Good day, ladies and gentlemen and welcome to the Q1 2019 OrthoPediatrics Corp. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Ms. Tram Bui of The Ruth Group. Ms. Bui, 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 would 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-Q, 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, May 9, 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 would like to turn the call over to Mark.

Good morning, everyone and thank you for joining us today on our first quarter 2019 earnings conference call. We advanced with another quarter of systematic achievement and I am delighted to review our progress strengthening our leadership position in the pediatric orthopedic market. I will begin with a summary of our performance during the quarter and then run through the six growth initiatives that are contributing to our success. These include new products, increased set deployments conversion of international stocking distributors to sales agencies, clinical education, acquisitions and culture. I’ll then turn the call over to Fred for a more detailed financial review before inviting questions. We are pleased with the momentum we sustained in the first quarter of 2019 following a record setting 2018. We delivered first quarter year-over-year revenue growth of 21% or $14.7 million, which was driven by strength across all our business segments. Most notably, Scoliosis, which grew by an impressive 59% in the quarter, and international, which grew 28% in the face of very strong comparables last year. Trauma and Deformity correction also grew at double-digit levels despite a temporary slowdown in elective deformity surgeries throughout the United States, which Fred will discuss in more detail. Based on trauma and deformity’s strong start in April, we believe that this slowdown has ended and we are actively managing the impact of the inherent variability of surgical volumes through continued diversification and expansion of our surgeon base and product scope. We are also pleased with the favorable sales impact of recent product launches. This performance keeps us on track to achieve our full year 2019 revenue guidance of 21% to 23% growth and to sustain our 10-year record of consistent 20% plus annual sales growth. We also remain on track to increase our annual investment in consignment…

Great. Thanks Mark. Total revenue in the first quarter of 2019 was $14.7 million, up 21% compared to $12.1 million for the same period in 2018. U.S. revenue in the first quarter of 2019 increased 19% to $10.3 million when compared to $8.7 million in the same period last year representing 70% of total revenue. International revenue in the first quarter of 2019 was $4.4 million, a 28% increase compared to $3.4 million in the same period last year, representing 30% of our total revenue. Our first quarter revenue breakdown by product category was as follows. Trauma and deformity revenue in the first quarter 2019 was $10.0 million, a 10% increase when compared to $9.1 million in the same period last year. This included significant contributions from our PNP Femur, slightly offset by a slowdown in elective surgeries, Mark mentioned earlier. The slowdown has been confirmed by surgeons, hospitals and our sales agents and may have been impacted by the extraordinary cold weather, prolonged flu season in many parts of the country as well as high volume KOLs extended trips away. We are pleased that this trend did not continue in April as we saw a very strong start to the second quarter in our deformity correction business. Scoliosis revenue in the first quarter of 2019 was $4.3 million, a 59% increase compared to $2.7 million in the same period last year driven by innovative products, including our small stature 4.5/5.0 millimeter response system launched in the fourth quarter of 2018 and our BandLoc DUO launched in the first quarter of 2019 as well as continued product acceptance and customer adoption. Lastly, sports medicine/other revenue in the first quarter of 2019 was $381,000, representing a 33% increase when compared to $286,000 in the same period last year. Nearly all of…

Thanks, Fred. So, to conclude, we’re pleased with our start to 2019. We remain confident that the systematic execution of our 6 strategic initiatives will allow us to achieve annual revenue growth of 21% to 23% this year and maintain our 10-year track record of 20% plus growth. With increasing investments in product development, consigned sets, international distributor, conversions, clinical education program, acquisitions and development of our culture, we anticipate continuing to strengthen our competitive position. Finally, and most importantly, I’d like to thank all of our associates whose engagement and hard work make possible our success in everything. So, with that, I’d now like to open the call up for questions. Operator?

[Operator Instructions] Our first question comes from Rick Wise of Stifel. You may proceed with your question.

Hi Mark and Fred. It’s Drew Ranieri on for Rick. Thanks for taking our question. But just to start with scoliosis growth, it continues to just be impressive and consistently beating our projections. But just after delivering nearly 60% growth in this quarter, where do you go from here, especially with the small stature system launch and BandLoc? How sustainable is scoliosis’ growth rate at this point?

Well, Drew, I don’t think we consider 59% to be necessarily something we’re going to forecast, but we certainly continue to see a red-hot scoliosis business, and so projections growth projections on that remain extremely robust. I think in a nutshell, we have a classic synergy going on here between the large RESPONSE system, the new small stature system, which initially is being targeted at current RESPONSE accounts, the BandLoc system, which complements that, all then sort of turbocharged by the FIREFLY alternative to a robotic navigation. And it’s interesting how these products complement one another. And I would argue that is why this growth rate is so impressive. A final element of that may be that there remains considerable lack of focus by some of the major scoliosis companies on developing new scoliosis products, whereas we are working in spinal tethering, we’re working on a growing scoliosis system, we have surgeon teams that are themselves composed of large volume surgeons who are involved in those efforts and they recognize our commitment to advancing the future of spine surgery in children.

