Orthopediatrics Corp Q4 FY2024 Earnings Call

Hello, and welcome to OrthoPediatrics Corporation fourth quarter and full year 2024 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 call over to Trip Taylor from the 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 upcoming annual report on Form 10-K which will be filed with the SEC on March 5, 2025. 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 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 measure to the most directly comparable GAAP financial measure in its earnings release. Please note that non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for OrthoPediatrics' financial results prepared in accordance with GAAP. In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, today, March 4, 2025. Except as required by law, the company undertakes no obligation to revise or update any statement to reflect events or circumstances taking place after the date of this call. With that, I'd like to turn the call over to David Bailey, President and Chief Executive Officer.

Thanks, Trip. Good morning, everyone, and thank you for joining us on our fourth quarter 2024 conference call. As always, I'd like to start by reporting the metric which most clearly defines our continued success and in which we are most proud. During the fourth quarter, we helped more than 34,000 kids and over 138,000 kids for the full year. Both record highs for OrthoPediatrics. Now having completed our eighteenth year at OrthoPediatrics, and having helped over 1,140,000 kids, my associates and I recognize the positive impact our company has had on so many children and their families. We take our responsibility very seriously. Our customers and all healthcare providers in the pediatric space have been forced to make do with less than ideal options for children. We will do everything in our power to right that wrong. While eighteen years have passed since our inception, in many ways OrthoPediatrics is just getting started. Our resolve to be a company that eventually helps one million kids every year has never been greater. During our journey, we have established OrthoPediatrics as the clear-cut market leader in pediatric orthopedic implants, and we anticipate our continued execution will lead to a dominant market share position in trauma and deformity correction and scoliosis implants in the coming five years. In the last few years, we have established ourselves as a leader in pediatric specialty bracing with our OPSB franchise. On top of deepening our commitment to the field and meeting more of the needs of our customers, this expansion of our business enables OrthoPediatrics to grow in a more capital-efficient way. In the coming several years, we plan to execute our clear-cut strategy to obtain market dominance in this very large $500 million marketplace. Given the OPSB business is generating a higher contribution margin than our implant business, these investments will enable us to generate increased EBITDA and improve cash flows. Every day, every quarter, every year, we become more ingrained in the children's hospitals. By growing our market share and displacing retreating incumbent competition and living out our near-fanatical commitment to doing what is right for children and their caregivers, we demonstrate this commitment by delivering new products and technologies that meet major unmet needs, providing unparalleled customer service through the world's only global sales channel in pediatric orthopedics, and through a network of dedicated pediatric-specific orthopedists and prosthetists by our outside support surgeon clinical education and training, and to put it simply, investing in important things our customers care about and that impact the field of pediatrics. When you look at the success of our company across our eighteen-year history, our ability to execute on our commitments, our consistent track record of sales growth through share taking, deliberate step function improvements in adjusted EBITDA, laying a clear path to free cash flow breakeven in 2026, and more recently, our record performance in 2024, we believe our market valuation is entirely inconsistent with the company's performance. We recognize as a public company, certain metrics and external macro dynamics will always be scrutinized. But we believe the fundamentals of our business have never been stronger. Regardless of the quarter-to-quarter gyrations and variations that can impact valuations for companies like ours, the unshakable truth is that OrthoPediatrics has carved out a unique position in the public growth med tech sector. Unlike other med tech companies, we are not in a bare-knuckle struggle against focused competition. This gives us confidence in our growth trajectory while allowing us to leverage our P&L, and soon we will produce free cash flow positivity. Therefore, we will continue to be aggressive and execute our strategy on our way to helping one million kids per year and creating substantial shareholder value. To this point, throughout the year, and again in the fourth quarter, we have successfully delivered positive results. We've produced extremely strong total revenue of $52.7 million, representing 40% growth from the comparable period. We saw quarterly growth in both trauma and deformity and scoliosis, with 35% and 62% growth respectively. Led by domestic strength, the quarterly growth of 52% from a particularly robust performance from domestic trauma and deformity as well as the addition of Boston O&P. Our