Good day and thank you for standing by. Welcome to Treace Medical Concepts Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Julie Dewey. Please go ahead.

Good afternoon, everyone, and welcome to our third 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 third 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 Investors 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 third quarter to be filed today and our Form 10-K for the full year 2022, filed on March 8, 2023, for a detailed presentation of risks. With that, I will now turn the call over to John.

Thank you, Julie. Good afternoon, everyone, and thank you for joining us. I'm going to focus my comments today on our third quarter results, the exciting progress of our SpeedPlate implant launch and other growth drivers. Following my comments, Mark will cover the specifics of our Q3 results and guidance. We continue to execute on our strategic plan, resulting in year-to-date U.S. revenue growth of 36% that we believe is significantly above foot-and-ankle peers, 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've identified an estimated addressable $5 billion 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 3 planes of the bunion deformity and securing the unstable joint, thereby addressing the root cause of the bunion. As of third quarter 2023, we've penetrated approximately 6.3% of the estimated 450,000 annual surgical bunion corrections in the U.S., up from 5% in the third quarter of 2022 and reflecting approximately 2.6% market penetration of the estimated 1.1 million annual U.S. surgical candidates that constitute our $5 billion-plus total addressable market in the U.S. In addition to the large and underpenetrated market for treating bunions, late in the quarter we also initiated commercialization of several new technologies, including our SpeedPlate…

Thank you, John. Good afternoon, everyone. Revenue for the first 9 months of 2023 was $124.9 million, representing 36% growth over prior year. Third quarter revenue was $40.8 million, a 23% increase compared to prior year. Growth in the third quarter was driven by increases in procedure volumes and increases in blended average selling price. In addition to the tough comp from last year that John mentioned, this quarter included 1 less selling day than Q3 2022. We sold 6,459 Lapiplasty procedure kits in the third quarter, a 13% increase compared to the same quarter last year, and was impacted by prioritized travel and vacations for our patient demographic, which led to lower-than-anticipated demand for our Lapiplasty procedure in the quarter. Blended average selling price in the third quarter was a record $6,311, up 9% over the third quarter of 2022. This blended average selling price is driven by Lapiplasty and the additional contribution from our expanding portfolio of complementary products, such as our Adductoplasty system, sterile single-use instruments, and some very early impact from SpeedPlate and Hammertoe, as our direct sales channel continues to increase their procedure access across our surgeon customers. Gross margin was 80.4% in the third quarter of 2023 compared to 81.6% in the third quarter of 2022. The 120 basis point decrease was primarily due to changes in product mix, an increase in inventory provisions, and an increase in overhead due to headcount to support the growing business partially offset by lower royalty rates. Total operating expenses were $50.6 million in the third quarter of 2023 compared to total operating expenses of $38.3 million in the third quarter of 2022. The increase in operating expenses reflect strategic investments in our expanding direct sales channel, investments in product innovation, increased capacity requirements, as well as support…

[Operator Instructions] Our first question comes from the line of Danielle Antalffy with UBS.

Happy to be back covering Treace. So I guess my first question is on the guidance cut by $10 million at the midpoint. And I was just wondering, Mark, if you could give any color on what's the impact of the fewer surgeons versus how you were thinking about it entering the year versus delay in SpeedPlate versus the patient travel that you called out. Is there any way to quantify what each of those components make up of the $10 million?

Danielle, it's good to hear your voice again. We've talked about in the prepared remarks, both of those elements had an impact in Q3, and both of those will have an impact into Q4. So we're not providing specific detail on which and how much that was in Q3 and Q4. But candidly, we were surprised by that summer seasonality. It was more pronounced than we had expected, and it's why the case volumes were down in Q3 and why the surgeon adds were down in Q2 and Q3 as well.

And then maybe my second question, or not maybe, my second question is actually on that point and the summer seasonality. Is there a way to give us the investor community comfort on the rebound and you modeling 45% sequential growth in Q4? I appreciate the seasonality normally, but this was a more meaningful seasonal impact from Q -- like in the summer. So what gives you the confidence that the rebound is coming in Q4? Is there something in your conversations with your treating surgeons that you could point to? I guess just how do you build that level of confidence that there's not something else going on here?

