O'Reilly Automotive Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 9 speakers on the call.

Operator

Good morning, and thank you for standing by. Welcome to the Second Quarter 2020 4 OrthoPediatrics Earnings Conference Call. At this time, all participants are in a listen only mode. I would now like to turn the conference over to Trip Taylor from Gilmartin Group for a few introductory comments. Please go ahead.

Speaker 1

Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer and Fred Hite, Chief Operating and Financial Officer. Before we begin today, let me remind you that the company's remarks include forward looking statements within the meaning of federal securities laws, including the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements are subject to numerous risks and uncertainties, and the company's actual results may differ materially. For a discussion of risk factors, I encourage you to review the company's most recent annual report on Form 10 ks, which was filed with the SEC on March 8, 2024.

Speaker 1

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 the non GAAP financial measure to the most directly comparable GAAP financial measure in its earnings release. Please note that the non GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for OrthoPediatrics' financial results prepared in accordance with GAAP. In addition, the content of this conference call contains time sensitive information that is accurate only as of the date of this live broadcast, today, August 6, 2024.

Speaker 1

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.

Speaker 2

Thanks, Chris. Good morning, everyone, and thank you for joining us on our Q2 2024 conference call. We're extremely proud to begin our call by reporting that we've helped over 32,000 kids in the Q2 of 2024, a 52% increase and another record high for OrthoPediatrics. Our cause is rooted in the desire to positively impact the lives of as many children worldwide as possible. And the 52% year over year increase is a true reminder that we continue to make an impact and are successfully delivering on that cause every day.

Speaker 2

OrthoPediatrics continued our strong performance into the Q2 of 2024 with revenues reaching a record $52,800,000 surpassing the $50,000,000 mark for the first time in our history and representing a 33% increase from the same period in 2023. This achievement was fueled by the effective execution of our business strategy and helped deliver top line revenue growth, produced healthy margins and positive adjusted EBITDA. We are pleased with the momentum we are generating and we look forward to continuing to drive results in the second half of twenty twenty four. Before diving deeper into the quarterly results, I want to briefly touch on the overall macro trends. At this point, we believe we are working in a normalized surgical environment.

Speaker 2

Hospital staffing has increased, efficiencies in the operating room have improved and we've seen minimal disruptions in the Amity somersurgery schedule. Going forward, we expect more of the same barring any major disruptions from future respiratory illnesses. In the quarter, our revenue showed more variability on a month to month basis, particularly in the surgical segments of trauma and deformity and scoliosis, which experienced the delayed start to their peak season. However, once the season started, it accelerated rapidly into the close of the quarter and is extending into the balance of the summer season. Case schedules are robust and we are experiencing the most stable environment in quite some time.

Speaker 2

Our business is comprised of a large and highly differentiated portfolio of products that continue to take market share across multiple pediatric orthopedic segments and drive our growth. During the quarter, the global trauma and deformity, domestic scoliosis and our newly formed and rapidly expanding specialty bracing or OPSB businesses all contributed to strong growth. 2nd quarter global T and D was very strong with 37% year over year growth and scoliosis produced substantial 26% year over year revenue growth in the 2nd quarter. OESB contributed to growth in both the T and G and scoliosis businesses as a result of the Boston OMP acquisition, coupled with increased sales from products outside the Boston O&P clinics such as MDO, DF2, Oral Levity and RHINO. At this early stage, we couldn't be more pleased with the Boston acquisition.

Speaker 2

The more we work together with the team and the better we understand the opportunity, the more convinced we are of the large expansion opportunities and the synergies between our implant business and OPSB. Our business has multiple levers from which we can drive value, including continued growth in legacy products, several new product launches, additional international regulatory approvals, several transformational R and D projects, a rapidly expanding specialty brazing business with OPSB and our expansion into digital health. While some of these efforts may need more investment and time, we believe they are essential for the company's future of driving rapid revenue growth, enhancing our profitability and improving ROI. With the combination of successful growth drivers we've outlined and with the anticipated upcoming investments, we have positioned the business to continue to grow in top line while improving profitability on our way to cash flow breakeven. We project to produce $8,000,000 to $9,000,000 in adjusted EBITDA in 2024 and assume a large step up for 2025.

Speaker 2

Given our bullish outlook and the multitude of opportunities we have in front of us, we have recently taken steps to recapitalize the business to maintain our aggressive growth and profitability trajectory. Refinancing our credit facility with the convertible offering and term loan from Braid Well provides an improved cost of capital and flexibility that will allow us to invest in high return opportunities like new LPSB clinics. Leveraging this capital and liquidity will enable us to continue funding these opportunities and reach our cash flow breakeven goal in 2026. Next year, we expect to take a major step towards that goal as we expect positive adjusted EBITDA levels in 2025 to completely offset our investment and set deployments for 2025, thus limiting operating cash usage to working capital growth. Now moving on to our revenue segments.

