Orthopediatrics Corp Q1 FY2024 Earnings Call

Good morning, and welcome to OrthoPediatrics Corporation's First Quarter 2024 Earnings Conference Call. 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 three organizations will be advanced through clinical data presentations and 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, improvements in the surgical environment are tracking our expectations. Hospitals are now better staffed and the training of new associates is contributing to improved efficiency. Improvements continue every month and by our estimations, we're approximately 95% back to normal levels. Given the seasonality of our business, the improved children's hospitals' capacity will be tested in these critical summer months. Throughout the next few quarters, we will continue to monitor those progress closely. However, our confidence continues to increase that this headwind will have less and less of an impact moving forward toward a completely normalized state. We've built a business with a highly diversified portfolio that surrounds our surgeon customers with high technology products that continue to take market share and drive OrthoPediatrics' growth. During the quarter, the global Trauma and Deformity, international Scoliosis, and our newly formed and rapidly expanding Specialty Bracing business, or OPSB, were all particularly strong. First quarter global T&D was very strong, with 42% year-over-year growth led by sales of Pega products, PNP Femur, Orthex, early sales of PNP Tibia, and growth within the OPSB franchise as well as the addition of Boston O&P's T&D product sales. PNP Tibia demand continues to exceed expectations and DF2 revenue has started strong. In addition, total surgeon users of eX-Fix increased by 29% in the first quarter, and total accounts increased by 37%. We believe these numbers imply strong quarters are ahead of us. Looking at our international business, we reported strong overall growth of 33%, led by a rebound in Scoliosis and very strong sales of T&D with eX-Fix at 59% growth and Pega at 152% growth. Operations commenced at our recently established German headquarters, which is improving customer service and increasing surgeon access to OrthoPediatrics' products across the country. We are already seeing a return on this investment as the German business grew 22%. We're also seeing very high growth in Canada, where recent product registration and our account conversion strategy have been extremely effective, leading to large share gains in some of the country's largest, most prestigious children's hospitals and global teaching institutions. In addition, the macro environment in Brazil is improving. This momentum internationally is expected to continue throughout 2024. Scoliosis revenue had substantial 44% growth led by domestic ApiFix, international sales in Europe and Latin and South America along with another quarter of share taking in our fusion franchise as well as the addition of Boston O&P scoliosis custom bracing product sales. We expected the OUS scoliosis to rebound aggressively in 2024 and to act as a tailwind and this is exactly the trend we're seeing to start the year. OPSB contributed to growth in both the T&D and Scoliosis businesses as a result of Boston O&P acquisition coupled with increased sales from products unrelated to Boston O&P clinics such as MDO, DF2, Ora Medical and Rhino. Increases in OPSB sales continue to rise as we hire additional sales staff exclusively focused on this franchise, and we are confident that as we build this business, there is a massive opportunity to capture growth. The various levers driving the next phase of OrthoPediatrics' growth and profitability are becoming more visible, and we remain quite bullish about our prospects for 2024 and beyond. For the remainder of the year, we're focused on continuing legacy product growth; launching several key new organic products; expanding Pega sales; capitalizing on normalization in international markets; publishing positive longer-term ApiFix data; and execution on OPSB; and an early start in digital health care. The continued advancement of our strategic initiatives, paired with our strong financial position, will enable us to execute our long-term goals. With the solid start for the year, we are raising our revenue guidance for full year 2024 to $200 million to $203 million, representing growth of 34% to 36%. The plethora of growth drivers outlined have positioned this business to continue growing on the top line while improving profitability on our way to cash flow breakeven sooner. Moving to our revenue segments. In the first quarter of 2024, we generated total Trauma and Deformity revenue of $33.3 million, representing growth of 42% compared to the prior year period. This quarter saw strong performances from Pega products, Trauma, specifically PNP Tibia, eX-Fix, and OPSB as well as the addition of Boston O&P T&D product sales. Our prior investments in set allocations are generating a return and driving meaningful share gains for the T&D business across the entire breadth of products, specifically Pega, which once again grew nearly 50% globally. Sales of Pega continue to be better than we ever expected as we more deeply penetrate our U.S. accounts with the full Pega product portfolio and we ramp international sales. Now that the distributor and agency transition is complete, OUS, Pega will likely continue this trajectory globally in 2024 and for the foreseeable future. Excitedly, the full U.S. market release of PNP Tibia and GIRO are underway, with several sets expected to arrive at accounts in the second quarter and every quarter thereafter for the next several quarters. The full market release of DF2 is also underway, and there is extremely high demand for this product, and it's helping grow OPSB sales. These products are great additions to our portfolio and will create an immediate impact. Product portfolio expansion remains a top priority for the business. We seek to surround our surgeon customers with everything they need to treat each patient and treat more children. OrthoPediatrics is building a dominant share position across our entire T&D portfolio. Each quarter, more customers are using more of our products, driving increased market share. Adding new high-technology products like Pega helps advance the key account conversion strategy. The T&D business is increasingly well positioned to continue to deliver sustainable growth for the next several years. On the R&D side, there are several exciting products within the surgical side of our T&D business. We're making great progress developing our entirely new pediatric plating platform, or P3, which we expect will be world-class and spawn further share-taking opportunities for us within our plating franchise. We've also made solid strides on new external fixation devices that will continue the growth trajectory of our eX-Fix franchise. Further, there will be several new CE Mark products that are positioned to launch in the EU market in the coming year to 15 months. The OrthoPediatrics' nonsurgical specialty bracing business, or OPSB, is performing extremely well and we continue to view this franchise as a significant opportunity to help more kids. Before diving into some of that progress, I want to reiterate the OPSB opportunity briefly. In addition to furthering our strategy to provide pediatric orthopedic surgeons with everything they need to treat children, we see this as another opportunity for market dominance as we scale a historically fragmented market to become the clear-cut leader. 