Ladies and gentlemen, thank you for standing by and welcome to the Quarter Four and Full Year of 2019 OrthoPediatrics Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Tram Bui from Ruth Group. Thank you. Please go ahead.

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 recent annual report on Form 10-K, which will be filed with the Securities and Exchange Commission shortly. During the call today, management will 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 5, 2020. Except as required by law, the company undertakes no obligation to revise or update any statement 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 2019 earnings conference call. We are very pleased with our fourth quarter results that drove a strong finish to 2019, which was our second full year as a public company. Systematic execution of our integrated growth initiatives generated another record performance, and continued to distance the company as the clear leader in pediatric orthopedics. This morning, I'll review these growth initiatives, which include expansion of our product offering, acquisitions, set investments, conversion of international stocking distributors to sales agencies, domestic sales force development, clinical education, and culture. Fred will then provide a financial review, after which we'll open the call to questions. We continued to build significant momentum in 2019 as evidenced by our industry-leading sales performance of 26% annual revenue growth to $72.6 million, which represents our 11th consecutive year exceeding 20% growth. More importantly, this performance results from helping 29,400 children in 2019. During the fourth quarter, we reported strength across our entire business, with Trauma and Deformity growing 34%, Scoliosis growing 21% and Sports Medicine/Other growing 18%, resulting in 30% total revenue growth in the quarter. This robust increase was in part driven by deploying $18.2 million of sets during the year and launching seven new surgical systems that will have a significantly greater impact on revenue growth in 2020 and beyond. 2019 also proved to be a pivotal year for OrthoPediatrics with the acquisition of Orthex and our entry into external fixation, which expands our addressable market by $200 million. Our strong sales performance in 2019 was not produced at the expense of gross margin, which increased to 75% or adjusted EBITDA which improved by $2.4 million for the full-year 2019, despite the significant and unplanned increases in quality and…

Great. Thanks, Mark. Total revenue in the fourth quarter of 2019 was $19.0 million, up 30% when compared to $14.6 million for the same period in 2018. US revenue in the fourth quarter of 2019 increased 30% to $14.2 million when compared to $10.9 million in the same period last year, representing 75% of total revenue. International revenue in the fourth quarter of 2019 was $4.8 million, a 32% increase, compared to $3.6 million in the same period last year, representing 25% of total revenue. Total revenue in 2019 was a record setting $72.6 million, a 26% increase compared to $57.6 million for 2018. US revenue in 2019 was $55.1 million, a 27% increase, compared to $43.5 million for 2018, representing 76% of our total revenue. International revenue in 2019 was $17.5 million, a 24% increase compared to $14.1 million for 2018, representing 24% of total revenue. Our fourth quarter and full-year 2019 revenue breakdown by category was as follows. Trauma and Deformity revenue in the fourth quarter 2019 was $13.6 million, a 34% increase compared to $10.2 million in the same period last year and $49.4 million in 2019, a 24% increase compared to $39.7 million in 2018, driven particularly by the addition of the Orthex hexapod deformity correction system, new product introductions, and our increase in deployed sets. Scoliosis revenue in the fourth quarter of 2019 was $4.9 million, a 21% increase compared to $4.1 million in the same period last year, and $21.5 million in 2019, 29% increase compared to $16.7 million in 2018, driven by continued product acceptance, customer adoption, combined with our increase in deployed sets. Lastly, Sports Medicine/Other revenue in the fourth quarter of 2019 was $430,000, representing an 18% increase compared to $365,000 in the same period last year. Sports Medicine/Other revenue in…

Thanks, Fred. To summarize, our performance in 2019 was driven by systematic execution of multiple growth initiatives, many of which we initiated years ago. All three of our businesses reported strong growth. And we believe that our diversified revenue base holds the promise of consistent future performance and supports 2020 revenue guidance of 22% to 24%. We appreciate the support of both legacy and new shareholders that helped us close the recent $60 million capital raise that gives the company the financial flexibility to support our ongoing growth, including $19 million to $21 million of investment in consigned sets in 2020 and further development and acquisition of new products and technologies. But most importantly, we are pleased that our exclusive focus on pediatric orthopedics has allowed us to change the lives of over 165,000 children since our inception. This volume of surgeries is highly unusual for a company of our size and is a testament to the strength of our product offering and our deep relationships with pediatric orthopedic surgeons. We look forward to continuing advancing the field of pediatric orthopedics, while we also drive increasing shareholder value. And with that, we'll open the call up to questions. David Bailey, our Executive Vice President, has joined us this morning. And I'm sure between the three of us, we'll do our best to answer them.

