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

Good afternoon, everyone, and welcome to our fourth 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 fourth quarter and full year 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 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 2023 to be filed on February 27, 2024, for a detailed presentation of risks. With that, I will now turn the call over to John.

Thank you, Julie. Good afternoon, everyone, and thanks for joining us. I'm going to focus my comments today on our full year and fourth quarter 2023 highlights, the exciting progress of our SpeedPlate implant launch and our other growth drivers. Following my comments, Mark will cover the specifics of our Q4 results and our 2024 guidance. 2023 was a busy and productive year for Treace, and we're proud of the significant progress that we've made. We successfully executed on our strategic plan resulting in full year U.S. revenue growth of 32%, surpassing the high end of our previously provided guidance range and growth that we believe is significantly above our foot and ankle peers. We also continue to scale our operations, making encouraging adjusted EBITDA progress that was head of the prior year and delivering gains across our key operating metrics, reaffirming our belief that we have the right strategies in place to expand the market penetration of our differentiated technologies. Here at Treace, we're driving a fundamental shift in the surgical treatment of bunions through our proprietary Lapiplasty procedure, which is well on its way to becoming a standard of care. Lapiplasty targets a $5 billion-plus addressable market in the U.S. with continued strong adoption by the foot and ankle surgeon community and with nearly 1 in 4 adults in the U.S. affected by bunions, we believe this represents the most compelling opportunity in the foot and ankle reconstructive market today. As for the fourth quarter of 2023, we have penetrated approximately 6.6% of the estimated 450,000 annual bunion surgeries in the U.S. up from 5.5% in the fourth quarter of 2022 and reflecting approximately 2.7% market penetration of the estimated 1.1 million annual U.S. surgical candidates that constitute our $5 billion-plus total addressable market. We've also expanded our…

Thank you, John. Good afternoon, everyone. Revenue for 2023 was $187.1 million, representing 32% growth over the prior year. Fourth quarter revenue was $62.2 million, a 25% increase compared to the prior year. Growth in the fourth quarter was driven by increases in procedure volumes and increases in blended average selling price due to increased adoption of the company's newer technologies and expanding portfolio of complementary products. Although the fourth quarter included 1 less selling day than the prior year, the month of December actually had 2 less selling days. On an average daily sales basis, we grew 27% in Q4. We sold 9,665 Lapiplasty procedure kits in the fourth quarter, a 15% increase compared to the same quarter last year. Blended average selling price was a record $6,437 in the fourth quarter, up 9% over the same prior year quarter. This higher blended average selling price was 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 early impact from SpeedPlate and Hammertoe as our direct sales channel continues to increase their procedure volumes across our surgeon customers. For the full year 2023, revenue was $187.1 million, a 32% increase over 2022. At the top end of our preannounced revenue expectations of $186.7 million to $187.1 million and above the high end of our prior 2023 revenue guidance range of $182 million to $186 million. We sold 29,675 Lapiplasty procedure kits for the full year 2023, a 20% increase versus prior year with a blended average selling price of $6,306, a 10% increase over the prior year. Gross margin was 81.6% in the fourth quarter of 2023 compared to 81.9% in the fourth quarter of 2022. This 30 basis point decrease was primarily due to…

Thanks, Mark. In closing, we delivered another year of significant progress in 2023 and expect to remain on track to drive strong growth and profitably scale our business in the years ahead. We are driving a market conversion in a large underserved market as the fastest-growing company in foot and ankle. We believe we're in a great position strategically with best-in-class bunion, midfoot and related complementary offerings and expanding TAM with the addition of new technologies such as Adductoplasty, hammertoe and SpeedPlate with more innovations to come, supported by differentiating clinical studies, continued strong additions to our surgeon base and a powerful and established direct sales team. We look forward to aggressively pursuing these significant opportunities to drive the performance of our business, and I couldn't be more excited about the accelerating momentum we expect as we move through 2024 and beyond. With that, now let me turn the call over to the operator to open the line for your questions.

[Operator instructions]. Our first question comes from Drew Ranieri with Morgan Stanley.

Maybe first just for both of you on the top line guidance for 2024, just help us parse that out a bit more, you're looking for incremental revenue of about $35 million to $40 million. But just, talk to us about how some of the new product launches might contribute to that and with those, should we be thinking more that this is going to drive utilization or more drive your blended ASP higher? I know you said mid-single digits, but just curious what the bigger lever for you is in 2024 with some of these new product launches.

