Good morning, and welcome to OrthoPediatrics Corporation's Second Quarter 2023 Earnings Conference Call. At this time all participants’ are in 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. Please go ahead.

Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer, and Fred 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 quarterly report on Form 10-Q, which will be filed with the SEC today. 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 evaluating its operations, period-over-period. For each non-GAAP financial measure referenced on this call, the company has included a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure in its earnings release. Please note that the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation, or as substitute for other 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 1, 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, Chris. Good morning everyone and thank you for joining us on our second quarter 2023 conference call. As we start all earnings calls, I'd like to begin by highlighting that we helped a record 21,000 children in the second quarter of 2023, and since inception, we have now helped over 670,000 kids. Helping more children remains the best measure of our success. In the second quarter of 2023, we generated record high revenue of $39.6 million, representing growth of 20%, compared to the second quarter of 2022. Despite a challenging operating environment within children's hospitals, we continued growing our business by taking market share and are encouraged by the momentum we generated in the first-half of the year. We are proud to have again generated growth of 20% against the strongest comparable period of the year while deploying $9.2 million of sets. Altogether we are positioned favorably for the second-half of the year. As expected, we are experiencing a gradual month-by-month improvement in the inpatient surgical environment where nearly all of our procedures are performed. As you may have read many insurance companies have reported increased overall volumes, but lower inpatient procedures. Our observations are consistent with this recent commentary and we continue to feel the impacts of lower than historical average volumes in the children's hospital environment. Nevertheless, execution of our historically successful strategy is leading to consistent quarter-over-quarter share gains and is producing sustainable growth regardless of market conditions. Therefore, we are reiterating our revenue guidance of $148 million to $151 million, representing growth of 21% to 23%. Moving to our revenue segments, in the second quarter of 2023, we generated total Trauma and Deformity revenue of $27.5 million, representing growth of 22% compared to the prior year period. Revenue growth in the quarter was led by…

Thanks, Dave. Our second quarter 2023 worldwide revenue of $39.6 million, increased 20% compared to the second quarter of 2022. Growth in the quarter was driven primarily by continued share gains across our legacy portfolio as well as growth of our non-surgical specialty bracing business. U.S. revenue was $29.6 million, a 19% increase from the second quarter of 2022. Growth in the quarter was delivered across our trauma and deformity product lines, including our non-surgical specialty bracing business and across our scoliosis product lines. We generated total international revenue of $10.0 million, representing growth of 25%, compared to the second quarter of 2022. Growth in the quarter was driven by strong performance within our scoliosis products, as well as our trauma and deformity product lines, including the non-surgical bracing. In the second quarter of 2023 Trauma and Deformity revenue of $27.5 million increased 22% compared to the prior year period. Growth in the quarter was driven primarily by share gains across our entire portfolio, with strong contributions from deformity correction. In the second quarter of 2023, Scoliosis revenue of $10.9 million increased 16% compared to the prior year period. Growth was primarily driven by the combined strength of ApiFix, RESPONSE and 7D. Finally, Sports Medicine/Other revenue in the second quarter of 2023 was $1.2 million, which increased 23%, compared to the prior year period. Turning to set deployment, $9.2 million of sets were consigned in the second quarter of 2023, compared to $3.4 million in the second quarter of 2022. Year-to-date, we have deployed $12.2 million, compared to $7.3 million in the first-half of last year. The increase was driven by significant new product development deployments, significant Pega deployments, as well as multiple consigned 7D units. Touching briefly on a few key metrics. For the second quarter of 2023 and…

Thanks. Brett. I'd like to remind you that OrthoPediatrics has systematically put into place an impressive array of long-term growth drivers that will continue to produce annual growth of 20% or more for years to come. New product launches, second assignments, surgeon education and great technologies such as ORTHEX, ApiFix and 7D are driving surgeon conversions and market share gains. Acquisitions such as MDO and Pega Medical will also continue to grow rapidly. Further, we are building a new non-surgical specialty bracing franchise, while also investing in digital health solutions that create new and exciting growth opportunities for the future, that are profitable and capital efficient while helping more and more kids on a global basis. In closing, I'd like to thank our surgeon partners and all of my associates for their tireless effort to improve pediatric healthcare around the world. And I'd like to thank you, as shareholders for supporting our cause. Thank you.

