Good afternoon, everybody. My name is Rick Wise. It is my very distinct pleasure to welcome the Orthopediatrics team to my left, Dave Bailey, Chief Executive Officer, and to Dave's left, Joe Hauser, President of the Trauma Deformity and OPSB Division. Just for perspective, those two pieces of the business make up roughly 75% of company sales. And just looking at it in the third quarter, Joe, congratulations. Trauma Deformity was up 17%, and OPSB was up over 20%. So you came out of the quarter looking really great. I wonder where this conversation is going. But seriously, one of the memorable pieces of due diligence I did this year was Joe kindly invited me to visit the OPSB Boston headquarters, and we went to the Boston Children's Hospital.
I wrote a note about that for anybody who's interested, but it just helped me better understand the tremendous, I'll call it rinse and repeat kind of strategy that the opportunity represents for the company and for the business. And maybe I'll just start off before I start picking on Dave. Let's start. You put out a press release, a couple more new products, internally developed products were announced, I think, this morning, right?
Yeah.
Talk about just talk about briefly about the strategy, what these new products mean, and how much more innovation can there be in what seems like a mundane surface business if you just look at it from afar.
Yeah, for sure. We did the press release just for you so that we had something good to talk about today.
I knew that.
I understood that.
Yeah.
So one of the three critical areas for the OPSB business is producing more products, being innovative, and adding products that are not in the space today. So we're exclusively focused on pediatric orthopedics. There is not any other company in the bracing space that is focused in that area. And so when we come out with a new product, you can bet that it is absolutely an unmet need. So the two launches that occurred were PD HIP. There's a modular abduction bar, and then there's another PD HIP product, a rigid brace. And one of the biggest areas that are challenging to our customers is this development dysplasia of the hip, or DDH.
And there's a continuum of care that when a patient comes in, so a parent with their child comes in, they start with a certain brace, and as they get older, and if things don't resolve, they have to graduate to different styles of braces. And we're on a journey to actually deliver all of the four braces that you need. And as of this morning, we've got three of the four now that you need, with one more to come early next year. We've been very encouraged with the R&D engine that we've built now within that group, our pipeline of new products coming out over the next year. We plan to launch four next year and then accelerating that five and six in the subsequent years. I'll tell you right now, we've got enough opportunities.
The list is quite long, and so we've had a nice process this year to actually refine down to the things that have the best margin profiles, solid reimbursement, somewhat predictable in terms of the R&D timing. So we've kind of culled those down to the ones that we know we can have a quick impact on, and most importantly, the ones that meet the biggest unmet need.
The bracing business, maybe just levels up folks who may be less familiar. How many centers, how many hospitals do you have now? What are the opening plans, or what are your stated goals for this year? And what kind of growth can we see in coming years in terms of the center-driven, new customer, new opportunity kind of growth?
Yeah, just to simplify it, just for you, Rick, just to.
Thank you. I need it.
Just break it down into two categories. There's the product side, and then there's the services side. Products are what we just talked about with PD HIP, and then the services side are our clinics. The product side gets sold everywhere wholesale, so we can sell those anywhere: hospitals, physician clinics, and anyone else that is putting on those products. The clinic side of it, or the services side, is actual patient care. We committed to getting to four markets this year in 2025. We are at seven year to date, so we are definitely ahead of where we plan to be. And we're very encouraged by the inbound between Greenfields and AquaHires that we have from our clinic expansion strategy, meaning that the surgeons that we call on today in our implant business are the same customers of ours for the nonsurgical side.
The demand list is quite long, and so we have to figure out which areas we want to be and make sure that we understand the reimbursement rates for those states and try to pick and choose because we can't go to all the places at once. And so certainly, we're ahead of where we thought we'd be at this point in time, and I think we're even more encouraged about what the next couple of years will look like because we're slightly ahead of pace.
All right. One of the things that impressed me at Boston Children's Hospital was the close connection between your operation there, which was on the floor below the surgical floor, and the close interaction with surgeons, which sort of drove that connection and uptake and utilization for your products. Is that going to be a factor in all these settings?