Yes. Thanks, Drew. Great question. Good to hear from you. Yes, let me tell you a little bit about how we're thinking about the guide as well as what that revenue increase is largely going to come from. We continue to have our focus primarily on our flagship Lapiplasty. So, we think a lot of that revenue growth is going to come from the volume increases. We will, as I talked about in the prepared remarks, that we're going to have some traditional seasonality, we saw some of that more pronounced last year, and we expect to see something similar. So, that's why we've given some color around what we expect to see the standard drop down in Q1 versus Q4 and then Q2 to be right around Q1 level slightly ahead of that and then Q3 in line. So, again, we're planning to build for the strong Q4 again this year but most of the revenue growth is going to come from having new customer surgeons that we continue to add those that were added in 2023 and then the volumes that will be driven primarily through Lapiplasty. So, we will have some incremental and additional complementary products that will also increase our blended ASP as well. So, we've talked about having mid-single-digit growth there.

And then just on the profitability side, it's encouraging to see more progress there towards breakeven, but you're still kind of in a unique decision. You're still a high-growth company, more opportunity ahead. So, maybe how are you thinking about dropping through potential top line upside down to EBITDA for this year? And is there necessarily anything that could change in terms of being a capital-light business model as you're thinking about further portfolio expansion with some of these new products that have been disclosed or undisclosed?

Yes. So, when we think about the profitability, we're really excited about what we have in store for 2024. As we mentioned in the prepared remarks we had positive EBITDA in the fourth quarter. So, we know that given scale and higher revenue volumes that we're definitely poised to have that improvement in our bottom line in that adjusted EBITDA line. So, I think a lot of it is just going to come through some leverage that comes primarily through the sales and marketing line item. We've talked about this in the past that as we've hired a lot of sales reps as they continue to get more experience and they are able to drive higher revenue volumes in their territories. That actually plays very well from a leverage perspective and so we'll see that we also have some opportunities to have some increased leverage in the marketing line item or marketing expenses as well. So, that's where a lot of that leverage is going to come from. And then, was there one last question on the back end of that, Drew?

Just how you were saying in the portfolio, yes, sorry, they're 50 questions in one. But just in terms of just the portfolio expansion, is there anything that would change like you're being a capital-light type of business model?

Yes, Drew, it's John. Yes, really nothing that will change there. We've got this really well-established and grained philosophy to have this capital-light model so the products and technologies that we continue to put out are designed with that intent. We talked about the margin from one Lapiplasty case covering for the cost of the instrumentation trade. SpeedPlate, we do on SpeedPlate case and the margin pace for 2 SpeedPlate instrument trays. So, it's a very capital-light model. It will continue to be that way.

Our next question comes from Robbie Marcus with JPMorgan.

Two for me. Maybe first, Mark, you talked about the typical drop fourth quarter to first quarter. The Street is sitting at about $49 million for first quarter, is that where you feel comfortable and what would be deemed typical?

Yes. Great question, Robbie. And that's where we do feel comfortable given the carryover that we've seen. So, historically, we see carryover that comes from the fourth quarter into the first quarter and given where we are in the quarter, we feel comfortable with that current number.

And then maybe down the P&L on adjusted EBITDA, you talked about progress towards breakeven. I think you have a 50% improvement, which would be about a $12 million loss for '24. You talked about profitable in fourth quarter, I believe, should we think about similar cadence as in 2023 where first, second, third quarter are negative and fourth quarter makes up the majority with the positive and offsets that or should we think about it improving throughout the year sequentially?

Great question, Robbie. Yes, I would think about it largely similar to what happened in 2023. We tend to have larger losses earlier in the year as we begin some of our marketing programs early in the year, some of our medical education programs that we start early in Q1 and Q2. And then as the revenue can increase, we will have positive EBITDA in the fourth quarter. So, I would expect similar to last year losses in the first 3 quarters and then there's going to be some positive adjusted EBITDA in the fourth.

Our next question comes from Rick Wise with Stifel.

I'm going to come back to the 2024 guidance, if you wouldn't mind. And I guess from 2 perspectives, one, when you're giving us this guide, what was your mindset? I mean, I could argue that the market seems strong, the sales force is doing a good job, you're clearly training the physicians, the portfolio is expanding, the SpeedPlate launched and demand seems incredibly strong, you get the picture. I could go on and on and on, help us understand why growth would be realistically 18% to 20% relative to the 30%-ish you grew last year. Why shouldn't we expect you to be more optimistic. Could you just talk about your thinking there?

