Earnings Call Transcript - KIDS Q1 2023

Operator, Operator

Good morning and welcome to OrthoPediatrics Corporation’s First Quarter 2023 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.

Trip Taylor, Gilmartin Group

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 1, 2023. 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, May 2, 2023. 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.

David Bailey, CEO

Thanks, Trip. Good morning, everyone. Thank you for joining us on our first quarter 2023 conference call. As we start all earnings calls, I'd like to begin by highlighting that we helped nearly 19,000 children in the first quarter of 2023. Since inception, and with the additions of MD Orthopedics and Pega Medical, we have now helped almost 650,000 kids. Doing the right thing for children remains our top priority. In the first quarter of 2023, we generated revenues of $31.6 million, representing growth of 35% compared to the first quarter of 2022. We're encouraged by the better than expected revenue growth and a strong start to the year. As we've discussed, the record high levels of RSV cases in the back half of 2022 remained a headwind early in Q1 but eased as the quarter progressed. Staffing shortages also continued to negatively impact children's hospitals throughput, and we continue to expect some staffing headwinds throughout the year. Despite the challenging environment, we continue to execute our strategy and deliver strong results across both, the Trauma & Deformity and Scoliosis businesses. The main drivers in the quarter included elective limb deformity correction and scoliosis procedures, combined with very strong contributions from MD Orthopedics and Pega Medical. Organically, domestic growth outpaced international growth, which underperformed slightly due to timing of set purchases by stocking distributors, and ongoing FX impacts. However, we expect the international business to improve in Q2 and throughout the year as underlying demand remains strong. Overall, we are extremely pleased with the start of the year and believe we are well positioned strategically to continue our successful growth story. Therefore, we are increasing our revenue guidance for the full year to $148 million to $151 million, representing growth of 21% to 23% compared to 2022. Despite our Q1 success, we remain cautiously optimistic heading into the second quarter. Staffing dynamics remain unpredictable and could impact our hospitals' ability to meet the rising summer demand and typical seasonality usually experienced late in the second quarter and throughout the summer. Given the difficult comparison to the second quarter of 2022 and until we see tangible evidence of structural improvements within the pediatric market, we will remain conservative with our outlook. Moving to our revenue segment. In the first quarter of 2023, we generated total Trauma & Deformity revenue of $23.4 million, representing growth of 42% compared to the prior year period. This included combined global revenue of approximately $4.8 million for MDO and Pega Medical. Revenue growth in the quarter was driven by strong performance of MDO and Pega and the return of elective limb deformity correction procedures offset by trauma softness that we saw rebound in March. Trauma & Deformity correction products, particularly Defo, PediPlate, PNP Femur, and Cannulated Screws sales were strong in the quarter. Demand for our products remains high as we continue to gain market share across the entire Trauma & Deformity portfolio. Now that MDO and Pega have been fully integrated, we continue to be pleased with our ability to accelerate growth in each franchise and their contributions to overall growth. With respect to MDO, the addition of new products and existing markets and expansion into new markets is bolstering the organic growth. We are excited to launch new products and expand the MDO portfolio. The pipeline of new products and launch cadence within our nonsurgical franchise represent a compelling opportunity, which I'll provide more detail on shortly. As for the Pega Medical product portfolio, Pega product sales grew at a very rapid pace in the first quarter, exceeding our initial expectations. The growth of the products has come almost entirely due to expanded surgeon access as the existing sets are now supported by a higher percentage of our sales force that is fully trained. We have yet to see a major impact from new sets in the U.S. However, in the second quarter, we plan to launch several new Pega sets alongside a significant deployment of OP legacy products such as PNP Femur, Cannulated Screws, and DRIVE Rail. MDO and Pega have advanced our leading strategic position in pediatric trauma and deformity by allowing us to further surround our customers with a comprehensive portfolio of products that meet all their patient needs. The OP