Hello, and welcome to OrthoPediatrics Corporation fourth quarter and full year 2024 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. 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 upcoming annual report on Form 10-K which will be filed with the SEC on March 5, 2025. 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 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 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, March 4, 2025. Except as required by law, the company undertakes no obligation to revise or update any statement to reflect events or circumstances taking place after the date of this call. With that, I'd 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 fourth quarter 2024 conference call. As always, I'd like to start by reporting the metric which most clearly defines our continued success and in which we are most proud. During the fourth quarter, we helped more than 34,000 kids and over 138,000 kids for the full year. Both record highs for OrthoPediatrics. Now having completed our eighteenth year at OrthoPediatrics, and having helped over 1,140,000 kids, my associates and I recognize the positive impact our company has had on so many children and their families. We take our responsibility very seriously. Our customers and all healthcare providers in the pediatric space have been forced to make do with less than ideal options for children. We will do everything in our power to right that wrong. While eighteen years have passed since our inception, in many ways, OP is just getting started. Our resolve to be a company that eventually helps one million kids every year has never been greater. During our journey, we have established OrthoPediatrics as the clear-cut market leader in pediatric orthopedic implants, and we anticipate our continued execution will lead to a dominant market share position in trauma and deformity correction and scoliosis implants in the coming five years. In the last few years, we have established ourselves as a leader in pediatric specialty bracing with our OPSB franchise. On top of deepening our commitment to the field and meeting more of the needs of our customers, this expansion of our business enables OrthoPediatrics to grow in a more capital-efficient way. In the coming several years, we plan to execute our clear-cut strategy to obtain market dominance in this very large $500 million marketplace. Given the OPSB business is generating a higher contribution margin…

Thanks, Dave. Before giving more details on our financial results, I wanted to reiterate that through our continued execution, we have established OrthoPediatrics as a high-quality, and differentiated asset with the demonstrated ability to scale growth increase operating leverage, which provides a clear path to free cash positivity and we are supported by a very strong balance sheet. That said, we made some very difficult yet very strategic decisions in the quarter that we expect to support our commitment to growth, profitability, and improved cash usage. You will notice some one-time charges on the P&L. The $3.7 million restructuring charge is primarily due to the closure of our OP Israel office, which was the former AphiFix headquarters. We have decided to move production out of Israel and into the US to reduce supply risk and to consolidate the management of the ApiFix product line into our Warsaw operation. These difficult decisions are a component of our continued focus on delivering improved adjusted EBITDA and demonstrate that adjusted EBITDA improvements and reduced cash usage are top priorities for the company. Additionally, as you will see from our results, during the quarter, our gross profit margin profile has shifted slightly. As we continue to integrate Boston O&P, we are growing the OPSB business launching this new strategy, and working through the process, we are learning and have adjusted certain expenses out of general and administrative expenses into cost of goods sold. As a result, we saw a negative impact on the gross margin profile of OPSB and our overall gross margin for the quarter. I wanted to be clear. This does not impact our profitability. And giving our growing channel in OPSB, we will not shun lower gross margin distribution opportunities that leverage our fixed costs and improve overall profitability. We've made…

Thanks, Fred. We are encouraged by how we ended the year and have already seen that momentum begin to carry into 2025. Our success in 2025 and beyond is driven by three main factors. Execution and scaling of OPSB, share taking across the business by leveraging prior set deployment, and ongoing success of our innovative product launches. The aggressive approach we have taken to this business and the opportunity ahead of us over the next three to five years is very exciting. We are extremely proud that we've continued delivering strong performances especially within this med tech market. Quarter over quarter, and year over year. And we do not plan for this to change moving forward. We will continue to help more children than ever. Capture more share across the entire business as we continue to break revenue records, grow our adjusted EBITDA, and improve cash usage in 2025 and beyond. Operator, let's open the call for Q&A. Thank you.

Thank you so much. And as a reminder to our audience to ask a question, simply press star one one on your telephone and wait for your name to be announced. To remove yourself, press star one one again. Our first question is from Ryan Zimmerman with BTIG. Please proceed.

