Good morning and welcome to OrthoPediatrics Corporation’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Trip Taylor 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, I encourage you to review the Company's most recent annual report on Form 10-K which was filed with the SEC on March 1, 2023. 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, May 2, 2023. 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, Trip. Good morning, everyone. Thank you for joining us on our first quarter 2023 conference call. As we start all earnings calls, I'd like to begin by highlighting that we helped nearly 19,000 children in the first quarter of 2023. Since inception, and with the additions of MD Orthopedics and Pega Medical, we have now helped almost 650,000 kids. Doing the right thing for children remains our top priority. In the first quarter of 2023, we generated revenues of $31.6 million, representing growth of 35%, compared to the first quarter of 2022. We're encouraged by the better than expected revenue growth and a strong start to the year. As we've discussed, the record high levels of RSV cases in the back half of 2022 remained a headwind early in Q1 but eased as the quarter progressed. Staffing shortages also continued to negatively impact children's hospitals throughput, and we continue to expect some staffing headwinds throughout the year. Despite the challenging environment, we continue to execute our strategy and deliver strong results across both, the Trauma & Deformity and Scoliosis businesses. The main drivers in the quarter included elective limb deformity correction and scoliosis procedures, combined with very strong contributions from MD Orthopedics and Pega Medical. Organically, domestic growth outpaced international growth, which underperformed slightly due to timing of set purchases by stocking distributors, and ongoing FX impacts. However, we expect the international business to improve in 2Q and throughout the year as underlying demand remains strong. Overall, we are extremely pleased with the start of the year and believe we are well positioned strategically to continue our successful growth story. Therefore, we are increasing our revenue guidance for the full year to $148 million to $151 million, representing growth of 21% to 23%, compared to 2022. Despite our Q1…

Thanks, Dave. Our first quarter 2023 worldwide revenue of $31.6 million increased 35% compared to the first quarter of 2022. Growth in the quarter was driven primarily by continued share gains across our legacy portfolio as well as contributions from MDO and Pega Medical of $4.8 million. In the first quarter of 2023, U.S. revenue was $23.8 million, a 31% increase from the first quarter of 2022. Growth in the quarter was primarily driven by organic growth in Trauma & Deformity and Scoliosis products, as we continued to deploy more sets and increase surgeon adoption, as well as the addition of MDO and Pega Medical. In the first quarter of 2023, we generated total international revenue of $7.8 million, representing growth of 49%, compared to the prior year period. Growth in the quarter was driven primarily by the addition of MDO and Pega Medical, as well as increased procedure volume across the majority of our OUS regions. This growth was partially offset by the ongoing negative impact of FX on our international sales. In the first quarter Trauma & Deformity revenue of $23.4 million increased 42%, compared to the prior year period. Growth in the quarter was driven primarily by a gradual normal elective surgical environment as well as the addition of MDO and Pega Medical. In the first quarter of 2023 Scoliosis revenue of $7.1 million increased 18%, compared to the prior year period. Growth was primarily driven by increased sales in the U.S., offset by lower year-over-year set sales to our international stocking distributors as they temporarily managed their cash positions. We expect this OUS trend to reverse for the remainder of the year. Finally, Sports Medicine/Other revenue in the first quarter of 2023 was $1.1 million, which increased 22% compared to the prior year period. Turning to…

Thanks, Fred. Following our successful first quarter, kicking off our 17th year as a company, I want to remind everyone that our culture and cause dedicated to impacting the lives of children is attracting the best and brightest and still underpins all of our success. Our share of cause and commitment to improving the lives of children with orthopedic conditions has fostered a culture that has again been recognized and awarded as a Top 100 employer in the state of Indiana, a distinction unique to Warsaw based medical technology companies. We are proud OP has received this recognition for the 7th time. And as shareholders, you should be proud of your continued support of a company that not only does so many great things for children, but continues its commitment to corporate social responsibility. With that, I'll turn the call back to the operator to open the line for any questions. Thank you.

[Operator Instructions] Our first question comes from Rick Wise with Stifel. Your line is open.

Good morning, gentlemen. And great to see the solid recovery and rebound. Maybe just starting from that perspective. Dave, maybe talk to us about -- or Fred, talk us through the quarterly flow, maybe just at a high-level, talking about the U.S. and the international separately. Talk about the quarterly flow of recovery and maybe how the second quarter starting off? Are we -- do you feel like, at a high-level, are we back? Are volumes where they need to be? Your confidence in looking at the rest of the year and maybe most particularly this international, why you feel confident on the international rebound? I know there's a lot there. But thank you.