Yes. Great question, Danielle. So I think there's a couple of things. First of all, September, the first month post summer, John mentioned that we had a record for our highest surgeon adds. And so we wanted to be thoughtful as we're thinking about Q4. But we've seen that strength in September, and we've had continued strength into October as well. When you think about the fundamentals of our business, they really remain strong. And we've had really nice continued advancements in a lot of our key metrics. So it doesn't seem like that is at all an issue. It's really a strength as we go into Q4. This step up that we have in Q4 is really consistent with prior years. Q4 has always been our highest revenue quarter every year. And so we also have accelerating additions to our surgeon base, increasing productivity of our direct sales channel, and several new technologies that are already starting to make a positive impact. So with all that in mind, we considered our new updated guidance very appropriate, and we believe we have accounted for all the puts and takes that are coming into Q4. So we feel really comfortable at the end point of that range.

Danielle, it's John. I just wanted to add a little bit on top of that. We've gone through this 8 years now of concentrated procedures in Q4 and significant step-ups. I can tell you as we sit here today, halfway through what we refer to as bunion season each year, it feels right and we're glad to see it again.

Our next question comes from the line of Robbie Marcus with JP Morgan.

This is actually Lili on for Robbie. So the 250 to 300 new surgeon adds is a lot lower than what we were thinking for next year and lower than what you've done in the past. So are you expecting that same seasonality with doc adds to continue into next year? And if doc adds are going to be a lot lower, I would think that would imply a big step-up in utilization. So what's giving you that confidence to see that step-up next year?

Lily, it's John. The 250 to 300, we think that's a reasonable level. The past couple of years, if you go back, we added 500 2 years ago, 600 a year ago, both of those years we more than doubled the size of our salesforce, creating a lot of surgeon contact, we grabbed a lot of low-hanging fruit, and we're very thankful for that. We've got a lot of loyal customers now because of that. This year, we expanded the salesforce size by about 20%, and we continue to add docs at a pretty nice pace here. As with any market, the larger the customer base you try to get, you get the low-hanging fruit and then you have to climb up higher in the tree and reach for that tougher-to-get fruit. And that's what we're doing here. One of the pieces that gives us confidence is we're still continuing to build the customer base at a really nice level through this year, despite not as large of a sales rep increase. The other thing we're doing is we found that we need to be able to appeal to a broader range of surgeons, and SpeedPlate plays a very important role in that. There's a whole group of surgeons out there that have not come to Lapiplasty, not come to Adductoplasty, because they believe in a different fixation philosophy, compression nitinol staples specifically. SpeedPlate gives us an avenue into some of those docs that we've never had before. And frankly, to the record new surgeon counts we added in September, SpeedPlate did play a role, even though it was out in limited supply in bringing on some of those new docs. So for a lot of reasons, we're really confident in our ability to continue to add new surgeons. It's just that it may not be at the blistering pace that it was in the days where we were more than doubling our sales channel.

Can you just talk a little bit more about the decision to push out the full launch of SpeedPlate? Is that a supply challenge, regulatory, or is it really just to focus on getting that second-generation product ready?

Lily, yes, that's really the thing. We got out there in our limited market release, had several doctors using it, and very quickly identified things through their feedback and through our observations that we could do that would make this product more broadly appealing to a larger range of surgeons and also be able to treat a larger number of foot-and-ankle conditions, not just Lapiplasty and Adductoplasty procedures. So we found that opportunity so attractive that we did extend our timeline, we incorporated these adjustments, worked with our vendors, filed a new 510(k) with the FDA. It cost us a little time, but I think we stand by that decision. It was the right call. We saw the opportunity to make a really great product awesome and we took it. And we will be very excited and glad that we did that as we enter 2024.

Our next question comes from the line of Rich Newitter with Truist Securities.

