OrthoPediatrics Corp. (NASDAQ:KIDS) Q4 2023 Earnings Call Transcript
OrthoPediatrics Corp. (NASDAQ:KIDS) Q4 2023 Earnings Call Transcript March 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 and welcome to OrthoPediatrics Corporation's Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen only mode. We'll 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 like to turn the call over to Trip Taylor from the 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 will be filed with the SEC in the near future.
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 in evaluating its operations period over period. 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 these 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, March 7, 2024.
Except 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, and thank you for joining us on our fourth quarter and full year 2023 conference call. As we start all earnings calls, I'd like to begin by highlighting that we helped over 82,000 kids in 2023, a new record for OrthoPediatrics. Since inception, we've helped over 710,000 kids and including Boston O&P, our combined organizations have helped more than 1 million kids. This continues to be the most important metric of success for OrthoPediatrics, and each year we strive to increase our impact and benefit more kids. In line with our pre-announcement from early January for the fourth quarter of 2023, we generated quarterly revenue of $37.6 million, representing growth of 21% compared to the fourth quarter of 2022.
For the full year of 2023, we generated record revenue of $148.7 million, representing growth of 22% compared to the full year of 2022. Driven by favorable leverage in the cash portion of G&A, disciplined expense management, strong margins and healthy revenue growth. We are excited to report that we outperformed our original adjusted EBITDA expectations, producing a record adjusted EBITDA of $5 million in 2023. In addition, we're thrilled to see our prior acquisitions fully integrated and performing well with robust top line revenue contributions and profitability. Looking closer at the quarter, revenue and surgery scheduling was strong throughout, except during the final two weeks of December, when we started to experience lighter surgical volumes due to an uptick in RSV.
After RSV rates rose rapidly at the end of December and extended into early January, volumes quickly returned to more normalized levels. Hospitals appear to be managing their spikes of the respiratory season better and mitigating the impact on case schedules. Altogether, volumes and staffing continue to improve month-over-month and while still not running full tilt we are encouraged recovery in the environment is tracking our expectations for modest sequential improvement. Overall, we feel this headwind is lessening and we will remain cautious until we see further normalization. The diverse nature of our business continued to benefit OrthoPediatrics in the quarter. The global trauma and deformity, domestic scoliosis and OPSB business were very strong, offset by lower growth in international scoliosis.
Fourth quarter global T&D was very strong at 23% with growth led by sales of Pega products, PNP Femur, early sales of PNP Tibia and growth within the OPSB franchise. U.S. scoliosis revenue bounced back aggressively in the fourth quarter with 35% growth, despite a very slow few weeks at the end of December, new scoliosis users continue to increase significantly across the response and ApiFix product lines. Overall, global scoliosis growth was slightly muted by a continuation of slower than expected ordering in our Latin and South American business, resulting in a 31% reduction in OUS scoliosis sales and negatively impacting overall growth. We expect OUS scoliosis to rebound in 2024 and to act as a tailwind for the year beginning as early as Q1.
With multiple opportunities including continuing legacy product growth, several key new organic product launches, Pega sales expansion, normalization of international markets, positive longer term ApiFix data publications, a newly formed and rapidly expanding specialty bracing business OPSB and an early start in digital healthcare. We are confident in our growth prospects for 2024 and beyond. Importantly, we remain in an extremely secure financial position and are confident that our current balance sheet enables us to execute our long-term strategy without additional equity capital. Therefore, we are reiterating our revenue guidance for the full year 2024 of $197 million to $200 million, including Boston O&P historical revenue of $25 million, representing overall growth of 32% to 34%.
We are also issuing our full year EBITDA guidance of $8 million to $9 million and our expectation for set deployments of less than $20 million, as we continue to focus on improving profitability and reducing cash usage. We closed 2023 on an extremely high note. We achieved a record number of children helped, record revenue and generated record adjusted EBITDA. We continue to balance top line revenue growth with improved profitability on our way to cash flow break even sooner, a trend we expect to carry into 2024. Moving to our revenue segments. In the fourth quarter of 2023, we generated total trauma and deformity revenue of $27.1 million, representing growth of 23% compared to the prior year period. Strong performances from Pega products, trauma, Ex-Fix and OPSB, led revenue growth in the quarter.
