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Edited Transcript of KIDS.OQ earnings conference call or presentation 8-Nov-19 1:00pm GMT

Q3 2019 OrthoPediatrics Corp Earnings Call

WARSAW Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Orthopediatrics Corp earnings conference call or presentation Friday, November 8, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fred L. Hite

OrthoPediatrics Corp. - CFO & Director

* Mark C. Throdahl

OrthoPediatrics Corp. - President, CEO & Director

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Conference Call Participants

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* Anna Marie Nussbaum

William Blair & Company L.L.C., Research Division - Associate

* David Louis Turkaly

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Frederick Allen Wise

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Matthew Oliver O'Brien

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Michael Stephen Matson

Needham & Company, LLC, Research Division - Senior Analyst

* Ryan Benjamin Zimmerman

BTIG, LLC, Research Division - Director & Medical Technology Analyst

* Tram Bui

The Ruth Group, Inc. - SVP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the OrthoPediatrics Corp. Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Ms. Tram Bui with The Ruth Group. Thank you. Please go ahead, ma'am.

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Tram Bui, The Ruth Group, Inc. - SVP [2]

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Thanks, operator, and thanks, everyone, for participating in today's call. Joining me from the company are Mark Throdahl, Chief Executive Officer; and Fred Hite, Chief Financial Officer.

Before we begin, I'd like to caution listeners that comments made by management during this conference call will 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 involve material 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 Securities and Exchange Commission on March 7, 2019.

During the call today, management will also discuss certain non-GAAP financial measures, which are used as supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period-over-period. For each non-GAAP financial measure referenced on this call, the company has included a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings release. Please note that non-GAAP financial measures have limitations as analytical tools and should not be used 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 the live broadcast, November 8, 2019. Except as required by law, the company undertakes no obligation to revise or update any statements to reflect events or circumstances that take place after the date of this call.

With that said, I'd like to turn the call over to Mark.

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [3]

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Good morning, everyone, and thank you for joining us today on our third quarter 2019 earnings conference call. I'm pleased to review with you our strategic progress and our accelerated growth. I'll start with an overview of our performance for the quarter and then review our key growth initiatives, which include set investments, new products, acquisitions and the integration of Orthex, international growth, culture and clinical education. I'll then turn the call over to Fred for a detailed financial review and update to our full year 2019 guidance. We'll then open the call up to questions.

The third quarter was another period of systematic execution that produced the largest revenue quarter in the company's history, $20.7 million in sales and more than 31% growth year-over-year. We drove growth across all product lines, with trauma and deformity growing 31%; scoliosis, 29%; and sports medicine and other, 98%. Domestic growth was 35% and international growth was 16%. We're pleased with the impact of recent new product introductions together with the increased utilization of recent set deployments.

In addition to our strong trauma and deformity performance, we're pleased by the impact of new product sales supporting our scoliosis business with continued adoption of our small stature scoliosis system and Bandloc Duo introduced in December 2018 and February 2019, respectively. We also saw 3 of the 5 high-volume scoliosis surgeons who were out of practice in the second quarter returning to limited practice in the third quarter. While these surgeons will not immediately return to the same level of volume overnight, we're pleased to see their impact on third quarter revenues. And we anticipate that they will ramp up surgical volume at their new institutions.

Contributing to our overall performance was our first full quarter with Orthex, which was approved in multiple new accounts and validated our conviction that this innovative external fixation technology will thrive in the hands of our focused pediatric sales force. We look forward to the continued benefits from Orthex in addition to new product launches in trauma and deformity and scoliosis. And we believe that our sales force, which grew by 21% to 158 consultants during the quarter, continues to grow at a pace that supports our sales trajectory.

Finally, we're pleased that we continue to improve operating metrics, including gross margin increasing to 77% and a positive adjusted EBITDA of $0.7 million while staying on track to deploy $15 million to $17 million of consignment sets in full year 2019. We're confident that our progress to date will drive another year of strong growth, and that this confidence leads us to update full year revenue growth guidance to 24% to 25%.

Let me now describe the progress executing our integrated growth initiatives, starting with set deployments. We remain dedicated to increasing children's access to our surgical systems across the globe through our initiative to maximize instrument and implant set deployments. We continue to enjoy pent-up demand for our sets. Year-to-date, we have deployed an impressive $13.7 million of sets, an increase of 29% compared to $10.6 million for the same period last year. This included $1.7 million deployed in the third quarter, which keeps us on pace to achieve our targeted $15 million to $17 million in consigned sets for the full year 2019. We see steady contributions to revenue as the sets become fully utilized over a 12- to 18-month ramp-up period, and we'll continue to monitor the return on investment of each set to drive optimal utilization. Our set deployments continue to be split between legacy products and new systems, which brings me to our second initiative, new products.

