Q3 2022 OrthoPediatrics Corp Earnings Call

November 1, 2022

Yeah.

Good morning, and welcome to the author of Pediatrics Corporation third quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.

We will be facilitating a question answer session towards the end of today's call. As a reminder, this call's being recorded for replay purposes.

I would now like to turn the call over to Emma Paulo from the Gilmartin group for a few introductory comments.

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 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 statements are subject to numerous risks 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 of this pandemic may have on demand for 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 annual report on Form 10-K, which was filed with the Securities and Exchange Commission on March three 2022 during.

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 for each non-GAAP financial measure referenced on this call. The company has included a reconciliation of non-GAAP financial measures to the most directly comparable GAAP.

Measures in its earnings release.

Please note that the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for ortho pediatrics financial results prepared in accordance with GAAP.

In addition, the contents of this conference call contains time sensitive information that is accurate only as of the date of this live broadcast today November one 2022, 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, Anna Good morning, everyone and thank you for joining us on our third quarter conference call as we start all earnings call I'd like to highlight after refining the calculation of our acquisitions. We helped over 17000 children in the third quarter of 2022.

Since inception, ortho pediatrics combined with MD orthopedics and Peg a medical does now helped more than 610000 children.

Doing the right thing for children is and will always remain our top priority.

In the third quarter of 2022, we generated record total revenue of $35 million, which includes stronger than expected revenue from our two acquisitions in the ortho and peg in medical and in total represents growth of 39% compared to the third quarter of 2021.

We generated domestic organic sales growth of 25% and overall global organic growth of 22% compared to the prior year period.

Organic international sales growth compared to the prior year period was 10% and was negatively impacted by unfavorable foreign exchange conversion.

Volume disruptions in Australia, and the EU due to staffing shortages.

And lower than expected set purchases from stocking partners due to the stronger dollar.

Although we generated 39% revenue growth in the third quarter of 2022 this was below our expectations while.

While the acquisition revenue outperformed our estimates organic growth was below our forecast despite strong commercial and operational execution surgeon conversions and market share gains we experienced extreme swings in case volumes in numerous locations late in the quarter.

Hospital staffing and capacity constraint.

A high rate of respiratory illness, or RSV negatively impacted case volumes.

As it has been published and multiple national publication, which referenced many of our largest customers RSV is filling beds and significantly reducing the capacity for surgery. This.

This started showing up in September and has continued through October .

All of these factors may continue for the remainder of the year and are now reflected in our reduced full year revenue guidance.

We have observed that unlike adult hospitals pediatric cases are not being moved to ambulatory surgery centers or ASC, where case capacity and efficiency seems to be much higher than in the hospital setting.

Obviously, we cannot control these unexpected environmental factors, but we can control our commercial and operational execution, which are producing strong growth in new users and increasing technology adoption across our expanding portfolio.

Looking at the business overall in the quarter through strong operational efficiency, we generated over $1 9 million of adjusted EBITDA. The last two quarters of positive adjusted EBITDA again, a positive trend forming the foundation to deliver on our goal of producing several million dollars and adjusted EBITDA in 2022.

And sets us up to further improvement in 2023.

Additionally, we took steps to strengthen the balance sheet, which will provide further flexibility to invest in sustainable growth initiatives. We believe our current position and continuing efficiency initiatives can enable sustained 20 plus percent sales growth profitability and cash flow breakeven in the next three to five years.

Moving to our revenue segments overall on the surgeon adoption front, we drove major new users with our response <unk> 70, and <unk> products.

FX response, Amethyst, PMT femur, and cumulated screws, all drove significant growth with <unk> more than doubling over prior quarter and prior year quarter.

In the third quarter of 2022, we generated total trauma and deformity revenue of $23 $9 million.

Representing growth of 42% compared to the prior year period.

This included combined global revenue of approximately $4 4 million for MD orthopedics and peg in medical.

Organic T&D was $19 5 million representing growth of 16% compared to the same period prior year.

Revenue growth in the quarter was driven by market share gains within our external fixation franchise and ongoing surgeon adoption of the Pnp femur granulated screw system.

In the third quarter of 2022, we generated total scoliosis revenue of $10 million, representing organic growth of 37% compared to the prior year period.

Despite key account disruptions, we added several new response <unk> users and deployed multiple demo units to 70.

<unk> saw continued improvement in the quarter more than doubling over prior quarter and prior year quarter.

The combination of response, Asics and 70 continue our progress taking market share from key competitors.

I'll now provide an update on the integration progress with our recent acquisition.

Starting with <unk> medical.

We are one quarter into the integration and are pleased with the initial progress as expected. Following the post acquisition announcement of the termination of nearly all legacy U S. Peg of distributors, we experienced some revenue disruption as the distributors work through their 60 day notice period. This.

This was immediately followed by record monthly revenue in September after the <unk> U S sales organization officially took control.

Looking forward, we are eager to get more purger instrument sets in the hands of our customers. So that we can meet the increasing demand for these innovative technologies.

Our surgeon customers feedback is extremely positive the product synergies are obvious and the cultural integration of this business is exactly what we had hoped for.

As we increase that allocation and train our global sales Representatives, we fully expect this business to grow revenue at greater than 20%.

Turning to the integration of endy orthopedics or MTO.

During the quarter, we continued seeing favorable acquisition synergies.

Strong sales, resulting from new distributor Reorders increased volumes and the opening of Brazil, Our first new market post acquisition.

Continuing to build on these synergies along with new product launches makes us confident that our non surgical franchise is going to be a great success and will also produce revenue growth greater than 20%, while delivering profit and positive cash flow.

Overall it is very early but we're excited by what we're seeing with the integration synergies and the initial stages of both of these acquisitions.

Feedback from our customers has been very positive and it is translating into increasing revenue already.

Both of these acquisitions as new sources of growth in key pieces and strengthening our competitive position.

Turning to new product development during.

During the quarter, we commenced confinement placements of our recently launched drive rail external fixation system, which complements the <unk> external fixation product and is leading to continued market share gains and new user acquisition.

We also progress with R&D projects across each segment of our business in.

In scoliosis, we're preparing to launch a number of response instrument set upgrades, including our new response <unk> rotation instrument.

And response cumulated screws.

We also furthered our early onset scoliosis system development and expect to launch our first ever power system. During the first quarter of 2023, which will allow surgeons to place both pedicle screws ancestors underpower with ease.

And trauma and deformity, we continued advancing our <unk> preplanning software along with <unk> and several peg a deformity correction products.

We're also nearing completion of our <unk> non surgical <unk> product for the non surgical treatment of pediatric femur fractures.

Lastly, we are preparing for the upcoming MTO line extension and the MTO spring assist clubfoot break to be available in the near future.

Transitioning to strategic partnerships.

As a reminder, during the quarter, we placed our first 70 surgical Nab intraoperative navigation system at St. Marys Palm Beach and continue to have several evaluation units currently working their way through the value analysis Committee.

Based on our early experience we are pleased with the initial pull through particularly of our response spine system with increasing utilization at accounts that have historically demonstrated low penetration.

We are increasingly confident several units will be converted into sales as we look into 2023.

