OrthoPediatrics Corp. (NASDAQ:KIDS) Q1 2024 Earnings Call Transcript May 7, 2024
OrthoPediatrics Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. Welcome to OrthoPediatrics Corporation’s First Quarter 2024 Earnings Conference Call. At this time, all participants are on a listening 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 Gilmartin Group for a few introductory comments.
Trip Taylor : 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 8, 2024. 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 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 7, 2024. Accepted 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: Thanks, Trip. Good morning, everyone. Thank you for joining us on our first quarter 2024 conference call. As we start all our earnings calls, I’d like to begin by highlighting that we helped a record 27,600 kids in the first quarter of 2024. This remarkable 47% year-over-year growth is the metric we’re most proud of out of all of the stuff we’ll share with you today. It embodies our fundamental commitment to helping children and demonstrates our ability to continue to expand our reach and create a more significant impact for children worldwide. So, today we’re excited to join you live from just outside of Washington, D.C. at the EPOSNA Conference where EPOSNA and EPOS are collaborating to host a joint annual meeting.
This is the largest pediatric orthopedic conference in the world and once again, OrthoPediatrics is the leading sponsor of this event. The shared mission across our three organizations will be advanced through clinical data presentations and educational sessions highlighting the most cutting-edge pediatric orthopedic treatments and technologies. We’re looking forward to connecting with our customers and colleagues this week and there is no better place to deliver our exciting business update. OrthoPediatrics is off to a great start in 2024, generating first quarter revenue of $44.7 million, representing growth of 41% compared to the first quarter of 2023. Driven by strong performance across the businesses, we continue to demonstrate robust top-line growth, maintain healthy margins, and outperform our adjusted EBITDA expectations.
The execution of our business plan is delivering both financial results and progress on our strategic initiatives. Looking closer at the quarter, after an initial RSV spike seen in early January, revenue and surgery scheduling quickly bounced back. Children’s hospitals have learned to manage RSV waves efficiently and effectively mitigate disruptions previously seen. Overall, improvements in the surgical environment are tracking our expectations. Hospitals are now better staffed and the training of new associates is contributing to improved efficiency. Improvements continue every month and by our estimations, we’re approximately 95% back to normal levels. Given the seasonality of our business, the improved children’s hospitals capacity will be tested in these critical summer months.
Throughout the next few quarters, we will continue to monitor this progress closely. However, our confidence continues to increase that this headwind will have less and less of an impact moving forward toward a completely normalized state. We’ve built a business with a highly diversified portfolio that surrounds our surgeon customers with high technology products that continue to take market share and drive OrthoPediatrics growth. During the quarter, the global Trauma and Deformity, International Scoliosis, and our newly formed and rapidly expanding Specialty Bracing business, or OPSB, were all particularly strong. First quarter global T&D was very strong with 42% year-over-year growth led by sales of Pega products, PNP Femur, ORTHEX, early sales of PNP Tibia, and growth within the OPSB franchise, as well as the addition of Boston O&P’s T&D product sales.
PNP Tibia demand continues exceeding expectations and DF2 revenue has started strong. In addition, total surgeon users of Ex-Fix, increased by 29% in the first quarter and total accounts increased by 37%. We believe these numbers imply strong quarters are ahead of us. Looking at our international business, we reported strong overall growth of 33% led by a rebound in scoliosis and very strong sales of T&D with Ex-Fix at 59% growth and Pega at 152% growth. Operations commenced at our recently established German headquarters, which is improving customer service and increasing surgeon access to OrthoPediatrics products across the country. We are already seeing a return on this investment as the German business grew 22%. We’re also seeing very high growth in Canada, where recent product registrations and our account conversion strategy have been extremely effective, leading to large share gains in some of the country’s largest, most prestigious children’s hospitals and global teaching institutions.
In addition, the macro environment in Brazil has improving. This momentum internationally is expected to continue throughout 2024. Scoliosis revenue had substantial 44% growth led by domestic ApiFix, international sales in Europe and Latin and South America, along with another quarter of share taking in our fusion franchise, as well as the addition of Boston OMP scoliosis custom bracing products sales. We expected the OUS scoliosis to rebound aggressively in 2024 and to act as a tailwind, and this is exactly the trend we’re seeing to start the year. OPSB contributed to growth in both the T&D and scoliosis businesses as a result of Boston OMP acquisition, coupled with increased sales from products unrelated to Boston OMP clinics, such as MDO, DF2, Ora Medical, and RHINO.