[Operator Instructions] The first question comes from Ryan Zimmerman with BTIG. Your line is open.

Hey guys, can you hear me okay.

Yes. Loud and clear. Good morning.

Good morning, Ryan.

Good morning. Good to speak with you guys. So I just wanted to ask couple of questions, if we could get started here. So just about the environment in the pediatric hospitals, and it sounds like it's improving but I guess I'm curious kind of why it's still remains challenging in your view, kind of what they're doing to address it? And kind of what's the expectation is for quote-unquote normalization in the pediatric space?

Yes, good question. So it's still not normal, certainly. And we think that's just due to specialized staffing, particularly in the more complex procedures. We're not seeing the same throughput. And that's pretty consistent with what we've seen now for better part of the year. That said, I think we've kind of moved beyond this in terms of not wanting to dwell on it. I mean we have to continue to execute the things that we do to drive growth and I think in the quarter, we saw a really nice acquisition -- new customer acquisition that has really, obviously producing 20% growth. We offset a lot of some of the volumes that just weren't normal in some of our major accounts. So I think this is improving, Ryan, I think you're seeing it. We're seeing this improve month to month as these children's hospitals are staffing up. Obviously, we're just pointing to the reports that are pretty consistent with what we are seeing that the outpatient environment is very strong, and we do very little of our surgery in the outpatient environment, as you know. And the inpatient environment is a little weaker, and I think when we look at our account by account, particularly places where we have really high share we see that very clearly. And now it's just a matter of are we onboarding new customers fast enough to offset that. And as this improves, and again it will, maybe we have a couple more quarters here where this is a gradual improvement. We will be in a spot where -- just a better spot, but overall I think we've tried to point it out, but not dwell on it and we got to move forward.

Yes. Fair enough. And appreciate that. Maybe just you laid out a ton of new products, and there's a lot to kind of chew on I think for investors, as we think about the back half of the year and then into '24. But couple of things that stuck out to me, Pega deployment and penetration -- you said, Pega doubled in revenue, it sounds like in the U.S. I guess good results. What do you think you're at in terms of penetration of Pega and kind of where can that grow to? You talked about MDO being, kind of, this huge opportunity longer term. Do you think of Pega in a similar manner? And then the second question to all of this in terms of the portfolio, is the scoliosis portfolio complete in your view with the combination of 7D, ApiFix and response. Just curious kind of what your thinking is there as well. Thanks for taking the question, guys.

Yes, good questions. Ryan. So yes, the Pega business in the United States nearly doubled since the time of the acquisition. So I wanted to just clarify that. We're definitely seeing a lot of adoption of Pega products. I think it's clear that the U.S. selling organization is impacting that, far greater impact by the U.S. selling organization then deployed inventory. A lot of that deployed inventory just hit in Q2. So we're not necessarily seeing a ton of the pull-through because of deployed inventory. I would say in terms of share in the United States, the FD product has a really high share. But what we're seeing is because it was limited access to the products, we're seeing the user profile of the products expand, more indications are being treated with the FD Rod, than I were before when surgeons struggled to get it. And with respect to the rest of the products, as we've said, there's six or seven products there, six of them really haven't seen the light of day in the U.S. or international markets. And so you point to all these new product launches and you're right. But we're trying to pace all those new product launches with the new things that are going on with Pega, because these products that are coming out of Pega to our customers are new to our sales force and new to our customers as well there. So I guess that's why we have a lot of confidence that now as Pega -- we're a year into this, and we see the next several years this opportunity with Pega to continue to grow well in excess of 20% yearly. And then we point out the international side of the business where we're going through a lot of transition from…

Got it. And thanks for taking the questions. It was very helpful.

You bet.

Please standby for our next question. Our next question comes from Matthew O'Brien with Piper Sandler. Your line is open.

Good morning, and thanks for taking my question. So Dave or Fred, can you just drill down a little bit more on the domestic business in the quarter? It was a little bit softer than Q1. I know you still got some headwinds. How meaningful are those headwinds? Can you quantify it at all? I know you said deformity was a little bit softer than you expected. Or maybe just talk about how things built throughout the quarter, and then can you delineate the share gains that you're seeing underlying some of these headwinds that you're facing? Are things come back to kind of pre-pandemic levels which I can imagine they won't, or pre-RSV levels, how big a tailwind could that be given the share gains that you're taking?

