Good day, and thank you for standing by. Welcome to the Treace Medical Concept's First Quarter 2024 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 first quarter 2024 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 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'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, outlook 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 2024 filed today and our Form 10-K for the full year 2023 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 first quarter 2024 highlights, the progress of our numerous product launches, including SpeedPlate, our other growth drivers and then spend some time discussing developments in the market environment, which is underpinning our decision to revise our full year guidance as well as tell you about our exciting opportunities and strategies going forward. Following my comments, Mark will cover specifics about our Q1 results and our 2024 guidance. We grew revenue 21% in the first quarter of 2024. Revenue performance was driven by increased procedure kit volume from our expanding base of surgeons and mix driven by increased adoption of our newer technologies in our core bunion and related midfoot cases, all supported by our dedicated direct sales team. We also benefited from strong patient demand trends that extended our seasonally strong fourth quarter into the first quarter. Additionally, we made encouraging progress with respect to our adjusted EBITDA results. Our adjusted EBITDA loss improved 18% to a loss of $8.3 million in the first quarter of 2024 compared to a loss of $10 million for the same period in 2023. We've expanded our position in the foot and ankle market by adding complementary procedures and technologies to treat related deformities, namely our Adductoplasty and Hammertoe correction systems, both of which coexist frequently with bunions and are addressed at the same time, and which together have expanded our TAM by an estimated $750 million without diluting our focus on the $5 billion-plus U.S. bunion market opportunity. Additionally, exiting Q1, we now have full market availability for a number of our newest technologies, including our SpeedPlate fixation platform, Hammertoe system, sterile instruments and our minimally invasive Micro-Lapiplasty procedure. We expect all of…

Thank you, John. Good afternoon, everyone. Revenue for the first quarter of 2024 was $51.1 million, a 21% increase with one less selling day than the prior year. Growth in the first quarter was driven by increased procedure kit volume from our expanding base of surgeons and increased adoption of our newer technologies, all supported by our dedicated direct sales team. As John mentioned, similar to what we saw last year, our seasonally strong fourth quarter extended into the first quarter. This year, there was more carryover from the fourth quarter into the first quarter than originally anticipated, which was the main driver of upside in the quarter. Gross margin was 80.2% in the first quarter of 2024 compared to 80.9% in the first quarter of 2023. This decrease was primarily due to a shift in product mix to newer products, partially offset by lower royalty rates. Total operating expenses were $59.9 million in the first quarter of 2024 compared to total operating expenses of $47.9 million in the first quarter of 2023. The increase in operating expenses reflects strategic investments in our expanding direct sales channel, investments in product innovation and support for other corporate initiatives. First quarter net loss was $18.7 million or $0.30 per share compared to a net loss of $13.5 million or $0.23 per share for the same period in 2023. Adjusted EBITDA loss improved 18% to a loss of $8.3 million in the first quarter of 2024 compared to a loss of $10 million for the same period in 2023. Cash, cash equivalents, marketable securities and investment receivable totaled $112.1 million as of March 31, 2024. We believe we have a lengthy runway in terms of our current cash level with sufficient balance sheet strength and flexibility to continue effectively executing on our strategic investments and growth initiatives for the foreseeable future. Let me now turn to our full year 2024 guidance. As John discussed earlier, we revised our revenue guidance for full year 2024 and now expect revenues of $201 million to $211 million, down from $220 million to $225 million, representing growth of 7% to 13% compared to full year 2023. We continue to anticipate adjusted EBITDA for the full year 2024 to improve approximately 50% compared to the full year 2023. Given our revised guidance, we now expect relatively flat year-over-year revenue growth in Q2 and high single-digit revenue growth in Q3 and in Q4 versus the prior year. Now before we open up the call for questions, let me turn it back to John for some concluding comments. John?