100%. We now do business at basically every pediatric children's hospital in the U.S. and mostly in North America at this point. So we've got a representative sitting within every children's hospital. The relationships are there. So it's very easy that as we've been coming alongside of those relationships at the higher volume centers to say, "Hey, we can partner with you on the bracing side to do your bracing services, O&P care." And then you're basically parlaying the relationship that we've built over the last decade and a half with those surgeons day in, day out with those reps, with now our OPSB focus.
And since Fred Heit, the CFO, isn't here today to stop, to tone us down, the innovation engine, the opening of these new centers, is all this should I think about it as sustaining this 20% plus trajectory, or does it accelerate? I mean, I don't know how to think about it, honestly.
I think you're thinking about it the right way. I think the 20+% growth is what we're after. We get asked a lot, "Why not just faster? Can you put the foot down harder on the gas?" And my answer back is, when we get a yes to put a clinic in with a hospital and a surgeon that has trusted us for a decade and a half, you can't have that go wrong. And so we want to ensure that we're bringing the best quality of care to all these clinics, which includes other little steps that we take to make sure it's going well, and then also keeping up with the fabrication side of it so that the speed at which they get braces turns around. But we certainly, since we're ahead of pace, we're certainly bullish on where this business can go.
The TAM's very large. We feel like we're just skimming the surface. You figure we've got 80 target markets that we want to get to in the U.S. over time, and we've got plans to easily get to 27 of those. And so there's still a big runway left, and we're going to chip away at it.
Exciting stuff. From those heights, maybe you're laughing. Let's turn to Dave. Dave, obviously, I have to credit you a little bit with the acquisition here and putting the strategy in place. So I'll say that for you. But I feel like I have to rip the Band-Aid off a little bit here. In October, the company did pronounce a below consensus sales quarter, lowered full year guidance, and rebased the longer term growth outlook, which I appreciate these were, and I truly believe, temporary issues, not related to competition, the market, the opportunity, your products, the customers, or anything. But just maybe quickly, just a high level, remind listeners what drove the miss. I mean, clearly, Joe's areas are doing well, but how do you address this? What's contemplated in your near and longer term outlook at this point?
Yeah. Good question. So really what drove the miss for us in Q3 and really moved us to think about the guide in the future is on the capital side of our business. We place and sell 70 units, which is an interoperative navigation platform that we sell as a distributor for Orthophix. And we have exclusive rights to the children's hospitals with that device. There's very high demand for the device, but certainly it's unpredictable in terms of when and how many of those units may close in any particular quarter. Q3 of last year was by far the highest number that we had ever done. So we had a comp going in. I think we sold four or five units probably last year at this time. And then the quarter, we didn't get any across the finish line.
So there's a big gap between what we had last year and what we had this year in terms of 70 units. That doesn't mean that there wasn't demand for the product. In fact, we normally are doing demos inside children's hospitals. Those demos take a period of time, and then the paperwork to get these units placed and get the capital set up to get a PO for those things, the timing of those things are not easy for us to predict. And you can assume that we're not generally selling a lot of capital. So this is an extremely small portion of our revenue. We don't have 100 deals going simultaneously. So if we have four or five deals going all at once and none of them close, but maybe they all close the next quarter, we have this lumpiness in our revenue.
And I think we felt like the rational thing to do was if we can miss once based on 70, then why not just pull this or the great majority of that from the guide into the future? There are certainly going to be quarters where we're going to sell a number of units, and that's going to be great. But trying to give the street a sense for a go-forward growth of 12% that's really not got a number of 70 units baked in. And it also has the disruption that we've seen in our Latin American business, particularly in Brazil, where we generally are selling sets. Those sets are at zero margin and generally have long payment terms associated with them so that we can seed the market. We pulled a number of the set placements and set sales to Brazil from the guide on a go-forward basis.
