Good morning and welcome to OrthoPediatrics Corporation Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. We’ll be facilitating a question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Basco from the Gilmartin Group for a few introductory comments.

Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer; and Fred Hite, Chief Operating and Financial Officer. Before we begin today, let me remind you that the company's remarks 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 are subject to numerous risks and uncertainties and the company's actual results may differ materially. For a discussion of risk factors, including, among others, the risks associated with COVID-19, the impacts this pandemic may have on the demand of the company's products and the company's ability to respond to the related challenges, I encourage you to review the company's most recent annual report on Form 10-K which will be filed with the SEC soon. During the call today, management will also discuss certain non-GAAP financial measures which are supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating it’s 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 it’s earnings release. Please note that the 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 on this call contains time-sensitive information that is accurate only as of the date of this live broadcast, March 3, 2022. Except as required by law, the company undertakes no obligation to revise or update any statements to reflect events or circumstances taking place after the date of this call. With that, I would like to turn the call over to David Bailey, President and Chief Executive Officer.

Thanks, Matt. Good morning, everyone and thank you for joining us. We hope you are safe and well. Before providing a business update and review of the financials, I'd like to highlight that we helped over 9,500 children in the fourth quarter and approximately 38,000 for the full year 2021 which was a record year for the company. Since inception, OrthoPediatrics has helped more than 234,000 children in total; doing the right thing for children remains our top priority. Consistent with our preannouncement on January 10, we generated quarterly revenues of $24.8 million, representing growth of 31% compared to the fourth quarter of 2020. For the full year of 2021, we generated $98 million, representing growth of 38% compared to the full year 2020. We are extremely proud of our 2021 performance and believe we have navigated through the pandemic very well which we view as a testament to our durable business and strong commercial execution. Before commenting on each business segment, I'd like to speak to some macro trends we experienced in the fourth quarter and full year 2021 that have impacted the entire healthcare system and specifically, the medical device industry. The first being COVID. While pleased with our 31% growth rate in the fourth quarter, it is important to point out that the spike in Omicron variant cases in December deferred elective procedure volumes which we estimate negatively impacted our growth by 10 percentage points. As we enter the first quarter of 2022, headwinds associated with Omicron variant continued to negatively impact our growth in January and the majority of February. In early March, we're seeing signs of improvement with reduced COVID case volumes and the rescheduling of surgical cases. We see this as an indication of progress toward a more normal operating environment and an opportunity…

Thanks, Dave. Our fourth quarter 2021 worldwide revenue of $24.8 million increased 31.1% when compared to the fourth quarter of 2020. Growth in the quarter was driven primarily by strong performance within the Trauma and Deformity segment, offset by the unfavorable Omicron impact on elective procedures in December. For the full year of 2021, our worldwide revenue of $98.0 million increased 37.9% when compared to 2020. Growth in the year was primarily driven by strong international recovery as well as the continued impact of new products and new users. In the fourth quarter of 2021, U.S. revenue was $19.9 million, an 11.2% increase from the fourth quarter of 2020. The growth in the quarter was primarily driven by our nonelective trauma business. U.S. revenue for the full year of 2021 was $77.8 million, representing an increase of 23.5% when compared to 2020. Growth in the year was driven primarily by continued growth of our nonelective trauma business, Response scoliosis product benefiting by the halo effect from ApiFix, additional ApiFix surgeons, ex-Fix users, growth across our legacy product lines as well as Telos growth. International revenue for the fourth quarter was $5.0 million compared to $1.1 million in the fourth quarter of 2020. As Dave mentioned earlier, growth was impacted due to the Germany, Austria and Switzerland converting to an agency sales model which resulted in a $2.7 million sales return in December of 2020. International revenue for the full year of 2021 was $20.3 million compared to $8.1 million in 2020. From a geographical basis, growth was driven primarily by strong sales in EMEA, benefiting from our agency conversion as well as South America. In the fourth quarter, trauma and deformity revenues of $16.5 million increased 46.5% compared to the prior year period. Growth was driven primarily by the high…

Thanks, Fred. I'd like to reiterate our optimism for the future. During the last two years, through uncertain times, we have doubled down on our commitment to pediatric healthcare. And while case volumes have been negatively affected, our company is stronger than ever. In addition to the list of accomplishments mentioned previously, we've organized ourselves internally to move with either even greater velocity in product development and have successfully positioned the company to comply with ever increasing international regulatory demand. Given this strong foundation, we entered 2022 knowing the unshakable truths that there are now more children who need our products and we have more surgeons using more of our products than ever before. We are a company on the move, striving every day to help more and more children with orthopedic conditions. With that, I'd like to turn the call back over to the operator to open the line for questions.

