KIDS - NASDAQ

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.

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 5, 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 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 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 4, 2025. Except as required by law, the company undertakes no obligation to revise or update any statement to reflect events or circumstances taking place after the date of this call. With that, I'd like to turn the call over to David Bailey, President and Chief Executive Officer.

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 for the full year. Both record highs for OrthoPediatrics. Now having completed our eighteenth 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. We will do everything in our power to right that wrong. While eighteen years have passed since our inception, in many ways, OP is just getting started. Our resolve to be a company that eventually helps one 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 orthopedists and prosthetists by our outside support surgeon clinical education and training, and to put it simply, investing in important things our customers care about and that impact the field of pediatrics. When you look at the success of our company across our eighteen-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 breakeven 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 macro dynamics 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 unshakable 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. This 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 one 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've produced extremely strong total revenue of $52.7 million, representing 40% growth from the comparable period. We saw quarterly growth in both TMD and scoliosis, with 35% and 62% growth respectively. Led by domestic strength, the quarterly growth of 52% from a particularly robust performance from domestic T&D as well as the addition of Boston OMP. 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 breakeven 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, Apothex, and Pega Medical, and the more recent launch of OPSD and the acquisition and full integration of Boston OMP. With all of these levers in place, we are confident we will continue to reach new highs and deliver important results for orthopedics. 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 deployment, and ongoing success of our innovative product launches. This year, we expect to generate revenue of $235 to $242 million, representing annual growth of 15% to 18% as we lap the Boston OMP acquisition. Importantly, we also expect adjusted EBITDA of $15 to $17 million to be greater than $15 million of set appointments 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 drive significant market share gains across several products as well as the addition of Boston L&P Road. This quarter's performance was highlighted by both trauma and OPSD products, including PMP tibia, cannulated screws, and Boston OMP sales. We continue to leverage our prior set deployments are driving increasing share gains for trauma and deformity across the breadth of our products. US trauma and deformity was extremely strong. And in fact, US 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. The F2 demand is now far exceeding our expectation. 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 R&D 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 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 OMP, 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 for both greenfield expansion in Indianapolis and AquaHire 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 that we are tracking to our guidance for four new territories in 2025, and expect that we'll be more updates on this front throughout the year. On the product side of OPSB, and as previously mentioned, we are experiencing rapid growth our DF2 femur fracture brace. Which is growing so rapidly that we are seeking additional manufacturing sources so that we can meet current future demand. Beyond that, our OPSB R&D team launched multiple products such as the new scoliosis brace sensor, patient compliance software, and additional DF2 sizes. As we extend its use beyond fracture management. And we signed distribution and licensing agreements for the Move Debraced and Minimize Tremors. Develop the Children's Hospital of Orange County. And the Thrive product portfolio, including Thrive Orthopedic F3 Hero Pediatric AFO, the True Stretch Pediatric Aquinas Sprays, and the Thrive Pediatric X Glide Carbon Fiber Insole. 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 OP OPSB is really ramping. We are certainly attracting entrepreneurs and inventors with new product lines and technology that they desire to scale globally through our growing sales channel 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, is spinning very fast. But 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 OPSD to drive our patient impact for treating more patients with capital-efficient growth. An 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 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 acquisition. We saw additional seventy placements in the fourth quarter in large institutions. And the continued introduction of our both first EOS product, Response Rhythm Health. 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 Apophix users. And growth that only continues to pick up. More users, learning where Apopex speak fits in their treatment algorithm. This supports our vision that eventually, Apophix will be a tool used by almost every pediatric scoliosis surgeon. While still relatively small, we expect Apophix to continue to grow rapidly in 2025 as more surgeons better understand the best use case for the device, and 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, Vertiglyde with the FDA. We have been working on confirming the regulatory path, 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 Vertigly will be approved in the US sooner than expected. And under 510(k) plan. 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 collection 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, 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 beyond. And we are confident 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. And 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 eighteen months. I want to point out 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 US 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 Adeirring IPOS, the International Pediatric Orthopedic Symposium, 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 product. We are 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 nonoperative care through OP specialty braces. Our time at events like this is incredibly important as we prioritize providing clinical education opportunities to grow alongside the pediatric or the pediatric community. So with that, I'd like to turn the call over to Fred to provide more detail on our financial results.

