OrthoPediatrics - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $52.7M, up 40% year over year (U.S. +52%, International +5%); adjusted EBITDA more than doubled to $3.0M, though GAAP diluted loss per share widened to $(0.69) due to restructuring and impairment charges.
• Gross margin was 67.5% in Q4, impacted by a full-year ~$3.0M reclassification from G&A to cost of revenue related to Boston O&P; management restated forward gross margin guidance to 72–73% (from 74–75%) without changing profitability expectations.
• 2025 guidance reiterated: revenue $235–$242M (+15–18% YoY), adjusted EBITDA $15–$17M, set deployment ~$$15M, with first positive quarterly free cash flow targeted for Q4 2025; free cash flow usage improved in Q4 2024 to ~$3.7M, down ~70% vs YTD average.
• Stock reaction catalysts: strong top-line and adjusted EBITDA growth; OPSB and scoliosis momentum; clarity on gross margin accounting; EU MDR approvals anticipated mid-2025; and 7D placements driving multi-year scoliosis account conversions.

What Went Well and What Went Wrong

What Went Well

• Domestic strength and scoliosis acceleration: Q4 U.S. revenue rose 52% to $42.9M; scoliosis grew 62% to $15.6M driven by RESPONSE, ApiFix, Boston O&P and 7D placements supporting conversion at large institutions.
• OPSB momentum and product innovation: rapid growth in DF2 brace with expanded indications and international launches; new OPSB Sensor System and MOVE-D brace broaden non-operative pediatric offerings.
• Adjusted EBITDA doubled: Q4 adjusted EBITDA of $3.0M vs $1.3M prior year; management emphasized a path to positive free cash flow in Q4 2025 and breakeven in 2026.

Management quote: “We will help more children than ever, capture more share across the entire business as we continue to break revenue records, grow our adjusted EBITDA, and improve cash usage in 2025 and beyond” — David Bailey, CEO.

What Went Wrong

• Gross margin compression and accounting reclassification: Q4 gross margin fell to 67.5% from 71.0% YoY due to ~$3.0M full-year reclassification tied to Boston O&P manufacturing; management restated future gross margin range to 72–73%.
• Widened GAAP net loss: Q4 net loss widened to $(16.1)M with $(0.69) diluted loss per share, reflecting $3.7M restructuring (Israel office closure) and $1.8M tradename impairment plus higher other expense.
• International softness tied to Brazil: company intentionally slowed shipments to South America (Brazil) to address AR amid FX volatility, limiting stocking orders; International revenue growth was 5% in Q4.

Transcript

Operator (participant)

Hello and welcome to OrthoPediatrics Corporation Fourth Quarter and Full Year 2024 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 Trip Taylor from the Gilmartin Group for a few introductory comments. Please go ahead.

Trip Taylor (VP)

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 upcoming annual report on Form 10-K, which will be filed with the SEC on March 5th, 2025. 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, March 4th, 2025. Except as required by law, the company undertakes no obligation to revise or update any statements to reflect events or circumstances taking place after the date of this call. With that, I would like to turn the call over to David Bailey, President and Chief Executive Officer.

David Bailey (President and CEO)

Thanks, Trip. Good morning, everyone, and thank you for joining us on our fourth quarter 2024 conference call. As always, I'd like to start by reporting the metric which most clearly defines our continued success and in which we are most proud. During the fourth quarter, we helped more than 34,000 kids and over 138,000 kids in the full year, both record highs for OrthoPediatrics. Now, having completed our 18th year at OrthoPediatrics and having helped over 1,140,000 kids, my associates and I recognize the positive impact our company has had on so many children and their families. We take our responsibility very seriously. Our customers and all healthcare providers in the pediatric space have been forced to make do with less than ideal options for children, and we will do everything in our power to right that wrong.

While 18 years have passed since our inception, in many ways, OP is just getting started, and our resolve to be a company that eventually helps 1 million kids every year has never been greater. During our journey, we have established OrthoPediatrics as the clear-cut market leader in pediatric orthopedic implants, and we anticipate our continued execution will lead to a dominant market share position in trauma and deformity correction and scoliosis implants in the coming five years. In the last few years, we have established ourselves as a leader in pediatric specialty bracing with our OPSB franchise. On top of deepening our commitment to the field and meeting more of the needs of our customers, this expansion of our business enables OrthoPediatrics to grow in a more capital-efficient way.

In the coming several years, we plan to execute our clear-cut strategy to obtain market dominance in this very large $500 million marketplace. Given the OPSB business is generating a higher contribution margin than our implant business, these investments will enable us to generate increased EBITDA and improve cash flows. Every day, every quarter, every year, we become more ingrained in the children's hospitals by growing our market share and displacing the retreating incumbent competition and living out our near-fanatical commitment to doing what is right for children and their caregivers.

We demonstrate this commitment by delivering new products and technologies that meet major unmet needs, providing unparalleled customer service through the world's only global sales channel in pediatric orthopedics and through a network of dedicated pediatric-specific orthotists and prosthetists, by our outside support for surgeon clinical education and training, and to put it simply, investing in important things that our customers care about and that impact the field of pediatrics. When you look at the success of our company across our 18-year history, our ability to execute on our commitments, our consistent track record of sales growth through share taking, deliberate step function improvements in adjusted EBITDA laying a clear path to free cash flow break-even in 2026, and more recently, our record performance in 2024, we believe our market valuation is entirely inconsistent with the company's performance.