international growth was impacted by our decision to slow set sales shipments to South America, specifically Brazil, in order to reduce AR balances negatively affected by rapid currency fluctuations. However, we still saw extremely strong EMEA trauma and deformity growth due to high demand, and international scoliosis growth was great despite challenges in Brazil. With extremely significant revenue growth, and more than doubling our adjusted EBITDA during the fourth quarter of 2024, we improved our financial profile and took another step towards free cash flow breakeven in 2026. All of our businesses continue to grow rapidly entirely from share taking due to continued demand for our products, large-scale set deployments in 2023 and 2024, major new products, successful scaling of our past acquisitions, such as OrthX, Apothex, and Pega Medical, and the more recent launch of OPSB and the acquisition and full integration of Boston O&P. With all of these levers in place, we are confident we will continue to reach new highs and deliver important results for pediatric orthopedics. We expect our business to continue this momentum and our success in 2025 and beyond is driven by three main factors: execution and scaling of OPSB, share taking across the business by leveraging prior set deployment, and ongoing success of our innovative product launches. This year, we expect to generate revenue of $235 to $242 million, representing annual growth of 15% to 18% as we lap the Boston O&P acquisition. Importantly, we also expect adjusted EBITDA of $15 to $17 million. We also expect to have our first quarter of positive free cash flow in the fourth quarter of 2025. In the fourth quarter of 2024, the trauma and deformity business continued to drive significant market share gains across several products as well as the addition of Boston O&P. This quarter's performance was highlighted by both trauma and OPSB products, including PMP Tibia, cannulated screws, and Boston O&P sales. We continue to leverage our prior set deployments and are driving increasing share gains for trauma and deformity across the breadth of our products. U.S. trauma and deformity was extremely strong and is likely as robust as we have ever seen it in company history, mainly attributable to set deployments in 2023 and 2024 and the more rapid adoption of our new products. In addition, during the quarter, several sets of PMP Tibia were launched, and we expect this will remain an important growth driver for the next several years. The DF2 demand is now far exceeding our expectation and is quickly setting a new gold standard for femur fracture management in young children. DF2 recently received expanded indications for postoperative care, which we believe is a much larger market than the femur fracture market. All of this has created the need for expanding our supply chain to meet exploding demand. On the R&D front, we're excited about our projects on the surgical side of our trauma and deformity business. Our pediatric plating platform, or 3P, a world-class system with significant opportunity to fill unmet needs, is progressing according to plan, and we anticipate a beta launch of 3P hip. Once launched, 3P hip will spawn further share taking opportunities for us within the plating franchise. Overall, trauma and deformity continues to be a solid performer for us as we leverage our scale, capture market share, and bring new products to market that fill unmet needs and drive continued growth across the board. As for the non-surgical specialty bracing business, or OPSB, from the start, we have been very bullish about this franchise, which represents a large new source of capital-friendly growth. Following the successful integration of Boston O&P, we are very pleased to see our strategic rationale validated and playing out as we expected, perhaps even better than we expected. As previously announced, we expanded our clinic business for both greenfield expansion in Indianapolis and aquihire in Florida and Colorado. The opportunities for clinic expansion are immense. The demand from our customers is high, and our funnel for clinic expansion is very large. The stand-up of the early expansion clinics is going well and providing a reproducible playbook that represents a substantial growth lever with significant runway. We are pleased that we are tracking to our guidance for four new territories in 2025, and expect that we'll have more updates on this front throughout the year. On the product side of OPSB, we are experiencing rapid growth in our DF2 femur fracture brace, which is growing so rapidly that we are seeking additional manufacturing sources so that we can meet current and future demand. Beyond that, our OPSB R&D team launched multiple products such as the new scoliosis brace sensor, patient compliance software, and additional DF2 sizes as we extend its use beyond fracture management. We signed distribution and licensing agreements for the Move, Debraced, and Minimize Tremors developed with the Children's Hospital of Orange County, and the Thrive product portfolio, including Thrive Orthopedic F3 Hero Pediatric AFO, the True Stretch Pediatric Aquatics Sprays, and the Thrive Pediatric X Glide Carbon Fiber Insole. All are focused on unique pediatric orthotic conditions. These solutions are supporting our thesis that OPSB can become the clearinghouse for specialty bracing products specifically designed for kids. Further, the pipeline of new opportunities coming on the business development side of OPSB