And so that 12% represents the growth that you see on the OPSB side and a really healthy implant growth both in the U.S. and outside the U.S. when you strip that away. I think global growth -X70 was 17%. So very consistent with how we performed. U.S. growth, 19%, really led by strong trauma deformity and very strong implant sales of scoliosis. So yeah, while the street may have not loved the miss from how we look at the way the business is performing, the underlying things that have significant value to us that are driving profitability, improving cash usage, those things were in great order, and we're really proud of that.
Yeah. No, I mean, I think honestly, I think people are not quite understanding that and that the 12% guide, which again, in a world where it's hard for many of my companies to get into double-digit growth, is pretty darn good. But there is going to be the opportunity to see that 12% potentially in a given quarter or three of the year be substantially better as these orders come in. I mean, you did 2.8 million in surgical capital sales in Q3, if I'm saying it correctly, and you did a half a million this quarter. So it's not impossible that suddenly in the fourth quarter or the first quarter, we can see it. I don't mean to put words in your mouth, but like a million or two of this kind of volume come back. I mean.
That's absolutely true.
Interesting.
When that happens, it could be Q4, it could be Q1. We can't say for certain. And so that's why I think let's at least eliminate the risk in the forecast of when that kind of lumpy sales comes through and give a baseline growth rate that we feel really good about and that the base business can produce pretty consistently quarter- to- quarter.
And just to dig into a little bit further, a couple of sort of Rick Wise oddball points, sorry. But let's just say you have an incremental million or 2 million or 3 million, who knows what, in the fourth quarter, the first quarter. Is that going to change your, "We're a 12% grower baseline," or, "No, we're a 12% grower and here's that lumpiness and it worked for us this quarter"? How are you thinking about it?
Yeah, I think we are saying very clearly we want to grow 12% or better, and we'll leave it at that.
And sometimes it is.
And sometimes it's going to be bigger. Sometimes it's not going to be bigger. But I think establishing that baseline and also establishing that that's the baseline with which we generate profit and cash. I mean, you see we had good EBITDA number here in Q3 and we missed from a consensus standpoint. We only used 3.2 million in cash. I think that was off an $11 million number in prior year. And I think we're very confident that we'll generate free cash for the first time in Q4 of this year, whether we sell 70 units or sell sets to Brazil or not. And so I think the underlying fundamentals of the business, as we're trying to balance top-line revenue against the profitability of the business and driving to free cash, those elements of the business don't have a lot of bearing on that.
And so that's why we're going to stick to our 12%. If it's better, great. But otherwise, we can run a profitable business on that kind of growth.
I think it makes a ton of sense. Is there anything you can do from an internal management flow sort of in terms of predicting or understanding or managing the timing of these order signings? I know it's. I've done this too long. I know it's hard and it's difficult to wrangle this kind of stuff.
Yeah, I think we have a very large funnel. Right now, the 70 technology is very compelling to children's hospitals and pediatric orthopedic surgeons because it's essentially the only way that you can do navigated pediatric spine surgery with zero radiation. And so you can imagine that being something the hospitals and particularly our customers are super interested in. Now, the surgeon may be clamoring for the device and maybe want a demo, and we have, I think, upwards of 50 hospitals right now that are asking for that. We distribute that product. So we're not probably going to use the capital to buy 50 units and then do 50 demos simultaneously. That would certainly guarantee, you would think, that we would have a more consistent flow of revenue from that side of the business. But it also ties up with a lot of capital.
And so we generally have five, six units that are in demo form constantly. And when those close, then we move to the next few. And we think that's a rational approach to targeting the market that doesn't get us over our skis in terms of capital usage, but also is a nice pace in terms of closing these units.
And let's turn to the LATAM headwinds. For several quarters, you've had headwinds pertaining to the business. Is that behind us now? Have you taken it out of the guidance? And again, what's the cure? What's the solution here? You've decided to place fewer sets in Latin America. I got that.
