Good morning, everyone, and thanks for joining us at this year's Canaccord Genuity Growth Conference. My name is Caitlin Roberts, and I'm one of the medical device analysts here at Canaccord I'm pleased to be joined this morning by Orthopediatrics, a publicly traded medical device company addressing a range of pediatric conditions with a product portfolio, spending deformity and trauma, scoliosis, and specialty bracing. With me today is Dave Bailey, CEO. And before we begin, I want to remind everyone of any relevant disclosures which can be found on our conference and our firm website. So we will begin with the fireside chat, and I'll try to leave a couple of minutes at the end for any questions from the audience. And so maybe starting off with the Q2, Dave, can you walk us through the key takeaways from the quarter and what you want investors to really understand about the business and how it's positioned exiting the first half of the year?

Absolutely. Thank you. And thank you for having us. It's been a great conference, and we've got a busy day today. So certainly, I think Q2, very pleased with record number of kids helped, record revenue, record EBITDA. I think it really represents a nice inflection point for the business. Certainly it's also probably the first quarter that we started to see a little bit of impact from our super cycle products, although it's very early there. And you start to see the impact of those super cycle products flowing through the P&L. It's a really good setup for us in H2 because we're targeting further records, certainly from an EBITDA and a cash flow perspective. And I think it sets us up well to achieve our goals of $25 million in adjusted EBITDA this year, as well as positive free cash flow or breakeven to positive free cash flow on the year.

And you beat Q2 expectations and also raised guidance. Anything you want to highlight from a cadence perspective as investors think about the second half?

Just that we have nice momentum. And I think we are very early in terms of these new products. And so we launched the majority of the 3P HIP system here in the second part or really the second few weeks of June. And so hadn't seen a lot of impact there. It's likely that we would start to see impact of some of the new product development that we see. Obviously, the cadence of our business, we tend to have very high volumes in the summer when kids are out of school. And so we've had a nice summer season so far, good volumes. I think there's been a lot of noise in the marketplace around just patient volumes and reimbursements. We have not seen any macro trends that have really affected the business. Scheduling was very strong into the summer and extended into July. And so it gives us a lot of confidence that we're going to perform really well in the second half of the year. And have a great year.

Maybe just turning to NPL. So you've described the current pipeline as the most clinically exciting in company history. Can you elaborate on why this launch cycle is different from prior cycles?

Yeah, great question. I think as we look at these products compared to maybe some of our legacy products, I would argue that they're dramatically more clinically relevant. We've been doing this now for 20 years. And with the relationships we have with the KOLs in the marketplace, I think we're able to take certain development risks. Maybe the earlier, as we're a smaller company, we weren't willing to take. And so I think some of that development risk has produced some products that are extremely clinically relevant, offering surgeons opportunities to do surgeries in the peds population that they hadn't done previously. And I think that what that is producing for us is generally higher ASP products. And when we get higher ASP products, we're getting better asset utilization metrics than our legacy. So we had historically, I think post-IPO talked about about a single dollar of sale to every dollar of deployed assets on an annualized basis. Now we're starting to see that in the twos and threes and fours in terms of dollar of sale to dollar of inventory. So certainly clinical relevance. And then we're seeing that flow through P&L with really high margin products that are also improving our free cash flow. And that's, again, it's very encouraging and it's very early. So I think this is something that we will be deploying these sets over the course of the next several years, super cycles deep, and I think it's going to be, it sets us up really nicely.

And just on that financial point with the newer products carrying higher ASPs, requiring less set deployment, how meaningful could that shift be to the financial profile of the business over time?

Yeah, I think it could be very substantial, and I think you're already, again, you're seeing the work that we've put in over the course of the last few years. I think, you know, we have, we're really trying to balance the top line revenue growth with improving EBITDA margin, improving EBITDA, and then ultimately EBITDA margin, and then improving free cash flow. And when you think about, you know, 2024 using 40 plus million dollars in free cash, in cash last year using approximately 15, we've only used eight here in the first half of the year. And generally speaking, we're, you know, we're positive free cash in the second half of the And so I think the proof is in the pudding already that the work we've done over the course of the last 24 to 18 months to get the business where it is now, now you start to see what we think are kind of inflection points in terms of very solid revenue growth, 15.5% or so this quarter with more new sets coming, more new products, OPSB growing extremely rapidly, and I think the business is starting to inflect here. And I think it's going to have a positive impact throughout the P&L and certainly from a cash flow standpoint for the next several years.

And you moved to a fuller launch of 3P hip and Vertiglide in the Q2. Can you just tell us what you're seeing from early adopters and how you expect contribution to ramp in the second half in 2027?