Speaker 2

In the Q2 of 2024, we generated total trauma and deformity revenue of $37,800,000 representing growth of 37% compared to the prior year period. We continue to make substantial market share gains with this quarter showing robust sales of trauma products, particularly PMT tibia, Pega, X6 and OPSD complemented by revenue from the newly included Boston O&P T and D product sales. Within the T and D business, I'd like to highlight a few products in areas that we feel have made important progress this quarter. Across our portfolio, we are really starting to realize the benefits of our prior investments in set allocation and are excited to see the payoff from this trend. This is particularly true with Pega as sales continue to be more continue to be better than we've ever expected, growing over 50% globally once again.

Speaker 2

Moving forward for the rest of 2024 and beyond, we expect this growth to continue at least for a few more years as we more deeply penetrate our U. S. Accounts with a full TEGOT product portfolio and we ramp international sales now that we've converted to our OP distributors and agencies out OUS. Growing our portfolio remains a critical part of our strategy and we continue to progress in this area with the advancements of several products. As we discussed last quarter, we are well on our way with the full U.

Speaker 2

S. Market release of BNP Tivity and we are excited to report that in the Q2 of 2024, we launched another 25 sets. Sets will continue to arrive at counts in each of the next several quarters and PMP Tibia will remain a key catalyst for the next several years. In tandem, we're also executing the full market release of DF2. Demand for this product has been extremely high and our customers have endorsed the product with rave reviews.

Speaker 2

While revenue at this stage is small, DF2 is poised for rapid growth for the next several years. The uptake of these technologies is surpassing our projections, prompting us to ramp surgeon training for these devices. In addition, I'd like to note that our X6 customer conversion during the quarter was very high. After a great Q1, we continued the momentum and followed up with strong second quarter with a strong second quarter, both in terms of revenue and new customers and account conversions. On the R and D front, we continue to make solid progress on our new T and D plating system, the pediatric plating platform or P3 and expect the first of a series of plating projects to launch in the first half of next year.

Speaker 2

P3 combined with our market leading PNP Femur and Tibia franchise will ensure we are providing our customers with the highest quality and the most sophisticated IMA and anatomic plating systems ever seen in pediatric orthopedics. As part of our overall strategy The OrthoPediatrics non surgical The OrthoPediatrics non surgical specialty bracing business or OPSB is an opportunity that not only allows us to surround our customers with more solutions to their children, but represents a substantial new source of capital friendly growth. We have now fully integrated the OPSD assets and we are starting to fully realize the breadth of synergies with our implant business and the scaling opportunity it presents. This will be a business that can contribute to our growth in the long term and improve profitability. The franchise's swift growth is driven by our 3 point strategy of sales force expansion, R and D that expands the range of products and our clinic expansion strategy.

Speaker 2

Since its inception, the sales force has already grown materially and we are seeing early returns from the investment in an OPSB specific sales force. Additionally, R and D projects continue to rapidly progress and we expect to launch 4 to 5 new products each year as a result. Lastly, while we expect most of the impact to begin in 2025, we have identified numerous opportunities for clinic expansion and are in the final stages of formalizing our plan. Notably, through applying a small operation in Virginia, we have our first new clinic and expect our next new clinic embedded in Nationwide Children's Hospital to be up and running in the second half of the year. More details regarding our clinic expansion strategy will be shared at an upcoming Investor Day, but it is safe to assume as we have learned more, our view of the growth prospects for OPSD is growing more positive by the day.

Speaker 2

Moving to the scoliosis business. In the Q2 of 2024, we generated scoliosis revenue of $13,700,000 representing growth of 26% compared to the prior year. This global growth was led by a strong increase in new users of our spinal implants, especially RESPOND and the addition of Boston OMP revenues. 2nd quarter domestic sales increased by 37%, led by the addition of the Boston brace from the Boston OMP product portfolio. Domestic scoliosis revenue was strong, but overall scoliosis revenue was somewhat muted by negative international growth in the quarter and a slower than expected start to June.

Speaker 2

Nevertheless, recent weeks indicate a promising uptick globally, ending at a record summer post pandemic. With an expanding base of surgeons adopting our offerings and significant new customer gains, we're bullish about continued scoliosis revenue growth in 2024 and beyond. Our team is constantly exploring ways to expand our impact and cater to unaddressed needs of children, while enhancing aspects of our product portfolio. Currently, we are focused on early onset scoliosis, which is a category that has lacked technical innovation over the past decade. At OrthoPediatrics, we had pioneered 3 EOS products, which are in different phases in development and we're pleased with the advancements we've made thus far.

Speaker 2

After launching the response Resyntelvic System in the Q1 of 2024, the surgeon response has been quite encouraging. This system represents a novel and distinct technology that addresses a significant gap in care and is now being utilized in facilities where our scoliosis footprint was previously known. This has reinforced our conviction that our strategy of developing products that meet some of the most complex unmet need in pediatric deformity surgery is the right one. Looking ahead, our expectations are high for the impact of our 2 additional EOS offerings, particularly with the upcoming launches of ELE and VERIGLI. Currently, VERIGLI is waiting FDA for FDA review and we hope to have approval in the second half of twenty twenty four.

