Good morning and welcome to OrthoPediatrics Corporation's Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in 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 like to turn the call over to Trip Taylor 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, I encourage you to review the company’s most recent annual report on Form 10-K, which will be filed with the SEC in the near future. 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 its operations period over period. 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 these 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 this live broadcast today, March 7, 2024. 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 Trip. Good morning, everyone, and thank you for joining us on our fourth quarter and full year 2023 conference call. As we start all earnings calls, I'd like to begin by highlighting that we helped over 82,000 kids in 2023, a new record for OrthoPediatrics. Since inception, we've helped over 710,000 kids and including Boston O&P, our combined organizations have helped more than 1 million kids. This continues to be the most important metric of success for OrthoPediatrics, and each year we strive to increase our impact and benefit more kids. In line with our pre-announcement from early January for the fourth quarter of 2023, we generated quarterly revenue of $37.6 million, representing growth of 21% compared to the fourth quarter of 2022. For the full year of 2023, we generated record revenue of $148.7 million, representing growth of 22% compared to the full year of 2022. Driven by favorable leverage in the cash portion of G&A, disciplined expense management, strong margins and healthy revenue growth. We are excited to report that we outperformed our original adjusted EBITDA expectations, producing a record adjusted EBITDA of $5 million in 2023. In addition, we're thrilled to see our prior acquisitions fully integrated and performing well with robust top line revenue contributions and profitability. Looking closer at the quarter, revenue and surgery scheduling was strong throughout, except during the final two weeks of December, when we started to experience lighter surgical volumes due to an uptick in RSV. After RSV rates rose rapidly at the end of December and extended into early January, volumes quickly returned to more normalized levels. Hospitals appear to be managing their spikes of the respiratory season better and mitigating the impact on case schedules. Altogether, volumes and staffing continue to improve month-over-month and while still not running…

Thanks Dave. Our fourth quarter 2023 worldwide revenue of $37.6 million increased 21% compared to the fourth quarter of 2022. Growth in the quarter was driven primarily by the strong performance across global trauma and deformity, domestic scoliosis and the OPSB. U.S. revenue of $28.3 million, a 24% increase from the fourth quarter of 2022, growth in the quarter was primarily driven by our trauma and deformity product lines, scoliosis and OPSB. We generated total international revenue of $9.3 million, representing growth of 13% compared to the fourth quarter of 2022, which grew by 67%. Growth in the quarter was primarily driven by trauma and deformity offset by lower scoliosis sales to stocking distributors in South America. In the fourth quarter of 2023, trauma and deformity global revenue of $27.1 million increased 23% compared to the prior year period. Growth in the quarter was driven primarily by share gain across our entire portfolio with strong contributions from Pega products, trauma, Ex-Fix and OPSB. In the fourth quarter of 2023, scoliosis revenue of $9.7 million increased 20% compared to the prior year period. Growth was primarily driven by increased U.S. growth of 35%, partially offset by canceled cases in late December from RSV and lower than expected orders in Latin and South America. Finally, Sports Medicine/Other revenue in the fourth quarter of 2023 was $0.9 million compared to $0.9 million in the prior year period. Turning to set deployment, $5.9 million of sets were consigned in the fourth quarter of 2023 compared to $6.3 million in the fourth quarter of 2022. For the full year of 2023, we deployed $22.0 million compared to $20.1 million in 2022. The increase was driven by significant new product development deployments, significant Pega deployments as well as multiple consigned 7D units. Touching briefly on a…

Thanks, Fred. As we look back on 2023, we're proud of all that we've achieved and are confident that we have the right growth drivers in place for continued success in 2024. We expect positive trends in the business to continue, including robust top line revenue growth and continued profitability growth as we move toward cash flow breakeven earlier than anticipated. In addition, in 2023, we launched eight new products including RESPONSE Power Scoliosis, the GIRO Growth Modulation System, Pediatric Nailing platform Tibia System, the DF2 Brace, Mitchell Ponseti Plus Bar and the Levity Device. We continue to expect strong performance from our legacy products as a result of our heavy investment in set deployments in 2022 and 2023. However, our recent acquisitions, along with ApiFix and OrthoX and our most recent organic product launches such as PNP, femur and tibia, Drive Rail and DF2 require less capital deployment to drive growth due to a faster return on invested capital. This combined with the launch and the growth of the OPSB franchise ensure we can maintain our high rate of growth while using less cash for inventory deployment, thus ensuring we drive to cash flow breakeven much sooner than earlier anticipated. All of our long-term plans, including profitability growth are supported by our robust balance sheet, strong cash position and access to debt. I've been with OP for nearly 17 years now and I'm not sure I've ever been more excited. We are in an extremely strong position with all the tools in place to help more children than ever before. And I think our customers feel the same way. Together our OP associates, our customers and our shareholders are building something special and that is having a profound impact on the lives of children. The future is bright for OrthoPediatrics and we are just getting started. In closing, I'd like to thank our surgeon partners, my OP associates, our investors and all the innovators in pediatric healthcare for standing together to help kids. Operator, let's open the call for Q&A.