As a reminder, ortho pediatrics own exclusive access to the 70 technology within the field of pediatric orthopedics and pediatric spine surgery within children's hospitals in the United States.

Lastly, we remain at the forefront of helping train the next generation of pediatric orthopedic surgeon and are particularly proud of our continued contribution across the community. So.

So far in 2022, we have conducted nearly 200 training events for health care professionals.

In September we served as a gold level sponsor of the Scoliosis Research Society in Stockholm, Sweden, where we conducted amethyst user meeting and hosted surgeons and our technology suite featuring 70.

Additionally, we continued as the only orthopedic OEM and leading sponsor of the American Academy for cerebral palsy, and developmental medicine annual meeting.

Finally, we were the premier sponsor of the pediatric orthopedic surgical techniques course offered to all pediatric orthopedic surgeon Fellows in North America.

With that I'll turn the call over to Fred to provide more detail on our financial results Fred.

Thanks, Dave.

Our third quarter 2022 worldwide revenue of 35 zero or $1 million increased 39% when compared to the third quarter of 2021.

Growth in the quarter was driven primarily by continued surgeon adoption.

<unk> and 22% organic growth.

In addition, we added $4 $4 million of combined revenue from MTO and Peg a medical.

In the third quarter of 2022 U S revenue was $26 5 million, a 37% increase from the third quarter of 2021.

The growth in the quarter was primarily driven by organic growth across scoliosis and trauma and deformity as well as the addition of MTO and peg a medical.

In the third quarter of 2022, we generated total international revenue was $8 4 million representing growth of 47% compared to the prior year period.

In the quarter was driven primarily by increased procedure volumes.

Increased set sales to our international stocking distributors as well as the addition of MTO and peg in medical.

In the third quarter trauma, and deformity revenue of $23 $9 million increased 42% compared to the prior year period.

This was driven primarily by organic growth from Cannulation screws and the PMT femur system.

As well as non organic growth from endy, ortho and peg a medical of $4 4 million.

In the third quarter of 2022, scoliosis organic revenue of 10.0 million increased 37% compared to the prior year period growth was primarily driven by increased sales of our response fusion system and assay fixed non fusion system.

As well as increased set sales to our international stocking distributors as they look to respond to increase backlog.

Finally sports medicine other revenue in the third quarter of 2022 was $1 1 million.

Which grew 8% compared to the prior year period.

Turning to set deployment.

$6 4 million obsessed were consigned in the third quarter of 2022 compared to $1 7 million in the third quarter of 2021.

Year to date, we have now deployed $13 $8 million up 24% compared to the first three quarters of 2021.

We expect another significant deployment in the fourth quarter of 2022.

Touching briefly on a few key metrics for.

For the third quarter of 2022 gross profit margin was 74, 1% compared to 74.0% in the third quarter of 2021.

Total operating expenses increased $10 7 million or 48% from $22 $2 million in the third quarter of 2021 to $32 9 million in the third quarter of 2022.

Sales and marketing expenses increased $2 1 million or 21% to $11 $9 million in the third quarter of 2022.

The increase was driven primarily by increased sales commission expense as well as the addition of our recent acquisition.

General and administrative expenses increased $4 1 million or <unk>, 37% to $15 1 million in the third quarter of 2022. The increase was driven primarily by the addition of personnel and resources to support the continued expansion of our business as well as the addition of our recent acquisitions.

In the third quarter of 2022, we recorded a $3 $6 million charge to operations related to trade name impairment.

Primarily driven by the decrease in forecasted revenue that was lower in comparison to the same period last year.

Research and development expenses increased <unk> 9 million or 69% to $2 $2 million in the third quarter of 2022.

The increase was driven by additional resources as well as the addition of our recent acquisition.

Interest and other expenses were $1 7 million in the third quarter of 2022, compared with <unk> 3 million in the same period last year.

In the third quarter of 2022, we realized a $23.0 million fair value adjustment benefit, which was driven by the decrease in forecasted revenue that was lower in comparison to the same period last year.

This compared to a $1 $4 million benefit in the third quarter of 2021.

We reported an adjusted EBITDA profit of $1 9 million in the third quarter of 2022 compared to a profit of zero point $5 million for the third quarter of 2021.

For the first nine months of 2022, we generated $2 5 million.

A positive adjusted EBITDA compared to zero point $4 million in 2021.

We ended the third quarter with 121 $6 million in cash short term investments and restricted cash.

This includes approximately $144 million in gross proceeds from our recent capital raise in August .

Less $31 million repayment of our line of credit.

We have materially increased our cash on hand pay down our debt.

And we have $50 million available to us on our line of credit.

Given the current economic environment, our strong balance sheet positive adjusted EBITDA in line of sight to cash flow breakeven plays.

Places us in a position of tremendous strength.

Turning to our outlook for the remainder of 2022.

We expected the elective surgical backlog would be extinguished in the second half of this year.

However, based on what we saw in September .

We believe children's hospitals will continue to operate at approximately 80% to 90% of their 2019 capacity.

Additionally, we continue to see high rates of RSV impacting children.

To be a headwind throughout the fourth quarter we.

We anticipate these headwinds will be offset by continued fundamental tailwind based on our leading competitive position, including an increased active surgeon base.

Growing backlog of deferred procedures.

Expanding product portfolio. The addition of key strategic partnerships.

Pending international approvals.

All which will enable further share taking.

For 2022, we now expect annual revenue to be in the range of $124 million to $125 million Rep.

Representing year over year annual growth between 26 and 27%.

This guidance assumes roughly $11 million of revenue contribution from MD ortho and peg a medical.

We now expect organic growth of 15% to 16%.

Lastly, we plan to deploy between 20 and $24 million of new sets in 2022, representing year over year annual growth between 47 and 77%.

In addition, we continue to fully expect to generate several million dollars of adjusted EBITDA for the full year of 2022 crossing a major milestone for our business.

Finally.

We wanted to provide an update regarding the SEC fact, finding inquiry that was previously disclosed by the company be an 8-K in late December 2020.

Earlier this year the SEC notified us that it had concluded its inquiry and did not recommend any enforcement actions from the SEC against the company.

At this point I'll now turn the call back over to Dave for some closing comments.

Thanks, Brad.

Overall, it may sound strange to express disappointment with 39% revenue growth, but there is no getting around the fact that our third quarter performance reflected continued disruptions in the operating environment.

We may see continued staff shortages and RSV impact Q4, but it is significant to note our competitive position is as strong as ever and there is no change in our posture of aggressive continued growth.

In fact, our competitive position continues to be enhanced by the prospect of improved profitability.

Set deployments.

Increasing surgeon adoption of key new products 70 placements and sales synergies produced from our two successful acquisitions.

These catalysts will all drive near term value and strengthen our market leading position.

We remain on track to continue expanding our profitability are bolstered balance sheet will support future growth when combined with disciplined investment will drive the company to cash flow breakeven.

Finally, our success remains grounded in a corporate culture that places, helping children first and at the center of everything we do.

All of these factors give us confidence in our ability to continue to successfully execute our long term strategy with that I'd like to turn the call back over to the operator to open the line for any questions.

