Hello, and welcome to Treace Medical Concepts Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there would be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Vivian Cervantes of Investor Relations. You may begin.

Good afternoon everyone, and welcome to our fourth quarter 2022 earnings conference call. Participating from the company today will be John Treace, Chief Executive Officer; and Mark Hair, Chief Financial Officer. During the call, we will offer commentary on our commercial activity and review our fourth quarter financial results released after the close of the market today, after which, we will host a question-and-answer session. The press release can be found in the Investor Relations section of our website at investors.treace.com. This call is being recorded and will be archived in the Investors section of our website. Before we begin, we would like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends, as well as our estimated results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information, and Treace assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. Please refer to our SEC filings, including our Form 10-K for the full-year 2022 to be filed on March 8, 2023, for a detailed presentation of risks. With that, I now turn the call over to John.

Thank you, Vivian. Good afternoon, everyone, and thank you for joining us on our fourth quarter 2022 earnings conference call. 2022 was another great year of growth and execution at Treace. At the beginning of the year, we strategically increased investments into proven business strategies, namely growing our direct bunion-focused sales channel, increasing investments into our patient awareness DTC initiatives, and making targeted R&D investments in Lapiplasty innovations, as well as in our expanding suite of complementary products. These investments resulted in strong revenue growth of 50% over 2021 and realized continued gains in our key operating metrics. Our operations continued to scale through 2022, ending our seasonally strong fourth quarter with positive adjusted EBITDA. We are proud of the progress we've made and believe we've built a strong foundation that will continue to fuel our growth over the coming years. Before I go into details about the quarter and year, let's start out with our market summary on where we stand today. Our disruptive Lapiplasty solution was specifically developed to correct the root cause of the bunion and address a large and underserved market. We've identified an addressable $5 billion plus U.S. market of 1.1 million annual surgical candidates of which only 450,000 undergo bunion surgery each year, which we believe is mainly due to limitations associated with current standards of care. As of the fourth quarter of 2022, we have penetrated approximately 5.5% of the estimated 450,000 annual bunion surgical procedures in the U.S., up from 3.8% in the fourth quarter of 2021 and reflecting approximately 2.2% market penetration of the 1.1 million annual U.S. surgical candidates that constitute our $5 billion plus total addressable market. Turning to our Q4 and full-year results. Revenue in the fourth quarter was 49.8 million, representing 49% growth over the fourth quarter…

Thank you, John. Good afternoon, everyone. Revenue in the fourth quarter was $49.8 million, up $16.3 million and 49% over the prior year. Growth was driven by increases in procedure volumes and an increase in blended average selling price, due to adoption of our newer complementary technologies. Our seasonally strong fourth quarter revenue increased 51% sequentially over Q3. In the fourth quarter 2022, the number of active surgeons performing at least one case in the trailing 12-months increased 34% year-over-year to 2,387 surgeons, which translates to approximately 24% penetration of the estimated 10,000 surgeons in the U.S. who perform bunion procedures. Surgeon utilization increased to an average of 10.3 Lapiplasty kits purchased in the trailing 12-months, up from an average of [9.8] [ph] a year ago. We are pleased with this notable increase. As a reminder, we commercialized Lapiplasty seven years ago. And in the past two years alone, we've added 1,112 active surgeons, nearly half of our total active surgeon base. On the average, this growing number of active surgeons steadily increase utilization each year they use Lapiplasty, due to positive patient outcomes and expanding indications in their practices. We sold 8,426 Lapiplasty procedure kits in the fourth quarter, a 35% increase versus the prior year's fourth quarter. Blended average selling price in the fourth quarter was $5,907, a 10% increase over the fourth quarter in 2021, driven by the adoption of our Lapiplasty and Adductoplasty systems, as well as early impact from our newer technologies, our S4A plating kit, SpeedRelease, and TriTome instruments. We continue to see greater uptake of our other complementary forefoot products as we add direct sales reps who tend to focus more on selling these complementary products, while in Lapiplasty cases, displacing other competitive bunions-related forefoot products. For the full-year 2022, revenue was $141.8…

Thank you. [Operator Instructions] Our first question comes from the line of Robbie Marcus with JPMorgan. Your line is open.

Great. Start with congratulations again on a great quarter and a good guide. Maybe we could talk about the trends that are informing the guide here. You're clearly adding a lot of reps, your revenue per procedure continues to grow up. Maybe speak to just how you think about the key drivers of the guide, and any color you want to give us on how to think about the growth between the volumes versus the revenue per procedure?

