Good morning, and welcome to OrthoPediatrics Corporation's First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Trip Taylor from 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 was filed with the SEC on March 8, 2024. 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 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 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 of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast today, May 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 first quarter 2024 conference call. As we start all earnings calls, I'd like to begin by highlighting that we helped a record 27,600 kids in the first quarter of 2024. This remarkable 47% year-over-year growth is the metric we're most proud of out of all of this stuff we'll share with you today. It embodies our fundamental commitment to helping children and demonstrates our ability to continue to expand our reach and create a more significant impact for children worldwide. So today, we're excited to join you live from just outside of Washington, D.C. at the EPOSNA Conference, where POSNA and EPOS are collaborating to host a joint Annual Meeting. This is the largest pediatric orthopedic conference in the world and once again, OrthoPediatrics is the leading sponsor of this event. The shared mission across our 3 organizations will be advanced through clinical data presentations and the educational sessions, highlighting the most cutting-edge pediatric orthopedic treatments and technologies. We're looking forward to connecting with our customers and colleagues this week and there is no better place to deliver our exciting business update. OrthoPediatrics is off to a great start in 2024, generating first quarter revenue of $44.7 million, representing growth of 41% compared to the first quarter of 2023. Driven by strong performance across the businesses, we continue to demonstrate robust top line growth, maintain healthy margins and outperform our adjusted EBITDA expectations. The execution of our business plan is delivering both financial results and progress on our strategic initiatives. Looking closer at the quarter, after an initial RSV spike seen in early January, revenue and surgery scheduling quickly bounced back. Children's hospitals have learned to manage RSV waves efficiently and effectively mitigate disruptions previously seen. Overall,…

Thanks, Dave. Our first quarter 2024 worldwide revenue of $44.7 million increased 41% compared to the first quarter of 2023. Growth in the quarter was driven primarily by strong performance across global Trauma and Deformity, international Scoliosis and OPSB as well as the addition of Boston O&P. U.S. revenue was $34.3 million, a 44% increase from the first quarter of 2023. Growth in the quarter was primarily driven by our Trauma and Deformity product lines, Scoliosis and OPSB as well as the addition of Boston O&P sales. We generated total international revenue of $10.4 million, representing growth of 33% compared to the first quarter of 2023. Growth in the quarter was primarily driven by Trauma and Deformity, Scoliosis and OPSB. In the first quarter of 2024, Trauma and Deformity global revenue of $33.3 million increased 42% compared to the prior year period. Growth was primarily driven by strong growth across numerous product lines, specifically our Cannulated Screws, PNP femur, PediPlates, external fixation and the Pega systems as well as the addition of Boston O&P Trauma and Deformity correction product sales. In the first quarter of 2024, scoliosis revenue of $10.2 million increased 44% compared to the prior year period. Growth was primarily driven by increased sales of our RESPONSE 5.5/6.0, ApiFix systems and revenue generated from 7D technologies as well as the addition of Boston O&P scoliosis custom bracing product sales. Finally, Sports Medicine/Other revenue in the first quarter of 2024 was $1.2 million compared to $1.1 million in the previous year period. Turning to set deployment. $4.3 million of sets were consigned in the first quarter of 2024 compared to $3.0 million in the first quarter of 2023. The increase was driven by the strategic decision to bring in inventory earlier in the year and deploy a greater percentage…

Thanks, Fred. Looking at the first quarter, we are extremely proud of how we've started 2024 and are confident that we will continue this momentum into the remainder of the year and beyond. We continue to capture share across the entire business, record robust top line growth, maintain healthy margins and outperform our EBITDA expectations. We will continue to move toward profitability growth and cash flow breakeven as we execute our strategic initiatives to drive value and capitalize on our opportunity. 2024 will be a tremendous year for OrthoPediatrics, and I look forward to updating you again soon. In closing, I'd like to thank our surgeon partners, my OP associates, our investors and all of the innovators in pediatric health care are standing together to help kids. Operator, let's open the call for Q&A.

[Operator Instructions] Our first question is from the line of Ryan Zimmerman with BTIG.