Increases in OPSB sales continue to rise as we hire additional sales staff exclusively focused on this franchise, and we are confident that as we build this business, there is a massive opportunity to capture growth. The various levers driving the next phase of OrthoPediatrics growth and profitability are becoming more visible, and we remain quite bullish about our prospects for 2024 and beyond. For the remainder of the year, we’re focused on continuing legacy product growth, launching several key new organic products, expanding Pega sales, capitalizing on normalization in international markets, publishing positive longer-term ApiFix data, and execution on OPSB, and an early start in digital healthcare. The continued advancement of our strategic initiatives, paired with our strong financial position, will enable us to execute our long-term goals.
With a solid start for the year, we are raising our revenue guidance for full year 2024 to $200 million to $203 million, representing growth of 34% to 36%. The plethora of growth drivers outlined have positioned this business to continue growing on the top line while improving profitability on our way to cash flow break-even sooner. Moving to our revenue segments. In the first quarter of 2024, we generated total trauma and deformity revenue of $33.3 million, representing growth of 42% compared to the prior year period. This quarter saw strong performances from Pega products, trauma, specifically PNP Tibia, Ex-Fix, and OPSB, as well as the addition of Boston OMP, T&D product sales. Our prior investments in set allocations are generating a return and driving meaningful share gains for the T&D business across the entire growth of products, specifically Pega, which once again grew nearly 50% globally.
Sales of Pega continue to be better than we ever expected. As we more deeply penetrate our U.S. accounts with the full Pega product portfolio and we ramp international sales. Now that the distributor and agency transition is complete OUS, Pega will likely to continue this trajectory globally in 2024 and for the foreseeable future. Excitedly, the full US market release of PNP Tibia and GIRO are underway. With several sets expected to arrive at accounts in the second quarter and every quarter thereafter for the next several quarters. The full market release of DF2 is also underway and there is extremely high demand for this product and it’s helping grow OPSB sales. These products are great additions to our portfolio and will create an immediate impact.
Product portfolio expansion remains a top priority for the business. We seek to surround our surgeon customers with everything they need to treat each patient and treat more children. OrthoPediatrics is building a dominant share position across our entire T&D portfolio. Each quarter, more customers are using more of our products driving increased market share. Adding new high technology products like Pega helps advance the key account conversion strategy. The T&D business is increasingly well positioned to continue to deliver sustainable growth for the next several years. On the R&D side, there are several exciting products within the surgical side of our T&D business. We’re making great progress developing our entirely new pediatric plating platform or P3, which we expect will be world-class and spawn further share taking opportunities for us within our plating franchise.
We’ve also made solid strides on new external fixation devices that will continue the growth trajectory of our Ex-Fix franchise. Further, there will be several new CE Mark products that are positioned to launch in the EU market in the coming year to 15 months. The OrthoPediatrics non-surgical specialty bracing business or OPSB is performing extremely well, and we continue to view this franchise as a significant opportunity to help more kids. Before diving into some of that progress, I want to reiterate the OPSB opportunity briefly. In addition to furthering our strategy to provide pediatric orthopedic surgeons with everything they need to treat children, we see this as another opportunity for market dominance as we scale a historically fragmented market to become the clear cut leader.
80% of pediatric orthopedic care is delivered outside of the operating room, and we estimate the U.S. non-surgical specialty bracing market is at minimum $775 million in total and conservatively a $500 million opportunity within the top 300 children’s hospitals. From a business models perspective, importantly these custom fit devices do not require the upfront capital investment in consigned inventory or instrument sets. As mentioned on our previous calls, we continue to successfully execute a build aggressively strategy in OPSB and anticipate it to grow very rapidly in the coming several years. OPSB is in the early innings of what we believe can be a business well in excess of $100 million in the coming years. The planed sales force expansion, product developments, and the addition of new clinics will scale this business rapidly.
Progress expanding the sales force and integrating our specialty bracing products with Boston’s are already contributing to growth. Our existing R&D pipeline will support launching four to five new products within the OPSB business every year. Lastly, we’ve identified several new clinic opportunities and expect these to have a major impact as early as next year. Moving on to the Scoliosis business. In the first quarter of 2024, we generated revenue of $10.2 million, representing global growth of 44% compared to the prior year. This global growth was led by a return in international sales in Latin and South America, new business in Europe, and strong ApiFix growth, as well as the addition of Boston OMP, scoliosis, custom bracing product sales.