If you'd like to ask a question. Please press star one one.

Our first question comes from Matt O'brien with Piper Sandler Your line is open.

Oh good morning, Thanks for taking the questions and congrats on the successful SEC conclusion, you announced this morning.

Wanted to start with the guidance for the year, because when I when I look at the increase in the MTO Slash Purger.

Guidance, a couple of million dollars for the organic business is actually down about six.

Would love if you could maybe parse out a little bit just the impact you're seeing from.

From the pandemic versus any other factors that are potentially impacting you and then I guess the next logical question is how that leads into <unk>.

2023, and what Youre thinking as far as as the business goes as we head into next year.

Yes ill talk about the environment here and then.

Fred maybe you take on some of the guide in the future.

I think what we've been seeing here, particularly in September as we noted in the script is just a.

Really.

And the wild swings in terms of volume of our key customers and so you've got these accounts that I think we're starting to really improve throughout the early part of the summer.

Still having staffing shortages, but certainly starting to improve and then you get hit with RSV and you have the combination of Covid staffing RSV.

And from account to account region to region, we saw particularly in September and moving into October some some wild swings, obviously thats impacting negatively impacting revenue growth, particularly in the on the organic side.

And I think going forward, what we have seen this in the past you typically see it as very rapid spikes and then a pretty rapid decline and certainly this has been noted in a number of our publications around all of these hospitals that have been really tapped out with with these RSV patients, but it is our hope.

Don't know that we can build it into our guide, but it is certainly our hope that we would see a month month and a half of this and this would improve but it's certainly very difficult for us to speculate as to how fast this.

The RSV kind of new RSV pandemic would would improve.

I think as we think about 2023, it would be our expectation, but this wouldn't last deep into Q1, and hopefully I know all of the marketplaces have been saying this for a long time, but hopefully we can get back to some type of normal operating environment as we look into 2023.

Yes, I would just add to that one other variable in there is FX.

So when you look at the organic business in the third quarter, we were unfavorably impacted by about $700000.

And the real change came in the month of September in Europe , and we anticipate those rates continuing into the fourth quarter. So.

We'll have another negative impact in the fourth quarter that will definitely combined with the third quarter impact. The overall guidance that was provided on the organic side of the business I think the positive is that the two acquisitions are doing much better than actually we thought they would be doing at this point and we.

See that continuing into the fourth quarter and into next year, particularly as we can get some sets and some inventory deploy domestically on the peg side of the business. So very excited about the growth drivers for next year related to peg it.

Got it that's really helpful. And then just on FX can you level set us on how the registry slash commercial rollouts going and I know a lot of people are really excited about that is it is it going to inflect a little bit more meaningfully maybe.

In 'twenty three and then David you mentioned some of these new products are introduced it seems like Theres a lot of them.

Can you maybe just maybe tease out some of the bigger contributors that we should see from a new product perspective next year. Thanks.

Sure sure.

You could expect to see <unk> contributing.

Contributing more next year in terms of growth. We have always said that we would expect the doubling of revenue.

From 2022 to 2023, certainly this has been kind of fits and starts.

With the <unk>, particularly early on with respect to Covid and certainly now with RSV, but it's really good to see.

That I would say at this stage in the volume of commercial cases is probably very similar to the volume of of registry cases, we still expect that registry to be closed at some point in time here in the early part of next year we've.

We've had a fair volume of surgeon movement from registry sites into commercial side. So a number of the cases that were in fact doing or not going into registry because they are in commercial sites, so that slowed that down a little bit but overall, we're very pleased with the way we're seeing.

<unk> grow expected to grow next year and we're extremely pleased with the results, we're seeing and so hopefully we'll be able to publish two year results.

Next year and I think that will also be another inflection point for the product.

As far as new product launches really pleased to see the organic growth of the scoliosis business at 37%.

Not too many companies growing 37% organic in the spine world at this stage and we think that's on the backs of certainly <unk> 70, but also some of the work we're doing on an R&D getting some of these day rotation instrumentation out. So we would expect next year to see that day rotation cumulated screws the constant work.

That we're doing on the complex scoliosis side.

Combined with <unk> 70 in <unk> to be real growth drivers. Obviously next year, we expect to see both MTO and peg it'd be growth drivers peg it, particularly when we get inventory, which we expect to get into the first quarter of next year expect that to be a driver and then we continue to take share with the Pnp femur. We believe that is a market leading.

<unk> technology, we think we're going to be able to take a lot more share next year and then <unk>. It comes right behind it. So there's a lot to talk about there and we just continue to give our sales force and our customers new technologies that I think youre going to continue to impact the business positively.

Great. Thanks, so much.

Thanks, Matt.

Okay.

Our next question comes from Rick Wise with Stifel. Your line is open.

Hey friend, David Anton on for Rick Thanks for taking the questions.

Okay.

So I mean.

First last quarter you talked about.

$2 5 million U S deferred procedure backlog kind of expect it to be rescheduled throughout 2022 can.

Can you talk to us a bit about how the.

Three Q like RSV headwinds impacted the U S backlog has it become law.

Larger now.

That elevated RSD volumes have kind of weighed on cash.

Pietro hospitals ability to do.

Our farm procedures and when do you think the backlog could be fully worked through is it like a positive tailwind for 2023 sales performance.

Yes, I would say at this stage.

It is very difficult to determine the magnitude of that backlog.

Harder outside of the U S. We know it's there.

And certainly we expected and was built into our guide in the second half that we would've extinguish that in based again on what we saw throughout the summer felt like we were starting to really pick up some steam there.

I mean, there is no doubt that our children's hospitals are not operating at full tilt right. Now we have surgeons that are anecdotally, telling us they're scheduled out right now through the early part of summer next year with major elective procedures and so while on one stage that is really good.

On another side of that was fairly uncommon and is indicative of just the capacity right now within these children's hospitals. So the backlog is probably growing I think Fred and I at this stage.

Hard time trying to quantify what that backlog is particularly when we see hospitals operating in 80, 90% capacity, particularly for these really complicated surgeries I would have to guess this is a tailwind for us when we can get back to a more normal operating environment and hopefully we see that in the start of 2023.

But it's very difficult to quantify at this point.

Yeah.

Okay got it.

And then on.

On <unk> your prepared remarks about <unk>.

Mary's placement driving responsible through which was very encouraging.

You mentioned last call that <unk>.

Your strategy for 70 placement target accounts with low <unk> penetration can you give us any additional color into the poultry or youre seeing seeing.

Seeing there how much further could go in.

An.

Additional hospitals currently Demoing systems, I guess, what's left to be done done there for them to convert and how many systems could we see come through next year.

Yes, it's a great question, so I would say.

To use the cliche, we are literally on the one yard line on the goal line here with a number of key accounts.

And a number of those key accounts are relatively new users a response and so we're a signature or so away from placing some of these units.

It's taken longer than we would've expected a suspect we're in the same boat with a lot of people at this stage, but we expect that this will have an impact certainly it's 2023, we expect to be able to place. The units that we acquired this year and then acquire more units in place more units in 2023, and Youre exactly right I mean, we have.

