Good day, and thank you for standing by. Welcome to the Treace Medical Concept's First Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Julie Dewey. Please go ahead.

Good afternoon, everyone, and welcome to our first quarter 2024 earnings conference call. We appreciate you joining us. I'm Julie Dewey, Treace's Chief Communications and IR Officer. With me today are John Treace, Chief Executive Officer; and Mark Hair, Chief Financial Officer. During the call, John and Mark will offer commentary on our commercial activity and review our first quarter financial results released after the close of the market today, after which we will host a question-and-answer session. The press release and supplemental materials can be found in the Investor Relations section of our website at investors.treace.com. This call is being recorded and will be archived in the Investors section of our website. Before we begin, we would like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results, outlook or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information, and Treace assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. Please refer to our SEC filings, including our Form 10-Q for the first quarter 2024 filed today and our Form 10-K for the full year 2023 filed on February 27, 2024, for a detailed presentation of risks. With that, I will now turn the call over to John.

Thank you, Julie. Good afternoon, everyone, and thanks for joining us. I'm going to focus my comments today on our first quarter 2024 highlights, the progress of our numerous product launches, including SpeedPlate, our other growth drivers, and then spend some time discussing developments in the market environment, which is underpinning our decision to revise our full year guidance as well as tell you about our exciting opportunities and strategies going forward. Following my comments, Mark will cover specifics about our Q1 results and our 2024 guidance. We grew revenue 21% in the first quarter of 2024. Revenue performance was driven by increased procedure kit volume from our expanding base of surgeons and mix driven by increased adoption of our newer technologies in our core bunion and related midfoot cases, all supported by our dedicated direct sales team. We also benefited from strong patient demand trends that extended our seasonally strong fourth quarter into the first quarter. Additionally, we made encouraging progress with respect to our adjusted EBITDA results. Our adjusted EBITDA loss improved 18% to a loss of $8.3 million in the first quarter of 2024 compared to a loss of $10 million for the same period in 2023. We've expanded our position in the foot and ankle market by adding complementary procedures and technologies to treat related deformities, namely our Adductoplasty and Hammertoe correction systems, both of which coexist frequently with bunions and are addressed at the same time, and which together have expanded our total addressable market by an estimated $750 million without diluting our focus on the $5 billion-plus U.S. bunion market opportunity. Additionally, exiting Q1, we now have full market availability for a number of our newest technologies, including our SpeedPlate fixation platform, Hammertoe system, sterile instruments, and our minimally invasive Micro-Lapiplasty procedure. We expect all of these new technologies to contribute to our growth going forward. And we recently announced that we've now treated more than 100,000 patients with our Lapiplasty procedure, recognizing that our success is not only measured by numbers, but by the transformative change that our differentiated therapies provide to patients to overcome painful, lifestyle-limiting bunion and related midfoot deformities. Further highlighting our progress in the first quarter, we delivered gains across our key operating metrics in Q1. We drove a year-over-year increase in volume of Lapiplasty, Adductoplasty, and complementary procedures, which were enabled by our versatile SpeedPlate platform. We also benefited from favorable mix as well with new products like SpeedPlate and our Hammertoe systems as well as our expanded offering of procedure-specific sterile instruments, all being utilized more frequently in our core procedures. As we previously announced, we established the first-ever National Bunion Day in the United States on April 16, and we launched our new Future You patient education brand awareness campaign. The response to this campaign has been very positive, driving significant increases in our website traffic and an amplified activity level on our Find A Doctor locator. Treace was also named the first medical device partner and official foot and ankle solution partner for the Professional Pickleball Association Tour. Pickleball is the fastest-growing sport in the U.S., and we believe we're uniquely positioned to drive greater awareness of the challenges posed by bunions and educate patients in this demographic on our pioneering Lapiplasty procedure, the #1 most commonly used 3D bunion correction procedure by U.S. surgeons. Now I'd like to turn to our product launches. Our SpeedPlate launch continues to fuel our growth, and we saw strong demand in the first quarter. In fact, SpeedPlate usage nearly doubled in Q1 versus Q4 2023. Exiting Q1, we've achieved full commercialization of SpeedPlate and expect adoption to continue steadily through the remainder of 2024. Additionally, we expect to launch