Good day, and thank you for standing by. Welcome to the Treace Medical First Quarter 2023 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Vivian Cervantes, Investor Relations at Gilmartin Group. Please go ahead.

Thanks, Teresa. Good afternoon, everyone, and welcome to our first quarter 2023 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 first quarter financial results released after the close of the market today, after which we will host a question-and-answer session. The press release and supplemental materials 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 other 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-Q for the first quarter to be filed tomorrow and our Form 10-K for full year 2022 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 thanks for joining us on our first quarter 2023 earnings conference call. Before we begin, I'd like to take a moment to acknowledge everyone at Treace Medical for their dedication, focused execution, and passion for our business and its mission to improve surgical outcomes for bunion patients. It's our team's collective effort, along with the support of our loyal surgeon user base, and the positive impact our technologies are having on the lives of the patients they treat, that has supported the success and growth for our company for nearly 8 years now, since our first Lapiplasty procedure was performed. In the first quarter, revenue increased 45% as compared to the same period in 2022, with steady gains across all of our key operating metrics. It's clear to us that the strategic investments we continue to make in our business are delivering strong returns, confirming we have the right strategies in place to expand the market penetration of our differentiating technologies. Before I go into details about the quarter, let's start with our market summary on where we stand today. Our disrupted Lapiplasty solution was specifically developed to correct the root cause of the bunion and address a large and underserved market. We've identified an estimated 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 first quarter of 2023, we have penetrated approximately 5.8% of the estimated 450,000 annual bunion surgical procedures in the U.S., up from 4.3% in the first quarter of 2022, and reflecting approximately 2.4% market penetration of the 1.1 million annual U.S. surgical candidates, which constitute our $5 billion addressable…

Thank you, John. Good afternoon, everyone. Revenue in the first quarter was $42.2 million, an increase of $13.1 million, and 45% growth 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. In the first quarter of 2023, the number of active surgeons performing at least one case in the trailing 12 months increased 31% year-over-year to 2,499 surgeons, which translates to approximately 25% penetration of the estimated 10,000 surgeons in the U.S. who perform bunion procedures. Surgeon utilization increased to an average of 10.5 Lapiplasty kits purchased in the trailing 12 months, up from an average of 10.1 a year ago. As a reminder, we commercialized Lapiplasty procedure nearly 8 years ago, and in the past 2 years alone, we've added 1,145 active surgeons, nearly half of our total active surgeon base. On the average, this growing number of active surgeons have steadily increased utilization each year they use Lapiplasty due to positive patient outcomes and expanding indications in their practices. We sold 6,758 Lapiplasty procedure kits in the first quarter, a 28% increase versus the prior year's first quarter. Blended average selling price in the first quarter was $6,244, a 13% increase over the first quarter in 2022, and a 6% increase from Q4 last year. First quarter blended average selling price of $6,244 includes a contribution of approximately $4,800 from Lapiplasty, and a growing contribution of approximately 1,400 from our expanding portfolio of complementary products, such as our Adductoplasty System, TriTome and SpeedRelease instruments, and FastPitch screw kits, as our expanding direct sales channel helps provide surgeons with our problem-solving technologies. Gross margin was 80.9% in the first quarter of 2023, compared to 82.3% in the first quarter of…

[Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan.

Maybe to start, I wanted to dive into some of the trends you saw in first quarter. I know it's probably hard to kind of tease out each of the individual components, but what are you seeing in terms of how much is coming from better contracting, a more complete product portfolio, returns on DTC investment, increased sales force, and anything you could add to try and place where some of the growth drivers are going and what you're focused on for the rest of the year?

Yes, Robbie, this is Mark. Great question. John and I have really tried to focus on all of those items that you've talked about, really with our investments on building the direct sales channel, our DTC investments that we leaned in a little bit more this year in Q1 versus last year. And now we have an expanded portfolio of products as well. So it's all these things, all the investments we really believe are helping. The other thing that we talked about in the prepared remarks was that this really strong seasonally fourth quarter really extended into the first quarter. So not all the procedures were achieved in the fourth quarter. And so we saw some of that benefit come into the first quarter as well. So I don't know that we have really quantified each one of those individually, but we feel really good about the momentum. And as a reminder, the 45% growth is over a really tough comp from last year as well. So we feel good about the momentum as we're coming in. We feel like all of those pieces are really playing well together to achieve that good result.