[Operator Instructions] Our first question comes from Matthew O'Brien with Piper Sandler. Your line is open. Matthew O’Brien: So just maybe starting obviously with the Boston O&P commentary, first of all, and sorry, this is going to be a multi parter, is that going to get split out separately, Fred? You're saying this morning clearly, you're not going to need additional capital because you have plenty of funding for that to build out these facilities because I don't think they're that expensive. And then how do we model this growth going forward off of this base that you have today as you're adding new clinics across the U.S.?

Boston is approximately 30% scoliosis bracing, custom braces. And the other 70% is deformity correction. And so that's how the sales will show up in those two segments going forward. The business has a different seasonality than our typical business. They don't have the big summer selling season the way we do in our scoliosis and deformity correction business. Their fourth quarter is a few points, few percentage points higher than the other quarters and typically their first quarter is a few percentage points lower. The middle quarters are roughly 25% of the year. The growth of this business obviously we're still working on that for 2025, but we would expect this to grow faster than the overall business as the sales force becomes effective, as new products are introduced and we are looking to open new clinics starting next year, that does take some time to get the hospital to approve it, to find the facility, to get the obviously specialists trained in the pediatric space. But overall, I would say that this segment is going to grow much faster than the overall business for the next several years.

Matt, I think what we're trying to signal here is the clinic side kind of as I walk through the three point strategy, we expect no question as we add sales reps and we've already done that. We expect the sales of the OPSB franchise, which is still inclusive obviously of MD Orthopedics and Rhino and Aura and the organic products that we launched last year, DF2 and the new stuff we're going to launch this year, we would expect that business to continue to grow well on excess of 20%. That's kind of what we've -- what it's done ever since we acquired MDO and then started adding products to that. I think what we're saying here is, it's going to take a little bit of time on the clinic side, obviously, to get that side of the Boston business ramped. But we're definitely expecting growth in the rest of that business again, as we've seen for the last couple years. Matthew O’Brien: And just on the upfront cost side, can you just comment a little bit there? And then I'll just ask my second question here, just expectations for ApiFix this year. Is that going to start to be a bigger contributor or is it more still the kind of a ‘25 event?

Yes, I think our view on view on ApiFix is the data continues to get stronger. There's no question. As the data gets stronger, we expect this to continue to go up into the right. I think, where we have kind of come off this position that there's going to be some quarter or some specific moment where it's this watershed moment where every surgeon agrees that this is the right treatment. But there's no question that the entire non fusion segment of pediatric spine is super interesting. It's still embryonic, it's still generally growing a lot of questions. We think we're answering those questions with the data and generally we expect ApiFix to continue to outpace the growth of our fusion business. And that's kind of how we're modeling it for 2024.

And specifically on the cost. So today Boston has 26 clinics. They're all leased facilities. So really the cost if we were to open a new facility is minimal upfront. It's just building out of the space, hiring and training the actual clinicians and then hiring more clinicians as the volume ramps. So I don't know, million dollars, I would say max to open one of these maybe less. And then the revenue starts coming in pretty quick because we're not going to open one unless we have commitments from the surgeons at the hospital that obviously they're going to be using the clinic.

Our next question comes from Rick Wise with Stifel.

Just to start off on a big picture question, if I'm hearing you correctly, it sounds like a lot of the headwinds that you've experienced over the last year or so, are either going away, gone away or sort of resolved on the staffing front, on the RSE front, on the variety of things. And so, I mean, that sounds very encouraging. Am I hearing you correctly, Dave?

Yes, I think that we are another quarter into this improvement and I think we're seeing that improvement here in Q1 as well. And so, yes, I think what we have said for a while here is we think that this is probably something that's behind us, let's say by mid-year. We're a little cautious just because we recognize that June, July, August, these are our, obviously our big months on the surgical side. So until we see that, June, July and August, I don't know that we're going to declare victory, but it's certainly encouraging,that we're seeing this come through. It's also encouraging that as the business further diversifies on the specialty bracing side that a lot of the headwinds that we saw in the OR setting, we don't see on the specialty bracing side. And so as that big business becomes bigger, it enables us to kind of mitigate some of the risks associated with the environmental -- the environmental risks that we saw over the last few years. And I think that's also encouraging us that overall the business should be less affected by those types of environmental abnormalities that we've experienced over the last few years.