Congrats on a strong start to the year here. I want to ask about guidance. Two-part question here. You beat by about $3.5 million; you're raising by $3 million at the midpoint. Just curious if you're seeing anything kind of ahead that you want to -- you're a little cautious about or maybe reserving that incremental $0.5 million. And the second part is you are passing through that $3 million. Adjusted EBITDA guidance is staying the same. So just talk to us about kind of that flow-through on higher revenue into the business and kind of what you're putting that to work on.

Yes. So first of all, we're obviously very excited about 41% growth in the first quarter. It's a great start to the year and sets us up very nicely. We had some RSV in late December, a little bit of it in January. And then I think some of that December got pushed into January, which helped pretty strong January to start the quarter, which is great to see. The wildcard for us, as you know, Ryan, is always the summer months, right? June and July are typically the dramatically larger months for us throughout the year and how those summer surgery seasons play out is really unknown until we get there. And so I think that's probably where the $0.5 million maybe is on the revenue as far as why it didn't flow through for the full year. And it's really the only thing that gives us pause, if you will, on increasing it further at this point.

Okay. And the EBITDA guide relative to the beat. Are you putting that back in the business, Fred?

Yes. The EBITDA number, the range is pretty wide. And again, the summer months are so large, that's when so much of it drops through. And so as you saw in the first quarter, it was negative $1.1 million, basically on or maybe a little better than our expectation, but we want to wait and see what the summer months look like and then we can increase that as we move throughout the year.

Got it. And then just last one for me. Boston O&P looks like it's been a real good contribution and asset to bring in. Just, Dave, love to hear kind of your thoughts on clinic development. And really, it's really the longer-term plans of what you can do with Boston O&P relative to your broader surgical customer base.

Yes. Good question. We see -- I think you've heard me say this before, Ryan, the volume of inbound interest we've gotten from our customers related to the Boston O&P acquisition is probably as great, if not greater than any other transaction or product we've done up into this point. So there's clearly a serious need out there to have a company focused exclusively in this bracing space and providing that service that Boston has done so well in about 15 institutions in the Northeast. And we want to obviously expand that to everywhere in the United States. So huge opportunity to do that. It's going to take us some time. I think by the fall this year, we'll probably be able to give some guidance as to what we think the pace is going to look like in terms of clinic expansion. But there is no shortage of opportunities for us from a clinic expansion standpoint. We have kind of an outpouring of ask here from a number of locations. And it's just going to take us some time to spin some of those things up. It's possible that we'll have some of these deals done and some clinics moving here by year-end, but we're not forecasting that. We do have the opening of our first clinic inside Children's National -- or Nationwide Children's in Columbus, which is, I believe, the highest volume children's hospital in the United States. So that should start here in the next few months. So really positive in terms of the long term. I think what we are really most pleased to see here is the fact that as we've added the sales channel and then we've added a number of products to the MDO portfolio since the acquisition a few years ago, it's great to see all of those products already in contributing to revenue growth. Not the clinic side of this stuff, but we've talked about 3-part strategy: number one, of sales channel and selling the products we have; number two, accelerating R&D, which we're definitely doing, on pace to do 4 or 5 -- have 4 or 5 new products a year; and then lastly, clinic expansion and to see the first 2 of those portions of our strategy already start to contribute and then to think that we have this huge TAM expansion opportunity, really large growth opportunity that should really kick in, in 2025 when we start to realize the benefit of clinic expansion. It's just really exciting. I think it's given us a reason to be very bullish.

Our next question comes from the line of Matthew O'Brien with Piper Sandler.

Just maybe to start with on the Boston O&P contribution. I know -- I think you guys had mentioned it being about a $25 million business roughly historically. And I think that's kind of what we were modeling this year. Is the increase that we're expecting in the guidance for the year, just all Boston O&P related, the extra $3 million really related to that, so it's more like $28 million? So you're kind of running ahead of schedule? Or how do we kind of frame up how well Boston O&P has done so far on its own?

No, I wouldn't assume that at all. I think you can assume that it's similar to historical levels. I think as we've mentioned in the past, about 23% of that $25 million typically falls in the first quarter, 25% in the second and third quarter and 28% in the fourth quarter. But the extra $3 million is not from Boston and very pleased with the legacy business, if you will.