Maybe as a follow-up here, there's a lot that we're hearing in terms competitively out in the field. Another lower extremity bunion competitor was recently acquired and the noise is growing, which is great for the field and the conversion to instrumented procedures. But I'd love to hear what your reps are seeing out in the field. Do you think any of the competitors are impeding your ability to grow? And if you don't win an account, what's the #1 reason you're not here?

Yes, hello, Robbie, John here. Yes, a little bit consistent maybe with what we discussed last quarter. There are other products in the marketplace being offered from other companies. Most of these are kind of highly diversified companies with large bags of products. We're not really seeing any incremental, I think, opposition to our momentum coming from these. In some ways, they're just further validating what we started and what we developed long ago. Any of these companies' products and offerings get like a fractional portion of their sales team's time and attention. And what we found is with over nearly 8 years of refinement, Lapiplasty is just so elegant and reproducible. It's frankly just unmatched in performance at the doctor-patient interface. And we continue to wrap more patents around what we're doing, making it a little more challenging for companies to make something that can truly replicate the elegance of Lapiplasty, so. On top of that, our direct sales channel, our training programs, our patient advocacy through our DTC, our real clinical outcomes data that we can back up our product with, it just further differentiates us in the market. But I can't say that there's any one of these multi-line distracted companies that's slowing our business momentum.

Our next question comes from Drew Ranieri of Morgan Stanley.

Just maybe to start on kind of the pricing trends, and I appreciate you breaking out the Lapiplasty Kits and the expanding portfolio. If I kind of look at the math from first quarter 2022 and kind of hold that forward, I mean, you're obviously expanding your blended ASP, you're adding a direct sales force, and I think I heard you saying you're getting up to about 200 this year. So maybe just talk to us about a couple things. One, maybe the acceleration that we should kind of expect with blended ASP through 2023 and even into 2024, if you want to get that dangerous. And then second, can you just maybe highlight a bit more on the attachment rate that you're seeing for Adductoplasty in your cases? And maybe what type of surgeons are actually performing the case? Are you seeing it more in your more established mature tenured surgeons, or even on some of the more recent adopters?

Sure. Hello, Drew, it's John. Happy to answer that question. I think regarding the blended ASP, as we peel back that 62-44 that we had in the first quarter, roughly around 4,800 is a Lapiplasty case and call it 1,400 and change is coming from complementary products that are used in those Lapiplasty cases. As we mentioned in the prepared remarks, we continue to see that blended ASP lifting from our new products due to the continued adoption of Adductoplasty, which we think is still early on in the adoption curve, as well as those other recently commercialized technologies, our S4A plating kits, our tissue release tools, et cetera. And I think what we're beginning to really see and appreciate is the leverage effect we're getting from this direct channel, selling more of these complementary products that serve those other procedures that are performed within the Lapiplasty case. So as we continue to layer on more and more new innovations, as we will be later this year with SpeedPlate, for example, we definitely believe there's more room to grow our ASP over time. And the Adductoplasty makeup surgeon profile, interestingly, we initially brought Adductoplasty to our more tenured surgeon base and targeted them to come to trainings, and they were most excited to come. But as time has gone by, we're now starting to introduce Adductoplasty in our beginner's courses. So they not only get trained on Lapiplasty when they come to a training course, but they get a little bit of a training on Adductoplasty as well. So they get exposed to it then. And then we're finding more and more of those new adopters are requesting Adductoplasty for their cases earlier on. So it's been a good blend of both our more tenured advanced users and now moving into our newer surgeon base, so.

And maybe this question is more for Mark, but as we kind of think about some of your commentary about the first quarter was tracking to expectations, but it extended seasonally strong fourth quarter into first quarter, should we kind of interpret that as the second quarter could be flat sequentially? I would just like a little bit more understanding of maybe what you're seeing in the field, given some of these strong drivers across ASPs, surgeon utilization improvements, just maybe help us flesh that out a little bit more.