Four or five accounts right now that literally had no exposure to the response system and our scoliosis products. They were or are customers of ours on the T&D side, but now they are using response and they are using responds even before they're contractually obligated to do that.

<unk> unit placement, so we really like what we're seeing there and I think that 70 again 70 <unk>. These types of things are certainly driving the 37% organic growth we saw in Q3.

Even in a really choppy environment, and we would expect to see that that positive uplift due to 70 continue throughout the balance of the year as well as the balance of next year.

That's great color. Thanks, again for taking the questions.

Sure.

Our next question comes from Ryan Zimmerman with <unk>. Your line is open.

Hey, Thanks for taking the questions and good morning, guys I wanted to follow up on Matt's question on RSP and just.

Just ask a little bit.

Dave do you feel like you've sufficiently accounted for full impact of RSV in the fourth quarter.

Given how volatile it is I just want to make sure that you guys feel confident with the guidance that said.

For fourth quarter and 22.

Yes, great question, the RSP as Dave mentioned spikes really really fast. So if you look at the trend charts on the CDC website.

And then it comes down really fast as well.

Seems to have started about two months earlier this year than years past.

And so we anticipate that will come back down in the fourth quarter sometime in the fourth quarter and we feel pretty confident in the guidance that we have fully reflected that as well as the unfavorable FX, that's going to be impacting the business.

Would anticipate hopefully that we can get this behind us and start recovering a bit before the end of the fourth quarter and then starting into the first quarter. So good question. We think we've got it adequately.

Yes.

Bracketed if you will and included in the guidance.

Thanks, Fred and I are become on becoming honorary virologists here.

We have a.

Certainly been involved in a lot of conversations with our accounts to try to gauge exactly how it's impacting them.

Yes.

Helpful. Because clearly I couldnt call it even though I thought I'd try but.

I wanted to ask about it.

I appreciate the disclosures on organic growth I think it's a question of investors have been asking for an ortho pediatrics for a while and so.

Maybe you could just talk a little bit Fred the M&A contribution was up about $2 million.

Better than we expected from the prior guidance what are you one what can that run rate next year in terms of kind of your expectations then too I.

I did notice that you did a little bit over $4 million this quarter, but you're implying $4 million in December is there a reason why that flows down is that seasonality or.

Just kind of take me through your thinking around M&A and the <unk>.

Contribution from the businesses.

Yes, absolutely as we mentioned both businesses are doing better than expected, particularly purger in the month of September once it got into the hands of our domestic sales agents.

So very pleased with the third quarter performance both of those businesses followed the same trend as our seasonality in our legacy business and so as you know in the fourth quarter typically the sales are softer than they are in the third quarter because of the kids have obviously gone back to school and so that reduction.

That has included the $4 million versus the $4 four which you are correct is it.

Really just driven by the seasonality of the overall pediatric business. That's included in there listen both both of these businesses are very exciting.

And we anticipate the growth of both of these businesses will be faster than the overall revenue growth for our business and all of 2023 and probably beyond for a few more years. So as Dave mentioned really on the peg side, it's a matter of getting sets deployed that will start in the first.

Quarter end tail out into the second quarter and probably continue into the second half of next year as we continue to deploy.

Yes.

In that business.

On the <unk> side, the product launches, we opened Brazil for the first time with them, we have a lot of distributor relationships in Brazil. They were not selling there historically and so encouraged to have that country open to club foot correction and more to come.

I appreciate the color thanks for taking the questions guys.

I'm trying.

Our next question comes from Sam Brodowski with Truest. Your line is open.

Hi, good morning, Thanks for thanks for taking the question.

Just one more on that.

And one more on the acquisition good morning, and then.

So can you parse out at all a little bit and maybe the mix between in that $4 4 million between the two.

Isn't about I think sort of a flat sequential for MTO or is there an increase there from <unk>.

Yes, so the businesses combined I think about half of it was domestic half of it was O U S. So both of those businesses are more international than our legacy business, which is about 25% outside of the U S.

And again, we saw nice growth from both <unk> as well as peg it within the quarter and we anticipate that continuing.

Okay, and then maybe just on <unk> when we think about that <unk> with the continued success is that $2 six ish million revenue is that like a reasonable run rate I think for next year.

I think thats reasonable for this year it should grow on that for next year.

Great.

And then just.

At a higher level, when we think about the algorithm to get to 20% organic growth.

I mean.

<unk> has been performing really well in the past two quarters on an organic basis.

Mid teens growth call it for for the trauma and deformity business is that how we should be thinking about the businesses in 'twenty three and beyond or is there maybe.

Maybe some acceleration in the trauma and deformity business. Thanks for taking the question.

Yes, I would expect the trauma and deformity business to continue to accelerate again, how do we get back to a more normal environment, particularly on the elective deformity correction side, we had a fantastic quarter of taking share on the in the external fixation franchise. The devise rail combined with <unk> has had a big impact and we expect that to.

That combined with DNP in cumulated screws to continue to drive growth throughout the balance of 2023, obviously the skull businesses growing faster. It has historically grown faster and again with <unk> and <unk>, we would expect that business to continue to grow but I think when you combine purger mbo and all that we've got going on the T&D business.

Now in a normalized environment as well as everything we've got going on in the <unk> business.

We are very bullish about our capacity to grow organic sales growth by north of 20%.

Thank you.

Thanks Sam.

Our next question comes from Mike Matson with Needham <unk> Company. Your line is open.

Good morning.

I wanted to ask about the trademark impairment.

I didn't completely understand what that was related to.

Yes, both the trademark impairment and the $23 million on the accretion both of those are related to <unk>.

Okay.

That imply that the.

The sales have been lower than you expected or planned for.

Yes, so the way that works is we provide a forecast.

10 year forecast actually to a third party, who goes through a valuation analysis and that was completed an updated here in.

In September .

In that envelope.

For the forecast.

Which is lower than we had anticipated.

Impacted the impairment and then that flows through to the <unk>.

Accretion analysis as well.

As a reminder, the accretion is related to a.

Four year system sales payment so its an earn out in April of 'twenty 'twenty four.

Okay and to what degree I mean, obviously youre launching this thing during the pandemic, so mainly related to COVID-19 or were there any other issues there that caused that to maybe not do as well as the thought of being slower in terms of the ramp.

I would just say that we were obviously much more bullish when we didn't know we were going to be facing.

Three years of a COVID-19 environment. So when we acquired this business during the first month of the pandemic.

We expected the rollout in the registry and everything obviously to be filled much quicker and now that I think from our standpoint long term, we have really no change in our view of what this technology is doing and obviously is growing our scoliosis business in a substantial way even though it is still relatively small I think that the expectations for this.

Business, given the impact of pandemic and everything else is probably pushed out a few years and that certainly impacts impacts the valuation absolutely okay.

And then just.

We are seeing this merger with orthopedics and spine and orthopedics is probably one of the few companies out there that had some sort of pediatric business, probably more in the trauma and deformity area than in spine and vertically but.

I'm just wondering what your views are on the deal in terms of what it means for ortho pediatrics I mean, I'd imagine there is probably going to be some disruption.

Combined the companies, but longer term is there a risk that they could become more of a.

Larger player in the pediatric market maybe.