And then just to drill down a little bit more in small stature. I know that just from our channel checks, there’s been a lot of interest in getting the system to market. But just curious, can you talk about the roll out on what you’re seeing? And appreciate that it’s still early, but are you seeing that you are now able to get into more of the challenging accounts that you couldn’t before? And are you seeing kind of your existing spine accounts now fully switching to OrthoPediatrics?

It’s a great question. We launched that in December with a limited number of sets. We’re very pleased to roll out additional sets here in 2019, so that helps. So, it had somewhat of a limited access in the first quarter of 2019. But we’re very excited about the receptive reaction from the surgeons, who got access to it and we’re going to continue to expand the sets of that product to enable other surgeons to have access to it. It is what we thought it was going to be, which is getting the additional 20% of surgeries from the surgeons that are using it, and then that last piece of the puzzle, to work on converting larger surgeons to our entire product line.

And then just one last one, Mark, you called out trying to reduce variability in surgical volumes. I just want to hone in on that a little bit and I believe pediatric orthopedics generally are procedures are concentrated at some U.S. hospitals. But can you maybe talk a little bit more in depth about your growth opportunities ahead for adding new accounts? And then just more adding more surgeons at existing accounts, just as you look over maybe the next 12 months, maybe what’s the bigger of the two of those growth components?

Well, Drew, in fact, Fred and I are here in Chicago with our sales agents here in the United States who account for about 67% of our sales last year and it is interesting how many of them speak to this continued expansion that we are seeing at hospitals where we now sell something, but have an opportunity to sell more. We just had a team up at Boston Children’s, which had witnessed a dramatic expansion of revenues because more and more surgeons there are adopting OrthoPediatrics products in the trauma deformity area. So, I think that surgeon expansion is certainly something that we see very tangibly occurring now, and it is complemented by product expansion as well by the number of new systems that we’re launching, by the ability to get more and more deployed sets out in the hands of our surgeons. And I’m not sure I would point to any one of these as the key growth driver. I think again, it’s a synergy of more systems, more products and more surgeons. Fred, would you want to amplify on that?

No, I completely agree. It’s all of the above, which we think is one of the strengths of the business model.

Great. Thank you for taking the question.

Thanks Drew.

Thank you. And our next question comes from Matthew O’Brien of Piper Jaffray. You may proceed with your question.

Great. Thanks for taking questions. This is Will on for Matt. I guess the first question would be if I could just get a finer point on the slowdown in trauma and deformity. It sounds like there you know, the weather, flu season, some possible travel that disrupted those volumes. But anything else that would make us believe or confident that volumes will be stronger in the second quarter and that there’s nothing structurally going on with that particular market?

Yes, well, I mean, that’s something that we have – is a question we’ve been all over in analyzing what’s going on here. There is no evidence that we have lost cases, no evidence we have lost customers, no evidence that there is any heightened competitive activity that’s going on in the marketplace. And it is interesting and was confirmed by just casual conversations yesterday with some of our sales agencies. One guy I was talking to from the South was saying that some of his hospitals were actually sending home surgical staff early in the day, because there were a number of cancellations of these elective deformity correction procedures. Here in this country, we saw a very robust domestic trauma growth well in excess of 20%, but deformity correction grew only slightly, I think about 6% in the United States. And so, while no one reports ironclad explanations for this, we can point to extraordinarily cold weather early in the quarter, which would have caused discretionary elective surgeries to be canceled. You can’t operate on people who have the flu, and there was a very long flu season. And so that’s about all we can explain. But whatever the explanation, I think the key point is that April has been very robust in terms of elective deformity correction procedures as well as trauma, and so it appears that this variability has ended.

Well, that’s great to hear. And I guess building off of that, you didn’t see any volume disruptions on the spine side or did you?

Not as many. There were some, but really minor compared to the deformity correction that we include with our trauma sales. Why that would be? I don’t think I have an explanation. Probably is a function of the much greater number of elective deformity cases that we would do in any given year – quarter as opposed to scoliosis cases, which as you know, in the first quarter is at a lower level than it would be during the summer time.

Absolutely. And if I could squeeze one more in, $2.5 million [ph] you deployed during the first quarter, was that by design or were there some timing issues that came up with launching new sets, because I guess that implies obviously a pretty big – further of launching new sets, because I guess that implies obviously a pretty big further investment in the second quarter. So, just curious if that was by design or if those sets kind of pushed into the second quarter, which I think it was PNP Femur and further set rollout? Thanks.