Yes, of course. Yes, so we do. We feel really good about what we achieved in Q1. That 45% growth over last year, that was a difficult comp. And we -- as a result, we've raised our annual guidance range to 34% to 38% growth for the full year. We do believe that the next couple of quarters, our growth rates will be within that raised annual range. And we're comfortable with those midpoints. And that's based on all of these investments that we're making. And so we feel good about the momentum that we have going on for the rest of this year.

Our next question comes from Rick Wise of Stifel.

Great to see another excellent quarter here. A couple of things. Maybe just starting on the direct sales rep expansion, you're basically at 80%, you're making great strides. Just remind us your latest thinking. I mean, is the goal to have 100% direct? How quickly can you achieve it? Maybe some color around that for starters, if you would?

Sure. Hello, Rick, it's John. We'll continue to progress through this year driving more direct salespeople into the field. And that will likely elevate that ratio above 80% over time. That's what we would expect. This said, we have some excellent, excellent, really aligned independent distributor partners who are putting up numbers that are really excellent. So we'll continue to work with them along the way and continue to build out our direct channel as we move forward. But I think you can continue to expect some progress in that ratio of direct as we continue to move ahead.

Right. And appreciating what you're saying about your strong independent distributors, John. Is it a concern in terms of the pace of growth at all? Just -- and I'm saying this from stark ignorance, but do I worry that as you get to your max conversion levels that slows momentum or it just shifts to other factors, growth driving factors?

I think it's probably the latter. Can you be a little more specific?

Yes, I'm sorry if I'm not clear. I'm just thinking. The idea of going direct and having all these direct reps, just that kind of focus and intensity, once you get to your sort of max level of conversion, does that slow your growth momentum in any way shape or form? In terms of looking ahead to 2024 and 2025 once that process is finished.

Yes, we'll continue. We'll continue to have high growth expectations for any of our new direct rep additions and any of our remaining independent distributors as we go forward. We don't concede on our growth expectations on either side. So we'll just continue to build the most effective distribution we can find in any given territory as we go forward and continue to drive high growth rates in this business, run our playbook, launching new product innovations, training more surgeons, more DTC, and of course, reinforcing everything with strong clinical data sets. I think that's the way we see it, Rick.

Got you. On the ASPs, I was really impressed with the jump in your blended average selling price. Obviously, and you've all explained it very clearly. How do we think about the sustainability of this level? And do we just assume as we see the cascade of innovative new products and the uptake of things like the micro-Lapiplasty system and SpeedPlate? Is that blended ASP going to move from here or move up from here? How do we think about it?

Yes, Rick, John, again, One way to think about it is if you think about the mix of procedures we have, average Medicare reimbursement rates for facility materials use is plus or minus 10,000. So if we're at 6,200 today, we definitely have more headroom to go in terms of addressing other procedures that coexist in a Lapiplasty case. So we're going to continue to look to innovate and provide new innovations for additional procedures so that our sales reps can stay in a Lapiplasty case, but more comprehensively solve all the interrelated problems of that bunion. And so we do believe that, there is more room to go up and to the right on the blended ASP. It's hard to say where that ceiling is going to max out, but we feel like the average reimbursement, and that's on the Medicare level, for the average case is somewhere around 10,000. Now, the majority of our patient mix is actually commercial pay, where you have a premium to that in terms of reimbursement for implants or materials used in surgery. So yes, I think we've got a nice runway of upward and to the right movement in our blended ASP over time. It could vary, it could kind of wobble quarter-to-quarter, but over an annual term, I think you would continue to see that at a modest rate.

Our next question comes from Ryan Zimmerman of BTIG.