Thank you. [Operator Instructions]. Our first question is from Rick Wise of Stifel. Go ahead, please.

Good morning to you both. Thank you for the fantastic question. Let me start off, and I apologize for – after the outstanding results and the brilliant outlook for the year ahead, starting on the COVID-19 situation, just if you could help us think through the potential – any concerns that the coronavirus issues might have on supply chain, on manufacturing, on procedures? Remind us about China or Asia-Pac exposure. And separately, with your direct push into Italy, how are you thinking about the situation there? Again, sorry to start there, but just it would be good to hear your high-level thoughts on all that.

Absolutely, Rick. Let me take a stab at this. So, I guess, first of all, we do not sell any products in China. So, that's the first statement. I would say that less than $1 million of our revenue today or maybe 1% of the $73 million comes from Italy and Japan. Obviously, we just completed the Italy transaction. We would do that with or without this going on. And we're very excited about that transaction. I think the majority of this million dollars is really coming from deformity correction surgeries, and can be delayed. The remaining is very small and would be trauma related volume, which is obviously not deferrable. If we look around the supply chain, we have one very, very small supplier that we do get products from China. They were on a two-week shutdown. That has been completed as of last week, and they are now shipping products again. It's probably less than 1% of our SKUs comes from China. So, we think that will have a minimal to zero impact on us. The one thing we are keeping an eye on is currency fluctuations. The Brazil currency has changed by about 30% in the last eight weeks. And while it might not all be related to this, they are pointing to this as one possibility. And so, we're keeping an eye on that. And then, we may see – I would say we haven't yet, but we may see some delays in surgeries maybe in Italy and other places in Europe, but it's a very, very small portion of our overall revenue. So, I think it's early days as of right now. It's obviously developing day by day. We don't feel it's impacted the business at all as of today, but we'll see what happens in the next several months.

Thanks for the thorough answer. Turning to the 2020 outlook and the growth guidance, again, very impressive 22% to 24%. But just help us, maybe at a high level first, reflect on the fact that the revenue base keeps getting larger, and yet you're sort of stepping up your 2020 revenue growth outlook to 22% to 24%, step up in growth versus the past few years. So, Mark or Fred, talk about the factors in your guidance. Clearly, new products, more people, I heard you clearly, but what gives you that extra confidence that the business can sort of step up that growth? And given your wonderful consistent track record of outperformance, what factors/elements do you think give you confidence at the high end or potentially could be better than as we contemplate 2020?

Well, Rick, I guess my take on that is that we have – any businesses faces theoretical concerns going forward. But when we look at the tremendous success of Orthex so far, the fact that it is outstripping the growth rate of the company as a whole, when we look at seven new surgical systems introduced last year, many of which were late in the year and have really not even begun to contribute. And finally, when we look at the growth in infrastructure, both sales infrastructure as well as capabilities internally, in quality and regulatory that are here at a time when many companies are dropping products internationally, I think we think that those strings would trump any potential headwinds that company might face.

Yeah, I would just add, particularly on the Orthex side – sorry, Rick, let me just add a couple of comments on the Orthex side. Absolutely agree. And it's going to be particularly important in the first two quarters because it is all incremental revenue. And then, obviously, in the second two quarters, we'll anniversary having the product last year. So, that's a factor. And I also think, the significant investment in sets that we've done, not just 2019, but the significant increase we've done in 2018 and 2019, those combined, I think, enable us to feel like we've made the investments in sets, in people, growing the domestic sales force and our international agencies gives us confidence in that 22% to 24%.