is really ramping. We are certainly attracting entrepreneurs and inventors with new product lines and technology that they desire to scale globally through our growing sales channel and clinic network. This is coming in licensing, distributing, and in some cases, small acquisition opportunities that will continue to allow us to leverage our channel, thus growing revenue and adding profit. We are building a flywheel. At this point, it is small but spinning very fast. With scale comes increasing momentum and we are very confident our flywheel will become quite large in the coming years. We recognize the huge potential within OPSB to drive patient impact for treating more patients with capital-efficient growth. Early traction within our strategy suggests that we are on track with our plans to execute through the remainder of 2025 and for several years beyond. Moving to the scoliosis business, our strong growth seen in scoliosis this quarter was driven by continued share gain combined with new users from large accounts. We anticipate that this trend will continue into 2025. As we increase our volume, we expect to reap the benefits of the new user acceleration from late 2024. To highlight a few key products, we continue to see strong growth in our Response Fusion franchise from new customer acquisition. We saw an additional seventy placements in the fourth quarter in large institutions and the continued introduction of our EOS product, Response Rhythm Health. We have a substantial opportunity to grow scoliosis revenue over the next three to five years. Additionally, we are seeing a consistent stream of new Apophix users and growth that only continues to pick up as more users learn where Apophix fits in their treatment algorithm. This supports our vision that eventually, Apophix will be a tool used by almost every pediatric scoliosis surgeon. While still relatively small, we expect Apophix to continue to grow rapidly in 2025 as more surgeons better understand the best use case for the device in their practices. Looking at our EOS products, our EOS product portfolio development remains on track. We are directly discussing the requirements for product approvals for Ellie and Vertiglyde with the FDA. We have been working on confirming the regulatory path and recently received encouraging feedback from the FDA. The most recent discussions have led us to believe that there is a higher likelihood that Vertiglyde will be approved in the U.S. sooner than expected under a 510(k) plan. Moving on to international, in the quarter, we saw slower international sales, generating revenue of $9.8 million and delivering 5% growth year over year. Despite significant international demand, we made a conscious decision to limit additional stocking order shipments to certain stocking distributors in order to stimulate timely receivables collection which have been negatively affected by the rising dollar against South American currency. Trauma and deformity implants were most affected by the shipping holds in South America while scoliosis delivered very nice growth year over year. That said, general demand across the entire trauma and deformity and scoliosis portfolio was healthy, especially in our agency markets where we saw strong sales growth. In fact, non-LATAM trauma and deformity growth exceeded 20% and scoliosis grew nearly 30%, highlighting the extremely compelling underlying demand. International scoliosis performed well due to solid revenue in our Direct Markets, where we are seeing new users come on board. We are very happy with the progress made in 2024 launching the scoliosis business in the EU and expect that with the anticipated EU MDR, our EU spine franchise is set for high growth in the future. We are awaiting the notified body audit to finalize our EU MDR status, which we expect to be completed in mid-2025. Once we receive our certification, we will launch a wave of products into the EU and then expect additional waves as further approvals are accomplished over the next eighteen months. I want to point out the EU MDR approval for implants is an expensive process, but we believe it is the right thing to do for kids who need these devices outside of the United States and it strengthens our strategic position. Additionally, we are exploring further expansion opportunities for OPSB outside the U.S. in 2025, which comes with a light touch and quick turnaround when it comes to regulatory approvals. Overall, the international business is set up nicely, and we believe the remainder of the year will contribute toward a healthy 2025. Finally, this brings us to surgeon training and education. In the fourth quarter, we hosted 132 unique training experiences for over 2,700 healthcare professionals, including at IPOS, the International Pediatric Orthopedic Symposium, where OrthoPediatrics continued our leadership position as an emerald level sponsor. Once again, our team was well represented and connected with customers to share hands-on learning experiences with our new and innovative product. We are excited that through our booths, and our educational events, we were able to introduce our new enabling technology division as well as highlight all the great work we are doing in nonoperative care through OPSB. Our time at events like this is incredibly important as we prioritize providing clinical education opportunities to grow alongside the pediatric community. So with that, I'd like to turn the call over to Fred to provide more detail on our financial results.