Speaker 2

The ELE, electromechanical growing rod, which received the pediatric breakthrough device designation by the FDA, continues to pass critical milestones in the development process. And we are hopeful it will be available in the market in the coming 12 to 18 months. Beyond our EOS suite of products, we're in the late stages of development of our next generation fusion system, which we expect to launch in the coming year. Collectively, this suite of innovative products will transform our scoliosis implant portfolio and further strengthen our position delivering the next wave of growth in scoliosis implants over the next several years to come. Moving on to international.

Speaker 2

Overall, international performance was strong, generating revenue of $11,600,000 and delivering 16% year over year growth. Growth was primarily driven by over 25% trauma and deformity product growth, including Pega, Xphix and several legacy devices. General demand across the entire T and D portfolio was strong, but was partially offset by a soft international scoliosis quarter. We continue to expect a very strong international growth rate for scoliosis on a full year basis. As the EU and Canadian agency businesses grow larger and begin to stabilize ordering patterns from our stocking partners in South America.

Speaker 2

Both the EU and the Canadian businesses are small, but growing rapidly. And we're well positioned for the future as we open new accounts in Ireland, the UK, Germany, France and several major accounts in Canada. Given the operating environment internationally and the distinct lack of pediatric orthopedic product launches in Europe over the last 4 to 5 years, we see a very large opportunity for our international business. We eagerly await upcoming developments that will only increase our footprint and ability to make more headwind. Specifically, we are awaiting the notified bodyguard to finalize our EU MDR status, which we expect to be complete in the second half of twenty twenty four or early twenty twenty five.

Speaker 2

This will enable the potential launch of several new products in Europe shortly thereafter. Overall, the international business is set up very nicely and we believe that the second half will contribute toward an improved 2024. That brings us to surgeon training and education. OrthoPediatrics continues to lead industry efforts to offer enhanced educational opportunities within the pediatric orthopedic community. As you know from our last call, we were live from ePOSMA, where we were delighted to reinforce our commitment to POSMA and EPOS through top level sponsorship of the event.

Speaker 2

At the annual meeting, we highlighted our growing portfolio of pediatric specific solutions through sponsored sessions. We're grateful for the opportunities such as this where we can highlight the advancements made in the pediatric orthopedic space and will continue to focus on industry events that align with our mission. Before turning the call to Fred, I'd like to announce that we plan to host an Investor Day in September, where we will take a deeper dive into our growth initiatives and look more specifically at our plans for the Specialty Bracing Business or OPSP. With that, I'd like to turn the call over to Fred to provide more detail on our financial results. Fred?

Speaker 2

Thanks, Dave. Our Q2 2024 worldwide revenue of $52,800,000 increased 33% compared to the Q2 of 2023. Growth in the quarter was driven primarily by our strong performances across global trauma and deformity, domestic scoliosis and OPSB as well as the addition of Boston O and P revenue. U. S.

Speaker 2

Revenue was $41,200,000 a 39% increase from the Q2 of 2023. Growth in the quarter was primarily driven by our trauma and deformity product line, scoliosis and OPSB, as well as the addition of Boston O and P Revenue. We generated total international revenue of $11,600,000 representing growth of 16% compared to the Q2 of 2023. Growth in the quarter was primarily driven by trauma and deformity and OPSB, partially offset by soft international scoliosis revenue. In the Q2 of 2024, trauma and deformity global revenue of $37,800,000 increased 37% compared to the prior year period.

Speaker 2

Growth was primarily driven by strong growth across numerous product lines, specifically PAGS Systems, PNP Tibia, X FiX and OPSB, as well as the addition of Boston O and P revenue. In the Q2 of 2024, scoliosis revenue of $13,700,000 increased 26% compared to the prior year period. Growth was primarily driven by increased new users of our spine systems and response 5,560 offset by negative growth in the international scoliosis revenue. Finally, sports medicine other revenue in the Q2 of 2024 was $1,300,000 compared to $1,200,000 in the prior year period. Turning to set deployment, dollars 7,800,000 of sets were consigned in the Q2 of 2024 compared to $9,200,000 in the Q2 of 2023.

Speaker 2

Year to date, we have deployed $12,100,000 of sets compared to $12,200,000 at this time last year. Touching briefly on a few key metrics. For the Q2 of 2024, gross profit margin was 77% compared to 76% for the Q2 of 2023. The increase in gross profit margin was primarily driven by higher domestic growth, combined with lower international set sales as well as favorable purchase price variance. Total operating expenses increased $10,900,000 or 30 percent to $46,500,000 in the Q2 of 2024.

Speaker 2

The increase was primarily driven by the addition of Boston O&P as well as increased commission expense and incremental personnel required to support the ongoing growth of the company. Sales and marketing expenses increased $3,100,000 or 23 percent to $16,600,000 in the Q2 of 2024. The increase was driven primarily by increased sales commission expense, coupled with additional employees to support the OPSB business. General and administrative expenses increased $8,200,000 or 43 percent to $27,300,000 in the Q2 of 2024. The increase was driven primarily by the addition of Boston O&P Acquisition, increased depreciation and amortization as well as personnel and resources to support the continued expansion of the business.