Thanks. And just one last quick one from me. It's not the first time I've heard you, Mark, call out the attention you're getting because of Orthex specifically and what the impact on your total product line from – your language was from new and existing accounts to be a primary source of all pediatric products. I don't know if it's the right question. Please reframe if it isn't. But how many accounts of all your accounts are you? In fact, the primary source of all pediatric products. And how do we think about that march forward? Is this something we should be asking about and tracking and paying attention to? Obviously, that's a meaningful statement. Thank you.

Yeah, there remain very few accounts where we are in that position of being the primary source. I can only think of one or two at the moment. What is encouraging to me, however, is that several of the largest pediatric centers in the United States are now engaged in discussions with us about this and we're seeing a very significant increase in revenues from them. And this rolling ball will collect more and more mass as our image, our brand equity continues to grow. I think we would hesitate – Fred would blanch if we said that we would start sort of revealing where we are account by account because, of course, that gets us into telling you more about penguins than you need to know.

Never enough. But thanks.

Thanks, Rick. Wonderful questions as always.

Thank you. The next question is from Matt O'Brien of Piper Jaffray. Your question, please.

Hi, guys. Good morning. This is Drew on for Matt. Thank you for taking the question. I guess just to start out, I kind of wanted to talk about the progression of the spine business. Obviously, it's grown pretty significantly over the last couple of years. I guess what type of new surgeons are you attracting? Are these dabblers or high volume users? And then, has that changed from early days in the company's history?

Why don't we ask Dave to answer that question?

Drew, that's a great question. It's Dave Bailey. I think we're seeing an expansion of our user base across both of those customers. The dabblers, those customers who do, let's say, less than 15 scoliosis procedures a year, as well as starting to be taken much more seriously by a number of the major scoliosis centers in the United States. And I think what we believe is driving that, obviously, it's just a perpetual increasing of our credibility with those customers as our spine business and our scoli business grows, but also our commitment to some of these very novel, unique technologies and the development of those technologies for true unmet needs in scoliosis, such as the growing spine and early onset scoliosis. So, I think those factors are improving our image and our credibility with customers across the spectrum of usage.

Got it, thank you. And then, on your set deployment guidance for the year, you're guiding to $20 million bucks at the midpoint. This is a target you put out every year and beat and I expect you're being pretty conservative with the outlook there once again. So, I guess the question is, are you starting to feel that you're getting to the point where sets in the field is not constraining the growth of the business in any way? Or are you still a long way from that point yet? Thank you.

I think we're still a long way from that point. There is still tremendous demand for sets. But what we are trying to emphasize in this message is that we're now beginning to back the deployment of more capital efficient sets. The Orthex sets are much more capital efficient than most of our legacy sets with the possible exception of Pedi plates, which remains a tremendous money earner, and QuickPack will be even more capital efficient than Orthex. And so, we can stretch the $20 million investment grosso modo and get enormous traction from it as a result. Fred might be able to provide, though, a more precise answer to that question.

Yeah, that's exactly right, Mark. In 2019, we increased our set deployment by 50% over 2018. In 2020, we're projecting an 11% increase at that midpoint. And I think to Mark's point, yes, there is tremendous demand out there for sets and we're trying to be more measured, I think, in 2020 on those efficient sets and we feel like we'll get more revenue dollars for it. Orthex is a tremendous example, in that we get $20,000 to $30,000 for a surgery and the set costs about $40,000. Our Scoliosis business, we get about $20,000 per surgery and our set costs $200,000. So, Orthex, we're very, very pleased with that not only product technology, but also the capital efficiency of that system.

Very helpful. Thank you.

Thank you, Drew.

All right. Our next question is from Ryan Zimmerman of BTIG. Go ahead please.

Thank you. Thanks for taking the questions. Congrats on all your progress, guys. Want to start with guidance, follow-up on some of Rick's questions earlier, some of his great questions earlier. Just on the cadence of guidance for the year, we have a couple dynamics going on between, certainly, the inorganic contribution of Orthex, you have some of the seasonality that you typically see and seasonality with pediatric patients in the summer. And so, maybe you can just comment kind of on the cadence of growth for the year and how you see that kind of playing out.