Yes, our biggest concern upfront was just how we ensured that we had a very strong partnership with with C spine and know the management quite well there and the biggest concern was just to make sure that we were all still full go in terms of the.

70 arrangement not just on the scoliosis side, but work that we're doing in partnership to develop technologies on the trauma and Linda forming side and we're very confident that that's a full a full go so I guess I can't comment comment for sure on what's going to happen there, but ortho fixed was.

Didn't particularly impact our revenue growth as a Standalone company. My suspicion is that this won't have a big impact or any impact on us as they try to integrate into an adult spine company.

And I think that probably provides us with some real opportunity. If there are some places, particularly outside of the United States, where they may see disruption.

Some nice opportunities, particularly with our expanded international footprint post <unk> acquisition.

Okay. Thanks, and then finally.

Just given where the gross margin doesn't look like you're really feeling neither contemplation of any pressures, but just wanted to check in on kind of what youre seeing with regard to inflation in your supply chain.

Yes.

Absolutely correct I mean, there is a little inflation, obviously in transportation and a few pockets here or there, but nothing thats impacting the margin of the business today or that we would anticipate in the future.

The lowering of the set deployment numbers by a few million dollars is some leftover legacy problems from suppliers again trying to get that one last instrument into the set before we can deploy it and some dates are moving out for deliveries from some of our suppliers. So that will that will push some of.

The deployment into next year.

But inflation wise, we're in good shape.

Okay got it thank you.

Thanks, Mike.

There are no further questions at this time I'd like to turn the call back over to Dave and Fred for any closing remarks.

Great well all of you at summit.

And we look forward to talking to several of you at some upcoming investor conferences. Thank you.

This concludes the program you may now disconnect everyone have a great day.

The conference will begin shortly to raise Johan during Q&A you can dial one one.

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Good morning, and welcome to the Orthopedic Pediatrics Corporation.

<unk> third quarter 2022 earnings conference call at this time, all participants are in a listen only mode.

We will be facilitating a question and answer session towards the end of today's call.

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to <unk> from the Gilmartin group for a few introductory comments.

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 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 statements are subject to numerous risks and uncertainties and the company's actual results may differ materially for a discussion of risk factors.

Among others the risks related to COVID-19, the impact of this pandemic may have on the demand for 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 annual report on Form 10-K filed with the Securities and Exchange Commission on March 32022.

During the call today management will also discuss certain non-GAAP financial measures, which are supplemental measures of performance.

He 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 non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings release.

Please note that the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for orthopedic <unk> financial results prepared in accordance with GAAP.

In addition, the contents of this conference call contains time sensitive information that is accurate only as of the date of this live broadcast today November <unk> 2022, 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.

Since inception, ortho pediatrics combined with MD orthopedics and Peg a medical has now helped more than 610000 children.

Doing the right thing for children is and will always remain our top priority.

We generated domestic organic sales growth of 25% and overall global organic growth of 22% compared to the prior year period.

Organic international sales growth compared to the prior year period was 10% and was negatively impacted by unfavorable foreign exchange conversion.

Volume disruptions in Australia, and the EU due to staffing shortages.

And lower than expected set purchases from stocking partners due to the stronger dollar.

Although we generated 39% revenue growth in the third quarter of 2022. This was below our expectations, while the acquisition revenue outperformed our estimates organic growth was below our forecast despite strong commercial and operational execution surgeon conversions and market share gains we experienced X.

Stream swings in case volumes in numerous locations late in the quarter.

Hospital staffing and capacity constrained and a high rate of respiratory illness, or RSV negatively impacted case volumes.

As it has been published and multiple national publication, which referenced many of our largest customers RSV is filling beds and significantly reducing the capacity for surgery.

This started showing up in September and has continued through October .

All of these factors may continue for the remainder of the year and are now reflected in our reduced full year revenue guidance.

We have observed that unlike adult hospitals pediatric cases are not being moved to ambulatory surgery centers or ASC for case capacity and efficiency seems to be much higher than in the hospital setting.

Looking at the business overall in the quarter through strong operational efficiency, we generated over $1 9 million of adjusted EBITDA.

Last two quarters of positive adjusted EBITDA began a positive trend forming the foundation to deliver on our goal of producing several million dollars and adjusted EBITDA in 2022.

And sets us up to further improvement in 2023.

<unk> ability and cash flow breakeven in the next three to five years.

Moving to our revenue segments overall on the surgeon adoption front, we drove major new users with our response <unk> 70, and <unk> products.

Sure. Thanks response, Amethyst, Pnp femur, and cumulated screws, all drove significant growth with app effects more than doubling over prior quarter and prior year quarter.

In the third quarter of 2022, we generated total trauma and deformity revenue of $23 9 million.

Representing growth of 42% compared to the prior year period.

This included combined global revenue of approximately $4 4 million for MD orthopedics and peg in medical.

Organic T&D was $19 5 million representing growth of 16% compared to the same period prior year.

Revenue growth in the quarter was driven by market share gains within our external fixation franchise and ongoing surgeon adoption of the Pnp femur granulated screw system.

In the third quarter of 2022, we generated total scoliosis revenue of $10 million, representing organic growth of 37% compared to the prior year period.

Despite key account disruptions, we added several new response <unk> users and deployed multiple demo units to 70.

<unk> saw continued improvement in the quarter more than doubling over prior quarter and prior year quarter.

The combination of response, Asics and 70 continue our progress of taking market share from key competitors.

I'll now provide an update on the integration progress with our recent acquisition.

Starting with <unk> medical.

This was immediately followed by record monthly revenue in September after the <unk> U S sales organization officially took control.

Looking forward, we are eager to get more peg of instrument sets in the hands of our customers. So that we can meet the increasing demand for these innovative technologies.

Our surgeon customers feedback is extremely positive the product synergies are obvious and the cultural integration of this business is exactly what we had hoped for.

As we increase that allocation and train our global sales Representatives, we fully expect this business to grow revenue at greater than 20%.

Turning to the integration of endy orthopedics or MTO.

During the quarter, we continued seeing favorable acquisition synergies.

Strong sales, resulting from new distributor Reorders increased volume and the opening of Brazil, Our first new market post acquisition.

Overall it is very early but we're excited by what we're seeing with the integration synergies and the initial stages of both of these acquisitions.

Feedback from our customers has been very positive and it is translating into increasing revenue already.

Both of these acquisitions as new sources of growth in key pieces and strengthening our competitive position.

Turning to new product development during.

During the quarter, we commenced consignment placements of our recently launched drive rail external fixation system, which complements the <unk> external fixation product and is leading to continued market share gains and new user acquisition.

We also progress with R&D projects across each segment of our business in.

In scoliosis, we're preparing to launch a number of response instrument set upgrades, including our new response be rotation instrument.

And response cumulated screws.

<unk> underpower with ease.

And trauma and deformity, we continued advancing our <unk> preplanning software along with Pnp tibia and several peg a deformity correction products.

We're also nearing completion of our <unk> non surgical <unk> product for the non surgical treatment of pediatric femur fractures.

Lastly, we are preparing for the upcoming Mbo line extension and the MTO spring assist clubfoot break to be available in the near future.