Yes, good question. Thanks, Matt. Yes, so we've been doing this a long time, and I think an indication that the marketplace is not completely behaving entirely rational is probably what we saw in Q2. When we think about the build, we really, really struggled and we pointed it out on the call, we struggled in April. And we just didn't grow the way that we would expect for the month. And then we saw this major rebound in May. I mean, a very strong snapback. So, obviously, Matt, the people that were -- our customers didn't leave us in April and stopped liking our products. They came back in May and then we saw kind of an ease into June in terms of the seasonality and that's carried forward through the summer, so, having a fairly normal summer. And so when we look at the months, it's choppy and choppier than what we had seen certainly previous to the pandemic. And so I guess that's why it gives us a bit of a pause to -- we like what we're seeing, we like the share gain, but even despite a lot of that share gain we have a month in a quarter that just doesn't look normal or rational. And I think that gives, Fred and me, both a bit of a pause to not get out ahead of ourselves, not to be not to be guiding super aggressively, because that's just not normal. Now I think over the course of the next few quarters, certainly into 2024, things will start to normalize. We were very pleased to see June and we're pleased to see the seasonality in the business. I think there were some questions coming into this quarter, particularly against a very difficult comp we had prior -- from prior year. We had some concern that could June be as big as it needs to be, given the staffing issues. And it wasn't as big as it's ever been in terms of throughput, but it certainly was big, and it's given way to a really nice summer here for us. So we haven't accounted at all up in terms of what we think is going to happen when all of this comes back to normal, but you got to think that with more and more customers using more and more products and improving market, we like the trend. Again not sure that it's going to all explode in Q3, Q4 but certainly the trend is to 20% growth like we've delivered for years.

Got it. I appreciate that. And then as far as the bracing business, you mentioned a $100 million business eventually. It sounds like more like ‘25 that's really going to start to ramp up significantly. But can you just talk about the investment needed, how you build that business to a $100 million and how you do that alongside the rest of the company that's growing nicely as well. Thanks.

Yes, so good question. We see a lot of opportunity on the R&D side. We knew that before we acquired MDO. But I think once our customers saw us make that acquisition, and we started seeing the growth that MDO was producing just through the partnership of our people and their people and now together, it gave us a lot of confidence that we've made the right decision. Move Bar came out, we are seeing growth related to that. We got DF2 on the way. DF2 was featured prominently in some KOL papers that were awarded at POSNA for the last two years and there's just a lot of buzz around those product lines and there's very limited competition. And so we think through the combination of pretty heavy investment on the R&D side, and when I say heavy investment, these are not particularly costly to develop because of the regulatory requirements are less than our implants. And then some investment in the selling organization, we feel very strongly that we're going to be able to build that business and build up pretty rapidly. I think it's going to contribute in 2024. It's probably one of the factors that will contribute to the continuation of kind of our 20% plus growth base. But yeah, you're probably right. It gets much bigger in 2025 and 2026, and I just -- Fred and I just want to point out that this is another area of growth we haven't talked a lot about, but it should give investors a lot of confidence that we've got another -- we've got another lever of growth here in addition to all the things that we're doing on our surgical side that are going to continue to produce really nice revenue growth, profit, don't require consign -- doesn't require consigned inventory, conserves cash. I would think that's everything we all have been aspiring towards.

Got it. Thank you.

Please standby for our next question. The next question comes from David Saxon with Needham and Company. Your line is open.

Yes. Good morning guys, and thanks for taking my questions. I guess first I wanted to ask on ApiFix. I know there's a competitive product launching. So are you seeing any impact around the ApiFix docs trialling that new product? I know you called out new and existing user growth, but just would love to hear kind of what you're seeing from a competitive perspective. And also, just any update on ApiFix and kind of just the expectations for the year?

