STIFEL 2026 HEALTHCARE CONFERENCE - ORTHOPEDIATRICS CORP

hello again welcome to our next presentation my name is Rick wise I'm delighted to welcome Dave Bailey president and chief executive officer of orthopediatrics stock symbol kids and Joe Hauser to Dave's left president of the trauma deformity correction and OPSB business OPS be the fastest growing division at orthopediatrics very impressive I'll say these last three quarters just 20% plus Joe good job with that oh then there's the CEO but seriously I want to start today both in focus both near term and longer term let's just start off with your truly excellent third quarter results and not just the setup for the fourth quarter but this as a staging point for 2027 yeah of course excellent better than expected sales growth positive adjusted EBITDA and free cash flow very solid directionally all key goals for you and the team it my overstating it or is that the way was that your reaction as well no I think the quarter was fantastic quarter before was very very strong as well particularly if you take the 70 and some of the headwinds that we've had in Brazil it's I think the organic side of that business minus some of those one times grew really really rapidly in the second quarter the year now we come more towards the close but if you look at how the company's performed across the entirety of the year performed really well I think what I'm most pleased with is it's very balanced and q3 was extremely balanced obviously 19% growth very very strong but it wasn't from any big one-time sales it was across all the businesses trauma deformity performed really well scoliosis performed really well the international business performed really and obviously you know the rock star here Joe and the OPSB franchise growing north of 20% all the business is performing really well. The EBITDA was a record for us still have some work to do to continue to see that EBITDA growth and continue to get leverage and then to generate positive free cash flow in Q3. As you know, we generated for the first time in Q4 of last year $10 million in positive FCF and had drastically reduced our cash usage from 2024 to 2025, committed to 2026 break even from an FCF standpoint. I think given that we did $10 billion in fourth quarter of last year we're a good setup here uh to generate at least six million in q4 and get to uh our goal that we've stated now for the last few years and been quite methodical about about that so i'm very pleased to see the way the business has grown and i think it's partially because of the new products but also just really strong use of our legacy products and pull through from a lot of those legacy products because of some of the super cycle products i think that sets us up really well for 2027 and beyond as well. Just not to dwell on the fourth quarter, but it feels like the business obviously is strong, but momentum is positive heading into the fourth quarter. And I know that not like every medical device company, maybe third quarter is often a little stronger period for a variety of reasons than the fourth. But, you know, my number is to get to like in rough numbers, 69 million in the fourth quarter. That's a 5% sequential deceleration. Is that the right way to think about it? Are you feeling, I don't know how to ask about it, but the business itself, the tone, the new product update, things are going along pretty smoothly. Yeah, I mean, overall, if you just look at the seasonality of our business, Q4 is generally weaker than Q3 and weaker thanQ2. Kids are out of school in the summer, so they're getting braces fitted. They're having scoliosis procedures. A lot of our high ASP, most complicated procedures occur during the summer months. We had a very, very robust summer. So it's rational to think that the seasonality would follow suit like it's followed for the last several years. Some of that seasonality gets offset as the OPSB business grows because of deductibles and people trying to get their bracing taken care of into the fourth quarter. But we still think seasonality is a rational way to forecast the business. we're going to continue uh to continue to be relatively conservative in our guide we're not giving guide i know you'll ask but not giving guy for 2027 but i think you can expect us to hew to what's worked here and and not get in front of ourselves we also have a 7d comp in q4 and as you know we've tried to eliminate most of the 7d sales out of our out of out of the guide uh we can't exactly determine when those units are going to come through we did have a pretty strong Q4 last year of 7D. And we also continue to limit set sales to partners in Latin America because it's balancing. We want to get our AR balance up there, and it's a focus on profitable sales that are contributing to positive free cash as opposed to potentially slowing us down in terms of our goal of generating positive free cache. You've signaled previously expectations for OUS growth to exceed the US in coming years after some of the moves you have made in recent years and yet the third quarter u.s was faster fourth quarter i mean i realize there's some uh headwinds but or cross currents if you will but with the product super cycle uptake initially so strong and we're going to talk more about in a second uh i mean are you is that the right way to think about the growth outlook now yeah i think you know we're we're under penetrated internationally obviously we started in the the US much earlier. We have more of our focus in the US. And we have some headwinds. Certainly with some of our stocking distributors, we're just not offering the kind of payment terms that we had in the past. And so we still have headwindς, particularly in Brazil, particularly in LATAM. We're facing some tough comps where we've sold sets in the pass. But I think if you look at the underlying growth, like just the replenishment usage of our products outside of the United States. The replenishment usage overall is probably growing much faster if you kind of take