A couple for me. Maybe just thinking about the '24 commentary and where you're jumping off from 4Q, I'm getting to about 11% to 12% 4Q implied Lapiplasty procedure growth rate, about mid-single digit ASP growth, and call it something in that run rate to get to 250 to 300, so call it somewhere in the 70 to 100 surgeon adds. If I just apply that throughout 2024, I'm getting to about a 20% growth rate with about low-teens Lapiplasty growth, mid-single digit ASP growth. I guess, is that the right way to think of the business right now broad strokes or directionally? And do we think of the weighting of the year with SpeedPlate coming next year, is that going to be a slow ramp? And it's really not until 3Q and 4Q that we see the contribution.

Rich, great question. This is Mark. Let me try to respond to that. And if I've missed anything, maybe John can help fill in. So with regards to 2024 guidance, as I mentioned in my prepared remarks, we feel like we're positioning ourselves for a really successful 2024 with our growing sales channel, all the new product launches, but we're not going to provide specific guidance on 2024 right now, although we can talk about a couple things that you mentioned. You mentioned something about the surgeon adds and how we should be thinking about that. Again, in my prepared remarks, I was saying as a baseline, 250 to 300. We've already added over 300 year to date this year. So that's 1 thing. And as we think about next year, we'll have a much, much larger active surgeon base. And so our growth can really come a lot from our existing surgeon base, and it's not as reliant on adding the incremental surgeons. Now, of course, we will continue to look for and add those important incremental surgeons, but on a larger base, we're going to make sure that all of our new products get into the hands of that existing customer surgeon base. I don't know if I hit all the points there.

Rich, John here. I think you were asking a little bit about when will SpeedPlate hit its stride or really start making an impact?

Yes, that's one of the questions. The other 2, I do think it would be helpful just thinking about mid-single digit ASP increases, level set us on active surgeon adds. I guess that would imply that you're looking at a low-teens kind of Lapiplasty procedure growth rate. Is that correct? And then, yes, how should we think of the ramp for SpeedPlate?

Okay. And maybe I'll answer them in reverse order if that's okay because I usually go to Mark on forward-guide questions. But the SpeedPlate ramp, as we exit Q4, we'll be getting into very good supply. And as we go through Q1, we'll be at full stride within the quarter. So we'll be able to satisfy all the customer demand. And that's what's got us really excited about how we're going to exit this year and ramp next year because it's a real blockbuster product for us. This is a big deal and it's very meaningful both on blended ASP, attracting new customers, and aggregating additional foot-and-ankle procedures that are outside of Lapiplasty and Adductoplasty but don't defocus our sales channel.

And with regard to Lapiplasty growth in next year, we look forward to providing additional details and guidance in our fourth quarter call. So we're just not giving too much there other than giving you an overview of some things to come.

Our next question comes to the line of Rick Wise with Stifel.

You were absolutely right last quarter when you cautioned that you were concerned about seasonality and vacation times. But I wanted to make sure that I'm understanding how we're starting the fourth quarter. We're obviously a month and a week or so in. Are you seeing the same slower trends from July, August, September, now into November with little change? Is that the major driver of the $10 million midpoint cut? I'm just trying to understand how the pieces all fit together. And that's making you more cautious. The only reason that I can't believe it's the 1 less selling day, you knew that before, and the salesforce has been expanded. If I remember correctly, SpeedPlate is delayed, but Micro-Lapiplasty and some of the other new products are, I think, in full launch this quarter. So I'm just trying to make sure I'm understanding what's driving what and to what degree that the $10 million cut at the midpoint is conservatism. Sorry for the long question.