And Fred, help us think through the quarterly setup for the year. It went by quickly. I wasn't sure if you -- I thought at one point maybe it was relative to a product and not overall. I thought you were talking about maybe sequentially better first quarter revenues overall, but help us level set the right place to start thinking about the first quarter and especially given the Boston O&P mix in there. Now thank you for the specific guidance that you gave about it in terms of their quarters, but how should we think about the flow of the new OrthoPediatrics quarterly flow overall for the ‘24 year?

Absolutely. So traditionally, pre-COVID in particular, because the last several years have been so unusual. The first quarter is typically around 5% or 6% lower than the fourth quarter. And so if you think about the legacy business in those factors, the first quarter revenue would come down. However, with the addition of Boston that is going to generate a first quarter revenue number that’s actually higher than the fourth quarter. And I would bet or I would assume that it's probably in that $41.5 million to $42 million range. So definitely a nice increase over the third quarter, over the fourth quarter at 37.6.

And, sometimes in the past, you've broken the overall company quarters by as a percentage of sales, so you're guiding us to that $197 million to $200 million range. How would you frame the -- as a percentage of sales in rough terms, the flow of the quarters as you contemplate 2024?

I mean, Boston is still right, $25 million out of $200 million. So it's not going to have a dramatic first year impact on changing the overall metrics. So the third quarter we still would anticipate is by far the largest and followed by the second quarter. And then the fourth quarter and the first quarter obviously be the smallest number. So I think it's going to be pretty similar, honestly to historical with a slight change with Boston but not much.

And I'm going to squeeze in one more if you don't mind. I know that you don't guide to gross margins, but if I'm hearing you correctly, Boston's going to be above average. Also you've got new products launching, you've got recovery, a variety of other things. Help us understand a little more clearly the again the cadence and how we should be thinking about gross margins in ’24? And put that in perspective relative to the as always seasonally slow fourth quarter performance given the mix of business typically.

Yes, absolutely. So the fourth quarter of 2023, gross margin at 71%, obviously lower than the third quarter, which is always our highest revenue and highest gross margin quarter. The 71% was an improvement year-over-year versus the 68.5% we saw in the fourth quarter previously. And so the gross margin in 2024, I would expect would continue to follow the sales. So it's going to be highest in the third quarter. A little lower in the second quarter, come down again in the fourth quarter and a little softer in the first quarter. I think overall, the business was under 75% in 2023, and we would expect to see a similar type of result between 74.5%, 75% for 2024. The Boston business gross margin is good. If you think about it, it's really two businesses in one. It's a manufacturing business, and so we get the manufacturing margin from their products they manufacture and it's a retail business in the clinics, so we're getting the retail pricing and the margins associated with that. And so overall, very strong similar gross margins to our overall business, but historically they've had very little sales, commissions, if you will. So the contribution margin from that business is very strong, better than our legacy business. And even adding some sales force into that to grow higher revenue, the contribution margin is still very strong in that business, which is very attractive, obviously to the bottom line for us.

Our next question comes from Ryan Zimmerman with BTIG.

I wanted just follow up. A couple questions for me. A lot already been asked on the Boston O&P side. Just first, Dave, the last few weeks of December, any quantification there to think about and that impact and the flow through, potentially the first quarter as a result of some of those cases?

I guess what I would say is that we were really, really doing well throughout the entirety of the quarter and we saw a kind of a screeching halt in the last two weeks. Last two weeks are traditionally two of the largest weeks for us. These are weeks when kids are out of school. And so it was a pretty steep drop and kind of happened all of a sudden and it did extend into the early part of January. Maybe Ryan, it's a couple points probably of total top line revenue growth for us. And it was a bit bit unfortunate, but not a lot we can do about it. What we did see though in the quarter, so is this quarter now is that obviously after the hospital systems were hit seems like handling that much better, particularly on the elective surgical side and seeing a really nice rebound in Q1. It seems like cases that were scheduled are starting to get put back on and get done. And so, I think that's why you hear fairly bullish commentary about the way the hospitals are handling the RSV situation, how rapidly it went up, affected us and came back down here in the first quarter. And things seems to be really normal going forward.

And then just, you're going to build out like more of this OPSB sales force. You already started doing that. When I think about kind of all the heads and FTs that are dedicated to OrthoPediatrics and I'm just kind of wondering if you could kind of size and scale kind of what that is relative to the existing sales force as your distributors and dedicated sales agents kind of ramp up over the coming years for OPSB?