team has done a tremendous job ramping up growth in these franchises as we leverage our global commercial footprint. We continue to expect each of these franchises will drive revenue growth in excess of our normal 20% organic corporate growth rate in 2023. Moving to the Scoliosis business. In the first quarter of 2023, we generated revenue of $7.1 million, representing growth of 18% compared to the prior year period, highlighted by very strong domestic revenue growth of 23%. This performance reflects a steady improvement in the elective surgical environment and continued share gain with RESPONSE and ApiFix. International revenue blunted overall growth by a few points due to tough comparisons and timing of certain international set orders. However, we expect this to be temporary and to become a tailwind for growth for the remainder of the year. We are pleased to see the value proposition of the combination of ApiFix, 7D, and RESPONSE, comprehensively addressing surgeon needs and driving market share gains. Total users in Q1 increased meaningfully compared to the prior year period. We continue to see strong incremental RESPONSE fusion growth in new accounts, where we have deployed 7D units or our surgeons have started using ApiFix. ApiFix grew in the first quarter despite clinic visits negatively affecting scheduling early in the quarter. As a result of scheduling challenges, many ApiFix procedures have been pushed into the second quarter. Additionally, we continue to make progress on the development of ApiFix's clinical data, which will lead to stronger KOL support and podium presence. Specifically, at the recent POSNA meeting, positive one-year follow-up data from 54 patients was presented, highlighting the early U.S. experience. We continue to expect more surgeons will become increasingly comfortable with where ApiFix fits into their practices as the U.S. data matures and is presented at scientific societies meetings. Late in Q1, we received FDA approval for the RESPONSE Cannulated Screws and performed our first case in March. Surgeon feedback was very positive, and we expect this system to improve outcomes for patients with neuromuscular scoliosis requiring pelvic fixation. Additionally, the early deployment of RESPONSE power and disposable torque limiters is underway. We believe these line extensions will continue to support share gain momentum within our scoliosis fusion portfolio. Overall, surgeons and children's hospitals are increasingly attracted to our scoliosis portfolio, as we continue to advance our RESPONSE fusion system, deploy 7D intraoperative navigation systems, and add new users of ApiFix. All of this is leading to share gains, and we expect that to continue as we execute. Moving on to international. In the first quarter of 2023, we generated international revenue of $7.8 million compared to $5.2 million the prior year period, primarily driven by MDO and Pega contributions in the Trauma & Deformity business. The timing of legacy set purchases, large Scoliosis orders by stocking distributors, and the ongoing FX dynamics negatively impacted our international sales. Demand for our products remains strong, and we expect the international performance to improve in the second quarter and throughout the remainder of the year. Turning to new product development. The first quarter proved to be a very successful quarter for R&D and new product development. We received FDA approvals, advanced full-scale product deployments, launched new products, and made meaningful progress on several long-term product development initiatives. We believe each of these accomplishments represents incremental opportunities to drive market penetration and share gains as their launches expand. Within our Trauma & Deformity business, we initiated the full-scale deployment of our new external fixation product, DRIVE Rail. It includes a unique, integrated lengthening mechanism, hinge options to span a mobile joint, and is designed to integrate with the Orthex system. We expect a large volume of DRIVE Rail sets to be deployed in the second quarter. Additionally, we received 510(k) FDA approval for our Orthex pre-planning software and are in the process of a full-scale domestic launch. This technology will assist surgeons in efficiently and precisely planning their Orthex cases, based on prior case data and advanced imaging. Finally, the R&D team made solid strides in the development of PNP Tibia and an entirely new pediatric-specific plating system. Inside the Pega franchise, we received our first FDA 510(k) approval since the acquisition last July for our new product in the guided growth area called Gyro. We expect to begin the beta launch of Gyro in the next several weeks. Beyond Gyro, we're busy introducing the entire product portfolio to surgeons around the world through our global sales organization. We're treating these