Conference Transcript - KIDS 2026-06-08

Johnny Rinovitz, Analyst — Goldman Sachs

Good afternoon, everybody. Thank you for being here. We are pleased to welcome Orthopediatrics. We have Frada Haidt, CFO. My name is Johnny Rinovitz. I cover U.S. MedTech and healthcare IT at Goldman with David Roman. I'm excited to get started. So, kicking off, I think it would be great for anyone here newer to the company, if we could start with a brief company overview, maybe the markets you participate in, the growth rate, the TAM, and your three key segments.

Speaker 2

Yeah, absolutely. So, first of all, thank you for having us. We very much appreciate the invitation. Had a great schedule today. Orthopediatrics is the only pediatric company focused in the ortho space. We serve a TAM of about $1.6 billion here in the U.S. and then about $3 billion on a global basis. If you look at the business, it's broken down into trauma and deformity correction, which is about 70% of our sales. And then the other 30% is scoliosis. We also have a segment called OPSB, which is specialty bracing that sells both trauma and deformity as well as custom scoliosis braces, as well as about 45 OMP clinics that we have here in the U.S. and a few overseas to also support the pediatric orthopedic surgeons around the world.

Johnny Rinovitz, Analyst — Goldman Sachs

So you referenced your target customer base being the 300 children's hospitals, at least for the U.S. are you covering all those hospitals today? Are you in all these hospitals? And how do you evaluate territories to add or to focus on?

Speaker 2

Yeah, so domestically, we absolutely are selling our implants into all 300 of those children's hospitals. On the bracing side of the business, we have about 45 clinics today. They serve about 20 to 25 of those 300 children's hospitals. Our goal is to eventually service all 300 with our clinics, and so very early days on the clinic side of the business. It was new to us in 2024, so we're only a couple years into it, but we're very excited about the growth of that business and serving more and more of those children's hospitals, both here in the United States as well as outside of the U.S.

Johnny Rinovitz, Analyst — Goldman Sachs

Well, speaking outside of the U.S., you recently received EU MDR approval and purchased the distributor in Brazil, So it seems like a bit more focused international. How would you characterize your international efforts recently?

Speaker 2

Yeah, so the business today is about 80% domestic, 20%, 25% OUS. It's been a nice growth driver for us over the years, but we're probably a little under-penetrated there compared to the U.S. EUMDR has been a big undertaking for us. We've been working on it for about five years and very pleased to have received EUMDR approval last fall and then, again, some additional ones here in the spring on the T&D, Scoliosis, and XFIX product portfolio. Really, in Europe, we haven't launched a product in about five years because of the EUMDR, so they've been starved for new products for a long time. So we're very excited about now having the ability to launch the products we've been selling in the U.S. for some time into the European market. We do see that as a catalyst for additional growth, and we see the OUS market probably growing faster than the domestic market, probably for the next several years, honestly, just because we're a little less penetrated. We sell our implants in about 70 countries outside the United States and our bracing products in about 90 countries, OUS. On the Brazil side, we have a very nice business, implants only in Brazil. Historically, we have sold through stocking distributors, and in November of last year, we did purchase our largest trauma and deformity partner in Sao Paulo, and so now we own that business. So we go from selling wholesale to retail. So we're now billing the hospitals direct. That obviously increases our revenue. It increases our margin. But most importantly, it improves our cash flow. We now have a legal entity in Brazil, and we are now selling to all of our other stocking distributors there. Instead of big lump sales all at once, we're selling to them on a weekly or biweekly basis to fulfill their replenishment needs that they have. So really in 2026, it's more of a margin improvement, cash flow improvement initiative for us. And then in 27 and beyond, it'll kick in and start to help us drive additional revenue growth as well.

Johnny Rinovitz, Analyst — Goldman Sachs

Considering your footholds in all 300 of these children's hospitals, are there any sub-specialties you would consider extending to? I guess, like what are your customers begging for you to add?

