Q3 2021 OrthoPediatrics Corp Earnings Call

Good afternoon, and welcome to Ortho Pediatrics Corporation third quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. We will be facilitating a question and.

And answer session towards the end of today's call.

As a reminder, this call is being recorded for replay purposes, I would now like to turn the call over to Matt back So from the Gilmartin group for a few introductory comments.

Thank you for joining today's call with me from the company are Dave Bailey, President and Chief Executive Officer, and Fred Hite, Chief operating and financial Officer before we begin today, let me remind you that the Companys 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.

<unk> are subject to numerous risks and uncertainties and the company's actual results may differ materially for a discussion of risk factors, including among others. The risks related to COVID-19, the impact impacts of this pandemic may have on the demand of the company's products and the company's ability to respond to the related challenges I encourage you to review the company's most recent quarterly.

Our report on Form 10-Q, which we filed with the SEC soon.

During the call today management will also discuss certain non-GAAP financial measures, which are supplemental measure measures. Our 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 the non-GAAP measures financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute.

Ortho pediatrics financial results prepared in accordance with GAAP in.

In addition to the content of this conference call contains time sensitive information that is accurate only as of the date of this live broadcast today November 4th 2021, 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.

Thanks, Matt Good morning, everyone and thank you for joining us, we hope you're safe and well.

Before providing a business update and a review of the financials I'd like to highlight that we helped approximately 10400 children in the third quarter of 2021, bringing the total number to more than 226000 since the inception of orthopedic matrix doing the right thing for children remains our top priority.

Consistent with our pre announcement on October 13th we generated quarterly revenues of $25 1 million.

Representing growth of 13% compared to third quarter of 2020.

Before commenting on each business segment I wanted to address three key topics that have a broad scale impact across the medical device industry.

First being COVID-19.

While pleased with our mid teens growth rate in the third quarter. It is important to point out that the recent spike in Delta variant cases impacted children more than any other period during the pandemic, thus negatively impacting electric procedural volumes.

Secondly, we also saw the impact from hospital staffing shortages and increases increased cases of RSV, which in recent months have increased dramatically.

In September alone the impact of Covid, RSV and staffing shortages generated our largest number of canceled procedures since April of 2020.

While all of these factors negatively impacted elective procedure volumes in the quarter, we view them as transitory in nature that said, we believe the demand curve to recapture backlog cases will be flattened. This cycle as parents wait for COVID-19 infection rates to decline before revisiting clinics for diagnostic evaluation and staff shortage in <unk>.

Spittle reducing capacity.

Given this dynamic we do not expect to recapture the entire Q3 backlog until early 2022.

Lastly, the disruption associated with the global supply chain. So far has had little to no impact on our company. We are proud to say that we sourced approximately 98% of all materials and inventory domestically, which significantly reduces our exposure to global supply contracts.

Moving to our revenue segment.

In the third quarter of 2021, we generated quarterly trauma and deformity revenue of $16 $8 million.

Representing growth of 12% compared to prior year period.

Both was primarily driven by a strong international recovery continued trauma growth as well as Pnp and Cannulation screw growth as a result of ongoing investments and set deployments.

Due to a reduction in elective procedures in the third quarter from increased Covid and RSV hospitalizations in children and staffing shortages.

Deformity revenues declined on a sequential basis, although it was unfavorable environment for elected procedures. We continue to expand the number of active users using orth X another deformity correction systems.

In the third quarter of 2021, we generated quarterly scoliosis revenue of $7 $3 million representing growth of 11% compared to the prior year period International revenue was the primary growth driver in the quarter, while domestic environmental headwinds mentioned previously negatively impacted.

Electric procedures in the third quarter.

Specifically, our international business generated sales of $5 $7 million, an increase of 118% compared to the third quarter of 2020.

Growth in the quarter was primarily driven by a recovery in procedural volumes in EMEA and South America, improving agency sales and increased set purchases from stocking distributors. Additionally.

