets to the field, which is going to take some time. Once those things occur, again, it could take a couple of quarters here, but we think the growth of that segment of our trauma and deformity business could be really strong for the next several years.

That’s helpful, Dave. Let me squeeze one last one and I'll hop back in queue. Gross margins obviously came back to, I think, a more normalized level than we saw in the first quarter, Fred. How are you thinking about – and I understand that was part of set purchases from international stocking distributors? Should we expect somewhat of a bounce back higher in the back half of the year as those distributors have purchased their inventory this quarter?

No. I think what we're seeing is actually what you said at the beginning, which is a return to more normal, so in 2020 and 2021, without selling sets to the international partners, our margin artificially was higher. We did see, what I would say is more normalized international stocking distributor purchases in the second quarter, and we would expect that to continue as it had prior to COVID. It was not a one-and-done situation. Every single quarter, we were selling sets as they were expanding their businesses. We would expect to continue to sell sets here in the third quarter, fourth quarter, and each quarter next year. I think what we're seeing now is the more natural gross margin rate that we'll see going forward, which is still very strong, obviously.

Our question comes from David Saxon with Needham & Company.

Yes, good morning, David, Fred. Thanks for taking the question and congrats on the quarter. Maybe one on Pega, one on backlog for Pega. Just wondering how meaningful that FDnail is to the overall kids’ portfolio? Maybe remind us what the market is for that type of system and whether or not it can have pull-through across your product portfolio?

Yes, good question. We've talked about this really moving us from about 85% of what a pediatric orthopedic surgeon does to 90%. That last 5% is a big one because this product line opens us up into an area of the market for children's with children with rare bone diseases. Given the fact that the FD rod is really unique in that there's really no competition, particularly in the United States for it. It gives us a pretty powerful position when you include those products into the balance of the OP T&D portfolio when it comes to hospital contracting. I do think that it is pretty significant to our market opportunity. There's about 25,000 to 50,000 kids with osteogenesis imperfecta, so that's where the FD nail plays and 25,000 to 50,000 in the United States. And so, while we know a lot of surgeons know about the FD rod, again, I think historically, surgeons have been reluctant to call for it because it's been very difficult to get and has not been supported by a selling organization that is dedicated exclusively to pediatric orthopedics.

Got it, that’s helpful. And then on the backlog, I think you called out you benefited from some rescheduled cases. Just wondering any way to quantify that benefit and then recapturing the remaining 2.5%, I think you said it was. Should that be split evenly or does it follow your typical seasonality? And then, if I can squeeze one last one in. I don't think I heard anything on Orthex. Any update on how that product is doing? Thanks so much.

Yes. You did hear that correct. We think there's about a $2.5 million backlog in the United States, primarily in elective limb deformity correction procedures, as well as elective spine surgery. We don't believe that in Q2, we saw a big return or pick up on any of that $2.5 million. Likely that we'll see that pick up here in the next few quarters, hopefully, between now and end of the year. On the Orthex side, Orthex is an elective limb deformity procedure, and so as we mentioned, April, May pretty tough on all of those elective procedures, better than Q1, but still not what we would expect from a normal environment. Again, we saw Orthex improve into June, seeing Orthex improve into Q3 and Q4, and I think it will positively be impacted by the backlog circumstance as well.

Our next question comes from Sam Bardowski with Truist.

Hi, thanks for taking the question, guys and congrats on the good quarter. I'll start with ApiFix. You touched a little bit on it in the prepared remarks. But just curious to hear any more granularity you could give us into where the registry or commercial rollout stands? And as cases pick up and we get surgeons with a few years of experience here. How should we be thinking about that into '23?