Speaker 2

As discussed on the Q1 2024 earnings call, the addition of Boston OMP includes lighter sales and marketing as well as R and D expenses, however, heavier G and A expenses. Research and development expenses decreased $400,000 or 14% to $2,500,000 in the Q2 of 2024 due to timing of external development expenses. Total other expense was $400,000 for the Q2 of 2024 compared to $2,300,000 of other income for the same period last year. In the Q2 of 2023, we recognized a $2,300,000 favorable adjustment to contingent considerations that did not repeat in the Q2 of 2024 as well as increased interest expense from our $10,000,000 Mid Cap loan. Adjusted EBITDA was $2,600,000 in the Q2 of 2024 and this compares to $2,300,000 for the Q2 of 2023.

Speaker 2

We ended the 2nd quarter with $30,900,000 in cash, short term investments and restricted cash. Total cash usage in the Q2 of 2024 was approximately $19,000,000 which was slightly higher than expected and did include payments of $2,200,000 to Apufix as a final acquisition payment, dollars 1,300,000 anniversary payment to MedTech Concepts and a $2,000,000 supplier payment due to volume commitments. In addition, we currently have higher receivables due to the seasonality of our business and higher June volume, as well as increased inventories in support of future set deployments. We anticipate continuing to invest in our strategic initiatives, but we expect that the cash burn at the level seen in the second quarter will not be repeated in subsequent quarters and that the cash burn will significantly be reduced in the second half of the year. With that said, we have recently taken steps to better support our capital needs with the closing of a new facility that will offer OrthoPediatrics more flexibility, increase our firepower and enable us to continue to grow the business and deliver growth.

Speaker 2

After evaluating our financing options, we have partnered with Braewell, with whom we have had a long term relationship and have signed a financing consisting of a term loan and a private placement of convertible notes that will provide up to $100,000,000 of capital. Terms of the financing include both a $50,000,000 term loan and a $50,000,000 of convertible notes. The term loan consists of initial term loan of $25,000,000 and access to a delayed draw term loan facility for an additional $25,000,000 In connection with the financing, we have also approved a stock repurchase program of up to $5,000,000 of outstanding common stock. The proceeds will be used to repay outstanding debt of approximately $10,000,000 transaction fees incurred in connection with the financing, potential stock repurchases and general corporate purposes and working capital needs, allowing OrthoPediatrics to continue to operate from a position of tremendous strength. Turning to guidance.

Speaker 2

We are reaffirming our expectations for full year 2024 revenue range of $200,000,000 to $203,000,000 representing year over year growth of 34% to 36%. We continue to expect to generate between $8,000,000 $9,000,000 of adjusted EBITDA in 2024. And additionally, we continue to expect less than $20,000,000 of new set deployment in 2024. This represents our continued focus on driving the business to cash flow breakeven by 2026. I'll now turn the call back to Dave for closing remarks.

Speaker 2

Thanks, Fred. As we've reached the midpoint of the year, it's encouraging to see where we stand today. We've established a solid base for continual growth and are looking forward to several upcoming catalysts that could pave the way for further expansion. We are confident that we will carry our momentum into the back half of the year and beyond as we continue to help more children than ever, shatter revenue records, capture share across the entire business, maintain healthy margins and execute on our EBITDA expectations. We are well positioned to drive improved operating leverage all while making meaningful investments in substantial opportunities from transformational product development, including EOS, EU NDR compliance as well as OBSD and digital health.

Speaker 2

Our continued execution will produce an expected $8,000,000 to $9,000,000 in adjusted EBITDA this year and an adjusted EBITDA level next year equal to consistent annual set appointment taking a major step towards cash flow breakeven. In closing, I'd like to thank our surgeon partners, my OP associates, our investors and all of the innovators in pediatric healthcare for standing together to help kids. And we're looking forward to providing an additional update in September during our Investor Day. Operator, let's open the call for Q and A.

Speaker 3

Thank

Operator

And our first question will come from Rick Wise with Stifel. Your line is now open.

Speaker 4

Good morning, gentlemen. Let me start off trying to think through the guidance and the outlook for the second half. I'll sort of ask it altogether a little bit. You did have a small beat. I'm trying to understand why no raise, why keep the numbers the same given all the excellent and positive commentary you both had about the outlook for the second half on multiple fronts?

Speaker 4

And maybe just as part of answering that, you can help us understand what organic growth was this quarter?

Speaker 2

Yes, I think from hey, Rick, nice to talk to you this morning. Yes, I think we have a very consistent policy of remaining fairly conservative in terms of our guide. I think you can expect organic growth in that high teens, I think around 18% or so if you subtract out the Boston O and P acquisition. And so that's pretty consistent with what we've talked about, an 18% to kind of 20% range, always targeting something larger, but something that we're really pleased with to see high teens growth again. And, yes, we have a lot of very positive things happening in the back half of the year.

Speaker 2

Obviously, July, August, 2 of our largest periods and until we get through the full measure of Q3, I think you will see us remaining fairly conservative despite, like you said, a multitude of good things that are happening within the business. And so far, what we're seeing is a really, really robust summer season.

Speaker 4

Yes. Following up on that, last quarter you had talked about expecting international momentum to continue through the year. And again, back to the everything that's going on fundamentally sounds really, really positive. It sounds like if I'm hearing you, Dave, that you're more confident than ever that the pieces are falling in place to show us better SCOLE numbers in the second half. Am I being too optimistic or what gives you that extra confidence that it really can happen now?