We saw continued record Pega product performance with substantial growth of 59% in the U.S. and 32% outside of the U.S. Sales with Pega continued to be better than we ever expected and as we more deeply penetrate our U.S. accounts with the full Pega product portfolio and ramp international sales, we believe Pega growth will continue to be very strong globally in 2024 and beyond. Elsewhere in T&D, we continue to take share across our entire T&D portfolio, a trend we expect to maintain for several years. We enjoy a leading share position in the T&D franchise within the U.S. children's hospitals, and we plan to continue to execute our market dominant strategy with set deployment, new product development and superior service. On the R&D side, we received FDA approval and beta launched the PNP Tibia system in Q3 and performed more cases than we expected in Q4.
Initial surgeries have gone extremely well. So far, the surgeon usage rate has been higher than we forecasted, which bodes well for our full market launch of the PNP Tibia scheduled to start in the first half of 2024. We expect PNP Tibia to be an important growth driver in 2024 and for the next several years, and expect the full release of the new Pega GIRO product to make a positive impact as well. Driven by continued execution of our key account conversion strategy, we have seen an increase in the number of customers and the quantity of products used. Now with more high technology products coming to the market and a robust pipeline that was strengthened by the Pega acquisition. Our T&D business is positioned to deliver sustainable growth over the next several years as we execute our long-term strategy to capture greater than 50% market share.
We also have several prominent R&D projects in process within the surgical side of the T&D business. We're making great progress on the development of our entirely new pediatric plating platform, the P-3 project, which we expect will be world class and spawn further share taking opportunities for us within our plating franchise. We're also making solid strides on new external fixation devices that will continue the growth trajectory of our X-6 franchise. Further, we expect numerous new EU MDR approved products that will be launching in the EU market in the coming year to be impactful. Our OrthoPediatrics non-surgical specialty bracing business, our OPSB continues to perform extremely well, and I'd like to spend a little more time today outlining this significant opportunity that we have here.
We recently announced the official OrthoPediatrics specialty bracing brand or OPSB, featuring a new website that incorporates the full MDO Clubfoot and RHINO product portfolio, along with several new products as well as the acquisition of Boston O&P. We believe the OPSB franchise represents a large new source of capital friendly revenue growth. It's estimated that 80% of the pediatric orthopedic care happens before and after surgery, and we're extremely excited to now be better positioned to address this important segment. We estimate the U.S. non-surgical specialty bracing market is at minimum $775 million in total and conservatively $500 million of opportunity in the top 300 children's hospitals. Importantly, these custom fit braces do not require the upfront capital investment in consigned inventory or instrument sets.
It has always been our aspiration to surround the pediatric orthopedic surgeon with all the products they need to treat children, and we're thrilled about this opportunity to provide our surgeon customers with more of the products they use to treat their patients every day. Boston Orthotics & Prosthetics is the only sizable company with an exclusive focus on pediatric orthotic management, offering leading custom bracing, orthotic and prosthetic technology for the non-operative treatment of children whose lives have impacted by scoliosis, plagiocephaly and various neuromuscular disorders. Their portfolio of some of the most advanced individualized braces available to treat pediatric orthopedic conditions includes custom pediatric specific Boston bracing for scoliosis, lower limb orthosis and dynamic movement orthosis, DMO, as well as the Boston Band for plagiocephaly.
Partnering with world class medical facilities, including Boston Children's Hospital, Children's Hospital of Philadelphia, Nationwide Children's Hospital in Columbus, Ohio and Phoenix Children's Hospital, just to name a few. Boston O&P maintains 26 patient care clinics, primarily concentrated in the Northeast. Boston O&P's annual historical revenue is approximately $25 million. As we 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. We see many of the same characteristics in the OPSB opportunity that we witnessed when we started OP 17 years ago. These include a large $775 million U.S. TAM, 500 million of which is in the top 300 U.S. Children's hospitals, very limited competition, a general lack of ongoing innovation and the opportunity to provide elite level of customer service and support clinical education and training.
We also see an opportunity for strong margins, healthy profits and the potential to build a large business in a very capital friendly manner. Beyond all of that non-surgical specialty bracing fits with our goal of providing our customers with all of the products they need to treat children with orthopedic conditions and building further brand loyalty across our entire surgical and non-surgical portfolio. We do not plan to just scratch the surface of this segment of the pediatric orthopedic market, and we believe the Boston O&P acquisition makes that very clear. This is another market dominance play, where we plan to be very aggressive and to scale this business rapidly until we are the clear cut market leader. This has been a historically fragmented market and we're able to leverage our current channel to increase access and most importantly, provide service required to achieve optimal patient outcomes in a way that allows us to increase the partnership with all of our customers.