Thanks, Dave. 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 AphiFix headquarters. We have decided to move production out of Israel and into the US to reduce supply risk and to consolidate the management of the ApiFix product line into our Warsaw operation. 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 giving 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 OPSV. As well as the addition of Boston OMP. Slightly offset by the lower growth in the international revenues. US 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 OMP. 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 in the 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 OPSD. 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 US growth across the response, and ApiFix nonfusion system an additional impact from seventy 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 seventy placement 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 OMP, 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 for 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 double 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 for 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 to $242 million representing year-over-year growth of 15% to 18%. During our analyst day last September, I had communicated that we expect our gross margins to remain flat at 74% to 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% to 73%. This does not impact our profitability just the buckets within the P&L. We also continue to expect to generate between $15 million to $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.

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've 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.

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

Thanks for taking our questions, guys. Appreciate it. Did I start with guidance a little bit. I know you don't guide by segment, but maybe you could help us kinda how you're thinking about, you know, some of the contributions here you know, in each of the buckets of the businesses. It sounds like you know, certainly the OUS business with the addition of EU MDR clearance, could step up a little bit in twenty five. I'd appreciate any color you have there. And then just I'll ask the second question upfront too, which is just around seasonality and pacing. Through the year. I mean, we know, you know, kids tend to get their surgeries know, second quarter, third quarter during the summer in between school. But you've had some fluctuations, I guess. Know, between the fourth quarter, the first quarter, to you know, seasonal dynamics, flu, RSV, etcetera. So any any color there, I think, would certainly be appreciated as well. For taking the questions, Scott.

Yeah. Thanks, Ryan. So I think from a seasonal perspective, maybe I'll take this one first. I think that, you know, likely to see consistency, consistent seasonality of the business, the way we've seen it in the past with kinda 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, you know, the next several years as OPSB continues to grow that some of that seasonality could maybe level out a little bit. But I think that, you know, normally see our first quarter a slight step down from Q4 of the previous year. And then we scale into Q2 as the or Q2 and Q3 as the summer season continues to grow. I think you're you're spot on in terms of the impact EU MDR can have on the business. You know, it's not a panacea right away. Obviously, we've gotta get sets built and we gotta 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 and probably more of an impact even in 2026 and 2027. I think that's 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. So as we can bring a full product portfolio to Europe on the fusion side, I think we're gonna continue to see that business grow. And, you know, that 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 our large opportunities outside of the United States up in up until recently. As you think about trauma, deformity, and scoliosis here in the United States and, I guess, around the world, generally speaking, you know, as you said, we don't generally guide specifically there, but you know, 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 and greater market share. And I think that's probably what you'll see again here in 2025.

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

Sounds good. Thank you.

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

Good afternoon, Dave. Hi, Fred. So much to unpack here that's intriguing. Maybe talking about a couple other opportunities. It seems like the business has tremendous momentum as you're talking about them. The US numbers would suggest. But maybe maybe start with the OPS you know, OPSB. You know, just just you're you're saying strategic rationale playing out. The funnel is full. For new territories. Help us think through talk through it more maybe a little more detail, Dave, the pipeline, new opportunities, the licensing. How's that what have you assumed in twenty five? When you know, how do we translate that into thinking about growth or outlook or time of year or do we see it in twenty five? Just help us think through that opportunity.