Speaker 2

Yeah, so today our orthopediatric surgeons, we provide everything that they need except for a mechanical growing rod on the spine side, which that product is coming out here later this year, and probably a trauma femur growing implant, which we're working on today. But other than that, I would say the vast majority of the orthosurgeons we have covered with our now bracing and clinic operations as we continue to expand that. We continue to walk alongside some other technologies outside of the ortho space. We just recently started selling a cochlear lead implant robot. So IOTA Motion is the company that manufactures that. They came to us, and we've partnered to have exclusive rights of distributing that product in the children's hospital because we probably have the largest channel to market in the children's hospital right now, and a lot of these other technologies are coming to us looking for a channel to market. So we're walking alongside several of those right now, and down the road, we may expand into some of these other subspecialties, but not in the short term. It's a longer-term play for us as we get deeper penetration into the ortho space.

Johnny Rinovitz, Analyst — Goldman Sachs

Diving through recent results a bit, so can we walk through the drivers of the 13% revenue growth in the first quarter? I think this also included some weather-related disruption. So how are you thinking about your performance normalizing for that?

Speaker 2

Yeah, absolutely. So 13% overall revenue growth in the first quarter. The trauma and deformity grew at about 14%, SCOLI at 13%, and then OPSB at greater than 20%, and OUS growth was 22%. So really nice growth across all of the segments of the business. So very pleased with that. As important, I think, is our G&A only grew 2%. And so the overall EBIT year over year had a dramatic improvement, which has been one of our strategic goals here for the last couple of years. So we're very pleased to see the EBIT very aggressive growth there. um and on the subject of the weather disruption i guess what have you seen on the volumes front since since you reported earnings so like in april and may how things trended yeah so in january both in january and in february for an entire week our clinics uh up in the northeast were shut down so we basically did no revenue for an entire week up there um given all the ice storms that took place back in january and february we did catch up a little bit of that in March, but some of it definitely spilled over into the April timeframe. And I think as we indicated on our first quarter call, the April volume was very strong. So we saw a strong rebound in March, and we're very pleased to see that continue in April as well.

Johnny Rinovitz, Analyst — Goldman Sachs

So given the strong performance, including that disruption, walk through the 11% to 13% growth outlook for the year, given that you're kind of at the high end of that, including that disruption, what are you contemplating in terms of market growth and contribution from new products?

Speaker 2

Yeah, absolutely. So our seasonality is a little different than most businesses. Our June and July are two biggest months because kids are out of school. So the severe scoliosis procedures, which does have recovery time, and some of the severe deformity correction procedures, a lot of that happens in the June and July time frame. So the first quarter is our smallest quarter, every second and third quarter are traditionally a lot. When we enter, when we exit the first quarter, it's always a, you know, a little bit of a question mark as to what that is going to look like. What's the schedule going to look like for June and July? So we're seeing the June schedule fill up nicely, starting to see the July schedule, which is great to see. Kids are out of school, starting to be out of school, not everywhere, but they are starting to get out of school. And so the summer selling months are starting to pick up. The 10 to 13% overall revenue growth gives us some variability in those summer selling season in the few months in the summer. And then it also contemplates how much and how fast these new products, which I'm sure we'll talk about, receive adoption and how many sets we can get out and when we can get those sets out to drive incremental growth in the business as well.

Johnny Rinovitz, Analyst — Goldman Sachs

You referenced the impressive G&A leverage from the first quarter. So can we walk through what influenced the decision to raise the revenue growth outlook while holding the adjusted EBITDA guide?

Speaker 2

Yeah. So in the first quarter, we outperformed, you know, by a million, million and a half. We did let that flow through to the full year. So we increased the full year revenue by a million bucks, which is relatively small. The $25 million of full year adjusted EBITDA this year compared to $15 million last year. is, you know, a million dollars of extra revenue is in the round for that, to be honest with you. It gives us a little bit more confidence of achieving that, as well as incremental revenue helps us on the free cash flow, breakeven guidance that we've put out there for 2026 as well.

Johnny Rinovitz, Analyst — Goldman Sachs

Turning to some of the new products you referenced, can we walk through kind of the status of the ongoing ones? There's a bunch, but 3P HIT, 3P Small Mini, Vertiglide, Ellie, anything else you want to cover as well.