Yes. So we haven't actually heard -- I'm sure it's a fine product. We just haven't heard anybody use the product in the U.S. yet. I'm sure it's happening, but we are aware of the product internationally. I think it's been available for a number of years, but listen, I think our position on non-fusion surgery in general is that as other people enter the tethering space, it just drives awareness, patient awareness and surgeon awareness that non-fusion surgery for pediatric scoliosis is here to stay. It's going to grow over time. We view the market as fairly embryonic. So right, we're going to see new people enter. No one can compete directly with what we do, obviously on the posterior side, and much easier surgery. And now when you stack up results, albeit early, one year results, but we stack those kinds of results up with the ease of use of this product. I think that's what's driving surgeons to start adopting the technology. We added a number of new users. We have a number of sites that are applying for their first IRB to start using this product commercially. And I think this is a continuation. We continue -- we think we'll see this product continue to grow as the marketplace grows and more people to enter the market, particularly on the anterior side of the surgical field, probably benefits us, because it just raises awareness. And again, I think we stand by our claim here. We think this business as give or take doubles this year and probably does that again next year. And just really like this and like the results we're seeing.

Okay, got it. That's helpful. And then just on OpEx, it was, I think mid-20%s in the first-half versus last year. It looks like a lot of that's R&D behind some new product launches and G&A. So like does that continue or can we see some more leverage in the model as we go into the back half?

Yes. We'll see some more leverage in the back half of the year. It's really volume-dependent, right? As the volume increased significantly, second quarter to first quarter, we get some nice leverage. Dave mentioned earlier the lack of consignment on the non-bracing side. Those products are all sold basically through our e-commerce website. So we're not paying a commission on those bracing products, which gives us nice leverage on the sales and marketing side. R&D, we will continue to invest in that pretty heavily. And then on the G&A side, it's really the stock comp depreciation and amortization that's driving that. We are getting leverage on the cash side of G&A. So yes, we should see some leverage continue in the second half of the year and really into next year as we have different growth drivers, I guess, improving the topline.

Okay, got it. And then just a quick follow-on question, what was the inorganic contribution in the quarter?

So the only impact is Pega. So Pega was purchased July 1 of last year, and that was about a $6 million run rate business, so $1.5 million-ish pre-acquisition.

Okay, got it, thanks.

Please stand by for the next question. The next question comes from Dave Turkaly with JMP. Your line is open.

Great. Good morning. Can you hear me?

Yes. Hey, there.

Great. Hey, just to clarify one upfront here, the month to month comment, I'm assuming that's typical in 2Q. But it may not be -- I understand that it sounds like it started slow and got a lot better. But is that typical for you in 2Q or is that -- is that not typical in terms of how it progresses?

Yes. Yes, Dave let me clarify. It is typical to see that ramp. I guess what we saw is growth rates. The comparables were not normal, at least as it pertains to April. Normally, we see this nice smooth ramp into June, and then obviously, June, July, August, those are big months in terms of volume. But as we just look at what April did versus what April did prior year, and frankly what April does prior years in the past, we're still seeing that sharp. That was what I was trying to point out. It's not that there wasn't a steady ramp into the year that was normal. It was just that what we saw in the month was pretty inconsistent with what we historically see in terms of kind of the growth rates that we would see over prior year. And then we saw almost complete reversal of that in May where revenues shot up and carried us into the summer. Does that makes sense?

Yes. I get it, thank you for that. And as a quick follow-up, you mentioned enabling technologies, FIREFLY and 7D driving even some response. I guess I just want to get your thoughts how your doctors are adopting enabling technology that what you expect there? Are they more willing? Is it -- are they conservative and it's taking a little longer? Just any color you could give us in terms of how that initiative is rolling out. Thank you.