Sure. Good question, Rick. So obviously, you know, when I talk about the three main things that we have to do to continue to really grow the business twenty twenty five and beyond, you know, scaling OPSB is at the top of that list. And I think you know, this time last year, obviously, we had just completed the acquisition of Boston, and, you know, we're just really starting our the journey of scaling LPSD. And, you know, when I look at that now a year later, I think everything we thought Boston could be and the scaling of planet and the addition of products, has come true. And I think, you know, we're looking at a $500 million TAM that's easily accessible with less capital. Frankly, than the consignment model of our our implant business. And that's know, that was the thesis that we could scale into this. And I think we have throughout the year, and I think it's gonna be a big part of twenty twenty five and beyond. What we've learned, I guess, in in our customers are certainly interested in in more clinics, more products. It's clearly a very underserved segment of the pediatric orthopedic orthopedic marketplace, and it has a ton of synergies with our implant business. So I think that the implant business is in part growing because the OPSB franchise is growing and, you know, 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 and we're sticking to that. It does seem like we've got enough in the funnel that know, it's possible that we could go to more than four territories in twenty twenty five. 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. But I I guess I what I what we're really saying is coming out of the analyst day in September, think we're much, much more solid on the pace with which we can scale our OPSB clinics and I 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 green field clinics continue to well, both green field clinics and that process was, I would say, in line with the timing and the cost that we thought. And so that's encouraging. And then also asked that the specialty bracing business and the R&D side of there and that 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 it really is the a single channel, almost dare I say, an Amazon of pediatric orthopedic devices, nonsurgical devices, where if entrepreneurs and and small companies wanna access the pediatric orthopedic market and access our customers, there there would be an opportunity to do that through the scale that we enjoy here in the United States and then around the world. Then as we add more clinics, and you fast forward this several years where we would say we have a completely dominant position in in clinics, that becomes an even more powerful type of of channels for us to drive revenue through. And then, 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 we're we're very encouraged, I guess, by the way DF2 is growing. And we see a number of opportunities like DF2 to continue to grow again, that has a duplicative effect when you're not only selling it to the own channel. So hope that answer your question, but a lot of optimism, obviously, and very encouraged a year post L P OPSD, year post Boston. What we can do with that over the next several years.

Yeah. That's great. Thanks for all the detail. And, Fred, turning to gross margin again, I totally get what you're saying. And the first thing I looked at was to see whether your adjusted EBITDA would change, and I see it's it's unchanged. So you can you know, so I I get it. But help me understand. It it You you had said the seventy four or seventy five range before you made this adjustment. Was flat. You said it again tonight. But it just strikes me, you know, 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, so I guess my real question is, help us think through some of the moving pieces on on the gross COGS line, gross margin, or whatever you wanna say. And is there room for upside as we go through the year? The the European products are approved. You know, it just seems like there should be there there is room for upside as we head toward the end of the year and maybe start thinking about twenty six. Thank you.

Thanks, Rick. Great question. And, you know, 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. And so we'll continue that trend. There is some consolidation, which could help show up as favorable gross margin. And then there's 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. So 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 to make some improvements there.

Alright, Fred. You you you teased me. I gotta ask Other activities? Help me understand. Thank you.

We're 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 the S G&A down below.

Gotcha. Thank you.

Thanks, Rick.

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

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 twenty five million in sales in twenty four. Did you do that? Are we still expecting north of twenty percent growth out of that business here in twenty five? 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 existing facilities that you have or just that you're ramping the the new ones faster than you expected or I don't know if it's cost or something else, but just any kinda you know, detail there would be helpful, and then I do have a follow-up.

Yeah. Perfect. So 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 or a medical, as well as the clinic expansion is is growing rapidly. And, yes, I think it will definitely be growing north of twenty percent in twenty twenty five. And and so we see that growing north of twenty percent for a long time, frankly. So we we got a long way to go as we 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 it takes time. Some of those, as we said, are gonna be AquaHire, where we've gotta get a footprint in a big market that we have no clinics in currently, but the opportunities and profitable opportunities for us are very high. Insurgent demand for that service as well as the products is very high. And so, you know, again, we thought that was what we were gonna see. When we announced this acquisition a year ago, and at this stage, I would say the demand for what we are offering is higher than I would have expected at this time. And then devices like DF2, are going better than we we expected. I I see the demand for that product as very high. I mean, we're now seeking alternative manufacturing sources, we make it in our in our facility in Boston and we're gonna have to continue to be able to scale the manufacturing of it there in Boston I wanna say, thirty plus countries now that the DF2 product is approved. So 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, and and so know, we've gotta be able to scale manufacturing of those devices such that we can meet demand out outside of the US. But I can just say that the the the surgeon demand for that device. Here in the US Again, still small, but maybe greater than we would expect. We have several more devices that I'm not saying are all home runs like that one, but several more devices on the R&D side. That we're close to launching. Working with a number of surgeons on, and I would think that you're gonna see similar kinds of impact from those devices on the OPSD business overall.