Absolutely. Yeah, that's the point I was trying to make earlier is the growth we feel in the first two quarters is probably going to be slightly higher than the growth we see in the third quarter and the fourth quarter. With that being said, we think that the pattern that we have seen in the last five years in our business as far as the third quarter still being the largest quarter, followed by the second quarter and then the fourth and then the first, is the same pattern we'll see in 2020.

Okay, that's helpful. And then, on Orthex for a minute here, you commented certainly on the ability to train your sales force, but maybe if you could indulge me a little bit in terms of Orthex, where are we at in terms of its contribution? And I know maybe not maybe disclosing specifically, but do you feel like you're seeing growth from the sales force on Orthex and [indiscernible] or are we are still on a position where it's the legacy Orthex and we haven't seen the impact of training the sales force yet and that's to be seen over the balance of 2020 once you do kind of really get it out there in the field.

Actually, we are seeing the impact of new accounts with Orthex, new users. And so, while the legacy business is there, it is not supporting the growth, but this has been very steady actually. So, this is a new user, new sales rep selling the product kind of story.

I'd also add that this product is really brand new. When we bought it, it was maybe three years on the market. It maybe had a handful of users because, again, they were adult foot and ankle business and they didn't have a channel to market. And so, we're really in the very early stages of this thing and it's very exciting for us not only in 2020, but for the next five years as we continue to increase the training the sales force.

Ryan, this is Dave. One last thing I would say is what, I think, I'm really pleased with seeing is that this technology and the enhancement of our overall technology platform is also driving interest from sales reps and new reps without history with selling external fixation devices. So, we're hoping using this technology also to expand our selling organization. And while we're growing very competent with the device through our own organic sales training initiatives, we're also getting much, much more healthy, at least in terms of our understanding of these very complex procedures because of additions to our selling organization that have had historical experience with very complex, three dimensional external fixation devices.

That's very helpful. Thank you for that color. And then, just squeeze one last one in and I'll hop back in queue. International is a bright spot this quarter. Are there any one-time larger orders and stock in there to call out or is that all just kind of steady as she goes orders? Thank you.

Great question. We're very pleased with the mix of sales between our agencies and our replenishment stock. I would say we were less dependent on those stocky sales in the fourth quarter than we have traditionally. And I think it's reflected in the gross margin that we see in the overall business. It is a focus point for us to get to a steady growth of more replenishments and agencies and have much less of a dependency on set sales. And we took a big step forward in that regard in the fourth quarter.

Thank you very much.

Thanks, Ryan.

All right. Our next question is from Michael Matson of Needham. Go ahead please.

Yeah. Hi, Mark and Fred. It's David on for Mike. Thanks for taking the questions. So, the first one just on the sales force. You've grown the sales force pretty significantly. So, how are you thinking about managing that round of hiring? And then also, revenue growth is kind of tracking sort of in line with the rate of sales force expansion. So, any initiatives you have in place to kind of drive productivity and get newer reps up that curve a little quicker?

Well, you're quite right in observing that the sales force growth mirrored that of revenues and that has been the case the last couple of years and it has occurred more or less spontaneously. We're not setting targets for particular people. It's simply the way this thing is evolving naturally. I think that we remain in the mode of not worrying about driving sales force efficiency and leveraging that investment in some way, in large part because it's not our investment to leverage. It's not on our P&L. We simply pay a commission for sales as they are occurring. I think that the key thing that's occurred is that we had increased the number of our own field sales managers who are our employees from four to six and then have attempted to specialize. Three of them only focus on Trauma and Deformity and three only focused on spine and this is having a very significant impact on the pressure being applied to our sales partners in the United States in terms of turning in a balanced sales performance among all of our businesses, rather than just focusing on Scoliosis or just focusing on Trauma and Deformity. And that is actually working even better than I would have thought.