Yeah, so we had just a few sets here for the first half of the year, and certainly the demand for those sets is very high, but you know, it's early. I think the procedures that have been performed with this, the surgeon feedback has been very strong, both with 3P hip as well as Vertiglide? I think what's really unique and it's been part of the strategy is that if we can deploy these very clinically relevant, highly differentiated systems where there essentially is no threat of substitute, there aren't like products in the children's hospitals for some of these procedures, it has the pull-through effect, a halo effect, if you will, on the other products. And so I think what we saw so far here in the first half of the year was less impact from those products although there was some but the impact has been felt more and pulling through some of our less differentiated technologies or getting higher utilization rates from sets that have already been deployed which is also benefiting free cash flow and so yeah as we get these sets out we got them out most of the sets out here in the at the end of Q2 we will continue to deploy sets here in the beginning of Q3 it'll start to impact the revenue on the on the on the implant side and TND and scoliosis for sure.

And you're also planning first cases of Varaxis later this year. Why was now a good time for you to refresh your fixation portfolio?

Yeah, great question. We'll see when first cases of Varaxis happen. That'll probably be an FDA decision so we'll see. But I think you know we continue to see our response fusion business growing double digits and so it is a completely rational question as to why would you replace a system that is taking share. I think Varaxis has, will never really fully replace response. It's more of an adjunct product line. And I think that the certain techniques that surgeons are using to reduce the spine in pediatric patients have been increasingly modernized and response doesn't do that. All of those techniques, Varaxis will. I also think that if you think of our strategy where we're launching these products in early onset scoliosis. So we started with a response rib and pelvic. Then we moved to the VertiGlide system and then LE is coming down here. Hopefully we will have surgeries by the end of the year. That strategy was to bring these products forward that there's huge unmet need, really no threat of substitute, not a lot of competition there. And then that accesses some of the top children's hospitals where we historically may have not been as strong with our scoliosis portfolio. We do that and then we bring another new system on the fixation on the fusion side. I just think it strengthens our competitive position, allows us to put our best foot forward with some key accounts. And I think we're already seeing some of that pull through, even with response here in Q2 and the first half of the year so far.

Let's move to OPSB. Given the nature of pediatric orthopedic care, bracing, you've noted is a vital part of the treatment algorithm. How does your bracing strategy really dovetail with your implant business to enhance your competitiveness?

Yeah, I think we've talked a lot about our customer being a very unique customer, probably not in many ways, not at all similar to a generalist orthopedic surgeon. About 80% of the time our customer spends is spent outside of the operating room. I think all of us would wish that we wouldn't have to take our kids to the operating room. So I think bracing really signals to our customer that we are there for the entire treatment pathway and care about the things they care about and I think that's another example clinical education things like that we've done historically as another but I think you know we're in the boat so to speak with our customer throughout the entire treatment algorithm there's huge unmet need in specialty bracing for kids it's not done well by by any of the particularly large OEMs and so I think that that is also having a halo effect on our implant business right we have a relationship we sell our products and every major children's hospital. We have a competent sales force that does that. Now we're bringing competent clinicians who are 100% focused on the indications in pediatrics. We're bringing new technologies. I think the super cycle includes so many cool technologies on the OPSB side that are changing standard of care. I think all that just continues to raise the credibility of the company. And again, it has this halo effect, not to mention the fact that there is a few products that we're coming out with, like Traxio and the Tractor Fix, that in fact dovetail very directly with our EOS portfolio of implants and our external fixation portfolio. So there is some really nice products that are not braces, but they're not implants, and they're kind of in between. And I think that further signals our contribution there, but also in our commitment. But I guess the halo that is created there is very positive.

I think it's unique because you open clinics and you also have products that you're launching in the segment. How do you think about the business as contributing from a growth and a margin perspective going forward to the overall business?

Yeah, I'll jump in on the growth side and then maybe Michelle could speak to how that margin is slightly different. But I think certainly the growth is there. You're seeing that, right, in the increasing growth rate of the business. We expect the OPSB franchise, which is It's, you know, smaller and obviously brand new for us to be able to grow north of 20% for the next several years. There's huge unmet need in terms of clinic demand as well as new product demand. We're just on the really some of the first DF2 is probably the first organically developed product and it has done incredibly well. And now you're hearing, you know, kind of press releases pretty consistent about that new products coming out from the OPSB product development team. So from a revenue perspective, it contributes substantially, also has really nice financial metrics from a cash flow standpoint. But maybe, Michelle, you'd speak to some of the margin implications.

Absolutely. Thanks, Dave. Echoing to what Dave said, the OPSB division continues to perform strongly from a revenue standpoint. From a margin standpoint, gross margin is slightly below the rest of our business, just given the products that the OPSB business sells. But they contribute very strongly from a contribution margin perspective. Also, a lot of our M&A activity and just expansion has been on the OPSB side of the business as well. So we're encouraged by what we see going forward.