We recognize as a public company, certain metrics and external macrodynamics will always be scrutinized, but we believe the fundamentals of our business have never been stronger. Regardless of the quarter-to-quarter gyrations and variations that can impact valuations for companies like ours, the unshakeable truth is that OrthoPediatrics has carved out a unique position in the public growth med tech sector. Unlike other med tech companies, we are not in a bare-knuckle struggle against focused competition, which gives us confidence in our growth trajectory while allowing us to leverage our P&L, and soon we will produce free cash flow positivity. Therefore, we will continue to be aggressive and execute our strategy on our way to helping 1 million kids per year and creating substantial shareholder value. To this point, throughout the year and again in the fourth quarter, we have successfully delivered positive results.

We have produced extremely strong total revenue of $52.7 million, representing 40% growth from the comparable period. We saw quarterly growth in both T&D and scoliosis with 35% and 62% growth respectively, led by domestic strength with quarterly growth of 52% from a particularly robust performance from domestic T&D, as well as the addition of Boston Orthotics & Prosthetics. Our international growth was impacted by our decision to slow-set sales shipments to South America, specifically Brazil, in order to reduce AR balances negatively affected by rapid currency fluctuations. However, we still saw extremely strong EMEA T&D growth due to high demand, and OUS scoliosis growth was great despite challenges in Brazil. With extremely significant revenue growth and more than doubling our adjusted EBITDA during the fourth quarter of 2024, we improved our financial profile and took another step towards free cash flow break-even in 2026.

All of our businesses continue to grow rapidly, entirely from share taking due to continued demand for our products, large-scale set deployments in 2023 and 2024, major new products, successfully scaling of our past acquisitions such as OrthX, ApiFix, and Pega Medical, and the more recent launch of OPSB and the acquisition and full integration of Boston O&P. With all of these levers in place, we are confident we will continue to reach new highs and deliver important results for OrthoPediatrics. We expect our business to continue this momentum, and our success in 2025 and beyond is driven by three main factors: execution and scaling of OPSB, share taking across the business by leveraging prior set deployments, and ongoing success of our innovative product launches.

This year, we expect to generate revenue of $235 million-$242 million, representing annual growth of 15%-18% as we lap the Boston O&P acquisition. Importantly, we also expect adjusted EBITDA of $15 million-$17 million to be greater than $15 million of set deployments in 2025. We also expect to have our first quarter of positive free cash flow in the fourth quarter of 2025. In the fourth quarter of 2024, the T&D business continued to derive significant market share gains across several products, as well as the addition of Boston O&P revenue. This quarter's performance was highlighted by both trauma and OPSB products, including PMP Tibia, DF2, cannulated screws, and Boston O&P sales. We continue to leverage our prior set deployments, which are driving increasing share gains for trauma and deformity across the breadth of our products. U.S.

Trauma and deformity was extremely strong, and in fact, U.S. trauma is likely as robust as we have ever seen it in company history, mainly attributable to set deployments in 2023 and 2024 and the more rapid adoption of our new products. In addition, during the quarter, several sets of PMP Tibia were launched, and we expect this will remain an important growth driver for the next several years. DF2 demand is now far exceeding our expectations and is quickly setting a new gold standard for femur fracture management in young children. DF2 recently received expanded indications for postoperative care, which we believe is a much larger market than the femur fracture market. All of this has created the need for expanding our supply chain to meet exploding demand. On the RND front, we're excited about our projects on the surgical side of our T&D business.

Our pediatric plating platform, or 3P, a world-class system with significant opportunity to fill unmet needs, is progressing according to plan, and we anticipate a beta launch of 3P HIP. Once launched, 3P HIP will spawn further share taking opportunities for us within the plating franchise. Overall, T&D continues to be a solid performer for us as we leverage our scale, capture market share, and bring new products to market that fill unmet needs and drive continued growth across the board. As for the non-surgical specialty bracing business, or OPSB, from the start, we have been very bullish about this franchise, which represents a large new source of capital-friendly growth. Following the successful integration of Boston O&P, we are very pleased to see our strategic rationale validated and playing out as we expected, maybe even better than we expected.

As previously announced, we expanded our clinic business through both Greenfield Expansion in Indianapolis and Aquihire in Florida and Colorado. The opportunities for clinic expansion are immense. The demand from our customers is high, and our funnel for clinic expansion is very large. The stand-up of the early expansion clinics is going well and providing a reproducible playbook that represents a substantial growth lever with significant runway. We are pleased with how we are tracking to our guidance for four new territories in 2025 and expect that we will be more updates on this front throughout the year. On the product side of OPSB, and as previously mentioned, we are experiencing rapid growth of our DF2 femur fracture brace, which is growing so rapidly that we are seeking additional manufacturing sources so that we can meet current and future demand.