We try to strike a balance between developing new technologies and continually improving legacy products. We started shipping our 2 new Cannulated Screw Systems domestically in September after receiving FDA 510 clearance in July. These 2 systems provide significantly expanded range of screw sizes and substantial enhancements to instrumentation, particularly for screw removal. The systems were designed in consultation with pediatric orthopedic surgeons so cases and trays are arranged specifically to follow procedural flow with color coding to speed the selection of appropriate instruments that match screw diameters, thus increasing efficiency and reducing operating room time. Surgeon feedback has been very positive so far with these 2 new systems, and we will continue to deploy more sets throughout the fourth quarter and into 2020.

We also received 510 clearance in August for PediFoot, the first pediatric-specific foot and ankle solution, which we expect to launch later this month. This is our first system to offer variable angle-locking screws, which we licensed from CoorsTek Medical in April and is designed to address common pediatric foot deformities such as cavus foot, flat foot, club foot and hallux valgus, among other small bone indications. Similar to our Cannulated Screw Systems, PediFoot was developed with input from a small team of eminent pediatric surgeons with a heightened focus on ergonomic instrumentation that enhances surgeon control.

With the imminent launch of PediFoot, we will offer 32 surgical systems, 7 more systems than the 25 in the third quarter 2018. We continue to grow our product offering at a pace that any possible new entrant would find daunting, and we look forward to the continued development of additional systems throughout 2020.

We are progressing our osteogenesis imperfecta nail as well as our slipped capital femoral epiphysis, neuromuscular scoliosis and spinal tethering development programs. We recently licensed a novel technology to treat patients with early onset scoliosis, which we are embodying in a second-generation system that is an alternative to growing rods. We're also continuing working with a European design firm on growing implants for scoliosis and Intramedullary Nailing so we can offer surgeons significant improvements to the current first-generation technology. We'd like to thank our development teams and our supporting physicians for their impressive progress developing surgical systems that enhance pediatric outcomes. Additionally, we are proud of our ability to attract innovative technologies for license or acquisition that expand our market opportunities.

And this brings us to our third growth initiative, acquisitions. We could not be more pleased with how well the Vilex/Orthex acquisition is going in the first full quarter we have owned it. We have seen significant interest by many of our surgeons in evaluating the Orthex system, and several of these evaluations have led to recent approvals at large institutions that Vilex had been trying to penetrate for the past 2 years. Multiple product evaluations have recently begun at other hospitals, and we look forward to converting more surgeons in the near term.

As a reminder, these are high-value complex surgeries similar to those in our scoliosis business. There are also well-established supplier relationships, so conversions take time. We recently supplemented our Orthex team by hiring 2 highly experienced sales managers with extensive competency in external fixation. Although half of our selling organization has been trained on Orthex, these 2 sales specialists will accelerate adoption of the system by helping penetrate new accounts and attending initial surgeries to ensure a good outcome. We're also adopting the same sales management approach that has driven our scoliosis business to growth rates of 30% and higher by systematically monitoring a comprehensive list of target surgeons, each with an assessment of their potential and the stage of conversion. We're also very optimistic about the international opportunity for Orthex and have seen an extraordinary degree of enthusiasm by our distributors who have access to this product.

We have also made substantive progress divesting the adult asset of BioLex, and we are extremely confident that we will have completed this divestiture by year-end. This will allow us to remain committed to our exclusive focus on the pediatric market while also recouping a meaningful portion of our investment. Additionally, we continue to review a number of other interesting acquisitions, all offering innovative technologies that can complement OrthoPediatrics' product offering.

Turning to international growth. We continue to sell in 43 countries outside the United States through 7 sales agencies and 38 stocking distributors. During the quarter, we transferred a trusted executive from our Warsaw headquarters, who happens to be European, to run our business in Europe and support our presence there. Earlier this year, we established the OrthoPediatrics European headquarters, and we anticipate having a warehouse operation by year-end. We remain excited about the growth in countries where our sales agencies sell directly to end customers, and we're working to finalize the conversion of another European stocking distributor in the next few months.

To maintain our leading position in international markets, we, together with all medical technology companies, have had to step up to major regulatory challenges with substantial increases in our quality and regulatory affairs staff. This will ensure that we remain compliant with the step-function increase in the rigor of regulations in CE market countries. While these investments have been substantial, we believe that they will generate significant future competitive advantage as other companies abandon products in countries requiring the CE mark.

I'd also like to point out that our company's dynamic culture and reputation in the orthopedic industry have allowed us to attract significant numbers of high-quality applicants for every quality and regulatory position we have had to fill. And this supports our belief that as one of the best places to work in Indiana, we are increasingly viewed as the orthopedic industry's employer of choice.

This brings me to corporate culture, which is our foundational initiative and lies at the core of our ongoing success. Our nonhierarchical culture continues to promote a high degree of engagement and commitment from all our associates. Visitors to our Warsaw headquarters sensed this immediately. We're organized around business teams that run our trauma and deformity and scoliosis businesses, directing product development, marketing, sales and the support from corporate functions such as operations, quality and regulatory affairs. Business teams focus all our associates on the customer, maximize engagement and makes us agile.

