Good day, ladies and gentlemen, and welcome to the Q4 2018 OrthoPediatrics Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce, Ms. Tram Bui with The Ruth Group, you may begin.

Thanks, operator, and thanks everyone, for participating in today's call. Joining me from the company are Mark Throdahl, Chief Executive Officer, and Fred Hite, Chief Financial Officer. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of federal securities laws, including the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve material risks and uncertainties, and the company's actual results may differ materially. For a discussion of risk factors, I encourage you to review the company's most annual report on Form 10-K which will be filed with the Securities and Exchange Commission later today. During the call today, management will also discuss certain non-GAAP financial measures, which are used as supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period-over-period. For each non-GAAP financial measure referenced on this call, the company has included a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings release. Please note that non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for OrthoPediatrics financial results prepared in accordance with GAAP. In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, March 7, 2019. Except as required by law, the company undertakes no obligation to revise or update any statements to reflect events or circumstances that take place after the date of this call. With that said, I'd like to turn the call over to Mark.

Good morning, everyone, and thank you for joining us today on our fourth quarter and full year 2018 earnings conference call. I'll begin with an overview of our performance, including the factors that are contributing to our success and the future drivers of our growth. I'll then turn the call over to Fred, for a more detailed financial review before opening the call up for any questions. 2018 concludes another year of industry-leading growth with record setting, full year revenue of $57.6 million, which represents 26% year-over-year growth. This is our 10th consecutive year of annual revenue growth exceeding 20%. The strong growth in 2018 was driven by consistent execution across all of our businesses and the growth initiatives including a consistent cadence of new product introductions, increased investment and consigned steps, ongoing conversions of international stocking distributors to sales agencies and a growing commitment to clinical education. During the year, we continued to distance ourselves as the clear of the pediatric orthopedic market. We expanded our product offering to 26 surgical systems and invested $12 million in consigned sets. We saw a significant and accelerating revenue growth from sales agencies in the UK, Ireland and Australia and New Zealand and we added sales agencies in Canada, and we converted our stocking distributor in Belgium and the Netherlands to the sales agency model effective as of January 1, 2019. Furthermore, we increased our ongoing support of clinical education to 3% of sales as part of our mission to train the next generation of pediatric orthopedic surgeons. While increasing investments in these growth initiatives, we also demonstrated continued progress improving the bottom line, with adjusted EBITDA of $581,000 for the full year of 2018. We are extremely pleased with our performance, and we’re delighted that OrthoPediatrics is increasingly viewed by surgeons…

Thanks Mark. Total revenue in the fourth quarter of 2018 was $14.6 million, up 25% when compared to $11.7 million for same period in 2017. US revenue in the fourth quarter of 2018 increased 24% to $10.9 million, when compared to $8.8 million in the same period last year, representing 75% of total revenue. International revenue in the fourth quarter of 2018 was $3.6 million, a 27% increase compared to $2.9 million in the same period last year, representing 25% of total revenue. Total revenue in 2018 was a record setting $57.6 million, a 26% increase compared to $45.6 million in 2017. US revenue in 2018 was $43.5 million, a 24% increase compared to $34.9 million for 2017, representing 75.5% of our total revenue. International revenue in 2018 was $14.1 million, a 32% increase compared to $10 7 million in 2017, representing 24.5% of our total revenue. Our fourth quarter revenue and full year 2018 revenue breakdown by product category was as follows: trauma and deformity revenue in the fourth quarter of 2018 was $10.2 million, a 20% increase, compared to $8.5 million in the same period last year and $39.7 million in 2018, a 21% increase, compared to $32.8 million in 2017, driven by new product introductions and the increase in deployed sets. Scoliosis revenue in the fourth quarter of 2018 was $4.1 million, a 38% increase, compared to $2.9 million in the same period last year, and $16.7 million in 2018, a 44% increase, compared to $11.6 million in 2017, driven by continued product acceptance and customer adoption. Lastly, sports medicine and other revenue in the fourth quarter of 2018 was $365,000, representing a 28% increase when compared to $286,000 in the same period last year. Sports medicine and other revenue in 2018 was $1.2 million, a 3%…