Rick, this is Mark. And let me respond to a couple of those things. Just first, I think there's a question about some of the other products that have been available. Micro-Lapiplasty is going to come in the fourth quarter, so it's not been launched and that will utilize SpeedPlate. So that is to come. A couple of the things that I just wanted to mention, and it's what I've said a little bit before is, we were cautioning about what we were seeing in the summer seasonality. It was much more pronounced than what we had expected. And we were surveying a lot of our surgeon customers, asking them, what are you seeing as far as your volumes, case count, and your patient demographic? And just as a reminder, we have a much more narrow, specific patient demographic than a lot of other companies. And so we were asking a lot of those questions. A lot of our guide going into Q3 was based on anecdotal what we were hearing from our customer surgeon base with hopes and views that some of this softness in the summer was going to turn. Well, it just didn't turn as quickly as we had hoped, but the positives that we take away from it is, like what John said, we've had this really strong September new surgeon adds. That means they're doing cases for the first time in September. So that was very helpful and beneficial, and some of that strength has continued into October from a surgeon add perspective. So we think that's very beneficial. But as we also think about not having the number of surgeons, as you go into the fourth quarter, it was a little bit of a challenge because as we think about it, we want to have the full team, the full complement of the team going into our busiest quarter. And so, of course, not having as many surgeons on the team and using Lapiplasty will definitely have an impact. And same thing with not having launched in as aggressive of a way SpeedPlate in the third quarter, so that has pushed into the fourth quarter. And so both of those things are really informing the way we're looking at the fourth quarter. And we feel confident in the midpoint of that guide, given everything that we know so far.

Okay. And Mark, maybe you'd expand on your comments about gross margin. It was less than we thought and I'm guessing less than you expected. And talk about the specific mix drivers and the greater overhead. And I think there's a third one which I'm not remembering right this second, but to what extent does that continue into the fourth quarter and maybe just help us think in general about your gross margin thinking and how you would frame our gross margin thinking going forward.

Yes, great question, Rick. And so it was 80.4% in the quarter, and it was impacted by product mix, some inventory provisions, and when I say increased overhead, we have a growing business and employees to handle the growing volume that we have, and that was partially offset by some lower royalty rates. And so those were all the puts and takes. I would not view this as uncommon. Our gross margin will fluctuate quarter to quarter depending on some of the mix. As we introduce new products, Rick, not only SpeedPlate, but we have some other sterile instruments and other things, what we've tended to see is when at the beginning of our launches that we may not fully have all the efficiencies in our manufacturing processes available. And so it may take 1, 2, 3 quarters before we get all those efficiencies. And so it's somewhat of a mix. Are we selling some of the new products or which products are being sold or preferred by our customers? Again, we think anything north of 80% is really strong, and we feel really good about that. And we've mentioned previously that we have relatively few sellable SKUs. We have less than 50 sellable SKUs. So a mix does have an impact when you're talking about so few SKUs. But we continue to focus on our gross margins, and we plan to remain at these high levels, near or above 80%.

Our next question comes to the line of Drew Ranieri with Morgan Stanley.

Just maybe to start on my end, what essentially gives you the confidence that this is truly a seasonality aspect, and I appreciate that it might be picking up into the fourth quarter, but why are you so confident that it's seasonality and not any competitive entry or changes in the landscape becoming more of a problem in capturing surgeon mind share or any incremental procedures? And I know that we're all trying to get at maybe what utilization could look like into '24, but maybe just help us better understand what you were seeing in terms of same surgeon utilization levels in the third quarter that's giving you confidence that maybe we're not appreciating.

Drew, John here. I'll try to get to the first one first, and then Mark can remind me of the other parts. What's giving us the confidence is we did a lot of work, a lot of surveying, a lot of work with our surgeons during these summer months to figure out what the root cause of what was going on in the softness in surgery demand, and that affected new surgeons coming on. We can train tons of doctors. But if patients are coming in at a normal rate asking for a surgery, they don't get counted as a new active doctor. So we're certainly going into Q4, which is our bunion season, with a different trajectory, combining the bit of delay on the SpeedPlate, full availability, and that lower doctor count. But again, we've been through 8 years of this bunion season in Q4. It is very real. And as we sit here today, I can tell you it's back, and we're feeling it in the activity. And that's what's got us confident that midpoint is doable and comfortable. So it's a tough point for me to not express my extreme enthusiasm because I can see the other side of this as SpeedPlate comes into full availability and that continuing ramp on surgeons in utilization and what's going to come. But that's what's happened during the summer and that's how it's affecting Q4.