First quarter domestic sales increased by 38%, led by the addition of Boston Brace from the Boston OMP product portfolio. We are proud to add the most studied and utilized Scoliosis Brace in the world and a product that is considered to be the premier system for non-operative treatment of scoliosis and kyphosis to the OPSB portfolio. We’re pleased with the rebound from the International Scoliosis business, which outpaced our domestic business, generating 114% growth. We expect to see a continuation of strong international growth, coupled with a robust summer surgery schedule in the coming quarters. The increased number of total response users over 2023, earn-outs on 70 units placed in 2023, continued ApiFix growth, improvements in South America, and our European launch, all together keep us bullish on 2024 scoliosis growth.
The Scoliosis R&D pipeline is continuously progressing, and the funnel is rich with highly novel technologies that solve major unmet needs for our customers, specifically for patients with early onset scoliosis, a category in which we have never had products before. In the first quarter, we launched the first of three products in the EOS space. The first surgeries with response Rib and Pelvic were completed in the first quarter, producing excellent results. We’ve made great progress with our new growing spine system for EOS, called Vertiglide, and hope to have FDA approval secured in the second half of 2024. Further, the FDA recently classified our electromechanical growing spine rod, eLLi, with the breakthrough device designation, both a major milestone on our way to FDA approval and a strong endorsement of eLLi’s potential for patients suffering from EOS.
Lastly, substantial progress has been made on the development of our next generation fusion system. The next 18 to 24 months will be the most prolific period of new product development and launches in OP Scoliosis history, transforming the already impressive product portfolio into the most substantial offering available to surgeons treating pediatric scoliosis. Moving on to international, overall international growth improved substantially compared to the prior quarter, generating revenue of $10.4 million, delivering 33% year-over-year growth. This major rebound was supported by a return to normal ordering patterns for scoliosis products in South America, the launch of scoliosis in Europe, Pega products, and general demand across the entire T&D portfolio.
The international growth seen this quarter is very encouraging. As I mentioned earlier, we are seeing meaningful traction within several of our core international markets. The results we’ve seen in Germany are particularly pleasing as we begin to reap the benefits of our investment in building a direct sales channel and local customer service. As we await the notified body audit to finalize our EU-MBR status, we are thrilled about all the progress we’ve made internationally and that 2024 has started off on such a strong footing. We expect completion of our audit in the second half of 2024, enabling the potential launch of several new products in Europe shortly thereafter. Given the general lack of new pediatric orthopedic product launches in Europe over the past four to five years, it is particularly impressive that we’ve made so much headway and have many more opportunities in front of us.
Overall, the international business is set up nicely. We believe that the first quarter represents a great start to an improved 2024. That brings us to surgeon training and education. Since inception, facilitating educational opportunities for the pediatric orthopedic community has been a foundational component of OrthoPediatrics strategy. That’s why we are live from the IPOS today and we look forward to updating you on how productive and impactful this meeting will be for the pediatric orthopedic community. Back in April, the company was again, a lead sponsor of ICSS, a meeting that offers a comprehensive program of lectures given by an outstanding international faculty and didactic cadaver labs focused on the cervical spine, lumbo-sacral junction, neuro monitoring and various aspects of scoliosis.
This interactive forum was a great opportunity for us to engage with pediatric orthopedic fellows and attending surgeons and provide training on the latest technologies and surgical techniques. We highlighted response and the new pelvic fixation system at this year’s meeting. In the quarter, we conducted a total of 46 unique learning experiences, highlighting over 162 different product touches, including labs, workshops and sawbones stations, and we reached over 1,100 healthcare providers and other staff members. As we continue advancing our ongoing commitment to training the next generation of pediatric orthopedic surgeon and leading innovation in our subspecialty around the world. Lastly, because of the continued focus on our people and culture building, I want to again highlight that for the eighth time, OrthoPediatrics was named as one of the best places to work in Indiana.
We are committed to fostering a culture that is positive, engaging and allows our associates to do their best work. This has become a key aspect of our competitive advantage and continues to expand our ability to help more kids around the world. With that, I’ll turn the call over to Fred to provide more detail on our financial results. Fred?
Fred Hite: Thanks, Dave. Our first quarter, 2024, worldwide revenue of $44.7 million increased 41% compared to the first quarter of 2023. Growth in the quarter was driven primarily by strong performance across global Trauma and Deformity, International Scoliosis, and OPSB as well as the addition of Boston O&P. US revenue was $34.3 million, a 44% increase from the first quarter of 2023. Growth in the quarter was primarily driven by our Trauma and Deformity product lines, Scoliosis and OPSB as well as the addition of Boston O&P sales. We generated total international revenue of $10.4 million, representing growth of 33% compared to the first quarter of 2023. Growth in the quarter was primarily driven by Trauma and Deformity, Scoliosis and OPSB.