Thanks, Robbie. Great question. As John mentioned in the prepared remarks, we feel really encouraged by the strength and the momentum that we experienced in the back half of last year. We had really strong growth in both third quarter and then again in the fourth quarter. And we believe a lot of this has been driven by the investments that we've been making throughout the full-year of last year. Namely, it's really that growing and building direct sales channel, which we believe is already beginning to have some dividends that we've experienced and they've been able to push through some of the headwinds that we've had historically. So, that's one of our primary drivers. The other thing that we're looking for and then as we talked about, there'll be enhanced DTC and patient awareness efforts. We think that now that we've got a larger surgeon base that it's the right time to continue to invest in patient awareness. Now that we've got more surgeons and a sales force to support those additional inquiries.

And I feel like I know the answer here, but I’ll still ask it anyways given the growth you're seeing and the growth you're expecting, but it's a very large underpenetrated market for instrumented procedures. There are a lot of companies going after it. Maybe just give us a sense of what you're seeing out in the field? Are there any products or companies you're losing accounts to? And what's the competitive message that your reps are putting out there to keep the growth engine going? Thanks a lot.

Hi, Robbie, John. Thanks for the question. And yes, we kind of go back to the fundamentals here that our number 1 competitors we see it is the osteotomy procedure. It's 70% of the procedure base and changing the mindsets of these surgeons to using Lapiplasty for the majority of their bunion cases versus the minorities. That's where we really focused our efforts with our surgeon education programs or direct sales force and even the patient awareness side comes into play there. So, it's converting that procedure not a company's product specifically that we're after. And that's what's been the underlying growth driver of this business for the past seven years. And we're going to continue to focus. That said, there are a few companies on the market and more are entering with products claiming to be like Lapiplasty. We haven't really seen a notable increase in the pressure or impact on us from those companies or products As we know, the market is really large over 5 billion and we're just way out ahead of everybody. We've always expected that these companies would try to come along and opportunistically get a piece of the market that we pioneered and developed here. And in some ways, these companies coming to market are sort of validating us. But keep in mind that these products are coming from companies that have multiple product lines, highly distracted sales forces, large bags of products to sell, of which this Lapiplasty like product is just yet another. And with over seven years of use in refinement, Lapiplasty is just so elegant and reproducible at the doctor patient interface, how it works and it's protected by a lot of patents. We have a tremendous patent portfolio, 40 issued patents And then we're constantly iterating the technology, making it faster, easier for the surgeon and ways to make it a quicker recovery for the patient. So, nobody's out there with that level of commitment to iterating, improving and modifying rapidly. But the other barriers we have are just beyond that and the IP and the product innovation, are beachhead of clinical data that keeps getting stronger and stronger, the bunion focused direct sales channel, our powerful surgeon and patient training programs. While these serve as really great, offensive drivers of our business, they offer the service great defensive barriers as well. So, I kind of long answered your question, but I think for these multi-line distracted companies, it’s really hard to compete with a rapidly innovating, highly focused company with a first-mover advantage that's so far out ahead like we are.

That's really helpful. Appreciate the color.

Thank you. Please stand by for our next question. Our next question comes from the line of Drew Ranieri with Morgan Stanley. Your line is open.

Hi, thanks for taking the questions and congrats on the great quarter and guide. Maybe just another guidance question to start, but as you are thinking about the guidance build for this year, can you maybe just help us, kind of parse out how you're thinking about the maturing surgeon base versus utilization improvement? I mean, you're already at around 10% penetrated for surgeons, but just maybe how are you kind of thinking about those factors in the guide and that this is really going to be a year where all those mature active surgeons that you've added over the past two years really kind of move up the utilization curve?

Andrew, this is Mark. Great question and thanks for joining us. We've previously commented that a lot of our revenue growth year-over-year is not purely from new surgeons, but from the increased utilization of our existing surgeon base. And so, we've been really pleased with and in my prepared remarks, I commented on nearly half of our active surgeons have come over the last two years. What we do believe though is that there is an incremental build of utilization year-after-year. It doesn't come exclusively in year two or exclusively in year three. So, we believe that a lot of the patterns that we've seen year-after-year will continue to hold true as we continue and plan to add new surgeons this year in 2023 as well. And our existing surgeon base will continue to move up that chain and have increased utilization on average. We have commented that in the most recent 12-month period that new surgeons have been adopting Lapiplasty at a faster rate than they ever have before. So, we believe that the surgeons who are coming to our labs getting trained, they're very interested in adopting Lapiplasty and the data is proving out that when they do become a customer, they're actually doing more cases than the average shows and what more than what we've had historically. So, all of this builds into our revenue build for the guidance number that we gave. So, we feel really good about this strong surgeon base. We plan on adding more and now we've got that direct sales channel to support all of these surgeons in their journey.