Congrats on the nice quarter. I'll ask both of my questions up front, if that's okay. First, as the DTC efforts grow, the market's getting more competitive, you're reaching a certain level of scale, when do you think investors start to see leverage on the DTC spend in the P&L mark? And then the second question I'll just ask this up front is, as we look at the different categories of surgeons in your customer base, how do you think about the funnel of those surgeons progressing to more advanced options? So at what percentage or what time point does someone move, say, from a novice user or a general user to a center of distinction and the center of excellence, et cetera, et cetera?

Yes, thanks, Ryan. This is Mark. I think it's a great question about our DTC efforts. We've really seen great activity from a DTC perspective and as we said in previous calls, some of that investment will fluctuate quarter-to-quarter, but overall, we think it's a valuable way to invest and to train and to educate our patients, drive them to our website and make sure that they understand more about the Lapiplasty procedure. With regards to leverage on the P&L, even this year, we've talked about having increased leverage versus last year, so we believe that some of that's coming this year and if things go well, maybe there'll be more to talk about next year. It's a little premature for that, but we're already beginning to see some leverage and so we feel good about how that's playing out for this year, 2023, and maybe I'll have John talk about the funnel.

Sure, sure, Ryan. Yes, I think your question was around how surgeons are progressing through different levels of -- I guess.

Yes, that's right, John, I mean, yes, just as you think about the broader customer base, I mean, you're at 25% of the market, what percentage of those start to progress to the centers of distinction and so forth and so on, kind of up the ladder, if you will, and the pace of that shift and how that's changing maybe from what it was even just a year ago as you introduce all these products and people become just extremely comfortable with the system.

Yes, Ryan, and you are very dialed into our centers and the surgeons on our website and do a lot of great analysis there, so you're probably a step ahead of me, but I can say there's certain fixed criteria for achieving center of distinction excellence and centurion and elite center status, multiple items that play into that. They tend to evolve through those different titles over time and more experience with the product. What I can tell you is that, this past year's first 12-month tenured surgeon group has adopted Lapiplasty more aggressively than any other prior first-year tenure group in the history of the business. So they tend to be coming on to Lapiplasty faster and more aggressively. We think that's largely due to the reputation that Lapiplasty has now as an established procedure and it's getting more mainstream, so they feel very comfortable embracing it a little more aggressively in their practice versus a few years ago where surgeons would try a couple cases, see how the patients do, wait a little bit, and then maybe come back, so respected peer effect is taking hold here. We've surveyed a lot of our new users and they say the number one reason that they're coming to get trained on Lapiplasty now or adopting is because a respected peer of theirs is using Lapiplasty and having good results. So we like what we see there. We think we're starting to get into the early majority part of the adoption curve and it's exciting to see this.

Our next question comes from Rich Newitter with Truist.

Couple for me here. Maybe just first on how you're compensating the now increasingly direct sales organization. You have more levers, if you will, especially with this really pretty impressive revenue per procedure ASP increase. I guess one, what I'm trying to get at here is what's the, where are you focusing or emphasizing rep to drive growth? Is it any more or less towards higher revenue per procedure or opening new Lapiplasty customer accounts? I'm just trying to get a sense for how you balance that, especially with this new avenue of growth that's materializing.

Yes, great question. Hello, Rich, it's John. We keep it pretty straightforward with the sales team. They tend to be pretty much fully commissioned. They have a quota. They make a certain percentage during the quarter and if they make their quarter number, they can make a little more. So we kind of motivate them on that. On the other side, the management team is being compensated not only on hitting their regional numbers, but on the number of rep hires and the number of new reps that they add to the team and then on how productive those reps get. So that's kind of the way we've been doing it. They're also aligned with adding new surgeon users as well as part of their compensation plan. They're out there working with the sales people to identify new surgeons, to bring to our training events, having a successful training event, and then getting back and making sure that surgeon can adopt Lapiplasty in their practice efficiently. So that's how we've been kind of working it. We don't have incentives to necessarily sell more products into a case or have a higher blended ASP, but it is an added benefit that we're starting to see now that we have a bigger bag, a bigger portfolio of products that can be implemented in those Lapiplasty cases. So it's a great situation to be in. We find ourselves able to divide up more territories, because there's more opportunity now. And that makes room for new reps, who make new relationships with doctors that weren't being called on before. And then those doctors are coming to our trainings and those new reps are now getting those doctors to convert to Lapiplasty. So hopefully, I answered your question there, but if not, please let me know what I can do.