introductions as new launches because we found many customers are being educated about the Pega products for the first time. With a heavy deployment of inventory on the way, we are excited about all their growth prospects. On the non-surgical specialty bracing side, our MDO team executed the beta launch of the Mitchell Ponseti move bar in March, and we expect the full launch to take place in the second quarter. The MP move bar further expands our market leading position in non-surgical clubfoot treatment and expands the use profile of the gold standard Mitchell Ponseti clubfoot brace. This is particularly meaningful as it also represents the first major new product introduction in several years for the MDO franchise, and is the first of several to come. Also within the non-surgical bracing franchise, we've completed the development of the DF2 femur fracture brace, and we'll be conducting a beta launch in the second quarter. On the Scoliosis front, as mentioned, we received 510(k) FDA approval for the RESPONSE Cannulated Screws and performed our first case in March. We expect this system will expand the use of our first-of-its-kind RESPONSE neuromuscular system that was launched in 2021. In addition, we kicked off the early rollout of RESPONSE power and disposable torque, which will make both screw placement and final tightening much easier for our customers. Beyond all of this, we continued to make great progress on our long-term development within our early onset Scoliosis initiatives, such as guided growth, rib and pelvis, and our growing run. Finally, I want to briefly discuss a bolt-on acquisition we closed yesterday. We've acquired an enabling technology platform called Medtech Concepts. Medtech Concepts is an early-stage pre-commercial platform designed to increase efficiency in the perioperative environment. The solution combines hardware, software, and data analytics to help streamline operative care and support better decision-making in the operating room. In the future, we believe this platform will provide valuable interpretive resources for surgeons that will improve decision-making, drive OR efficiency, and ultimately improve healthcare for kids. While we don't expect material revenue contributions from the platform in 2023, we view this as an opportunity, much like 7D and FIREFLY, to continue to support market share gains for our implant systems in the years to come. We are excited to welcome to our team, the Medtech Concepts founder, Kevin Unger, who was previously a 10-year member of the OP Board of Directors. Kevin has stepped down from the Board and has joined us full time as an OrthoPediatrics employee. On behalf of the entire Board of Directors, I'd like to thank Kevin for all his contributions. We look forward to working with him to drive our enabling technology strategy. That brings us to surgeon training and education. Critical to our success is an unwavering commitment to support pediatric orthopedic clinical education and training and to help train the next generation of pediatric orthopedic surgeons. In the first quarter, we grew the number of hands-on training sessions conducted for healthcare providers from 70 in the prior year period to over 85. We also conducted nearly 250 product sessions. Combined, we reached over 950 individuals on a global basis. Furthermore, we were a leading supporter of the IMS course in Dublin, Ireland, where discussions took place about the most complex pathology facing pediatric scoliosis surgeons. Also during the first quarter, we were once again the largest contributors to the European Pediatric Orthopedic Society or EPOS course held in Krakow, Poland. That course was attended by nearly 800 pediatric orthopedic surgeons. We held a symposium on osteogenesis imperfecta or OI, moderated by our own Medical Director and pediatric orthopedic surgeon, Dr. Scott Hoffinger. OI is one of the most challenging surgical problems pediatric orthopedic surgeons face. The presentation highlighted case studies and engaged EPOS attendees in discussions of their experiences and best practices. Just last week, we attended our largest industry meeting, POSNA, which was attended by over 1,000 pediatric orthopedic surgeons. We are very excited to have unveiled a new, larger and longer-term commitment to this prestigious society and its membership. This new multiyear commitment is of the highest level and continues to establish OrthoPediatrics as the clear leader in supporting pediatric orthopedic clinical education and training. To conclude, we believe it is our responsibility as the market leader to do everything we can to support our surgeon partners in the collective effort of advancing the entire field of pediatric orthopedics. In a way, this may be our greatest contribution of all. With that, I'll turn the call over to Fred to provide more detail on our financial results.