Thanks, Fred. To summarize, our performance in 2018 reflected the systematic execution of multiple initiatives that strengthened our position as the category leader in pediatric orthopedics. First it was superior products, which will continue to drive growing adoption and utilization. Second, it was growing investment in consigned sets, which will in time produce at least $1 of revenue for every $1 dollar of investment. Third, it was continued conversion of international stocking distributors to sales agencies with an immediate increase in sales and gross margin, and we believe an acceleration of volume growth due to more aggressive penetration of converted markets. Fourth, it was clinical education programs, which exposed young surgeons to OrthoPediatrics at an impressionable point in their careers. Fifth, it was the acquisition of novel technologies, which can allow us to meet unmet needs and further strengthen our competitive position. These five factors will continue to allow us to maintain our 10-year track record of commercial success into the foreseeable future. Efforts to build and engaging non-hierarchical culture will continue to be the foundation of our work in building OrthoPediatrics into one of the great medical device companies. As we look ahead to the remainder of 2019, we will continue growing our R&D investment. We will consign the $15 million to $17 million in new sets with appropriate scaling of our sales organization, convert more international stocking distributors to sales agencies, and increase our commitment to clinical education programs. We remain confident that the investments in these initiatives will allow us to achieve our full-year revenue growth guidance, and with our recent follow-on offering we have the capital to make acquisitions that fill holes in our product line and have the potential to increase our total addressable market. With that I'd now like to open the call up for questions. Operator?

[Operator Instructions] And our first question comes from Rick Wise with Stifel. Please proceed.

Maybe let's start off with 2019 guidance, I know Mark that Fred always likes to stay conservative, maybe you can give us a little more exuberant reflection on your assumptions for your guidance range, and when you say we'll remain conservative, what's that mean, and maybe just talk about some of the high and low-end drivers. Is it about sets or the timing of new products or these international conversions, just give us a little more color on your thinking?

Yeah, absolutely. So last year going into 2018 our guidance was 20% to 22%. So we did increase that up to 21% to 23%, so an additional point on both the lower and the high end. And that is really reflective of the additional sets that we have now that we've completed the follow-on offering in December and are increasing the sets about $15 million to $17 million, whereas a year ago I was thinking that 2018 would be closer to $10 million in deployed sets. So that's the primary driver, as far as what could change that, clearly the sooner adoption of the sets that were deployed in 2018, and a quicker adoption of sets deployed throughout 2019 could impact that in a favorable way, as well as sooner addition of other international conversions in 2019 would have an impact on that.

I might add to that that we see Rick absolutely no deceleration or headwinds, with regard to a number of these growth initiatives. There will be a number of new product launches in the first half, and actually at this point they should all be done by Q3. There is no shortage of demand from our selling organization for more sets. In fact if anything I think Fred is having to restrain their exuberance. In terms of conversions of stocking distributors, there are discussions ongoing now with certain stocking distributors in Western Europe, and I'm very confident we'll be announcing some acquisitions in the first half. So it's really full steam ahead on all of that. We have I think a very prudent policy with regard though to guidance to the market, and that is something that I think Fred and I believe very strongly, and just as a matter of principle

That's helpful, thank you. Turning to maybe more specifically to scoliosis growth, scoliosis had an extraordinary year by any measure up in the mid-40s. We're modeling sort of low-20s kind of growth for '19, and again the expanded sets the FIREFLY launch and also some other factors I appreciate are driving. But why would scoliosis growth decelerate that much? Is there something we need to understand, why wouldn't it look more like 2018 in 2019? Help us just think and understand a little more about that

So we would be I think remiss to say that our scoliosis business is going to grow by another 44% in 2019. 2018 was the first full year when we had FIREFLY technology. So we signed that license agreement in the middle of 2017, and we started selling it in the second half of '17 on a limited basis. But in 2018, we really got a full impact of that technology selling through, not only are we selling the FIREFLY technology, but that also then brings along additional implant sales of our 5.5/6 system in '18. We'll continue to have some benefit of that, but it will be now comparable to the strong growth that we had in 2018. But I think we anticipate scoliosis continuing to grow faster than trauma and deformity, but we're not going to forecast the continued 44% growth in that business obviously.

Two last ones from me. The gross margins, you know Fred it was a touch weaker than I thought. It sounds like it's this international conversion. Is the fourth quarter gross margin rate the new norm or does it move back to where it's been in more mid-70s? Help us understand that, and I'll just go ahead and ask my last question now. Mark you're talking about cash solutions, priorities beyond set expansion to acquiring new novel technologies. Help us understand what are you looking at, where are the holes in the portfolio, what kind of hurdle rates - how do we think about this?