a new SpeedPlate configuration in Q3, which is designed to address some incremental larger bone fusion procedures in the foot. Next, our Micro-Lapiplasty system. This exciting evolution of our instrumentation allows the patented Lapiplasty procedure to be performed now through a 2-centimeter incision using our new SpeedPlate fixation technology. Our Micro-Lapiplasty system is now fully available, and throughout Q1, we witnessed a growing number of surgeons utilizing this minimally invasive Lapiplasty approach. While we're excited about the growth opportunity that all these product launches represent, there's even more expected to come from our robust product development pipeline to deliver a steady cadence of new innovations in the second half of 2024, including Mini-Adductoplasty and our RedPoint patient-specific instrumentation. We believe both of these technologies will reinforce our market leadership position in the bunion and related midfoot correction space. We look forward to providing additional updates on these platforms as well as other new product innovations as we progress throughout the year. Turning to our guidance. Despite our strong start to the year with expected growth opportunities stemming from product launches and new innovations I just mentioned, it's become clear that the market environment and competitive landscape is quickly evolving, and we've made the decision to revise guidance for fiscal 2024. We have decided to do this now because we're seeing increased use in surgeon adoption of MIS Osteotomy solutions. At the same time, we're facing even more competition from knockoffs of our Lapiplasty products. Both of these dynamics are creating incremental headwinds to our Lapiplasty growth. Specific to these knockoffs, we fundamentally believe that none of these systems match Lapiplasty's performance and reproducibility at the surgeon-patient interface, nor are they supported by the strong differentiating clinical data sets that Lapiplasty offers. We also believe some of these competing products are violating our IP. With this backdrop, I'd like to spend the next few minutes reviewing our strategy to expand our offerings and advance our business. While building our leading position in the Lapidus segment of the bunion market, we've simultaneously been pursuing a strategy to advance Treace from a company focused solely on Lapidus and related solutions to a comprehensive bunion solutions company. Meaning, to implement our strategy to expand our bunion solution portfolio, we plan to launch two innovative 3D MIS Osteotomy systems in late 2024 into the metatarsal osteotomy segment of the market, which accounts for 70% of the overall procedure volume today, and into our base of nearly 3,000 surgeon customers. Once launched, our customers who love Lapiplasty but still perform, on average, over half their bunion cases using metatarsal osteotomies will then have a Treace product to address all of their Lapidus and osteotomy bunding cases. Additionally, we expect our MIS Osteotomy solutions will afford us the opportunity to appeal to a new group of surgeons, those with a strong bias for using osteotomy approaches for the majority of their bunion patients. We expect to see the positive benefit of these new MIS innovations starting in the fourth quarter of this year and ramping throughout 2025. I continue to believe we are uniquely positioned to build upon our market-leading Lapiplasty position while leveraging that position to make a significant impact in the large osteotomy segment of the bunding market. First, we are confident in our track record of developing, commercializing, and rapidly innovating 3D bunion technologies that achieve broad customer acceptance due to their elegant design, reproducibility, and clinical effectiveness. We have proven this with Lapiplasty, and we've applied this expertise in our instrumented approach to our 3D MIS Osteotomy systems mentioned earlier. And we are confident in our ability to provide a strong educational resource for our customers as well as educate patients about our innovative therapies. Again, we have proven this with Lapiplasty, and we will apply this experience with our forthcoming 3D MIS Osteotomy platforms. Finally, we're confident in our bunion-focused direct sales team's ability to deliver these 3D MIS technologies to our base of nearly 3,000 Lapiplasty surgeon users and continue to expand the size of our surgeon customer base over time. We recently trained an initial group of surgeons on one of our new 3D MIS Osteotomy platforms in anticipation of our upcoming limited market release, and the surgeon feedback was overwhelmingly positive. I could not be more excited about the significant opportunity we expect from our new 3D MIS Osteotomy platforms. At the same time, we continue to focus on expanding our product offerings and the total market we serve to become a comprehensive bunion solutions company. We are taking decisive actions to mitigate the impact of the competitive challenges as well as our revised growth rates by rightsizing our P&L and reducing costs. In addition, we intend to assert and enforce our IP rights. I am confident in our ability to capture the opportunities ahead of us, innovate for our surgeon customer base, and deliver value for our shareholders. I'll now turn the call over to Mark to review our first quarter financial performance and provide more details about guidance.