Additionally, in the third quarter of 2021, we sold the largest number of international instrument sets in the last 18 months.

While international procedure volumes have lagged the U S recovery, we believe increased set purchasing is a positive catalyst and gives us confidence in a more sustainable recovery over the immediate term as COVID-19 headwinds continue to dissipate.

I will now provide an update on our key initiatives, which we as compared to five strategic pillars.

Focusing on high volume children's hospitals.

Portfolio expansion.

Deployment and sales expansion strategic partnerships and clinical education.

There was substantial progress on several of these initiatives during Q3.

Starting with strategic partnerships in the third quarter, we announced distribution agreements on two enabling technologies in September we executed an exclusive distribution arrangement with C. Spine for the 70 surgical flash intraoperative navigation platform for pediatric applications. This five year agreement enables O P to.

Provide children's hospitals with a unique market leading navigation solution that we believe is ideal for children.

Over the last few years, there has been an increased rate of adoption of intraoperative navigation and children's hospitals, primarily for scoliosis surgery, and we expect that trend to continue.

During that time, we evaluated different navigation solutions and also successfully launched the Mighty Oak Medical Firefly patient specific navigation guide in the end, we determined that the combination of the Firefly and 70 products would offer our customers to radiation free solutions that we believe are the safest and most accurate options.

For children.

The 70 flashed navigation system is the only approved image guidance system that utilizes novel and proprietary camera based technology and machine vision algorithms. The system uses only visible light reducing radiation exposure by by eliminating intra operative C T and fluoroscopy for purposes of.

Registration both of which are commonly used with other technologies.

This results in a registration workflow that takes just seconds and allow surgeons to control the system within the sterile field. Our continued commitment to enabling technology is also demonstrated by the recent extension of our distribution agreement with <unk> medical to sell its Firefly patient specific technology as part of our strategy to offer a U.

<unk> suite of enabling technologies that complement our surgical systems.

Transitioning to apathy X and.

In the third quarter, we added an additional clinical site in the post approval study registry and subsequently added new App a VIX users. We now have 18 U S clinical locations that have both required IRB approvals, enabling those locations to enroll patients in the registry.

We have however, strategically pivoted away from adding additional clinical sites and focused on X on securing the next 10 to 20 commercial sites.

While the patient registry is extremely important from a data collection perspective. It is now independent of our broader commercial launch plans in 2022.

We conducted three major in person sales training courses in the third quarter with upcoming surgeon training course as scheduled.

We have identified numerous non registry sites completed initial commercial cases and booked additional cases in the fourth quarter.

Turning to clinical education in early August we were a diamond sponsor of the Baltimore limb deformity course, or several Orthodox training sessions were conducted which led to multiple surgeon conversions.

Additionally in October we continued our leading sponsorship of other key educational events, including the annual Srs or Scoliosis Research Society meeting in St. Louis and the sixth annual pediatric orthopedic surgical techniques or post course.

I am proud to say that ortho pediatrics was the originator and continues to be the leading supporter supporter of the post course since its inception in 2016.

This CME course focuses on senior residents fellows and early career surgeons to provide training and a variety of pediatric orthopedic surgical techniques through bolt didactic instruction and hands on labs led by pediatric orthopedic surgeons from prominent U S pediatric hospitals.

We believe our efforts address an unmet need for surgical training, which has a direct and positive impact on this sub specialty we look forward to supporting physicians at all career levels and driving superior outcomes.

The timing of the Srs conference lined up perfectly with our recent 70 partnership announcement, we were able to showcase this technology to interested surgeons and many who saw them demos were deeply impressed by the navigation system and its synergistic application to our broad product portfolio, while only a few months into the strategic partner partnership. This early.

Excitement gives us confidence, we will be able to drive robust surgeon adoption.

In addition, we hosted our first App affects user group at Srs, which was well attended by surgeons both from institutions in the registry and outside the.

