Orthopediatrics Corp Q2 FY2024 Earnings Call

Good morning, and thank you for standing-by. Welcome to the Second Quarter 2024 OrthoPediatrics Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Trip Taylor from Gilmartin Group for a few introductory comments. Please go ahead.

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 in evaluating its operations period-over-period. For each non-GAAP financial measure referenced on this call, the company has included a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings release. Please note that 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, August 6, 2024. Accepted 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 second quarter 2024 conference call. We're extremely proud to begin our call by reporting that we've helped over 32,000 kids in the second quarter of 2024, a 52% increase and another record high for OrthoPediatrics. Our cause is rooted in the desire to positively impact the lives of as many children worldwide as possible. And the 52% year-over-year increase is a true reminder that we continue to make an impact and are successfully delivering our cause every day. OrthoPediatrics continued a strong performance into the second quarter of 2024, with revenues reaching a record $52.8 million, surpassing the $50 million mark for the first time in our history and representing a 33% increase from the same period in 2023. This achievement was fueled by the effective execution of our business strategy and helped deliver top line revenue growth, produced healthy margins, and positive adjusted EBITDA. We are pleased with the momentum we are generating, and we look forward to continuing to drive results in the second half of 2024. Before diving deeper into the quarterly results, I'm going to briefly touch on the overall macro trends. At this point, we believe we are working in a normalized surgical environment. Hospital staffing has increased, efficiencies in the operating areas have improved, and we've seen minimal disruptions in the surgical schedule. Going forward, we expect more of the same, barring any major disruptions from future respiratory illnesses. In the quarter, our revenue showed more variability on a month-to-month basis, particularly in the surgical segments of trauma and deformity and scoliosis, which experienced a delayed start to their peak season. However, once the season started, it accelerated rapidly into the close of the quarter and is extending into the balance of the summer season. Case schedules are robust, and we are experiencing the most stable environment in quite some time. Our business is comprised of a large and highly differentiated portfolio of products that continue to take market share across multiple pediatric orthopedic segments and drive our growth. During the quarter, the trauma and deformity, domestic scoliosis, and our newly formed specialty bracing businesses contributed to strong growth. Second quarter global trauma and deformity was very strong, with 37% year-over-year growth, and scoliosis produced substantial 26% year-over-year revenue growth in the second quarter. Our specialty bracing contributed to growth in both the trauma and deformity and scoliosis businesses as a result of the acquisition, coupled with increased sales from products outside the clinics. At this early stage, we couldn't be more pleased with the acquisition. The more we work together with the team, and the better we understand the opportunity, the more convinced we are of the large expansion opportunities and the synergies between our implant business and the specialty bracing. Our business has multiple efforts from which we can drive value, including continued growth in legacy products, several new product launches, additional international regulatory approvals, several transformational R&D projects, a rapidly expanding specialty bracing business, and our expansion into digital health. While some of these efforts may need more investment and time, we believe they are essential for the company's future of driving rapid revenue growth, enhancing our profitability, and improving ROI. With the combination of successful growth endeavors we've outlined, and with the anticipated upcoming investments, we have positioned the business to continue growing top-line while improving profitability on our way to cash flow breakeven. We project to produce $8 to $9 million in adjusted EBITDA in 2024 and assume a large step up for 2025. Given our bullish outlook and the multitude of opportunities we have in front of us, we have recently taken steps to recapitalize the business to maintain our aggressive growth and profitability trajectory. Refinancing our credit facility with the convertible offerings and term loans provides an improved cost of capital and flexibility that will allow us to invest in high return opportunities. Leveraging this capital and liquidity will enable us to continue funding these opportunities and reach our cash flow breakeven goal in 2026. Next year, we expect to take a major step towards that goal, as we anticipate positive adjusted EBITDA levels in 2025 to completely offset our investments. Now, moving on to our revenue settings. In the second quarter of 2024, we generated total trauma and deformity revenue of $37.8 million, representing growth of 37% compared to the prior year period. We continue to make substantial market share gains, with this quarter showing robust sales of trauma products, complemented by revenue from the newly included product sales. Within the trauma and deformity business, I'd like to highlight a few products in areas that we feel have made