Yes, Matt. I mean we see growth across every segment at this stage. I mean it's just really good to see really positive momentum. I do want to specify that we are seeing above-average growth in OPSB, but we've been doing that for a long time, right? I mean we have taken -- ever since we took on the MDO product portfolio on the clubfoot side and then added products last year, that business has been growing in excess of 20% really since the acquisition. And we're seeing more of that, and so the OPSB, let's say, minus the Boston clinics is performing extremely well and it's certainly adding all those product lines to the T&D growth. So yes, from that perspective, let's say, the non-Boston component of OPSB, really pleased for what we're seeing there. But listen, this is a growth story that's going across every product line right now.

Okay. Okay. That's great to hear. Super encouraging. Just maybe back to that other point. I'm assuming it's too early to be getting any kind of halo effect from Boston O&P, but the Pega numbers and some commentary about ApiFix and other areas seem like they're kind of -- the momentum there is extremely strong. So I'm just curious about just the core business or the more organic historical business where some of that growth is coming from and the durability of some of that growth, especially Pega. I mean, I know you're not going to grow 150% every quarter with that thing. But just some of the durability that you're talking about now in the more traditional OrthoPediatric's franchises would be helpful.

Yes. I think what we're seeing, first on the implant side of Trauma and Deformity, I mean, it's no secret that we put out a lot of inventory over the course of the last few years. It's also no secret that some of that inventory utilization has been maybe stifled a little bit just because of pure throughput inside children's hospitals. And so I think what we're seeing is a combination of the fact that we've landed a lot of inventory, and we're starting to see a normalization almost back to normal in terms of the surgical market. And so we're seeing efficiencies in that inventory. And you see -- you might assume that we're being pretty aggressive in terms of wanting to pull up some of that product launch into the first half of this year because we're starting to drive real efficiencies and see real growth from the inventory that we put out in 2022 and especially 2023. So it's good to see a lot of that legacy growth come because, obviously, we were betting on that when we put out that volume of inventory. I would argue that we're obviously seeing really the first returns of a lot of inventory of Pega. And so still seeing great growth domestically. I think it was about 50% globally. So stronger international, much smaller business for us. But now that we have Pega in all of our agencies and converted to all our distributors, I mean we do expect to see pretty strong growth from Pega outside of the United States for a long time. I would also say PNP Tibia is performing better than we had expected. Admittedly, I think we're almost to our annual sales number forecast on PNP Tibia now through April. And so that's a pretty…

Our next question comes from the line of Rick Wise with Stifel.

A couple of things for me. Very exciting quarter, obviously, but getting into the weeds a little bit. Fred, maybe you can help us. Talk us through how to think about gross margin progress for the year sort of from a quarterly perspective. I heard what you said about some of the gross margin, if you will, mix pressures in the quarter that took it a little lower than we were thinking, the OUS set sales and the purchase price variances, et cetera. Can you help us understand how that plays out over the course of the year? Does it step up sequentially? Are we understanding that in the second quarter, does it step up sequentially in some kind of way that sort of gets it back more to the 74%, 75% range. Just help us by quarter and the implications for the year now.

Yes, absolutely. So the gross margin rate really varies a lot based on volume. And so over the last many, many years, the third quarter is typically the highest gross margin rate. I think it was like 77% last year. The second quarter is typically the second-highest quarter. And then with the first and the fourth quarter revenues being much smaller, obviously, than those 2 quarters in the middle, the margin is typically a little lower in those quarters. So yes, I would expect an increase second quarter compared to first quarter and then possibly another increase third quarter compared to second quarter.

So still getting to that mid-70s kind of area for the year despite the start or?

Yes. Yes.

You're still comfortable with that?

I think I mentioned 74%, 75% on the call last time.

Great. Turning to the pipeline. Obviously, Dave, you're talking about really exciting pipeline. I can tell you're excited about it. Maybe talk to us about a couple of things. Some of the organic product launches in a little more detail, which ones you'd have us focus on most and just a little more sense of timing. You highlighted a couple of them, but maybe dig into a little more. And as part of that, why this electromechanical growing rod opportunity is such a big deal and what the breakthrough designation might mean for launch expectations. A lot in there, but if you could just break some of that down.