The user group was conducted by renowned surgeons from children's healthcare of Atlanta.

Dayton Children's hospital and Stanford University.

Lastly, we were fortunate to have Dr. Jeffrey <unk> Sanford University lead alive, App, a fixed webinar with approximately 30 surgeons registered.

As a market leader, we believe it is integral to our mission to partner with pediatric orthopedic surgeons and advancing the entire field of pediatric orthopedics, not just selling more of our product our commitment to clinical education initiatives fosters collaboration and stronger partnerships with surgeons. Thus furthering this mutual objective.

In summary, we are pleased with our resilient mid teens growth in the third quarter and view the factors, which negatively impacted electric procedures in August and September to be transitory in nature, while we cannot control COVID-19 in RSV, we are taking action and making the investments to ensure our long term success as the market leader.

<unk> and pediatric orthopedics.

In the next few quarters, we expect to recapture cobot backlog cases, which ultimately gives us confidence to reiterate our 2021 revenue guidance range of $97 million to $101 million with that I'll turn the call over to Fred to provide more details on our financial results Fred.

Thanks, Dave.

Our third quarter 2021 worldwide revenue of $25 $1 million increased 13% when compared to the third quarter of 2020.

Growth in the quarter was driven primarily by the strong international recovery offset by a difficult operating environment domestically due to increased COVID-19 cancellations in late August and September.

In the third quarter of 2021 U S revenue was $19 4 million a 1% decrease from the third quarter of 2020.

Due to a deferral of elective procedures in the third quarter from increased tobit and RSV hospitalizations in children and staffing shortages U S revenue declined relative to the prior year period.

International revenue was $5 $7 million increased to 118% as compared to the third quarter of 2020.

From a geographic basis growth was driven primarily by strong sales in South America and EMEA.

Additionally, in the third quarter of 2021, we shipped the largest number of international instrument sets in the last 18 months.

In the third quarter of 2021 trauma and deformity revenue of $16 $8 million increased 12% compared to the prior year period.

Growth was driven primarily by a strong international recovery.

Continued trauma growth Pnp and Cannulation screw growth as a result of ongoing investments and set deployment.

In the third quarter of 2021, scoliosis revenue of $7 $3 million increased 11% compared to the prior year period.

International revenue was the primary growth driver in the quarter, while domestic environmental headwinds mentioned previously negatively impact elective procedures in the third quarter.

Finally sports medicine other revenue in the third quarter of 2021 was 1.0 million.

Representing 46% growth over the zero point $7 million in the same period last year.

Growth in the quarter was driven by another strong quarter of Telos revenue growth.

Turning to set deployment.

In the third quarter, we continued to execute our strategy upset deployment, specifically $1 $7 million of sets were confined in the third quarter of 2021 compared to $4.01 million in the third quarter of 2020.

Year to date 2021, we have deployed $11 1 million compared to $13 1 million in the first three quarters of 2020.

We continue to anticipate 13 million to $15 billion of set deployments in 2021, a somewhat lower number from recent years because of the significantly lower cost and greater return on investment of <unk> <unk> instrument sets.

Touching briefly on a few key metrics for the third quarter of 2021 gross profit margin was 74.0% compared to 79, 4% in the third quarter of 2020. This change was driven by a higher percentage of international revenue.

Including set sales, which generates a lower gross margin rate than our domestic revenue.

Total operating expenses increased $2 1 million or 10% from $20 $1 million in the third quarter of 2020 to $22 2 million in the third quarter of 2021 the.

The change resulted mainly from increased employee and travel expense increased sales Commission and increased research and development expense.

However cost controls during the softer COVID-19 volume enabled our operating expenses to grow at a lower rate than our revenue during the third quarter of 2021.

Fair value adjustment of contingent consideration benefit the P&L by $1 4 million in the third quarter of 2021 compared to a charge of zero point $9 million in the third quarter of 2020.