Thank you, John. Good afternoon, everyone. Revenue for the first quarter of 2024 was $51.1 million, a 21% increase, with one less selling day than the prior year. Growth in the first quarter was driven by increased procedure kit volume from our expanding base of surgeons and increased adoption of our newer technologies, all supported by our dedicated direct sales team. As John mentioned, similar to what we saw last year, our seasonally strong fourth quarter extended into the first quarter. This year, there was more carryover from the fourth quarter into the first quarter than originally anticipated, which was the main driver of upside in the quarter. Gross margin was 80.2% in the first quarter of 2024 compared to 80.9% in the first quarter of 2023. This decrease was primarily due to a shift in product mix to newer products, partially offset by lower royalty rates. Total operating expenses were $59.9 million in the first quarter of 2024 compared to total operating expenses of $47.9 million in the first quarter of 2023. The increase in operating expenses reflects strategic investments in our expanding direct sales channel, investments in product innovation, and support for other corporate initiatives. First quarter net loss was $18.7 million or $0.30 per share compared to a net loss of $13.5 million or $0.23 per share for the same period in 2023. Adjusted EBITDA loss improved 18% to a loss of $8.3 million in the first quarter of 2024 compared to a loss of $10 million for the same period in 2023. Cash, cash equivalents, marketable securities, and investment receivable totaled $112.1 million as of March 31, 2024. We believe we have a lengthy runway in terms of our current cash level with sufficient balance sheet strength and flexibility to continue effectively executing on our strategic investments and growth initiatives for the foreseeable future. Let me now turn to our full year 2024 guidance. As John discussed earlier, we revised our revenue guidance for full year 2024 and now expect revenues of $201 million to $211 million, down from $220 million to $225 million, representing growth of 7% to 13% compared to full year 2023. We continue to anticipate adjusted EBITDA for the full year 2024 to improve approximately 50% compared to the full year 2023. Given our revised guidance, we now expect relatively flat year-over-year revenue growth in Q2 and high single-digit revenue growth in Q3 and in Q4 versus the prior year. Now before we open up the call for questions, let me turn it back to John for some concluding comments.

Thanks, Mark. As we wrap up, I want to take a minute to highlight what we believe to be the key takeaways from this call. Looking ahead, Treace's evolution from a purely Lapidus-focused company to a comprehensive bunion solution company is underway and on track. We continue to be relentlessly driven by our mission to advance the standard of care and are innovating to meet demand for certain customers and their patients. I'm confident we have the right team in place to navigate the current market challenges we face, achieve our ambitious goals, and ultimately deliver long-term value to our shareholders. With that, now let me turn the call over to the operator to open the line for your questions.

Our first question comes from Robbie Marcus of JPMorgan.

This is Lilly speaking on behalf of Robbie. To start with the competitive landscape, what has changed? For a long time, you seemed unaffected by competition, but now it appears to have significantly impacted your momentum. Can you explain what led to this change? Also, how confident are you in your ability to regain some of the market share you've lost, especially with several larger orthopedic competitors in the mix?

Lilly, John Treace here. As we talked about competition in the past, what we've stated is we know there are more competitors entering the market. We recognize there's competition, but we had yet to see anything that was of a significant headwind that would thwart our ability to hit our communicated revenue targets. What we're communicating here and with this revised guide is that we now are feeling that type of competitive pressure that is creating a headwind. So that's why we had to make the guide change. We've discussed the increased use of MIS osteotomies in the marketplace, which we believe we have a great solution for later in this year. And specific to Lapiplasty, we've seen competitors become a little more aggressive with getting doctors to trial these alternative products, and that's another headwind. Surgeons like to often evaluate new things, and there's just a lot of them out there to try right now. So it's hard to say how many of these surgeons will try it for a competitive product for a while and then ultimately come back to Lapiplasty and then how many might fully convert and stick with a competitive offering. We've seen a lot of these scenarios where surgeons evaluate other systems, and they do come back to Lapiplasty, but it definitely creates some headwinds. But fundamentally, we believe that as we get more of our Osteotomy MIS sets into the market over time late this year, along with our other planned launches, this should put us in a much stronger position as we'll have a comprehensive suite of union offerings to bring to our base of nearly 3,000 Lapiplasty users who, on average, are using osteotomies for half or more of their cases. So I think we've got a great plan in place. We've got a little bit of a headwind here for the next couple of quarters, and we'll look forward to those launches at the end of the year.

Got it. That's helpful. And then maybe just a follow-up on that. I appreciate that you're not breaking out kits and physician count and ASP anymore. But can you talk through which of those pieces is really the driver of the step down? Are you not able to train as many physicians? Is utilization declining? Is it the ancillary products that you're not able to tack on as much? So how should we qualitatively, I guess, be thinking about all those pieces moving forward?