Yes, great question, Will. So, we deployed $2.7 million in the first quarter, that was lower than what we expected to. But also of note, on the balance sheet, you’ll notice that the PP&E number went up by $5 million and inventory on top of that went up another $3 million. So, we had a lot of partial sets come in and we were waiting on 1 or 2 key instruments from some of our suppliers that was delayed and so that did delay some of our product launches that we wanted to send out in the first quarter in March that rolled into April. And so it delayed things by maybe 30 days or so. So, while we wanted to get those sets deployed in March, many of them went out in April instead. So, we’re caught up from what we expected in the first quarter and then we’ve got another, as you said, large set roll-out happening in the second quarter, which will be going out here before the summer selling season.

Great to hear. Thank you.

Thanks Will.

Thank you. And our next question comes from Ryan Zimmerman of BTIG. You may proceed with your question.

Thank you and good morning.

Hey, Ryan.

Hi, Ryan.

Good morning. I want to just follow-up on the slowdown. I appreciate the reasons you gave. Should we think though that it sounds like April starting off very strong. Do you think you are going to see a more pronounced seasonality so to speak in the Q2 and the Q3 or do you think you’re making up most of this volume specifically in Q2 just given the pace you’re kind of moving at in April? And then I have a follow-up. Thank you.

Well, Ryan, I don’t have a clear answer to that question. Obviously, we are hopeful that we make all of this up. I think that as we look at the robust pace in April and the projection for the second quarter, it looks very robust indeed. As you know, our first quarters are only 21% to 22% of the annual sales total and that’s been the case for what 5 years, Fred?

That’s right.

Going back. So, I don’t think we’re all concerned by what happened in Q1. In fact, I think we’re quite pleased that we were able to manage this temporary slowdown, as well as we did in the quarter. So, it’s full steam ahead in terms of the 21% to 23% guidance we’ve given for the year.

Sure. Appreciate that commentary, Mark. And then two quick ones for me, just can you remind us kind of your conversion plan this year internationally or maybe kind of the amount that you’re thinking in terms of international conversion that can help allay some of the softness we saw in the gross margins this quarter from stocking?

Well, we are hard at work at two of the larger Western European markets, which we think could be as impactful as the conversion in the UK, which took place, that was that – at the ahead of the conversion list. Fred, as to the financial impact that might have this year, I’m far less clear. Do you have any thoughts on that?

Well, we’re only – I don’t know, 25% to 28% of our international revenue right now are going through these agencies. And so that number can continue to grow in 2 aspects. Number one, as we deploy more and more sets to those locations, which we did in 2018 and we have more sets going to them here in ‘19, that additional deployment will enable us to grow faster in those locations and those gross – higher gross margins in our stocking distributors will help the overall gross margin of the business. And then the second point is additional conversions of additional countries particularly in Europe, which we are working on and should happen yet this year will have an additional favorable impact on the gross margin. And Ryan, as you look back in 2018, you’ll see the gross margin is higher in the second and third quarter and then it’s softer in the first and the fourth quarter, and a lot of that’s just driven by the mix. I mean, the domestic volume given the summer selling season is so much higher in the second and third quarter, it drives those gross margins up pretty dramatically. And so we would expect to see that same trend in 2019 as we did back last year.

Very helpful. And then last one for me and I’ll hop back in queue. POSNA next week I think in Charlotte, anything we should be on the lookout for or anything that you want to give us a little preview of ahead of the conference? Thank you guys for taking the questions.

Thanks, Ryan. No, I think we’re looking into POSNA as being even bigger and better. In fact, we’re sending an even bigger army to that than we normally do. We’re reaching the point that I worry about the society beginning to limit our numbers, because we do tend to dominate it as you know by your attendance. We’re doing a number of symposiums and training sessions as we do year-by-year. I think that it promises to be an extremely good show. So, it really will be more of the same.

Wonderful. Good to hear. Look forward to it. Thanks, guys.

Thanks, Ryan.

Thank you. And our next question comes from Margaret Kaczor of William Blair. You may proceed with your question.

Hey, good morning, guys. Thanks for taking the questions. Maybe the first one for me is a follow up on the OUS market and kind of the drivers of growth within that this last quarter was maybe a little bit higher than we expected. So how much of that was driven maybe by those new sets, some of the conversion of distributors to agency and so on?