Our culture is also reflected in the recent dramatic expansion of our open-concept office space, which was completed during the third quarter. The physical expansion of our Warsaw headquarters is tangible evidence of our growth. This expansion also included doubling the size of our warehouse and constructing dedicated training and education facilities, which will support our continued commitment to sales training and clinical education.

Our clinical education growth initiative continues to differentiate us from other companies which offer few, if any, pediatric programs. Participation in medical meetings is an important part of our clinical education effort. In July, we were a gold sponsor of the International Meeting on Advanced Spine Techniques. In September, we were a gold sponsor for the Scoliosis Research Society's annual meeting. This was followed by our platinum sponsorship of the Annual Meeting of the American Academy of Cerebral Palsy and Developmental Medicine, where we hosted a pre-course on our locking cannulated blade plate and distal femoral osteotomy systems. Rounding out the quarter, we attended the Orthopaedic Trauma Association's Annual Meeting.

In October, the OrthoPediatrics Foundation for Education and Research supported the fourth annual OrthoPediatrics -- Pediatric Orthopedic Surgical Techniques course. This sold-out program, conducted in simulated operating rooms, brought 15 eminent pediatric orthopedic surgeons, together with 35 fellows and young attending surgeons and is now a standard requirement in many fellowship programs. The foundation also funded the second annual PediOrtho WEST course in October, a resident review course at Shriners Hospital in Sacramento that attracts young surgeons throughout the Bay Area. Additionally, the foundation sponsored for the eighth time the resident review program at Akron Children's Hospital, which draws approximately 125 residents annually from the Upper Midwest.

Our clinical education medical advisory board, composed of 10 eminent pediatric orthopedic clinical educators, has challenged OrthoPediatrics to train the next-generation of pediatric orthopedic surgeons. While state-of-the-art products and technologies are one aspect of our success, clinical education programs for young surgeons help us to advance the field of pediatric orthopedics, as does our unique 1,100-member surgeon community on DocMatter, a digital tool that enables expert surgeons to post cases or pose questions 24/7 and receive responses from fellow surgeons around the world. During the past month, we have seen approximately 77% of our members engaged in using this tool.

Set deployments, new product development, acquisitions, international growth, culture and clinical education. These are the integrated growth initiatives that cumulatively are strengthening OrthoPediatrics' competitive position and driving our growth.

Let me now turn the call over to Fred to review our financial results. Fred?

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [4]

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Thanks, Mark. As a reminder, the third quarter 2019 results include our first full quarter with the impact of Orthex. The impact of the Vilex is included in discontinued operations. .

Total revenue in the third quarter of 2019 was a record-setting $20.7 million, up 31% when compared to $15.8 million for the same period in 2018. In the third quarter of 2019, U.S. revenue increased 35% to $16.8 million when compared to $12.4 million in the same period last year, representing 81% of total revenue. International revenue in the third quarter of 2019 was $4.0 million, a 16% increase compared to $3.4 million in the same period last year, representing 19% of total revenue.

Our third quarter revenue breakdown by product category was as follows: trauma and deformity revenue in the third quarter of 2018 was $13.8 million, a 31% increase when compared to $10.6 million in the same period last year. We're pleased with the continued improvements from the first quarter of 2019, when we experienced a temporary slowdown in the elective deformity surgeries with strong performance during the significant summer-selling season, combined with our first full quarter with Orthex' external fixation systems.

Scoliosis revenue in the third quarter of 2019 was $6.5 million, a 29% increase compared to $5.0 million in the same period last year, which continues to reflect new surgeon conversions and new product adoption. As Mark mentioned, we also saw light revenue contributions during the quarter from 3 of the 5 key domestic surgeons that were temporarily out of practice in the second quarter due to changing locations or on sabbatical. Similar to trauma and deformity performance, we experienced strong scoliosis sales during the significant summer-selling season, which provides us confidence to achieve our updated total year growth guidance.

Lastly, sports medicine/other revenue in the third quarter of 2019 was $0.4 million, representing a 90% increase compared to $0.2 million in the same period last year. Although much smaller in size compared to our 2 other business segments, continued adoption drove nice growth.

Moving down the income statement. Gross profit in the third quarter of 2019 was $15.9 million, a 33% increase compared to $12.0 million in the same period last year. Gross margin in the third quarter of 2019 was 77% compared to 76% in the same period last year. Sales and marketing expenses in the third quarter of 2019 increased 23% to $8.8 million when compared to $7.2 million in the same period last year, and general and administrative expenses in the third quarter of 2019 were $7.3 million, an increase of 49% when compared to $4.9 million in the third quarter of 2018. The increase in expenses was driven by higher quality and regulatory efforts, along with increased depreciation from our significant increase in deployed sets.

Research and development expense were $1.4 million in the third quarter of 2019, which was a 24% increase compared to $1.1 million in the second quarter of 2018. And total operating expenses in the third quarter of 2019 were $17.4 million compared to $13.1 million for the same period last year driven by the previously mentioned items as well as the inclusion of Orthex' operating expenses.