So we've already factored some of those heads in. Obviously, we started some of the hiring here in Q4 and early in Q1. So just to be clear, the expense associated with that is captured in our guide for the $8 million to $9 million in EBITDA. I think orders of magnitude you might expect over the year for us to add or have maybe 20 people or so, in the U.S. that are focusing more heavily or exclusively on the OPSB side of the business. And obviously that's up from zero this time last year. So that's why we're pretty bullish about it, that that sales force's capacity to help us drive revenue with the MDO products and RHINO and Aura and all the DF2, all the things that we've come out with in the last year. But you have to remember that these people aren't spending time standing in the operating room, right? And so it doesn't take as many people to cover the geographies that we want to cover. We also have obviously really strong relationships with our surgeons in the operating room. And when you partner these OPSB sales force with our existing sales force and our existing sales force so far has been really great about receiving these people in and working as a team. We just think the combination of the great people we have in the field already and the 200 plus strong OR based sales reps that we have combined with 20 or so of these more clinical based sales reps, it's a real tonic for us to grow. And Ryan, over the course of the next several years, we'll see maybe that sales force grows out larger but we're not committing that at this point.

Just real quick one quick modeling question for Fred. You already gave the split between scoli and deformity correction on the Boston O&P business and it's all U.S. based though, right Fred? I mean, is there any international revenue there as just from a modeling perspective want to make sure we take care of that correctly?

We haven't clarified that. It is 100% domestic as of today. But that in ‘25, ‘26, ‘27, may be an opportunity for us to enhance the growth of that business as well.

Our next question comes from Mike Matson with Needham & Company.

Hey guys, this is Joseph on from Mike. So you guys have a lot of growth prospects moving forward, international expansion, Pega, X6 ramping, new product launches. But I guess the comments today, if it seems like OrthoPediatrics has shifted its strategy to favoring maybe growth and profitability or profitability over growth. So I guess maybe could you just give a little bit more color, a little bit more of your thoughts on maybe the shift in the strategy and why that's good moving forward?

Yes, Joseph, I don't think I would characterize our strategy as a focus of profit over growth. We're heads down focusing on growth and but also recognizing that balancing growth with profitability, with the aspiration to get to cashflow breakeven is probably a more prudent irrational course, particularly in the current financial environment. And so this is not a new, I guess I don't view this as a new thing for us, this over the last three years has been our aspiration to continue to focus more heavily on top line revenue growth. And I think that was one of the reasons why we're excited about the OPSB side, and all the product launches going on the legacy side and all the sets that we've deployed over the last two years. We think all of those are going to generate really nice growth for the business for the next several years, but we also think that the growth is going to come be more profitable growth and the cash usage associated with that is going to be lower, which is kind of what we've been trying to get to over the course of the last three years. And I think we're well positioned to do it. So we still see this as an aggressive top line growth strategy. There's no question about that. We just think that it's a bit unique in that this is an aggressive top line growth strategy that's also going to be profitable and generate its own cash. And I think that's pretty unique right now in the marketplace.

Maybe just touch on that a little bit more. We estimate your organic growth to be in the mid-teens or so for the last two years, but do you think you could maybe get back to the 20% plus number? Or do you think mid-teens is more of a realistic expectation for organic growth moving forward?

So obviously the guide implies mid teens and I think, we -- everything we're doing here internally and the setup, particularly on the OPSB and the legacy product launch is pointing us towards driving top line revenue growth in excess of mid-teens. But I think as we model, as we guide, we're not going to get ahead of ourselves here. And so that's what you see in the guide, but you can rest assured that our team is aligned around a growth rate that's in excess of 20%. And obviously with the acquisition it's in excess of 30 for 2024. So we're putting the drivers in place. And I think, again, on the OPSB side, we're trying to put a driver in place that we have really low share, really good competitive opportunities here and a really big TAM for us. We see that as a catalyst to hopefully get to where we're cheating higher in the upper teens or maybe breaching back over the 20s. And that's a real feat when you're a business that's much larger now and in the future than we have been -- when we were consistently growing 20%, 22%. It's our aspiration to continue to do that but we're just not going to guide to that at this stage.

Our next question comes from Dave Turkaly with Citizens JMP.

I think when you announced the BOP deal, it said $22 million upfront. I was just curious, if you might comment on any milestones or sales related targets. Is that the all in price or is there additional payments to come?

That is the all in price. There are no contingent additional payments.