Thanks for taking our questions, guys. Appreciate it. Did I start with guidance a little bit. I know you don't guide by segment, but maybe you could help us kinda how you're thinking about, you know, some of the contributions here you know, in each of the buckets of the businesses. It sounds like you know, certainly the OUS business with the addition of EU MDR clearance, could step up a little bit in twenty five. I'd appreciate any color you have there. And then just I'll ask the second question upfront too, which is just around seasonality and pacing. Through the year. I mean, we know, you know, kids tend to get their surgeries know, second quarter, third quarter during the summer in between school. But you've had some fluctuations, I guess. Know, between the fourth quarter, the first quarter, to you know, seasonal dynamics, flu, RSV, etcetera. So any any color there, I think, would certainly be appreciated as well. For taking the questions, Scott.

Yeah. Thanks, Ryan. So I think from a seasonal perspective, maybe I'll take this one first. I think that, you know, likely to see consistency, consistent seasonality of the business, the way we've seen it in the past with kinda June, July, August still being our biggest months. December, obviously, a big month for us as well as school as kids get out. It is possible that over the course of, you know, the next several years as OPSB continues to grow that some of that seasonality could maybe level out a little bit. But I think that, you know, normally see our first quarter a slight step down from Q4 of the previous year. And then we scale into Q2 as the or Q2 and Q3 as the summer season continues to grow. I think you're you're spot on in terms of the impact EU MDR can have on the business. You know, it's not a panacea right away. Obviously, we've gotta get sets built and we gotta get sets sold to distributors and sets into the market when we get approved. But, certainly, it should have a positive impact in 2025 and and probably more of an impact even in 2026 and 2027. I think that's thing to call out there is that we're seeing really strong growth of our scoliosis franchise in Europe. And that's really with only one of the systems available. So our 5560 Response Fusion system. So as we can bring a full product portfolio to Europe on the fusion side, I think we're gonna continue to see that business grow. And, you know, that that starts to negate some of the reliance that we've historically had on scoliosis OUS in Brazil and some of the South American markets where it's primarily been our our large opportunities outside of the United States up in up until recently. As you think about trauma, deformity, and scoliosis here in the United States and, I guess, around the world, generally speaking, you know, as you said, we don't generally guide specifically there, but you know, I think you could expect to see scoliosis smaller business continue to grow a little bit faster than the trauma and deformity business. Obviously, much larger business on the T&D side and and greater market share. And I think that's probably what you'll see again here in 2025.

Okay. Very helpful, Dave. Appreciate the color. I'll hop back in queue.

Sounds good. Thank you.

Our next question comes from the line of Rick Wise with Stifel. Please proceed.

Good afternoon, Dave. Hi, Fred. So much to unpack here that's intriguing. Maybe talking about a couple other opportunities. It seems like the business has tremendous momentum as you're talking about them. The US numbers would suggest. But maybe maybe start with the OPS you know, OPSB. You know, just just you're you're saying strategic rationale playing out. The funnel is full. For new territories. Help us think through talk through it more maybe a little more detail, Dave, the pipeline, new opportunities, the licensing. How's that what have you assumed in twenty five? When you know, how do we translate that into thinking about growth or outlook or time of year or do we see it in twenty five? Just help us think through that opportunity.

Sure. Good question, Rick. So obviously, you know, when I talk about the three main things that we have to do to continue to really grow the business twenty twenty five and beyond, you know, scaling OPSB is at the top of that list. And I think you know, this time last year, obviously, we had just completed the acquisition of Boston, and, you know, we're just really starting our the journey of scaling LPSD. And, you know, when I look at that now a year later, I think everything we thought Boston could be and the scaling of planet and the addition of products, has come true. And I think, you know, we're looking at a $500 million TAM that's easily accessible with less capital. Frankly, than the consignment model of our our implant business. And that's know, that was the thesis that we could scale into this. And I think we have throughout the year, and I think it's gonna be a big part of twenty twenty five and beyond. What we've learned, I guess, in in our customers are certainly interested in in more clinics, more products. It's clearly a very underserved segment of the pediatric orthopedic orthopedic marketplace, and it has a ton of synergies with our implant business. So I think that the implant business is in part growing because the OPSB franchise is growing and, you know, the brand of OrthoPediatrics and its importance in the mind of our customers is growing as well. I guess, when you think about clinics, I mean, our aspiration is to have four new territories as we call out in the analyst day and and we're sticking to that. It does seem like we've got enough in the funnel that know, it's possible that we could go to…