Fred Hite, CFO

Thanks, Dave. Our first quarter 2023 worldwide revenue of $31.6 million increased 35% compared to the first quarter of 2022. Growth in the quarter was driven primarily by continued share gains across our legacy portfolio as well as contributions from MDO and Pega Medical of $4.8 million. In the first quarter of 2023, U.S. revenue was $23.8 million, a 31% increase from the first quarter of 2022. Growth in the quarter was primarily driven by organic growth in Trauma & Deformity and Scoliosis products, as we continued to deploy more sets and increase surgeon adoption, as well as the addition of MDO and Pega Medical. In the first quarter of 2023, we generated total international revenue of $7.8 million, representing growth of 49%, compared to the prior year period. Growth in the quarter was driven primarily by the addition of MDO and Pega Medical, as well as increased procedure volume across the majority of our OUS regions. This growth was partially offset by the ongoing negative impact of FX on our international sales. In the first quarter Trauma & Deformity revenue of $23.4 million increased 42%, compared to the prior year period. Growth in the quarter was driven primarily by a gradual normal elective surgical environment as well as the addition of MDO and Pega Medical. In the first quarter of 2023 Scoliosis revenue of $7.1 million increased 18%, compared to the prior year period. Growth was primarily driven by increased sales in the U.S., offset by lower year-over-year set sales to our international stocking distributors as they temporarily managed their cash positions. We expect this OUS trend to reverse for the remainder of the year. Finally, Sports Medicine/Other revenue in the first quarter of 2023 was $1.1 million, which increased 22% compared to the prior year period. Turning to set deployment. $3.0 million of sets were consigned in the first quarter of 2023 compared to $3.9 million in the first quarter of 2022. Touching briefly on a few key metrics. For the first quarter of 2023, gross margin was 74.6%, compared to 79.3% in the first quarter of 2022. The slight decline in gross margin was primarily driven by favorable purchase price variances in the first quarter of 2022, which did not repeat in the first quarter of 2023. Total operating expenses increased $7.2 million or 29% from $25.0 million in the first quarter of 2022 to $32.2 million in the first quarter of 2023. The increase was driven by the addition of MDO and Pega Medical as well as incremental personnel required to support the ongoing growth of the Company. Sales and marketing expenses increased $2.5 million or 25% to $12.2 million in the first quarter of 2023. The increase was driven primarily by increased sales commission expense coupled with the addition of our recent acquisitions. General and administrative expenses increased $4.5 million or 34% to $17.7 million in the first quarter of 2023. The increase was driven primarily by the addition of MDO and Pega Medical as well as the personnel and resources to support the continued expansion of the business and an increase in non-cash G&A expenses including depreciation, amortization, and stock-based compensation. Research and development expenses increased $0.2 million or 12% to $2.3 million in the first quarter of 2023. Total other income was $1.2 million for the first quarter of 2023 compared to a $3.0 million expense for the same period last year. In the first quarter of 2023, we recognized a gain on the fair value adjustment of contingent consideration, as compared to a charge in the first quarter of 2022. We reported an adjusted EBITDA loss of $2.1 million in the first quarter of 2023, compared to a loss of $1.6 million for the first quarter of 2022. We ended the first quarter with $109.2 million in cash, short-term investments, and restricted cash. We maintained a strong cash position and $50 million available on our line of credit. Turning to guidance. We now expect full year 2023 revenue to be in the range of $148 million to $151 million, representing year-over-year growth of 21% to 23%, compared to our prior expectations of $146 million to $149 million. The guidance assumes roughly $7.0 million of revenue contribution from MDO and Pega Medical before the acquisitions became organic on their anniversaries. We expect organic growth of 15% to 18%. Lastly, we plan to deploy around $25 million of new sets in 2023, representing a year-over-year annual growth of 24%. Additionally, we continue to expect to generate between $3 million to $4 million of adjusted EBITDA in 2023. I'll now turn the call back over to Dave for some closing remarks.

David Bailey, CEO

Thanks, Fred. Following our successful first quarter, kicking off our 17th year as a company, I want to remind everyone that our culture and cause dedicated to impacting the lives of children is attracting the best and brightest and still underpins all of our success. Our share of cause and commitment to improving the lives of children with orthopedic conditions has fostered a culture that has again been recognized and awarded as a Top 100 employer in the state of Indiana, a distinction unique to Warsaw-based medical technology companies. We are proud OP has received this recognition for the 7th time. And as shareholders, you should be proud of your continued support of a company that not only does so many great things for children but continues its commitment to corporate social responsibility. With that, I'll turn the call back to the operator to open the line for any questions. Thank you.

Operator, Operator

Our first question comes from Rick Wise with Stifel. Your line is open.

Rick Wise, Analyst

Good morning, everyone. It's great to see the solid recovery and rebound. Dave, could you talk to us about the quarterly flow, specifically looking at the U.S. and international markets separately? Please share your thoughts on the recovery in the current quarter and whether we feel like we’re back on track. Are volumes where they need to be? What is your confidence level regarding the rest of the year, especially concerning international markets? I know there are many points to cover, but thank you.