Operating loss in the third quarter of 2019 was $1.5 million compared to a loss of $1.2 million in the third quarter of 2018 driven by higher sales and gross margin offset by higher quality and regulatory efforts, depreciation as well as stock-based compensation.

Adjusted EBITDA for the third quarter of 2019 increased to $0.7 million compared to a negative $0.1 million for the third quarter of 2018. The change was primarily driven by the increase in revenue and associated gross margin. Please note that there has been an adjustment to our previously reconciliation of 2018 adjusted EBITDA in that we no longer adjust for public company costs as well as unusual professional service and legal fees.

Interest expense in the third quarter of 2019 was $1.3 million compared to $0.6 million in the same period last year. The increase in interest expense was related to our increase in debt related to the Vilex and Orthex acquisition.

Net loss from continued operations in the third quarter of 2019 was $2.9 million compared to a loss of $1.9 million in the same period last year. Total net loss, including a small net gain from discontinued operations, was $2.7 million or a loss per share attributable to common stockholders of $0.18 per basic and diluted share compared to $1.9 million or a loss of $0.15 per basic and diluted share in the same period last year.

Turning to our balance sheet. As of September 30, 2019, our cash balance was $19.7 million compared to $21.9 million as of June 30, 2019. Purchases of property and equipment during the third quarter of 2019 were $2.0 million compared to $1.1 million during the same period last year. Including implants, $1.7 million of consigned sets were deployed during the quarter compared to $2.3 million during the third quarter of 2018. We have now deployed $13.7 million of sets for the 9 months ended September 30, 2019, compared to $10.6 million in the same period of 2018. It's a 29% increase and keeps us on track to achieve our total year 2019 set deployment plans of $15 million to $17 million.

As of September 30, 2019, total net debt was $51.2 million, including the $30 million term loan associated with the Vilex/Orthex acquisition. As Mark mentioned, we have advanced the process of finding a buyer for the Vilex' adults product line and expect a significant reduction in our outstanding debt position by year-end.

In terms of guidance, we updated the low end of our annual revenue growth for 2019 from 23% to 25% up to 24% to 25%. Additionally, we remain on track with our annual investment in deployed consigned sets in the range between $15 million and $17 million in 2019.

Let me now turn the call back over to Mark for some closing remarks.

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [5]

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Thanks, Fred.

To summarize, we are excited that we can report a quarterly revenue growth rate exceeding 30%. We're pleased that this acceleration in growth was produced by consistent performance across all 3 of our product lines. We are proud of our ability to execute systematically across multiple growth initiatives. We are convinced that this success continues to be driven by our exclusive focus on pediatric orthopedics. We're delighted by our initial success with Orthex and its likely contribution to future growth. We are confident that the divestiture of Vilex' adult assets will be completed by year-end. We are gratified that our investments in clinical education are enhancing our brand equity in the minds of experienced and newly trained surgeons alike. We are proud of our positive contribution to society by making a difference in the lives of children around the globe.

So on behalf of my colleagues, I would like to thank all our associates for their passion, their commitment and their hard work that made the third quarter such a success.

And with that, I'd now like to open the call up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Matthew O'Brien with Piper Jaffray.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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Just for starters on the Q4 guidance. I understand roughly 25% of your sales are generally generated in Q4, but this would be the biggest sequential step-down from an absolute revenue perspective that we've seen. This -- what you implied at the midpoint is about down [$2.6 million], and the most we've seen is [$1.2 million] over the last couple of years. So can you just help us understand where that big step-down comes from? Is it just a level of conservatism? Or is there something else that we should be mindful of?

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [3]

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No. You're right, Matt. The fourth quarter is always our softest quarter. It's our lowest quarter when you look across the 4 quarters. The summer months are always strong with June and July. We do have an uptick in December when there's a small break for the kids, but we do have lower sales in the fourth quarter compared to the third quarter. There's nothing, I would say, going on. We continue to be conservative, as we always have been, in our forecasting, and I think that just continues here throughout the rest of 2019.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [4]

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Okay. Fair enough. And then I'd love to -- follow-up question just to hear a little bit more about Orthex. I know it's early days, but a lot of interest in that product line. So as you're going to some of the accounts you already have relationships, can you just talk about what that conversation's been like? And then how much interest level you're seeing so far as you think about that product rolling into 2020?

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [5]

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Well, Matt, as we said, we are very, very pleased that the relationships we have with a number of leading surgeons, who are also big frame users, is making it reasonably straightforward to gain an evaluation. And then we've been very pleased that these evaluations have been going well. We would have expected, frankly, there to be a somewhat slower process of gaining evaluations given the stickiness of supply relationships with the several major suppliers historically of external fixation systems. And I think it just validates this expectation we have that with the nature of a pediatric-focused selling organization, we would have an easier task of gaining these evaluations. So I think that's what we see so far. There have been some very gratifying conversions already, and this is the sort of thing where you don't need many conversions to boost the sales growth rate of this thing. And at least in the first quarter, we owned it. I think we saw a significant acceleration of sales in July and August. The second -- no, it's, sorry, August and September, in August and September, the second 2 months of the quarter, we saw this very gratifying increase in sales. So we'll see what the fourth quarter brings. But so far, this thing has easily (inaudible) patients.