Thanks, Dave. Before giving more details on our financial results, I wanted to reiterate that through our continued execution, we have established OrthoPediatrics as a high-quality and differentiated asset with the demonstrated ability to scale growth and increase operating leverage, which provides a clear path to free cash positivity and we are supported by a very strong balance sheet. That said, we made some difficult yet strategic decisions in the quarter that we expect to support our commitment to growth, profitability, and improved cash usage. You will notice some one-time charges on the P&L. The $3.7 million restructuring charge is primarily due to the closure of our Israel office, which was the former ApiFix headquarters. We have decided to move production out of Israel and into the U.S. to reduce supply risk and to consolidate the management of the ApiFix product line into our Warsaw operation. These decisions are a component of our continued focus on delivering improved adjusted EBITDA and demonstrate that adjusted EBITDA improvements and reduced cash usage are top priorities for the company. Additionally, as you will see from our results during the quarter, our gross profit margin profile has shifted slightly. As we continue to integrate Boston O&P, grow the OPSB business, launch this new strategy, and work through the process, we are adjusting certain expenses out of general and administrative expenses into cost of goods sold. As a result, we saw a negative impact on the gross margin profile of OPSB and our overall gross margin for the quarter. I want to be clear. This does not impact our profitability. Given our growing channel in OPSB, we will not shun lower gross margin distribution opportunities that leverage our fixed costs and improve overall profitability. We've made a full-year adjustment of approximately $3 million out of G&A and into cost of goods sold. This negatively impacted our fourth-quarter gross margin, but properly reflects our full-year 2024 gross margin. Taking a closer look at the P&L, our fourth-quarter 2024 worldwide revenue of $52.7 million increased 40% compared to the fourth quarter of 2023. Growth in the quarter was driven primarily by strong performances across trauma and deformity, scoliosis, and OPSB, as well as the addition of Boston O&P, slightly offset by the lower growth in international revenues. U.S. revenue was $42.9 million, a 52% increase from the fourth quarter of 2023, representing 79% of our total revenue. Growth in the quarter was primarily driven by our additional market share gains across trauma, deformity, scoliosis, and OPSB, as well as the addition of Boston O&P. We generated total international revenue of $9.8 million representing growth of 5% compared to the fourth quarter of 2023, representing 21% of our total revenue. Growth in the quarter was primarily led by strong scoliosis sales in our agency markets. In the fourth quarter of 2024, trauma and deformity global revenue of $36.4 million increased 35% compared to the prior year period. Growth was primarily driven by Pega products, Trauma X Fix, and OPSB, plus the addition of Boston O&P. In the fourth quarter of 2024, scoliosis global revenue of $15.6 million increased 62% compared to the prior year period. Growth was primarily driven by increased U.S. growth across Response and ApiFix nonfusion systems, an additional impact from seventy placements, as well as the addition of Boston O&P. Finally, sports medicine and other revenue in the fourth quarter of 2024 was $0.6 million compared to $0.9 million in the prior year period. Turning to set deployment, $3.7 million of sets were consigned in the fourth quarter of 2024 compared to $5.9 million in the fourth quarter of 2023. In 2024, we deployed $21.1 million of sets compared to $22.0 million in 2023. The $21.1 million for 2024 was slightly higher than our forecast of less than $20 million, driven by higher-than-expected seventy placement and some earlier-than-expected deliveries on recent product launches. Touching briefly on a few key metrics: for the fourth quarter of 2024, gross profit margin was 68%, compared to 71% for the fourth quarter of 2023. The decrease in gross profit margin was primarily driven by an approximately $3 million full-year adjustment from the reclassification of expenses from overhead costs related to manufacturing across the OPSB business. Full-year 2024 gross margin of 72.6% is a better representation of the business's performance and is more indicative of the gross margin rate for the near future. Total operating expenses increased $14.8 million or 43% compared to the prior year period to $49.6 million for the fourth quarter of 2024. The increase was primarily driven by the restructuring charge, the impairment charge, the addition of Boston O&P, increases in spending related to EU MDR compliance, increased commission expense, and the incremental personnel required to support the ongoing growth of the company. Sales and marketing expenses increased $4.0 million or 31% compared to the prior year period to $16.8 million in the fourth quarter of 2024. The increase was mainly driven by increased sales and commission expense. General and administrative expenses increased $5.4 million or 28% year over year to $24.4 million in the fourth quarter of 2024. The fourth-quarter increase was driven primarily by the addition of personnel and resources for the continued expansion of the business and an increase in depreciation and amortization. Research and development expenses remained flat at $2.9 million in the fourth quarter of 2024 due to the timing of external development expenses. As discussed, we did see the impact from the one-time $3.7 million restructuring charge that includes severance, inventory write-off, lease break, and other expenses associated with the closure of our Israel office. In addition, we recorded a charge related to one of our trade names of $1.8 million. Other expense was $2.4 million for the fourth quarter of 2024 compared to $1.2 million of other income for the same period last year. Adjusted EBITDA was $3.0 million in the fourth quarter of 2024, more than double when compared to $1.3 million for the fourth quarter of 2023. For the full year of 2024, adjusted EBITDA was $8.5 million compared to $5.0 million in the prior year. In the fourth quarter of 2024, free cash flow usage was $3.7 million representing a significant reduction of 70% when compared to the year-to-date average for the first three quarters of 2024, and a 67% reduction when compared to the same period in the prior year. We now expect the first quarter of positive free cash flow to be in the fourth quarter of 2025. We ended the fourth quarter with $70.8 million in cash, short-term investments, and restricted cash and we still have $25 million available on our new term loan. Turning to guidance, we are reiterating our expectation for full-year 2025 revenue to be in the range of $235 to $242 million representing year-over-year growth of 15% to 18%. During our analyst day last September, I had communicated that we expect our gross margins to remain flat at 74% to 75% for the next several years. Given our current reclassification of G&A into cost of goods sold, I am restating the guidance that our gross margins will in fact continue to be flat; however, the newly updated range is 72% to 73%. This does not impact our profitability, just the buckets within the P&L. We also continue to expect to generate between $15 million to $17 million of adjusted EBITDA in 2025. Additionally, we continue to expect approximately $15 million of new sets deployed in 2025. This represents our continued focus on driving the business to free cash flow breakeven by 2026 and we anticipate delivering our first quarter of free cash flow positivity in the fourth quarter of 2025. Our current guidance assumes no impact of tariffs or other government changes; however, we will continue to monitor the dynamics, and while we expect potential tariffs to have minimal impact, it is too early to determine all potential government actions and their impact. I'll now turn the call back to Dave for closing remarks.

