Good morning, and welcome to the OrthoPediatrics Corporation Third Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 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 in evaluating its operations period-over-period. For each non-GAAP financial measure referenced on this call, the company has included a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measures in its earnings release. Please note that the non-GAAP financial measures have limitations of analytical tools and should not be considered in isolation or as substitute towards the pediatrics 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, November 7, 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, and thank you for joining us on our third quarter 2023 conference call. As we start all earnings calls, I’d like to begin by highlighting that we helped nearly 22,000 children in the third quarter of 2023, a new record for OrthoPediatrics. And since inception, we have helped over 692,000 kids, helping more children remains the best measure of our success. Before I continue, I’d like to acknowledge our 14 OP colleagues in Israel, who regardless of situation continue to tirelessly support one another and this company through unimaginable time. In the third quarter of 2023, we generated record quarterly revenue of $40 million, representing growth of 14% compared to the third quarter of 2022 and produced a record adjusted EBITDA of $3.6 million. We are proud of the progress we’re making, balancing strong revenue growth with improving profitability and continued progress towards achieving cash flow breakeven sooner. Our business continues to grow by taking market share in an environment where Children’s Hospitals inpatient surgery volumes remain suppressed. As expected, we continue to see incremental staffing and efficiency improvements, yet these factors remain a headwind. During the quarter, we benefited from the diverse nature of our business as the trauma and deformity and international businesses were very strong, offset by lower growth in scoliosis due to an extremely tough comparable quarter, a decline in international scoliosis revenue due to abnormal ordering patterns from a few large South American distributors and continued procedural headwinds in a few key U.S. accounts that are easing in Q4. With that said our October Scolio performance indicates an extremely positive growth trajectory in Q4 and continued strong performances in T&D and international. Therefore, we are reiterating our revenue guidance for full year 2023 of $148 million to $151 million, representing…

Thanks, Dave. Our third quarter 2023 worldwide revenue of $40.0 million is a new record for us and increased 14.4% compared to the third quarter of 2022. We Growth in the quarter was driven primarily by record Pega performance, strong global trauma growth as well as continued share gains across our legacy portfolio and growth of our non-surgical specialty bracing business. U.S. revenue was $29.4 million, a 10.6% increase from the third quarter of 2022. Growth in the quarter was primarily driven by our Trauma and Deformity product line, including our non-surgical specialty bracing business. We generated total international revenue of $10.6 million, representing growth of 26.2% compared to the third quarter of 2022. Growth in the quarter was driven by strong performance with our T&D products, offset by slower scoliosis sales due to the timing of orders from stocking distributors in South America. In the third quarter of 2023, Trauma and Deformity global revenue of $28.8 million increased 20.6% compared to the prior year period. Growth in the quarter was driven primarily by the share gains across our entire portfolio with strong contributions from Pega, Trauma and OP SB. In the third quarter of 2023 scoliosis revenue of $10.3 million increased 3.3% compared to the prior year period. Growth was primarily driven by the continuation of our strategy of the combined strength of ApiFix, response and 70 placements in the U.S., offset by international weakness driven by timing of set sales to our South American stocking distributors. Finally, Sports Medicine/Other revenue in the third quarter of 2023 was $0.9 million, which decreased 20% compared to the prior year period. Turning to set deployment, $3.9 million of sets were consigned in the third quarter of 2023 compared to $6.4 million in the third quarter of 2022. Year-to-date, we have deployed…

Thanks, Fred. As we look back so far on 2023, we are proud of all that we’ve achieved and are excited about the growing opportunities in front of us next year. We expect positive trends in the business to continue, including robust top line revenue growth and continued profitability growth as we move towards cash flow breakeven even sooner than anticipated. Much of our predicted strength in the upcoming period lies with our recent product portfolio expansion, ApiFix, Orthex and the specialty bracing business that are all producing higher return on invested capital and require less set deployment to drive profitable revenue growth. All of our long-term plans, including profitability growth are supported by our robust balance sheet, strong cash position and access to debt. The future is bright for OrthoPediatrics and we have never been more excited about what lies ahead. In closing, I’d like to thank our surgeon partners, my OP associates and all of the innovators in pediatric healthcare for standing together to help KIDS. Operator, let’s open the call for Q&A.