Yeah. That's great. Thanks for all the detail. And, Fred, turning to gross margin again, I totally get what you're saying. And the first thing I looked at was to see whether your adjusted EBITDA would change, and I see it's it's unchanged. So you can you know, so I I get it. But help me understand. It it You you had said the seventy four or seventy five range before you made this adjustment. Was flat. You said it again tonight. But it just strikes me, you know, with all these new products launching, your gain share, and I reflect on the Israeli closure, I get the reasons for doing it. Wouldn't that be positive as you consolidate manufacturing and run more volume through Warsaw? I mean, so I guess my real question is, help us think through some of the moving pieces on on the gross COGS line, gross margin, or whatever you wanna say. And is there room for upside as we go through the year? The the European products are approved. You know, it just seems like there should be there there is room for upside as we head toward the end of the year and maybe start thinking about twenty six. Thank you.

Thanks, Rick. Great question. And, you know, I would say we are hesitant to get ahead of ourselves. But we do agree that there, may be some opportunities that we're working on in that area. As we've talked in the past, a little bit of selling price always helps in that area. And so we'll continue that trend. There is some consolidation, which could help show up as favorable gross margin. And then there's some other activities that we are, I think, refocused on this year that maybe we hadn't been as focused on in the past. That could definitely, over the next several years, have a favorable impact on the gross margin rate. So I think we're being conservative, keeping our guidance flat as it was before. But I would say we have a renewed focus in this area to to make some improvements there.

Alright, Fred. You you you teased me. I gotta ask Other activities? Help me understand. Thank you.

We're we're reviewing all of the line items. We're reviewing all of the line items that go into our cost of goods sold and looking for opportunities to leverage that just like we're leveraging the the S G&A down below.

Gotcha. Thank you.

Thanks, Rick.

Thank you. Our next question comes from the line of Matthew O'Brien with Piper Sandler. Please proceed.

Good evening. Thanks for taking my questions. Maybe to follow-up on Rick's question on OPSB. Did you guys I think you had mentioned doing better than twenty five million in sales in twenty four. Did you do that? Are we still expecting north of twenty percent growth out of that business here in twenty five? And then just a little bit more specifics on things are going better than expected. Dave, is it really just going deeper in the existing existing facilities that you have or just that you're ramping the the new ones faster than you expected or I don't know if it's cost or something else, but just any kinda you know, detail there would be helpful, and then I do have a follow-up.

Yeah. Perfect. So I think it's safe to say that OPSB across the board, not just Boston, but OPSB across the board, MDO, DF2, the products associated with that or a medical, as well as the clinic expansion is is growing rapidly. And, yes, I think it will definitely be growing north of twenty percent in twenty twenty five. And and so we see that growing north of twenty percent for a long time, frankly. So we we got a long way to go as we as we scale that business. I think when we see things going better than expected, the volume of opportunities for clinic expansion is extremely high. It it takes time. Some of those, as we said, are gonna be AquaHire, where we've gotta get a footprint in a big market that we have no clinics in currently, but the opportunities and profitable opportunities for us are very high. Insurgent demand for that service as well as the products is very high. And so, you know, again, we thought that was what we were gonna see. When we announced this acquisition a year ago, and at this stage, I would say the demand for what we are offering is higher than I would have expected at this time. And then devices like DF2, are going better than we we expected. I I see the demand for that product as very high. I mean, we're now seeking alternative manufacturing sources, we make it in our in our facility in Boston and we're gonna have to continue to be able to scale the manufacturing of it there in Boston I wanna say, thirty plus countries now that the DF2 product is approved. So the thesis that we can get these products approved outside of the United States much faster than our implant products and that there is huge demand outside of the United States is certainly an accurate thesis, and and so know, we've gotta be able to scale manufacturing of those devices such that we can meet demand out outside of the US. But I can just say that the the the surgeon demand for that device. Here in the US Again, still small, but maybe greater than we would expect. We have several more devices that I'm not saying are all home runs like that one, but several more devices on the R&D side. That we're close to launching. Working with a number of surgeons on, and I would think that you're gonna see similar kinds of impact from those devices on the OPSD business overall.