Thanks, Fred. We are encouraged by how we ended the year and have already seen that momentum begin to carry into 2025. Our success in 2025 and beyond is driven by three main factors: execution and scaling of OPSB, share taking across the business by leveraging prior set deployment, and ongoing success of our innovative product launches. The aggressive approach we have taken to this business and the opportunity ahead of us over the next three to five years is very exciting. We are extremely proud that we've continued delivering strong performances, especially within this med tech market, quarter over quarter and year over year, and we do not plan for this to change moving forward. We will continue to help more children than ever, capture more share across the entire business as we continue to break revenue records, grow our adjusted EBITDA, and improve cash usage in 2025 and beyond. Operator, let's open the call for Q&A. Thank you.

Thank you so much. And as a reminder to our audience to ask a question, simply press star one one on your telephone and wait for your name to be announced. To remove yourself, press star one one again. Our first question is from Ryan Zimmerman with BTIG. Please proceed.

Thanks for taking our questions. Did I start with guidance a little bit? I know you don't guide by segment, but maybe you could help us how you're thinking about some of the contributions in each of the buckets of the businesses. It sounds like internationally with the addition of EU MDR clearance, that could step up a little bit in 2025. I'd appreciate any color you have there. And then a second question upfront: just around seasonality and pacing through the year. We know kids tend to get their surgeries in second quarter and third quarter during the summer in between school, but you've had some fluctuations between the fourth quarter and the first quarter due to seasonal dynamics, flu, RSV, etc. Any color there would be appreciated.