David Bailey, CEO

Thanks, Rick. As we reflect on the quarter, we've observed a fluctuating pattern month to month, which may continue for a while until the macroeconomic environment stabilizes. While we're experiencing strong growth overall, daily and monthly stability hasn't been ideal. The early part of the quarter was impacted by the decline in RSV, followed by a more typical environment for respiratory illnesses, which has gotten less coverage in the media. However, we've not seen the same improvements reported by some companies in the adult hospital sector regarding children's hospital throughput. We faced ongoing challenges throughout the quarter with surgeons' capacity to perform elective procedures, even though these procedures significantly contribute to our strong performance. We anticipate continuing staffing challenges throughout the year. Until we witness sustainable structural changes, we plan to maintain a cautious outlook, especially as we head into a second quarter that presents a tough comparison to last year's strong performance. We initially perceived everything as normal after Q2 last year, but the latter half was impacted by RSV and staffing issues. We acknowledge that staffing conditions are changing consistently, and while we remain optimistic, we're cautious about our hospitals' ability to handle a high volume of elective cases during the busy summer months. On the international front, we experienced substantial growth, primarily driven by MDO and Pega, although demand for scoliosis products remains strong. We were slightly disappointed that international growth wasn't stronger, but this can be attributed to timing and not just a few significant orders, including some major restock orders on the scoliosis side. That demand is likely to persist. We have a clear perspective on what Q2 looks like, and we are confident that international performance will positively affect the business in the upcoming three quarters.

Rick Wise, Analyst

At a high level, Fred, you've always been helpful in guiding us through the quarterly seasonal patterns. You've started off stronger than anticipated, achieving a nice beat and raise. How should we view the second quarter, especially in terms of revenue and its implications for the remainder of the year?

Fred Hite, CFO

Yes, Rick. We still expect the third quarter to be our largest of the year, with the second quarter not far behind. The fourth quarter is anticipated to be lower than the second quarter, assuming the summer season unfolds as we predict. Currently, there are no signs that it won't go as planned. July is expected to be the largest month, followed by June, and then August, which is driven by the scoliosis business and severe deformity correction surgeries as kids are out of school. We expect this trend to continue this year.

Rick Wise, Analyst

I'm sorry to sneak in one more question to ensure I understand. Regarding your comments about the second quarter, I completely understand what you mean. Clearly, this year you have MDO and Pega, which you didn't have before. Can we expect the business expansion with those additions to grow year-over-year, or should we still anticipate positive growth? How should we view the second quarter number from a dollar perspective, Fred?

Fred Hite, CFO

Yes. I think to Dave's point, so first quarter of last year, COVID negatively impacted the first quarter. That kind of went away, and the second quarter sprung back to what we thought was a normalized or very aggressive number. We had great growth on the domestic side, as well as the international side. And we kind of thought everything was back to normal. And then, growth slowed in the third and fourth quarter as RSV started filling up the children's hospitals. So, I think Dave just called out a tougher comp because the second quarter was so strong. But we'll have growth on the organic side excluding MDO and Pega, which are obviously going to add tremendous growth to the business. Just a tougher comp than the third and fourth quarters.

Operator, Operator

Our next question comes from Ryan Zimmerman with BTIG.

Ryan Zimmerman, Analyst

A couple of questions for me, if I may. The first is, MDO and Pega had a really nice quarter, the highest we've seen, I think since you started reporting those out and they were inorganic. Is it kind of fair to assume that they can run at, call it $20 million combined on an annual basis, or would that be viewed as a disappointment given the set investment and deployments you're expecting through the balance of the year?

Fred Hite, CFO

Listen, we’re very pleased with both MDO and Pega, tremendous year-over-year growth from their organic numbers. And we anticipate that will continue. As we stated earlier last year that the growth is not going to be explosive like 50%, but it's going to be very strong in the higher than the 20% range. And I think you're pretty close on what we would anticipate for the year here in 2023. And as we continue to get sets deployed throughout the year, feel very good about growth continuing very aggressively into next year, both of those businesses.

David Bailey, CEO

Yes, Ryan. I was particularly excited about the growth on the Pega side, especially in the domestic market. This reflects the impact of the U.S. sales organization. Currently, we don't have a lot of sets in the field, but we are gradually launching more each week and month. The current growth isn't being driven by the sets themselves but rather by strong demand from surgeons. I want to commend the commercial team in the U.S. for how quickly surgeons have started reaching out to them and for boosting their confidence in our team. I am really proud of the performance of the domestic sales force and their efforts in managing inventory. I believe the next three quarters, and indeed the next several years, could be very promising for the Pega products.