Okay. Okay. That's, I guess, a good problem to have on the manufacturing side. And then 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 twenty three and then twenty, and now we're down to fifteen. Know you have a more capital efficient model now with OPSD, but, you know, the the legacy trauma and and spine businesses are doing really well. Are you gonna run the risk of starving those businesses a little bit in the near term, and we're gonna need another big bump as far as as far as set deployments go in twenty six twenty seven? Or is this more of a steady state in terms of how much you really need to be deploying in order to grow the business is still at a very healthy clip.

Yeah. It's a great question. It's a question we spend time analyzing ourself. We think fifteen is the right number for twenty twenty six. I think the good news is a lot a higher percentage of that is really for new products. As opposed to legacy products. So we're really excited about that. And the impact that that's gonna have on our overall business and growth in twenty seven and beyond. In twenty twenty seven, what is the right number that we'll deploy hasn't been determined yet. We'll see what the demand is both for legacy systems as well as new products. Again, I would expect twenty seven, twenty six and twenty seven to be highly concentrated on the new product launches, given all the launches coming up that we have in twenty five, twenty six, and twenty seven. So I would say that we haven't made that determination yet. But it you we will be confident in saying that it's gonna highly focused on our new products being launched.

Yeah. I I think it's safe to say we're not gonna starve those business particularly when we see products like PNP Tibia that have you know, relatively high ASPs, fantastic margin I mean, the business that product line, I think we told you, you know, we achieved this year's revenue in May. So, both of that device is obviously growing and we're gonna support that. I just I think what we've seen over the course of the last several years, Matt, and you know the our story well, but know, when we were deploying three to five million dollars worth of inventory for several years, as primarily legacy products, You know, we've probably entered near the end of the need to deploy a lot of those legacy products. And as Fred said, You know? These are primarily new product development and the numbers will shift as we have really know, compelling new products like PNP tibia and and some of the other devices. But when you also think about the out years of our growth, particularly on the Scully 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. And so, you know, we're fine tooth to 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. And I think that's what you're seeing with with the move down a little bit on the on the implant side of deployment. And again, as as we as demand dictates for some of these more differentiated products, you know, that'll change from time to time. But I think think we're gonna be able to sweat our assets in a way that's gonna allow us to not have to deploy as much in the future.

Very helpful. Thank you.

Thank you.

Our next question is from the line of Mike Matteo with Needham and Company. Please proceed.

Hey, guys. It's Joe 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 on Playbook, the enabling technology soft. Where just kinda curious, you know, how that business is going. You know, any milestones there. And then the the new fusion implant system is that still on track to launch in second half of this year?

Yeah. Good question. So playbook was, I think, officially launched to the sales team at our sales meeting here about a month ago. And so the device the the product is we're very pleased with the the way the product looks, and certainly it's a process to get those products implemented inside inside hospital systems. But I think we've made really nice progress on on playbook on enabling tech side. And, you know, just from a revenue perspective, it's a business that we you know, we haven't forecasted a ton of revenue in twenty twenty five. We see that as contributing to driving revenue in our trauma deforming business and in our scoliosis business, and then driving more substantial revenue as a standalone play in twenty twenty six, twenty twenty seven, and beyond. But extremely pleased with with with where it's at. And it created a heck of a lot of buzz at our sales meeting, which was which was very encouraging. And on fusion. Oh, on on fusion. So yeah. Fusion product development, we on track. And I think you know, the goal would be to try to get some surgeries done by the end of twenty twenty five. Here in the United States. But again, not something that we have placed in the twenty twenty five forecast in terms of revenue. And so, you know, we're gonna make certain that we get the device the device right it's everything we want it to be. We know, the fusion business as it stands with response is growing very rapidly now. So we're we're not you know, we don't have to rush things certainly to get that device on the market.