[Operator Instructions] Our first question comes from Matthew O'Brien with Piper Sandler. Your line is open.

Good morning. Thanks for taking my questions. Fred, can we start with the -- I think what you just said on Q1 and what it implies for the rest of the year. So mid-single digit year-over-year growth at Q1, I'm just doing a really quick math there. I may have gotten it wrong but it implies 26% growth for the last three quarters of the year. So in a little bit more challenging environment, generally speaking, the confidence you guys have in hitting those numbers and I don't think the sets are really going to kick in, in a big way until later this year. And so where does that big step-up in the last three quarters really come from?

Yes. No, yes, it absolutely correct. The first quarter in that single to high mid-single to high-digit revenue growth year-over-year which we're pretty pleased with, given the negative headwind with Omicron which obviously was not here in the first quarter of last year. And then, the second half of '22, we have the easier comps, right? So the third quarter and the fourth quarter of '21 was negatively impacted by Delta and Omicron. So you are correct that the second half growth rate is going to be higher than given that first quarter is going to be pretty soft.

Okay. Okay. And then the second question -- sorry, I have a couple of parts to it. So EpiFix, what are you anticipating for the contribution there this year? Is it really still more of a '23 event like it really in flex just because you're still collecting information on patients, making sure you get optimal outcomes? And the second part of the question is the PNP Femur launch, I think you said is your biggest one. Is that going to be one of the bigger drivers this year of overall growth or are there other products as well that will augment that growth?

Yes. Thanks, Matt. So we do expect ApiFix to have a material contribution to the Scoliosis revenue. I mean more than likely, we'll double the number of procedures that we performed in 2021 and 2022. And complete the registry which we're pleased with the progress, although it has certainly been hampered by the resurgence of the pandemic here. But certainly going to close out the registry and then we've added commercial sites in the fourth quarter, a little -- probably a little ahead of pace from a commercial site onboarding standpoint. So we feel good about where we're at with ApiFix and it’s contribution. And obviously, we continue to say this over and over but ApiFix accounts or accounts that start with that product almost universally, we see this halo effect that creates more and more use of the rest of our Scoliosis platform. So whether it's from billings directly from ApiFix cases or just the association of ApiFix with some of these new accounts, we do expect ApiFix' presence along with the 7D technology and all the halo that's created there to have a material impact on our Scoliosis growth. When you turn to PNP Femur, we're still very early in that product launch. For the most part, we haven't launched that product outside of the U.S. and it's already our largest product within the United States. So our trauma -- our largest trauma and limb deformity product in the U.S., so we know we're taking share there. We have more and more deployment coming and we like how PNP Femur, along with Orthex is also creating this really nice halo effect around the entire trauma and limb deformity portfolio. So we see the drivers here is PNP Femur combined with Orthex and our ex-fix products Cannulated Screw and PediFoot and really the legacy products being pulled through. And then on the scoli side, the ApiFix technology in 7D, obviously, the billings from that as well as the pull-through of the entire scoliosis franchise. That's kind of how we're looking at it.

Yes. I would just add, Dave, in your earlier comments, in 2021, almost every single one of our product lines, our 37 product lines grew by double digits. And so that's one of the strengths we see in the business is we're not dependent on any sort of single product line and we would expect every single product line to continue to grow in '22 and beyond as well.

Got it. Thanks so much.

Thanks, Matt.

Our next question comes from Rick Wise with Stifel. Your line is open.

Hi, good morning, gentlemen. Nice to see the solid finish despite the challenges. I'm going to start with set deployment. I don't know, I'm sort of blown away by that number, Fred, $24 million to $26 million. I mean I don't know, that's the biggest number ever, I appreciate that there might be some pent-up demand. Maybe just talk about where those sets are going? And it would seem to me that the implications of all those sets and the expanding pipeline and recovery, I mean, as we start to contemplate '23, I know you're anxious to give us '23 guidance but can you give us -- can you help us think through what that could mean to the outlook? Surely, all things equal, I mean a dramatic setup for '23.

No, you're absolutely right. A couple of things driving that, right? The first is we're a much bigger business today than we were two or three years ago. And as the business continues to grow and we want to maintain that high growth rate more sets are needed to deliver that growth rate. And so you're absolutely right, the sets deployed this year is really setting the stage for '23 and beyond. So that's the first comment. The second is that the 70% is new to this category. So right now, I'm viewing if we can sign a unit into a hospital that would show up in our deployed set number because to me, it's just another investment that we're making in the hospital to drive future revenue growth. And so, there is a small impact, a couple of million dollar probably impact from that which was not there previously. But listen, we continue to be encouraged by the long list of demands for sets, both domestically as well as outside of the U.S. which will generate revenue in '22 but more importantly, to your point, out into '23 as well.