And, Drew, I think there's another part of your question with regards to customer utilization. That was 10.6. That's a strong utilization number. It's up more than 4% over the prior year at the same time. So it really isn't that it's a lack of utilization, per se. It was really what John talked about is there was a different patient demand for our patient demographic and that caused a few things. And then with the decision of SpeedPlate as well, pushing that out just a little bit, which was the right decision. But the combination of those 2 just had an impact in Q3 and then that's going to set us up for Q4. So that's why we felt that it's an appropriate guide for Q4, understanding those 2 items.

And, Drew, I think I missed another component of your question about competition, and we've had competition for the last several years in this space. We expected it. We created a very exciting market. The market is very big, over $5 billion in the U.S. We're way out ahead, and we've got the best technology. New entrants will continue to come into the market, but we've got a pretty powerful offense. Our rapid innovation, our focus, our direct sales channel, and then this patient advocacy that we drive through our DTC. So will competition be there and continue to be there? Yes, it has been and it will continue to. But that's not what was driving this shift. That's not what's driving the softness in the summer months. This was a real and dramatic shift in the way our patient demographic, the 30- to 60-year-old female in the U.S. behaved this year. And the headlines, you can see it all over the place. International travel, my wife was quite upset with me because I think we're the only people we don't know that didn't go to Europe at least once this year. And it was bottled up, 4 years of pre-COVID plans that all came piling into this year once the COVID restrictions left, and that demographic behaved differently probably than other companies' demographics.

And I think the final piece on that, Drew, is we stayed really close to our surgeon customer base, and we continue to ask them these questions. So that's what we're telling you is also what we're hearing from them. The same things.

And just on SpeedPlate for a moment, John. You were mentioning in your earlier remarks that this could appeal to a broader range of surgeons that believe in a different fixation system. So when you do think about SpeedPlates going into next year, will these surgeons adopt and also more broadly adopt the Treace portfolio, or do you expect them to be more siloed in one particular area of your portfolio with SpeedPlate?

Yes, great question. It very quickly, in its limited availability, found its way to be the now preferred fixation system for Lapiplasty and Adductoplasty cases for the doctors that have access to it right now. And right now only a small fraction of our doctors have access to it. And we're going to work on that quickly. But pretty quickly, we started hearing comments like, I can use this all over the foot. There are 5 or 6 other procedures that I do very commonly and routinely with your cases and outside of your cases where your rep can be there or not even have to be there. I love this fixation technology. This is a homerun, and this is the next big thing beyond nitinol technology. The combination of stability and strength of a titanium plate with the dynamic compression capabilities of a nitinol staple is an extremely attractive combination and it's a unique and first and only from Treace again. And that's why we took the extra time with it to get it as great as it possibly could be. So when we go out there with this product, our customers say, wow, Lapiplasty, Adductoplasty first and only, and now another first and only awesome product from Treace. So I think it will be adopted over time more broadly across the foot-and-ankle outside of our core procedures.

Our next question comes to the line of Ryan Zimmerman with BTIG.

Juggling a few calls tonight, so I apologize if this has been asked, guys. But I didn't hear as much on your prepared remarks around your DTC investment priorities. And I'm just wondering how you think about that in the context of driving more operating profit or adjusted EBITDA, I should say, and leverage in the model and what needs to be done to continue to maintain your position, well-balancing maybe on some of those more profitability-oriented metrics.

Ryan, it's John. You're right, we cut to the core on this script and prepared remarks and thought we'd follow up with a more detailed DTC catchup in our Q4 call. But in a nutshell, several months ago we brought on a new head of marketing with strong expertise in consumer DTC, and he's very quickly come in and been able to look at the programs we're running, fast wins, ways to optimize them, reduce even our spend and get higher output. So we're seeing some really great efficiencies on the DTC side. With less spend, we're getting higher levels of deep patient engagement and customer contact through our website and surgeon locator and call center. So we're really pleased with what's going on here. We're also, right now, very actively sponsoring the National Pickleball Championship down in Dallas. So if you're watching ESPN, you may see some...