80% of pediatric orthopedic care is delivered outside of the operating room, and we estimate that the U.S. nonsurgical specialty bracing market is at minimum $775 million in total and conservatively a $500 million opportunity within the top 300 children's hospitals. From a business models perspective, importantly, these custom-fit devices do not require the up-front capital investment in consigned inventory or instrument sets. As mentioned on our previous calls, we continue to successfully execute a build-aggressively strategy in OPSB and anticipate it to grow very rapidly in the coming several years. OPSB is in the early innings of what we believe can be a business well in excess of $100 million in the coming years. The planned sales force expansion, product developments, and the addition of new clinics will scale this business rapidly, progress expanding the sales force and integrating our specialty bracing products with Boston's are already contributing to growth. Our existing R&D pipeline will support launching four to five new products within the OPSB business every year. Lastly, we've identified several new clinic opportunities and expect these to have a major impact as early as next year. Moving on to the Scoliosis business. In the first quarter of 2024, we generated revenue of $10.2 million, representing global growth of 44% compared to the prior year. This global growth was led by a return in international sales in Latin and South America, new business in Europe, and strong ApiFix growth as well as the addition of Boston O&P scoliosis custom bracing product sales. First quarter domestic sales increased by 38%, led by the addition of Boston Brace from the Boston O&P product portfolio. We are proud to have the most studied and utilized scoliosis brace in the world and a product that is considered to be the premier system for nonoperative treatment of scoliosis and kyphosis to the OPSB portfolio. We're pleased with the rebound from the international Scoliosis business, which outpaced our domestic business generating 114% growth. We expect to see a continuation of strong international growth coupled with a robust summer surgery schedule in the coming quarters. The increased number of total response users over 2023, earnouts on 70 units placed in 2023, continued ApiFix growth, improvements in South America, and our European launch altogether keep us bullish on 2024 Scoliosis growth. The Scoliosis R&D pipeline is continuously progressing, and the funnel is rich with highly novel technologies that solve major unmet needs for our customers, specifically for patients with early onset scoliosis, a category in which we have never had products before. In the first quarter, we launched the first of three products in the EOS space. The first surgeries with RESPONSE Rib and Pelvic were completed in the first quarter, producing excellent results. We've made great progress with our new growing spine system for EOS called Vertiglide and hope to have FDA approval secured in the second half of 2024. Further, the FDA recently classified our electromechanical growing spine rod, eLLi, with the breakthrough device designation, both a major milestone on our way to FDA approval and a strong endorsement of eLLi's potential for patients suffering from EOS. Lastly, substantial progress has been made on the development of our next-generation Fusion system. The next 18 to 24 months will be the most prolific period of new product development and launches in OP Scoliosis history, transforming the already impressive product portfolio into the most substantial offering available to surgeons treating pediatric scoliosis. Moving on to international. Overall, international growth improved substantially compared to the prior quarter, generating revenue of $10.4 million, delivering 33% year-over-year growth. This major rebound was supported by a return to normal ordering patterns for Scoliosis products in South America, the launch of Scoliosis in Europe, Pega products, and general demand across the entire T&D portfolio. The international growth seen this quarter is very encouraging. As I mentioned earlier, we are seeing meaningful traction within several of our core international markets. The results we've seen in Germany are particularly pleasing as we begin to reap the benefits of our investment in building a direct sales channel and local customer service. As we await the notified body audit to finalize our EU MDR status, we are thrilled about all the progress we've made internationally and that 2024 has started off on such a strong footing. We expect completion of our audit in the second half of 2024, enabling the potential launch of several new products in Europe shortly thereafter. Given the general lack of new pediatric orthopedic product launches in Europe over the past four to five years, it is particularly impressive that we've made so much headway and have many more opportunities in front of us. Overall, the international business is set up nicely. We believe that the first quarter represents a great start to an improved 2024. That brings us to surgeon training and education. Since inception, facilitating educational opportunities for the pediatric orthopedic community has been a foundational component of OrthoPediatrics' strategy. That's why we are live from the EPOSNA today, and we look forward to updating you on how productive and impactful this meeting will be for the pediatric orthopedic community. Back in April, the company was again a lead sponsor of ICSS, a meeting that offers a comprehensive program of lectures given by an outstanding international faculty and didactic cadaver labs focused on the cervical spine, lumbosacral junction, neuromonitoring, and various aspects of scoliosis. This interactive forum was a great opportunity for us to engage with pediatric orthopedic fellows and attending surgeons and provide training on the latest technologies and surgical techniques. We highlighted RESPONSE and the new Pelvic Fixation system at this year's meeting. In the quarter, we conducted a total of 46 unique learning experiences, highlighting over 162 different product touches including labs, workshops, and sawbone stations, and we reached over 1,100 health care providers and other staff members as we continue advancing our ongoing commitment to training the next generation of pediatric orthopedic surgeons and leading innovation in our subspecialty around the world. Lastly, because of the continued focus on our people and culture building, I want to again highlight that for the eighth time, OrthoPediatrics was named as one of the best places to work in Indiana. We are committed to fostering a culture that is positive, engaging, and allows our associates to do their best work. This has become a key aspect of our competitive advantage and continues to expand our ability to help more kids around the world. With that, I'll turn the call over to Fred to provide more detail on our financial results. Fred?