No, that definitely was helpful. And maybe just my follow-up on your DTC, I know you said you're putting a little more, a little sooner in '23 relative to last year, at least. So I was hoping, A, is there any quantification you can give us for how much your DTC spend is growing or what that dollar amount was last year or what you plan to be this year? And then what was behind the decision to maybe accelerate some of that spend? How do you guys quantify the ROI if you can? And what should we be thinking about that from a leverage standpoint in the back half?

Yes, great question, Rich. And appreciate you being on the call. So when we think about this year, really we ended last year, 2022 was really our full year where we talked about it being an investment year and we specifically called out the DTC as an investment. We did a lot of tracking with, all throughout last year in all of our different channels in which we can make those investments. And we felt really good about what was happening in the results of that DTC. So that's why we came in this year, and we really wanted to lean in. So we've leaned in a good 30%, 40% increase over last year. And we feel like that's going to support our growing surgeon base. There was part of our thought process was, we needed enough surgeons, Lapiplasty surgeons out there to really benefit from this DTC. There was no point in really leaning too far in without this large surgeon base. And now that we have 25% of all surgeons are using Lapiplasty, we just really felt that this was a year to lean into that. We've seen really good results last year. We've learned a lot last year, we continue to learn. And so we want to invest more this year because we've got this larger group of surgeons that can benefit.

Our next question comes from George Sellers with Stephens.

Congrats on a great quarter. Maybe to start on the surgeon population and thinking about just the growth algorithm, how much would you attribute to surgeons who are using Lapiplasty for their Lapidus Fusion procedures versus converting surgeons to treating bunions with Lapiplasty and doing a Lapidus fusion from a more traditional osteotomy? So how much growth is associated with driving greater penetration of surgeons who are already using Lapidus Fusion procedures to treat bunions versus further penetrating that surgeon who's still doing kind of the Traditional Osteotomy?

Yes, great question. Hello, George. It's John. Well, we see 2 cancer surgeons and you've identified them really, really well. You have some surgeons that come out of training programs already highly Lapidus-centric. They believe in the principle of correcting the deformity at the point of origin and that Lapidus is the correct way to do it. And those people that convert to Lapiplasty tend to embrace it very quickly and they will use for upwards of 70% of their cases. The other group are, and it's the majority of the surgeon population that follow the traditional algorithms that Lapidus fusion should be for the 15% or so of cases that are extreme in their deformity angles or they're hypermobile and you really can't treat them effectively with an osteotomy. So with those doctors, what we find is we expose them to Lapiplasty in our training programs. They go back and use it for their next severe case, what would be a Lapidus fusion for them that they struggled with in the past. They realize how straightforward and reproducible Lapiplasty is. So they get much more comfortable with it over time and they begin to carve into their osteotomy base over time, starting with the severe and then going to the more moderate cases over time and they'll progress to 40%, 50%-plus of their cases over time. So we're having a lot of growth and success. I would say the majority of our revenue growth is coming from converting those more conservative osteotomy biased surgeons and converting their osteotomies to Lapiplasty.

And then on micro Lapiplasty and some of the other devices that you commented on, apologies if I missed this, but could you give us an update on the full commercialization timeline for some of those additional devices?

Sure, yes, both micro Lapiplasty instrumentation. We've been doing select cases with micro Lapiplasty instrumentation and our prior implants already in a few centers. The speed plate component is going to come fully commercial late this year, towards the end of the year, probably more fourth quarter and then ramp up through fourth quarter and into 2024. So those 2 kind of go hand in hand in a late 2023 launch.

Thank you for your questions. At this time, I would like to turn it over to Vivian Cervantes, excuse me, for closing remarks.

Thank you, Teresa. Thanks everybody for joining us today. This concludes our call and we look forward to our next update following the close of the second quarter of 2023.

Thank you for your participation, everyone. This does conclude the program. You may now disconnect.