From a seasonal perspective, we expect consistency with the seasonality we've seen in the past with June, July, and August still being our biggest months and December also a strong month as kids get out of school. It is possible that over the next several years as OPSB continues to grow some seasonality could level out. Normally we see our first quarter slightly down from Q4 of the previous year, and then we scale into Q2 and Q3 as the summer season continues. EU MDR can have a positive impact in 2025 and likely more of an impact in 2026 and 2027. We still need sets built and sold to distributors and sets into the market when we get approved, but we are seeing strong growth of our scoliosis franchise in Europe with only one of the systems available, our Response Fusion system. As we bring a full product portfolio to Europe on the fusion side, that business should continue to grow and will reduce some historical reliance on scoliosis in Brazil and parts of South America. Regarding trauma, deformity, and scoliosis in the United States and globally, while we don't guide by segment, you can expect scoliosis to grow a bit faster than trauma and deformity, though trauma and deformity is a much larger business and continues to take share. That is probably what you'll see in 2025.

Okay. Very helpful. Appreciate the color. I'll hop back in queue.

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

Good afternoon, Dave. Hi, Fred. So much to unpack. Maybe start with OPSB. You're saying strategic rationale is playing out and the funnel is full for new territories. Help us think through the pipeline, new opportunities, licensing. What have you assumed in 2025? How do we translate that into thinking about growth or timing or whether we see it in 2025? Any detail would be helpful.

When I talk about the three main things that will drive growth, scaling OPSB is at the top of the list. A year after completing the Boston O&P acquisition, everything we thought Boston could be and the scaling of OPSB has come true. We view the OPSB market as a $500 million TAM that is accessible with less capital than the consignment model of our implant business. Customers want more clinics and more products. It's a very underserved segment of pediatric orthopedics and has many synergies with our implant business. The implant business benefits in part because OPSB grows the brand of OrthoPediatrics in the minds of customers. Our aspiration is to have four new territories as we called out at the analyst day and we are tracking to that. We have enough in the funnel that we could potentially exceed four in 2025, but we are not calling that out. We now have a better sense of the cost associated with clinic expansion and the timing. Greenfield clinics and aquihires are proceeding in line with our expectations. The specialty bracing business and the R&D and licensing opportunities are powerful. We see OPSB as a channel for entrepreneurs and small companies to scale pediatric orthotic products globally through our sales channel and clinics. As we add more clinics and scale, that channel will become more powerful. Devices like DF2 are growing faster than expected and we are seeking additional manufacturing sources to meet demand. DF2 is approved in over thirty countries, demonstrating the thesis that we can get these products approved outside the U.S. faster than our implant products. We have other R&D devices close to launch that could have similar impact. Overall, a lot of optimism and strong momentum a year post Boston O&P.

Thanks for the detail. Fred, on gross margin: I get the reclassification and adjusted EBITDA is unchanged, but help us think through the moving pieces in gross costs and margin. Is there room for upside as the year progresses and as European products are approved and manufacturing consolidates? It seems like there should be room for upside heading into 2026.

Great question. We're hesitant to get ahead of ourselves, but we do agree there may be opportunities in that area. A little selling price improvement always helps. Some consolidation could help show up as favorable gross margin. There are other activities we are refocusing on this year that could have a favorable impact on gross margin over the next several years. We're being conservative and keeping guidance flat as it was before, but we have a renewed focus on improving gross margins.

You teased me. 'Other activities' — help me understand.

We're reviewing all of the line items that go into our cost of goods sold and looking for opportunities to leverage that just like we're leveraging SG&A below.

Thanks, Rick.

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

Good evening. Thanks for taking my questions. To follow up on OPSB: did you do better than $25 million in sales in 2024? Are we still expecting north of 20% growth out of that business in 2025? And when things are going better than expected, is it going deeper in existing facilities, ramping new ones faster, or something else?

OPSB across the board — Boston, DF2, and related products and clinic expansion — is growing rapidly. Yes, it will definitely be growing north of 20% in 2025 and we expect that growth rate for a long time as we scale the business. The volume of clinic expansion opportunities is extremely high. Some will be aquihires where we need a footprint in a big market. Demand for the service and products is very high and higher than we expected a year ago. DF2 demand is especially strong; we are seeking alternative manufacturing sources and need to scale manufacturing in Boston. DF2 is approved in over thirty countries, and that supports the thesis that we can get these bracing products approved outside the U.S. faster than our implant products. We have several more devices on R&D that could have meaningful impact on OPSB.