Rick, this is Dave. You always ask me these questions about how the progress of key account conversion is going. It seems like every quarter, we have that call. And I would just say that without giving any specifics, I think you could say that -- we could say that our confidence in how that's going is reflected in the volume of new capital we want to deploy to those types of markets. And my comments surrounding the number of active users of our products and us categorizing or counting those metrics gives Fred and me a lot of confidence to know that we -- if we deploy this asset, these assets, they'll get used. I mean there's just a lot of demand in the field right now for additional inventory based on those factors.

Right. Just a couple more, if I could. I'm sure I'm not thinking about this correctly but maybe help me understand. The OUS sales returns, so you did $5 million in the quarter. You had the $2.5 million, I think I'm remembering in terms of returns. Does that imply that if that hadn't happened, you would -- what would be sort of normalized number have been? I'm just trying to get a sense of what kind of recovery we're seeing on a normalized basis? I appreciate that's not a one-to-one number but -- and how we think about the setup for next year or for this year, I should say, '22?

Yes, yes. So the $2.7 million negative sales was in the fourth quarter of 2020 and when we converted DACH to our agency. And so yes, in looking at the fourth quarter of 2021, roughly $5 million of revenue, the growth rate obviously was impacted by that. But for the full year of '21, those revenues does not include the $2.7 million returns. So it's a more normalized basis that we're looking off of for 2022.

Got you. And just last for me on just sort of flesh out some of your P&L comments. Gross margins have been sort of in the 75 -- 74%-75%-ish, how do we think about '22 and the moving pieces? And same question really for OpEx, given some of your comments about supply chain and inflation.

Thank you, Rick. So yes, we are seeing a little bit of inflation in pockets. We don't think that's going to impact gross margin. We anticipate offsetting that with some small slight price increases. So that would be neutral on the gross margin rate. The thing that may put some pressure on the gross margin rate is we're hoping that we start selling some more sets outside of the U.S. We saw some of that in the second half of '21, really none of it in 2020 or the first half of '21. So as set sales continue which we did see in the second half, that puts a little pressure on the margin. We think those sets are needed outside of the U.S. to start fulfilling some of this pent-up demand outside of the U.S. So that will definitely put a little pressure on the gross margin rate in '22 compared to unusually strong gross margin in 2020 when we were not selling those sets. But with that being said, we think that 75% for the combined business is probably where we will be operating here in '22 and probably beyond for the next couple of years.

Thank you.

Our next question comes from Samuel Brodovsky with Truist. Your line is open.

Hey, thanks for taking the questions. I'll just start -- just kind of characterizing the backlog, if you could maybe give us a little more granularity where should we expect that to come in, in terms of business line and sort of the confidence you have in that kind of -- what did you see in your prior ways that gives you confidence that you can see that fully come back in this year?

Go ahead, Fred.

Yes. So our business -- our Trauma business has continued to perform very, very well and continue to grow. The portions of the business that are impacted the most are the deformity correction and the scoliosis business. So those two lines were softer in the third quarter and the fourth quarter of 2021 and again, in the first quarter here of 2022. So those pent-up elective surgeries, we anticipate coming back on the books starting here in March, in the second quarter and through the third quarter. In the past, we've seen that snap back very quickly but here domestically, we think that's going to take longer to extinguish because of the staffing shortages at the hospitals. Outside of the U.S., there's mixed bag based on which country you're talking about. But we know, particularly in the U.K. and South America, many of these countries have a large pent-up demand that could take up to 18 months to extinguish. So domestically, we think it's about probably $2.5 million of backlog which we'll see the benefit of that in the second quarter and the third quarter and hopefully extinguish that by the end of the third quarter. And then outside of the U.S., we think it's going to be all of 2022 and into 2023 before that's fully extinguished.

And maybe just put a finer point on that, that 2.5%, is that fairly even the mix between deformity and scoliosis lines or is there maybe more than one direction?

No, I would say it's pretty evenly mixed between those two product lines.

Yes. I think what's important here, Sam, is that the -- again, these are progressive conditions, particularly on the elective scoliosis side and the limb deformity side. One could argue that the limb deformity correction like our Orthex business, for example, is most affected because those would be our most elective procedures. Again, none of these are elective but they can be delayed. Fact is, these are progressive. And so these procedures are going to have to happen. We believe that hospitals are going to ultimately prioritize these really complex elective procedures. And while this is horrible for kids ultimately, it certainly -- it provides a tailwind for us as we get into Q2 and Q3.