Lilly, this is Mark. I'll start and then John can add any additional thoughts. We discussed the growth and its drivers, which stem from two main factors. It's due to increased kit volume and the product mix. This mix includes the new products John mentioned. We have SpeedPlate, a premium-priced item, along with hammertoe and other complementary products like stares instruments used in the procedures. Therefore, the 21% growth in Q1 was driven by both volume and mix.

I was asking for the full year. So how should we be thinking about how those pieces play into the lower guide? Appreciating that you're not breaking them out specifically, but qualitatively, what's moving lower in those buckets?

Yes. So that's a great question. So what we will continue to see is increases in both volume as well as our blended ASP. We've been talking last year, we saw a lot of uplift in what we referred to as blended ASP, meaning that's really the mix and our new product launches that are used at the same time as our core Lapiplasty procedures. So we will continue to benefit that from that product mix and new product offerings this year, but we will continue to see volume increases as well. So it's going to come from both the volume increases and then the incremental products. So what we saw in Q1, maybe not at the same growth rate, but we're going to see similar growth from both.

Our next question comes from the line of Richard Newitter of Truist Securities.

It seems you are facing increased competition from the knockoff segment regarding your core Lapiplasty offering. Should we interpret the updated outlook as an indication that you expect this competitive pressure to continue rising? Will you balance that with some positive contributions from your expanding product portfolio, essentially buying time until the MIS offerings in osteotomy are available? I'm trying to grasp the competitive landscape for core Lapiplasty over the next two to three quarters before you can introduce anything to penetrate the MIS osteotomy market.

Yes, Rich, this is Mark. I think the way you articulated it, to begin with, is right that we see continued competition from competitors in the Lapidus space that are indirectly with Lapiplasty. We have a tougher comp in Q2, and we have easier comps in Q3 and Q4, and we expect to see some benefit from these new product launches in the back half of this year. So that's going to help us with the growth in the back half.

Okay. Considering the slower growth in revenue, it seems you are adapting the profit and loss statement accordingly. Could you explain how you plan to manage the profit and loss? I noticed your updated EBITDA guidance remains mostly the same, projecting a 50% year-over-year increase. How much control do you have over the various factors influencing this? It appears that you may need to increase spending as you approach the end of the year. Please help me understand how this all fits together.

Yes. So Rich, we're evaluating all these opportunities to reduce costs, and we're confident that we can definitely manage them. Based on our lower revenue guide, if you take the midpoint, or based on the lower guide, there's a healthy component of the cost reductions that come very naturally from reduced variable expenses related to COGS, commissions, corporate incentives, and then the remaining expenses are discretionary in nature, that we know that we can manage and will impact our business longer term. So we're a nimble company. We're nimble enough that we can operate the P&L effectively without losing sight on our core opportunities. So we feel comfortable with that P&L guidance.

Our next question comes from the line of Drew Ranieri of Morgan Stanley.

Maybe just, again, revisit the competition again. You mentioned you're at about 3,000 surgeons now. So maybe just hone in on this a little bit more and kind of like what you're seeing in your surgeon base. And I think we're also all kind of struggling to see or really understand that the 7% to 13% growth guidance that you're giving now is really derisked for the competition at this point. Like why should we be confident that this is the right range? What are you seeing to maybe help instill that?

Yes, Drew, it's John. We feel pretty positive about our guidance. While we're facing some challenges, we also have some advantages. We're still onboarding new surgeons, but some of the procedures our surgeons were performing are now being shifted to competitive trials and some to minimally invasive osteotomy. We're noticing that although we plan to keep adding new surgeons, the efficiency per surgeon has slightly decreased. Additionally, there is some turnover as some may choose to switch to a competitive product over time. Is there anything else I may have overlooked, Mark?

Yes. We feel really optimistic. I mentioned earlier that the comparisons are much easier in the second half of the year, which gives us added confidence. We've been working on new product lines for a long time and developed some excellent products with the help of a skilled surgeon advisory group. As John noted, we have several upcoming releases, including Redpoint products and a new SpeedPlate design, along with other innovations slated for the latter part of the year with easier comparisons. Overall, we feel positive about our guidance and believe it has been appropriately managed for risk.

Okay. Got it. And again, just with the surgeons, can you talk about maybe like what attrition rate you're maybe seeing in the surgeon base at this point, compare that maybe to historical levels? And when we do think about the surgeon base, I mean where in the curve or the adoption curve are you kind of seeing the most impact within the kind of the competition dynamic? I mean is this happening more to like your year 1, year 2, year 3 surgeons? Or is this getting into even some more of your tenured base?