Rick, this is Mark. Great question. I appreciate that. And I like embedded in your question on the positives that we have going from the company because that's the way we see it, too. We've got a great sales force, we've got some great products, we've got some products launching in the back half of the year. But the one thing that we see right now is, you talked about 32% for the full year, but the last 2 quarters, third quarter and fourth quarter were a little bit below that. And so, it's really early in the year, so we just want to be very prudent as we're considering how we're laying out the way we're thinking about 2024. And admittedly, even with the seasonality, it leads more of a back half-loaded guide but it's very early still, and we don't see it representing any loss of our momentum going into 2024.

So there's nothing about the market, the technology, the training, that's making you anxious, which leads to my second question on competition. Clearly, it seems clear to me from ACFS and from AOS that there's more competition than ever, more new products, folks seem to be waking up to the market and also imitating your strategy, nice complement. To what extent is this more of a challenge, less of a challenge? And to what extent is that maybe making you more careful, thoughtfully conservative as you start the year?

Hi, Rick, it's John, thanks for the question, and I'll take that one. We've been seeing progressively more people enter the space over the past 3 years and so new competitors entering the space is kind of nothing new to us. It's a really exciting market that we've sort of strategically redirected in terms of 3-plane bunion corrections, so, no surprises other companies want to enter that space, the space that we pioneered and developed. The TAM is really huge, it's over $5 billion in the U.S., and we continue to expand it with Adductoplasty and our hammertoe entry but the bunion space itself is still very underpenetrated, we're way out ahead, our retention rates with our surgeons are very high, our IP makes it difficult for these copycats and tends to produce less elegant solutions that work more like the old freehand Lapidus than they do Lapiplasty, and we just strongly believe that nothing works as well as the surge in patient interface as Lapiplasty does. And then you have to keep in mind these new entrants are entering the market using multiline, largely distracted sales forces. So, they only get really a fraction of that sales force's time and attention and we think our 3-pronged offense of direct focused sales channel, rapid product innovation and iteration and surgeon in patient education. While these are great offensive tools, they position us with a very strong defense as well and we're just going to keep reinforcing that over time and continuing to grow and establish ourselves as the fastest-growing company in the foot and ankle market, which is what we are today and where we're going to continue to be.

I'm just going to be rude and just a quick half of a follow-up to that. Early in the year presenting at JPMorgan, you described yourself as well positioned for 20% plus growth in '24 and you're guide to 18% to 20%. Why the change, John? I'm guessing folks are going to be curious.

I appreciate the follow-up and fair question. Like we are positioned to move towards EBITDA breakeven, we are positioned well to grow at that 20% range. We absolutely believe that. Our guide, and as Mark said, is intentionally prudent. It's early in the year, we're excited about the accelerating momentum of this business, both with the sales channel and the product launches that we have slated for the back half of the year. And I think we're just trying to be prudent and make sure that early here in the year we're allowing ourselves to build that confidence as we go through the year.

Our next question comes from Simon Nigan with UBS.

When thinking about the contribution potential from the new product launches over the next 2 years, how do you think about this? And do you think any of these products have the ability to emulate the success of Lapiplasty? I know you recently highlighted a significant platform launch coming this year.

Great question, Simon. I'll take that one and Mark can maybe add to it. As we look at the market, the Lapiplasty market opportunity is the largest opportunity we have, clearly. But anything we can do to build upon that and accelerate that and enhance our share over time, we're going to be working on. Adductoplasty was a very obvious add-on because 30% of our bunion patients had a midfoot deformity that nobody had a good way to correct. So, we created a way to do it, and we're democratizing that opportunity and that's a $0.5 billion opportunity in itself. But RedPoint technology that can add to our opportunity in bunions and midfoot corrections as well. And then, yes, we alluded to another significant platform that we're developing right now and we expect to launch in the back half of this year that will help us accelerate our penetration into the bunion market and expand utilization. So, hard to exactly say that any of them could match the Lapiplasty opportunity, but they all build on it and help accelerate our momentum into penetrating that opportunity.

I have one quick one for you guys. How do you think about utilization increasing moving forward despite your surgeon base maturing? When we look at our model we're not seeing utilization increase as much as we would have expected.

Yes. That's a really good question. We've talked about this on prior calls. We've had nearly 40% of our active surgeon base has come on board in the last 24 months, so in the last 2 years. So, we continue to make great strides in adding active surgeons year after year. So, what that means, we have a little bit of a step function and surgeons come in initially. They're doing around 6 cases in their first 12 months, and it continues to build up to nearly 20 cases after 5 or 6 years. So, it's unique, they get experience with Lapiplasty and then they tend to utilize Lapiplasty more and more in their practices. And so, mathematically, if you were to take away all these earlier or more recent, I should say, more recent surgeons that have come aboard who typically do fewer cases per year, our average utilization is much higher than what we've reported. So, I think that's a good problem to have, meaning we continue to add a lot of surgeons and we know that those who have been around longer just do more and so we expect utilization to continue to increase, notwithstanding the fact that we will continue to add a lot more surgeons in 2024 and beyond.