While the integration of Boston O&P will happen throughout 2024, we expect the rest of the OPSB franchise to organically grow aggressively this year. Once integrated our strategy to aggressively grow Boston will produce many years of future growth. Our strategy for the OPSB business is rooted in three core initiatives that we believe will enable OrthoPediatrics to deliver outside growth. These include salesforce expansion to drive adoption and scale usage, product development to build a competitive and comprehensive portfolio and the addition of new clinics to enhance profitability. While we're in the early innings of this growth journey, we believe we are well on our way to growing this business to be in excess of $100 million in the coming years.
Turning to the first initiative of salesforce expansion. In anticipation of the Boston O&P acquisition and to support the OPSB business as a whole, we have been preemptively recruiting OPSB specific sales representatives that will be integrated into our existing agency sales network. We continue to actively recruit and train new associates and so far we are pleased with the types of people we are attracting. With our pre-existing customer relationships, we expect to see rapid organic revenue ramp in each territory where our new OPSB reps are partnering with our existing surgical sales teams. Regarding the second initiative product development within the MDO team in Iowa, the OPSB team in Warsaw, and now the Boston OMP team at our OPSB headquarters in Boston, we are now staffed to deliver our aspiration to launch four to five new products every year beginning in 2024.
This cadence, along with the launch of several products in 2023, such as the MP light, MP plus the move bar DF2, the Rhino cruiser and the Aura Medical Levity device set us up nicely for strong growth. Beyond these product launches and partnerships, there will be several more in the coming months and quarters supporting our thesis that we can build a scale business in this space in the coming years. Looking at the third initiative, over the last several years, we have completed multiple acquisitions and partnerships, all of which we have successfully grown and will continue to grow, but never have we seen such a favorable response for our customers as when we announced our partnership with Boston O&P in early January. This is a true testament to the legacy of amazing service products and patient care that Boston O&P has provided our customers through their 26 clinics largely in the upper New England.
Our customer's feedback makes clear their desire to have a true partner in the non-surgical treatment of their patients and validates the large unmet need and the non-surgical support of their patients. In addition, it signifies our customer support of our growth strategy to scale Boston O&P to the rest of our 300 children's hospitals around the U.S. and in certain international markets. It'll take us a little time, but we feel this is an important first step that will open a larger opportunity for our company. Importantly, the operating economics for each of our existing clinics and future clinics is favorable for OrthoPediatrics. Generally speaking, we expect modest setup costs with limited additional capital outlay consisting mainly of leased office space, limited buildout and staffing orthotists growing with the scale of the opportunity.
Consistent with Boston O&P's historical revenue, we expect each new clinic will have the capacity to generate between $1 million and $3 million in revenue and produce a profit rapidly once fully operational. Again, it will take us some time for us to integrate Boston O&P and ramp the strategy, but we are already working to build a large funnel of opportunity and expect this to have a material contribution to revenue growth as early as 2025. Moving to the scoliosis business, in the fourth quarter of 2023, we generated revenue of $9.7 million representing global growth of 20% compared to the prior year. This global growth was led by an extremely strong domestic performance of 35% growth and muted by a few slower weeks in the back of December due to RSV rates and a slower quarter internationally.
Fourth quarter international sales declined by 31% and were lighter due to continued chopping ordering patterns from a few large international stocking distributors in Latin and South America. Despite this, we started to see a rebound across the international scoliosis business and we expect improved international scoliosis in 2024 as we lap these difficult comparables, Latin and South America and ordering improves and new revenue growth opportunities materialize as we launch scoliosis in Europe. We're very proud of the way this business is rebound and have a clear line of sight into continued improvement for the coming year. A highlight in the quarter is the success of our U.S. scoliosis business, which outpaced a rebounding international business.
The fourth quarter saw strong U.S. growth of 35%, driven from more users of response and ApiFix and the successful execution of new launches this year. In addition, we’re pleased to report that the surgeons from the three largest sites to transition to new practice locations are now settled in and have ramped up to speed, starting to perform more cases and returning to more normalized levels. This significant growth in U.S. scoliosis is representative of both the strength of this business and the opportunity we have for the future. We are bullish on 2024 scoliosis growth, as we exit 2023 with 25% more total users of response and ApiFix, several new products that were launched in 2023, such as response cannulated screws andresponse power, strengthening ApiFix data, a robust pipeline of 7D placements and an improving international outlook.