Transitioning to strategic partnerships.

Based on our early experience we are pleased with the initial pull through particularly of our response scientists with increasing utilization at accounts that have historically demonstrated low penetration.

We are increasingly confident several units will be converted into sales as we look into 2023.

As a reminder, ortho pediatrics own exclusive access to the 70 technology within the field of pediatric orthopedics and pediatric spine surgery within children's hospitals in the United States.

Lastly, we remain at the forefront of helping train the next generation of pediatric orthopedic surgeon and are particularly proud of our continued contribution across the community.

So far in 2022, we have conducted nearly 200 training events for health care professionals.

In September we serve as a gold level sponsor of the Scoliosis Research Society in Stockholm, Sweden, where we conducted amethyst user meeting and hosted surgeons and our technology suite featuring 70.

Additionally, we continued as the only orthopedic OEM and leading sponsor of the American Academy for cerebral palsy, and developmental medicine annual meeting.

Finally, we were the premier sponsor of the pediatric orthopedic surgical techniques course offered to all pediatric orthopedic surgeon Fellows in North America.

That I will turn the call over to Fred to provide more detail on our financial results Fred.

Thanks, Dave.

Our third quarter 2022 worldwide revenue of 35.0 million increased 39% when compared to the third quarter of 2021.

Growth in the quarter was driven primarily by continued surgeon adoption, resulting in 22% organic growth.

In addition, we added $4 $4 million of combined revenue from MTO and peg in medical.

In the third quarter of 2022 U S revenue was $26 5 million, a 37% increase from the third quarter of 2021.

The growth in the quarter was primarily driven by organic growth across scoliosis and trauma and deformity as well as the addition of MTO and peg in medical.

In the third quarter of 2022, we generated total international revenue was $8 4 million representing growth of 47% compared to the prior year period.

Growth in the quarter was driven primarily by increased procedure volumes increase.

Increased set sales to our international stocking distributors as well as the addition of MTO and Peg a medical.

In the third quarter trauma, and deformity revenue of $23 $9 million increased 42% compared to the prior year period.

Growth was driven primarily by organic growth from <unk> and the PMT femur system.

As well as non organic growth from endy, ortho and Tiger medical of $4 4 million.

In the third quarter of 2022, scoliosis organic revenue of $10.0 million increased 37% compared to the prior year period growth was primarily driven by increased sales of our response fusion system and abbvie fixed non fusion system.

As well as increased set sales to our international stocking distributors as they look to respond to increased backlog.

Finally sports medicine other revenue in the third quarter of 2022 was $1 1 million, which grew 8% compared to the prior year period.

Turning to set deployment $6 $4 million of sets were consigned in the third quarter of 2022 compared to $1 7 million in the third quarter of 2021 year.

Year to date, we have now deployed $13 $8 million up 24% compared to the first three quarters of 2021.

We expect another significant deployment in the fourth quarter of 2022.

Touching briefly on a few key metrics for.

For the third quarter of 2022 gross profit margin was 74, 1% compared to 74.0% in the third quarter of 2021.

Total operating expenses increased $10 $7 million or <unk>, 48% from $22 $2 million in the third quarter of 2021 to $32 9 million in the third quarter of 2022.

Sales and marketing expenses increased $2 1 million or 21% to $11 $9 million in the third quarter of 2022.

The increase was driven primarily by increased sales commission expense as well as the addition of our recent acquisition.

General and administrative expenses increased $4 1 million or 37% to $15 1 million in the third quarter of 2022. The increase was driven primarily by the addition of personnel and resources to support the continued expansion of our business as well as the addition of our recent acquisitions.

In the third quarter of 2022, we recorded a $3 $6 million charge to operations related to trade name impairment, which was primarily driven by the decrease in forecasted revenue that was lower in comparison to the same period last year.

Research and development expenses increased <unk> 9 million or 69% to $2 $2 million in the third quarter of 2022.

The increase was driven by additional resources as well as the addition of our recent acquisition.

Interest and other expenses were $1 7 million in the third quarter of 2022, compared with <unk> $3 million in the same period last year.

This compared to a $1 $4 million benefit in the third quarter of 2021.

We reported an adjusted EBITDA profit of $1 $9 million in the third quarter of 2022 compared to a profit of zero point $5 million for the third quarter of 2021.

In the first nine months of 2022, we generated $2 5 million.

A positive adjusted EBITDA compared to zero point $4 million in 2021.

We ended the third quarter with $121 $6 million in cash short term investments and restricted cash.

This includes approximately $144 million in gross proceeds from our recent capital raise in August .

$31 million repayment of our line of credit.

We have materially increased our cash on hand.

Down our debt and we have $50 million available to us on our line of credit.

Given the current economic environment, our strong balance sheet positive adjusted EBITDA in line of sight to cash flow breakeven play.

Places us in a position of tremendous strength.

Turning to our outlook for the remainder of 2022.

We expected the elective surgical backlog would be extinguished in the second half of this year.

However, based on what we saw in September we believe children's hospitals will continue to operate at approximately 80% to 90% of their 2019 capacity.

Additionally, we continue to see high rates of RSV impacting children.

To be a headwind throughout the fourth quarter we.

We anticipate these headwinds will be offset by continued fundamental tailwind based on our leading competitive position, including an increased active surgeon base.

Growing backlog of deferred procedures.

Expanding product portfolio. The addition of key strategic partnerships.

Pending international approvals all.

All which will enable further share taking.

For 2022, we now expect annual revenue to be in the range of $124 million to $125 million.

Representing year over year annual growth between 26 and 27%.

This guidance assumes roughly $11 million of revenue contribution from MD ortho and peg in medical.

We now expect organic growth of 15% to 16%.

Lastly, we plan to deploy between 20% and $24 million of new sets in 2022, representing year over year annual growth between 47 and 77%.

In addition, we continue to fully expect to generate several million dollars of adjusted EBITDA for the full year of 2022 crossing a major milestone for our business.

Finally.

We wanted to provide an update regarding the SEC back finding inquiry that was previously disclosed by the company be an 8-K in late December 2020.

Earlier this year the SEC notified us that it had concluded its inquiry and did not recommend any enforcement actions from.

From the SEC against the company.

At this point I'll now turn the call back over to David for some closing comments.

Thanks, Brad.

In fact, our competitive position continues to be enhanced by the prospect of improved profitability set deployment, increasing surgeon adoption of key new products 70 placements and sales synergies produced from our two successful acquisitions.

These catalysts will all drive near term value and strengthen our market leading position.

We remain on track to continue expanding our profitability are bolstered balance sheet will support future growth and combined with disciplined investment will drive the company to cash flow breakeven.

Finally, our success remains grounded in a corporate culture that places helping children one.

And at the center of everything we do.

If you'd like to ask a question. Please press star one one.

Okay.

Our first question comes from Matt O'brien with Piper Sandler Your line is open.

Oh good morning, Thanks for taking my questions and congrats on the successful SEC conclusion.

Announced this morning.

Wanted to start with the guidance for the year, because when I when I look at the increase in the Npls last peg.

Guidance is up a couple of million dollars for the organic business is actually down about six.