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Operator [6]

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Our next question comes from Ryan Zimmerman with BTIG.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [7]

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Congrats on the quarter. I want to ask, your gross margins were very impressive this quarter, and I don't think you called out international stocking distributor conversions. So maybe help us understand what drove the gross margin performance this quarter. And what we should be thinking about for the cadence of international stocking distributor conversions into FY '20? And then I have a follow-up.

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [8]

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Great. Thanks, Ryan. So the gross margin is really driven by the mix of our revenue, as you saw, 81%, a little higher domestic percentage of our total revenue. Again, summer-selling season is helping drive that. We also had the addition of the Orthex product, which is primarily sold on the domestic front with some international included, but they have very similar gross margins to our other products in that 80% to 85% range. And so as the domestic growth outpaced the international growth here in the third quarter, that helped drive our gross margins. .

If you look at the trend of our gross margin percentages across the quarters this year, it's very similar to last year. It's obviously just a little better, given the strong growth on the domestic side of the business.

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [9]

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And with regard to the international stocking conversions, we continue to work on a major one in Western Europe. That, we would hope, would be done by year-end. It is astonishing how complex these are in terms of various legal and regulatory requirements. But nonetheless, that is progressing well. We will then shift our attention to an even more significant conversion that will require perhaps several years to fully be played out, but this will be quite transformative with regard to our European business.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Director & Medical Technology Analyst [10]

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That's very helpful, guys. And then on set deployment, you're on pace to do $15 million to $17 million, as you said. Just directionally, I'm not looking for guidance for FY '20, but maybe just comment on where you see set deployment going in next year. Consistent with what you're doing this year, expect to accelerate? Just any color there, I think, would be directionally helpful.

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [11]

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Yes. We're very pleased with the set deployment that we've done this year and that we'll finish out strong this year. I think a couple of things drive that. Number one is demand for the legacy system, so fulfilling the demand we have on legacy systems, and then also the pace that we deliver new product introductions and the pace at which we roll out those new sets. So we're in the final stages, I think, of our strategic planning. That will roll into the budgeting process, which will determine what is that demand and the appetite for deploying sets next year. But it's really measuring the demand and how much of that we're going to fulfill, along with how aggressive we get on new product development. So I would say that we're not going to provide a number, but it's going to continue at a very healthy pace to support the growth of the business.

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Operator [12]

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Our next question comes from Rick Wise with Stifel.

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Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [13]

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Let me start with a question on the extra day that "you lost" in the second quarter that was a little bit of a headwind. You had indicated it would come back in the second half. Fred, how do we think about that impact in the quarter you just reported and/or the fourth quarter?

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [14]

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Yes. We did, in fact, pick up that extra day here in the third quarter. So that drove a small portion of the 31% growth that we saw, so we are back even. And the fourth quarter will have the same number of days that we had last year. So it'll be an even comparable.

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Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [15]

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And can you quantify that impact this quarter? I mean it's obviously modest. I mean it seems like a few hundred thousand dollars maybe of revenue.

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [16]

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That's right. It's pretty modest.

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Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [17]

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Okay. Second, and again, back to international briefly. I guess, a two-part question. One, international growth seemed a lot slower this quarter than when I look at the more typical mid-20s-ish kind of growth we've seen. Maybe help us understand what's happening this quarter? And what that might mean or not mean going forward? And maybe, Mark, you could highlight -- I mean, clearly, you're -- I feel like you're a little more focused on growth opportunities internationally, whether it's conversion, whether it's stepping up on the leadership front, investing in infrastructure. Maybe help us think about what you're trying to achieve. And will we see that impact of some of these investments and changes in 2020? Or no, it's going to take longer? Is this about sustaining that mid-20s kind of growth? Or could it accelerate? Again, any color would be welcome.

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [18]

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Well, with regard to the international growth, I think we have to admit that international sales are inherently lumpy. They are very much a function of, for example, set sales that we don't totally control. And in certain quarters, we get a lot of them, and others, we don't. We were very satisfied by the replenishment volume growth that occurred in the third quarter. And in many ways, that is the truest indication of strategic strength in markets because that's indicative of surgeries. We also saw some structural things that happened in the quarter, completely unrelated to primary demand such as a very large stocking order that didn't quite make the quarterly cutoff. And we'll enjoy that in the fourth quarter. And to be frank, we didn't need international growth in the quarter to achieve this sort of performance.