Thanks, Mark. As we wrap up, I want to take a minute to highlight what we believe to be the key takeaways from this call. Looking ahead, Treace's evolution from a purely Lapidus-focused company to a comprehensive bunion solution company is underway and on track. We continue to be relentlessly driven by our mission to advance the standard of care and are innovating to meet demand for certain customers and their patients. I'm confident we have the right team in place to navigate the current market challenges we face, achieve our ambitious goals and ultimately deliver long-term value to our shareholders. 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 the line of Robbie Marcus of JPMorgan.

This is actually Lilly on for Robbie. Maybe just starting with the competitive dynamics, what changed? It sounds like for a really long time, you really weren't seeing any competitive impact at all. And now all of a sudden, it's created this pretty meaningful impact to your momentum. So what happened there? And can you give your -- or talk about your confidence in your ability to recapture some of that share loss that you're seeing, especially given you're going up against several larger ortho players?

Lilly, John Treace here. As we talked about competition in the past, what we've stated is we know there are more competitors entering the market. We recognize there's competition, but that we had yet to see anything that was of a significant headwind that would thwart our ability to hit our communicated revenue targets. What we're communicating here and with this revised guide is that we now are feeling that type of competitive pressure that is creating a headwind. So that's why we had to make the guide change. We've discussed the increased use of MIS osteotomies in the marketplace, which we believe we have a great solution for later in this year. And specific to Lapiplasty, we've seen competitors become a little more aggressive with getting doctors to trial these alternative products, and that's another headwind. Surgeons like to often evaluate new things, and there's just a lot of them out there to try right now. So it's hard to say how many of these surgeons will try it for a competitive product for a while and then ultimately come back to Lapiplasty and then how many might fully convert and stick with a competitive offering. We've seen a lot of these scenarios where surgeons evaluate other systems, and they do come back to Lapiplasty, but it definitely creates some headwinds. But fundamentally, we believe that as we get more of our Osteotomy MIS sets into the market over time late this year, along with our other planned launches, this should put us in a much stronger position as we'll have a comprehensive suite of union offerings to bring to our base of nearly 3,000 Lapiplasty users who, on average, are using osteotomies for half or more of their cases. So I think we've got a great plan in place. We've got a little bit of a headwind here for the next couple of quarters, and we'll look forward to those launches at the end of the year.

Got it. That's helpful. And then maybe just a follow-up on that. I appreciate that you're not breaking out kits and physician count and ASP anymore. But can you talk through which of those pieces is really the driver of the step down? Are you not able to train as many physicians? Is utilization declining? Is it the ancillary products that you're not able to tack on as much? So how should we qualitatively, I guess, be thinking about all those pieces moving forward?

Lilly, this is Mark. Maybe I'll take a first shot and then John can add any incremental thoughts. You talked about the growth and what is really driving that growth. It came from 2 things, as we've talked about. It's coming from incremental kit volume as well as mix. And that mix is involving these new products that John talked about. We have SpeedPlate, which is a premium priced product. We have hammertoe. We have these incremental complementary products, stares instruments, that are used in the procedure. So it's really coming -- the 21% growth in Q1 really came from both volume as well as mix.

I was asking for the full year. So how should we be thinking about how those pieces play into the lower guide? Appreciating that you're not breaking them out specifically, but qualitatively, what's moving lower in those buckets?

Yes. So that's a great question. So what we will continue to see is increases in both volume as well as our blended ASP. We've been talking last year, we saw a lot of uplift in what we referred to as blended ASP, meaning that's really the mix and our new product launches that are used at the same time as our core Lapiplasty procedures. So we will continue to benefit that from that product mix and new product offerings this year, but we will continue to see volume increases as well. So it's going to come from both the volume increases and then the incremental products. So what we saw in Q1, maybe not at the same growth rate, but we're going to see similar growth from both.

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

Just the first one, it sounds like you're experiencing stepped up competition from the "knockoff" bucket on your core Lapiplasty offering. So what just -- do we think in the updated outlook we just supposed to view it as you continue to see that trialing and that competition getting worse? And then you offset that with some of the continued mix items to some extent from the growing portfolio and then we buy time until the MIS offerings in osteotomy come, and that's kind of the call down on the outlook? Or I'm just trying to understand what the trend is on the core Lapiplasty competitive situation over the next 2 to 3 quarters before you even have an offering to start to make inroads on the MIS osteotomy piece?