Yes, absolutely. So, we’re very pleased with the continued aggressive growth that we’re seeing in those countries we converted, Australia, New Zealand, as well as the UK and Ireland, and we did add a little bit in with Belgium and Netherlands as we converted that in the first part of this year. But by deploying more sets in 2018, it’s aggressively ramping up the growth of those countries, which is just tremendous to see. So, we saw aggressive growth there and then we also saw growth in our stocking distributors albeit not as much as the agencies. And that really is impressive on top of the 42% growth that we saw in our international business in the first quarter of last year. So, very pleased to say the least with the performance of that team.

My take on this thing, Margaret, would be that we again saw in the first quarter the value of this conversion to sales agencies in terms of our ability to ramp up the pace of penetrating these markets. The growth in Australia was remarkable. And last year, we saw equally robust growth in the UK and this would never have happened unless we had effected these conversions, where we can pace the degree of set consignments and work with our sales agency on [Technical Difficulty].

[Technical Difficulty] throughout the year keeping on that topic, how should we think about international either as a percent of growth related within guidance or as a percentage of total sales?

Yes, I think as we said on the last call, we do continue to expect the international business to grow slightly faster than the domestic. With these additional conversions, there’s definitely a boost that it gets in the year and there is just demand wherever we go, which is tremendous to see. So, particularly if we do some of those conversions later in this year, it is tremendous to see. So, particularly if we do some of those conversions later in this year, it could boost it in the third or maybe fourth quarter of this year. But overall, we see robust demand everywhere we go. So, we’re very excited about that continuing and it’ll probably outpace the overall growth of the company slightly in 2019.

Okay. And then maybe last one for me. In terms of rep hires continuing to move forward on an overall basis. Maybe you can give us some guidance over how we should view that throughout the rest of the year, maybe how things have laid out over the last 6 months and how that maybe compares within the agency model versus otherwise? Thanks.

Well, I think that the headline here is that we would expect the selling organization to be growing at least as fast as revenues throughout the year. But in any given quarter, it’s going to be lumpy. I think we’ve said in the past that we are right now at work with all 33 of our domestic sales agencies on a scaling strategy that would enable them to anticipate the kind of growth in the sales force required to keep up with the growth of our company, as well as the continued expansion of products, both in the scoliosis and the trauma and deformity field together with the potential of laying in acquisitions, which would be additive to that. And those discussions are ongoing. But I’m delighted to report that we have a highly motivated group of sales agencies in this country, who are very eager to expand their sales forces as they keep up with us and as they increase their focus on OrthoPediatrics.

Great. Thanks so much.

Thank you, Margaret.

Thank you. [Operator Instructions] Our next question comes from Rick Wise of Stifel. You may proceed with your question.

Hi, guys. Just a follow-up question. Just in terms of the trauma and deformity slowness that you saw in the quarter, and I am sorry, if I missed this, but did you quantify that impact? Just considering that it’s been growing in the 20% range, should we kind of think about that as maybe $1 million to $2 million impact on your top-line for the first quarter?

Yes, it definitely was slower within that. The 10% [Technical Difficulty] there was two – there was a slow [Technical Difficulty] is made up of two pieces. So, the domestic T&D growth was actually higher than that, but it was pulled down a bit by the international growth, which was much, much lower. And if you remember that 42% growth last year, a lot of that was set sales and a lot of that was on the trauma and deformity side. So, while the overall 10% is lower than expected, the domestic wasn’t quite as bad as we had – as it implies, I guess, with that 10% growth. But no, we did not quantify exactly how much that impacted the revenue, but it’s probably in the $1 million range.

Okay, great. Thank you.

Thanks Drew.

Thank you. And our next question comes from David Turkaly of JMP Securities. You may proceed with your question.

So, I will just squeeze one real quick one in here at the end, but you mentioned about your new products PediFoot and then the CoorsTek Medical screw. I was wondering, I know you’re kind of more about singles and doubles than home runs. But is there any way to sort of size out some of the opportunities on the new products? Is there any one that you’d highlight as potentially being needle moving versus the [Technical Difficulty]?

Hey, Dave. That’s a great question. I think we would view PediFoot as a real needle mover this year just as we would see this year the dramatic impact of PNP Femur. And I think we probably throw the small stature in as well because of its potentiating impact on our whole scoliosis franchise. So, I think those three, PediFoot, PNP Femur and the small stature system launched last December.

Thank you.

Thank you, Dave.

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to Mark Throdahl for any further remarks.

Yes, thanks very much. Well, just one final comment and that is that I think as we look at the quarter, we feel that progress is of course measured in sales growth, but it’s also more than that. It’s a function of systematic execution across multiple growth initiatives and it’s a function of rigorous focus. So, I’d like to thank you for your interest in OrthoPediatrics, as well as your interest in our cause of transforming the lives of kids with orthopedic conditions.

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a wonderful day.