This impact was generated from an updated Monte Carlo simulation from our third party valuation firm.

We reported adjusted EBITDA of approximately $500000 in the third quarter of 2021 compared to $1 $1 million in the third quarter of 2020.

Given the lower than expected revenue in the quarter, we were pleased to add another quarter of positive adjusted EBITDA.

Year to date, we reported approximately $400000 of adjusted EBITDA and keeps us on track for an estimated full year of breakeven to positive adjusted EBITDA.

We ended the third quarter with $59 $1 million in cash and restricted cash.

Finally, turning to our outlook for the remainder of 2021, we are reiterating our revenue guidance range of $97 million to $101 million.

<unk> growth of 36% to 42%.

While we continue to take a measured approach given the potential impacts resulting from COVID-19.

The current operating environment has improved relative to the third quarter.

Given this backdrop, we remain confident in our original guidance range issued during our second quarter earnings call in August.

We also continue to plan on deploying between 13 and $15 million of new sets in 2021.

At this point I will turn the call back to Dave for closing comments.

Thank you Fred we continue to make progress on each of our five strategic pillars, which we believe are key to improving the lives of children, who suffer from orthopedic conditions.

I would like to conclude by thanking everyone for their interest in ortho pediatrics and look forward to updating you on our future progress and meeting many of you at upcoming Investor conferences with that said I'd like to turn the call back over to the operator to open the line for questions.

Thank you.

At this time to ask a question you will need to press star one on your telephone.

And to withdrawing a question just press the pound key once again Thats star one for questions one moment for questions.

Yeah.

Our first question will come from the line of Matthew O'brien from Piper Sandler you may begin.

Hi, good morning, guys.

<unk> on for Matt. Thank you for taking the question.

And I guess I wanted to start out with the <unk>.

Guidance range that you reaffirmed.

The mid point.

Hi.

Small step up from Q3 to Q4, which typically.

Typically a weaker quarter for the business and you know you guys mentioned you still kind of.

Feeling the impact of those ongoing macro headwinds due to COVID-19. So can you expand a little bit more on maybe some of the things that you have been seeing that give you confidence in that range.

Absolutely good morning.

So the first thing is that there is definitely a softening of the COVID-19 impact on the business. So while we're still seeing it it's much much less than it was during the third quarter and some of those deferred surgeries are now coming back onto the calendar for the fourth quarter, we're starting to see a bit.

Of that uptick already so that would be the first thing. The second thing is the international business did very well for us in the third quarter and we see that continuing into the fourth quarter. As you said typically the fourth quarter is a.

A lower quarter than third, but because of the strong international demand and these deferred cases coming back onto the calendar, we're confident that the fourth quarter will be equal to or better than the third quarter of this year.

Okay, Perfect and then secondly on <unk>. So you guys mentioned you have 18 of those IRB sites. When do you expect to hit that 20 sites enrolled milestone and then as you pivot.

Focusing on on the commercial ramp.

<unk>.

What kind of revenue contribution are you expecting the book and you.

You know potentially Q4, and where do you see that ramp going into 2022.

Yes. Good question I'll, let Fred you can comment on the revenue ramp if you'd like.

At this stage our focus has been up until about a month ago. Our focus has been obviously on these these registry sites and we announced in our last quarter earnings call that we would shift that focus.

Not purely away from the from the sites, but start to shift some of our focus on these commercial sides, which we did and we did successfully in Q3 and so.

It could take a couple of months to a couple of weeks, we're kind of in a holding pattern in getting these other two sites and these other two registry sites completed but I think that our focus now has is really on starting to commercialize the product in this first wave through the next 10 to 20 sites and we saw enormous interest there from sites.

We had frankly put on the back burner for the last year as we were focused exclusively on the registry and so we've made progress there. We did see some cases already from some of the commercial sites. Obviously, we did additional cases within the registry sites as well and but I wouldn't expect that in Q4, we would see an outsized influence.