Great. And then just shifting towards the international launch of Orthex. I mean, how should we think about the pace of the rollout there? And how can that contribute to growth in the market mean pretty sizable opportunity there, I think?

Yes. So we think the rollout both of Orthex as well as PNP can be a big portion of our story as things return to normal internationally, both from a set purchase standpoint. So most markets where we have stocking distributors have not added the PNP or Orthex products. I'd add that in Brazil, for example, I think we have a number of -- some six or eight new products that are not approved yet that we expect to approve some time here in the first half of the year and that's a set stocking distributor market. So we expect those products all to contribute to growth as our distributors get back to a normal purchase -- more normal purchasing habits. And then, we've really prioritized the launch of Orthex as well as PNP in markets where we have agencies. So we've seen a lot of success in Australia and Canada starting to see success in DACH region with a number of new users in Germany and Austria and Switzerland. And so, it's very early. And I think if we see the type of response outside of the United States that we see in the U.S., this could be a substantial tailwind to growth.

Great. Thanks for taking the questions.

Our next question comes from Ryan Zimmerman with BTIG. Your line is open.

Hey Dave, Fred. Thanks for taking the questions. Just want to follow up on ApiFix a little bit, if I could. I'd love, Dave, if you could just kind of talk about some of the scaling up of the commercial sites and kind of how to think about that in conjunction with the registry that's ongoing and just kind of the benefit that, that can drive in parallel to the registry?

Yes. Thanks, Ryan. So we are continuing to be conservative within these commercial sites and making sure that we get a look at the X-rays and then we, in fact, prove the patient. We feel like the technology is too valuable long term to get bad data out there because we've lost control of this. Interest is extremely high. I think we have more than -- give or take, Ryan, I think we have about 10 commercial sites that are trained in either scheduling ApiFix cases or capable of scheduling ApiFix cases. We expect the pace of that to add a few to five, let's say, a quarter throughout the balance of the year. And again, I mean, there's a lot of interest there. And what we have been trying to do is prioritize people based on their -- obviously, their interest in ApiFix, their willingness to do more than a couple of surgeries but their willingness to really go kind of all-in on the technology as we get better data as well as their willingness to show more interest in some of our other products and to kind of create that halo. So again, we'll knock out the balance of the registry here which will have a pretty substantial impact on revenue this year. And then probably, you would think by Q3, Q4, it would be reasonable to think that more of the surgeries happening are happening out of our commercial sites than, in fact, are happening out of our registry sites.

Okay. That's very helpful, Dave. And then I think I heard you or it might have been Fred. You added 19 sales professionals in the quarter or the year. I think either way, you're kind of landing around that 190 or so number if I'm not mistaken and correct me if I'm wrong but just help us understand where that could be going over time based on certainly the set deployment numbers as maybe an indicator for where sales professionals as part of the agencies can go over time?

Yes. Thanks, Ryan. Yes, I was -- I think Fred and I were very pleased to see our selling organization be aggressive in adding new personnel, in what was a pretty tough year and an uncertain year. So to see even back half adds as well as to see demand from our selling organization for additional sets, I think gives us a lot of confidence as we move into 2022. We said this a number of times, that number of sales professionals that get added on a quarterly basis is not something that we gnash our teeth over around here on a quarterly basis. But generally speaking, we would expect that number to increase as revenue increases. When we see higher ASP products like ApiFix and Orthex, it's possible that, that will lag slightly behind our overall growth rate just because of just the efficiency that we drive within the selling organization. But in talking to our agencies in the U.S. and agencies outside of the U.S., I see people willing to invest. And they're asking us to invest in -- and obviously, we are hoping that they invest in their sales force. And so far, that's worked and really pleased to see that kind of adding in a challenging environment in 2021.

Thank you.

Thank you, Ryan.

Our next question comes from Mike Matson with Needham & Company. Your line is open.

Yes, good morning. Thanks for taking my questions. I wanted to ask about the consignment of the 70 navigation systems. Is the intention there the systems are there to do demos and things like that, they would eventually be sold or are these essentially like your other instruments, where they're just going to be loaned out to customers that are using your products? And in other words, are these something that are going to generate revenue for OrthoPediatrics or is it more of a tool to kind of capture market share?

Yes, great question. Capital equipment is new to us. So we're just getting our feet wet. But we think that about 80% of these units will be consigned to the hospital with earn-out agreements. So incremental market share will come for us consigning those units there and the other 20% will actually be capital equipment sales that will show up as incremental onetime sales into those hospitals. So we really prefer the consignment model because they benefit, we can deploy some capital and we can lock up some market share.