Speaker 2

Yes. I think what we're experiencing on the OUS side, at least in terms of the shop and revenue is entirely isolated and has been for the last several quarters to stocking distribution ordering patterns in South America. And as I think you know, our scoliosis business historically outside of the United States has only been in a few countries and primarily in South America and in Australia where pediatric orthopedic surgeons also do pediatric spine surgery. And in markets like Canada and Europe where it's primarily, pediatric spine surgeons who are doing pediatric spine surgery, we don't have as large of a footprint. From our perspective, what we see in terms of demand in the markets where we're strong, Australia was very strong this year or this quarter, but South America continued to I think the only way to describe it is a small business and it was very choppy.

Speaker 2

And so generally speaking, when we have fairly low orders in a particular quarter, you can be fairly confident that that comes back in the next quarter. And so what my commentary on the business overall is that we're seeing growth in markets like Canada and EU. These are all agency markets that are much less. They're very small at this stage, but they're much more stable, because they're not through our stocking partners. And as that component of our business grows and it is growing rapidly, most likely over the next several quarters, smooth out the revenue that we're seeing in our scoliosis business international.

Speaker 2

But we are quite bullish that the second half of the year, even in South for us will be very strong in terms of ordering patterns just based on what we're seeing in terms of the usage profile of our surgeons there. Yes. I would just add, Rick, that we know that the procedures in Latin America continue to grow because we track that data. What the lumpiness you're seeing is when we decide to sell sets to Latin America and us managing our open receivables with our stocking partners down there. And so we need to keep them current on paying for those sets and not get too far ahead of ourselves.

Speaker 2

So the demand is there. The procedures are happening. Some of the timing of this is us managing our cash positions.

Speaker 4

That's great, very helpful color and great to see the strong U. S. Performance. Thanks so much.

Speaker 2

Thanks, Rick. Thanks, Rick.

Operator

And our next question comes from Ryan Zimmerman with BTIG. Your line is open.

Speaker 5

Good morning. Thanks for taking our question. I want to ask about Boston OMP. When you did the deal with them, they were on track to do about $25,000,000 for the year, if I recall. Just first want to make sure that that is still the prevailing assumption for the Boston OMP contribution on an annual basis.

Speaker 5

And then the second thing is with the private financing, it sounds like you're accelerating, and again, correct me if I'm wrong here, but you're accelerating kind of your clinic strategy around Boston OMP and I know we'll get more details in September, but it does feel like maybe that's happening at a more rapid pace. And if that's the case, kind of just how to think about that as we move into 2025?

Speaker 2

Yes. I think the $25,000,000 is a solid number, Brian. We'll stick with that. I think that's really specific to again, I always point out that specific to the Boston O and P side of the business, unrelated to the rest of the OPSB franchise that is selling some of the wholesale Boston products as well as the Ora Medical or the MDO product portfolio Ora Medical Rhino, these devices. And so we see that component of OSB growing very rapidly.

Speaker 2

I think what you could assume and like you said, we'll talk more about it in September. But what you could assume is that our assumption heading into the acquisition or after the acquisition of Boston OMP would that there would be a lot of opportunity for us on the clinic expansion side, both in terms of our capacity to open Greenfield locations, which we think will take some time, just to get licensing set up and facilities set up, but also our capacity to do some small acquisitions that would allow us to maybe speed along that process. And so post acquisition, you've heard us talk very bullish about how things have gone so far. I would just say we have a lot of opportunity coming at us on the clinic acquisition, clinic expansion side. And so I don't know if I would say that we are accelerating that at least in terms of what its impact would be in the back half of this year.

Speaker 2

But certainly, I think the scale of opportunity is you can assume that our capital raise here was connected to our the scale of opportunity that we think we have in front of us in terms of our capacity to grow the LPS and franchise through clinic expansion. Does that make sense, Ryan?

Speaker 5

Yes. No, no. Very much, very appreciated. And I know we'll get more color in a few weeks. And then maybe turning to scoliosis for a bit.

Speaker 5

I'm curious, there's been some changes in the market, changes in ownership of some of your competitors. I think about the spine business from one of your competitors going into a private equity buyer. I'm curious what, if any impact that has resulted in domestically in the scoliosis market and whether you can capitalize on some of that disruption? Yes.

Speaker 2

I think we try to be opportunistic. As you well know, the M and A that's occurred there has been all adult companies with very small pediatric spine portfolios. I would say that at least some of the companies that have pediatric products, the opportunity for us to reaffirm our exclusive commitment to pediatric orthopedics and in pediatric scoliosis surgery has been well received by our customer base. We're not going anywhere. We're not changing our focus.