important progress this quarter. Across our portfolio, we are starting to realize the benefits of our prior investments and are excited to see the payoff from this strategy. This is particularly true with one product as sales continue to be better than we've ever expected. Moving forward for the rest of 2024 and beyond, we expect this growth to continue as we more deeply penetrate our US accounts with the product portfolio. Growing our portfolio remains a critical part of our strategy, and we continue to progress in this area with the advancement of several products. As we discussed last quarter, we are well on our way with the full US market release of another product and we are excited to report that we launched another 25 sets. Sets will continue to rise in each of the next several quarters and will remain key catalysts for the next several years. In tandem, we are executing a full market release of another product. Demand for this product has been extremely high, and our customers have endorsed it with great reviews, while revenue at this stage is small, it is poised for rapid growth in the next several years. The uptake of these technologies is surpassing our projections, promising us to ramp search and training for these devices. Furthermore, our customer conversion during the quarter was very high. After a great first quarter, the momentum continued with strong second quarter results, both in terms of revenue and new customers. On the R&D front, we continue to make solid progress on our new plating system and expect the first of a series of plating projects to launch in the first half of next year. Our continued expansion into transformational and underserved areas with larger opportunities is essential. We have now fully integrated the specialty bracing assets, and we are starting to realize the breadth of the synergies with our implant business, creating a business that can contribute to our long-term growth and improved profitability. The franchise is driven by our three-point strategy of sales force expansion, R&D that expands the range of products, and our clinic expansion strategy. Since its inception, the sales force has matured, and we are seeing early returns from the investment in a specialty bracing-specific sales force. Additionally, R&D projects continue to progress, and we expect to launch four to five products each year. Lastly, while most of the impact will begin in 2025, we've identified numerous opportunities for clinic expansion and are in the final stages of formalizing our plan. Notably, through acquiring a small operation, we have our first new clinic, and we expect our next new clinic embedded in a major children's hospital to be operational in the second half of the year. More details regarding our clinical expansion strategy will be shared at an upcoming Investor Day, but it is safe to assume our view of the growth prospects is growing more positive by the day. Moving to the scoliosis business. In the second quarter of 2024, we generated scoliosis revenue of $13.7 million, representing growth of 26% compared to the prior year. This global growth was led by a strong increase in new users of our spinal implant. Our domestic sales increased by 37%, driven by the addition of product revenues. The overall scoliosis revenue was somewhat muted by negative international growth in the quarter and a slower-than-expected start. Nevertheless, we indicate a promising uptick globally. We had a record summer post-surgery. With an expanding base of surgeons adopting our offerings, we're optimistic about continued scoliosis revenue growth in 2024 and beyond. Our team is exploring ways to expand our impact and cater to unaddressed needs while enhancing our product portfolio. Currently, we are focused on early onset scoliosis, which is a category that has seen little technical innovation over the past decade. We have pioneered three products in different phases of development and are pleased with the advancements made thus far. After launching one system in the first quarter of 2024, the response has been quite encouraging. Our expectations are high for the impact of our additional offerings, particularly with upcoming launches. Collectively, this suite of innovative products will transform our scoliosis implant portfolio and strengthen our position for growth in the coming years. Moving on to international performance, we generated revenue of $11.6 million and delivered 16% year-over-year growth. Growth was driven by trauma and deformity product growth, including several legacy devices. We expect strong international growth rates for scoliosis this year as well as a return to normalized ordering patterns in various markets. Overall, the international business is set up well, and we believe that the second half will contribute toward an improved 2024. That brings us to our search and training programs. We continue to lead industry efforts to offer enhanced educational opportunities within the pediatric orthopedic community. We were delighted to reinforce our commitment to positive ethos through sponsorship of the event. At the annual meeting, we highlighted our growing portfolio through sponsored sessions. We will continue to be optimistic about aligning our mission with industry advancements. Before turning the call over to Fred, I'd like to announce that we plan to host an Investor Day in September, where we will take a deeper dive into our growth initiatives and look more specifically at our plans for the specialty bracing business. With that, I'd like to turn the call over to Fred to provide more detail on our financial results.