Great. That's helpful. And then, on the gross margin, that saw some pretty strong improvement this year and it sounds like a lot of it was geographic mix. Going into 2020, you have some new product launches and then converting some international distributors to sales agencies. How should we think of the improvement in 2020? Thanks.

Absolutely, David. So, yes, we've very pleased with what we saw, particularly in the fourth quarter and our 75% overall for the year. I would say that we're going to be probably in that range in 2020. Italy will help us slightly. It's not a tremendous size today. We'll be looking to grow that in the future, but that immediate transition will not change it dramatically. So, we'll be looking to keep it in that 75% range, growing over time, but very slightly.

Great. Thanks so much, guys.

Thanks, David.

Our next question is from David Turkaly of JMP Securities. Go ahead please.

Yeah, good morning. This is actually Dan on for Dave. Thanks for taking the questions. Just first off, going back to consigned sets, deployment in 4Q came in strongly than we had expected. So, just curious if you could touch on what led to that during the quarter, whether it's more opportunistic or just as a means of meeting demand for your new product launches? And then, just looking out to 2020, how should we think about investment cadence for sets? Should it be no more similar to 2019 as far as getting the sets on the field prior to the busier summer months? Thanks.

Yeah. Great question, Danny. Good to have you on the call. The fourth quarter, we are very pleased with. The majority of that was new product related launches. And to your point, the cadence is going to be similar to 2019 where we want to get as much of the stuff out in the first quarter and the second quarter to get ahead of that summer selling season, get those assets in the field before then. And then, typically, the third and fourth quarter is kind of reserved for a few other sets, but whatever our new product introductions are throughout that time period as well.

Great. And then, just as a follow-up, I know you talked about all the recent changes to the balance sheet, but just wanted to ask heading into 2020, how do you view your capacity for acquisitions. Obviously, have some adequate room for tuck-ins to the portfolio, but any idea how large of an acquisition, your balance sheet could shoulder at this point and any areas that you feel there's still gaps in your offering that you'd want to sell? Thanks.

Yeah, great question. So, we do have cash on the balance sheet, which is great. We're very pleased with our endeavor in December to put some more cash on the balance sheet to support the operations, more set sales. As you can imagine, we use some of that $72 million to eliminate the $5 million line of credit usage early this year to save some interest, but we still have plenty of cash available. As we look at acquisitions and we look at product offerings in general, there are still some gaps in the portfolio. We're working on filling some of those internally and there's definitely some assets out there that would help us fill those gaps faster as well. As far as size, we have some cash. If it was dramatic – I don't know what it would be, but if there was dramatic, we could go back to the market again in the future. We, obviously, have enough cash as we sit here today for the next several years and an acquisition would be the only thing that may require us to come back to the market. So, we feel really good about where we're at, particularly some of the volatility in the marketplace right now. We have plenty of cash on the books and we continue to look for assets, as you said, to build those product gaps.

Great. Thanks so much, guys.

. :

Hey, guys. Thanks so much for taking our questions and congrats again on the progress in the fourth quarter. So, two quick ones from us. On set deployment, you guys gave some color as to what segments of the business you'll be investing in and you're growing set investments. But it is at a lower rate than prior year. So, can you just remind us about the capital efficiencies behind set investments with Orthex just relative to other areas of your business? Any additional color there would be helpful.

Sure. We're deploying sets in all of our systems – legacy systems, new products that were launched in 2019 and new products that will be launched in 2020. But we are trying to be more disciplined and focused on those sets that are more efficient. And Orthex is just a great example. We love the technology of the product, but the asset utilization is tremendous. As I mentioned, I think before the – a case maybe builds out at $20,000 or $30,000 for Orthex and a set maybe costs $30,000 to $40,000 for Orthex compared to our scoliosis system, a $20,000 surgery with a $200,000 set deployment. So, we just get a lot more leverage, a lot more utilization on the Orthex side of the business than some of our other systems. And even within our Trauma and Deformity product lines, we have some that are much better than others. With that being said, at the IPO, we said we're targeting a dollar of revenue for every dollar that was deployed and we feel very good about that metric. We still are very confident in that metric. It's a 12 to 18-month time period delay before all of the sets are up to speed and running, but we still feel good about that metric and think it's the right metrics going forward.