Speaker 2

We're 100% dedicated to pediatric orthopedics and pediatric scoliosis. And I think that's been followed up by the EOS product development we've done, right? I mean, we're focusing on these extremely complex unmet needs that have been underserved by the adult spine companies that dabble in pediatric orthopedics. And so I think the combination of maybe some of that disruption that you're seeing in the adult spine market or maybe there's been a bit of a loss of focus on the few products they had in pediatric spine combined with us basically pushing our chips into the center of the table, telling our customers we are here to develop and develop products that are the most complex and the most and the largest unmet needs. I think that's resonating with our customers and I think it is continuing day by day, quarter by quarter building the credibility of our scoliosis franchise.

Speaker 2

And you heard on the call that response ribbon pelvic, for example, fairly small product for us, but a very large unmet need in pediatric scoliosis surgery. That product is now being used in some of the premier children's hospitals in the United States. And in some of those locations, there were locations where we otherwise had no strong presence, at least with our response fusion system. And so it is giving us a toll, if not a foothold in some of those facilities, exposing those physicians to the balance of our scoliosis portfolio and then allowing us to tell the story that, hey, this is just one of 3 very, very unique systems. And by the way, in the next 12 months or so, we're going to be delivering you an entirely new fusion system state of the art.

Speaker 2

When you combine that with apapix, when you combine that with 7D, it's just a really compelling story. And I think that's what's driving surgeon conversions to the entire

Speaker 5

Appreciate the color and again congrats on all the progress.

Speaker 2

Thanks Ryan. Thanks Ryan.

Operator

And the next question comes from Matthew O'Brien with Piper Sandler. Your line is open.

Speaker 6

Good morning. Thanks for taking the questions. Maybe just to stick with the Specialty Bracing commentary.

Speaker 3

Dave, can you talk

Speaker 6

a little bit about what you're seeing in terms of integrating that business? I mean, it was great to see that came in line as you're still kind of integrating. What kind of successes are you seeing in terms of just capturing maybe new business? I know it's early. And then these 2 new centers, should we think about those 2 as on an annual basis being similar in terms of revenue contribution to the business?

Speaker 6

Or just because they're kind of greenfield, can they be much, much bigger than that? And then I do have a follow-up.

Speaker 2

Yes. So just on the scale of those 2, I think the both of them are probably of similar size, although the Nationwide Children's, obviously, one of the largest children's hospitals in the United States. And so having a facility embedded in nationwide, not giving individual client guidance here, but you would have to think that that would be pretty substantial for us. We're not seeing patients there yet. It's going to be a little bit.

Speaker 2

But as you think about a growth driver for 2025, that certainly is 1. Virginia is just getting started. I think we're seeing a few patients there, but it supports an account there that we have historically not had really strong bracing business with. So probably not big impacts in the back of half of this year, but certainly a part of our growth story. And when you attach the growth numbers that we expect from Knowles and you add a few more, you can see how that would be a significant portion of the growth that we would expect in 2025 and beyond.

Speaker 2

I think from an integration perspective, it's things have gone extremely well here. I mean, it seems like this thing was meant to be our organizations culturally have it's almost like we're the same company with Boston in terms of we do implants, they do non surgical products. It was a very similar feel that we had with our friends at MDO and how they have well integrated. The integration efforts have primarily been integrating the balance of the OPSB portfolio. So MDO, Rhino, these other products into the Boston business.

Speaker 2

And I think at this stage that has essentially done. Things that I think we're still working on, Rand's in R and D, Boston didn't really have an R and D footprint. We had a small R and D footprint both here in Morrisville as well as in Iowa. And so we have a lot of projects in the hopper and when it starts to get some of those projects live to our customers. So that's something I think that we are working on.

Speaker 2

And then I guess I just echo what my comments made to Ryan here.

Speaker 3

The volume of places that

Speaker 2

we go out and we're talking to surgeons or we're giving talks about the business, talking about our scoliosis franchise or our TD franchise, the volume of places, physicians as well as hospitals that are asking for a Boston OMP clinic, either embedded or local to their hospital is extremely high. And it is extremely obvious, Matt, that what Boston does with that 100% focus on the bracing and the patient care in major centers like Boston Children's Hospital and Children's in Philadelphia that that is sought after by the balance of children's hospitals in the United States. And I guess that's why we have been just so bullish about our opportunities to scale that. Again, it's going to take us some time, but I think we're probably a bit surprised at this stage about how the response by our customer base has been so incredibly positive related to this acquisition. And frankly, what I may be more surprised is that it's given our whole business more credibility that we are willing to do again some of the more difficult things that other companies haven't been willing to do for pediatric orthopedic surgeon.

Speaker 2

And then we would actually care about the patient that's outside of the operating room when we've historically been viewed as a surgical company just reinforces this position that we are here to stay, that we are a company that is fully dedicated to the entire patient population in pediatric orthopedics. And then we actually care about the things that our customers care about, which is not exclusively implants, not exclusively pet screws. They care about getting kids back to a high activity level and taking care of kids overall. And I think that has I'm surprised, I guess we shouldn't be, but really surprised to see just how well that entire story and the truth line has been well received by our customer.

Speaker 6

Okay. Got it. Very helpful. And then question for Fred. I just want to make sure I'm clear on commentary on EBITDA for next year, meaningful improvement equivalent to set deployment.