Absolutely, I'll take the first one on gross margin. So what a new impact in the gross margin that we didn't have a year ago is actually from the FIREFLY product. So that product, as I mentioned is a licensed product and that product does have a lower gross margin than our normal domestic margin. Our overall domestic products are selling through at 85%, and because this is a licensed product, it comes through at a lower gross margin in the 50% range. As that grew, dramatically in the fourth quarter, in particular, although (inaudible) throughout 2018, it did have an impact on our gross margins, and so that's a bit of a drag on the margins in the fourth quarter. Our overall sales are lower in the fourth quarter than they always are in the second and third quarter summer selling season, and so that scoliosis had a bigger impact. As we get into the summer selling season in 2019, our overall revenues are growing, it will have less of an impact, and as we have additional conversions that could help the gross margins. So I think to your specific question the fourth quarter gross margins are a little lower than I would expect to see overall going forward. But 74, 75 in that range is probably where I see it for 2019.

Speaking Rick to your very interesting final question, since the IPO we have amassed a list of some 30 potential acquisition opportunities, and now have discussions ongoing with a handful of those that are at the top of the list. I think that in terms of gaps in our product line, clearly we would see an early onset scoliosis a whole new era with regard to the development of surgical treatments that would allow surgeons to intervene with much younger children before their deformities have progressed. External fixation devices are clearly the number one gap in our current trauma and deformity product line, and there are opportunities to expand into other treatment options to follow our pediatric orthopedic surgeons into other products they might use in a non-surgical way in the treatment of patients before they progress to the need for surgery, and here there are a number of interesting technologies in bracing for scoliosis, for example. But in all cases, we would need to see criteria of filling a significant gap in our portfolio, proven growth potential, and ease of integration into the sales bag with minimal integration risk. And for the most part these are technologies or products, if it would happen to be a company, I think we would expect that that entity would have to be very small in terms of people thus minimizing integration risk and built around a novel technology.

And our next question comes from Ryan Zimmerman with BTIG. Please proceed

I want to follow up on Rick's earlier question on guidance, and just maybe help us understand a little bit about how you're thinking about the balance of growth between say the US market and the O-US market. It's historically been stronger outside the US on a smaller basis. Just maybe help me understand where you think that's going in '19? And I have a follow-up.

We're very pleased obviously with our overall international growth at 32% in 2018. What's really needed about the business is that there is strong demand for our products across the globe, and so we see as much opportunity outside of the United States, as we do in the United States deploying more sets in the United States. We've talked a lot about that demand continues, there's also demand in our agency locations outside of the United States, UK and Australia and now Belgium and Netherlands. So there's a lot of demand, so we can assign more sets there to continue to grow, and then all of our other partners across the globe continue to grow very aggressively. So we see the international demand equal to or more than our domestic demand and growth in 2019, and really beyond based on our future projections

That's helpful, Fred. And then if I could ask about the sales headcount for a minute here. You ended '19 or excuse me '18 with a 130 in your headcount; I think it was up about 18% or so from the start of '18. Help us understand where that maybe potentially going, may not from an America perspective, you're not comfortable giving that out, but where do you think that's going and the leverage you can drive off that, because certainly you're driving higher leverage off that growth in headcount based on the results in '18?

Ryan I think in the final analysis, this is not a precise metric of performance, and therefore the correlation between sales reps and sales growth is something that we simply cannot manage that precisely. We are now working or we believe that it is more important to work with our 33 sales agencies on individualized strategies, each of them would have to keep up with the growth of the company in all of its dimensions, and that number may vary from territory to territory. But the key to it is that our guys are thinking strategically, about how they will have to increase their headcount over the planning horizon, which in our case is three years. And it would mean that (inaudible) they’d need to double their headcount, each of them. But how they do that, where they do that is an individualized circumstance. So yes we've got a number in mind at this point, but on the other hand it is not something that is definitive or is the sort of thing that we can announce at this point in this sort of setting.

And our next question comes from Matthew O'Brien with Piper Jaffray. Please Proceed.