Beyond that, our OPSB RND team launched multiple products, such as a new scoliosis brace sensor with patient compliance software and additional DF2 sizes as we extend its use beyond fracture management. We signed distribution and licensing agreements for the Move D brace to minimize tremors developed at Children's Hospital of Orange County, and the Thrive product portfolio, including Thrive Orthopedics F3 Hero Pediatric AFO, the True Stretch Pediatric Aquinas Spray, and the Thrive Pediatric X-Glide Carbon Fiber Insoles, all focused on three unique pediatric orthotic conditions. These solutions are more evident supporting our thesis that OPSB can become the clearinghouse for specialty bracing products specifically designed for kids. Further, the pipeline of new opportunities coming on the business development side of OPSB is really ramping.

We are certainly attracting entrepreneurs and inventors with new product lines and technologies that they desire to scale globally through our growing sales channel and clinic network. This is coming in licensing, distributing, and in some cases, small acquisition opportunities that will continue to allow us to leverage our channel, thus growing revenue and adding profit. We are building a flywheel. At this point, it is small and is spinning very fast. With scale comes increasing momentum, and we are very confident our flywheel will become quite large in the coming years. We recognize the huge potential within OPSB to drive our patient impact potential for treating more patients with capital-efficient growth. Early traction within our strategy suggests that we are on track with our plans to execute through the remainder of 2025 and for several years beyond. Moving to the scoliosis business.

Our strong growth seen in scoliosis this quarter was driven by continued share gain combined with new users from large accounts. We anticipate that this trend will continue into 2025. As we increase our volume, we expect to reap the benefits of the new user acceleration from late 2024. To highlight a few key products, we continue to see strong growth in our Response Fusion franchise from new customer acquisitions. We saw an additional 70 placements in the fourth quarter in large institutions and the continued introduction of our first EOS product, Response Rhythm elt. We have a substantial opportunity to grow scoliosis revenue over the next three to five years. Additionally, we are seeing a consistent stream of new ApiFix users and growth that only continues to pick up. More users are learning where ApiFix fits in their treatment algorithm.

This supports our vision that eventually, ApiFix will be a tool used by almost every pediatric scoliosis surgeon. While still relatively small, we expect ApiFix to continue to grow rapidly in 2025 as more surgeons better understand the best use case for the device in their practices. Looking at our EOS products, our EOS product portfolio development remains on track, and we are directly discussing the requirements for product approvals for Ellie and Vertiglide with the FDA. We have been working on confirming the regulatory path, and recently, we've had encouraging feedback from the FDA. The most recent discussions have led us to believe that there is a higher likelihood that VERTIGLIDE will be approved in the U.S. sooner than expected and under 510(k) clearance. Moving on to international. In the quarter, we saw slower international sales, generating revenue of $9.8 million and delivering 5% growth year-over-year.

Despite significant international demand, we made a conscious decision to limit additional stocking order shipments to certain stocking distributors in order to stimulate timely receivables collections, which have been negatively affected by the rising dollar against South American currency. Trauma and deformity implants were most affected by the shipping holds in South America, while scoliosis delivered very nice growth year-over-year. That said, general demand across the entire T&D and scoliosis portfolio was healthy, especially in our agency markets, where we saw strong sales growth. In fact, non-LATAM T&D growth exceeded 20%, and scoliosis grew nearly 30%, highlighting the extremely compelling underlying demand. International scoliosis performed well due to solid revenue in our direct markets, where we are seeing new users come on board.

We are very happy with the progress made in 2024 launching the scoliosis business in the EU and expect that with the anticipated EU MDR approvals, our EU Spine franchise is set for high growth in the future. As we look ahead, EU MDR approval remains a large catalyst for our growth in 2025 and beyond, and we are confident that we are well-positioned for approvals. We are awaiting the Notified Body Audit to finalize our EU MDR status, which we expect to be completed in mid-2025. Once we receive our first, we will launch a wave of products into the EU and then expect additional waves as further approvals are accomplished over the next 18 months.

I want to point out that the EU MDR approval for implants is an expensive process, but we believe it is the right thing to do for kids who need these devices outside of the United States, and it strengthens our strategic position. Additionally, we are exploring further expansion opportunities for OPSB outside the U.S. in 2025, which comes with a light touch and quick turnaround when it comes to regulatory approvals. Overall, the international business is set up nicely, and we believe the remainder of the year will contribute toward a healthy 2025. Finally, this brings us to surgeon training and education. In the fourth quarter, we hosted 132 unique training experiences for over 2,700 healthcare professionals, including at the International Pediatric Orthopedic Symposium, where OrthoPediatrics continued our leadership position as an emerald-level sponsor.

Once again, our team was well-represented and connected with customers to share hands-on learning experiences with our new and innovative products. We were excited that through our booths and our educational events, we were able to introduce our new enabling technology division, as well as highlight all the great work we are doing in non-operative care through OP specialty bracing. Our time at events like this is incredibly important as we prioritize providing clinical education opportunities to grow alongside the pediatric orthopedic community. With that, I'd like to turn the call over to Fred to provide more detail on our financial results. Fred? Thanks, Dave.

