Good day and thank you for standing by. Welcome to the Treace Medical Concepts' Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Julie Dewey. Please go ahead.

Good afternoon, everyone and welcome to our second quarter 2023 earnings conference call. We appreciate you joining us. I'm Julie Dewey, Treace's Chief Communications and IR Officer. With me today are John Treace, Chief Executive Officer; and Mark Hair, Chief Financial Officer. During the call, John and Mark will offer commentary on our commercial activity and review our second quarter financial results released after the close of market today, after which we'll 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 Investor section of our website. Before we begin, we'd 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-Q for the second quarter to be filed tomorrow, our Form 10-Q for the first quarter filed on May 9, 2023, and our Form 10-K for the full-year 2022 filed on March 8, 2023 for a detailed presentation of risks. With that, I'll now turn the call over to John.

Thank you, Julie. Good afternoon, everyone and thank you for joining us on our second quarter 2023 earnings conference call. Before we begin the call, I'd like to start off by saying how proud I am of what our team was able to accomplish since our last earnings call and in the first half of the year. We're pleased with the progress we're making, and we believe we are well positioned for the second half of 2023. In the second quarter, we continued to execute on our strategic plan, resulting in sustained strong revenue growth, encouraging adjusted EBITDA progress, and continued gains across our key operating metrics, reaffirming once again that we have the right strategies in place to expand the market penetration of our differentiated technologies. Before I go into details about the quarter, let's start 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 have identified an estimated addressable $5 billion plus U.S. market of an estimated 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. We believe our proprietary Lapiplasty system addresses these limitations by surgically correcting all three planes of the bunion deformity and securing the unstable joint, thereby addressing the root cause of the bunion. As of the second quarter of 2023, we have penetrated approximately 6.2% of the estimated 450,000 annual surgical bunion procedures in the U.S. up from 4.6% in the second quarter of 2022, and reflecting approximately 2.5% market penetration of the estimated 1.1 million annual U.S. surgical candidates that constitute our $5 billion plus total addressable market in the…

Thank you, John. Good afternoon, everyone. Revenue in the second quarter was $42 million, an increase of $12 million, and 40% 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. As a reminder, we commercialized the Lapiplasty procedure nearly eight years ago, and in the past two years alone, we've added 1,089 active surgeons, or about 42% of our total active surgeon base. On average, this growing number of active surgeons have steadily increased utilization each year they use Lapiplasty, which we believe is due to positive patient outcomes and expanding indications in their practices. We sold 6,793 Lapiplasty procedure kits in the second quarter, a 30% increase versus the prior year's second quarter. Blended average selling price in the second quarter was $6,176, an 8% increase over the second quarter in 2022. This blended average selling price includes a contribution from Lapiplasty and 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. As John mentioned earlier, we continue to anticipate strong year-over-year increases in our blended average selling price, but there could be some variability from quarter-to-quarter. Gross margin was 81.7% in the second quarter of 2023 compared to 82.3% in the second quarter of 2022. The 60 basis point decrease was primarily due to changes in product mix and an increase in inventory provisions. Total operating expenses were $47.3 million in the second quarter of 2023, which includes sales and marketing expenses of $33.8 million, research and development expenses of $3.5 million, and general and administrative expenses of $10 million. This compares the total…

Thank you. We will now conduct the question-and-answer session. [Operator Instructions] Please stand by while we compile the Q&A roster. Our first question is from Robbie Marcus with JPMorgan. Please proceed with your question.

Hi. This is actually Lily on for Robbie. Thanks for taking the question. Maybe if you could dig a little bit deeper into the guidance and the cadence commentary that you just gave. I think historically, you've been able to still improve 3Q over 2Q sequentially. So any reason why we should see a bigger step up into the third quarter this year?

Yes. And great question. Thanks for joining us. Yes. Let me take that. This is Mark here. First of all, we again are really pleased with all the execution in the second quarter. We have 40% pro, which we're really pleased about. And as we've mentioned on prior quarters, the orthopedic industry traditionally does experience lower sales volumes in the third quarter, as elective procedures generally decline during the summer months. And so, and as we've talked about in the past, we're now at a scale where this seasonality has become apparent to us. And we feel very comfortable with that guidance range. And as we've said in the past, we just want to be prudent with our guidance as we continue to execute on all those commercial strategies that John has talked about.

Got it. That's helpful. And maybe just on ASP, I think that's stepped down a little bit sequentially for the first time, despite you continuing to roll out new products. So anything to call out there, and how should we be thinking about ASP trending from here? Do you think that can continue to move higher as you expand the portfolio, or are there any sort of headwinds to keep in mind? Thanks so much.