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 of the annual sets prior to our busy summer months. Touching briefly on a few key metrics. For the first quarter of 2024, gross profit margin was 72% compared to 75% for the first quarter of 2023. The decrease in gross profit margin was driven primarily by increased international set sales in the first quarter of 2024 as well as less purchase price variance released in the first quarter of 2024 compared to 2023. Total operating expenses increased $9.7 million or 30% to $41.9 million in the first quarter of 2024. The increase was mainly driven by incremental personnel costs associated with increased head count, increased commissions, and the addition of the Boston O&P acquisition. Sales and marketing expenses increased $1.6 million or 13% to $14.2 million in the first quarter of 2024. The increase was primarily driven by increased sales commission expense, with a limited increase coming from the addition of Boston O&P acquisition. General and administrative expenses increased $7.6 million or 44% to $24.7 million in the first quarter of 2024. The increase was driven primarily by the addition of Boston O&P acquisition as well as resources to support the continued expansion of our business and increases in noncash expenses, such as stock compensation, depreciation, and amortization. Research and development expenses increased $0.6 million or 23% to $3.0 million in the first quarter of 2024 due to the incremental product development and the addition of personnel to support the future growth of the business as well as the addition of the Boston O&P acquisition. Total other expense was $0.6 million for the first quarter of 2024 compared to $1.2 million of other income for the same period last year. In the first quarter of 2023, we recognized a $0.6 million favorable adjustment to contingent consideration that did not repeat in the first quarter of 2024, as well as increased interest expense from our $10 million mid-cap loan. Adjusted EBITDA loss was $1.1 million in the first quarter of 2024 and this compares to a loss of $2.1 million in the first quarter of 2023. We ended the first quarter with $49.7 million in cash, short-term investments, and restricted cash. Cash usage in the first quarter of 2024 includes $22 million paid for Boston O&P, increased set deployment as well as increased inventory to support future set deployments. With our current cash position as well as our debt facility, we are well capitalized to continue to execute on our long-term strategy. Given our strong balance sheet, positive annual adjusted EBITDA, our line of sight to cash flow breakeven, and the addition of Boston O&P, we are in a position of tremendous strength. Turning to guidance. We are raising our expectation for full year 2024 revenue from the previously announced $197 million to $200 million up to $200 million to $203 million, representing year-over-year growth of 34% to 36%. We continue to expect to generate between $8.0 million to $9.0 million of adjusted EBITDA in 2024. Additionally, we continue to expect less than $20 million of new sets deployed in 2024. This represents our continued focus on driving the business to cash flow breakeven sooner rather than later. As mentioned, this year, we plan to deploy sets earlier in the year compared to prior years.