Fred Hite (CFO)

Before giving more details on our financial results, I wanted to reiterate that through our continued execution, we have established OrthoPediatrics as a high-quality and differentiated asset with the demonstrated ability to scale growth, increase operating leverage, which provides a clear path to free cash positivity, and we are supported by a very strong balance sheet. That said, we made some very difficult, yet very strategic decisions in the quarter that we expect to support our commitment to growth, profitability, and improved cash usage. You will notice some one-time charges on the P&L. The $3.7 million restructuring charge is primarily due to the closure of our OP Israel office, which was the former ApiFix headquarters. We have decided to move production out of Israel and into the U.S. to reduce supply risk and to consolidate the management of the ApiFix product line into our Warsaw operations.

These difficult decisions are a component of our continued focus on delivering improved adjusted EBITDA and demonstrate that adjusted EBITDA improvements and reduced cash usage are top priorities for the company. Additionally, as you will see from our results, during the quarter, our gross profit margin profile has shifted slightly. As we continue to integrate Boston O&P, we are growing the OPSB business, launching this new strategy, and working through the process, we are learning and have adjusted certain expenses out of general and administrative expenses into cost of goods sold. As a result, we saw a negative impact on the gross margin profile of OPSB and our overall gross margin for the quarter. I wanted to be clear. This does not impact our profitability, and given our growing channel in OPSB, we will not shun lower gross margin distribution opportunities that leverage our fixed costs and improve overall profitability.

We've made a full-year adjustment of approximately $3 million out of G&A and into cost of goods sold. This negatively impacted our fourth quarter gross margin, but properly reflects our full-year 2024 gross margin. Taking a closer look at the P&L, our fourth quarter 2024 worldwide revenue of $52.7 million increased 40% compared to the fourth quarter of 2023. Growth in the quarter was driven primarily by strong performances across trauma and deformity, scoliosis, and OPSB, as well as the addition of Boston O&P, slightly offset by the lower growth in the international revenues. U.S. revenue was $42.9 million, a 52% increase from the fourth quarter of 2023, representing 79% of our total revenue. Growth in the quarter was primarily driven by our additional market share gains across trauma, deformity, scoliosis, and OPSB, as well as the addition of Boston Orthotics & Prosthetics.

We generated total international revenue of $9.8 million, representing growth of 5% compared to the fourth quarter of 2023, representing 21% of our total revenue. Growth in the quarter was primarily led by strong scoliosis sales in our agency markets. In the fourth quarter of 2024, trauma and deformity global revenue of $36.4 million increased 35% compared to the prior year period. Growth was primarily driven by Pega products, trauma, X-Fix, and OPSB, plus the addition of Boston O&P. In the fourth quarter of 2024, scoliosis global revenue of $15.6 million increased 62% compared to the prior year period. Growth was primarily driven by increased U.S. growth across the response and ApiFix non-fusion system and additional impact from 7D, as well as the addition of Boston O&P. Finally, sports medicine other revenue in the fourth quarter of 2024 was $0.6 million compared to $0.9 million in the prior year period.

Turning to set deployment, $3.7 million of sets were consigned in the fourth quarter of 2024 compared to $5.9 million in the fourth quarter of 2023. In 2024, we deployed $21.1 million of sets compared to $22.0 million in 2023. The $21.1 million for 2024 was slightly higher than our forecast of less than $20 million, driven by higher-than-expected 7D placements and some earlier-than-expected deliveries on some recent product launches. Touching briefly on a few key metrics. For the fourth quarter of 2024, gross profit margin was 68% compared to 71% for the fourth quarter of 2023. The decrease in gross profit margin was primarily driven by an approximately $3 million full-year adjustment from the reclassification of expenses from overhead costs related to manufacturing across the OPSB business.

Full-year 2024 gross margin of 72.6% is a better representation of the business's performance and is more indicative of the gross margin rate for the near future. Total operating expenses increased $14.8 million, or 43% compared to the prior year period, to $49.6 million for the fourth quarter of 2024. The increase was primarily driven by the restructuring charge, the impairment charge, the addition of Boston O&P, increases in spending related to EU MDR compliance, increased commission expense, and the incremental personnel required to support the ongoing growth of the company. Sales and marketing expenses increased $4.0 million, or 31% compared to the prior year period, to $16.8 million in the fourth quarter of 2024. The increase was mainly driven by increased sales and commission expense. General and administrative expenses increased $5.4 million, or 28% year-over-year, to $24.4 million in the fourth quarter of 2024.

The fourth quarter increase was driven primarily by the addition of personnel and resources to support the continued expansion of the business and an increase in depreciation and amortization. Research and development expenses remained flat at $2.9 million in the fourth quarter of 2024 due to the timing of external development expenses. As discussed in the fourth quarter, we did see the impact from the one-time charge of $3.7 million restructuring charge that includes severance, inventory write-off, lease break, and other expenses associated with the closure of our Israel office. In addition, we recorded a charge related to one of our trade names of $1.8 million. The other expense was $2.4 million for the fourth quarter of 2024 compared to $1.2 million of other income for the same period last year.

Adjusted EBITDA was $3.0 million in the fourth quarter of 2024, more than doubled when compared to the $1.3 million for the fourth quarter of 2023. For the full year of 2024, adjusted EBITDA was $8.5 million compared to $5.0 million in the prior year. In the fourth quarter of 2024, free cash flow usage was $3.7 million, representing a significant reduction of 70% when compared to the year-to-date average through the first three quarters of 2024, and a 67% reduction when compared to the same period in the prior year. We now expect the first quarter of positive free cash flow to be in the fourth quarter of 2025. We ended the fourth quarter with $70.8 million in cash, short-term investments, and restricted cash, and we still have $25 million available on our new term loan.