Thanks, Dave. Our second quarter 2024 worldwide revenue of $52.8 million increased 33% compared to the second quarter of 2023. Growth in the quarter was driven primarily by strong performances across global trauma and deformity, domestic scoliosis, and specialty bracing. Our US revenue was $41.2 million, a 39% increase from the second quarter of 2023. The growth was primarily driven by trauma in the trauma and deformity product line, scoliosis, and specialty bracing. We generated total international revenue of $11.6 million, representing growth of 16% compared to the second quarter of 2023. In the second quarter of 2024, trauma and deformity global revenue of $37.8 million increased 37% compared to the prior year period. Growth was primarily driven by strong growth across numerous product lines, specifically several key trauma and deformity products. In the second quarter of 2024, scoliosis revenue of $13.7 million increased 26% compared to the prior year period. The growth in that segment was primarily driven by increased new users of our spine systems. Sports Medicine/Other revenue in the second quarter of 2024 was $1.3 million compared to $1.2 million in the prior year period. Turning to second point, $7.8 million of sets were consigned in the second quarter of 2024 compared to $9.2 million in the second quarter of 2023. Year-to-date, we have deployed $12.1 million of sets compared to $12.2 million at this time last year. The gross profit margin was 77% compared to 76% for the second quarter of 2023. The increase in gross profit margin was primarily driven by higher domestic growth combined with lower international set sales as well as favorable purchase price variance. Total operating expenses increased $10.9 million, or 30%, to $46.5 million in the second quarter of 2024. The increase was primarily driven by the addition of Boston O&P as well as increased commission expense and incremental personnel required to support the ongoing growth of the company. Sales and marketing expenses increased $3.1 million, or 23%, to $16.6 million in the second quarter of 2024. The increase was driven primarily by increased sales commission expense, coupled with additional employees to support the specialty bracing business. General and administrative expenses increased $8.2 million, or 43%, to $27.3 million in the second quarter of 2024. The increase was driven primarily by the addition of Boston O&P, increased depreciation, and personnel required to support our continued expansion. Research and development expenses decreased $0.4 million, or 14%, to $2.5 million in the second quarter of 2024 due to timing of external development expenses. Adjusted EBITDA was $2.6 million in the second quarter of 2024, compared to $2.3 million for the second quarter of 2023. We ended the second quarter with $30.9 million in cash, short-term investments, and restricted cash. Total cash usage in the second quarter was approximately $19 million, slightly higher than expected and did include payments related to acquisitions and supplier commitments. We anticipate that our cash burn at the level seen in the second quarter will not be repeated in subsequent quarters, and we expect it will significantly decrease in the second half of the year. We have recently taken steps to better support our capital needs with the closing of a new facility that will provide OrthoPediatrics more flexibility and increased capacity. After evaluating our financing options, we have partnered with a financial institution to sign a financing consisting of a term loan and a private placement of convertible notes that will provide us with up to $100 million of capital. The terms of the financing include a $50 million term loan and a $50 million of convertible notes. Additionally, we have approved a stock repurchase program of up to $5 million of outstanding common stock. The proceeds will be used to repay outstanding debt, transaction fees incurred in connection with the financing, potential stock repurchases, and working capital needs, allowing us to continue to grow the business. Turning to guidance, we are reaffirming our expectations for full-year 2024 revenue range of $200 million to $203 million, representing year-over-year growth of 34% to 36%. We continue to expect to generate between $8 million and $9 million of adjusted EBITDA in 2024. I will now turn the call back to Dave for closing remarks.