out some of the one-time sales and headwinds. Supercycle really not contemplated outside of the U.S. yet. We haven't started selling any of these products and really aren't projecting to sell a lot of these projects in 2027. But the EMDR approvals have become very, very significant for us. And we're really in the early innings of starting to launch products in Europe that we have been launched here in the United States several years ago. And I would point out that we've had very strong international scoliosis revenue, and particularly in Europe. Some of that, again, has been offset by set sales in Brazil. Some Of these set sales are a million bucks. So when you look at the growth rate of our scoliosis franchise, you know, high mid-teens, then offset by, in some cases, a million dollar orders in those quarters, the underlying strength of scoliosis has been very strong, and if you really parse out what's happening in Europe, it's a small business, but it's growing very rapidly, and that has been impacted by being able to get more of our scoliosus fusion products available to surgeons in countries like Ireland, the UK, and we're very early in the growth story, I think, for the scoliosa business in Europe. So it may be more similar to, you know, maybe more parity between the U.S. and OUS business going forward but generally speaking we're under penetrated we have a lot of growth opportunities and international and still feel very bullish about you know being able to grow the way we've grown in the past just reflecting on the company just now beer picture and looking ahead and before we talk about the super cycle again just since the IPO you've just steadily built a broader deeper more diversified pediatric orthopedics platform just at a high level how do we think about the growth runway from here is it deeper just at Ohio is a deeper penetration into existing hospitals is it opening new hospitals you talked about the international expansion but or is the major opportunity growing the OPS be bracing clinic business and pulling through everything how are you pushing the big levers and buttons here yeah so it's a little bit of all those things which I think is good we don't have one specific part of our strategy that is outsized over all others. It is mainly though getting deeper penetration in existing children's hospitals. There's not that many children's hospital where we could say we have a hundred percent of the market share, although through contracting, which I know you like to talk about, the contracting single vendor, dual vendor contracts that are happening at a more frequent pace now, I think that there's just a lot of growth opportunities for us. We're in every children's Hospital in the United States and in Canada doesn't mean every surgeon is using every one of our products and I think that when we deliver more kind of what I would call in of one solutions like 3p hip for example some of the PEGA products vertiglide it's giving us leverage to pull through the more commoditized products when we also see companies that are exiting the space particularly on the trauma deformity side it makes some of our legacy products more valuable and gives us leverage in those conversations so I think it's more about us continuing to get deeper and deeper penetration. I mean, you've probably heard us say this, but our aspiration long-term is to help a million children a year. Our goal this year is to hope about 175,000. And so if you put that in the context for where we think how we can grow the business, we're still in the early growth phases of this business, even though we've been public nine years. And so we think that over the course of the next several years, their opportunity to truly take a completely dominant position in the subspecialty of pediatric orthopedics is well within our charge, and I see no resistance to us being able to do that over the course of the next several years. I agree for what it's worth. And just again, as we start to think about the super cycle impact, just at a high level, I mean, for those less familiar with all the synthesis, I think even I get overwhelmed with the incredible number of products and what they do and what that could mean. Is it new products replacing older products, already existing products? Are you opening up new sub-segments, part of the whole that you weren't in before? How do we think about it at a high level? Yeah, I'll turn this over to Joe, but I think first, there is very little replacement in this. There's a few products that I think overlap, but primarily it's expanding the potential indications surgeons can use our products on. There's an number of procedures that frankly just can't happen in pediatric orthopedics because they don't have the appropriate instrumentation or products implant products and certainly on the bracing side you see a large scale bastardization of products that aren't made for children so it's primarily that there is a little bit of overlap but uh but it's it's primarily new kind of more blue ocean opportunities i don't know joe if you have other comments no that's spot on i think that every system it's one of the stories of what got us here won't get us there and there's products within each one of these super cycle products systems that have a new indication that is blue ocean that might also be partnered with a couple things that we've learned over you know we're on to our third generation of some of these systems and so there is some things we've learned and so we've made those adjustments to make the products better that are existing and then offering things that give us some more indications more case coverage big picture how much of third quarter maybe all focused on U.S. revenues. How much of third quarter U. S. revenues came from super cycle new products? And if I ask you the same question, you know, in a year ahead or five years ahead, what's that mix going to be from all these products in the pipeline? Yeah, I would say it's still very early. I mean, it certainly impacted