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 for standing together to help kids. Operator, let's open the call for Q&A.

Our first question is from Ryan Zimmerman with BTIG.

Congratulations on a strong start to the year. I have a two-part question regarding your guidance. You exceeded expectations by about $3.5 million and are raising your midpoint by $3 million. Are there any concerns or reservations regarding that additional $0.5 million? Additionally, you are maintaining the adjusted EBITDA guidance. Can you discuss how the increased revenue will be utilized within the business?

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 produce a 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 might be 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. 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 your thoughts on clinic development. And really, it's the longer-term plans of what you can do with Boston O&P relative to your broader surgical customer base.

Yes, good question. The interest we've received from our customers regarding the Boston O&P acquisition is comparable to or exceeds any previous transaction or product we've engaged in. There is a clear demand for a company dedicated to the bracing sector, as demonstrated by Boston's success in about 15 institutions in the Northeast. We aim to expand this service across the entire United States, presenting a significant opportunity. It will take some time, but by fall, we should be able to provide guidance on the pace of clinic expansion. There are numerous opportunities for expansion, and while it may take time to initiate some of these projects, we might have deals completed and clinics operational by the end of the year, though we aren't forecasting that yet. We are set to open our first clinic inside Nationwide Children's Hospital in Columbus, the highest volume children's hospital in the U.S., in the coming months. Long term, we are excited to see our sales channel and the new products added to the MDO portfolio contributing to revenue growth. While clinic expansion is part of our strategy, we've focused on sales channels and accelerating R&D, aiming for four or five new product launches annually. The early contributions from the first two aspects of our strategy, along with the considerable growth opportunity we anticipate from clinic expansion starting in 2025, are very encouraging and give us reason to be optimistic.

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

To begin with the contribution from Boston O&P, I believe you mentioned it has historically been around a $25 million business. We were projecting something similar for this year. Is the increase in our guidance this year solely attributable to Boston O&P, specifically the additional $3 million, which would suggest it's more like $28 million? Are we ahead of schedule, or how should we assess Boston O&P's performance so far?