Okay. Okay. That's, I guess, a good problem to have on the manufacturing side. And then question for Fred. Just as I look at the instrument set deployments, that you've done over the last couple of years, I think it was twenty three and then twenty, and now we're down to fifteen. Know you have a more capital efficient model now with OPSD, but, you know, the the legacy trauma and and spine businesses are doing really well. Are you gonna run the risk of starving those businesses a little bit in the near term, and we're gonna need another big bump as far as as far as set deployments go in twenty six twenty seven? Or is this more of a steady state in terms of how much you really need to be deploying in order to grow the business is still at a very healthy clip.

Yeah. It's a great question. It's a question we spend time analyzing ourself. We think fifteen is the right number for twenty twenty six. I think the good news is a lot a higher percentage of that is really for new products. As opposed to legacy products. So we're really excited about that. And the impact that that's gonna have on our overall business and growth in twenty seven and beyond. In twenty twenty seven, what is the right number that we'll deploy hasn't been determined yet. We'll see what the demand is both for legacy systems as well as new products. Again, I would expect twenty seven, twenty six and twenty seven to be highly concentrated on the new product launches, given all the launches coming up that we have in twenty five, twenty six, and twenty seven. So I would say that we haven't made that determination yet. But it you we will be confident in saying that it's gonna highly focused on our new products being launched.

Yeah. I I think it's safe to say we're not gonna starve those business particularly when we see products like PNP Tibia that have you know, relatively high ASPs, fantastic margin I mean, the business that product line, I think we told you, you know, we achieved this year's revenue in May. So, both of that device is obviously growing and we're gonna support that. I just I think what we've seen over the course of the last several years, Matt, and you know the our story well, but know, when we were deploying three to five million dollars worth of inventory for several years, as primarily legacy products, You know, we've probably entered near the end of the need to deploy a lot of those legacy products. And as Fred said, You know? These are primarily new product development and the numbers will shift as we have really know, compelling new products like PNP tibia and and some of the other devices. But when you also think about the out years of our growth, particularly on the Scully side, Certainly, a new scoliosis system coming soon that we've talked about. But also EOS products. And EOS products, as you know, very high ASP. They're all scheduled procedures. And so, you know, we're fine tooth to nail on the regulatory side. But when you get through that, these aren't set deployment needs that are massive for us to be able to grow our top line, particularly on the scoliosis side and with some of these highly differentiated trauma implants. And I think that's what you're seeing with with the move down a little bit on the on the implant side of deployment. And again, as as we as demand dictates for some of these more differentiated products, you know, that'll change from time to time. But I think think we're gonna be able to sweat our assets in a way that's gonna allow us to not have to deploy as much in the future.

Very helpful. Thank you.

Thank you.

Our next question is from the line of Mike Matteo with Needham and Company. Please proceed.

Hey, guys. It's Joe on for Mike. Thanks for taking our questions. Maybe to start it off, just wanted to see if we could get an update I guess the first one on on Playbook, the enabling technology soft. Where just kinda curious, you know, how that business is going. You know, any milestones there. And then the the new fusion implant system is that still on track to launch in second half of this year?

Yeah. Good question. So playbook was, I think, officially launched to the sales team at our sales meeting here about a month ago. And so the device the the product is we're very pleased with the the way the product looks, and certainly it's a process to get those products implemented inside inside hospital systems. But I think we've made really nice progress on on playbook on enabling tech side. And, you know, just from a revenue perspective, it's a business that we you know, we haven't forecasted a ton of revenue in twenty twenty five. We see that as contributing to driving revenue in our trauma deforming business and in our scoliosis business, and then driving more substantial revenue as a standalone play in twenty twenty six, twenty twenty seven, and beyond. But extremely pleased with with with where it's at. And it created a heck of a lot of buzz at our sales meeting, which was which was very encouraging. And on fusion. Oh, on on fusion. So yeah. Fusion product development, we on track. And I think you know, the goal would be to try to get some surgeries done by the end of twenty twenty five. Here in the United States. But again, not something that we have placed in the twenty twenty five forecast in terms of revenue. And so, you know, we're gonna make certain that we get the device the device right it's everything we want it to be. We know, the fusion business as it stands with response is growing very rapidly now. So we're we're not you know, we don't have to rush things certainly to get that device on the market.