Further, the 2024 R&D pipeline is rich with extremely novel technologies that solve major unmet needs for our customers, specifically for patients with early onset scoliosis, an area historically we've never had products. We recently announced the FDA approval and beta launch of our first EOS product response rib and pelvic and expect to have the new vertiglide growing spine system FDA approved in 2024. Beyond that, we'll launch our new rod reduction instrumentation in 2024 that will support both the response spine system and our new fusion system currently in development. Lastly, we continue progress on the development of our electromechanical growing rod, although its launch will be a few more years. Notably, U.S. surgery scheduling trends strengthened late in Q3 and continued into Q4, but for a few weeks at the end of the year, we expect this strength to continue into 2024 as the elective market normalizes.
Moving on to international. In the fourth quarter of 2023, we generated international revenue of $9.3 million, delivering 13% growth on top of 67% growth in the fourth quarter of 2022. Fourth quarter of 2023 growth was led by extremely solid performance with our T&D products offset by slow scoliosis sales to stocking distributors in South America. We're pleased to see a continuation of the rebound in our international business in the fourth quarter and expect it to continue throughout 2024. International agency market sales continue to be particularly strong both in trauma and deformity and scoliosis. Progress in our German direct sales model continues to track favorably and should produce good growth in 2024. We have onboarded several new users and we look forward to increasing penetration in the German market.
We expect strong Pega product sales to continue into 2024 and likely 2025, as we deploy inventory and train our sales channel. Despite the scoliosis softness we experience from Latin and South America, we're making great progress launching scoliosis in Europe. We're performing first surgeries in new markets and with new surgeon customers. Additionally, we're making good headway and growing Australia and entering New Zealand, as we have had added cases and leadership in support of our longstanding agency partner and we’re starting cases in Canada following recent approvals and launch. Overall, we've got a really nice setup for our international business and we believe that 2024 will show great improvement beginning as early as Q1. That brings us to surgeon training and education.
In Q4, we hosted 98 unique training experiences for over 2,600 healthcare professionals. Among these events, our premier sponsorship of the Akron Resident Review Course and the Annual International Pediatric Orthopedic Society Meeting, IPOS, which takes place in Orlando every December. In 2023, we unveiled a new sponsorship level for the Pediatric Orthopedic Society of North America, POSNA and IPOS as the first ever Emerald level sponsor. Our presence at IPOS this year was marked by multiple hands-on workshops featuring five sessions, including one for our new specialty bracing business and the DF2 brace for kids with femur fractures. The full year 2023 saw record numbers of educational moments for pediatric orthopedic surgeons and other allied health professionals.
Globally, we advanced our partnership with multiple surgical societies, including the European pediatric orthopedic society, as well as special scoliosis meetings in the UK and Germany, each hosting several hundred European surgeons. We conducted a total of 391 learning experiences for our surgeon customers, thus advancing our ongoing commitment to training the next generation of pediatric orthopedic surgeons and leading innovation in our subspecialty around the world. Lastly, continued focus on our people is a critical part of our competitive advantage, which is why it's so important that we recently announced for the eighth time OrthoPediatrics was named as one of the best places to work in the state of Indiana. We are committed to fostering a culture that is positive, engaging and allows our associates to do their best work.
This important culture allows us to further our mission and successfully help more kids all over the world. With that, I'd like to turn the call over to Fred to provide more detail on our financial results. Fred?
Fred Hite: Thanks Dave. Our fourth quarter 2023 worldwide revenue of $37.6 million increased 21% compared to the fourth quarter of 2022. Growth in the quarter was driven primarily by the strong performance across global trauma and deformity, domestic scoliosis and the OPSB. U.S. revenue of $28.3 million, a 24% increase from the fourth quarter of 2022, growth in the quarter was primarily driven by our trauma and deformity product lines, scoliosis and OPSB. We generated total international revenue of $9.3 million, representing growth of 13% compared to the fourth quarter of 2022, which grew by 67%. Growth in the quarter was primarily driven by trauma and deformity offset by lower scoliosis sales to stocking distributors in South America.
In the fourth quarter of 2023, trauma and deformity global revenue of $27.1 million increased 23% compared to the prior year period. Growth in the quarter was driven primarily by share gain across our entire portfolio with strong contributions from Pega products, trauma, Ex-Fix and OPSB. In the fourth quarter of 2023, scoliosis revenue of $9.7 million increased 20% compared to the prior year period. Growth was primarily driven by increased U.S. growth of 35%, partially offset by canceled cases in late December from RSV and lower than expected orders in Latin and South America. Finally, Sports Medicine/Other revenue in the fourth quarter of 2023 was $0.9 million compared to $0.9 million in the prior year period. Turning to set deployment, $5.9 million of sets were consigned in the fourth quarter of 2023 compared to $6.3 million in the fourth quarter of 2022.