Yeah. So generally in markets like Brazil, for example, you can imagine it's a complex process to get sets sold to distributors. We have historically sold sets at our cost. So they make the capital investment, and then we sell inventory, replenishment inventory as surgeries happen. And generally, that's a 50+% margin with no commission paid. So contribution margin is very strong on that sale. You can also think that markets like Brazil, where there's a number of children and we see a lot of different types of fractures and deformities that are very common there, it's a big market opportunity for us. And we're, again, the only pediatric player there. So we like the market dynamics, at least in terms of the demand, very high. We have great relationships with customers and we have a lot of good distributors.
But I think it is entirely rational for our distributors not to want to tie up their capital if it takes sometimes months to import the device, tariffs on top of that, and then to deploy those devices in hospitals or those sets in hospitals. It takes them time to pay that asset off. And so they ask us for longer payment terms. And in an era where we're trying to drive towards free cash and generate more cash, sales, at least in the short term, that generate no profit and tie up capital for 12 to 18 months, it's not something we're going to do. Now, I think there's a number of larger companies in the ortho space and the spine space that have gone before us and have successful adult businesses in Brazil.
We need to be able to analyze the models with which they're using to be able to continue to exploit the market well without having to tie up as much cash. I think there are ways that we can do that, but it's going to take us some time to execute on that strategy. Quite frankly, until more recently, the business wasn't probably large enough in that market to really think about how do we change the structure there. But I think it's probably time that we do that. And over time, I think we can have some solutions there that will let that business continue to grow, but also won't tie up as much cash.
Right. But maybe, I'm absolutely putting words in your mouth, is it going to be just as risky and should I be anxious heading into the fourth quarter or next year? Or no, you feel like you've got it buttoned down?
Yeah. In the guide, we basically pulled all the set sales out. It's possible that some of those set sales will happen. It's possible that we'll improve the structure of our organization there before the close of next year. But at this stage, to be safe, we've just said, let's pull the set sales from Brazil. Let's not assume there's going to be LATAM growth next year. And again, that's another factor that's driving us to the kind of the 12% long-term number.
Stepping back now and moving away from that, just again, in reporting last quarter, you highlighted that you had a very normal selling season. Again, Joe's business clearly is in a solid growth trajectory. I feel like just over the last couple of days of all the meetings here and actually just more broadly in the third quarter reporting season, it just sounds like the environment's pretty stable overall. And particularly in the orthopedic area, it just sounds like just all our surveys and physician work. Are pediatric procedure volumes in October, November mirroring that? You're more than halfway through the quarter probably. Are early fourth quarter procedure trends stable, solid in that kind of vein?
Yeah, I think we've seen fairly stable procedure trends in pediatrics now for a while. I mean, the summer was always our big deal. It's kind of for us, those numbers, particularly in June and July, are so big. It's kind of like Christmas for retailers, right? If we're not successful in June and July, it's hard to make those numbers up because the ramp that we see from a month like May all the way up into June and July is just so steep. And so if we can get through those numbers or those months and procedure volumes are solid, then generally we're going to have a solid year. And I think that was reflected in Q3 where you got July, August. If you again strip out the 70, very pleased to see 19% U.S. growth rate, 17% overall, and you can assume that's negative growth for LATAM.
So yeah, I think the procedures volumes are solid and I don't see disruption heading into Q4 into Q4 and into next year.
Great. On the call, you highlighted the shifts in some of the larger orthopedic players. They're exiting certain product lines. And I think it might have been announced afterwards or was it announced before that J&J, DePuy is separating, which could suggest chaos in terms of sales or R&D focus. Talk to us about the environment and the implications for orthopediatrics. Are there opportunities in terms of product lines or share gains or personnel? How are you thinking about all that?
Yeah, I think generally disruption is probably good for orthopediatrics. I mean, when companies are bought and sold and we have remained independent now for 19 years, generally we can attract talent and sales talent is sometimes available to us in that. But I don't know if it's we are opportunistic in that. I don't know that we're not planning a great party because of some of these things. I think there's some upside potential for us, but probably not baked into our strategy. What we have seen, and I think it's probably largely due to the EU MDR requirements for a lot of these companies, that it's an investment that we have chosen to make as we've documented well. It cost us several million dollars to go through the EU MDR process with our devices.