Yes, Rich, this is Mark. I think the way you articulated it, to begin with, is right that we see continued competition from competitors in the Lapidus space that are indirectly with Lapiplasty. We have a tougher comp in Q2, and we have easier comps in Q3 and Q4, and we expect to see some benefit from these new product launches in the back half of this year. So that's going to help us with the growth in the back half.

Okay. And then just as we think of the -- obviously, it's a slower top line growth trajectory, but it sounds like you're going to accommodate the P&L accordingly. Can you talk a little bit just how you plan to manage the P&L? I see that you -- your updated EBITDA guidance is relatively unchanged on a -- it's going to increase 50% year-over-year. How much control do you have over the levers there? And it sounds like you need to step up spending as you're exiting the year. So just help me reconcile that.

Yes. So Rich, we're evaluating all these opportunities to reduce costs, and we're confident that we can definitely manage them. Based on our lower revenue guide, if you take the midpoint, or based on the lower guide, there's a healthy component of the cost reductions that come very naturally from reduced variable expenses related to COGS, commissions, corporate incentives and then the remaining expenses are discretionary in nature, that we know that we can manage and will impact our business longer term. So we're a nimble company. We're nimble enough that we can operate the P&L effectively without losing sight on our core opportunities. So we feel comfortable with that P&L guidance.

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

Maybe just, again, revisit the competition again. You mentioned you're at about 3,000 surgeons now. So maybe just hone in on this a little bit more and kind of like what you're seeing in your surgeon base. And I think we're also all kind of struggling to see or really understand that the 7% to 13% growth guidance that you're giving now is really derisked for the competition at this point. Like why should we be confident that this is the right range? What are you seeing to maybe help instill that?

Yes. Drew, it's John. I think we feel pretty good about the guide. We've definitely got some headwinds, but we also have tailwinds. We're still adding new surgeons, but some of the volume that our surgeons were doing are being taken by some of the competitive trials, some to MIS osteotomy. So we're just seeing a -- we plan to continue to add new surgeons. It's just that the efficiency we're getting per surgeon is a little reduced. And then there's some churn there as some may decide to go with a competitive product mid or longer term. So is that -- I think that -- anything else I missed there, Mark?

Yes. And we feel really good. I mentioned it a little bit earlier that the comps are much lighter in Q2 -- in Q3 and Q4. So that's going to -- that gives us additional confidence. And then having these new product lines that have been we've been working on for a long time here. We've developed some great products, not by ourselves. We've used a great surgeon advisory group to help us build these new MIS products. We've got -- John also mentioned, we have other things that we've been talking about for a while coming. We've got Redpoint products. We have a new SpeedPlate design that's coming. And we have other things as well that were always coming in the back half of the year with easier comps. So we feel good about the guide and that it's been properly derisked.

Okay. Got it. And again, just with the surgeons, can you talk about maybe like what attrition rate you're maybe seeing in the surgeon base at this point, compare that maybe to historical levels? And when we do think about the surgeon base, I mean where in the curve or the adoption curve are you kind of seeing the most impact within the kind of the competition dynamic? I mean is this happening more to like your year 1, year 2, year 3 surgeons? Or is this getting into even some more of your tenured base?

Yes. Great question, Drew. So we've talked about that we said last year that we plan to grow 250 to 300 surgeons this year we're well on track with that. We continue to add surgeons, they fuel current and future growth. And so we continue to do that. What we're seeing is that it's not so much an attrition rate. It's more of how often are they going to use our Lapiplasty, this Lapidus solution in the OR. And to the extent there are competing products, both from an MIS perspective, that's the osteotomy, it's a different approach altogether to the bunion correction, or if there's other Lapidus type solutions, there's just a lot more of them. And so we're seeing that. We continue to add new surgeons. They continue to do what we're expecting them to do in that first year, but we're seeing some of our more tenured surgeons who have been using other options rather than Lapiplasty exclusively.