Ryan Zimmerman, Analyst

Okay, got it. And then, the other thing, you had this impact of RSV in the fourth quarter, I think if I look back at my notes, maybe a $2 million to $3 million impact. When you look at underlying T&D growth, it’s similar to prior quarters. So I'm wondering kind of what your thoughts are, Dave, about what you may or may not have made up from those RSV impacts. And I know there was some in January. But what you may or may not have made up in the first quarter and kind of how you're thinking about the recoupment, if you will, of those procedures or of that potential sale through the balance of the next few quarters? Thanks.

David Bailey, CEO

Yes. We hope to recover the backlog we experienced in late Q3 and Q4 throughout the remainder of the year. Our guidance on this matter is rather conservative. We have just returned from POSNO and EPOS, and what we’re hearing from customers is consistent. However, as I mentioned earlier, it's challenging to secure enough operating room time to address both regular cases and the backlog. Therefore, forecasting is difficult. In Q1, we noticed strong performance in certain products, particularly in our trauma deformity business's deformity correction segment, which marked a turnaround from earlier quarters. However, this was countered by some unexpected softness in trauma, which rebounded sharply in March. Overall, everything is moving in a positive direction, but the fluctuations from month to month in the elective space and the trauma environment make it hard to predict whether everything will return to normal in Q2. I believe we will see that additional volume pick up over the next year.

Operator, Operator

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

Unidentified Analyst, Analyst

This is Phil on for Matt. Congrats on the quarter. Just for starters on guidance, raised by $2 million here, which amounted to the beat and seemingly coming from MDO and Pega. So the organic guide remains the same. And I think historically, you've indicated your desire to be a 20% organic grower in, call it, normal market conditions. Can you walk us through the structural differences here between adult and children's hospitals, results from your adult counterparts indicate that at least volumes on the adult side are coming back in a big way. And when might the children's hospitals see something similar to that?

David Bailey, CEO

I will address the structural differences. Fred, perhaps you can discuss our revenue outlook for the next three quarters. There is a notable difference in staffing situations between children's hospitals and adult hospitals, especially concerning some common procedures. We have lost a significant number of specialized and highly trained staff in children's hospitals, many of whom have extensive experience in the operating room. For instance, a multi-hour scoliosis fusion procedure on a neuromuscular scoliosis patient is one of the most complex surgeries. Replacing lost staff with traveling nurses or new staff is challenging while maintaining efficiency. We have been closely monitoring accounts where we hold a significant market share, comparing pre-COVID levels to our current status, and we have not yet achieved the same throughput. There are reports of healthcare providers re-entering the workforce, and our hospitals are actively working to train their staff. However, for routine procedures like total knees or total hips, the training process is more straightforward, allowing for quicker staff adaptation. In contrast, the specialized nature of our procedures means losing even one team member can significantly impact efficiencies. This is why our perspective on the situation differs from what we've heard regarding adult hospitals.

Fred Hite, CFO

Yes. I would just add that the second half of last year really felt like the COVID period for children's hospitals. If you recall, the initial staffing issues were primarily caused by COVID several years ago in adult hospitals, leading to nurses and overall staff being completely overwhelmed. For us, that was particularly evident in the latter half of last year. In the fourth quarter, the volume was extremely high, and nurses were working long hours. From what we’re observing, a lot of staff are taking vacations and trying to catch their breath in the first quarter, and as a result, they are not achieving the same throughput while managing these challenges, which is notably different from what we are hearing from adult hospitals.

Unidentified Analyst, Analyst

I would like to shift the conversation to the MedTech Concepts acquisition. I'm pleased that you brought in an enabling technology company early. Could you explain the differentiation you might implement between your vision for the product intended for children's hospitals and a similar product that might already exist in adult hospitals regarding this enabling technology?