I was hoping to start on the instrument set side, the $15 million to $17 million is pretty robust. Would love to hear what gets you to 15 and what gets you to 17. And I don't know how much you want to disclose as far as the split between trauma and deformity and complex spine. But just help us think about where those investments are going to be really focused this year?

The good news just like demand is across the globe, the demand is across all of our product line. So again just like it was in '18 that investment will be deployed across both trauma and deformity, as well as the scoliosis business. And I think the difference between 15 and 17 is really the timing of some of our new product launches when those roll out and how aggressive we get on rolling out new sets in those different launches.

So is it fair to think Fred that it's probably more back half loaded, as far as the 15 to 17 million goes?

No, both historically and it's been true in 2018, most of this goes out in the first and second quarter. So in 2018, of the $12 million, 5.5 million of it was in the first quarter and 2.8 million was in the second quarter. And I would say that in 2019 that trend that pattern would be probably consistent with that. We try to get as many of those sets in place prior to the summer selling season.

Understood, that's helpful. Speaking of and it kind of duck-tailed off what you just said, that $5 5 million it’s actually in deployed in March of last year. Can you give us a sense for how those are tracking from a productivity perspective? I know you said one for one, are we getting close to that one for one level, and are you seeing any signs of even a little bit better on some of those sets?

We do track those each and every set, we track the weekly sales against every set, so we can look at utilization. We deployed that $5.5 million mainly at the end of March of 2018, and so we're just now coming up on that 12 month mark. As we've talked in the past it's usually 12 to 18 months until the sets are typically fully utilized. And what I would say is that we're absolutely on track with that pattern based on what we're seeing, very pleased with the utilization, and hopefully longer term, we could get over that dollar-for-dollar. But right now that still looks like it's a good number for forecasting.

And last one from me, just on the small stature size launch, I know it's early, I'd just love to hear a little bit more anecdotal or just qualitative commentary you're getting from the field in terms of discussions that that product is opening up for you. I know it's not a huge chunk of the overall market, but I know it’s a very gating factor for scoliosis business to some extent. So what have you seen so far in terms of new accounts' opening up or potential deeper penetration in existing accounts?

Well Matt, I think we are seeing exactly what we had hoped, which is that surgeons are saying okay, great, now that you've got this system I do not need to keep the incumbent supplier around. And I think that's going to be further accentuated in hopefully the second quarter when we launch our neuromuscular scoliosis system, which is, should we say an even more exotic system, but on the other hand is yet another reason that a dedicated user of a competitive of a competitor would not need to keep that competitor around at all. So, so far so good, in terms of the rationale for launching that small stature system.

And our next question comes from David Turkaly with JMP Securities. Please proceed

Just a quick follow-up on the 15 to 17, should we think of that as essentially opening new accounts for you guys that are both consigned sets or is that further penetration into existing accounts primarily?

It's really both. I mean these are consigned sets which go for new product systems that are being launched, they go into current accounts, where we feel that additional sets are required. They would be the basis for penetrating new accounts, and remember this is a surgeon-by-surgeon system-by-system kind of game we're in, and so there may be a given account where one surgeon is using the product extensively and his colleagues now want to use it. So we've got to place an additional set or more at the account for that very system. So it's really this multi-dimensional demand for more instrument (inaudible) sets.

And I realized you're still pretty early in the FIREFLY rollout here. But I was wondering if you might take a stab at guessing or estimating for us what percentage of your accounts do you think have used this to-date?

It remains a small number, and those that use it, has an extraordinary sort of uptake. It's very interesting that there are several classes of surgeons here in terms of advocacy of FIREFLY. There are some who have converted totally; they use it on every case. There are others who use it only on their more complex cases. And in most of these circumstances, these are not accounts that have been using navigation systems, robotic systems. But there are such cases as well, and I think that's because there just aren't that many robotic systems that are in use in pediatric centers, which typically don't have the sort of volume of spine surgeries that large adult hospitals would have, for whom those navigation systems really have been designed

One last one for Fred, maybe looking at your guidance, your growth expectations, the set deployment, the new product launches all kind of events happening early in the year. If we look at the P&L on your operating income line, should we expect leverage in 2019, do we think that the actual loss gets smaller? Given that you have all these investments going on, but you do have again really nice sales growth.