Okay. That's a good problem to have on the manufacturing side. Question for Fred: looking at instrument set deployments over the last couple of years, you're down to $15 million projected. You have a more capital-efficient model now with OPSB, but are you risking starving the legacy trauma and spine businesses in the near term and needing another big bump in set deployments in 2026–2027? Or is $15 million a steady state to support healthy growth?

Great question. We think $15 million is the right number for 2025. A higher percentage of that will be for new products as opposed to legacy products, which is positive. We're excited about the impact of new products on growth in 2026 and beyond. We haven't determined the right number for 2026 yet and will see demand for legacy systems and new products, but expect 2026 and 2027 to be highly concentrated on new product launches given the pipeline.

We're not going to starve the legacy businesses, particularly with products like PMP Tibia that have relatively high ASPs and fantastic margins. That product grew quickly this year. We've likely reached the end of a period where we needed to deploy large numbers of legacy sets; future deployments will be more focused on new, differentiated products. As those new devices with high ASPs, such as EOS products, come to market, we won't need massive set deployments to grow top line, especially on the scoliosis side. We will continue to support legacy businesses while sweating our assets to reduce the need for large legacy deployments.

Very helpful. Thank you.

Our next question is from the line of Mike Matteo with Needham and Company. Please proceed.

Hey, guys. It's Joe on for Mike. Thanks for taking our questions. Maybe to start, could we get an update on Playbook, the enabling technology software? How is that business going and any milestones? And is the new fusion implant system still on track to launch in the second half of this year?

Playbook was officially launched to the sales team at our sales meeting about a month ago. The product looks good and generates buzz, and implementation inside hospital systems is a process, but we've made nice progress. From a revenue perspective, we haven't forecasted a lot of revenue from Playbook in 2025. We see it contributing to trauma, deformity, and scoliosis revenue and expect it to contribute more substantially as a standalone play in 2026 and 2027. On the fusion system, product development is on track. The goal would be to get some surgeries done by the end of 2025 in the U.S., but we have not included revenue from this device in the 2025 forecast. We will make sure the device is right before launching, and Response is growing rapidly in the meantime, so there's no rush.

Great. And one more: seventy placements seem to be ramping. Looking at 2025, is this an inflection for seventy placements or should we view it as a more meaningful driver in 2026?

Seventy placements are already a driver for us in the second half of the year. Response Fusion business and our overall scoliosis business, particularly in the U.S., are accelerating. The seventy placements placed units in accounts that historically haven't been large users of our fusion products, which impacted Q3 and Q4 revenue. We're confident you'll see consistent placements quarter to quarter in 2025 that will impact scoliosis revenue in 2025 and beyond, and many contracts are three-year arrangements, creating a compounding effect as we place more units.

Appreciate it. Congrats on the great quarter.

We have a question from Ryan Zimmerman from BTIG. Please proceed.

A high-level follow-up: there's been chatter about potential Medicaid changes affecting coverage. Medicaid covers roughly 37 million kids in the U.S. How are you thinking about potential Medicaid changes, how your customers are thinking about positioning for it, and how it might impact the business?

That's an important topic and something we're watching closely. It's not clear how any changes would ultimately impact the business. We struggle with the concept that children would be left without healthcare. Much of our customer base includes hospitals that are endowed or have charitable missions, such as Shriners Hospitals, that provide care regardless of payer. That creates some shielding. It's hard to imagine the country allowing children with conditions like cerebral palsy or congenital deformities to lack access to necessary devices. Our devices often rationally reduce total cost of care over time, which strengthens the case they will remain accessible. At this stage, we are not modeling a major impact to our business from potential Medicaid changes.

Makes sense, and I appreciate your thoughts.

This concludes our Q&A session for today. I will turn it back to Dave Bailey for final comments.

Great. Thanks, operator, and thank you everybody who joined our call this evening. We appreciate your questions and look forward to giving you a business update in the coming quarter. Have a great evening.

And thank you all for participating, and you may now disconnect.