For the full year of 2023, we deployed $22.0 million compared to $20.1 million in 2022. The increase was driven by significant new product development deployments, significant Pega deployments as well as multiple consigned 7D units. Touching briefly on a few key metrics. For the fourth quarter of 2023, gross profit margin was 71.0% compared to 68.5% for the fourth quarter of 2022. The slight increase in gross profit margin was driven primarily by lower set sales to international stocking distributors. Total operating expenses increased $5.2 million or 18% to $34.8 million in the fourth quarter of 2023. The increase was mainly driven by increased volume related commissions as well as incremental personnel required to support the growth of the company.
Sales and marketing expenses increased $1.5 million or 14% to $12.4 million in the fourth quarter of 2023. The increase was primarily driven by increased sales commission expenses. General and administrative expenses increased $3.0 million or 18% to $19.6 million in the fourth quarter of 2023. The increase was driven primarily by the addition of personnel and resources to support the continued expansion of the business and an increase in depreciation and amortization expense. Research and development expenses increased $0.7 million or 35% to $2.7 million in the fourth quarter of 2023, driven by additional resources as well as increased payments to third party providers. Total other income was $1.2 million for the fourth quarter of 2023 compared to $0.4 million for the same period last year.
Adjusted EBITDA was $1.3 million in the fourth quarter of 2023. This compares to a loss of $2.2 million in the fourth quarter of 2022. This increase was driven by incremental revenue combined with cost controls across the organization. Net loss for the full year of 2023 was $21.0 million compared to a net income of $1.3 million last year. Fair value adjustment of consideration for the total year 2023 was a favorable $3 million compared to a favorable $26 million in 2022. Adjusted EBITDA for the full year of 2023 was $5.0 million compared to $0.2 million for the full year of 2022. We ended the fourth quarter with $82.3 million in cash, short-term investments and restricted cash. As of December 31, 2023, $10.0 million had been drawn on our new term loan with mid cap, post-closing the Boston O&P acquisition in January of 2024.
Our cash and restricted cash balance was approximately $60 million. With our current cash position as well as our new debt facility, we're well capitalized to continue to execute on our strategy. Given our strong balance sheet, positive adjusted EBITDA, our line of sight to cash flow breakeven and our recent acquisitions, we are in a position of tremendous strength. Turning to guidance, we are reiterating our expectation for full year 2024 revenue to be in the range of $197 million to $200 million, representing year-over-year growth of 32% to 34%. Additionally, we now expect to generate between $8.0 million to $9.0 million of adjusted EBITDA in 2024. We expect less than $20 million of new set deployed in 2024, representing our continued focus on driving the business to cash flow breakeven sooner rather than later.
Lastly, our S3 shelf registration filed in 2020 was fully sold in 2022. In keeping up with good corporate housekeeping, we will likely establish another universal shelf in 2024. As discussed previously, we have no need or plans to raise capital in the near-term, but we believe maintaining shelf is consistent with good corporate practices. I'll now turn the call back over to Dave for closing remarks.
David Bailey : Thanks, Fred. As we look back on 2023, we're proud of all that we've achieved and are confident that we have the right growth drivers in place for continued success in 2024. We expect positive trends in the business to continue, including robust top line revenue growth and continued profitability growth as we move toward cash flow breakeven earlier than anticipated. In addition, in 2023, we launched eight new products including RESPONSE Power Scoliosis, the GIRO Growth Modulation System, Pediatric Nailing platform Tibia System, the DF2 Brace, Mitchell Ponseti Plus Bar and the Levity Device. We continue to expect strong performance from our legacy products as a result of our heavy investment in set deployments in 2022 and 2023.
However, our recent acquisitions, along with ApiFix and OrthoX and our most recent organic product launches such as PNP, femur and tibia, Drive Rail and DF2 require less capital deployment to drive growth due to a faster return on invested capital. This combined with the launch and the growth of the OPSB franchise ensure we can maintain our high rate of growth while using less cash for inventory deployment, thus ensuring we drive to cash flow breakeven much sooner than earlier anticipated. All of our long-term plans, including profitability growth are supported by our robust balance sheet, strong cash position and access to debt. I've been with OP for nearly 17 years now and I'm not sure I've ever been more excited. We are in an extremely strong position with all the tools in place to help more children than ever before.
And I think our customers feel the same way. Together our OP associates, our customers and our shareholders are building something special and that is having a profound impact on the lives of children. The future is bright for OrthoPediatrics and we are just getting started. In closing, I'd like to thank our surgeon partners, my OP associates, our investors and all the innovators in pediatric healthcare for standing together to help kids. Operator, let's open the call for Q&A.
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