us. Maybe it's a couple points, but I would the bigger impact was the pull through of legacy and certainly OPSB growing north of 20%. I think that we're starting to see, really Q3 was the first time we started to see a real impact of the super cycle. I think how investors should think about this is that products like 3P Hip, for example, are in their first or second inning in terms of product launch. There's 300 children's hospitals. We have a trivial volume of sets out there. We're managing growth against producing positive free cash and next year 3p hip will be a huge part of our growth story right for trauma and deformity and it'll be maybe in its third or fourth inning while products like 3p or while small mini become a first inning story and by the time we get to 2028 3p hit will be in its sixth inning and then small mini will be in its 3rd inning and 3p themer that will be in its first inning and so that's why we've talked about this as a cycle because it's not one product and then we're going to grow this thing exclusively for the next five years as those products gain momentum there's another product right behind it same thing in our im nail portfolio same thing and our scoliosis portfolio and then the work that the team has done on opsb there's just a huge volume of really compelling technologies there and so i would say when we talk in 2027 2028 these products will make a bigger percentage of our total sales they're higher ASB. Generally speaking, better margins, they have better capital utilization metrics impacting our positive free cash flow. So this has a more outsized impact, certainly 2027, 2028, and beyond. Since you've referenced 3P a couple of times, I think 3P had a full market release in the third quarter, if I'm remembering correctly. Should I be asking about reorder trends, or you know how do I how are you measuring progress there yeah we are way ahead of pace where 3p hip where we had originally budgeted for that to be we're ahead of place from what we expected since the beginning of the year full market release you know is still relative to Dave's point you know we're still in the early innings it's not like we've released a extreme number of sets to cover all of the country but we go out of the limited release to where we have at least you know added significantly more sets that can get us to different accounts that we weren't in today and I think the 3P HIP story is just one of the stories of how 3P is going to serve us over the long haul so you got definitely some contribution for 3P hip within Q3 we're going to see more here within Q4 going into next year as more sets get added we're gonna see additional throughout the first half of 2027 just as the that is starting to get continue to ramp up you'll start to see how 3p small mini goes from a limited release which it's in right now into a full market released where we'll add additional sets, and then you'll see the early innings of those, that growth throughout the first half of 2027 into the second half of 1027. And then the hardest part is to contextualize that we see there being a long runway of growth. And the value of doing these limited launches, and I know I get asked a lot about why limited launch first, it's not just about seeing what's going on with the system with surgeons that are ready to use it. It also allows to understand the inventory required to actually get to the marketplace gives us a good expectation of what utilization rates we want and when you have multiple different product systems in the super cycle we can decide to launch more of send more sets out of one that's getting a better utilization rate versus others and so it is a really nice build a waterfall if you may on how we bring more systems to the market then when you get to this second half of 2027 there'll be stuff for 3p femur and additional systems coming into 2028 no it's it's i think waterfall or whatever the image should be is a great description i want to talk about opsb as a whole in a minute but maybe since we're focusing let's take 3p hip as a as an example how does the relationship for the context with OPSB, pull through new products like that. I mean, what's special about OPSP being present in a hospital that enables the launch to maybe go faster or better? Talk about that. For sure. Yeah. I mean we try to target areas where we're already embedded in a Hospital, have a really strong implant presence. So when we look at where we want to be, certainly layers of that start with surgeons that are very familiar with the company, very familiar our implant products. So when we're having the bracing discussion, it's a pretty easy discussion to transition to why you'd want one of our clinics either inside the hospital or nearby or down the street. I think one thing that is interesting relating back to the super cycle is some of the products literally cross over between the businesses. So you think about TractorFix, which is in a limited release now, will go into full market release next year. It's a product that goes with every one of ours. It's an external fixation Orthex system applications. So every case we do today with X-Fix, with Orth-X, is an immediate candidate to have a bracing product called TractorFix. And it helps to prevent something that's a really big problem out there, which is flexion contractures. These kids that have frames struggle with how they walk, and this product helps bring it out. And so now you need, not only the implant side, but now you can go down to the clinic and be outfitted with one of the braces. I think another good example is Traxio, which is part of a halo-gravity traction system, which is just the walker or the device that actually holds the child into traction. That is connected to pins and rings that get applied in the OR. We don't have the pins and wings yet. That's going to come out here early on into the next year. And then you have what's beyond that, which is some of these children that need fusion surgery after they've been held out in the