We're very pleased with the progress that we've made, really over the last four years, in leveraging the sales growth into smaller operating loss. And now into 2018 where we've got adjusted EBITDA positive, we absolutely will continue to see leverage each year going forward, not to the same extent of the sales growth, but we'll leverage the G&A and the business to continue to improve on that adjusted EBITDA profitability that will grow year-after-year-after-year. But one thing also to keep in mind in 2018, we did have $2 million of accelerated vesting of restricted stock that will not repeat in 2019. So we'll pick up $2 million of positive operating income just from that alone.

And our next question comes from Margaret Kaczor with William Blair. Please proceed.

Hey guys, this is Anna in for Margaret. Can you guys talk about the rollout of Femur in trauma and deformity and rollout of RESPONSE small stature? I was just curious has the majority of those initial sets been rolled out now for these products, and then in RESPONSE small stature particularly where would you say you are in that launch?

Well I think we're still at a very early stage of both launches, and I'd look to Fred with numbers of sets here that could be recited. But I think we have remained conservative with regard to the numbers of sets initially that we use for kind of our first phase rollout, and then we see how the uptake is and we will do more. So Fred, would you want to elaborate?

Yes, that's absolutely correct. So we rolled out the PNP/Femur in the middle of 2018, with our initial launch, it’s gone very, very well, and based on that we've increased the number of sets that we are ordering for 2019. So those will start to roll out here at the end of March of this year, and again into the second quarter. The small stature system launched in the fourth quarter in December of 2018, and we have more sets of that also being rolled out in 2019. So it doesn't all happen at once, we kind of continue to roll this thing out across the country, and across the world. And that both of those programs have more sets being deployed in 2019, based on the initial successes that we've had

And beyond the innate conservatism that we have in terms of preservation of capital and deploying it efficiently, there are a number of subtleties with regard to the launch of any of these sets, because of the complexity of the instrumentation. And despite the fact that we've got a small team of surgeon advisors, who are working with us on developing these instruments, it is astonishing that when they get into the hands of more surgeons, suddenly the need for a left-handed (inaudible) or a right-handed (inaudible) crack comes up, or well this handle is really a little too fat for female surgeons or all of these subtleties, and that requires then a modification of instrumentation. And obviously the smaller the installed base of systems that we've got out there with a new product, the easier the task of making those adjustments. So I think that will continue to be a, shall we say, a force for being conservative in terms of the numbers of sets that we would initially launch with.

Okay, that's helpful. And then pivoting to the international side for a bit; international revenue we saw strong growth against the tough comp. Can you walk us through which product category contributed the strongest outside of the US, and then what were the largest drivers as compared to what we saw in the third quarter?

As far as I'm concerned, we see a very similar profile, with the possible exception of scoliosis which is highly concentrated in markets like Australia and certain of the South American markets. We have very little scoliosis sales in Western Europe, but it's across the board, we see it everywhere in trauma and deformity, and in a place like Australia we see it in trauma and deformity as well as scoliosis. Fred do you have any more color on that?

Yeah, that's right. I would say that the international growth was similar to the domestic, very strong on the scoliosis side. We did start selling the FIREFLY technology in Australia in the second half of 2018. So that was another growth driver. But Anna your question is very relevant particularly as we come up on the first quarter of 2019, because you'll recall back in the first quarter and the second quarter of '18, our international business grew at 42% in the first quarter and 39% in the second quarter, and some of that growth was driven by selling incremental sets to our stocking distributors post-IPO, when we for the first time had enough cash to order sets that we could actually sell to these guys. So, we are coming on tough comp on those international segments in the first quarter and second quarter of '19. But aside from that we feel very good about demand of underlying products and that's continuing to be strong on the scoliosis side internationally, just like it is domestically.

Thank you. And with that that concludes our Q&A session for today. I'd like to turn the call back over to Mark Throdahl for closing remarks.

Just one final remark, and that is, I think one of the themes of today has been diversified sources of growth, superior products, increased investment in sets, conversion of international distributors, clinical education, and acquisitions. These five levers of growth I think will enable us to maintain our industry-leading growth rate virtually indefinitely, at least over the planning horizon. And all five contributed last year, all five will contribute this year, all five will continue to contribute over the planning horizon, and I think that will enable us to continue to gain airspeed and altitude. So thank you very much for your interest in OrthoPediatrics.

Thank you, ladies and gentlemen for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.