Speaker 2

Yeah, we're pretty excited. Dave Bailey, our CEO, is calling this the new product launch super cycle. And it really dates back several years. So EUMDR, new increased regulations that came about, really took our attention about five years ago. And so a lot of our engineering resources were spent requirements of EUMDR. That left us a little bit of launches for a couple of years. We've completed that work several years ago. We've now turned back to new product launches, and we're now starting to see this massive wave of new product launches that are coming out in the marketplace, not only in quantity, but for us, as important, very, very high innovation factor on all of these products. So we're very excited about it. To run through a couple of them, 3P, which is Pediatric Plating Platform. The first version of that is the 3p hip system so that was launched in the fall with a limited launch had great response here in the first quarter of that system we'll be doing a full rollout of that product here in the second quarter and really for the next three to five years as we continue to put more and more sets out we had an initial launch of 10 sets so limited launch to get some feedback it went very very well next will be 3p small and mini so think very very small plates very very small, tiniest screws available in the marketplace for hand, foot, anything in the extremities that require very, very small plates and screws. That will be doing a beta launch here at the beginning of the third quarter. So that's a couple of them on the trauma and deformity side. On the scoliosis side of the business, very excited about a product called VertiGlide. Vertiglide serves the EOS market. EOS is early onset scoliosis. This is a very young, very sick patient, ages four to eight years old, sometimes can have a curve of 90 to 100 degrees, so very, very severe. It's so severe it starts to collapse their lung capacity and is very risky. This product enables a young patient like that to have a straighter spine, So we attach the top and the bottom with screws, and then we put screws in the middle that actually glide for the glide system. So as the child grows naturally, they can continue to grow, and the rod system will continue to grow with it. So very excited about the product. Very high ASP, serves a niche market, but very high ASP, high profitability, and very good set utilization metric for us. So that's received tremendous results. We only had five sets available on initial launch. More sets will be coming here in June of this year. Following that is a new mechanical spine growing rod called Ellie. That will be first in human here this fall by the end of this year. And we've been working on that product for a long time. It also serves the EOS patient, but a little older patient. So maybe 6 to 10 years old, somebody who has severe curves but is still growing, put this implant in place and then through radio frequency will transfer power to a capacitor inside of the implant itself and then with the controller be able to expand the rod system as that child grows over time. So a brand-new product for us. It's probably one of the single biggest gaps we have today in the marketplace, and I'm very excited about getting that product into market and into patients and allowing them to continue to benefit. Another one coming is Varaxis. So Varaxis is a redo of our entire fusion system, probably our single biggest portfolio right now, the response fusion system. Varaxis will be launching early in 2027 with brand new implants, set screws, brand new instrumentation, a lot of innovation in that system as well. Again, it'll be a small launch, five systems, get some feedback, make some adjustments, and then roll out more sets of that in the second half of 2027. So those are some of the things that we have coming into the marketplace. Before I move on, that's the implant side. On the bracing side, we have a new product we just launched called Troxio. It is a halo gravity traction system that goes into the hospital, and we have several new hip braces that have been launched in the last three months. And then we have more and more of those specialty braces coming on the bracing side of the business over the next six to nine months as well. So a long list, to say the least.

Johnny Rinovitz, Analyst — Goldman Sachs

Yes, definitely. Maybe a follow-up on Vertiglide. So I think you called out that 80 surgeons have been trained so far, at least as the last earning call. I guess any update to that metric, where we are today? And what has the feedback been entering full market release this quarter?

Speaker 2

Yeah, so Vertiglide, as I mentioned, those patients are very, very – it's a very serious procedure, very difficult surgery. And so we are requiring anybody that is going to use that system to come in both the surgeon as well as our rep to come in and complete training and get certified before we'll give them access to that system. So we've had multiple training sessions prior to our first quarter call. We've had another training session since that call. So we'll continue to train more and more surgeons. It is somewhat limited on how many we're going to train because we only have so many sets available. So it's a slower, gradual rollout of it that is timed really with the availability of systems so that they have access to the system after they get trained.

Johnny Rinovitz, Analyst — Goldman Sachs

Do you have any sense of how many surgeons in the U.S. do this procedure? Like 80 surgeons trained out of how many?

Speaker 2

It is a small subset of the surgeons that complete this training, that complete this very difficult surgery. I would estimate it's probably a group of three to 400 surgeons, and so we're about 80 into that whole population at this point.