With regard to what we're trying to achieve internationally, particularly in Europe, I think we feel that we are all in -- that we are now in the right countries. So country expansion is not the issue. It is a drive for penetration, of market share growth in these areas. And so the conversion of stocking distributors to sale agencies is one element in that. Secondly is the investment in people in Europe. The individual that we moved to Europe to take over our business ran our trauma and deformity business worldwide for a period of time and, in fact, had actually been President of a distributor in Europe before we hired him. So he's a very experienced guy, and we were -- we will now be building out around him focused infrastructure on clinical training and education, on regulatory affairs and sales managers who will focus on specific country markets.

And then I think a third element of this is the huge investment we've been making in quality and regulatory, a lot of which is directed at compliance to the EU MDR and this other initiative of unifying regulatory standards in 7 of the major markets, including the United States. And we're doing that in the background of other companies who are actually coming to us, wanting us to buy their pediatric lines because they're going to abandon them. So I would think that over time, we would see a further acceleration of our international growth, particularly in Europe, as we do more than, to be blunt, skimming the market, which is what we have done historically.

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Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [19]

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Got you. And just one last one for me, if I could. Mark, you highlighted that you're reviewing other interesting acquisitions, which is always exciting to hear and makes tremendous sense, at least to me, as you continue to flesh out -- build out your very special portfolio. But I'd be curious to hear your thoughts on a couple of points related to that. How do we think about size, type? I mean, is this complementary and adjacent to everything you have? And in thinking about your balance sheet in round numbers, $20 million in cash, $50 million debt, are you, in a sense, restricted? Do you feel like restrained from doing anything until you sell Vilex? And can we assume that if, let's just say, Vilex cuts debt in half, plus/minus, I don't know what you're expecting, that then you're -- then you feel you have sufficient financial flexibility to go out and do what you want to do? A lot of questions in there, but I'd be curious to hear your thoughts.

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [20]

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Let -- as usual, let me try to answer the conceptual ones and leave the hard one to Fred with regard to adequacy of capital. We are right now evaluating both some small acquisitions that in no way would tap our capacity financially as well as some very significant acquisitions. These are all directly in our wheelhouse, with the exception of one that is of a longer-term nature that might move the company into an adjacency of nonsurgical products that are used by our customers directly. But at any rate, I think the key point is these will be most definitely complementary acquisitions. Some of those, for example, that we're looking at are in this whole field of early onset scoliosis or nonfusion technologies that are reversible, that we see the market moving to so that people at a younger and younger age can be treated before their spine deformities progress with surgeries that are not a permanent fusion of the back. And we see that as the future of pediatric scoliosis treatment. And so there's some very interesting things out there to look at that will further increase the innovation that our company can bring to the market. Now I leave it to Fred to answer how the hell we're going to pay for all this.

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [21]

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Absolutely. I think, as Mark mentioned, we continue to look at a lot of opportunities, many of them range in size, from very small nice tuck-ins to larger opportunities. And obviously, the smaller stuff we can execute ourselves on our own. As we look at larger things, the first step, as you mentioned, would be to get rid of some of the debt that we have on our books through selling the adult product lines of Vilex. But beyond that, we have a great strategic partner on our board and supportive of the company, Squadron, who helps us if we need to move in a quick fashion to support the business through short-term debt. I think longer term, if there's anything of size, it would obviously require a funding through the equity side of the balance sheet. And I think that could happen either before or after an acquisition to make sure we have funds available to pay for acquisitions, to pay for the operations of the business going forward and to fund any potential future acquisitions that we would be looking at as well. So I think it's a combination of all 3 things: Reducing the debt we have on our books now, helping -- getting help from Squadron, and then eventually, over time, some equity capital raise as well to shore up the balance sheet.

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [22]

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And just to amplify on what Fred said and answer your question about Vilex, the timing is such that the Vilex acquisition will have taken place before we make any further purchases.

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Operator [23]

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Our next question comes from Dave Turkaly with JMP Securities.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [24]

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So EBITDA, positive in the quarter, and I think we were looking for breakeven on the P&L sometime next year. I was wondering if maybe you could comment on that as a goal in 2020 or 2021.

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [25]

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Yes. I mean, it's a balancing act, as we've talked about, Dave. It's a balancing act between controlling the spending and driving growth opportunities that we see ahead of us. And so I think we'll continue to try to balance that equation best we can, but bringing in the Orthex acquisition is additional cost. Obviously, it was a nice addition to the P&L, actually helping some of the profitability, but those types of opportunities, as they are in front of us, we'll continue to take advantage of that. The quality and regulatory, I think, is a new world that we're in. It's not something that is temporary or that's just a quick project that we're working on. This is the new world that we live in, and it's a new world all of our competitors live in as well. And I think those costs are going to continue on. But we see that as a strategic advantage by supporting the qualification of CE mark on all of these products. When many other people are abandoning these marketplaces, we see this as a true competitive advantage, which will continue to help drive our growth. And so I think we are, again, balancing the opportunities we see to support the business and to drive the growth and advancements of this space with trying to get to profitability. We could be profitable very quickly, as you can imagine, if that's what we wanted to do. But we're going to continue to support the overall growth of the business that we see tremendous opportunities in as we see fit.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [26]

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Got it. And then I don't know if you want to talk about the contribution specifically from Vilex. But I think there was also Orthex and then maybe 4 or something to that order of magnitude, foot and ankle-type products that came as well, that I believe you said you might sell with PediFoot. I just wondered if you could comment on either the size of that or if that had any contribution? And how that is going along with? I think PediFoot is just launching (inaudible). It's probably early. But any thoughts there?