Our next question comes from Richard Newitter with Truist Securities.

Maybe on guidance, I just want to make sure I'm understanding some of the assumptions here. On gross margin, you had a little better than we were expecting in the fourth quarter. I know you guided to adjusted EBITDA. Should we think gross margin basically holding steady with 2023? And then I think you also referenced mid-single-digit growth in your revenue per procedure or ASP, however you want to characterize it, is that the right way to think of what's embedded in your 24 guide? And then I have a follow-up.

Yes, Rich. Really good question. I think you're right on all those fronts. Given a lot of new product launches and some of the mix shift we're anticipating maybe the gross margin to come down a little bit and we've talked about this in the past, as we introduce new products, we just don't quite have the same efficiencies in the gross margin initially. And so, I view 2024 as having maybe some slight pressure on the gross margin but nothing substantial. So, maybe a little bit less than what we saw in 2023, so, all your other assumptions are right on.

I actually have another follow-up, but I have a follow-up to the gross margin comment first. Just should we think of gross margin in the first half a little bit below what is going to be in the second half and on a net basis for the full year, it's down? I mean just to get the cadence right. And I'll ask my follow-up right now just on ASCs, you can remind us what your mix businesses in the ASC setting. It's something that we continue to hear at AAOS, that's the trend that's materializing throughout orthopedics. Talk about your portfolio, how you're positioned there and what that will do to your pricing and margins going forward.

All right. Great questions, Rich. There's 2 of them. I'm going to take the first one, and I'll give the second one to John. With respect to gross margin, again, we're not expecting substantial decreases over 2023, but I think the way you articulated it is the way we're thinking about it, that earlier in the year, it may be a little bit lower with some improvement in the back half of next year. So, again, just a slight step down year-over-year. We're still going to be over that 80% gross margin level, which is extremely strong, so, we feel really pleased. I just wanted to say that it will be tempered slightly versus last year. And then, John, with respect to the ASCs and hospitals?

Yes. Hi, Rich, so, I think there's a little bit of confusion out there on this topic because I know there's a lot of contemporary discussion about hip and knee volumes moving to the ASC setting, that outpatient setting. Foot and ankle has been done in those settings for 30 years, decades and we participate in ASCs, the private ASCs and then the hospital-owned ASCs. Obviously, the hospital-owned ASCs get a little better more favorable reimbursement. But we're market competitive in the private ASCs as well with different products. So, we have that have different price points. I would say it's the minority of our revenue that are in the private ASC setting and the majority is more in the hospital outpatient and our hospital-owned ASC, be that freestanding or at the hospital facility itself. So, we're competitive there and we continue to make progress there, but there's not this huge surge and trend towards foot and ankle procedures there like there is in hips and knees and maybe even some spine cases that is kind of creating a lot of talk in the hip and knee world.

Our next question comes from Ryan Zimmerman with BTIG.

I want to start on SpeedPlate. It's been off to a really good start, we've heard very positive feedback on it. I think, John, you called out that it's about 20% of cases today. Where do you think that can go? Because I mean, just doing some simple math, it can account for a decent chunk of growth in 2024 and it could probably swing higher if that 20% moves higher.

Yes. Great, great question. I mean, very exciting. I talked about this as being probably the most impactful technology launch for the company since Lapiplasty. These are things that our surgeons say, not me, but it's true. Very favorable response, we've had it in 20% of our surgeons' hands within Q4, and it made up 25% of our procedural revenue and we're just getting started with it. And the other piece of the momentum is, right now our sales force really has 3 great shots on goal with Lapiplasty/Micro-Lapiplasty, Adductoplasty and the evolution of that and SpeedPlate, 3 unique technologies they can only get from our company. So, one of those technologies is going to appeal to some foot and ankle surgeons sooner or later. And once they get interested in one, if they want to use SpeedPlate, we're going to introduce them to Lapiplasty and we're going to introduce them to Adductoplasty because 30% of the cases they need to correct the midfoot deformity. And if they like Adductoplasty, we're going to show them SpeedPlate because it makes the procedure faster and more convenient. So, those 3 technologies are really powerful and it's creating a very efficient model from a sales force standpoint. So, we love SpeedPlate, we think it has a lot of opportunity not only in Lapiplasty and Adductoplasty but in a lot of other areas in the foot for foot and ankle procedures, and you could see the ratio of our cases continue to rise as we get more sets out there and get into full commercial throughout the year.