traction. So you have the product catching the patient earlier in the cycle of treatment, and then ultimately leading to, if they need surgery, our products to be able to offer there. So it's connected pretty well, and you can bet that hospitals that use our implant business that are now starting to use our bracing products absolutely want to have a bigger discussion on how they contract with us to get all of our products there. It really goes both ways. It's interesting. I want to touch on, we've talked about a number of the products, but VertiGlide, sliding scoliosis rods. On Monday, I think, Dave, you launched the full market release of VertiGuide. You talked about 40-plus hospitals are using it already, maybe. Talk about the case volumes, and how would you quantify the repeat utilization there, if that's the right question? But is VertiGlide also, do you expect it to open up new account wins, et cetera, etetera? Yeah, it definitely is. I think that one of the things we've talked about is, in the past, where accounts where we've been very strong in trauma and deformity, in places that are very large, very well-known here on the East Coast, for example, that are top 10 children's hospitals in the United States, oftentimes we've had a really strong presence with those accounts with our trauma and deformity business, but less of a presence with our scoliosis fusion business. They may have had a 30-year relationship with Medtronic, for example, or, you know, Synthes, WSynthes. And those 30 years or 10 years before we were even a company, and so they have very strong relationships, not just with the company, but with the local representatives. And those are things that that portion of our business is quite competitive, and it's difficult to break up those relationships. I think what we're seeing with products like VertiGlide is some of those accounts that we were doing very little surgery in now, we're now doing a reasonable volume of VertiGuide, which helps our revenue, certainly, but probably more importantly, it is exposing those surgeons to the quality and the clinical relevance of that scoliosis portfolio. We're being taken dramatically more seriously and we're starting to see pull-through of the response fusion system and I think if you look at our top 10 growth accounts this year what you would find is the majority of those accounts are tied out to a great experience they've had with vertiglide and now an opportunity to say hey this you know we did this very complex multi-hour surgery that helped a four-year-old with an incredibly complex condition I think you deserve the right to come in and do something that's a a little simpler. And I'll take a look at your response fusion. And we're definitely seeing that pull through. I think VertiGlide is going to be big for us next year. We've got more sets out there. Finally, we are seeing repeat users from those surgeons. We will continue to host big training events. And these are events where 12, 15 surgeons generally come to learn about the system, but also then start to talk to key opinion leaders who are now six months to a year out with some of their first patients and see how those patients are doing. Case in point, this week the rest of our team is in San Diego at the ICEOS course, which is a big early onset scoliosis course. We're the largest sponsor of that course, and there's a number of labs and a number of panels, discussions where surgeons are talking about early onset scoliosis in the context of vertiglide. So the momentum is certainly building around that product line. Another new and novel technology is ELE, Electromechanical Growing Implant for Scoliosis. Are you still on track for IDE approval? I think I had the feeling it's very soon. And do you still expect first cases there to be in early 27? When would full launch, sort of in the same cadence, be more like 28? But this seems like another truly new, novel, unique technology. Yeah, ELE is a big one for us. There's no question. And Ellie has a larger market opportunity probably than VertiGlide. VertiBlide is generally for patients who are very small that have a lot of remaining growth. But sometimes you need to be able to push the spine where the spine is stiffer or the child has less remaining growth, and so Ellie is a mechanical lengthening device. We just run a lab, running a lab this week in San Diego. I think this is going quite well, but we need FDA approval, and so we're waiting on the IDE. We would expect that kind of at any moment here, hopefully early part of the year, and then we'll start doing first cases. We will be in a debate with FDA associated with what after we do first cases, how long do we really need to follow these patients before we get a green light? So we can't be certain exactly when that, you know, full approval will be, but I can say that the interest around Ellie has been, I would say it's massive. I mean, surgeons come all the way to Warsaw, isn't an easy place to get. Oftentimes, if they're scoliosis surgeons, the number one thing they want to see. Warsaw, Indiana. Just in case. Sorry, yes. But I think they want to see the LE device and how it works. And it meets so many unmet needs. And, it's a decent-sized market opportunity for us. And, again, it drives the usage of Response Fusion and, eventually, Varaxis when it's available. It's been a long time waiting to get to OPSB, Joe. OPSP is going from strength to strength. In the last quarter, I think you're in over 60 clinics, and maybe when I visited Boston Children's Hospital with you a couple years ago, you had three maybe, and you've doubled in two years. Is this going to be the, I mean, I don't know, what's the right number here? 300, 500? I think that's how you told me to phrase the question, Dave. Always signing me up for more. Exactly. So there is a huge runway left. You know, our goal here was to get within every geography that's within a stone's throw of children's hospitals across the country. So if we assume there's about 300 of those and we're at 60 