Johnny Rinovitz, Analyst — Goldman Sachs

Got it. Switching over to 3P, I think, I mean, applies to other product launches as well, but it seems like there's been strong demand, but somewhat constrained by sets available. So how much progress have you made in increasing availability for 3P since the earnings call, and how quickly can you ramp to full availability to meet the demand?

Speaker 2

Yeah, it's a great question. So the overall strategy of the business is continue to drive the top line. So 13% first quarter revenue growth, continue to grow the top line with profitable growth, aggressively grow the EBITDA of the business. So $15 million last year, $25 million this year, and also get the business to free cash flow breakeven here in 2026. We used $15 million of cash, free cash flow in 2025, and we'll get to the free cash flow breakeven in 2026. So when you talk about how many sets you're going to deploy, that comes into play with that equation. And so it's a balancing act to meet those metrics and to also not overspend on the free cash flow of the business. So in 2026, we're projecting to roll out $10 million of new systems, new sets. Ninety percent of that is all of these new systems. There's probably demand for more, and we're probably holding it back a little bit to achieve the free cash flow break even for 2026. In 27 and 28, we fully expect that adjusted EBITDA to continue to grow to generate additional cash from operations, and we will be increasing the set deployment in 27 and 28 to meet some of this demand on these new systems. The business will always be free cash flow, break-even, or better, but the goal, I think, in the future is not to maximize that free cash flow. It's to just get to the positive mark and then reinvest in the business for continued revenue growth.

Johnny Rinovitz, Analyst — Goldman Sachs

On the enabling tech side, can you walk through some of the feedback you've been getting on 7D and Firefly? What KPIs do you monitor? Are there any metrics on placements or surgeon users on those?

Speaker 2

Yeah, so 7D is a great technology. It is a radiation-free spinal navigation system that actually uses cameras that's combining AI with an MRI scan ahead of the surgery to give you navigation during the surgery. It's a capital sale for us. We distribute that product. All of the surgeons that use it on a trial basis want the piece of equipment. And then it's a time-consuming effort to work through the hospital administration to get it into the hospital. We have probably 25 or so of those systems placed today. We have, I think, a backlog of surgeons who want it that we are working through the hospital administration to get them placed in the hospital. It just takes time. And they don't have, I don't think, the same sense of urgency that we do, particularly around quarter end. And so we continue to work a long list of those opportunities to ensure that we're getting closure rates on it. So it's a great product. It's great for the patient. Zero radiation, lots of demand. It just is difficult to predict a little bit on when those are going to hit quarter to quarter. Firefly is another great technology. It's a patient-specific custom-printed guide that is used for scoliosis surgery. It has a 99.7% accuracy and tremendous to success in the marketplace, and we continue to see growth with that across the product. The other enabling technology that we're getting ready to put into the marketplace is called Playbook. It's a brand new product that is to help the efficiency and the flow of the OR system. So it's got a pre-surgical planning, it's got preference cards, it's got additional steps throughout the procedure to help the overall efficiency in the OR, and we're excited about getting that into the marketplace and getting some feedback on that product. So again, the whole goal here is to surround the surgeon with everything they need, not only on the implant side, but on the bracing side, 80% of their time is spent outside of the operating room, as well as on the IT, enabling tech, on the AI side of their business as well, to make sure that every need that they have, we have a solution for.

Johnny Rinovitz, Analyst — Goldman Sachs

What's the business model for enabling tech? How do you make sure you get paid for these? Are they usually usage-based contracts, or how does that work?

Speaker 2

There's two different models, depending on the customer. So one is a pure sale. So the hospital will say, hey, we have the capital budget available. We will sell them a unit. They'll place it in the hospital. And then the other model is usage-based. So we'll put it in with a usage-based contract in place with the hospital. And we're pretty flexible on how we organize it. based on the customer's needs.

Johnny Rinovitz, Analyst — Goldman Sachs

Turning to the sales force for a bit, where are you in your goal of reaching those 27 territories by 2027, and what territories are you finding particularly attractive now?

Speaker 2

Yeah, so as I mentioned, all 300 children's hospitals, we have those all serviced on the implant side of the business. On the specialty bracing side with the clinics, our goal is to get into 27 different territories out of availability of about 80 by the end of 2027. We started with nine. We've moved up to about 13, and we're on our way to that 27. We're pretty confident that we will get there by the end of 2027, if not exceed that number. When we started the business, bought the business in January 2024, we had about 20, 25 clinics. We're up to 45 clinics now, and we see that continuing to grow really for the next 10 years, which is how long it's going to take to get to all 300 children's hospitals.