Speaker 6

I think this year you've talked about $20,000,000 ish just under of set deployment. Is that about the level we should think about for EBITDA next year? And then that assumes some pretty meaningful leverage. Can you just talk about some of those leverage points? Thanks.

Speaker 2

Yes, absolutely. So volume obviously is the single biggest leverage point, continued leverage down on the G and A side of things, particularly on the cash portion of those expenses, not leveraging R and D. We will pick up a few, call it, 2 to 3 points of additional leverage on sales and marketing side, just like we have for the last couple of years. So all of that with incremental volume drops through very nicely for us next year. And yes, that set deployment next year again will be less than that $20,000,000 And to Dave's comment in the script, we're planning for adjusted EBITDA to cover and pay for that investment in 2025.

Speaker 2

And then in 2026, the adjusted EBITDA to cover any working capital needs of the growing business and achieving the cash flow breakeven at that point in time. Outstanding. Thank you. Thanks, Matt. Thanks, Matt.

Operator

And the next question comes from Mike Matson with Needham. Your line is now open.

Speaker 4

Yes, thanks. I just want

Speaker 3

to ask one on the ELEGRIMRAAD. So you said you think you'll be launching out within 12 to 18 months, but do you know what the approval pathway is going to be for that? Is it 510, de novo or PMA? And do you expect to have any requirement for any kind of clinical data there to get that approved?

Speaker 2

Yes, great question. So the pediatric breakthrough device designation was obviously a huge step for us and it gives us some confidence that the likely pathway for this will be five gs. Obviously, there is one other device in the market that has some obviously strong clinical success, but then also some challenges. And so I think the breakthrough device designation issued by FDA is recognizing that there is a real need in the market for more devices that can help change kids' lives and not save kids' lives. And so we are pretty confident at this stage that based on what we're seeing, based on the interactions that we've had with the FDA and their behavior that this is likely a 510, which would give us confidence that 12 to 18 month time horizon is a good one.

Speaker 2

Again, things could change there, Mike, you know that, in the FDA. But from our perspective, things couldn't be going better in terms of how we're operating with FDA to get this device approved. I don't believe at this stage that this will require a post market clinical data or clinical data to get approved. You could assume though that we probably will work with some of the large, whether it's PFSG or one of the large registry groups in pediatric spine to capture data related to this device. And I think that the clinical condition is so severe and the challenges associated with this procedure so severe that we want to learn and we want to make sure that the devices that we're coming out with that are making a clinical difference.

Speaker 2

And so I think that's something that will be extremely well received. We've already talked to the leaders in inside pediatric spine surgery and I think that's been well received by the leaders. So I think it's the right thing for us to do clinically and it's a rational approach for us commercially as well.

Speaker 3

Okay, thanks. And then just one on the stock repurchase. So you said $5,000,000 I know it's kind of small, but it is a little unusual to see a company at your stage in the life cycle sort of buying back stock. So maybe just comment on why you've chosen to do that? What the outlook is?

Speaker 3

It sounded like you were considering maybe doing some additional buybacks as well.

Speaker 2

Yes, great question, Mike. So it's really related to the convert. So as you noticed, there is no other instrument put in place for a cap call associated with the converts. We looked at additional pricing. We looked at the cap call and we came up with this idea as a means to effectively get that strike price from up 30 to something like up 50.

Speaker 2

And so it is directly related to that and nothing else.

Speaker 3

Okay, got it. That makes sense.

Speaker 2

Thank you. Thanks, Mike.

Operator

And the next question comes from David Turkaly with Citizens JMP. Your line is now open.

Speaker 2

Hey, good

Speaker 7

morning guys and congrats on the recap. Fred, I was just wondering if you could just at a high level remind us of the economics of sort of investing in these new clinics in terms of sort of cash upfront? And then how quickly you think you kind of get a return or a positive ROI on those investments?

Speaker 2

Yes, absolutely. So let's say we're opening a new clinic. Obviously, the first thing we have to do is get support from the surgeons in the hospital. Then we have to get support from the hospital administration. We're not going to open one hoping volume comes our way.

Speaker 2

It's going to be guaranteed. We then would either lease some space inside the hospital or very, very near the hospital. So we have some lease payments, build out that space, which is minimal cost and then hire some clinicians. We think all in that's probably $500,000 of kind of sunk cost, if you will, before revenue starts coming into the business. And we anticipate that these would be cash flow positive within probably the 1st 3 or 4 months.

Speaker 2

Again, we're not going to open one unless we're confident revenue is going to come in pretty early. So within 3 or 4 months, it's then cash flow positive and starting to pay back on that investment. Obviously, it depends on the size, but we think that would be kind of the average size of a new clinic that can then obviously grow pretty aggressively over the years after that point in time.

Speaker 7

Sounds like you got a lot of firepower to go at then now. So that's good to hear. And we didn't talk a lot about enabling technologies on the call. I was wondering if you'd give any update on either 7 d or Firefly. And we had a conversation recently with a doc who was, I guess, super excited about how specifically 7 d registers and then how it recalibrates.

Speaker 7

So any thoughts on those businesses and those two parameters would be great. Thanks.

Speaker 2

Yes. Good question, Dave. Yes, I think the commentary that you got from Doctor. Twalston was fantastic. It was really well executed interview.