We expect several approvals of the EU MDR even yet this year, which is great. But I think some of the larger companies, J&J, a few others have looked at some of those product lines. They're fairly orphaned in their product portfolio and said, "Yeah, we're not going to go through that process." And therefore they get to a point where you have to rationalize those products from the portfolio. I think what we think is going to benefit us long term is the opportunity on the contracting and the pricing side. We have several different products. And now when you think of certain hip systems that aren't on the market, now we're launching our new 3P Hip. We have several products that have no direct competitor. And so it gives us opportunities with our customers.
We may be able to extract higher prices for those devices, but certainly we can leverage that for contracts. And I know that you like to talk about sole vendor contracts and.
It's my favorite phrases.
I would say that it is no better time to talk about that than now when we see an increasingly benign competitive environment, particularly in trauma limb deformity. And we are at the very early edges of product launch in that business that is probably the most significant product launch we've done in the 20-year history of our company.
Great. Joe, I want to loop you back in the conversation. Let's focus a little bit more on trauma and deformity. Obviously, continue to perform well. One of the bright spots, it is the largest business and it's been growing double digits for some time. Talk about what are the key drivers? It's hard for, I think one of the challenges of following and understanding the kids' story is the diversity of the portfolio. But just from your perspective, what are the key drivers of continued performance for T&D going forward?
Yeah, one is to continue to bring new products out that get us access into areas that we're not in today. And two is just to get further penetration in the accounts that we're already at from the sales account conversion execution.
And on the product side, and these are all typically my understanding is when you bring new products to market, they're premium priced. Obviously, some of it's greenfield where there's no treatment whatsoever. One of the top couple of products that you'd have us focus on that are drivers in the near to medium term is at the 3P, the pediatric plating platform strategy. Maybe talk about that a little bit.
Yeah, absolutely. A few years ago, from an R&D standpoint, we started this journey to overhaul all of our plates and screws system, but not just to update what we have and refresh it, but to actually add more plates and indications within those systems so they can treat a wider variety of things. So instead of that set being pulled for, let's call it five cases, now that same system that's now been refreshed and things added to it, there's now 10 cases it has the opportunity to serve. So we started that journey and we're really excited about the progress we made to launch the 3P hip system, which happened in July of this year from a limited standpoint. That system is far ahead of where it was supposed to be from a budget standpoint and number of cases that we've done.
I think we've been very impressed with the premium ASP. We underestimated the uniqueness to this system. And I think our field has done a nice job of positioning it as a good value proposition where you can't get what this system is anywhere else in the market. So 3P hip is going well. That's the first installment of what we'll say is five systems over the next five or six years. The second system is on its way here in the first half of 2026 in 3P small and mini. Same similar story to the 3P hip system where we're adding different plates and different items within that set that help us get to a whole nother series of indications and procedures that we're not in today.
And certainly after that, we've got a couple other systems over the next couple of years that we'd say is going to be a key driver. I mean, in addition to what we did with our P&P franchise over the last couple of years. So although we're not talking about P&P because we're focused on the plates and screws side of the business, we are seeing most of the success coming from the trauma and deformity business right now is happening on the basis of the launches we did a few years ago. So our P&P femur system continues to grow way above market. Our P&P tibia system is continuing to outperform our own expectations. And so we're certainly excited about those two coming forward.
And those are the two of the most important incremental new growth opportunities. Is there a lot in the pipeline, innovation pipeline that we haven't talked about that you haven't shared that we should imagine is heading our way at some point over the next six, 12 months?
I don't know. We've shared quite a bit of it with you guys.
Yeah. I would just say that we are at the early stages of what I think is the largest, most significant R&D cycle we've conducted as a company. When you think of VertiGlide on the scoliosis side that just launched, we've done just a handful of surgeries at this stage. It just came out a few weeks ago, but I can say already we're doing surgeries in children's hospitals where we didn't have scoliosis business. I mean, this is a very, very compelling, clinically relevant, clinically significant product. And that took us several years. It was a very complex negotiation with FDA. It treats a very complex unmet need for young kids. And you see RESPONSE, rib and pelvic. You see the second installment of VertiGlide, Ellie, the electromechanical growing. We expect to do cases next year for the first time.