Turning to guidance, we are reiterating our expectation for full-year 2025 revenue to be in the range of $235 million-$242 million, representing year-over-year growth of 15%-18%. During our analyst day last September, I had communicated that we expect our gross margins to remain flat at 74%-75% for the next several years. Given our current reclassification of G&A into cost of goods sold, I am restating the guidance that our gross margins will, in fact, continue to be flat. However, the newly updated range is 72%-73%. This does not impact our profitability, just the buckets within the P&L. We also continue to expect to generate between $15 million-$17 million of adjusted EBITDA in 2025. Additionally, we continue to expect approximately $15 million of new sets deployed in 2025.

This represents our continued focus on driving the business to free cash flow breakeven by 2026, and we anticipate delivering our first quarter of free cash flow positivity in the fourth quarter of 2025. Our current guidance assumes no impact of tariffs or other government changes. However, we will continue to monitor the dynamics, and while we expect potential tariffs to be minimal impact, it is too early to determine all potential government actions and their impact. I'll now turn the call back to Dave for closing remarks.

David Bailey (President and CEO)

Thanks, Fred. We are encouraged by how we ended the year and have already seen that momentum begin to carry into 2025. Our success in 2025 and beyond is driven by three main factors: execution and scaling of OPSB, share taking across the business by leveraging prior set deployment, and ongoing success of our innovative product launches.

The aggressive approach we have taken to this business and the opportunity ahead of us over the next three to five years is very exciting. We are extremely proud that we have continued delivering strong performances, especially within this med tech market, quarter-over-quarter and year-over- year, and we do not plan for this to change moving forward. We will continue to help more children than ever, capture more share across the entire business as we continue to break revenue records, grow our adjusted EBITDA, and improve cash usage in 2025 and beyond. Operator, let's open the call for Q&A. Thank you.

Operator (participant)

Thank you so much. As a reminder to our audience to ask a question, simply press star 11 on your telephone and wait for your name to be announced. To remove yourself, press star 11 again. Our first question is from Ryan Zimmerman with BTIG.

Please proceed.

Ryan Zimmerman (Equity Research Analyst)

Thanks for taking our questions, guys. Appreciate it. Let's start with guidance a little bit. I know you don't guide by segment, but maybe you could help us kind of how you're thinking about some of the contributions here in each of the buckets of the businesses. It sounds like certainly the OUS business with the addition of EU MDR clearance could step up a little bit in 2025. I appreciate any color you have there. Just I'll ask the second question upfront too, which is just around seasonality and pacing through the year. I mean, we know kids tend to get their surgeries second quarter, third quarter during the summer in between school, but you've had some fluctuations, I guess, between the fourth quarter and the first quarter due to seasonal dynamics, flu, RSV, etc.

Any color there, I think, would certainly be appreciated as well. Thanks for taking the questions, guys.

David Bailey (President and CEO)

Yeah, thanks, Ryan. I think from a seasonal perspective, maybe I'll take this one first. I think that likely to see consistency, the consistent seasonality of the business the way we've seen it in the past with kind of June, July, August still being our biggest months. December, obviously, a big month for us as well as school as kids get out. It is possible that over the course of the next several years, as OPSB continues to grow, that some of that seasonality could maybe level out a little bit. I think that normally see our first quarter as a slight step down from Q4 of the previous year, and then we scale into Q2 or Q2 and Q3 as the summer season continues to grow.

I think you're spot on in terms of the impact that EU MDR can have on the business. It's not a panacea right away. Obviously, we've got to get sets built, and we've got to get sets sold to distributors and sets into the market when we get approved, but certainly it should have a positive impact in 2025 and probably more of an impact even in 2026 and 2027. I think the thing to call out there is that we're seeing really strong growth of our scoliosis franchise in Europe, and that's really with only one of the systems available, so our 5560 RESPONSE fusion system. As we can bring a full product portfolio to Europe on the fusion side, I think we're going to continue to see that business grow.

That starts to negate some of the reliance that we've historically had on scoliosis OUS in Brazil and some of the South American markets, where it's primarily been our larger opportunities outside of the United States up until recently. As you think about trauma, deformity, and scoliosis here in the United States and I guess around the world, generally speaking, as you said, we don't generally guide specifically there, but I think you could expect to see scoliosis, smaller business, continue to grow a little bit faster than the trauma and deformity business, obviously much larger business on the T&D side and greater market share. I think that's probably what you'll see again here in 2025.

Ryan Zimmerman (Equity Research Analyst)

Okay. Very helpful, Dave. Appreciate the color. I'll hop back in queue.

David Bailey (President and CEO)

Sounds good.

Operator (participant)

Thank you. Our next question comes from the line of Rick Wise with Stifel. Please proceed.