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 quarters, 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. We are experiencing growth in every segment at this stage, which is encouraging to see. I want to emphasize that we are achieving above-average growth in OPSB, and this trend has been ongoing for quite some time. Since we acquired the MDO product portfolio for clubfoot and added products last year, that business has consistently grown over 20% since the acquisition. We continue to see this upward trajectory, and the performance of OPSB, excluding the Boston clinics, is very strong and certainly contributes to T&D growth.

That's great to hear, very encouraging. Going back to the earlier point, I assume it's too soon to see any halo effect from Boston O&P, but the Pega numbers and some comments about ApiFix and other areas suggest that the momentum is very strong. I'm curious about the core business or the more organic historical business where some of that growth is coming from and how durable some of that growth is, especially with Pega. I understand that you won't experience 150% growth every quarter, but any insights into the durability you're discussing regarding the traditional OrthoPediatric franchises would be helpful.

Yes. In terms of the implant segment of Trauma and Deformity, we have indeed distributed a significant amount of inventory over the years. However, some of that inventory utilization has been slightly hindered due to throughput challenges in children's hospitals. We're observing a combination of successfully landing a lot of inventory and a nearly normal return to activity in the surgical market. This is allowing us to see efficiencies from that inventory. We're also looking to accelerate some product launches into the first half of this year, as we're beginning to achieve real efficiencies and growth from the inventory we released in 2022 and especially in 2023. It’s encouraging to witness that legacy growth since we anticipated it when we distributed that volume of inventory. We're starting to see favorable returns from our Pega inventory, which is showing strong domestic growth and approximately 50% globally. Our international presence is still smaller, but with Pega available across all our agencies and distributors, we expect solid growth outside the United States for the foreseeable future. Additionally, PNP Tibia is exceeding our expectations, nearing our annual sales forecast through April, which is a positive sign for the product’s performance. This success is also revitalizing the usage of PNP Femur, our most significant trauma product. Furthermore, our Orthex growth numbers clearly reflect success. The eX-Fix portfolio has increased steadily since our acquisition three and a half years ago, and it's still only beginning to gain traction internationally. We believe we rank among the top two players in children's hospitals within the U.S. eX-Fix market. All these factors are contributing positively as we progress through the year. Lastly, ApiFix appears to be benefiting from improved data. We anticipate longer-term, better data moving forward. ApiFix is performing well, and the response to ApiFix 70 is strong, aligning with our longstanding expectations. As we continue to invest in OPSB and partner with Boston, we’re building trust among surgeons, demonstrating our longevity, and showing commitment to advancing pediatric orthopedics, which positively impacts our entire business.

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 two quarters in the middle, the margin is typically a little lower in those quarters. So yes, I would expect an increase in the second quarter compared to the first quarter and then possibly another increase in the third quarter compared to the second quarter.

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

Yes. Yes.

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. I believe the immediate opportunity lies with the products we recently launched or started in the third and fourth quarters. PNP Tibia is performing particularly well. We have around 15% of the sets planned for PNP Tibia.

Maybe 10%.

We are seeing strong performance with a significant inventory that has not yet been launched, which I believe will be an important story for us. GIRO is also a key focus for us. DF2 on the OPSB side was developed for fracture care for children under the age of 4 and has been well received. We have several products that are currently performing well and we have started our first cases with the EOS product line. The EOS space is critical, making up about 15% of scoliosis procedures, and until now, we did not have a product in this area. We have three new products, starting with RESPONSE Rib and Pelvic, which just launched and is already generating sales and procedures. Next is the Vertiglide device, which I believe will drive significant revenue once we launch it in the second half of this year. Additionally, eLLi, the electromechanical growing rod, just received breakthrough device designation. Our strategy in the early onset scoliosis space is to offer a comprehensive range of solutions rather than just a single product. Most adult orthopedic or spine companies typically provide a single product line for early onset scoliosis; however, we aim to equip surgeons with a wide array of tools for this complex condition. I am very excited about this, as it enhances our product portfolio, making it compelling for the top institutions worldwide since we will be the only company with such a comprehensive offering for these challenging circumstances. The FDA's breakthrough device designation enables us to have direct discussions with the FDA regarding the approval process for this device. While we can't guarantee approval, our testing and the opportunity for one-on-one discussions with the FDA provide us with a strong level of confidence in meeting their requirements. This marks a significant moment in our company's history as it's the first time we have developed a technology recognized as crucial for the healthcare of pediatric patients. This level of recognition is a clear indicator of the need for such a device. For those of us who have been with the company for a long time, this feels like the realization of our aspirations—not only to improve children's lives but also to be involved in potentially life-saving surgeries. This is a significant achievement for our company, and we believe that within the next year, this device can be available for implantation in children, representing a major breakthrough for us.