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [27]

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Well, certainly, Orthex is the biggy. These additional products that came along with it are minor. They are line extensions. They can be sold with some of our other products, and they are interesting in terms of fleshing out a product line more fully but from a financial standpoint would be very, very marginal. Orthex was the reason we did this deal, and that is what we're looking at growing robustly.

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [28]

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Yes. I would just additionally comment that those other product lines that we've looked to add to the PediFoot 510(k) is a process that is going to take time. It's going to require 510(k) adjustments, and we have not even started on that process, to be honest with you. So what you -- what's included right now is just continuing selling the Orthex and the eX-Fix product lines. In the future, in 2020, we'll be then taking a few of those other foot and ankle products, let's say, a staple and rebranding that under the OrthoPediatric name and bringing that to the marketplace under our product lines. But that is not something that contributed here in the third quarter. That will be something that will help us in the future.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [29]

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Got it. I guess one last one quickly, if I could. I think Zimmer got approval of a tethered product. And I would just like to get your thoughts on sort of them as a competitor and how maybe your system that you're developing kind of compares with that. Are they pretty similar? I would imagine they are. But any thoughts there?

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [30]

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They're based on the same principle. We would like to see ours as different. I think that one needs to recognize that Zimmer has been selling the only product that has been used in tethering off-label for a number of years. It's a product called Dynesys, and it was developed for the adult lumbar fixation market. I think Zimmer found itself in a very difficult regulatory quandary because FDA had, we are told, alerted it that it would not tolerate this product to continue to be sold in these quantities without there being some kind of regulatory approval. And that is why we think Zimmer saw the Humanitarian Device Exemption.

We do not see this as some harbinger of a new competitor in the pediatric orthopedic space, quite the contrary. So we actually view this, though, as very encouraging because it is the first time FDA has approved a device for spinal tethering. There will be others not only for spinal tethering but for nonfusion scoliosis treatment, and that is of enormous interest to us. And I think we said also, Dave, that our goal is to develop a portfolio of these products that are not fusion-related and that can be used with younger patients and that are reversible. And so in that general sense, we're very encouraged by FDA's approval of Dynesys.

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Operator [31]

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Our next question comes from Margaret Kaczor with William Blair.

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Anna Marie Nussbaum, William Blair & Company L.L.C., Research Division - Associate [32]

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This is Anna on for Margaret. I first wanted to focus on trauma and deformity again. And if you could just walk us through some of the primary drivers of growth this quarter, whether it was the contribution of Orthex or just continuing strong demand of legacy products, new products. Should we expect those same drivers to continue in the next several quarters? And then on top of that, the PediFoot launch in the coming months. And then just curious if you plan on launching Orthex internationally, too, in the near future.

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [33]

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Well, the story on trauma and deformity is a very boring one, Anna, because when we look at the growth rate of every product family in the trauma and deformity area, they were positive. And with one exception, I think, they were all in the 20% range. It is extraordinary how these products, all these product families in trauma and deformity, grew more or less consistently and contributed to this performance.

With regard to the PediFoot launch, we have been awaiting the few instruments that require us to finish out the sets, to build out the sets. Those are all here, and that product should be launched literally within a week or so. So we're very optimistic about the impact that PediFoot would have to this integrated portfolio of solutions for deformity and trauma correction.

And there has been considerable interest internationally in Orthex. And so we would anticipate that, again, it's a function of getting enough sets, but we will be aggressively putting that in the hands of distributors that will be representing it. And there's been considerable enthusiasm already from our international distributors in terms of taking that product on and promoting it.

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [34]

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Yes. As Mark mentioned, there is tremendous demand for that product, which we're excited to see. We're selling it today in Brazil, in Colombia, a few limited countries. But I think the big opportunity for that will be the continued expansion in those areas but, as well, getting the CE mark for that product. That product today has never had the CE mark on it. And so we are -- have focused resources working to obtain the CE mark. We don't think that's a quick process, given all the other activities going on in that space. But eventually, when we do get the CE mark on that product, we anticipate a high demand for that product across all CE-marked countries. And we're very excited about moving forward with that.

We did also, just in the month of September, early October, receive approval in Australia for the product for the first time. And so we've not yet sold it into Australia, but we'll be doing that here starting in the fourth quarter and beyond, so another very nice opportunity for us going forward.

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Anna Marie Nussbaum, William Blair & Company L.L.C., Research Division - Associate [35]

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And then my second one quickly is on the scoliosis side. Strong scoliosis revenue in the quarter again, and you said that you saw 3 of the 5 surgeon -- high-volume surgeons return to practice. Going forward, are these surgeons now included in guidance and even though that you're assuming that the other 2 come back? And then if I recall correctly, last quarter, you saw a number of conversion or surgeon conversions. Is this something you're also continuing to see?