Hey Rick, thanks. Yes. So, I think as we think about the flow of the quarter, what we saw during the quarter, and I think what we'll probably see continuously here for a while, until things at a macro level get completely normalized is still a bit of chop -- month to month, a little bit of choppiness obviously, producing really great growth in the end. But it's not -- it hasn't been what I would call super stable from day to day, from month to month. Certainly affected by the waning portion of RSV in the first part of the quarter, followed by I would say a much, much more normalized environment when it comes to respiratory illness. I think that's out of the news, as we're all seeing. But we have not seen the improvement that I think some other companies are reporting on the adult side, in hospital -- children's hospital throughput. We still remained hampered throughout the quarter with surgeons’ capacity to be able to get a long time and get particularly elective procedures through, despite the elective procedures really driving strong performance for us. And so, I think our guides still anticipates that we will have staffing challenges throughout the year. And like I said earlier, I think until we see really structural change that's sustainable, we want to remain pretty conservative with respect to what we see, particularly as we enter into a second quarter, where we have a pretty tough comp, if you remember last year, we did very, very well. We left Q2 thinking everything was completely normal and obviously it wasn't in the back half of the year with RSV and staffing. So, we see staffing situations changed, I think fairly consistently, we just remain optimistic but a bit cautious about our hospitals capacity to move a lot of the elective cases through in the really busy summer months of June, July and August. Last thing I would comment on related to the international. International obviously grew very substantially but -- primarily because of MDO and Pega, but the demand for products, particularly on the scoli really high. I would say we were a little disappointed that international wasn't better, but it was, I think entirely due to some timing, not just a fed orders, but even a couple big restock orders particularly on the scoli side. And that's not demand that's going away. We've got a pretty good look at what Q2 looks like. And I think we feel really confident about how international could impact the business positively through the last three quarters of the year.

And maybe just keeping at high level. Fred, you've always been great about helping us think through the quarterly seasonal flow here. You've started off better than expected, you have a nice, beat and raise, et cetera. How do we think about the second -- how would you have a think about the second quarter, particularly from a revenue perspective and how it plays out for the rest of the year?

Yes. Absolutely, Rick. We're still anticipating the third quarter, being our largest quarter of the year, followed by the second quarter just below that. And then the fourth quarter is lower than the second quarter. That's all assuming the summer kind of season plays out the way we anticipate it to be. So, we'll see. But right now, there's no indication that it shouldn't play out that way. In June -- or July, actually is the largest month followed by June and then August when the kids are out of school really drives the scoli business, as well as the severe deformity correction surgeries. And we would anticipate that happening again this year.

And just sorry to sneak in one more here, just to make sure I understand. Your comment about the second quarter, I totally get what you're saying. Obviously, you have MDO and Pega this year, you didn't. Can the business ex that -- those additions grow year-over-year, or should we expect you're still going to report positive growth? How do we think about the second quarter number from a dollar perspective, Fred?

Yes. I think to Dave's point, so first quarter of last year, COVID negatively impacted the first quarter. That kind of went away, and the second quarter sprung back to what we thought was a normalized or very aggressive number. We had great growth on the domestic side, as well as the international side. And we kind of thought everything was back to normal. And then, growth slowed in the third and fourth quarter as RSV started filling up the children's hospitals. So, I think Dave just calling out a tougher comp, because the second quarter was so strong. But we'll stop growth on the organic side, excluding MDO and Pega, which are obviously going to add tremendous growth to the business. Just a tougher comp than the third and fourth quarters.

Our next question comes from Ryan Zimmerman with BTIG.

A couple of questions for me, if I may. The first is, MDO and Pega had a really nice quarter, the highest we've seen, I think since you started reporting those out and they were inorganic. Is it kind of fair to assume that they can run at, call it $20 million combined on an annual basis, or would that be viewed as a disappointment given the set investment and deployments you're expecting through the balance of the year?

Listen, we’re very pleased with both MDO and Pega, tremendous year-over-year growth from their organic numbers. And we anticipate that will continue. As we stated earlier last year that the growth is not going to be explosive like 50%, but it's going to be very strong in higher than the 20% range. And I think you're pretty close on what we would anticipate for the year here in 2023. And as we continue to get sets deployed throughout the year, feel very good about growth continuing very aggressively into next year, both of those businesses.