Yes. There's no question that the pediatric orthopedic surgeons, particularly on the Scoli side are keenly interested in enabling technologies and particularly on the spine side. We see a real opportunity for that also on the non -- on the Trauma & limb Deformity side which is why we really like this partnership. We think over time the partnership with SeaSpine, 7D, Orthofix will allow us to potentially get into the Trauma & Limb Deformity side. So there's a big demand for that. Certainly, I think the demand for navigation with very low radiation for pediatric patients is extremely high. I think one of the things that's held navigation back in the pediatric space is because historical navigation platforms involve so much radiation. And the pediatric patient absorbs a lot of that radiation. It's not particularly good. And so now that there is a solution that is very low radiation and frankly allows people in the operating or not even have to wear lead, and in a long surgery, that's a big deal. I think the surgeon feedback, healthcare provider feedback across the board related to the enabling technologies particularly 7D is very high. The only thing, I think we were a bit surprised by is we have never been in the capital market -- capital equipment sales market. And so this is a bit new for us. And frankly, we are probably a bit naive in terms of how we thought that the hospital environment would allow for purchase or even consignment on contract, some of these units. And so we've done a lot of work over the last year or so to put a lot of options in play and we're starting to see, particularly Q2 and we think throughout the balance of the next year to 18 months a number of these units that we have insights start to go on contract from a consignment standpoint. And we even have some sales. And we have some sales pending, may not happen in Q3, but we're going to have some capital sales here we believe in Q4. And so, again we like what we see there. It's probably just maybe a little delayed in terms of not the surgeon adoption but the hospital taking on the product and get them going. Does that makes sense?

Yes, thank you for that.

Sure.

Please stand by for the next question. The next question comes from Sam Brodovsky with Truist Securities. Your line is open.

Hey, thanks for taking the questions and congrats on a good quarter. The first one, just to put a finer point on it. Were May and June sort of back to the normal inpatient census level that you're expecting or are still a little bit of room to go there, and just relating that to guidance. The second half still assumes that environment is going to be choppy in terms of patient volume, right?

So May and June, the inpatient environment still wasn't normal. I think when we look at the accounts where we would say, Sam we have nearly 100% share, particularly on elective limb deformity and elective Scoliosis, it's pretty easy to measure that. And we just look at the volume. Total procedures done, revenue generated. We see in a lot of the big accounts and we cite these three places that we're have fixed accounts, but they're also scoli fusion accounts. I mean those accounts where -- we had some accounts that were way off comparatively to prior year. And again it's not -- we didn't lose share in those accounts. And so it isn't normal, but it's better, right. It was better in May and June and April was kind of an enigma for us. It was an odd month all the way around. So no, we're not signaling just, it certainly got better, it still wasn't running kind of full tilt like we would expect it to in the coming quarters.

Got it. Thanks. That's helpful. And then just one on the international Scoliosis. Can you help us think about how big of an impact that could be, how much scale do you think you can have in '24 in international markets with Scoliosis. And should we think about sort of the whole portfolio being launching internationally including ApiFix or is that more just starting with some of the core products and then going from there? Thanks.

Yes. So probably most people don't know probably -- I guess I realize that we essentially sell no Scoliosis products in Europe right now. And we do sell Scoliosis obviously in Australia and South America, Latin America and have a good business there. But the products we had never really launched Scoli. Part of this is related to EU MDR right, and which products and what timing we were going to get EU MDR approval. And so that's why we called that out, as a good pickup Sam that we called this out that there's a number of products in Europe, that --- a number of products in the United States that are very well accepted here in the U.S. that are not sold in Europe, because of pending approval related to EU MDR. And so we don't know the exact timing of where in 2024 the full portfolio would be approved. But it is a growth driver for us certainly as soon as that happens, as well as even into 2025 and 2026 where we have a lot of new products that we will ultimately introduce into our largest markets outside of the United States. Scoliosis just being one. And so I don't know if the impact on the Scoliosis, the overall business next year will be huge for Scoli in Europe. It's certainly going to take some time to build, but it definitely will impact the Scoliosis growth rate next year even if that number's say a few million dollars. Now with respect to ApiFix, outside of the U.S., we've actually pulled in accounts, post-acquisition the ApiFix leadership previous had allowed some people to do some procedures outside of the United States through stocking distributors that we have in fact halted, because we're trying to capture data and want to make sure that, that data is good. So we're a bit in the process of relaunching ApiFix through our Scoliosis strategy. And again, we expect to see a very similar dynamic, right? ApiFix brings customers to our product portfolio. We follow that up with RESPONSE and the full portfolio and kind of pull that through. We expect those dynamics to be similar in major European markets. And again, not huge in 2024, but it will have an impact on the growth rate.

All right. Thanks for taking the questions.

I show no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.