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [36]

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As to the guidance, I'm certain that Fred has taken into account the 3 people who have returned to practice. They've all moved. It takes a time for each of the 3 to increase their volume, but we're seeing that occurring. The -- I think the other 2 are both on military deployment, and I'm not sure when they're coming back. But they were significant users, and they will. I think, though, the headline here with scoliosis is that all of these conversions that continued to take place simply increased the gene pool. And so we're not as dependent on 5 high-volume surgeons as we might have been. And with each passing quarter, the number of people using our scoliosis product grows. The scale of the business grows, and that dependency on individual surgeons decreases. So that's my conclusion with regard to this. It's great to see the 3 returning to practice, but I'm not sure this is even a factor that you specifically comprehend, Fred, in the guidance that you've put together. But you might want to comment on that.

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [37]

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Yes. You're absolutely right. I know the one, I think, is on sabbatical. He's not coming back in the fourth quarter, and it's not a level of detail that we would get into in the specific forecasting. We feel good about the scoliosis business in the fourth quarter regardless of those 2 surgeons. The 3 that have now started will be ramping up, which is going to help us, obviously. But the other 2 will benefit us later in 2020.

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [38]

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Fred has actually been very modest in not crowing about his prediction that the small stature system would have a dramatic impact. It has. And so that is, I think, another great headline here, that the small stature system complementing our normal system has been very helpful in account conversions.

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Operator [39]

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

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [40]

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So apologize if you've gone through this, but I didn't hear it. So I just wanted to try to get an understanding of what the true underlying growth was in the quarter. So I think you had an extra selling day, and then obviously, it's a contribution from the acquisition. So can you quantify those 2 things in terms of dollars or percent on the growth in the quarter?

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [41]

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Yes. As Rick was saying earlier, in the second quarter of 2019, we had 1 less selling day. And so that -- we did call that out on our call, which had a small impact. I mean, we're talking a couple of hundred thousand dollars. And we did pick that back up in the third quarter, which helped us, again, a few hundred thousand dollars. It's rounding. And so that helped us a little bit. That keeps us even-out year-to-date and in the fourth quarter will be comparable year-over-year with the same number of days.

The overall growth of the business, as you saw in all 3 segments, was up dramatically. The Orthex, to the extent that, that had an impact on it, all came in the T&D business, which grew nicely at 31%. But we're very pleased with the underlying growth in that business, that returned to the above 20% growth, which is where we had saw -- we saw that business growing previously, except for the first quarter when we had an unusual slowdown in the deformity correction business.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [42]

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Okay. So I mean, I guess, if we're estimating that the deals added $750,000 -- deal -- I'm sorry, not deals, I mean, is that a reasonable assumption?

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [43]

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Yes. We're not going to break out specifically what it is. The overall business, the growth is steady with or without the -- with Orthex. Orthex just gives us a little adder.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [44]

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Okay. But I mean, it sounds like you think that the underlying growth did improve with -- even stripping out these one-offs in the quarter.

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Fred L. Hite, OrthoPediatrics Corp. - CFO & Director [45]

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Absolutely.

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [46]

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(inaudible), Mike, of all of these trauma and deformity products, particularly one that's significant, is an external fixation device, in making us more attractive for total hospital conversions, more relevant, more competitive in total hospital conversions. And not having an external fixation device was a big gap in the product line. And now that that's closed, we would expect to see that together with our current trauma and deformity line or our legacy line, there will be an uplift in sales. And hopefully, it will help increase the growth rate of trauma and deformity, who knows, maybe even into the range of the scoliosis business, which has been so robust over the last years.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [47]

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Yes. Okay. So there's sort of a halo effect with that product line you acquired, the eX-Fix.

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [48]

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That's an excellent description. That's an excellent description, a halo effect indeed.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [49]

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All right. And then just one final question on the sales force expansion. So seems like it's been kind of tracking with your revenue growth, which I guess makes sense. Is that kind of where you'd expect it to continue going in the next few years?

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [50]

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Yes. There's no question that we would view the selling organization as needing to grow more or less in pace with sales. But as I'm sure you'd be aware, every territory has its own dynamics. And the key here is, we think, a new selling -- a sales management organization, where we've added the number of managing directors who are our employees in the field working with our distributors on strategically how does each of them scale their business so as to keep up not only with a bigger company but also more and more products. And so that is a story that will have 34 different chapters, each 1 for the 34 territories we have nationally. But in aggregate, the answer should be that the selling organization ought to grow with sales.

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Operator [51]

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Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Mark Throdahl for any closing remarks.

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Mark C. Throdahl, OrthoPediatrics Corp. - President, CEO & Director [52]

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Well, I'd like to just thank you all today for joining us and for your interest in our company, as we improve the lives of kids around the world while also enhancing shareholder value. So have a good day, everybody.

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Operator [53]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.