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, that's a great question, Mike. Over the past four years, our product portfolio has developed significantly, yet very few of these products, especially those developed organically, have entered the European market. If you look at the materials we’ve shared, you’ll see how much we’ve released in the U.S. and other markets, but most of it is still unavailable in Europe. Despite this, we are experiencing rapid growth in the European market, which presents a huge opportunity for us to introduce several new brands that are making their debut in Europe. Currently, we are attending the EPOS and the Pediatric Society of North America meeting in D.C., where many surgeons are familiar with our products. However, they have yet to access these products in key markets like Germany, the U.K., Ireland, Italy, France, and Spain. So, gaining approval for our products is crucial. We are fully prepared for the EU MDR audit; our technical files are updated, and we are ready to proceed. The only delay is that the notified body has a backlog of audits. Once the audit is complete, we will be set to launch these products. I can’t specify a date, whether it will be in November, December, or early next year, which is why we indicated a timeframe of 12 to 15 months. However, when this happens, it will be a significant achievement for us, marking the launch of nearly four to five years' worth 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 a bit all over the place, so I hope I can ask something new. You mentioned plans to hire staff for Boston. Could you remind us of your current footprint? You also said you believe you can grow that to $100 million. What staffing levels do you expect with that? How many additional people do you need to bring on board, and how quickly can you accomplish that?

We've been discussing the expansion of our sales force. When we acquired Boston and MD Orthopaedics, there was no direct sales staff in place, just a few sales managers and some dedicated individuals making significant contributions, especially in the United States and a few international locations. Our goal is to develop a proper sales team, aiming to add around 20 salespeople in 2024. These new hires will work in conjunction with our current U.S. and international distributors to ensure a smooth transition and strong customer relationships. We have established close ties with pediatric orthopedic surgeons globally, which we plan to leverage. The new team will focus on the non-operative side, allowing them to work within clinics rather than being solely operating room-bound. I believe we have already added most of these salespeople, and their costs are beginning to reflect in our financial statements. We anticipate continued growth as we expand our clinics and possibly our international presence. We're aiming to build a business that exceeds $100 million, and all indicators suggest we are on track to achieve significant expansion in this area. This represents a substantial new market opportunity that will drive strong revenue growth in the coming 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 great question. The difference between the EOS and ApiFix is that the ApiFix surgery, which is a nonfusion spine surgery, is not commonly performed by every surgeon. This requires surgeons to adopt new practices that they are not currently utilizing. For children with early onset scoliosis who face significant challenges, there are no nonsurgical treatment options available. These procedures are being conducted, and many surgeons are finding it difficult to identify suitable technologies to carry them out. Therefore, we believe that advancements in technology are vital in this area. There is a strong demand from the pediatric orthopedic community for technologies that can aid these children. Often, surgeons have to resort to less preferred products. While these procedures continue to take place, we believe that if we offer superior technology, which we are confident we will, and supplement it with three distinct products, we will have a significant competitive edge. We anticipate strong growth in these product lines. Additionally, as we see an increase in EOS revenue, it further enhances our company's reputation among our customers, showing that we are willing to address extremely challenging cases that many orthopedic professionals tend to avoid. These conditions may be rare, but they are quite complex. Historically, surgeons have not had solid partnerships for addressing these cases. We believe this positioning creates additional positive perception for our business, provides us with the chance to assist more children, and is likely to enhance the usage profile 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.