Thank you. [Operator Instructions] Our first question is from Matthew O’Brien, with Piper Sandler. Please proceed. Matthew O’Brien: Good morning. Thanks for taking the questions. Dave, maybe just first of all, clarification. Just similar growth profile on the top line of 24%, that’s assuming 20%? And then the real question there is, is this commentary about people like exiting the space. Can you just give a little bit more color on that? Is it some of the bigger folks that you’re hearing specifically that are potentially exiting the space? And how big of an opportunity could that be?

Yes. Thanks, Matt. Yes, I think our comments on growth or growth trajectory similar to what we saw in 2023 as we think about 2024. Obviously, we’re not providing guidance at the moment. But yes, you’re right in that kind of range. What we have seen historically, particularly since the advent of EU MDR is more and more companies that have either come to us to potentially acquire some of their smaller pediatric devices because they want to take those to the MDR. And so I guess from my perspective, when you hear companies talking about different asset classes or different product lines that they are not heavily focused on. We obviously know that there is very few people, if any, other than us focused in pediatric trauma limb deformity in particular. And so I guess our forward thinking is that there will be less competitors coming out with devices, particularly in our trauma space and maybe to a certain – to a lesser degree in our limb deformity space. And I think that just hastens our position in terms of taking a dominant market share position going forward. Does that make sense? Matthew O’Brien: Makes total sense. Appreciate that. And then a question for Fred. The profitability number in the quarter was fantastic. I know it’s a seasonally strong quarter for you guys. But the gross margin number specifically was really, really strong. Can you talk about that? And then how we think about the EBITDA progression going forward because you’re up about $4 million this year versus last year. I don’t think we’re going to get that kind of level of improvement next year. But just maybe talk a little bit about that in the free cash flow breakeven sooner. There is a little bit more color you can provide there specifically. Thanks.

Yes. Absolutely, thanks, Matt. Very pleased, obviously, with the gross margin in the quarter. Typically, the higher volume does deliver higher gross margin for us, which we saw here in the third quarter, highest revenue the company has ever delivered, which is our third quarter is always our strongest quarter within the year. And it was nice to see that show up in the gross margin line as well as the adjusted EBITDA line. So very pleased with the profitability. We still think for the year, it’s in the 76% range, gross margin, and that’s probably what we will anticipate next year as well, 75% to 76% higher in the third quarter when the volume is the highest. The adjusted EBITDA, very strong in the quarter and enabled us to increase the full year guidance on adjusted EBITDA up to that $4 million to $5 million this year compared to positive $0.2 million last year. And I would guess we would anticipate seeing some similar type of improvement next year. Again, number one goal is growing the top line. Secondary goal is to improve year-over-year adjusted EBITDA, not maximize it, but to show a nice improvement. And the third is to get to that cash flow breakeven sooner. So that adjusted EBITDA growing, less cash on sets gets us to that cash flow breakeven as we said sooner than we would have anticipated even 12 or 18 months ago. Matthew O’Brien: Got it. Thank you so much.

Thank you. [Operator Instructions] And it comes from the line of Rick Wise, with Stifel. Please proceed.

Hi, good morning to you both. Maybe just to start, you could talk a little bit more, Dave, about the pediatric costal environment. I mean I heard several things about volume trends for specific products. If I heard you correctly, you start to improve or improve as you’re exiting the quarter as you’re heading into the fourth quarter. But have you seen steady month-to-month improvement? Are you seeing staffing recovery? How far away from normal are you? When do we get back to normal usual across the board? A lot in there, but I just wanted to – if you could expand on all that.

You bet. Thanks, Rick. Yes. I mean, certainly, this is still a headwind, and we’re feeling it. As you know, our patients are an inpatient, they are not going to outpatient surgery centers, where I think the environment is better. So this remains a headwind for us. I think we are seeing, as we’ve said in the past, we’re seeing hospitals higher. Obviously, staffs coming together, efficiencies improving. I think we probably haven’t come off our position in thinking that maybe this is a mid-next year type of thing we when we get back to normal. And I would just say that it’s incremental, Rick. I mean, we’re seeing kind of month-to-month, quarter-to-quarter, the lightning of this. We’d like to see some hospitals that we’re running more rooms get back to running all their rooms. I’m not sure that we’re seeing that. And so that depresses some of the volume that we see in our more complex procedures like scoliosis. But it is improving. It’s hard to give you a specific percentage, but I think we’re on a track to certainly within the next 12 months or so getting back to a pretty normal environment.