Rick Wise (Managing Director)

Good afternoon, Dave. Hi, Fred. So much to unpack here. It's intriguing. Maybe talking about a couple of other opportunities. It seems like the business has tremendous momentum as you're talking about and the U.S. numbers would suggest. Maybe start with OPSB. Just you're saying the strategic rationale playing out, the funnel is full, four new territories. Help us think through, talk through in maybe a little more detail, Dave, the pipeline, new opportunity, the licensing. What have you assumed in 2025? How do we translate that into thinking about growth or outlook or time of year? Do we see it in 2025? Just help us think through that opportunity.

David Bailey (President and CEO)

Sure. Good question, Rick. Obviously, when I talk about the three main things that we have to do to continue to really grow the business 2025 and beyond, scaling OPSB is at the top of that list.

I think this time last year, obviously, we had just completed the acquisition of Boston, and we were just really starting the journey of scaling OPSB. When I look at that now a year later, I think everything we thought Boston could be and the scaling of clinics and the addition of products has come true. I think we're looking at a $500 million TAM that's easily accessible with less capital, frankly, than the consignment model of our implant business. That was the thesis that we could scale into this, and I think we have throughout the year. I think it's going to be a big part of 2025 and beyond. What we've learned, I guess, and our customers are certainly interested in more clinics, more products.

It's clearly a very underserved segment of the pediatric orthopedic marketplace, and it has a ton of synergies with our implant business. I think that the implant business is in part growing because the OPSB franchise is growing, and the brand of OrthoPediatrics and its importance in the mind of our customers is growing as well. I guess when you think about clinics, I mean, our aspiration is to have four new territories as we call out in the analyst day, and we're sticking to that. It does seem like we've got enough in the funnel that it's possible that we could go to more than four territories in 2025. We're not calling that out, but it is possible. We certainly won't hold back in terms of our opportunity to expand beyond those four territories.

I guess what we're really saying is coming out of the analyst day in September, I think we're much, much more solid on the pace with which we can scale our OPSB clinics and have a better sense of what the cost associated with that is to the P&L. We've now set up some greenfield clinics, some of the first ones we've ever done, and those greenfield clinics continue to, those greenfield clinics and that process was, I would say, in line with the timing and the cost that we thought. That is encouraging. I guess last, the specialty bracing business and the R&D side of there and these licensing opportunities and distribution opportunities, it's really powerful.

I mean, we think of this business as an opportunity for us to establish what really is a single channel, almost, dare I say, an Amazon of pediatric orthopedic devices, nonsurgical devices, where if entrepreneurs and small companies want to access the pediatric orthopedic market and access our customers, there would be an opportunity to do that through the scale that we enjoy here in the United States and then around the world. As we add more clinics and you fast forward this several years where we would say we have a completely dominant position in clinics, that becomes an even more powerful type of channel for us to drive revenue through.

I guess the last, last thing, sorry, long answer to a short question, Rick, but we're seeing devices like DF2, which you heard called out in the script, growing at rates that I'm not sure we thought were very encouraged, I guess, by the way DF2 is growing. We see a number of opportunities like DF2 to continue to grow. That has a duplicate of effect when you're not only selling to the hospitals, but then as we add clinics, we're selling it through our own channel. I hope that answered your question, but a lot of optimism, obviously, and very encouraged a year post OPSB, year post Boston, what we can do with that over the next several years.

Rick Wise (Managing Director)

Yeah, that's great. Thanks for all the detail. Fred, turning to gross margin again, I totally get what you're saying.

The first thing I looked at was to see whether your adjusted EBITDA would change. I see it's unchanged. I get it. Help me understand. You had said the 74-75 range before you made this adjustment was flat. You said it again tonight. It just strikes me with all these new products launching, your gain share, and I reflect on the Israeli closure. I get the reasons for doing it. Wouldn't that be positive as you consolidate manufacturing and run more volume through Warsaw? I mean, I guess my real question is, help us think through some of the moving pieces on the gross, the COGS line, gross margin, or whatever you want to say. Is there room for upside as we go through the year? The European products are approved.

It just seems like there should be there is room for upside as we head toward the end of the year and maybe start thinking about 2026. Thank you.

Fred Hite (CFO)

Yeah, thanks, Rick. Great question. I would say we are hesitant to get ahead of ourselves, but we do agree that there may be some opportunities that we're working on in that area. As we've talked in the past, a little bit of selling price always helps in that area. We will continue that trend. There is some consolidation, which could help show up as favorable gross margin. There are some other activities that we are, I think, refocused on this year that maybe we hadn't been as focused on in the past that could definitely, over the next several years, have a favorable impact on the gross margin rate.

I think we're being conservative, keeping our guidance flat as it was before, but I would say we have a renewed focus in this area to make some improvements there.

Rick Wise (Managing Director)

Sorry, Fred. You teased me. I got to ask. Other activities? Help me understand. Thank you.

We're reviewing all of the line items. We're reviewing all of the line items that go into our cost of goods sold and looking for opportunities to leverage that, just like we're leveraging the SG&A down below.

Gotcha. Thank you.

David Bailey (President and CEO)

Thanks, Rick.

Operator (participant)

Thank you. Our next question comes on the line of Matthew O'Brien with Piper Sandler. Please proceed.

Matthew O'Brien (Senior Research Analyst)

Good evening. Thanks for taking my questions. Maybe to follow up on Rick's question on OPSB, did you guys I think you had mentioned doing better than $25 million in sales in 2024. Did you do that?