Would love if you could maybe parse out a little bit just the impact youre seeing from.

The pandemic versus any other factors that are potentially impacting you and then I guess the next logical question of how that leads into two.

<unk> 2023, and what Youre thinking as far as as the business grows as we head into next year.

Yes ill talk about the environment here and then.

Brad maybe you take on some of the guide in the future.

I think what we've been seeing here, particularly in September as we noted in the script is just.

Really.

And wild swings in terms of volume of our key customers and so you've got these accounts that I think we're starting to really improve throughout the early part of the summer.

Still having staffing shortages, but certainly starting to improve and then you get hit with RSV and you have the combination of Covid staffing RSV.

And from account to account region to region, we saw particularly in September and moving into October some some wild swings, obviously, that's impacting negatively impacting revenue growth, particularly in the on the organic side.

And I think going forward, what we have seen this in the past you typically see this very rapid spikes and then a pretty rapid decline and certainly this has been noted in a number of our publications around all these hospitals that have been really tapped out with with these RSV patients, but it is our hope.

We don't.

I don't know that we can build it into our guide, but it's certainly our hope that we would see a month month and a half of this and this would improve but it's certainly very difficult for us to speculate as to how fast this.

The RSV kind of new RSV pandemic would would improve.

I think as we think about 2023, it would be our expectation that this wouldn't last deep into Q1, and then hopefully I know all of the marketplaces has been saying this for a long time, but hopefully we can get back to some type of normal operating environment as we look into 2023.

Yes, I would just add to that one other variable in there is FX.

So when you look at the organic business in the third quarter, we were unfavorably impacted by about $700000.

And the real change came in the month of September in Europe , and we anticipate those rates continuing into the fourth quarter. So.

We will have another negative impact in the fourth quarter that will definitely combined with the third quarter impact.

Overall guidance that was provided on the organic side of the business I think the positive is that the two acquisitions are doing much better than actually we thought they would be doing at this point and we see that continuing into the fourth quarter and into next year, particularly as we can get some sets and some inventory deploy.

Domestically on the peg side of the business. So very excited about the growth drivers for next year related to peg.

Got it that's really helpful. And then just on App effects.

Can you level set us on how the registry slash commercial rollout going and I know a lot of people are really excited about that.

Is it going to inflect, a little bit more meaningfully maybe.

In 'twenty three and then David you mentioned some of these new products are introduced it seems like Theres a lot of them.

Can you maybe just maybe tease out some of the bigger contributors that we should see from a new product perspective next year. Thanks.

Sure sure, Yes, I think that you could expect to see app effects.

<unk> more next year in terms of growth. We've always said that we would expect the doubling of revenue.

From 2022 to 2023, certainly this has been kind of fits and starts.

With the <unk>, particularly early on with respect to Covid and certainly now with RSV, but it's really good to see.

And I would say at this stage in the volume of commercial cases is probably very similar to the volume of.

Of registry cases, we still expect that registry to be closed at some point in time here in the early part of next year.

We've had a fair volume of surgeon movement from registry sites into commercial side. So a number of the cases that we are in fact doing or not going into registering because they are in commercial sites.

That slowed that down a little bit, but overall, we're very pleased with the way we're seeing apathy.

<unk> grow expected to grow next year and we're extremely pleased with the results, we're seeing and so hopefully we'll be able to publish two year results.

Next year and I think that will also be another inflection point for the product.

As far as new products launches really pleased to see the organic growth of the scoliosis business at 37%.

Too many companies growing 37% organic in the spine world at this stage and we think that's on the backs of certainly Amethyst 70, but also some of the work we're doing on an R&D getting some of these day rotation instrumentation out. So we would expect next year to see that day rotation cumulated screws the constant work.

That we're doing on the complex scoliosis side.

<unk> was <unk> 70, <unk> to be real growth drivers. Obviously next year, we expect to see both MTO and peg it'd be growth drivers peg it, particularly when we get inventory, which we expect to get into the first quarter of next year expect that to be a driver and then we continue to take share with the Pnp femur. We believe that is a market leading.

Technology, we think we're going to be able to take a lot more share next year and then <unk>. It comes right behind it. So there's a lot to talk about there.

And we just continue to give our sales force and our customers new technologies that I think youre going to continue to impact the business positively.

Great. Thanks, so much.

Thanks, Matt.

Okay.

Our next question comes from Rick Wise with Stifel. Your line is open.

Hey friend, David Anton on for Rick Thanks for taking the questions.

Okay.

So I mean, the first last quarter you talked about.

$2 5 million U S deferred procedure backlog kind of expect to be scheduled throughout 2022 can.

Can you talk to us a bit about how the.

Three Q like RSV headwinds impacted the U S backlog has it become law.

Larger now.

That elevated RSD volumes have kind of weighed on cash.

Pietro hospital's ability too.

Foreign procedures and when do you think that backlog could be fully worked through is it like a positive tailwind for 2023 sales performance.

Yes, I would say at this stage.

It is very difficult to determine the magnitude of that backlog.

Harder outside of the U S. We know it's there.

And certainly we expected and was built into our guide in the second half that we would have extinguished that based again on what we saw throughout the summer felt like we were starting to really pick up some steam there.

I mean, there is no doubt that our children's hospitals are not operating at full tilt right. Now we have surgeons that are anecdotally, telling us they're scheduled out right now through the early part of summer next year with major electric procedures and so while on one stage that is really good.

On another side of that was fairly uncommon and is indicative of just the capacity right now within these children's hospitals. So the backlog is probably growing I think Fred and I at this stage.

But it's very difficult to quantify at this point.

Yeah.

Okay got it.

And then on an <unk> your prepared remarks about the spill.

St Marys placement driving responsible through which was very encouraging.

I think you mentioned last call that your strategy for 70 placement target accounts with low <unk> penetration can you give us any additional color into the pull through you are seeing.

Seeing there how much further could go in.

An additional.

Additional hospitals currently Demoing systems, I guess, what's left to be done done there for them to convert and how many systems could we see come through next year.

Yes, it's a great question, so I would say.

To use the cliche, we are literally on the one yard line on the goal line here with a number of key accounts.

And the number of those key accounts are relatively new users a response and so we're a signature or so away from placing some of these units on track it's taken longer than we would've expected a suspect we're in the same boat with a lot of people at this stage.

We expect that this will have an impact certainly it's 2023, we expect to be able to place. The units that we acquired this year and then acquire more units in place more units in 2023, and you're exactly right. I mean, we have four or five accounts right now that literally had no exposure to the response system and our scoliosis products they were.

Or are customers of ours on the T&D side, but now they are using response and theyre using response, even before they're contractually obligated to do that.

The unit placement. So we really like is like what we're seeing there and I think that 70 again 70 app effects. These types of things are certainly driving the 37% organic growth we saw in Q3.

Even in a really choppy environment, and we would expect to see that that positive uplift due to 70 continue throughout the balance of the year as well as the balance of next year.

That's great color. Thanks, again for taking the questions.

Sure.

Our next question comes from Ryan Zimmerman with BTG. Your line is open.

Hey, Thanks for taking the questions and good morning, guys I wanted to follow up on Matt's question on RSP and just.