Got it. And I was hoping you could – you touched on the scoliosis pressures and some of the factors that restrain performance there. But maybe you can help us – maybe you could sort of tie a bow on it, so to speak, and help us understand why you are so optimistic and so confident that that along with the basically excellent performance elsewhere that scoli is going to be better in the fourth quarter and you feel equally I assume constructive about next year. Is it the new products? Is it those three large sites getting back up? What are the biggest factors in your current confidence in improvement there? Thank you.

Yes. So one of the things I think gives me a lot of confidence on the scoli side in the United States, 9% growth, a little lower than we would have thought. But when we look at total new users, we actually added substantial volumes and new users on the Fusion side as well as the ApiFix side, which is kind of odd, obviously, to see our new user base go in a way that it was really positive. But just in general, to see volume slow or be a little bit lower than we thought. When we isolate where that volume comes from, again, this is still a relatively small business at $10 million plus in a quarter. And so we remain impacted by three to five accounts that we haven’t lost any share, but volumes are off. And obviously, you feel that pretty substantially in a quarter in the United States where we – the comparable was a 38% growth number previous year. So we don’t have a lot of those comparables out there that are at that rate. And so we feel pretty good about where we’re going. I also think – well, we have a line of sight, obviously, into Q4. And while December is a big month for us, obviously, it’s the third largest month we have in kind of the second scoli season, we have gotten off to a really, really nice start. And so scoli has been choppy. We’ve said that for a while, but it’s really nice to see here that we got a strong line of sight into Q4 and with the new users. And some of those surgeons that we said have moved accounts started to pick up, and that’s why in the script, we talk about scheduling improving in the back part of Q3. And we expect that to start to become a bit of a tailwind for us as those surgeons have now gotten into their new locations and have started scheduling cases.

Yes. I would add that in addition to that, Rick, on the OUS side, actually, the spine was negative growth, and that was driven because we had 35% growth internationally in the third quarter of last year, driven by set sales to South America that did not repeat here in the third quarter of this year. And again, we have line of sight into what that looks like for the fourth quarter, which has much improved over the third quarter revenue. So feeling confident in both the fourth quarter and next year on that side of the business as well.

Yes, that’s good perspective. I’m going to ask one more this morning. I mean the cash flow question, obviously, it’s great to see the positive progress there. You’re in better at than I expected. You’ve said Fred, that you expect cash flow breakeven. My memory may be wrong, but I feel like you said cash flow breakeven within the next 5 years is why I remember you saying last. You want to update that? It seems like you’re making better progress more quickly. So is it within the next 4 years or 3 or 2? I’ll let you update it. Thank you.

Yes, absolutely, Rick. Yes, you are right. Historically, we would have said in the next 5 years. We’re thinking now it’s probably closer to that 3-year mark as opposed to 5 years based on how we see things, the improvement in the adjusted EBITDA and the reduction in cash usage of the business. So versus 12 or 18 months ago, it’s probably a couple of years sooner than what we were thinking then.

Excellent. Thank you.

Thank, Rick.

Thanks, Rick.

Thank you. [Operator Instructions] It’s from the line of Ryan Zimmerman, with BTIG. Please proceed.

Hey, thanks for taking the questions, guys. I wanted to just ask about kind of the state of the scoliosis market in the U.S. with some of the disruption and consolidation we’ve seen broader in spine. I am wondering if, Dave, you want to just – if you can speak to kind of what you are seeing from surgeons’ interest in ApiFix, especially in the context of maybe some of the other options either being hindered or less focus put on some of the specialized orthopedic products and what that may do for you guys from a user perspective as we think about 2024?