Johnny Rinovitz, Analyst — Goldman Sachs

As you're hiring reps, have you noticed any impact from disruption from larger orthopedics peers?

Speaker 2

We don't have a difficult time hiring reps. When you think about our cause of helping kids, as well as a very, very positive culture that we have. We've won Best Places to Work for about nine years now. And when you combine a positive culture with a great cause, we have a tremendous offering to any potential hire that's coming into the organization, whether it's a sales rep, an engineer, regardless. So we continue to hire a mix of sales individuals, some right out of college, some with five years of experience, some with a little bit more. But that hiring of reps has not been a limiting factor for us at all. As far as disruption, it's not something that we're really focused on, to be honest with you, or to try to take advantage of. We have a pretty good pool of applicants when we post for a job. Got it.

Johnny Rinovitz, Analyst — Goldman Sachs

All right. Turning to financial results and P&L a little bit, what's your updated thinking on exposure to rising raw material costs and what raw materials are you most exposed to?

Speaker 2

Yeah, so when you look at our implant business, we have domestically about 85% gross margin. So the cost structure is pretty small relatively compared to other expenses. We outsource all of our implant manufacturing. We think that especially as early on as a startup company, our capital is more important to put into the growth side of the business as opposed to a manufacturing entity. So metal is the single biggest factor that comes into that. And with volume growing, we continue to focus on that as leverage to keep our costs down. On the bracing side of the business, we do manufacturing, some of those custom braces. And plastics was a concern of mine, I went out and talked to some folks, and we have seen some inflation on plastic, single-digit, high single-digit levels, but it's such a small level of overall cost as far as our P&L. It just doesn't have any big impact on the business. The flip side is we always have, and we continued this year, and we will continue into the future to get some price, selling price uplift to offset any inflation that we experience across the P&L. So we'll continue to do that. These new products offer an opportunity for us to continue to improve the margin and mix of our products to offset any small inflation that we may be experiencing.

Johnny Rinovitz, Analyst — Goldman Sachs

We've talked a bunch about the innovation super cycle. How do you think about spending R&D to support this pipeline and the future pipeline? And I guess putting it another way, how is R&D down $10 year over year given all these new products?

Speaker 2

Yeah, absolutely. We have continued to invest in the R&D side of the business. I think your specific question was first quarter. It was down $100,000 or 5% year over year, and some of that is pure timing of third-party testing results, buying the new products, prototype, and when did those get expensed through the P&L. So we continue to invest in R&D, not only the projects we're talking about and the projects we're launching right now, but we're now obviously working on even ones beyond that that'll come out in 28 and 29. So we will continue to invest in R&D. Our goal is for that to grow with revenue. So we want to continue to invest there while we leverage some of the sales and marketing and most importantly, continue to leverage the G&A side of our business.

Johnny Rinovitz, Analyst — Goldman Sachs

We talked about 2026 as the first cash flow break-even year. I think it's pretty rare for risk suppliers of this revenue base to be able to break even, I guess. Which part of your strategy or your business model is enabling this?

Speaker 2

Yes, interesting. So three years ago, we were deploying probably $25 million of new sets to drive growth along with the new product introductions back in the day. And the question was, why isn't it $50 million? If you're going to deploy 25, why not $50 million of deployment? And about three months later, the questions were, well, when are you going to get to cash flow breakeven? And so in the last 36 months, we've changed our strategy a little bit from growing at all costs to, as I said, having profitable revenue growth, growing EBITDA, and getting to the cash flow. So three years ago, the business used $42 million of free cash flow as we were supporting the growth and deploying sets. Last year, we reduced that $42 million of usage to $15 million of usage, so dramatic improvement, and this year we'll get to break even. We view it as the right thing to do for the investment community, but we also view it as the right thing to do to have a long-term, sustainable business. And the things that are unique that enable us to do that, I think, are number one, we have pretty high gross margins. At 85%, it is higher than most. And I think because we're in a niche space, because we have somewhat limited competition, and we have a pretty narrow and concentrated customer base, it enables us to stay very focused on just those pediatric hospitals and their needs. So high gross margins, small footprint, concentration of customers enable that, and pure discipline. We view this as critical to sustain the long-term growth, the long-term sustainability of this business, and that's pretty important to us as we think about helping more and more kids each year. Our goal is to help a million kids a year. We've helped 1.3 million kids to date, and we'll help about 175,000 kids this year. So we're early on in our journey of helping a million kids a year, and we want to make sure that we're around long enough to be able to do that.