today, there's, you know, 60 clinics today, there's clearly tons of runway to grow. We've been talking a lot about it with target markets, different geographies that we want to do business in. So certain metropolitan areas that have larger population densities and maybe multiple children's hospitals. Strategically, we'll probably go to those sooner than some of the other markets, but there's a huge runway left for clinics, whether it's Screenfield or Aquahire. Both of them are appetizing to us. We evaluate it from different sides of the street. Certainly, the Aquahires get us into markets faster where we need insurance approvals, and we can acquire those to get into a market, and then Greenfield beyond those. Also, with the Aquahires, we're able to get through and actually have these maybe be profitable to start so there's some revenue in there different than the green fields which start from you know you take an investment up front maybe the one of the most underappreciated pieces of the OPSB growth has to do with the product growth not the clinic growth product growth from even when you contrast that to our implant business doesn't require any set deployment so from a cash perspective we don't need to get the inventory like we do traditionally with our implant business and then on top of that the unmet needs on the bracing side is almost where orthopediatrics was on the implant side 15 years ago there is just an unbelievable number of things that need developed we manage a list the list gets longer and longer every week our job is to try to get those defined into a smaller categories and that's why you see such a huge increase on the OPSB front from a product standpoint because the ideas are endless the time to actually get class 1 approvals is a little bit more predictable than the class 2 devices that we do on the Implant side the regulatory burden is less to maintain those products the cost of development is less so you can see why that super cycle is one that and you're not going to have one product that is going to be a le type you know tam or market opportunity but you've got a ton of little products that actually can make up a pretty big business from the product side we don't have you know 30 minutes isn't enough to touch on everything that you're doing but I feel like I need to touch profitability you brought it up several times Dave you're balancing super cycle growth versus investment and profitability and cash flow, you know, break even or better. I'm sure it's frustrating sometimes that you can't invest more. Are you investing enough? Maybe I should start to ask. Yeah, it is a challenge. I think we think the prudent approach here is to balance, you know very strong top line revenue growth, but not growth at all costs, which is probably where we were three years ago, particularly when the market was overvaluing, probably just pure top line, revenue growth. We think a rational, sustainable approach is balancing top line against increasing leverage, EBITDA leverage, and generating free cash. We will not seek over the course of the next few years to maximize positive free cash, so as EBITda goes up, we will be using more of the EBITDa likely in 2027 and 2028 to get more inventory on the street. This year, we're going to deploy 10 million. We haven't given a guide, but you could assume that we'll take some of the EBITDA from next year's EBITда growth and probably put more inventory out in 2027 and 2028 to continue to fuel growth. It's a bigger business, so we'll need that. But it isn't to maximize positive free cash flow here. I think what is also misunderstood is whether we grow by 12%, 15%, or 19%, we don't have someone chasing us down here. We don'thave people nipping at our heels. In fact, the competitive landscape is increasingly benign. So we will get the growth. I think getting the growth in a measured, rational way, not trying to get it all in one shot, and then putting the balance sheet and everything at risk doesn't seem prudent to me, especially when we've built such a dominant competitive position. And so you're likely to see more of the same, I would say, over the course of the next few years. No, I feel like you've been in a several-year transition as you acquired and integrated, invested in OPSB and brought all these new products forward. And it feels like you are on a better, more predictable growth tack from here. I think from an ortho perspective, just to toot our horn here, I think we're a very unique asset in orthopedics. sub $300 million, getting leveraged on the EBITDA side and generating positive free cash and still growing the business in the mid-teens. And we've seen a lot of companies, particularly spine assets, that ultimately have to grow much, much larger, have to have much greater scale to be able to generate that kind of, even to get break-even from a free cash flow standpoint. And I think it's the strength of a dominant competitive position, very long product life cycles where we can have products out that are still growing at 15 years after we launched them where we're not perpetually having to re-engineer the next new thing to replace you know a product that we just launched five years ago those dynamics make our market quite interesting and i think it's why we've been able to establish ourselves i think as a unique asset in the space i was going to ask you about 27 with fred not here very dangerous if you're listening fred But this, Fred Height, the CFO. My mic just went out. It's weird. Weird how he probably turned it off remotely. But, I mean, it feels like the business, this is my opinion, is showing impressive sort of stability and accelerating momentum. And it just feels like this setup for the year ahead is really positive. I assume you wouldn't argue with me. I wouldn't agree. We have a good setup for not just the year head, but in the next several years ahead. That's great to hear. On that positive note, we will stop there before I do any more damage. Thank you so much, Steve. Appreciate you. Thank you.