By those commercial sites.

In Q4, specifically just because we are starting to ramp that that said because we have been able to decouple the registry sites.

And the commercial side, we expect that the <unk> product line will contribute substantially to our growth next year.

Okay perfect. Thank you guys.

Thank you Henrik.

Our next question comes from the line of Mike right.

May begin.

Good morning. This is David on for Mike Thanks for taking the questions.

I just wanted to follow up on one of the previous questions.

About guidance and the rest of 2021 I mean, it sounds like September was a pretty bad months.

Did note that you saw some.

<unk>. So I just wanted to hear you you called out three impacts deferrals hospital staffing an RFP. So are you seeing improvement across all of those three.

Sources of disruption.

And then in terms of guidance.

Got it into two.

If they stay where.

They are or do you see continued.

Improvement across those.

Those three factors.

Yes with respect to the environment. What we saw in Q3 was kind of a gradual worsening of case cancellations of that really started in August we saw the impact of Delta and then as kids started to go back to school certainly the impact of RSV and when combined the impact of Delta RSV and then.

Staff shortages, we just did not see the immediate snapback and electric procedures like we had seen at the height of the pandemic.

In late spring of last year that really snapped back in the fall or the summer and fall of last year.

Happened quickly and.

We saw a lot of cases cancel in August those Kansas got re put on in September and we saw a lot of cases re cancel again in September that said as we move into Q4, we have as Fred mentioned earlier already seen an environment, where COVID-19 cases are declining hospital admissions for RSV or declining.

We are seeing a much more favorable elective surgical environment in October already and again, we can't predict. This obviously no one can but we would expect to see that continue through the balance of the year and hope that we can see a continuation of progress here into the first part of next year related to guidance when we had.

Our second quarter call. We were just at the beginning of the Delta variant really starting to pick up in the U S.

And we didn't know when that was going to have a negative impact on us, but we anticipated it definitely negatively impacting the second half revenue and so Luckily we had that built in to the 97 to 101, I would say it happened a little sooner and quicker and more aggressively than maybe.

Two are having their spines navigated with with these types of technologies.

But it was our sense that over time that technology, that's well adopted in the adult space would ultimately become well adopted in pediatrics and while it is still a minority of cases that are done with intraoperative navigation is a it's a growing minority of patients who are treated that way and so we had walked alongside the <unk> technology like we frankly do.

Almost every partnership we've known these guys as well as the guys at 70 or 70 as well as these bond for a number of years and after looking at their technology in a number of others. We really felt like this radiation free or intraoperative radiation free type of technology that gives surgeons complete control of the operative theater in.

The surgical environment was an ideal product for for pediatrics beyond that we see other opportunities in the partnership with <unk> and <unk> to potentially develop applications outside of pediatric spine and at this stage, we see no other company, that's focusing on bringing navigation solutions too.

Children's hospitals outside of spine. So we think that's going to have a real impact on the business certainly in the next several years, we like the partnership we like both of the C spine and <unk> combined are good people running good companies and it felt like a really good time for this partnership ultimately we expect like all companies who do this we.

To gain share, particularly on the scoliosis side, but I think what could be unique for us is the bundle this with our scoliosis platform and in the future potentially bundle this with trauma and limb deformity products.

And I think this could be key to two large account conversions for us in the future.

That's right and when you combine this with Mighty open medical we see 70, and Mighty Oak medical both radiation free.

<unk> that increase the accuracy of screw placement and to those we view them as enabling technologies, meaning that theyre going to pull through more of our product sales and so with <unk>, we probably will be not.

Selling a lot of these units per se, but more placing them in hospitals with earn out agreements with the hospitals to pull through more scoliosis sales initially and today's point eventually pulling through more of our trauma and deformity correction product sales.

We'll see what that looks like it's not going to have an impact in 2021, but we do anticipate it's starting to have an impact in 2022 and then beyond.