That sounds like a pretty good deal given the sales base there, but so again, thanks for all the detail in the business. To follow up on, I think it was Ryan's question about the scoli business, the RSV, the impact maybe being a couple points. When you look at the lower sales to stocking distributors in South America, maybe the lower than expected orders in Latin and South America. I mean, is that another point or is that, I guess I'm trying to quantify. You grew 20% in scoli and you had kind of three things you called out and I don't know, maybe it's even more than a couple points.

Yes, certainly the situation that we've had in the last few quarters in Latin America, while a fairly unexpected, it had a pretty big impact. It was a pretty big headwind on the scolio growth overall and on the company's growth overall. And it was disappointing to see. But I think at this stage, we feel good about that being behind us and being able to diversify our scoliosis business now that we're in markets like Canada, and the rest of Europe. Again, that's small segment right now, but it's going to grow and it's going to be all pure growth for us in 2024 because it essentially grows off a zero base. So yes, I think that's behind us. I don't know, if we would call it a couple points. We haven't really quantified it, but we don't expect it to continue. And I have a pretty good line of sight into that as we head into this -- as we're in 2024, we expect that to be a tailwind for our business not a headwind.

And just one last one if I could. The OB&P you mentioned gross margin. I think you said the profile is pretty similar, but operating margin wise, I'm just curious, if that's higher than sort of where you stand today. And I know the EBITDA guide of 8 to 9 was higher than the street seven. I'm thinking some of that's coming from that acquisition, but any comments sort of on the bottom line contribution as that scales?

Yes, absolutely. So very similar to MDO when we bought it this business Boston is profitable. It is positive adjusted EBITDA, it's positive net income, positive cash flow. And however, historically hadn't been growing tremendously fast. And so we will be investing a little bit of money into that business, obviously the sales force. But yes, you are correct in assuming that that business is more profitable than our overall business was in 2023. That is correct. And we would expect that to continue going forward.

Our next question comes from Samuel Brodovsky with Truist Securities.

I'll just ask one more on Boston to start off, I think you'd mentioned a $1 million to $3 million revenue number per clinic and with 26 clinics that implies a pretty nice opportunity to ramp revenue there without adding new clinics. Is that something we should think about being able to be achieved quickly sort of after the integration is completed? Or is that going to a steady ramp over time as new products come in?

So it definitely is an opportunity for us to drive the efficiency of the existing clinics and the kind of flow of patients through the existing clinics as well as the products used at the existing clinics, with the added sales channel. It's not something we've modeled aggressively yet, because it's so new, but I do think you're right, it's probably an opportunity there. And part of the reason that is such is that these clinics are primarily surrounded around Boston, around Philadelphia kind of upper Northeast, which are major population centers as well as major hospitals that are using Boston's products. And so, it takes a few maybe more clinics in those areas where patients are coming from a longer distance because of their catchment. And so maybe some of those clinics are doing a little less than they would if there were fewer. It isn't our intent to consolidate, but it is our intent to drive more volume through the existing. So that is a possibility. But I also think you've got this right though. And when you think about our capacity over the course of the next several years, our intent is to scale this to every major children's hospital jurisdiction in the United States and then some internationally. And when you start thinking about those 26 clinics, we think they're serving give or take 15 children's hospitals right now. I mean, when you think about the mass there is a really big opportunity for us to scale this into the other 285 children's hospitals that aren't active users or don't have active Boston clinics in their area. So yes, that's obviously why we're one of the reasons why we think we should be pretty excited about the opportunity here.

And then just switching to guidance, can you just remind us what's factored in terms of sort of respiratory illness seasons as I know I think coming into ‘23 you factored in pretty worst case scenario. Is that how we should be thinking about it this year? And then just philosophically it's a pretty tight range, especially given the acquisition coming into revenue, just how'd you settle out at the range and how should we think about the high and low end?

So similar to last year, 2024 guidance assumes that we will see a similar RSV environment in the fourth quarter of 2024 that we saw in 2023. So we're not assuming that it goes away, we're not assuming it's worse. And as far as the guidance goes, it's a tight range. We have a pretty good line of sight on the core business as well as Boston coming into this. And it is kind of what it is, I guess. So I don't have any philosophy on why it's as tight as it is, but we're pretty confident in those numbers.

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

Thanks, operator. Well, I appreciate you all joining us today on the call. Today's call a little bit longer, just wanting to make sure that we can fully explain the Boston acquisition and the opportunity we have on OPSB combined with everything else that's going on. So thanks for your time today, and we look forward to seeing you all at meetings in the next several months. Have a great day.

Thank you for your participation. This does conclude the program. You may now disconnect. Good day.