We have our next platform fusion system that's coming out in the next 12 to 18 months. All the work that's going on on the 3P side, and then not to mention all the development on the OPSB side. We're still in product development mode with some of those things, but you're starting to see some of those get out here. And I think if you look at the business over the course of 18 months, this is probably an era of some of the most significant launches we'll ever do or we've ever done.
It's great. It is exciting, and again, going to the post-medical meeting, I went to the commercial floor, thought, "Oh goodness, I'm going to see all the competitors," and really it was you guys, so I mean, it's clear that how you dominate the space. I thought this would be a good time to ask you some financial questions and see what the president knows. Joe's not looking too confident over there, but seriously, rest of 25 margin profitability guidance, Dave, you lowered the full year sales guide by $5 million at the midpoint, maintained the company's full year gross margin and Adjusted EBITDA. What gives you the confidence to reaffirm the 25 margin and profitability targets given some of this disruption? What are the drivers underpinning that and given the lower revenues?
Yeah, I think the confidence is born out in what we saw when you pull a few million dollars out of the revenue number in Q3 and it really doesn't affect the EBITDA of the business. Actually, you see how much less cash the business uses in Q3. I think we're starting to see some of the restructuring things that we started a year ago, starting to see the leverage there and starting to come to fruition. I think we feel very confident about where we're heading in Q4, really confident about a step function improvement in EBITDA in 2026 that would ultimately not only cover our set deployments in 2026, but our working capital needs and get us to cash flow break even. That's been something we've been chasing and made very clear that 2026 was our year.
And what we saw in Q3 and I think what we're going to see here in Q4 gives us a heck of a lot of confidence that we're in a good spot to do that. To your point, margins go up a little bit when you're not selling zero margin set sales to Brazil. And if we don't do that, we're going to see a little bit of appreciation on margin. Same thing with low margin sales of 7D. That's going to fluctuate obviously depending upon how much 7D we actually would sell in any given quarter, but it is encouraging to see that. And then I think the areas of the business we're making investments like OPSB are starting to not only be top line creative, but really starting to generate some positive on the bottom line.
We're out of official time. I'm going to go on just a little bit longer. You stole my sole source vendor question, Dave, which I know you enjoy. But just thinking about the platform and the possibility of long-term expansion opportunities into other pediatric specialties, I mean, there does seem. I'm intrigued by that. How are you thinking about that? And when do we see maybe that part of the strategy unfold more visibly?
Yeah, I think moving into OPSB was a new thing for us. And certainly under Joe's leadership, it's gone really well. It was what we would call near adjacency. Still our same customer, right? But something new for us that we'd never done. And I think we wanted to prove to ourselves before we launch into, who knows, pediatric cardiovascular surgery or pediatric ENT or general surgery, some of these other subspecialties that we could do this well. And we're executing extremely well on the OPSB side. A lot of growth remaining there. And I want to continue to see that go well. But yeah, we do think of the business long term as more of a pediatric healthcare company as opposed to pediatric ortho.
And I think when we start to see challenges on the growth side inside ortho and our share gets to such a dominant share position that we need to look into other subspecialties, it seems like there are opportunities outside of our space to do what we've done in orthopedics and other subspecialties in pediatric healthcare. We continue to call on other inventors and investors and people who are interested in this. It's a real problem in pediatric healthcare that your kid goes into a hospital and doesn't have the same quality of care that they do in adults or that you or I would. That's absurd. And I think it's going to take a lot of us partnering together to make sure that we can solve that problem over the course of the next decade.
That's an inspiring message. I think the clear takeaway is that the challenges from third quarter are clearly manageable. They're out of guidance. There's a lot more growth and profitability improvement. You're on the cusp of cash flow positivity.
We're heading in a good direction.
Heading in a very solid direction. Let's hope investors hear that.