Great. Thanks, so much.

Our next question Ryan.

Ryan Zimmerman from <unk> you may begin.

Hey, Thank you good morning, and thanks for taking the questions just two for me upfront number one just the instrumentation increase internationally.

Fred I'd love to just understand kind of what the capacity is from the distributor base or for Dave what the capacity is for more instrumentation and kind of.

Where they are at in terms of their demand.

Relative to kind of expectations of what you think over time and then the second question just love to understand kind of the interplay between Abbvie fix in response and how you think abbvie effects may or may not impact. Your response sales is maybe more parents and physicians choose to go with Abbvie. Thanks. Thank you.

Yeah, absolutely so very pleased in the third quarter to start to see some demand of our partners outside of the U S.

Requesting sets that they can then purchase which enables them to grow their business.

This is the largest set sale quarter that we've had in 18 months.

As many of our partners outside the U S are small family run businesses and they were trying to get their feet back underneath them related to cash.

The Covid cases, obviously last year, particularly in Brazil.

The beginning of this year was really shut down.

Did limited cases that has started to open up in the third quarter and as they see the strong demand and the big backlog that theyre facing they do in fact need more and more sets to meet that backlog. In addition to that we're working on quite a few approvals outside of the U S of many of.

Our surgical systems, which will then also increase the demand for new sets and so we would anticipate that the fourth quarter and really throughout next year. The set sales should be equal to or greater than what we saw in the third quarter more sets then means more replenishment.

<unk>, obviously in the future as well, which grows the overall international business.

Just one thing building on Fred's point, I think one of the things that we probably haven't talked enough about is the fact that a number of these products that we have launched or we're just at the beginning of their launch at the start of the pandemic.

<unk> has been launched in the United States, and obviously have been very successful Pnp femur now being our largest trauma and limb deformity product. We have has really been launched for the most part during the pandemic and so we like what we're seeing there and certainly we like the rate of surgeon adoption in the United States, but in most of our stocking distribute.

<unk> markets, we haven't launched that product, we havent launched <unk> and a very credible way, we certainly haven't launched app effects and some of these markets and so as our stocking distributors returned to a position where they can feel confident about their business and as we've told you guys in markets like Brazil, or the massive backlog of patients and.

It's just really good to see that as they start to become confident in their business. They're also confident.

In some of our newer products that have a history in the United States are being very successful and I think that's also a motivating factor for our stocking distribution partners to start.

Not only picking up their purchases of products that they have launched over the last several years, but really for the first time launching new products to major new markets and I think we're experiencing at the beginning of some of the tailwind that we had talked about.

Quarters ago.

Just addressing the <unk> response interplay, it's a really good question one of the primary drivers of the acquisition of <unk> beyond the fact that we felt like we wanted to be at the center of game changing technology to improve the lives of kids, who are traditionally being fused.

Maybe the next largest point was the fact that we felt like it would bring.

Certain well it certainly help drive.

The Halo effect that we see around the response business and I think when you think about <unk> now combined with Mighty Oak Medicals, Firefly technology as well as the 70 technology. All three of those technologies are without question driving response usage.

I think we're seeing.

Total we're seeing an increased number of users within hospitals, where we already have a foothold and we're able to open up new accounts as a result of some of those enabling technologies as well as people who have gotten involved with us on the <unk> side, So really like what we see there and I think as we commercialize apathy in a bigger way in 2022, we would expect the character.

The option characteristics of apathy likes to have a pretty strong impact on our ability to continue to grow our fusion business.

Yeah.

Thank you.

Our next question will come from the line of Sim Brodowski.

Truths.

You may begin.

Hi, Thanks for taking the questions and I'll, just keep it to <unk> and ask my two upfront just Wanna.

Make sure I didn't Miss there was a number of cases enrolled in the registry at this point, that's a number of years.

Previously given and then just in terms of shifting shifting towards the commercial model is there anything you saw in the registry of cases that gave you that increased confidence to move towards that or is this.