Thanks, Fred. As we've reached the end of the year, it's encouraging to see where we stand today. We have established a solid base for continuous growth, and we are looking forward to several upcoming catalysts that could pave the way for further expansion. We are confident that we will carry our momentum into the back half of the year as we continue to help more children than ever, capture revenue growth, capture share across the entire business, maintain healthy margins, and execute on our EBITDA expectations. We are well positioned to drive improved operating leverage while making meaningful investments in substantial opportunities from transformational product development. Our continued execution will produce an expected $8 million to $9 million in adjusted EBITDA this year, taking a major step towards cash flow breakeven. In closing, I'd like to thank our surgeon partners, my associates, our investors, and all of the innovators in pediatric healthcare for standing together to help. We look forward to providing an additional update in September during our Investor Day. Operator, let’s open the call for Q&A.

Thank you. Our first question will come from Rick Wise with Stifel. Your line is now open.

Hi. Good morning, gentlemen. Let me start trying to think through the guidance and the outlook for the second half, and I'll sort of ask it all together a little bit. You did have a small beat. I'm trying to understand why no raise, why keep the numbers the same given all the excellence and positive commentary you both had about the outlook for the second half on multiple fronts. And maybe just as part of answering that, you can help us understand what organic growth was this quarter.

Yes, I think from – Hi, Rick, nice to talk to you this morning. Yes, I think we have a very consistent policy of remaining fairly conservative in terms of our guidance. I think you can expect organic growth in that high teens or around 18% or so if you subtract out the Boston O&P acquisition. And we've had a lot of good things happening in the back half of the year. Obviously, July and August are two of our largest periods, and until we get through the full measure of Q3, we will remain fairly conservative despite the multitude of positive happenings in the business. What we are seeing is a robust summer season.

Yes. Following up on that, last quarter, you talked about expecting international momentum to continue through the year. It sounds like if I'm hearing you that you're more confident than ever that the pieces are falling into place to show us better scoliosis numbers in the second half. Am I being too optimistic, or what gives you that extra confidence?

Yes. I think what we are experiencing on the outside international side is entirely isolated and has been for the last several quarters to stocking distribution and ordering patterns in South America. Our scoliosis business has historically been focused in a few countries and primarily in South America and Australia, where pediatric orthopedic surgeons perform pediatric spine surgery. In markets like Canada and Europe, we are seeing good demand where we are strong. We are quite optimistic that the second half of the year will revert to stronger ordering patterns based on the surgeon's usage. We expect vitality in the second half.

I would just add, Rick, that we know the procedures in Latin America continue to grow, because we track that. The lumpiness we are seeing is when we decide to sell sets to Latin America and managing our open receivables with our partners. So the demand is there; the procedures are happening.

That's great. Very helpful color, and great to see the strong US performance. Thanks so much.

Thanks, Rick.

Thanks, Rick.

Good morning. Thanks for taking our question. I want to ask about Boston O&P. When you did the deal with them, they were on track to do about $25 million for the year, if I recall. Just first, I want to make sure that is still the prevailing assumption for the Boston O&P contribution on an annual basis.

Yes, the $25 million is a solid estimate. We see a lot of opportunity connected to our clinic expansion as well.

And the second thing is with the private financing, it sounds like you’re accelerating your clinic strategy around Boston O&P. If that's the case, can you comment on the pace of that moving into 2025?

Yes, we see a scale of opportunity coming at us on the clinic acquisition, and while we will gradually develop these clinics, we are bullish about the outputs as we move forward. It will take some time to set everything up, but there's a lot of opportunities.

I appreciate it, and I know we'll get more color in a few weeks. I want to ask also about scoliosis.

We've tried to be opportunistic. Most of the M&A has happened in adult companies with small pediatric spine portfolios. We are fully committed to pediatric orthopedics, and that has been well received by customers.

Thanks for that clarification. Good to hear. Congratulations on all the progress.

Good morning. Thanks for taking the question. Can you talk about the integration of the specialty bracing business? What successes are you seeing, and how should we think about the new clinics' revenue contributions?

The integration of the specialty bracing business has gone extremely well. Both clinics might be similar in size, but having a facility in a major children's hospital will likely have a substantial impact down the road. We expect good growth from both clinics in 2025, with positive responses already coming in from our customer base.

Got it. Very helpful. And then a question for Fred, I want to clarify the commentary on EBITDA for next year.

Absolutely. Volume will be the key leverage point next year, and we expect that adjusted EBITDA will cover our set deployment. We are looking at continued growth, leveraging down cash portions of G&A, resulting in improved margins.

I want to ask about the eLLi Growing Rod. Do you know what the approval pathway is going to be, and do you expect to have any requirements for clinical data?

The Pediatric Breakthrough Device Designation was a major step for us, and we are confident that the pathway will likely be 510(k). We do not anticipate a need for post-market clinical data to get approved, although we will capture data related to this device.

Thanks. And one on the stock repurchase. It's unusual to see a company at your stage buying back stock, so what prompted that decision?

The stock repurchase decision was related to the convertible. It's a means to effectively manage the dynamics associated with our capital structure. It allows for stronger shareholder alignment while we plan for significant growth.

Can you remind us of the economics of investing in these new clinics and how quickly you can expect a return on those investments?

In opening a new clinic, the start-up costs are roughly half a million, and we anticipate cash flow positivity within the first three to four months. As we grow, these investments can yield substantial returns over the longer term.

Yes, we will see significant growth in the specialty bracing market and in our trauma and deformity business. We are looking to leverage the organic growth and new strategies to ensure we capitalize on this margin expansion.

I am showing no further questions at this time. I would now like to hand the call back over to David Bailey for closing remarks.

Thank you, Michelle, and thanks, everybody, for joining us today on the call. I look forward to seeing many of you and discussing updates in our September Investor Day. Have a great day.

This does conclude today's conference call. Thank you for participating. You may now disconnect.