Great. Yes, sure. So I think the near-term opportunity, right, is with products that we just had launched here or kind of kicked off in Q3 and Q4. So PNP Tibia, as I mentioned earlier, really doing well. I mean we have, I don't know, Fred, 15% of the sets that we'll have out on PNP Tibia, I mean --

Maybe 10%.

Maybe 10%. So see it performing the way it's performing, with the volume of inventory that hasn't even been launched, I think that's going to be a story for us. GIRO's certainly a story for us. DF2 on the OPSB side, that was a product that we developed for fracture care for patients really under the age of 4, that has been well received. So those products, kind of the here and now, we've got them in our hands, they're going well. Started doing first cases with, as I said, our first EOS product line. And you hear us talking a lot about the EOS space. That represents about 15% of scoliosis procedures. And up until this point, we've never had a product in that space. So 3 different products, the first of which we talked about, the RESPONSE Rib and Pelvic that just launched and we have sales going on and procedures going on with that. Then this [ Vertiglide ] device which is another very substantial, I think, will be a strong revenue producer for us. Hopefully, we can get it out in Q -- or in the second half of this year. And then eLLi, as you mentioned, which is the device that was this electromechanical growing rod just received breakthrough device designation. I mean our strategy in the early onset scoliosis space is not to provide a single -- the customer with a single solution. Most of the kind of adult ortho or adult spine companies may have a single product line for early onset scoliosis. Again, true to a form, we want to surround the surgeon with everything they could use across that very, very complicated set of indication. And so very excited. I think all of that creates, again, a seriousness in our product…

That's exciting.

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

Yes. So I wanted to ask about Europe. I think there were some commentary that you're expecting some new product clearances there and you mentioned an audit or something. Can you just provide a little more detail on what's happening there? It sounds like it could be meaningful in terms of the number of new products you're expecting.

Yes, great question, Mike. So basically, you can think about our product portfolio and how it's developed over the course of the last 4 years and assume that almost none of those products that we've developed, particularly organically, none of those products have hit the European market yet. And so if you just look at the slide deck and see how much we have developed and put out into the U.S. market and certain other markets outside of the U.S., most of that hasn't hit Europe, yet we're still growing very rapidly in the European market. So you can kind of think of this as really a massive opportunity for us to launch several new brands that are new to Europe. Here, we're at the European -- the combination meeting between the EPOS, the European Pediatric Orthopaedic Society and the Pediatric Society of North America here in D.C. I mean a lot of these surgeons have seen these products. They'll certainly see them exhibited here, but they haven't had access to those products. In markets like Germany, U.K., Ireland, Italy, France, Spain. And so this is a big deal for us when we can get this approved. We are ready for the EU MDR audit. Our technical files, everything is updated. We're ready to roll. It's just a question, frankly, of getting notified body into our offices. They're backed up with all kinds of these audits. And so as soon as we get that audit done, and we will be ready to start launching these products. I'm not certain we can put a date. Is it November or December or early next year? That's why we've kind of said 12 to 15 months. But when it happens, it's a big deal for us, and I think it represents the launch of almost 4 or 5 years of U.S. products into the European market.

Okay. And then I know that you don't really disclose your sort of organic growth, but if we assume that Boston O&P was sort of like $5.5 million, it implies about 24% growth for the non-O&P business. So it seems like it's safe to assume your organic growth was probably over 20%. I mean, is that reasonable?

I'd say that's an extremely reasonable assessment, Mike, yes.

Our next question comes from the line of Dave Turkaly with Citizens JMP.

Sorry, I've been bouncing around a little, so I hope I ask something that hasn't been asked. But you mentioned, I think, that you're going to hire some staff for Boston. And I was just curious, could you just refresh our memory in terms of the footprint that you have today and then -- and I think you even said that you think that you could build that to $100 million. What kind of head count came with them? And how many people do you need to add? And how quickly can you do that?