Okay. And of that -- the dollar amount, the $24 million -- $26 million for new sets, you take out the nav systems out of that what does that number look like for just instrument sets if you're willing to disclose that?

Yes. Yes. I think there's probably rounding a couple of million dollars in those numbers that would be associated with the 70 consignment.

Okay. All right. That's lower than I would have guessed but okay. And another question I had was just given the ZimVie spin-off that just occurred, they had an Investor Day and they were talking up the Tether product quite a bit. So just curious what your thoughts are on that? And if you expect to see any kind of changes competitively now that it's a separate company?

Yes. I don't think we expect to see -- well, we don't expect to see any changes competitively. And I think given how things have gone with the Tether, particularly from the podium and the words that we hear with surgeons, I think it's only strengthened our resolve that what we have to do is capture data in a transparent and honest way and then provide that data to our customers and let them make the best decision as to which product is safest and most effective for young children. And that's why you hear us over and over, talk about our results around making sure that we're capturing good data with patients within the inclusion criteria. I think if we do that, that is one, it's the right thing to do; and when we do that, this particular customer base is very academic, I think we'll respect that and ultimately, that will be the key driver for adoption of this technology long term.

Okay, great. Got it. Thanks.

Thanks, Mike.

Our next question comes from Dave Turkaly with JMP Securities. Your line is open.

Hey, good morning guys. You mentioned new DACH onboarding in the scoli side and I was wondering if you might be able to give us a little color about how many of these guys are new that you're adding either in '21 and anything we should expect for '22? And is it the new product that's driving these new surgeons to onboard?

Yes. So we've never given specific numbers. But I guess what I will just say is that we started this year with a goal, particularly on some of the key products like Orthex and response. And that goal was known to the selling organization and to leaders within the selling organization and we either met or exceeded that onboarding goal in 2021. And you can imagine that was spread out through the balance of the year. It wasn't all in Q1, it wasn't all in Q4. But again, it's an indicator of what we think we can do in 2022 based on the volume of new users, combined with the fact that we'll inevitably have a goal in 2022 of new users that we want to onboard there. And I do think that it's primarily an adoption on the scoli side of the response system. And I think I think overall, though, a lot of this is an adoption -- continued adoption of the company. We continue to double and triple down on pediatric orthopedics and pediatric orthopedic healthcare. We continue to do the things that we feel like are critically important to the customer, not just new product development but education, investment in research and development, all the critical things that we are doing that no other company does. And I think that is creating a building inertia around the entire product portfolio. When you add technologies like 70 and ApiFix, PNP and Orthex that also create an even greater technology profile and create this halo, those are certainly drivers for adoption of our scoliosis franchise and all of our trauma products. So I think it's a combination of those things.

Got it. And appreciate the color on the guidance, the large backlog you see and the comments you made about the comps. As we look at the back half of the year from a cadence standpoint, do you think '22 is the year where you might actually be up sequentially as we come out of COVID in the back half versus some of that seasonality sometimes you see in the third quarter?

Yes. I would say that we still expect our third quarter to be the strongest quarter of the year. It has been historically prior to COVID and we're hoping that we can get this thing behind us and move on to more of a normalized schedule. So strong third quarter and fourth quarter, maybe down just a little bit as it has been traditionally. But obviously, the growth rate is going to be very strong given the weakness in '21.

I would say the only thing that could potentially disrupt that would be how fast we can get back to, not just a normalized environment but capture backlog. And to me, that's still a staffing-related issue. And that's why we are pretty confident this is going to create a tailwind for a number of quarters here, not just a couple of months where we capture what essentially is a backlog that started in Q3, expanded in Q4 and expanded further in January and February of this year.

Got it. Maybe one last quick one here. You may have said this, the $5.5 million fair value adjustment that was specifically from what? And should we think of that as sort of your accrued liability that was bigger than you now assume you're going to have to pay?

Yes. So that is associated with the ApiFix system for -- I'm sorry, year four system sales payment for the full year of 2021, that actually benefited the P&L by $2 million. I think that's more of a $5 million charge in 2022. So it will be a pretty big swing on the P&L and that is all related to the ApiFix and updating of the Monte Carlo model and the assumptions that go into that.

Thanks a lot.

Thank you.

There are no further questions at this time. I'd like to turn the call back over to David Bailey for any closing remarks.

Great. Thanks, operator. We appreciate all of your time. Thank you for the good questions. And we look forward to talking to each one of you over the course of the next several months. Thank you.

Thank you. This concludes the program. You may now disconnect. Everyone, have a great day.