Really a response from demand from your commercial partners for this system in and wanting to get them access to it sooner and how should we think about the ability of these centers to ramp compared to the ramp we sell on the registry centers in over the second half of last year in the first half of this year. Thanks.

Alright, Thanks, Sam Great question. So we did not give a number and it's unlikely that we'll give a number going forward primarily for competitive reasons.

Our accounts that everybody has known that's known to everybody and we are in competition with another non fusion technology I will say that between cases that have been performed cases that are either scheduled or approved to be performed here in the next.

Several weeks, we're more than halfway through the registry.

And we feel good about that certainly the pace of that was impacted by electric procedures in Q3 factor.

The fact remains as kids have to come into clinics to be able to be approved for the <unk> procedure and we just saw in Q3 fewer X rays come through from our registry sites.

As a result of just the lower census of patients coming into clinics that said, we're extremely pleased to be on our way to this 200 patient I expect we will close that out in the first half of next year, but at the end of the day, what we have seen Sam is really really strong results in its first 100.

<unk>.

It's given us and I think the FDA the confidence to move to the next the next 10 to 20 sites. We've also seen really strong demand for our surgeons, probably some more aggressive or more early adopter surgeons that are outside of the registry that have wanted to have access to the technology and so I think the.

<unk> of the results we've seen combined with the interest we've seen from some pretty key accounts in the United States are driving our interest obviously in moving forward with this next 10 to 20 commercial sites and certainly being able to decouple. The registry with our commercial endeavors next year gives us a lot of confidence that <unk> will have a really nice impact.

On revenue growth next year.

Thank you. Our next question will come from the line of Dave <unk> from JMP Securities you may begin.

Good morning.

Thanks for the color.

Yeah.

The cost.

You're saying I know you mentioned the gross margin was down a bit I think because of mix.

But.

Obviously freight does not appear to be something that impacts you guys, but I was wondering if we could get your thoughts on any other inflation that you might be seeing whether it be labor or materials.

Of late.

Yes, Dave good good to hear your voice.

Knock on wood, we're very fortunate in that probably 98% of our products come from the U S. So we are not impacted by the delay in a lot of shipping from overseas, which is a huge benefit for us we've seen a small amount of inflationary.

The impact on the business, but I would say very very small on ancillary items.

The core business is <unk>.

Not been impacted and.

Long may that.

Continue we're hearing that there may be some pressures next year, but it's nothing I think that is going to have any major impact on the business. So right. Now we continue to have those conversations with our suppliers as we are hearing it from everywhere else, we have very little amount of transportation cost relative to our.

Overall business and so we think that will not have a major impact on the gross margin to your point the gross margin decline in the third quarter is exactly what you said, a a higher percentage of international, particularly the set sales, which bill out at zero margin definitely had an impact on the overall.

Profitability as the domestic sales return the gross margin should increase a little bit in the future.

Thank you for that that's a quick quick follow up.

It would seem to us that.

Pricing power you may have that given <unk>.

Given the nature of the products, you sell and where you are selling them but.

I guess, maybe you could just refresh our mind on price increases have.

Have you taken any do you think you can can you offset anything if it does come along in the future.

<unk>.

Yes, so we're heading into the budgeting process as you can imagine this time of the year and so every year at this time, we are having those discussions with our business teams to look at our pricing and look at our margin and not I would say be overly aggressive because.

We think we have fiduciary responsibility to be responsible to the hospitals, but where necessary. We have increased prices on selective items year to year in the past and we'll continue to do that next year any of these inflationary impacts would obviously factor into those decisions on <unk>.

Each product.

Price increases.

Yeah.

Thank you.

Thanks, Dave.

Thank you and I'm currently not showing any further questions in the queue.

This is all the time, we have for Q&A.

With that I'll go ahead and close the call.

This concludes today's conference call. Thank you for participating you may now disconnect.

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