In the first quarter of 2024, Trauma and Deformity global revenue of $33.3 million increased 42% compared to the prior year period. Growth was primarily driven by strong growth across numerous product lines, specifically Cannulated Screws, PNP Femur, PediPlate, External Fixation and Pega Systems as well as the addition of Boston O&P, Trauma and Deformity correction product sales. In the first quarter of 2024, scoliosis revenue of $10.2 million increased 44% compared to the prior year period. Growth was primarily driven by increased sales of our RESPONSE-5.5-6.0, ApiFix systems, and revenue generated from 70 technologies as well as the addition of Boston O&P Scoliosis custom bracing product sales. Finally, Sports Medicine/Other revenue in the first quarter of 2024 was $1.2 million compared to $1.1 million in the previous year period.
Turning to set deployment, $4.3 million of sets were consigned in the first quarter of 2024 compared to $3.0 million in the first quarter of 2023. The increase was driven by the strategic decision to bring in inventory earlier in the year and to play a greater percentage of the annual sets prior to our busy summer months. Touching briefly on a few key metrics. For the first quarter of 2024, gross profit margin was 72% compared to 75% for the first quarter of 2023. The decrease in gross profit margin was driven primarily by increased international set sales in the first quarter of 2024, as well as less purchase price variance released in the first quarter of 2024 compared to 2023. Total operating expenses increased $9.7 million, or 30% to $41.9 million in the first quarter of 2024.
The increase was mainly driven by incremental personnel costs associated with increased headcount, increased commissions, and the addition of the Boston O&P acquisition. Sales and marketing expenses increased $1.6 million, or 13% to $14.2 million in the first quarter of 2024. The increase was primarily driven by increased sales commission expense, with a limited increase coming from the addition of Boston O&P acquisition. General and administrative expenses increased $7.6 million, or 44% to $24.7 million in the first quarter of 2024. The increase was driven primarily by the addition of Boston O&P acquisition, as well as resources to support the continued expansion of our business, and increases in non-cash expenses such as stock compensation, depreciation, and amortization.
Research and development expenses increased $0.6 million, or 23% to $3.0 million in the first quarter of 2024, due to the incremental product development and the addition of personnel to support the future growth of the business, as well as the addition of the Boston O&P acquisition. Total other expense was $0.6 million for the first quarter of 2024, compared to $1.2 million of other income for the same period last year. In the first quarter of 2023, we recognized a $0.6 million favorable adjustment to contingent consideration that did not repeat in the first quarter of 2024, as well as increased interest expense from our $10 million mid-cap loan. Adjusted EBITDA loss was $1.1 million in the first quarter of 2024, and this compares to a loss of $2.1 million in the first quarter of 2023.
We ended the first quarter with $49.7 million in cash, short-term investments, and restricted cash. Cash usage in the first quarter of 2024 includes $22 million paid for Boston O&P, increased set deployment, as well as increased inventory to support future set deployments. With our current cash position, as well as our debt facility, we are well-capitalized to continue to execute on our long-term strategy. Given our strong balance sheet, positive annual adjusted EBITDA, our line of sight to cash flow break-even, and the addition of Boston O&P, we are in a position of tremendous strength. Turning to guidance, we are raising our expectation for full year 2024 revenue from the previously announced $197 million to $200 million up to $200 million to $203 million, representing year-over-year growth of 34% to 36%.
We continue to expect to generate between $8.0 million to $9.0 million of adjusted EBITDA in 2024. Additionally, we continue to expect less than $20 million of new sets deployed in 2024. This represents our continued focus on driving the business to cash flow break-even sooner rather than later. As mentioned, this year, we plan to deploy sets earlier compared to prior years. I will now turn the call back over to Dave for closing remarks.
David Bailey : Thanks, Fred. Looking at the first quarter, we are extremely proud of how we’ve started 2024 and are confident that we will continue this momentum into the remainder of the year and beyond. We continue to capture share across the entire business, record robust top-line growth, maintain healthy margins, and outperform our EBITDA expectations. We will continue to move toward profitability growth and cash flow break-even as we execute our strategic initiatives to drive value and capitalize on our opportunity. 2024 will be a tremendous year for OrthoPediatrics, and I look forward to updating you again soon. In closing, I’d like to thank our surgeon partners, my OP associates, our investors, and all of the innovators in pediatric healthcare for standing together to help kids. Operator, let’s open the call for Q&A.
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