Okay. Great. And then maybe just one more. On seventy, It seems like you know, three Q in in the in this quarter, four Q were pretty strong. It seems like that's ramping up. I guess just looking at twenty twenty five, do you guys kinda see this as more of an inflection for for seventy placements, or is it maybe just a little longer, maybe twenty twenty six, it's more meaningful driver.

Well, I think seven D is a driver right with a driver for us in the second half of the year. So you're seeing a response fusion business and just our scoliosis business, particularly in the United States, accelerating growth on a much larger business. And and again, that's one of the reasons why while we wanna get the new system out, we're driving a heck of a lot of growth with our existing system in conjunction with with seven D. So I think we're already starting to see the impact of that as we've placed seventy units in in accounts that historically haven't been large users of our fusion products. And so that's impacting Q3, Q4 revenue and and fact, we'll have a pretty substantial impact, and I think why you see us so confident in our growth on the scoliosis side in twenty twenty five and twenty twenty six because a lot of that is connected to seven D placement. I think we've learned a lot about just capital placement in general. As you know, you know, just a few years ago, we had no experience in this space. And so our capacity to to build a funnel and to see these things come through the funnel in a more consistent way quarter to quarter to quarter, I think has that's a muscle that we have built. And I 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, you know, develop a muscle to get involved in capital placement and capital equipment sales. And so I think you're gonna see in twenty twenty five consistent placements quarter to quarter to quarter of of seven D units that will impact revenue on the scoliosis side both in twenty twenty five and for the term of those contracts, which are normally three years. So it becomes a bit of a a compounding effect as we place more and more of these units.

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

Yeah. Thanks. Thanks.

Thank you. And we have a question from Ryan

Just a high-level question follow-up for me, Dave. For you, know, there's there's just been a lot of chatter about Medicaid coverage in in the news lately. Right? And and and, you know, potentially removing that. I think you know, it's like thinking about CHIPS and Medicaid. I think it covers something like thirty seven million kids. In the US. And so you know, I don't know what your thought is on it, if you have a thought, but you know, I have to imagine your customers are thinking about it. How they're thinking about positioning for it, and and how you think about it in terms of you know, potentially impacting the business? I just want to kinda Yep. Pick your brain on it a little bit if I could.

Yeah. Well, certainly not a topic that anyone can give you a definitive answer on as you know. But, you know, it's obviously something we're watching you know, I'm not sure exactly how that in been how that how that impacts the business as we go forward. Obviously, we're not certain that it it is going to impact it at all. That said, I think our our feeling here is that we really struggle with the concept that that children will be left without any form of health care. And if you look at the makeup of our customer base, so much of our customers are current so many of our customers are currently in systems where know, they're they're endowed hospitals or there are hospitals like Shriners Hospitals, for example, that certainly take what Medicaid or private insurance might might pay, but are still offering care based on based on their based on their endowment. So think there is some shielding that we would have of that, and think when push comes to shove, it seems very difficult that we are gonna you know, allow kids in this country who have cerebral palsy or congenital deformities to not have appropriate access to to the kinds of devices that they need in the hospital to to live a normal life. And I think, you know, all of our devices have a very, very rational impact on the total cost of care. Right? And so if we can impact positively these patients, in the operating room that then ultimately lowers their care to to Medicaid thereafter, again, it's hard to imagine that that those devices wouldn't be readily available to to our customers, but again, it's anybody's guess at this stage, and we have not we we can't formulate exactly, you know, 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.

Yeah. No. Makes makes sense, and I appreciate your thought on it, Dave.

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

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