Trained internationally, you recently saw some EU MDR regulatory wins later last year. How has that been trending with those launches, and what's the strategy here to continue driving growth internationally?

Yeah, great question. So we had invested a lot of our expense base in the prior five years or so prepping for EUMDR. We felt like it was a strategically rational initiative. We felt like a lot of the other larger OEMs that do dabble or have a few pediatric products were probably unlikely to support some of the devices that for them are fairly orphan. And I think that strategy is born itself out. We have seen companies that aren't now willing to support or having to pull some product lines because of lack of EU MDR approval. And so I think our strategy to make that investment is paid off. We're very early. It's kind of like where we're at with the super cycle. We're very early in terms of starting to deploy some new sets. But just anecdotally, I was at the European Pediatric Orthopedic Society meeting. about half of the product portfolio that's available in the US has up until now not been available to our customers in Europe. And so the booth was extremely busy with people excited to be able to see and get access to the new products. And it's interesting because it's like a new product rebirth in terms of these products in Europe, but there's systems that we have a really long track record here in the United States. We know they work well. We know they work well for us financially and so yeah we continue to be quite bullish about our options our opportunities in in outside of the United States particularly Europe we have a nice small but growing scoliosis franchise now in Europe and OPSP is growing there as well and so it was really good to see 22 percent growth it's likely to see it's reasonable that you would expect the business outside of the US to outpace the US growth for the next several years we have lower market share and a ton of opportunity there.

And, you know, last year you removed LATAM from your guidance. Maybe just give investors a brief overview of, you know, why you decided to do this and how you've been working to improve cash flow in the regions and what are your expectations for recovery in this business? Yeah, good question.

So what we did with the guide last year is in about half of our markets outside the United States were wholesalers. So So we sell two stocking distributors versus agency, which is largely in Europe. And so the revenue tends to be a little chunky. We sell sets, particularly scoliosis sets, that can cost a lot of money to our distributors. And oftentimes, if it takes a long time to import and get these going, our distributors, particularly in Brazil, tend to have or ask for longer payment terms. So we have been working hard to change our model in Brazil in particular. We pulled a lot of the set sales that we had in 2024 and 2025 from the guide expectation for 2026 and you saw that here, you see that that impacted the scoliosis top line number because we didn't sell any sets to speak of in LATAM for scoliosis. But overall, we think it's the right thing to do to stabilize that business. The demand is extremely high in Latin America, it's just that we're not going to use our capital to deploy these sets with long payment terms in an area where we get very low margin. And so I think the structure of our organization in Brazil post acquisition of one of our distributors there is getting better. That business is starting to turn profitable, it's going to be generating cash and certainly improving our accounts receivable balances there, and the demand is extremely high. And so I would expect that this has been a bit of a tailwind for us or a bit of a headwind for us over the last 12 months. We're probably within a few quarters of this turning towards becoming a tailwind under a much better structure that I think improves our profitability substantially.

Turning to partnerships in M&A, historically, you know, these have been an important part of the kids' story. How are you thinking about the M&A opportunities today? And you've also recently signed a distribution agreement with Osseo. How do you see this partnership as really enhancing your competitive position? Yeah.

So we remain opportunistic on the M&A front. I think there's nothing huge or chunky I think that we see out there right now. But as Michelle indicated, most of our M&A strategy over the course of the last few years has been focused on the OPSB franchise. And I would expect that you will continue to see us look to try to be aggressive on the aqua hire side where we can hire or we can acquire a small bracing clinic that then gives us a footprint to scale from that in certain jurisdictions where we don't have presence, and I think we'll continue there. I think because of us having the only commercial channel really in the world that focuses exclusively in pediatric orthopedics, we're ubiquitous in every children's hospital now, and I would say the developed world, I think we have really good technologies like Osseo that are coming to us, which is part of our strategy. We want to be a good partner for people who have unique technologies, but maybe don't have the scale or the specialized sales force to access these hospitals. I think Osseo is going to be great for us. It's a differentiated technology. Obviously, if you can go in and have something that absorbs and you don't have to remove implants in kids, that's avoid a second surgery. That's a huge deal for kids, patients, parents, family, or the hospital. It also further differentiates the company. And as we start to think about how we contract with hospitals, being able to contract based around very differentiated technologies where there's no threaded substitutes, helps us on our contracting, and pulls through some of the other products. And so I think, you know, we don't talk about Osseo in terms of the super cycle, but it is very much part of our strategy with these product launches with 3P, 3P HIP, 3P Small Mini, and it's a further differentiator for us that just strengthens our competitive position.

And turning to financials, Michelle, Jeffrey, thank you so much for joining us. You generated positive adjusted EBITDA again in the Q2 and continue to target cash flow breakeven this year. What gives you guys the confidence in achieving these goals?