Speaker 2

The surgeons had, I think, a ton to say. And it was really interesting following your conversation, Dave, there was a podcast that was done by Poznan that some physicians that we are connected well, all the physicians that we're well connected to there had a number of different comments about robotics as well as 7 d and Firefly and that same very positive sentiment by a different group of physicians was echoed related to Firefly as well as 7D. I mean 7D has been great for us. Again, it's number one of those technologies that opens up doors for us in certain facilities. And this need for radiation sparing or minimal radiation type of navigation is extremely well received in pediatrics.

Speaker 2

And some of the growth that we're seeing on the response fusion side of our business is directly correlated to some of the placements that we had done in the year previous. And we have a very large hopper of locations that we expect to place units over the course of the next 12 to 18 months, which I think spells well for growth of our Fusion franchise in the future. So both FIREFLY as well as 70 continue. We're also working, as you well know, through the MedTech Concepts acquisition a few years ago, working on some additional digital health tools that we expect to be beta launching here in the coming few months. And I think when you combine that with the technologies we have on navigation, the whole digital healthcare side of our business, while right now very small, is another very promising source of very profitable growth for us in the out years.

Speaker 2

Dave, what's the new certification that 7D just received? Yes. So 7D has the capacity now to do fully navigated spine surgery without any CP. So they can do MRI specific registration, MRI specific they can base their the navigation on a preoperative MRI. And that essentially really eliminates almost all of the CT or all of the radiation required.

Speaker 2

And that's a big issue. That's huge. So we have customers wanting that, as you can imagine. And, I think it's just it just shows the power of some really, really innovative technologies by 7D.

Speaker 3

Thank you.

Speaker 2

Thanks, David.

Operator

And the next question comes from Richard Newitter with Truist. Your line is now open.

Speaker 8

Hi, good morning. This is Ravi Misra in for Rich. Can you hear me okay?

Speaker 2

Hi, Ravi. Hey, Ravi. Hey,

Speaker 8

Ravi. Hey. So just one question, I want to turn back to actually two questions, but the first I'd like to just turn back to guidance. The Street has you at about $38,000,000 for the U. S.

Speaker 8

In Q3 and you're talking about a normalized surgery environment with robust schedules. And I'm just curious, I appreciate the conservatism aspect here, but can you maybe walk us through any constraints that you might be seeing or macro changes or challenges that might be there that might be adding a little bit more of your conservatism? Or just help us understand kind of why if the U. S. Business is what appears to be stable or healthy or maybe even improving that number is unchanged?

Speaker 2

Yes. I think, our Q3 is typically our largest quarter. Most of that growth, a lot of that is in July, which we obviously have seen and feel good about. But as Dave mentioned, we're very conservative. And so we beat in the second quarter by some, but not by 1,000,000.

Speaker 2

And so we continue to be conservative in the guidance. We feel good about the Q3. The thing that is always a wildcard for us, particularly in the last 2 years is RSV in the 4th quarter. And it's impossible to predict what that will look like. Our guidance today assumes that it's similar to the Q4 of last year, but flu season RSV can have an impact on the business.

Speaker 2

And until we get to that point in the year, it's difficult to predict. So we're assuming it's similar to last year, but we don't know what it's going to be like until we actually get to that point. So it's nothing more than us being conservative and trying to make sure that we're not getting ahead of ourselves in the overall guidance.

Speaker 8

Great. And then maybe one around long term strategy and clinic expansion plans. Just trying to understand, you're talking about a pretty significant ramp in EBITDA in 2025 and onwards. But how do we kind of reconcile that against the capital intensity required to stand up new clinics or getting deeper in the trauma and deformity business? I mean, do you guys need more bracing type products or other kind of portfolio additions to help drive that EBITDA margin expansion?

Speaker 8

Or is this kind of an underlying growth and kind of emergence of leverage in the business that you're at a revenue point that should be able to support this level of cash flow generation? Thanks.

Speaker 2

Yes. It's truly leveraging the organic growth of the implant side of the business as well as the increased ROI on the clinic side of the business. So yes, we will be putting in place some, if you will, lease build out costs. We will be deploying sets that the cost of those will show up as depreciation and not impact negatively impact the adjusted EBITDA. So we're effectively leveraging the sales and marketing line a few points each year, keeping R and D growing with revenue and then really the leverage is coming from the cash portion of the G and A side of the business.

Speaker 2

So depreciation, stock comp, amortization, those things will probably continue to grow with the revenue. But the cash portion, which is really the support cost of the businesses, is where the leverage will continue to come from. And with high contribution margins on the bracing side of the business, actually higher contribution rate than the implant side of the business, higher growth there will drop through to nice profitability in the overall business.

Operator

Okay. And I am showing no further at this time. I would now like to hand the call back over to David Bailey for closing remarks.

Speaker 2

Thank you, Michelle, and thanks everybody for joining us today on the call. Look forward to seeing many of you and discussing updates in our September Analyst Day. So thanks for your time and have a great day.

Operator

This does conclude today's conference call. Thank you for participating. You may

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O'Reilly Automotive Q2 2024
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