And then, Mark, you talked about the cash on hand, I kind of know where spend is going. But you made a comment that was interesting which was the access to liquidity and I'm just curious if your view on how you're thinking about your cash has changed? And are you looking at assets that are potentially out there in the field, given those comments? And just your broader view on kind of not necessarily where you're going to buy, but just your appetite to kind of bring in more into the portfolio?

Yes. Great question, Ryan. And the way I articulated just our cash and access to liquidity was just to give the same level of information that we've given in the past, just to say what we have access to, we have a great relationship with our lender and so we have access to financing if needed. John and I have often talked about if there are opportunities for us to expand the portfolio, we did last year with some great technology, RedPoint, that's PSI. We're not saying that we require any kind of acquisitions or additional products in our portfolio to have this growth that we're talking about this year but we'd always be open to great complementary technologies if it were to match what we're doing here. So, that was not in any way suggestive of what we're planning to do or any strategy changes, but just to give the full perspective as far as what our cash on hand is in full liquidity.

Maybe I read into that a little too much, but thank you for clarifying.

No problem.

Our next question comes from George Sellers with Stephens.

On the sales force, I'm just curious, what does the productivity look like for some of your top-performing direct reps? And then how should we think about the capacity of your direct reps in terms of maybe the number of surgeons they can support or the level of revenue they can drive or how you're always thinking about it internally?

Yes. George, it's John. Good to hear from you. Good question. We have a broad spectrum of revenue productivity with our sales team today. You have some that have quite significant tenure, several years, and some of those reps can be in the several million dollar range. And then we have newer reps that are still trying to climb to $300,000 and beyond those newer reps, right? So, what we do know is when you get to the 2-year time point, most of our reps are operating at a level of revenue performance that we're very pleased with, and we believe is very sustainable and they're also operating at a cost of sales ratio that's very nice for the business, and we know can create a lot of leverage going forward. So, we feel good about the sales team, we feel good about their capacity to bring these other technologies forward and part of it is because of the efficiency of this model and the way we're bringing these products out. We're not asking them to run around from one part of the foot to another part of the foot and do a trauma case and then do a hammertoe where everything builds upon. Lapiplasty and Adductoplasty build on each other, SpeedPlate builds on both of those, and the hammertoe fits into the bunion case, our disposable instruments, they're problem-solving for mid-foot fusions that we specialize in and Lapiplasty cases. So, it's a very, very efficient way to sell. And we've proven that we can establish a powerful direct channel that's really well sustaining with room for future year nice cost leverage as well. So, hopefully that answered your question. Let me know if you need more information.

And then, Mark, maybe one for you. You talked about the marketing line as being an area where you can see leverage this year and in the future and I know you all have recently hired a new Director of Marketing. Can you just speak to some of the areas where you've been able to find maybe some more efficient ways to spend in that marketing line? And how you're sort of driving some better returns on those investments through that marketing line item?

Yes, great, great question. This is Mark. Let me take a first stab at that and if there's any other color John can add to it. Yes, over the past several years, we continue to increase our spending. We've tested a lot of different marketing techniques areas, whether it be social media, whether it be TV commercial spots, we've done a lot of marketing activities and campaigns. We do have a new Senior Vice President of Marketing, who's been phenomenal. We're lucky to have him, he's got a lot of great experience and he's already been able to really streamline a lot of our efforts to get similar results or higher results with even less spend. So, he comes as a professional, great experience, we're leaning on him. So, that's what we're saying, we can get the same kind of results or even better results without having to continue to increase our spend levels year after year. So, that's where the leverage can come in because if we can hold some of that spending levels consistent yet have better outcomes, that's where that leverage comes. John, anything?

No, I think you said it very well and comprehensively. We're excited about Nathan's expertise and the impact he's been able to have quickly on the business. He's only been here 6 months and driven a lot of efficiencies and productivity, got us sponsoring the national Pickleball championships, which has high demographic overlap with our patient group and a very impactful, very cost-efficient way to reach a lot of potential patients and a lot more creativity coming out of him and more to come, stay tuned on some new initiatives that we'll be launching here in the next 2 to 3 months.

I'm showing no further questions at this time. I'd now like to turn it back to Julie Dewey for closing remarks.

Thanks, everybody, for joining us today. We appreciate your time and interest. If you have more questions, please reach out, and we look forward to talking to you next quarter. This concludes our call.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.