Thank you. We had a very strong Q2. Record revenue, record adjusted EBITDA, free cash flow usage came down 10 million versus Q2 of last year. And so it shows us that what we're doing is working. So if we can continue to be strategic with driving revenue, managing set deployments, working on managing working capital, and focusing on maximizing adjusted EBITDA, we can continue to perform this way going forward as well.

And where are you from a set deployment perspective so far this year? And what are your expectations in the out years given the enhanced efficiency of these newer launches that we were talking about earlier?

So if we look back two years, in 2024, we deployed over 20 million of new sets to the And we're targeting 10 million this year. It should not hamper our growth from a revenue standpoint at all. It just means that we're being more strategic in deploying sets. And we also anticipate a higher, as Dave mentioned, higher set utilization and asset utilization related to all those sets that we're deploying. So we expect more revenue dollars for every set, especially the new product launches that we are anticipating.

And assuming you achieve these cash flow objectives this year, how does that change the way you think about capital allocation over the next several years?

Yeah, I think that, you know, we are, we're going to be very pleased here to achieve our goal, break even if not slightly positive. And the goal of the business is not necessarily to generate a huge amount of cash. We have a bunch of growth opportunities in front of us. And so it would be reasonable to assume that as EBITDA improves, we'll use a percentage of that improving EBITDA to put a little bit more inventory on the street, particularly as we're in the end of the super cycle. But we have no intention of ever turning back on using cash. We're going to be a cash generator. It's just that as we continue to generate more and more of that EBITDA, we want to stimulate certain growth, particularly given the nature and the power of the products we have in the super cycle.

Maybe in the last couple minutes, touching on the competitive landscape. I think you noted last year several larger competitors exiting or reducing focus on certain pediatric product categories. How has that impacted your business and our strategy, and how do you view that going forward?

Yeah, so we continue to see some of the small, maybe nascent product lines from some of the large OEMs either not being supported at all, being pulled from the market, or not going through the EU MDR process. It's certainly strengthened our competitive position both in the U.S. as well as in Europe because more of our legacy products now have no threat of substitute. So I think it's a really unique position now where if we look at the majority of our trauma deformity portfolio, for example, probably 40 to 50 percent of the whole portfolio really doesn't have a threat of substitute. And so that gives us some pricing power. It gives us contracting power. It's allowing us to pull some of the less differentiated products in, and again, we're not having to deploy a lot of that inventory because, you know, I have an account with 10 surgeons. Maybe a few surgeons were using us for some of the less differentiated, and now, you know, through contracting means, we're able to pick up the other eight. Well, that inventory's there, and so it just makes it more productive, and so I think what we've learned is that product development focused on extremely unique clinical conditions and an increasingly benign competitive environment is creating a very, very strong long-term strategic competitive advantage for us, and that should be leveraged and be able to flow through our entire P&L, not just the top line.

Any questions from the audience?

Yeah, it's a great question.

You know, we have we have been unabashed supporters of clinical education and training for pediatrics. Certainly the M&A environment has actually created a problem in some cases for our clinicians, where some of the bigger companies aren't supporting at the same level as they were historically. And so at this stage, you know, our investment, we're the largest sponsor of ClinEd on every continent for every major surgical society, connected to the KOLs that lead those institutions, and most of it is non-commercial. So we're not out there just selling product. We're actually working to help educate young physicians. I think the nature of the new products is going to lead us towards having to do some more specialized training. Vertiglide is a great example. Since its launch, we've trained 124 surgeons. It's not a technique that people are entirely unfamiliar with, but it's something where surgeons need to hear from their colleagues as to what the right patient population is for this, and there's some nuance. And so I think we've got that built into the P&L, the associated expense base. But it is a great call out that as you develop more clinically relevant products and that are differentiated, it does require a different type of training. We're eager to do it because it gives us more opportunities to be in front of our customer in a way that's not so commercial. We're trying to do the right thing for kids. I think they see that.

Great. Dave, anything you want to leave in the last minute to the audience about the business and the trajectory going forward?

Yeah, I just think that, as I pointed out earlier, Q2 is a really great inflection point for the business. We're talking about positive recash flow, improving EBITDA. We've talked a lot about the super cycle. I think that this business is incredibly well set up, and not just in the short run. The super cycle is deep. The financials on these products make sense. OPSB continues to grow, and I would just argue that the moat around our competitive position is not only deep but it's it's very wide and I think all of those things position the business really well to continue not just taking share but taking share in a very profitable way that is this consistent with what we've said over the last few years and we're really seeing that inflection point now and would expect it to continue in the future so thank you for the time okay thanks Dave Thanks, Michelle.

Thanks, everyone.