Johnny Rinovitz, Analyst — Goldman Sachs

Got it. I think since your IPO, you've done six deals, six acquisitions, and the most recent one closed last summer, and it's been kind of quiet since then. So how are you thinking about M&A, and what types of targets would be of interest to you?

Speaker 2

Yeah, we're very excited about this Boston O&P, which is the business we purchased in January 2024. Last business, it was another growth driver that we, a strategic growth driver, we added to the business to continue to grow the business. But in all reality, it also met our goals of being capital efficient. Because on the implant side of the business, we do have consigned inventory. And so we have to deploy capital on that side to grow the business. On the OPSB side, the specialty bracing side, there is no consigned inventory. So we can grow profitable growth on that side of the business with less capital. And so we're driving growth on both sides of the business, but it was all in an effort to continue to drive our strategy of this cash flow break even business. We continue to look for opportunities. There's not a lot out there in the ortho space. As I mentioned earlier, we are looking at, talking to, building some relationships in areas that are close to us, but I don't think that's part of the short-term goal. Short-term goal is to prove the growth drivers are going to be delivered through the new super cycle, prove that we can get to this cash flow break-even metric that we've committed to, and I think acquisition targets can come after that's kind of proven to our investor base.

Johnny Rinovitz, Analyst — Goldman Sachs

Last one for me. If anyone in the audience, feel free to ask as well. But remind us of your LRP targets. I believe it's 2024 to 2027. There's been a lot of LRP blowups in the industry, but it seems like you guys are hanging on. So just remind us about your targets and how you're tracking against those.

Speaker 2

Yeah, absolutely. So we are committed to grow the top line, 12%. Continue to grow EBITDA year after year, adding 300 basis points of EBITDA growth. And to continue to get the business to that cash flow breakeven, which we said we were going to do three years ago by 2026. And we are going to deliver on that commitment. So, you know, we feel like when we say those, that's something that we're going to put plans in place to deliver. And we're confident that we are doing exactly that to continue to grow the business. We were talking to some investors earlier about, you know, the whole mid-tech space and the valuations and why it's so low. And I mentioned to them in 2023, our stock went down 20% one day when GLP-1 was announced. Three months later, when Eli Lilly got their drug approved, our stock went down 20% again. As you can imagine, GLP-1 has zero, zero impact on our patient population. trauma it's not impacting that severe deformity it's not impacting that and scoliosis it's not impacting that so our patient population has zero impact but unfortunately i do feel like we're still kind of lumped into that overall sector which is unfortunate we feel like getting to this free cash flow break even is is a transition point for us and we're hopeful that with the new product cycle's coming, start delivering on that, and get to this free cash flow break even. It'll start to make us stand out as compared to the rest of the industry, if you will.

Johnny Rinovitz, Analyst — Goldman Sachs

At the last minute, let me turn it back to you. Any closing remarks, anything interesting from investor meetings you want to highlight today or just something underappreciated?

Speaker 2

Yeah, thank you. I think the one thing that we haven't talked about when people ask about the company is, it's not an easy company to understand. We do have 90 different products. It's a bunch of products that are necessary because our surgeon customer doesn't just sit there and do knees all day or hips all day. They service a patient and that patient can have deformities in their ankles, knees, hips, across their entire body. And so the surgeon customer takes care of that patient from when they're born all the way through until they're maybe 18 or even 20 years old. And so it's always been our goal to have a broad range of products to be able to help them serve their patient population. And unfortunately, that complicates the story. So we're trying to make it simple. The super cycle is very exciting. We're excited to make an impact and to continue to help more and more kids. And again, we thank you for having us.

Johnny Rinovitz, Analyst — Goldman Sachs

Thank you for being here.

Speaker 2

Thank you.