Are we still expecting north of 20% growth out of that business here in 2025? And then just a little bit more specifics on things are going better than expected. Dave, is it really just going deeper in the existing facilities that you have, or just that you're ramping the new ones faster than you expected? I do not know if it's cost or something else, but just any kind of detail there would be helpful, and then I do have a follow-up.

David Bailey (President and CEO)

Yeah. Perfect. I think it's safe to say that OPSB across the board, not just Boston, but OPSB across the board, MDO, DF2, the products associated with that, Aura Medical, as well as the clinic expansion is growing rapidly. Yes, I think it will definitely be growing north of 20% in 2025.

We see that growing north of 20% for a long time, frankly. We have a long way to go as we scale that business. I think when we see things going better than expected, the volume of opportunities for clinic expansion is extremely high. It takes time. Some of those, as we said, are going to be aqua hires where we have to get a footprint in a big market that we have no clinics in currently. The opportunities and profitable opportunities for us are very high. Surge in demand for that service as well as the products is very high. Again, we thought that was what we were going to see when we announced this acquisition a year ago.

At this stage, I would say the demand for what we are offering is higher than I would have expected at this time. Devices like DF2 are going better than we expected. I see the demand for that product as very high. I mean, we're now seeking alternative manufacturing sources. We make it in our facility in Boston, and we're going to have to continue to be able to scale the manufacturing of it there in Boston as well as probably through other facilities. I want to say, 30+ countries now that the DF2 product is approved. The thesis that we can get these products approved outside of the United States much faster than our implant products and that there is huge demand outside of the United States is certainly an accurate thesis.

We have got to be able to scale manufacturing of those devices such that we can meet demand outside of the U.S. I can just say that the surge in demand for that device here in the U.S., again, still small, but maybe greater than we would expect. We have several more devices that I am not saying are all home runs like that one, but several more devices on the RND side that we are close to launching, working with a number of surgeons on. I would think that you are going to see similar kinds of impact from those devices on the OPSB business overall.

Matthew O'Brien (Senior Research Analyst)

Okay. That is, I guess, a good problem to have on the manufacturing side. Question for Fred.

Just as I look at the instrument set deployments that you've done over the last couple of years, I think it was 23 and then 20, and now we're down to 15. I know you have a more capital-efficient model now with OPSB, but the legacy trauma and spine businesses are doing really well. Are you going to run the risk of starving those businesses a little bit in the near term? We're going to need another big bump as far as set deployments go in 2026, 2027, or is this more of a steady state in terms of how much you really need to be deploying in order to grow the businesses still at a very healthy clip?

Fred Hite (CFO)

Yeah. It's a great question. It's a question we spend time analyzing ourselves. We think 15 is the right number for 2026.

I think the good news is a higher percentage of that is really for new products as opposed to legacy products. We are really excited about that and the impact that that is going to have on our overall business and growth in 2027 and beyond. In 2027, what is the right number that we will deploy has not been determined yet. We will see what the demand is, both for legacy systems as well as new products. Again, I would expect 2026 and 2027 to be highly concentrated on the new product launches, given all the launches coming up that we have in 2025, 2026, and 2027. I would say that we have not made that determination yet, but we will be confident in saying that it is going to be highly focused on our new products being launched.

David Bailey (President and CEO)

Yeah.

I think it's safe to say we're not going to starve those businesses, particularly when we see products like PMP Tibia that have relatively high ASPs, fantastic margin. I mean, that product line, I think we told you we achieved this year's revenue in May. So that device is obviously growing, and we're going to support that. I think what we've seen over the course of the last several years, Matt, and you know our story well, but when we were deploying $3 million-$5 million worth of inventory for several years of primarily legacy products, we've probably entered near the end of the need to deploy a lot of those legacy products. As Fred said, these are primarily new product development. The numbers will shift as we have really compelling new products like PMP Tibia and some of the other devices.

When you also think about the out years of our growth, particularly on the Scoli side, certainly a new scoliosis system coming soon that we've talked about, but also EOS products. And EOS products, as you know, very high ASP. They're all scheduled procedures. We're fighting tooth and nail on the regulatory side, but when you get through that, these aren't set deployment needs that are massive for us to be able to grow our top line, particularly on the scoliosis side and with some of these highly differentiated trauma implants. I think that's what you're seeing with the move down a little bit on the implant side of deployment.

Again, as demand dictates for some of these more differentiated products, that'll change from time to time, but I think we're going to be able to sweat our assets in a way that's going to allow us to not have to deploy as much in the future.

Matthew O'Brien (Senior Research Analyst)

Very helpful. Thank you.

Operator (participant)

Thank you. Our next question is from the line of Mike Matson with Needham & Company. Please proceed.

Joseph Conway (Equity Research Associate)

Hey, guys. It's Joseph on for Mike. Thanks for taking our questions. Maybe to start it off, just wanted to see if we could get an update. I guess the first one on Playbook, the Needham Technology Software. Just kind of curious how that business is going, any milestones there. And then the new fusion implant system, is that still on track to launch in the second half of this year?

David Bailey (President and CEO)

Yeah. Good question.