Yes. Thanks Ryan. Good question. So, you really like what we are seeing with ApiFix. In this quarter, we had extremely tough comp. I mean I think we had last year a surgeon that did six cases in a given day with ApiFix, and that was one of the surgeons that’s moved practice locations. So, it’s good to see it grow despite a really tough comp. But I mean we are getting a number of surgeons in historically, maybe a few years ago, who would have been sitting on the sidelines on the ApiFix front, moving towards IRB approval. And those IRB approvals are happening with more frequency, and we are getting through them faster, which is encouraging. So, I think that the likelihood that the way ApiFix develops over the course of the next several quarters is that all of our pediatric surgeons who take care of scoliosis are certainly well trained to place screws in the back of the spine, and I think feel very comfortable there. And so this is an opportunity for literally every surgeon who uses scoliosis products who takes care of AIS to be trained on the ApiFix device and have that within their kind of armor material [ph] when they need to take care of patients with non-fusion patients with scoliosis. And I think that’s a little different than what we see with some of the other solutions. And I think we are going to continue to benefit by being able to have a lot more potential users globally. And maybe fewer sites that are doing 20, 30 a year, but most, every surgeon who takes care of pediatric spine really having ApiFix available to them. And I also think as we start to see better data and we had some nice data that came out of Germany here recently that I think is helping us to gain momentum, helping surgeons understand where to use ApiFix in their practice and what the likely result of that ApiFix procedures are going to be. I think that’s driving interest in the product. And so while we have said that we don’t expect this necessarily to be a hockey stick. I do expect this thing to continue to get more and more traction. And obviously, the combination of ApiFix is pulling us into ORs that we weren’t in otherwise. So, when we say we added new fusion users in this quarter, a lot of that is because of their association with ApiFix or because of their association with 7D. So, really pleased to see it. Again, probably not a hockey stick in the next few quarters, but certainly up and to the right with ApiFix right now as the data gets better and we onboard more and more users.

Got it. Okay. And then Pega sounds like going really well, was that constrained? You talked about maybe a little bit about kind of this opportunity over the coming months to get more sets out there for Pega. Just talk to us about kind of from a capacity standpoint or kind of where you are at in this development and kind of how you think about the broader or maybe longer term opportunity for that Pega business, now that it’s fully integrated and part of Operator?

So, we have been very successful in getting sets out to the field, particularly in the United States. We are now that the agency transitions that occurred outside of the United States. There is a great opportunity for us to start deploying inventory into some of our big agency markets, Germany, in particular, UK, some of these large markets. And Ryan, our expectation is that what we would see internationally in the next few years is what we have seen here in the United States over the last few years, where over the last five quarters, where almost instantly, you get an uptick in revenue because we have such strong representation. But then as you apply inventory and get products to the field that, frankly, a lot of these surgeons haven’t been exposed to in the past, you see increased share taking there and increased revenue. So, really, really like kind of the trajectory of this now that we have got the international business integrated and expect to see really strong growth. Here in the United States, I think this continues to grow for us for the next several years. I mean what we are starting to see is some of the products that maybe were a little further down in the Pega portfolio. The SLIM-Nail, for example, is probably their number two product when we did the acquisition. That is becoming very rapidly adopted for a number of different procedures within the indication profile. And I think that is driving really substantial growth and we expect to see that continue for the next few years. So, in short, we expect this growth profile, while maybe it’s not going to double every year, we do expect this growth profile to be substantially higher than 20%, 25% year-over-year for the next few years. And that’s one of the reasons why we have such confidence going into 2024.

Got it. Very helpful. Thank you.

Thank you. One moment for our next question, please. It’s from the line of Samuel Brodovsky with Truist Securities. Please proceed.

Hey. Thanks for taking my questions. The first one I will ask is just sort of what the implications for 4Q, and it’s a pretty wide range. Can you just give us some levers to what you think could drive it to the high end or the low end of the full year range in 4Q?

Yes, absolutely, Sam. So, as Dave mentioned earlier, this December is our third largest month of the year, particularly in the scoliosis and the severe deformity correction, those big surgeries. And it’s always a wildcard, right. We never know exactly how it’s going to come in. So, that does explain some of the variance in the range depending on how December comes in. The other is RSV. As you recall, RSV was very prevalent last year at this time. It has taken an uptick from where it was in the summer. And so that’s always a wildcard on what that is going to do here in the next 60 days. So, those are two of the main reasons the range is so wide is really the environment more so than anything internal.