I think we're also trying to signal, Kayla, that we are very concerned as a company about capital efficiency. And in fact, the investment decisions we make, any future acquisitions, much like the Orthex thing will have to have capital efficiency box ticked. And so, I think that will keep us from needing to be on a treadmill to oblivion to increase capital deployments at the same pace as revenue growth indefinitely.

That's really helpful. Thank you, guys. That's great color. And then, just on EBITDA – and thanks, Fred, for your comments there on the quarter. I'm sorry if I missed this, but can you just give us the sense for any items that you view as sort of more one time in nature? And how we should think about go-forward spending? Should we still be modeling EBITDA profitability in the coming quarters? Just want to understand sort of the puts and takes there? Thank you.

Absolutely. So, you can see in the adjusted EBITDA section on the last page of the press release some of those adjustments. But, really, the other things that are not called out in here in the fourth quarter are really heavy quality and regulatory spending along with validation. The new requirements from the MDSAP, the new requirements from the EU MDR were tremendous. A lot of new requirements. And so, we worked very hard to make sure that we're up to speed in complying on those. We made tremendous progress in 2019. We've got some more work to do in 2020. And as Mark said, the additional staff that we brought on, there will be some additional consulting fees, some additional validation fees, but a lot of those expenses were very heavy in the fourth quarter. And as you saw, we had $900,000 of loss – adjusted EBITDA loss in the fourth quarter compared to a negative $1.1 million for the full year. So, very heavy in the fourth quarter. We feel like we did get some of those out of the way, some will continue, but we made a tremendous amount of progress. As we look at the business and growing 22% to 24%, we're still definitely confident in our statement that sales and marketing is probably going to continue in the same range. R&D is probably going to continue in the same range and we're going to try to leverage the G&A side of the business. It is more and more challenging because, as I mentioned earlier, we have a $2 million increase in depreciation and amortization in 2020 compared to 2019 and we have a $2 million increase in non-stock – restricted stock expense in 2020 as we reach our third year of cliff vesting in our restricted stock. But with that being said, we're still committed to leveraging that segment of the business and having those expenses grow at a slower pace than the revenue.

Great. Thank you, guys.

Our next question is from Jon Braatz of Kansas City Capital. Your question please.

Good morning, Mark, Fred.

Hi, Jon.

Mark, in your commentary, you mentioned that you're pursuing maybe some exclusive arrangements with some – to be the exclusive provider of orthopedic equipment to hospitals. What does that really mean? What are the opportunities if you were to obtain some exclusive arrangement?

At a large account of it would be in the millions of dollars, several million dollars of incremental revenue.

Is this something that would be unusual for a hospital to do and it would be out of the ordinary?

No. In fact, many of these accounts, years ago, by default had to use Synthes as their primary supplier because these were adult instrument systems that were the only ones available, surgeons were used to MacGyvering bring their way through procedures with those systems, very few were ever developed for pediatric use specifically. And so, there are still a number of legacy contracts out there with companies like DePuy Synthes which we have been chipping away at quite systematically over the years and now are reaching a tipping point because we have this product line that is fully comparable except it's all developed for pediatric patients.

How quickly do you think something like that could – an arrangement could be achieved?

Everything in the hospital world goes slowly. So, it will be a gradual thing. But it's encouraging that we're beginning to see that now. There are two or three accounts that immediately pop into mind and we're seeing significant increases in revenue there at the expense of the very company I just mentioned.

Okay. All right, Mark. Thank you very much.

Hey, thank you, Jon.

That ends our Q&A session. I would now like to turn the call back to our presenters.

Well, I'd like to thank you all for your interest in the company and for joining us on today's update and we look forward to keeping you posted on our continued progress. Thanks again.

This concludes today's conference call. Thank you all for attending. You may now disconnect.