[Operator Instructions] Our next question comes from the line of Harrison Parsons of Stephens.

This is Harrison on for George. I wanted to start on rightsizing the P&L. I was wondering if you could just expand a little bit on costs or areas that you could see costs take out. Is this primarily in the sales and marketing line? Or are there other areas we could see some leverage in 2024?

Harrison, this is Mark. Great question. As I did mention before that when there is lower revenue, there's a fair and healthy portion of costs that come out because they're purely variable in nature. And so there will be reductions in that sales and marketing line item just because that's where a lot of the variable expenses come from. But there will also be some overall reductions throughout the P&L. But again, we believe that those are going to be discretionary spending items and that we're definitely nimble enough that we can operate the P&L effectively and without losing sight on all these commercial initiatives and programs and launches that we're talking about. So it's -- yes, there will be some that are variable in the sales and marketing line, but it will impact some of the G&A and R&D as well.

Okay. Yes. Sounds good. And then in terms of protecting your IP, I was wondering if -- because I mean I guess I know there's been competition for a while. Has there been a new product? Or is there something specific to go after there? And kind of what's the game plan in terms of protecting that IP?

Yes, Harrison, John here. We're really not going to comment much on our IP strategy timing. But as and when things may happen, we will communicate to you as we progress.

Our next question comes from the line of Danielle Antalffy of UBS.

This is Simon Nigan on for Danielle. When you think about the competition that you're -- when you think about the competition that you're currently facing, is this coming in the form of larger competitive headwinds from surgeons not converting over from osteotomies? Or is this purely from the competitive Lapiplasty products? Just want to know how we should think about that.

Yes, Simon, John here. it's really not one competitor per se, but it's an amalgamation of a number of competitors, big companies, small companies, public and private, that are now selling products intended to directly compete with Lapiplasty. Several of those companies also offer MIS Osteotomy products, which, as of this time, we do not have, but that's a temporary situation for us. And there are more competitors today than there were last year. But we're focused on effectively navigating this market environment and continue to work to capture opportunities ahead and innovate for our surgeon base and we've got a great MIS Osteotomy platform coming in Q4, and we're very excited about the capabilities that we'll have and transforming Treace Medical into a full-line bunion product company and fueling the next leg of the growth of this business.

That's really helpful. And just a quick follow-up for you. There were a couple of comments on how efficiency per surgeon has come in maybe a bit less than expectations. Do we think that this is impacting, I guess, maybe your future targets for total Lapiplasty penetration growth? And how should we think about this impacting utilization over the next, I guess, over the near term?

Yes, that's a great question. One thing that we continue to see is a nice steady uptick of surgeon -- net surgeon adds. So we continue -- we had 475 adds last year. We've had a lot of surgeon adds. We've had healthy surgeon additions this year as well. So we continue to see that. It's been more of -- surgeons have always had the option of how to approach unions. And so we believe that Lapiplasty provides a great solution. We have a lot of clinical data, we believe, more than any other Lapidus type solution. And so we have a lot of confidence that our Lapiplasty solution gives great results, and it's elegantly designed for surgeons. We constantly and regularly hear how much they appreciate the design in the OR, we've made it faster and more effective and more efficient. However, surgeons have always had the option of whether or not they're going to approach a patient surgery with a Lapidus procedure or an osteotomy. And there have been some differences between the 2 approaches. And so we continue to see that, and some surgeons continue to use Lapiplasty but may have may decide that maybe the percentage of the Lapis or the Lapiplasty procedures in their overall patient base is shifting a little bit. So it's more of that. I don't want to say that's the answer for every surgeon because every surgeon is different, but we've definitely seen a trend that MIS Osteotomies are more and more of the overall procedure base.

And Mark, I think that's why we're pretty excited about this upcoming MIS Osteotomy program that we're going to be launching because now we can be the solution provider for those cases that they're opting to do MIS Osteotomies on today instead of a Lapiplasty potentially.

Julia, operator, are you there?

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

Thank you, and 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 does conclude the program. You may now disconnect.