Yes. Hi, Lily. John here. Yes. So, we continue to anticipate strong year-over-year increases to continue with our blended ASP, but as we have discussed before, you can see some variability in quarter-to-quarter based on mix and other factors. We're continuing to see lifts from our new plating systems like S4A and our expanding portfolio of complementary products like an Adductoplasty, SpeedRelease instruments, FastPitch screws, and some others. And beyond that, we've got a pretty robust pipeline of future product launches in the works including our SpeedPlate implants coming towards the end of the year, which we believe will help continue to sustain -- ASP going up and to the right over time. A little color on the softer versus Q1 number we're really focused on penetrating this market, and in order to do that, we need to ensure to ensure that our docs can get access to Lapiplasty wherever they operate, even more cost-sensitive settings like an ASC. And in Q1, we did add a new Lapiplasty kit configuration to our menu of offerings to allow our surgeon customers to get greater access in these more cost-sensitive settings. And we're really pleased with the success we're seeing here, but it did put a little bit of a swipe and what we believe to be a short-term dampener on our Q2 blended ASP.

Thank you for your question. Please stand by while we get our next question. Our next question comes from Drew Ranieri with Morgan Stanley. Please go ahead. Please stand by for our next question. Our next question comes from Ryan Zimmerman with BTIG.

Good evening. Thanks for taking the questions and congrats on the progress. I want to ask a little bit about the cadence of doctor additions that we saw this quarter. And John, just to get your thoughts around kind of the pace at which you expect to educate and bring in physicians to be Lapiplasty users going forward.

Sure, Ryan. Thanks for the question. Yes, we ended the quarter with 2,581 active surgeons. We feel really good about our annual progression of our new surgeon ads as we continue to on board new reps, make new relationships with doctors, put those doctors through our training events. Surgeon additions may vary from quarter-to-quarter. For example, during the second quarter, we saw some surgeons and patients sort of prioritizing travel and time away from the office, but we feel good about the number we're bringing on this year relative to our expectations. As you may recall, in 2021, we added about 500 and last year we added about 600 or so. So we feel like we're on the right track there. I can tell you the interest and attendance by surgeons at our training events remains really strong. I just returned from a oversold training event this weekend in Boston, for example, and I can tell you a surgeon and rep enthusiasm for our differentiated technologies is very, very high, and we look forward to executing on additional training events we have slated for the back half of the year.

Okay.

So I think overall, we got the right strategy in place to continue to penetrate the target surgeon market and increase utilization over the long run.

That's helpful, John. And just two more from me if I could. The first one is just, as you add new products, the speed plate, the micro-incision, Lapiplasty System, one of the things that you've talked about is, the penetration of usage, say, for example, in the Adductoplasty product, right? And how you could eventually get to maybe 15%, of mid-foot deformities. And you're not there yet and there's kind of a long runway there. Just help us understand kind of how you think about the penetration rate of some of these newer products as they launch and where you'd be happy with kind of their adoption over time. I mean, I don't think it's reasonable to assume that 100% of cases would use all those products necessarily, but what's the right way to think about kind of that adoption over time? And then I have an expense question for Mark, thank you.

Sure, with things like going to an Adductoplasty specifically that midfoot deformity affects about 30% of bunion patients. Our customers tell us that they could foresee at some point in time using it on half of those, so 15% of their Lapiplasty cases. We continue to train more doctors, get them more comfortable with this procedure. I asked one of the doctors at this Boston lab, why are you here? And he said, I've done a couple of Adductoplasty, I want to get more experience. I think this is a breakthrough. I'm operating on patients that I either used to have to refer or I would only do the bunion on, and I knew it wasn't a comprehensive fix. So we see this gaining more and more traction and we have next-generation Adductoplasty systems in the works. Another catalyst there I think is going to be our speed plate implant platform because that could be used in Adductoplasty cases and inserted through some smaller incisions. It goes in quicker than our current plate and doctors are really liking that in some of the pre-market cases as a key application for SpeedPlate. So I'd like to see us work our way towards that 15% over time. I just can't tell you the exact pace at which it would it would occur.

Right. Okay. That's helpful. And then just for Mark, go ahead, go ahead John.

SpeedPlate could get could get significant traction as an overall platform pretty quickly. There's a lot of enthusiasm from the doctor community about that technology and the sales reps that have used that have a lot of customers saying. This is the way I want to go for most of my patients. So, we're really excited about that platform coming on. Not only in its ability to make the procedure faster, less steps, but bring on new customers that have looked for different fixation options and maybe haven't embraced Lapiplasty yet because we don't offer something like speed plate.

That's helpful and apologies for a jump of the gun there. Just last question for me and I'll hop back in queue. Just Mark, take me through your thought process a little bit about balancing additions to DTC versus expense leverage. And what kind of how you're pushing and pulling on those two components and as you think about ramping headcount or maybe slowing the pace of ramping headcount versus maybe what you need to do in terms of further additions and increases in DTC. Thanks for taking the questions, guys.

Yes. Thanks, Ryan. Great question, and it's something that John and I talk often about is, what is the right mix of the DTC and the investments into our business and the overtime profitability of the business? And so I can tell you what we've said in the past is, our primary objectives right now is to really execute on all of those commercial strategies that have been working for us. And that is building the bigger direct sales channel and really helping patients be educated about the benefits of Lapiplasty through our DTC platform. And so we'll continue to do those things. We have an eye on profitability. We've talked about on this call and the prepared remarks and in the past that we want to have leverage this year compared to last year. And so, we're still on track to do that. Again, as we announced today that we had some really strong improvements from an EBITDA bottom line perspective. So, we think we can do a little bit of both with the primary objective is to really execute on the top line. And as John, said, we really want to introduce products that are going to be helpful to our surgeons that are going to be useful in bringing new surgeons to become customers and to continue to drive our top line through more and more direct sales reps who really leverage our whole portfolio with our surgeon customers.