Yes. So what we've been talking about, Dave, is just the scaling of the sales force. So when we came -- when we acquired Boston and MD Orthopaedics, where literally, there was no direct sales staff. We had a couple of people that were kind of sales managers, and we have some really great folks that have been helpful kind of one-person teams really leading in the United States and then a few people outside of the United States that have done great for Boston and for particularly MDO. And now we're trying to get those people and others some -- an actual sales force. And so the aspiration here in 2024 was to have about 20 people added within the sales channel. And we want to partner those people with our current U.S. and international distributors. We don't want these people to be entirely separate, so they show up on the doorstep of a customer who they don't know. Obviously, we have very close relationships with really every pediatric orthopedic surgeon around the world. And so we want to be able to leverage our relationship and the fact that they know OrthoPediatrics and then bring some people into the sales channel that focus exclusively on the nonoperative side that aren't obligated to stand in the operating room and work with surgeons all day long, but certainly, can work in their clinics. And so that's what we're really talking about. We have added, I would say -- I don't know for sure, but I think we've probably added the majority of those salespeople already. And so those costs have started to figure into our P&L already. And obviously, we've got that forecasted for the balance of the year. And as that portfolio expands and clinics expand and maybe even our business expands further internationally, you could assume that we will want to continue to scale the sales channel. And we've talked about building a $100 million business here. I think you heard me say in the call, a business well over $100 million. I don't want to put a number on that right now, but all systems are go here for us to build a very, very large business in this space, and we love the financial metrics associated with it, and we see very little resistance to us continuing to do that over the course of the next several years. And it's just -- this is a big new TAM with a big new growth opportunity all the way around that should drive really strong top line growth for us for the next several years.

Our next question comes from the line of Sam Brodovsky with Truist Securities.

Guys, can you hear me okay?

Loud and clear, Sam.

Great. And congrats on a solid start to the year. I just wanted to start off a higher-level question, and appreciate the commentary on where system capacity is back there. Can you just remind us what's contemplated in guidance as it relates to capacity coming back online? And if there's any sort of backlog component in your estimation out there in the market that could potentially come into the volumes this year?

Yes. I don't think we try to anticipate dramatic increases in capacity in our guidance. So it's pretty much what we see today is what we try to use to forecast and include in the guidance. And we honestly, other than a little bit of carryover from RSV December into January, don't feel that there's some huge pent-up demand that's going to flow through the system in our guidance either.

Great. And then switching to EOS. Just as we think about that opportunity, how quickly do you think the new product could see uptake there? Is it going to be similar to what we saw with ApiFix where data needs to mature a little bit before you can see broader adoption? Or do you think there's room for that to potentially adopt even more quickly?

Yes. That's a really good question. So I think with the EOS and what's different about EOS than ApiFix is that the ApiFix surgery, this nonfusion spine surgery is a procedure that not every surgeon does. This is not -- this is asking surgeons to do something different within their practice that they don't currently do. The fact remains is that a child with early onset scoliosis, young kid that's having substantial difficulties, there really isn't a nonsurgical treatment option available. These are procedures that are happening and surgeons are struggling right now to find adequate technologies to do those procedures, perform those procedures. So I think technology wins in this space. There's a great hunger from the pediatric orthopedic community to have technologies that can benefit these kids. And a lot of times, surgeons are forced to use kind of last resort types of products. So these procedures are happening. And so I think if we have a better technology, which we believe we will, and then we can round that technology out with 3 different products, we think really these 3 products you would need to take care of this very tough set of indications, gives us a real distinct competitive advantage. And we do think that the uptick can be really strong with these product lines. And again, I think as much as the uptick in the EOS revenue, it also places the company in, I believe, a fairly prestigious spot in the minds of our customers that say, we're willing to take on the extremely difficult things that the majority of ortho is just not taking on. I mean these are pretty -- fairly rare conditions, but they're very complicated. And surgeons haven't historically had great partnerships to take care of these kids. So we think that kind of creates, again, another halo around the business, gives us an opportunity to help more kids but also will probably drive usage profile of the balance of our other products.

And I'm currently showing no further questions at this time. I'd like to hand the call back over to David Bailey for closing remarks.

Thank you. Well, I'd like to thank everybody for joining us today. We've got an exciting week here at EPOSNA. I think this will be the largest meeting of the pediatric orthopedic community in history. And so we're excited to get out there and meet with customers, show off what we've done and just no better place to talk about a fantastic quarter for us and all the momentum we have heading into the balance of 2024. So appreciate everybody being on the call. Great questions, and we'll look forward to reporting on how things go as we progress. Take care.

This concludes today's conference call. Thank you for your participation. You may now disconnect.