Playbook was, I think, officially launched to the sales team at our sales meeting here about a month ago. The product, we're very pleased with the way the product looks. Certainly, it's a process to get those products implemented inside hospital systems, but I think we've made really nice progress on Playbook on the enabling tech side. Just from a revenue perspective, it's a business that we haven't forecasted a ton of revenue in 2025. We see that as contributing to driving revenue in our trauma deformity business and in our scoliosis business, and then driving more substantial revenue as a standalone play in 2026, 2027, and beyond. Extremely pleased with where it's at. It created a heck of a lot of buzz at our sales meeting, which was very encouraging. On fusion? Oh, on a fusion side. Yeah.

Fusion product development on track. I think the goal would be to try to get some surgeries done by the end of 2025 here in the United States, but again, not something that we have placed in the 2025 forecast in terms of revenue. We are going to make certain that we get the device right, and it is everything we want it to be. The fusion business, as it stands with Response, is growing very rapidly now. We do not have to rush things, certainly, to get that device on the market.

Joseph Conway (Equity Research Associate)

Okay. Great. Maybe just one more on 7D. It seems like 3Q and this quarter, 4Q, were pretty strong. It seems like that is ramping up.

I guess just looking at 2025, do you guys kind of see this as more of an inflection for 7D placements, or is it maybe just a little longer, maybe 2026, that it's a more meaningful driver?

David Bailey (President and CEO)

I think 7D is a driver right now, was a driver for us in the second half of the year. You are seeing a Response Fusion business and just our scoliosis business, particularly in the United States, accelerating growth on a much larger business. That is one of the reasons why, while we want to get the new system out, we are driving a heck of a lot of growth with our existing system in conjunction with 7D. I think we are already starting to see the impact of that as we have placed 7D units in accounts that historically have not been large users of our fusion products.

That is impacting Q3, Q4 revenue. In fact, it will have a pretty substantial impact. I think why you see us so confident in our growth on the scoliosis side in 2025 and 2026 is because a lot of that is connected to 7D placements. I think we have learned a lot about just capital placement in general. As you know, just a few years ago, we had no experience in this space. Our capacity to build a funnel and to see these things come through the funnel in a more consistent way, quarter-to-quarter to quarter, is a muscle that we have built.

I guess I have to credit the Enabling Technologies team that while we're also working on Playbook and technologies like that, it's been a huge help to us to be able to develop the muscle to get involved in capital placement and capital equipment sales. I think you're going to see in 2025 consistent placements, quarter to quarter to quarter of 7D units that will impact revenue on the scoliosis side, both in 2025 and for the term of those contracts, which are normally three years. It becomes a bit of a compounding effect as we place more and more of these units.

Joseph Conway (Equity Research Associate)

Okay. Perfect. Much appreciated. Congrats on the great quarter.

David Bailey (President and CEO)

Hey, thanks. Thanks.

Operator (participant)

Thank you. We have a question from Ryan Zimmerman from BTIG. Please proceed.

Ryan Zimmerman (Equity Research Analyst)

Just a high-level question follow-up for me, Dave, for you.

There's just been a lot of chatter about Medicaid coverage in the news lately, right, and potentially removing that. I think as I think about CHIPS and Medicaid, I think it covers something like 37 million kids in the U.S. And so I don't know what your thought is on it, if you have a thought, but I have to imagine your customers are thinking about it, how they're thinking about positioning for it, and how you think about it in terms of potentially impacting the business. I just wanted to kind of pick your brain on it a little bit, if I could.

David Bailey (President and CEO)

Yeah. Certainly not a topic that anyone can give you a definitive answer on, as you know, but it's obviously something we're watching. I'm not sure exactly how that impacts the business as we go forward.

Obviously, we're not certain that it is going to impact it at all. That said, I think our feeling here is that we really struggle with the concept that children will be left without any form of healthcare. If you look at the makeup of our customer base, so many of our customers are currently in systems where they're endowed hospitals or they're hospitals like the Shriners Hospitals, for example, that certainly take what Medicaid or private insurance might pay, but are still offering care based on their endowments. I think there is some shielding that we would have of that.

I think when push comes to shove, it seems very difficult that we are going to allow kids in this country who have cerebral palsy or congenital deformities to not have appropriate access to the kinds of devices that they need in the hospital to live a normal life. I think all of our devices have a very, very rational impact on the total cost of care, right? If we can impact positively these patients in the operating room that then ultimately lowers their care to Medicaid thereafter, again, it's hard to imagine that those devices wouldn't be readily available to our customers. Again, it's anybody's guess at this stage, and we can't formulate exactly what potential impact here, but I think it's I guess we aren't betting that this is a major impact on our business on a go-forward basis.

Ryan Zimmerman (Equity Research Analyst)

Yeah.

No. Makes sense. I appreciate your thoughts on it, Dave.

Operator (participant)

Thank you. This concludes our Q&A session for today. I will turn it back to Dave Bailey for final comments.

David Bailey (President and CEO)

Great. Thanks, operator. Thank you, everybody, who joined our call this evening. I appreciate your questions, and we'll look forward to giving you a business update in the coming quarter. Have a great evening.

Operator (participant)

Thank you all for participating. You may now disconnect.