Got it. Thanks. And maybe just a couple other financial questions too. Just as we do think about the seasonality from 4Q to 1Q, Mark, I get your comment that this past first quarter was – had the benefit from recapturing some of the COVID procedures, [indiscernible] should we be – just maybe help us put a finer bow on maybe the sequential step down? And then second, can you help us a little bit more with OpEx for the year, just in terms of your revenue growth rate? Thanks for taking the questions.

Yes, thanks Drew. So, I wanted to comment in the remarks that there was a little bit of an anomaly. We're glad that we're not talking about or making references to COVID anymore, but wanted to just bring to everyone's memory that Q1 of 2022 did have some benefit from some rescheduled cases. So, historically and if you adjust for some of those – some of the benefit in Q1, the last couple of years we've had a step down and so Q1 has been roughly about 80% of the revenue, plus or minus, but around 80% of revenue in Q4. So, that's a very normal step down. That's what we experienced last year. If you adjust the revenue out of Q1 and kind of push it back into Q4, that would have been the same. So, we would expect something very similar to that as we come into 2023. Overall, you asked a question about the OpEx and we're going to continue to invest in the company. John outlined several things that we will continue to do. We're continuing to build the sales channel. We'll continue to invest in R&D and we will have some incremental investments in our DTC program. So, there will be some build, but overall, there'll be some improved leverage in 2023 versus 2022.

Thanks for taking the questions.

Thank you. [Operator Instructions] Please standby for our next question. Our next question comes from the line of Ryan Zimmerman with BTIG. Your line is open.

Good afternoon. Thanks for taking the questions and congrats on all the growth and everything as said before. Sitting here at the American Academy of Orthopaedic Surgeons, thinking about, kind of who your marginal customer is. Now, I know it's not the general [orthopod] [ph] that's going to necessarily pick up a Lapiplasty kit, but as we think about the 1.1 million potential bunion surgeries out there versus those that are having the 450,000, how do you think about that 450,000 growing over the next few years. What's it going to take? Is it more DTC? Just, John, your thoughts on general market growth and what moves the needle from actual surgery to penetrate more of those candidates?

Hi, Ryan. Good to hear from you and thanks for the question. Yes. So, I think if you look at all the kind of standard market reports that companies can acquire out there, they would typically show the bunion procedure base growing at 3% to 4% maybe for the next five years. That's my recollection. How we try to expand that is obviously through our DTC and patient awareness efforts and investments. If we can get to those fence sitting patients with our DTC messages, with our stronger clinical evidence, and communicate that there is a better procedure now, a better offering than there was in the past, that recurrence rates can be much lower than they were in the past that you can get back to bearing weight and back to your activities at a predictable time, then we think that can resonate. We think that can bring some of these fence sitting patients over the fence and connecting with our doctors maybe for a consultation through our website about Lapiplasty. So, I think in the coming years that's our project. We're going to try to work to expand our relative portion into the 1.1 million as best we can. And yes, that's where we'll put our efforts.

Fair enough, John, I know it's not an easy question and there's no magic silver bullet, I guess, but appreciate the commentary. And then the second question is just around complementary products. I mean, they are so important for you guys. As we think about the model and the move higher in ASPs, I'm wondering if you can kind of help us understand what the [indiscernible] 39:05 rates are as you think about them today for your key, kind of complementary products and where you think you can take that over time or where we should think about that going over time? Thank you for taking my questions.

Sure, sure. So, the complementary products, definitely a great part of our strategy. And most of our complementary products are all aimed at improving the outcomes for these bunion patients. We got Adductoplasty because we recognized people with that midfoot deformity didn't get as good and enduring correction or lasting correction with their bunion procedure if you didn't fix the midfoot. So, these are all really tied together. So, the attachment rate I think kind of goes hand-in-hand. If a surgeon is doing an ductile procedure, 99% of the time they're going to be doing a Lapiplasty as well. Our SpeedRelease instrument is another excellent example of an instrument that can make the great [toe tissue] [ph] release [indiscernible] release much easier, more predictable for the surgeon. And this occurs in over 95% of our Lapiplasty cases. So, attachment rate can be very, very high there once we get a doctor trained on it and they implement it in their practice. Other things like the S4A plates, not really complementary, but heavy conversion going on right now out in the field to doctors wanting to use that next generation more advanced plating geometry on their patients and [so planning] [ph] earlier versions of our plating with that. And then, of course, in the back half later this year, we'll be releasing the micro Lapiplasty and the SpeedPlate technologies and I think SpeedPlate is going to be a really neat technology platform for us. It's going to be used in a variety of Lapiplasty and other midfoot cases as well.

Great. Thanks, John.

Sure. Thank you.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back to Vivian for closing remarks.

Thank you, [Twanda] [ph]. Thanks everyone for joining us today on behalf of Treace Medical. This concludes our call and we look forward to our next update following the close first quarter 2023.

Thank you. You may now disconnect.