Just ask a little bit.

Dave do you feel like you have sufficiently accounted for a full impact of RSV in the fourth quarter.

Given how volatile it is I just want to make sure that you guys feel confident with the guidance that said.

For fourth quarter and 22.

Yes, great question, the RSP as Dave mentioned spikes really really fast if you look at the trend charts on the CDC website.

And then it comes down really fast as well.

Seems to have started about two months earlier this year than years past.

Yes.

Bracketed if you will and included in the guidance.

Thanks, Brett and I are becoming an African becoming honorary virologists here.

We have a.

Certainly been involved in a lot of conversations with our accounts to try to gauge exactly how it's impacting them yes.

Yes, no that's helpful. Because clearly I couldnt call it an even though I thought I'd try but.

I wanted to ask about I.

I appreciate the disclosures on organic growth I think it's a question of investors have been asking for an ortho pediatrics for a while and so.

Maybe you could just talk a little bit Fred the M&A contribution was up about $2 million.

Better than we expected from the prior guidance what are you one what can that run rate next year in terms of kind of your expectations. Then too I did notice that you did a little bit over $4 million this quarter, but you're implying $4 million in December .

There a reason why that slows down as that seasonality just kind of take me through your thinking around M&A.

The contribution from the businesses.

Yes, absolutely as we mentioned that both businesses are doing better than expected, particularly purger in the month of September once it got into the hands of our domestic sales agents.

And so very pleased with the third quarter performance both of those businesses followed the same trend as our seasonality in our legacy business and so as you know in the fourth quarter typically the sales are softer than they are in the third quarter because of the kids have obviously gone back to school and so that.

Shouldn't that has included the $4 million versus the $4 four which you are correct is really just driven by the seasonality of the overall pediatric business. That's included in there listen both both of these businesses are very exciting.

And we anticipate that the growth of both of these businesses will be faster than the overall revenue growth for our business and all of 2023 and probably beyond for a few more years. So as Dave mentioned really on the <unk> side, it's a matter of getting sets deployed that will start in the firm.

Quarter end tail out into the second quarter and probably continue into the second half of next year as we continued to deploy sets in that business.

And on the <unk> side, the product launches, we opened Brazil for the first time with them, we have a lot of distributor relationships in Brazil. They were not selling there historically and so encouraged to have that country open to club foot correction and more to come.

I appreciate the color thanks for taking the questions guys.

Thanks Ryan.

Our next question comes from Sam Brodowski with Truest. Your line is open.

Hi, good morning, Thanks for thanks for taking the question.

Just one more on.

And one more on the acquisition good morning, and then.

So can you parse out at all a little bit and maybe the mix between in that $4 4 million between the two.

Reasonable to think sort of a flat sequential for MTO or is there an increase there from Q2.

And again, we saw nice growth from both <unk> as well as peg it within the quarter and we anticipate that continuing.

Okay, and then maybe just on <unk>, if we think about that <unk> with the continued success is that two six ish million dollars revenue is that like a reasonable run rate to think for next year.

I think thats reasonable for this year it should grow on that for next year.

Yes.

Great. That's helpful and then just.

At a higher level, when we think about the algorithm to get to <unk>.

8% organic growth.

I mean.

<unk> has been performing really well in the past two quarters on an organic basis.

Mid teens growth call it for for the trauma and deformity business is that how we should be thinking about the businesses in 'twenty three and beyond or is there maybe.

There may be some acceleration in the trauma and deformity business. Thanks for taking the question.

In a normalized environment as well as everything we've got going on in the solar business.

We are very bullish about our capacity to grow organic sales growth by north of 20%.

Thank you.

Thanks Sam.

Our next question comes from Mike Matson with Needham <unk> Company. Your line is open.

Good morning.

I wanted to ask about the trademark impairment.

I didn't completely understand what that was related to.

Yes, both the trademark impairment and the $23 million on the accretion both of those are related to <unk>.

Okay.

That imply that the.

The sales hub.

Been lower than you expected or planned for.

Yes, so the way that works is we provide forecast.

10 year forecast actually to a third party, who goes through a valuation analysis.

And that was completed an updated here in.

In September .

And that envelope.

For the forecast.

Which is lower than we had anticipated.

Impacted the impairment and then that flows through to the accretion analysis as well as a reminder, the accretion is related to a.

Four year system sales payment so its an earn out in April of 'twenty 'twenty four.

Okay.

To what degree I mean, obviously youre launching this thing during a pandemic so.

Mainly related to Covid or were there any other issues there that caused that to maybe not do as well as we thought it would be slower in terms of the ramp.

I would just say that we were obviously much more bullish when we didn't know we were going to be facing.

Three years of a COVID-19 environment. So when we acquired this business during the first month of the pandemic.

We expected the rollout in the registry and everything obviously to be filled much quicker and that I think from our standpoint long term, we have really no change in our view of what this technology is doing and obviously, it's growing our scoliosis business in a substantial way even though it is still relatively small I think that the expectations for this.

Business, given the impact of pandemic and everything else, it's probably pushed out a few years and that certainly impacts impacts the valuation absolutely okay.

And then just.

We are seeing this merger with orthopedics and spine and high net worth of fixed is probably one of the few companies out there that had some sort of pediatric business, probably more in the trauma and deformity area than in spine and vertically but.

I'm just wondering what your views are on the deal in terms of what it means for ortho pediatrics I mean, I'd imagine there is probably going to be some disruption.

Combined the companies, but longer term is there a risk that they could become more of a.

A larger player in the pediatric market maybe.

Yes, our biggest concern upfront. It's just how we ensured that we had this very strong partnership with with C spine and know the management quite well there and the biggest concern was just to make sure that we were all still full go in terms of the.

70 arrangement not just on the scoliosis side, but work that we're doing in partnership to develop technologies on the trauma Alimta farming side and we're very confident that that's a full a full go so I guess I can't comment comment for sure on what's going to happen there, but ortho fixed was.

Didn't particularly impact our revenue growth as a stand alone company. My suspicion is that this won't have a big impact or any impact on us as they try to integrate into an adult spine company.

I think that probably provides us with some real opportunity. If there are some places, particularly outside of the United States, where they may see disruption.

Some nice opportunities, particularly with our expanded international footprint post peg acquisition.

Okay. Thanks, and then finally.

Yes that is absolutely correct I mean, there is a little inflation, obviously in transportation and a few pockets here or there, but nothing thats impacting the margin of the business today or that we would anticipate in the future.

The lowering of the set deployment numbers by a few million dollars is some leftover legacy problems from suppliers again.

Trying to get that one last instruments into the set before we can deploy it and some dates are moving out for deliveries from some of our suppliers. So that will that will push some of the deployment into next year.

But inflation wise, we're in good shape.

Okay got it thank you.

Thanks, Mike.

There are no further questions at this time I'd like to turn the call back over to Dave and Fred for any closing remarks.

Great well all of you at summit.

And we look forward to talking to several of you at some upcoming investor conferences. Thank you.

This concludes the program you may now disconnect everyone have a great day.

Q3 2022 OrthoPediatrics Corp Earnings Call

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