Yes, there's no question, Sam that as surgeons get more data, we're not to 200 yet. I think none of this environment until June has really benefited our capacity to close the registry sooner. But I think registry likely to close year-end probably leaking into the first part of next year. That said, we have about as many commercial sites that have been trained, not all of them have scheduled cases yet, but have been trained and are starting to send in X-rays, as we have clinical sites or registry sites. We did see a nice bump in June, seeing really nice scheduling through July and into Q3. And I think some of that is coming from new users. Others is coming from surgeons who now do have a year, year and half of experience and are seeing results and are feeling more comfortable in scheduling additional ApiFix cases.

Great. That’s helpful. And then, Fred, one for you. I got the commentary on probably lack of further acquisitions of scale going forward. How should we think about the balance sheet going forward and use of cash liquidity?

Yes, absolutely. So $52.5 million of cash, $31 million of that was used the first day in the third quarter, July 1st with Pega. The good news is we continue to have another $19 million of cash available to us on our line of credit. I think it also demonstrates the continued commitment from Squadron to be very flexible in the financing, which gives us a lot of leeway to effectively manage our balance sheet. So yes, we have used cash for our set builds, obviously, we've used cash to pay MDO earlier this year and to pay our ApiFix payment. But we're very encouraged by the positive adjusted EBITDA, and that will continue both the rest of this year and then next year, which will start covering some of the set deployment numbers and reducing the overall amount of cash that's required to support the growth of the business.

Our next question comes from Daniel Stauder with JMP Securities.

Great. Thank you. Just touching back on gross margin. You mentioned that you haven't seen any meaningful inflation from your suppliers. But note that in mind, could you give us any color on your ability to maintain or even gain price compared to some of the adult ortho players should inflation become an issue? And then in that same bank, could you give us any color on whether the PedOrtho market is naturally able to mitigate pricing erosion that you might typically see in the adult ortho industry. So any comment to players should inflation become an issue? And then in that same bank, could you give us any color on whether the PedOrtho market is naturally able to mitigate pricing erosion that you might typically see in the adult ortho industry? So any commentary there would be helpful. Thank you.

Yes, absolutely. Listen, we feel very fortunate in the environment that we live and work in. Traditionally, we have been able to get a little bit of price. We have been able to get a little bit of price to offset inflation. This year, we did go out with a little bit of a higher price increase to offset transportation where we are seeing inflation and to be a little proactive on this. We're confident that we'll continue to be able to get enough price to cover the inflation impact that we would see today or into the future through our business. Yes, I think there is opportunities as we increase the value overall of the customer experience with Pega to gain pricing within the Pega portfolio and particularly in the United States. I would also argue that we talk a lot about FD, but Pega has six additional products, and for the most part, you could say that those products haven't been launched in the United States. And so we have opportunity both on the pricing as well as just a pure launch. I mean it's almost like we're looking at six, seven new product launches for our trauma limb deformity portfolio in rapid succession over the course of the next 12 months. So on the pricing side, of course, there's opportunities for us there. I just think for the scale of our T&D business and the competitive position, it also gives us some leverage in those circumstances.

Yes. I would just add that launching those products will take some time, right? So we have to order the products from the suppliers. It probably will have at least a four to six month lead time to get those sets in on the Pega side, and we'll be launching those hopefully later this year and/or early into 2023.

Great. Thank you and just one quick one. Just looking at the set deployment. You reiterated guidance for the year and comment on some of the slight delays. But could you give us an idea of the cadence of the spend in the back half of the year? You just mentioned some of it, but any incremental investment needed for Pega set or is that more of a 2023 concern?

Yes. The number that we reconfirm does include, in fact, 70, as we mentioned earlier in the year as well as some little amount of Pega, which we'll be able to get out, get from our suppliers and start deploying this year. And then the majority of the Pega will be into 2023. The cadence of that is going to be pretty consistent month after month after month throughout the rest of 2022.

There are no further questions. I'd like to turn the call back over to David Bailey.

Once again, thank you, everybody, for your time. Thank you for your questions, and we look forward to seeing you at conferences in the future. Thank you.

This concludes the program. You may now disconnect. Everyone, have a great day.