Yes, Ryan. I think what I was most enthused by particularly on the Pega side is to see the way the growth came in, particularly domestic. And really just that's the impact of the U.S. selling organization. And we don't have a ton of sets in the field at this stage. Obviously, we are launching week-to-week, month-to-month, we're getting more sets out. But kind of a big bolus has not been out there. So it's not sets that is necessarily driving this, it's pure surgeon demand. And kudos to the commercial team, particularly in the U.S. because I think surgeons instantly started calling that group and feel much more confident with that group. And I'm just really proud of how the domestic sales force has performed here, and get them some inventory. And I think the next three quarters really be strong -- really the next several years could be really strong for the Pega products.

Okay, got it. And then, the other thing, you had this impact of RSV in the fourth quarter, I think if I look back my notes, maybe a $2 million to $3 million impact. When you look at underlying T&D growth, it’s similar to prior quarters. So I'm wondering kind of what your thoughts are, Dave, about what you may or may not have made up from those RSV impacts. And I know there was some in January. But what you may or may not have made up in the first quarter and kind of how you're thinking about the recoupment, if you will, of those procedures or of that potential sale through the balance of the next few quarters? Thanks.

Yes. It is our hope that we make up what we saw backlog, let's say, in late Q3, Q4 throughout the balance I think that, again, our guide is fairly conservative on this point. We just got back from POSNO. We just got back from EPOS. It's pretty consistent with what we're hearing from customers is just, as I pointed out earlier, tough to get the appropriate volume of OR time required to get through a normal case log much less backlog. And so it's tough for us to forecast that. I think what we saw in quarter -- in Q1 is certain products. And for example, the deformity correction side of our trauma deformity business performed really well. And that was a bit of a turnaround from what we've seen in the first few quarters, but it was offset by some softness in trauma that didn't make much sense, but then rebounded really aggressively in March. So like I said to Rick earlier, it's -- overall, everything is directionally going well, but I think the chop from month to month on -- in the elective -- and even for a couple of months there, the trauma environment makes it difficult for us to say that we know this is all going to come back in Q2. I'd say it's over the next year where we'll probably pick up that additional volume.

Our next question comes from Matthew O'Brien with Piper Sandler.

This is Phil on for Matt. Congrats on the quarter. Just for starters on guidance, raised by $2 million here, which amounted to the beat and seemingly coming from MDO and Pega. So the organic guide remains the same. And I think historically, you've indicated your desire to be a 20% organic grower in, call it, normal market conditions. Can you walk us through the structural differences here between adult and children's hospitals, results from your adult counterparts indicate that at least volumes on the adult side are coming back in a big way. And when might the children's hospitals see something similar to that?

Yes. I think I'll address the structural, Fred, maybe if you want to talk about the way that we see the next 3 quarters going from a revenue standpoint. But I think there is a difference between the staffing situations that we see in children's hospitals and adult hospitals, particularly on some of the more common procedures performed. We lost a lot of staff in children's hospitals that were very specialized, that were extremely well trained and many that have been in the OR for a long time. And so for example, if you're going to do a multi-hour scoliosis fusion procedure on a neuromuscular scoliosis patient, that is about as complicated as the surgical procedures you're going to have. And when you lose staffing there, it's pretty difficult to plug even a traveling nurse or a staff member into that environment and maintain the same level of efficiency. So we've monitored this quite aggressively in accounts where we have extremely high share and looked at a pre COVID level versus where we're at now, and we're just not -- the throughput is just not there yet. Now obviously, we're getting reports that health care providers are coming back into the workforce. I know our hospitals are working hard to train up their staff. But if you do a ton of total lease to a total hips, it's easy to get that easier to get that kind of repetition going for staff members and bring people up to speed. But the procedures we do involve specialized care, it's a specialized care team. And when you lose even one person, much less several people from that team, the efficiencies change. And so I think that's why our commentary on this is definitely different than what we are hearing from our adult counterparts.

Yes. I would just add that it feels like the second half of last year was really the COVID for the children's hospitals. If you think back on what created the staffing issue to start with, it was really COVID several years ago in the adult hospitals and those nurses being completely overwhelmed, not just nurses, but overall staffing being completely overwhelmed. I think that was for us in the second half of last year. The fourth quarter, the volume was just crazy. -- nurses were working in crazy hours. And there was -- from what we're hearing, a lot of vacation and kind of catching your breath here in the first quarter for a lot of the staff being support, and they're just not getting the same throughput as they're dealing with some of that, which is definitely different, I think, than the hospitals on the adult side.

And I guess just shifting gears here really quickly on the MedTech Concepts acquisition. I like the fact you brought it in an enabling tech company early. Can you talk -- can you walk us through the differentiation that you guys might try to employ here between, let's say, your vision for the product that will sit in children's hospitals and a similar product that might currently exist in an adult hospital for this enabling tech piece.