Yes. Great question, Drew. So we've talked about that we said last year that we plan to grow 250 to 300 surgeons this year we're well on track with that. We continue to add surgeons, they fuel current and future growth. And so we continue to do that. What we're seeing is that it's not so much an attrition rate. It's more of how often are they going to use our Lapiplasty, this Lapidus solution in the OR. And to the extent there are competing products, both from an MIS perspective, that's the osteotomy, it's a different approach altogether to the bunion correction, or if there's other Lapidus type solutions, there's just a lot more of them. And so we're seeing that. We continue to add new surgeons. They continue to do what we're expecting them to do in that first year, but we're seeing some of our more tenured surgeons who have been using other options rather than Lapiplasty exclusively.

Our next question comes from Harrison Parsons of Stephens.

This is Harrison on for George. I wanted to start on rightsizing the P&L. I was wondering if you could just expand a little bit on costs or areas that you could see costs take out. Is this primarily in the sales and marketing line? Or are there other areas we could see some leverage in 2024?

Harrison, this is Mark. That's a great question. As I mentioned earlier, when revenue decreases, a significant portion of costs also comes down because they are primarily variable. Therefore, we will see reductions in the sales and marketing expenses as that’s where many variable costs are incurred. Additionally, there will be overall cuts across the profit and loss statement. However, we believe these will be related to discretionary spending, and we are flexible enough to manage the profit and loss effectively without losing focus on our commercial initiatives, programs, and launches. So yes, there will be some variability in the sales and marketing expenses, but it will also affect some of the general and administrative and research and development costs as well.

Okay. Yes. Sounds good. In terms of protecting your intellectual property, I was wondering if there has been a new product or something specific to pursue, given the ongoing competition. What is the strategy for safeguarding that intellectual property?

Yes, Harrison, John here. We're really not going to comment much on our IP strategy timing. But as and when things may happen, we will communicate to you as we progress.

Our next question comes from the line of Danielle Antalffy of UBS.

This is Simon Nigan on behalf of Danielle. Regarding the competition you are currently facing, is it primarily due to increased challenges from surgeons not shifting away from osteotomies, or is it mainly from competing Lapiplasty products? I would like to understand how we should consider this.

Yes, Simon, John here. It's really not one competitor per se, but it's an amalgamation of a number of competitors, big companies, small companies, public and private, that are now selling products intended to directly compete with Lapiplasty. Several of those companies also offer MIS Osteotomy products, which, as of this time, we do not have, but that's a temporary situation for us. And there are more competitors today than there were last year. But we're focused on effectively navigating this market environment and continue to work to capture opportunities ahead, and innovate for our surgeon base. And we've got a great MIS Osteotomy platform coming in Q4, and we're very excited about the capabilities that we'll have and transforming Treace Medical into a full-line bunion product company and fueling the next leg of the growth of this business.

That's really helpful. And just a quick follow-up for you. There were a couple of comments on how efficiency per surgeon has come in maybe a bit less than expectations. Do we think that this is impacting, I guess, maybe your future targets for total Lapiplasty penetration growth? And how should we think about this impacting utilization over the next, I guess, over the near term?

Yes, that's a great question. We continue to observe a steady increase in the number of surgeons using our products. Last year, we added 475 surgeons, and we've seen healthy additions this year as well. We've always provided surgeons with the option on how to approach unions, and we believe Lapiplasty offers an excellent solution. Our clinical data supports this belief, showing we have more evidence than any other Lapidus-type solution. We are confident that Lapiplasty delivers impressive results and is well-designed for surgeons. We frequently receive positive feedback about its design in the operating room, making procedures faster, more effective, and more efficient. Still, surgeons can choose whether to perform a Lapidus procedure or an osteotomy, and there are distinctions between these methods. We notice some surgeons are continuing to use Lapiplasty but may be adjusting the proportion of Lapiplasty procedures in their overall practice. I wouldn’t say this applies to every surgeon, as each has their own approach, but we have identified a trend where minimally invasive osteotomies are becoming a larger share of the overall procedures.

And Mark, I think that's why we're pretty excited about this upcoming MIS Osteotomy program that we're going to be launching because now we can be the solution provider for those cases that they're opting to do MIS Osteotomies on today instead of a Lapiplasty potentially.

Thank you, and thanks, everybody, for joining us today. We appreciate your time and interest. If you have more questions, please reach out, and we look forward to talking to you next quarter. This concludes our call.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.