I saw that, John. I saw that. As a budding pickleball player, thank you.

Yes. Well, Nathan is very savvy and very quickly dialed in on that demographic, which is right up our wheelhouse and a very efficient, low-cost way to get a lot of exposure and impact. So these are the kinds of things that Nathan's working on already, and I have to say 3, 4 months in, he's really on a roll and he's going to bring a lot of value to our DTC initiatives.

And Ryan, I think you talked a little bit about profitability, and I don't think -- there was a portion in my prepared remarks that talked about a potential of adjusted EBITDA breakeven in 2024 and perhaps even positive cash flow in 2025, the following year. So we've definitely started seeing leverage on the P&L already. And for the full year 2023, we continue to expect to show modest improvement in adjusted EBITDA compared to last year. So we expect operating leverage to continue in the coming quarters and into 2024.

Got it. And again, apologize. I'm juggling a few calls, so if this question has been asked, just stop me. But John, as you think about the Hammertoe product and you're expanding outward beyond Lapiplasty, has your view in terms of strategy changed at all to be more expansive in the foot-and-ankle space relative to maybe your prior views around really being focused on bunion and then adding some complementary products? it almost seems like you're following this natural pathway, but I'm wondering if your aperture has opened up a bit as you get deeper into the bunion segment and look for new markets and opportunities for growth.

No, great question and very timely. We have a high focus still on penetrating the bunion market, and we will continue to for future years. That is our sweet spot. That's where we built our direct sales channel. That's where we built our initial surgeon base and loyalty from. But now we're in a wonderful position to leverage this large direct channel that we have and start to lay in some complementary product technologies that fit into the bunion case or overlap with the bunion case to a high degree. Our Sterile Osteotomes, our Hammertoe, our SpeedPlate that can provide fixation in other areas while they're in the case that they didn't want to use a plate. So you will continue to see us expand our footprint more broadly across the foot-and-ankle market but keep laser focus on penetrating the bunion market as our spearpoint and just building around that over time.

Our next question comes from the line of George Sellers with Stephens.

Could you maybe just help clarify the SpeedPlate launch commentary? Should we read into those comments as it's still a more targeted rollout of SpeedPlate here in the fourth quarter with full commercialization in the first quarter of '24? Or is the 1Q '24 full commercialization comment referring to gen-2 SpeedPlate? And then how should we think about that relative to Micro launching this quarter?

Sure. So, SpeedPlate, the only SpeedPlate we will market is the gen-2 SpeedPlate, just to clarify that. I know it is a little confusing. That is the refined product that we've decided to build large supplies of. We will be ramping our production levels as we go throughout this quarter and then achieving full market availability within the first quarter. So we're working very hard with our vendors to get this done quickly. Just to clarify, this is not a supply chain issue. This is a change in the product configuration that we decided to make, and we had to work with our vendors to figure out how to get it achieved quickly and try not to lose too much of our revenue trajectory that we had planned for the SpeedPlate platform.

And then maybe for the 10 new technologies that you've talked about launching over the next 12 months, could you give some additional color on how many of those are maybe new devices that are attacking new foot-and-ankle deformities versus improving on and updating some of the existing devices that you currently have in your portfolio?

Yes, George, I would say the majority of them are new significant impact products, significant innovations. RedPoint technology, that's 1 of them. Something that's coming beyond that in the back half of the year that Mark alluded to will, we believe, help us expand and increase penetration into the bunion market. That's a major significant platform. And then we have a handful between call it now and the first half of the year that we'll be introducing as well.

I think that's it for today, everybody. Thank you for joining us. We appreciate your time and interest. If you have more questions, please reach out and we'll look forward to talking to you next quarter. This concludes our call.