So yes, we are very pleased to have an opportunity here to take on this digital asset playbook. Certainly pleased to have Kevin join the team, who is a very seasoned veteran in digital health as well as on the implant side, so rare to find the combination of those things. I think what we see, and it's a similar phenomenon that we see with our partnership with SeaSpine on the 7D side, that there are really no companies aggressively addressing the unique digital needs of children's hospitals. Certainly, just like we talked about staffing, I mean, the needs in terms of workflow, the complexity of these surgical procedures, and frankly, the data capture to help drive better decision-making, particularly about procedures that aren't as high volume, let's say, is total near total hip, where there's gold standards applied. I think long term, that's where we see playbooks having a lot of value for our customers. Our goal here is to be able to take preoperative data, infuse that preoperative data in an suite of intraoperative solutions to help our customers make better decisions. And then ultimately, to be able to capture data such that our customers can use that and correlate that against their preoperative outcomes and ensure that they get better -- they're making better decisions and driving better outcomes for kids. We don't see anybody doing that at all anywhere. And so the opportunity to develop software and hardware that meets kind of the unique needs of pediatric orthopedics versus where we see these technologies so frequently being used in adult hospitals where it's reputation surgery, hips, knees, those types of things. We think there's a huge value add for us. Again, it's not going to be overnight. This is a long-term play for us, but we like the entry point, and we think this could have a big impact in terms of long-term share gain for the business.

Our next question comes from Mike Matson with Needham & Company.

I guess, just starting with the set placements. It looks like the numbers were down a bit from the first quarter of last year. I just want to gauge your confidence in the ability to hit the guidance for the year there.

Yes. We absolutely have plans in place to deploy that full $25 million this year. As we've said in the past, strong demand from the field continues and so we're swapping out priorities to get stuff to the right places. As we had last year some slight delays in getting that one last instrument into the case, so we can get it deployed. But we're highly confident in the suppliers, getting us what we need yet this year and getting that deployed.

And then just one product-related question in Scoliosis the RESPONSE powered disposable torque, just want to learn a little bit more about that. I assume you're not selling the actual powered tools, but just the attachments or something? Maybe you could just provide some more detail on that.

Yes, that's exactly right, Mike. You got it just right. We -- it's really -- and we have -- our customers have always an always placed our screws manually as well as set screws manually. And it's -- it can be a painful process, particularly when you've got for screws and you're providing the torque required manually. And so this is something that we've been working on for a number of years. We've had a number of our -- for a few years. We have a number of our customers that are getting to a spot where there's a recognition that the strain that's on their elbows strain on shoulder is pretty tough. And so this makes the implantation of our RESPONSE system much, much more efficient, easier on our physicians. And you're right, it's a kit of instrumentation that allows surgeons to more clearly power screws in as well as set screws that applies to BandLoc as well as our small and standard stature RESPONSE fusion systems.

Our next question comes from Sam Brodovsky with Truist.

First one, I'll just stick with Pega and MDO. Should we think about sequential growth through the year there? Or should we expect those businesses to mirror the seasonality of the core business for this year?

Yes, I would expect that the Pega would most likely nearly mere the seasonality of our business, although again, we'll see. We haven't gone through a full summer with Pega before. It may not be as seasonal just because you're born with osteogenesis and perfect. So it's not a condition that is as elective maybe as our scoliosis franchise. And I think MDO probably has less seasonality overall. I mean, obviously, it's applied shortly after birth. So maybe some seasonality there, but maybe a little less seasonality than we've seen with our -- particularly our scoliosis franchise.

And then you mentioned some OUS set timing items in the quarter and that potentially driving accelerated growth through for the next 3 quarters. Is that -- should we think about this sort of being the low bar in terms of growth OUS for the year? Or are there other things to contemplate there?

Yes. No, I would agree that this would be the low bar for the growth rate for the first quarter on an organic basis, still had a little bit of negative FX impacting us here in the first quarter. We would anticipate that negative impact in the second quarter. And then we're assuming it's a neutral impact in the third and fourth quarter, but we see the growth rate organically internationally picking up in the second, third and fourth quarter as compared to the first quarter rate for sure.

Our next question comes from Dave Turkaly with JMP Securities. Your line is open. There are no further questions at this time. I'd like to turn the call back over to David Bailey for closing remarks.

Great. Well, as always, thank you for your great questions from our group and really appreciate you joining us on our call and look forward to seeing you all at upcoming conferences and discussions in the future. So, thank you. Have a great day.

This concludes today's conference. Thank you for your participation. You may now disconnect. Everyone, have a great day.