David Bailey, CEO

We are very pleased to have the opportunity to take on this digital asset playbook. We are excited to welcome Kevin to the team, who brings a wealth of experience in digital health and the implant sector, a combination that is quite rare. In our partnership with SeaSpine regarding the 7D technology, we observed that there are very few companies actively addressing the specific digital needs of children's hospitals. Just as we discussed regarding staffing, the workflow demands, the complexity of surgical procedures, and the necessity for data capture are critical for improving decision-making, especially for procedures that may not be as high in volume as total or near-total hips, where gold standards are established. We believe that long-term playbooks will provide significant value for our customers. Our objective is to take preoperative data and integrate it into a set of intraoperative solutions that enable our customers to make better decisions. Ultimately, we want to capture data that our customers can use to correlate with their preoperative outcomes, ensuring they make improved decisions and achieve better results for children. We do not see anyone else doing this anywhere. Therefore, there is a significant opportunity to create software and hardware tailored to the unique needs of pediatric orthopedics, in contrast to how these technologies are often applied in adult hospitals, which typically focus on procedures like hip and knee surgeries. We believe this represents a huge value addition for us. While this will not happen overnight and is a long-term strategy, we are optimistic about our entry point and anticipate a substantial impact on long-term market share growth for the business.

Operator, Operator

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

Mike Matson, Analyst

I guess, just starting with the set placements. It looks like the numbers were down a bit from the first quarter of last year. I just want to gauge your confidence in the ability to hit the guidance for the year there.

Fred Hite, CFO

Yes. We absolutely have plans in place to deploy that full $25 million this year. As we've said in the past, strong demand from the field continues, and so we're swapping out priorities to get stuff to the right places. As we had last year, some slight delays in getting that one last instrument into the case so we can get it deployed. But we're highly confident in the suppliers getting us what we need yet this year and getting that deployed.

Mike Matson, Analyst

And then just one product-related question in Scoliosis the RESPONSE powered disposable torque, just want to learn a little bit more about that. I assume you're not selling the actual powered tools, but just the attachments or something? Maybe you could just provide some more detail on that.

David Bailey, CEO

Yes, that's exactly right, Mike. You understood it perfectly. Our customers have always manually placed our screws and set screws, which can be a challenging process, especially when dealing with four screws that require manual torque. This is an issue we've been addressing for several years. Many of our customers are now realizing the physical strain on their elbows and shoulders can be significant. This recognition makes the implementation of our RESPONSE system much more efficient and easier for physicians. It's a kit of instruments designed to help surgeons more effectively power in screws and set screws for both BandLoc and our small and standard stature RESPONSE fusion systems.

Operator, Operator

Our next question comes from Sam Brodovsky with Truist.

Sam Brodovsky, Analyst

First one, I'll just stick with Pega and MDO. Should we think about sequential growth through the year there? Or should we expect those businesses to mirror the seasonality of the core business for this year?

David Bailey, CEO

I would expect that Pega will likely follow the seasonal patterns of our business, although we will have to see how it goes since we haven't experienced a full summer with Pega yet. It may not be as seasonal because having osteogenesis imperfecta is not as elective as our scoliosis line. Additionally, I believe MDO has less overall seasonality. It is typically applied shortly after birth, so there might be some seasonal patterns, but probably less than what we've observed with our scoliosis line.

Sam Brodovsky, Analyst

You mentioned some timing items outside the U.S. in the quarter that could potentially drive accelerated growth in the next three quarters. Should we consider this as the low benchmark for growth outside the U.S. for the year, or are there other factors we should take into account?

David Bailey, CEO

Yes. No, I would agree that this would be the low bar for the growth rate for the first quarter on an organic basis, still had a little bit of negative FX impacting us here in the first quarter. We would anticipate that negative impact in the second quarter. And then we're assuming it's a neutral impact in the third and fourth quarter, but we see the growth rate organically internationally picking up in the second, third, and fourth quarters as compared to the first quarter rate for sure.

Operator, Operator

Our next question comes from Dave Turkaly with JMP Securities. Your line is open.

Unidentified Analyst, Analyst

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

David Bailey, CEO

Great. Well, as always, thank you for your great questions from our group and really appreciate you joining us on our call and look forward to seeing you all at upcoming conferences and discussions in the future. So, thank you. Have a great day.

Operator, Operator

This concludes today's conference. Thank you for your participation. You may now disconnect. Everyone, have a great day.