Thank you. Thanks for taking the questions. Congratulations. Good quarter.

Thanks.

Thanks, Ryan.

Thank you. [Operator Instructions] Please stand by while we get our next question. Our next question comes from Richard Newitter with Truist Securities. Please proceed.

Hi. Thanks for taking the question. This is actually Sam on Richard. Just to start out with a guidance question, it looks like unit growth accelerated on an underlying basis with the lack of capacity. With coming up against a little bit easier unit growth comp in the second half and then a little bit harder ASP comp in the second half, how should we think about the components of growth that's factored into guidance? Is this level of unit growth sustainable through the second half and should we think about a little bit softer on ASP?

I think there's a couple questions there. With respect to ASP, I think John, talked about that, that we believe that we're offering these very beneficial, ancillary, complementary products. And so, that's going to fluctuate from time-to-time, from quarter-to-quarter, but we think overall, we're going to continue to offer products that are going to add to our overall blended ASP over time. So that's going to continue to happen. As we think about just really the cadence and the volume, Q3 versus Q2, I mentioned a little bit, there is some seasonality that we do feel at this scale of business. And so we feel really good about what guidance we gave, which is really consistent with the Q2 levels of volume. So that's going to translate into very similar unit volumes in blended ASP as well. So it's going to be pretty consistent is the way we're thinking about Q3.

Okay. And then you had mentioned that a new kit for the ASP setting may have weighed a little bit on price. Just curious why should we should we expect that to be a more sustained impact on going forward given, assuming a growing mix of Lapiplasty today I see. Thanks for taking the question.

Yes. Hi, Sam. This is John. I wouldn't say it's going to be a long lasting dampener. We tend to see whether we sign a GPO agreement. They tend to be short term dampeners on our blended ASP, and then the new product and the complimentary product contribution starts to outweigh those dampeners. So, we're really pleased with the incremental uptake we got from that product. I'd say it had a little bit to do with that strong kit volume number and it's a great thing to have in our menu of offerings.

Thank you. Please stand by for your next question. Our next question comes from George Sellers with Stephens. Please go ahead.

Hi. This is Harrison, on for George. Congrats on the quarter and thanks for taking the time and for taking my question. I wanted to start on the two distinct sets of surgeons you all have often talked about the on one hand, the ones who primarily use osteotomies to treat, treat patients and then reserve the Lapidus fusion for the select few more severe cases and then the surgeons who have more fully adopted the Lapidus fusion procedure. I was wondering if you could to sort of parse that out a little bit more and maybe quantify those surgeon populations in the mix of 10,000 total, and then if you could break out how penetrated you all are at this point in both of those markets.

Yes. Hi, Harrison. This is John, I'll try to clarify that a little bit. You certainly have surgeons that have been through training programs that are more Lapidus fusion-centric as their primary way of fixing the bunion, and then you have the majority of surgeons that have been educated through teachings that the osteotomy is for the majority of bunions and Lapidus type procedures are for the minority, the more severe bunions. I would say the majority of the 10,000 are in that latter group where they view Lapidus fusion that's for the more severe and osteotomies for the less severe, so by numbers. But we make excellent inroads into both of those camps with our training programs and our products. With a more Lapidus-centric surgeon, they tend to embrace it pretty quickly for all of their procedures. It's just a better way to do a Lapidus and add the third plane of correction to what -- prior to this was a two-plane correction. So that camp embraces pretty quickly. And then the other group, we typically get their next Lapidus case, which might be a more severe deformity of a patient. And then we work on them over time and educate and they get more proficient with the procedure and they start to carve more and more into their osteotomy practice and do a higher overall percentage of Lapiplasty relative to their osteotomies over time.

Got it. Yes. Thank you. That makes sense. And then as a follow-up there, I was wondering did those sort of surgeon, or did those different types of surgeons, do your sales force, do they choose a specific type of surgeon to go after or are you all really just trying to reach out to as many surgeons in there as possible?

Yes, great question. I mean, they certainly have data to help them ascertain who the busier surgeons are performing bunions. And they typically take that approach, but sometimes it can be a bit opportunistic we say with Lapiplasty, we're never selling a surgeon hard and trying to, quote, get a case. We're trying to get the surgeon to embrace our philosophy. And once -- they've embraced our philosophy, we can be very successful with them and getting them trained on boarded, and getting them up that utilization curve but that's been the approach.

Understood. Yes. Thanks for taking the questions.

Thank you.

Thank you. Please stand by for our next question. Our final question comes from Rick Wise with Stifel. Please go ahead. At this time, I'm showing no further questions. I will now like to turn the conference back over to Julie Dewey for closing remarks.

Thank you. On behalf of Treace Medical, thanks for joining us today. If you have any more follow-up questions, please reach out, and we'll look forward to talking to you following the close of our call for the third quarter 2023. This concludes our call today. Thank you.

Thank you for participating. You may now disconnect.