Got it. And then just as we think about RSV, there was a bit of an uptick sort of towards the end of 3Q. Did that impact the quarter at all, or was that more typical levels of virus?

Yes. I would say it was typical levels. It was there, right. So, it wasn’t non-existent like it was in the summertime. But I wouldn’t say that it had a major impact negatively on the business in the third quarter.

And shifting to MDO, listed them all out really nice new product cadence here. Is that – I mean I would assume we are probably going to take a step back from that going forward. But how should we think about the new product cadence there and what’s required to drive that towards the $100 million business into the future?

Yes. Good question. So, like I have said, we are really excited. When we acquired MD Orthopedics, part of the reason we did that was to essentially set a platform for what is now the OP SB business or the pediatric specialty bracing business. And in addition to the team at MDO really driving top line and profitability out of our business in Iowa, it has spawned just a number of inventors, surgeons, small companies that have come to us with ideas. And so we have a very robust pipeline of products that we expect to launch over the course of the next several years. We also have a really robust pipeline of potential partnerships and even some small companies that we could acquire over the course of the next few years. So, it is very reminiscent, Sam, of what we all saw when we were here 17 years ago starting this business, the surgical side, where huge unmet need, a customer base that is really looking for a partner in the space, very limited competition in the space. And a number of niche products, right. A lot of these products are $100 million standalone products. But that’s why I think there is fairly limited competition. And it’s an opportunity for us to connect our brand from the majority of what our customer does and trying to avoid taking a kid to the operating room all the way through the operating room. And it helps us execute this strategy of surrounding the pediatric orthopedic surgeon with all the products they need to help kids. And so, so far, we are very pleased with what we see. Obviously, it’s growing very rapidly. And there is just no shortage of opportunities there for us in the future. R&D cycle is slower or is faster. The costs associated with those R&D – that R&D cycle is less, profitability is really strong, and we like the capital usage, right. It doesn’t take a lot of capital to deploy these things. We are not deploying consigned sets in the field. So, there is just a lot to be excited about. And I think we stand behind this that if we can execute and build aggressively strategy here over the course of the next few years, that this will be a really large lever for growth and profitability and ultimately, cash generation.

Samuel, does that answer your question?

Yes. Thank you for taking the questions.

Alright. One moment for our next question, please. Alright. And it comes from the line of Mike Matson with Needham & Company. Please proceed.

Hey guys. This is Joseph on for Mike. I guess the first one, I may have missed it on the call, but did you guys mention any plans, I guess in 2024 for converting international stocking distributors to agents?

No, we did not talk about that for ‘23 or ‘24 to be honest with you. So, the last time we have converted one of those is a couple of years ago was Germany. But there are no plans for any major conversions on the international side. It’s just continuing to grow the ones that we have right now.

Yes. Okay. Perfect. And then maybe could we get just an update on 7D, maybe how big is the installed base now?

Yes. So, a couple more units, I believe a couple of more units were placed in the quarter installed base. Fred, can you help me here, installed base, we have about 15 units or so. Is that right?

Yes, probably a little less than that right now. Between sold and placed, it’s probably in that range, but consigned, it’s probably 10-ish, 8 units to 10 units.

Yes. And I think at this stage, what units aren’t officially placed or consigned are currently in some form of evaluation. So, we continue to see new users in the process of evaluating 7D and feel really good. We have a deep pipeline right now of locations where we expect 7D to be placed. It’s just as we have said in the past, these things, even the consignment of these things take some time, but really pleased with what we are seeing. And the technology is fantastic. It’s ideal for pediatric scoliosis. And it’s certainly something that we think is going to impact us positively in 2024, especially as you think about the units that were placed in 2023 on earn outs.

Okay. Great. Thanks very much. Yes. I will just do those two questions. I appreciate your guys’ comments on the quarter.

You bet. Thank you.

Thank you. And with that, we think you all who have participated in the Q&A. I will turn it back to David Bailey for final remarks.

Thank you. Well, once again, thank you everybody for joining us on the call. Fred and I are always available. And so we look forward to seeing you at some upcoming conferences or on the conference calls. Thank you.

Thank you all for joining. You may now disconnect.