Okay. Great. And then maybe just one more. On seventy, It seems like you know, three Q in in the in this quarter, four Q were pretty strong. It seems like that's ramping up. I guess just looking at twenty twenty five, do you guys kinda see this as more of an inflection for for seventy placements, or is it maybe just a little longer, maybe twenty twenty six, it's more meaningful driver.

Well, I think seven D is a driver right with a driver for us in the second half of the year. So you're seeing a response fusion business and just our scoliosis business, particularly in the United States, accelerating growth on a much larger business. And and again, that's one of the reasons why while we wanna get the new system out, we're driving a heck of a lot of growth with our existing system in conjunction with with seven D. So I think we're already starting to see the impact of that as we've placed seventy units in in accounts that historically haven't been large users of our fusion products. And so that's impacting Q3, Q4 revenue and and fact, we'll have a pretty substantial impact, and I think why you see us so confident in our growth on the scoliosis side in twenty twenty five and twenty twenty six because a lot of that is connected to seven D placement. I think we've learned a lot about just capital placement in general. As you know, you know, just a few years ago, we had no experience in this space. And so our capacity to to build a funnel and to see these things come through the funnel in a more consistent way quarter to quarter to quarter, I think has that's a muscle that we have built. And I I guess, I have to credit the enabling technologies team that while we're also working on playbook and technologies like that, it's been a huge help to us to be able to, you know, develop a muscle to get involved in capital placement and capital equipment sales. And so I think you're gonna see in twenty twenty five consistent placements quarter to quarter to quarter of of seven D units that will impact revenue on the scoliosis side both in twenty twenty five and for the term of those contracts, which are normally three years. So it becomes a bit of a a compounding effect as we place more and more of these units.

Alright. Perfect. Much appreciated. Congrats on the great quarter.

Yeah. Thanks. Thanks.

Thank you. And we have a question from Ryan Zimmerman from BTIG. Please proceed.

Just a high-level question follow-up for me, Dave. For you, know, there's there's just been a lot of chatter about Medicaid coverage in in the news lately. Right? And and and, you know, potentially removing that. I think you know, it's like thinking about CHIPS and Medicaid. I think it covers something like thirty seven million kids. In the US. And so you know, I don't know what your thought is on it, if you have a thought, but you know, I have to imagine your customers are thinking about it. How they're thinking about positioning for it, and and how you think about it in terms of you know, potentially impacting the business? I just want to kinda Yep. Pick your brain on it a little bit if I could.

Yeah. Well, certainly not a topic that anyone can give you a definitive answer on as you know. But, you know, it's obviously something we're watching you know, I'm not sure exactly how that in been how that how that impacts the business as we go forward. Obviously, we're not certain that it it is going to impact it at all. That said, I think our our feeling here is that we really struggle with the concept that that children will be left without any form of health care. And if you look at the makeup of our customer base, so much of our customers are current so many of our customers are currently in systems where know, they're they're endowed hospitals or there are hospitals like Shriners Hospitals, for example, that certainly take what Medicaid or private insurance might might pay, but are still offering care based on based on their based on their endowment. So think there is some shielding that we would have of that, and think when push comes to shove, it seems very difficult that we are gonna you know, allow kids in this country who have cerebral palsy or congenital deformities to not have appropriate access to to the kinds of devices that they need in the hospital to to live a normal life. And I think, you know, all of our devices have a very, very rational impact on the total cost of care. Right? And so if we can impact positively these patients, in the operating room that then ultimately lowers their care to to Medicaid thereafter, again, it's hard to imagine that that those devices wouldn't be readily available to to our customers, but again, it's anybody's guess at this stage, and we have not we we can't formulate exactly, you know, what potential impact here, but I think it's I guess we aren't betting that this is a major impact on our business on a go forward basis.

Yeah. No. Makes makes sense, and I appreciate your thought on it, Dave.

Thank you. And this concludes our Q&A session for today. I will turn it back to Dave Bailey for final comments.

Great. Thanks, operator, and thank you everybody who joined our call this evening. And appreciate your questions and we'll look forward to giving you a business update in the coming quarter. Have a great evening.

And thank you all for participating, and you may now disconnect.