Morning, everybody. Thanks so much for joining us. Very excited and lucky to have the OrthoPediatrics team here with us from the company of Dave, who's the CEO here. Dave, thanks so much for coming out. Appreciate it, and as I understand, it's a really busy week for you, so thanks for making time for us.
Yeah. Great. Appreciate it.
Maybe start with, you know, some of the updates that we had on Q3. You know, the guide came down a little bit. I think it was really just a couple of areas. You know, maybe talk about the pressures you're seeing there and then just potential recovery that we could get from those categories, you know, in the future. I'm not sure timing-wise, but just maybe talk a little bit about it.
Yeah. Yeah. So, despite what the top-line number looked like against our guide, I think we really had a strong quarter in Q3. We have a small amount of our business that's in capital. So, 7D capital is our, a distributed product for us. It's a navigation platform for spine surgery. Generally speaking, we sell a couple of units of those in any given quarter. And in fact, in Q3 of last year, I believe sales of that were the biggest they've ever been, so nearly $3 million in revenue last year. And in Q3, we had no orders that actually completed. So tons of demos. I think all the way through the quarter, we thought we were probably gonna get a couple of closes, no big deal. And these things tend to close at the end of every quarter.
We just didn't have any close. Now, those are relatively low-margin part of our business. They're generally tied to some type of contract on our spinal implant business. They're not gonna go away forever, but at least in Q3, it really hurt us and cost us several million dolllars in growth. Then we've had some difficulty, and we've talked about this over the years, particularly in Latin America, where, you know, a portion of our sales in Latin America are to stocking distributors, a large portion of our sales. Those distributors tend to want longer payment terms. So if we're gonna sell sets that are generally at low margin, in this case, maybe zero margin, and we're gonna be asked to give payment terms that could be as long as 12 months, it cuts against our goals of generating free cash.
We have purposefully looked at that circumstance and said, you know, let's strike set sales in Latin America from our guide. It's cutting against generating free, you know, free cash flow, and it's not, at least in the short term, profitable for us.
Yep.
Then let's eliminate at least some of the 7D revenue from the forward-looking guide such that, you know, there's no surprises. If it can happen in Q3 of 2025, it's possible that we could sell no units in another quarter.
Right.
We wanna remove the majority of that from the guide such that we can focus the baseline business in this kinda 12% range. There's certainly gonna be quarters where we're gonna sell 7D units. There could be quarters where we sell a huge volume of 7D units and others where we sell none. I think we're just trying to eliminate the uncertainty from elements of our guide, and give investors kind of a clear path to what we think the future's gonna look like.
So, Dave, it kinda feels like a good reset. You know, I mean.
Yeah.
You've been beating numbers forever. Not gotten a lot of credit. Why not just go ahead and kinda reset things and then go execute on what your, you know, strat plan is?
That's a very fair assessment. I mean, we've admittedly frustrated 'cause I think over the years, there's very, very few quarters where we haven't beaten, and we've certainly never had a quarter like Q3, but you know, certainly in this environment, we haven't gotten a lot of credit for that.
Right.
So let's reset things to where we feel very good about, you know, what we can do quarter to quarter. And I think if you look at that, all the different products we have and the growth on the OPSB side, and the fact that we will get 7D sales, it's just we don't know when. It, it's a good setup for 2026 for sure.
Got it. Okay. If you don't get 7D sales, if you have two quarters in a row where you don't get 7D sales, do you get a hole in your spine business at some point? 'Cause I know you get implant pull-through in those accounts. Is that a potential risk?
It's a theoretical risk, I suppose.
Yeah.
How this generally works for us is that we distribute these products from Orthofix.
Yep.
So, we have for years, and they've been a great partner in this. We acquire those units, and those units that we acquire, we use as demo units.
Yep.
And so unlike maybe some of the big capital companies that we're not doing hundreds of demos simultaneously.
Right.
Because then we would have a bunch of inventories on our books. And so we're doing demos in accounts. Generally speaking, you could assume that there's four or five of these units that are in accounts. And in those accounts where we're doing demos, we're doing spine surgery.
Yep.
Generally, it's getting growth from day one, even when we start that demo. Generally speaking, you have a surgeon who says, "I don't want this to ever leave my hospital," and we're working with hospital administration to get final sign-offs and approvals. That, I will say, is taking longer than we've seen even a year ago, but we're not moving that inventory or moving those units out of the hospital.
Yep.
So really, it doesn't affect us a lot. I guess it does theoretically slow down the next four demos that we could kick off, but we're certainly not anticipating it to impact our implant business negatively in the future. I mean, 7D has been great in terms of exposing surgeons who haven't used our system in the past, and they see this radiation-free navigation, which is huge. As you know, we've talked about this in kids.
Yep.
A huge deal. I think it's actually the driver right now of a lot of our share gains that we're getting on the fusion.
Got it. Okay. And I mean, you're not the only one talking about, you know, slow down in terms of capital. So not surprising there. Maybe again, just sticking on the guidance side of things, and I ask you this 'cause I know Fred's not here and won't stop us. But so, you know, right now, the Street is modeling around or you've talked about kind of a 12% baseline growth. Can you talk about the components of that growth now that we're kinda pulling out 7D and LatAm?
Yeah. So obviously, we haven't given guidance for next year. We'll probably do that early in next year, but we have tried to signal that it's the long term, moving from kinda like this mid- to high-teens to a 12% baseline, as you said. I mean, the components of that, I would say, are the components of our business that are very predictable and generate high gross margins and profit for the business. So this is the T&D implant business that continues to grow through share taking. It's the OPSB business that we see continuing to grow kinda north of 20% and very profitably for us for the next several years. And then the scoliosis implant side of the business, we see on Latin, how we're forecasting that is it's probably gonna be flat for next year.
And really what that means is we're gonna continue to serve the replenishment side of that business, which is profitable for us, and we have good collections, fast collections on that, but not get way out ahead and sell a lot of sets there. And then we are seeing really strong growth in our agency side of our international business, particularly in Europe and in Australia. And I would just like to point out that the scoliosis side of that is really coming on extremely strong. You probably know, but we haven't had a scoliosis business to speak of outside of the United States other than in Latin America. Generally speaking, pediatric orthopedic surgeons don't do a lot of spine surgery in Europe. And we have started to launch our system. We're waiting, like any day here, for the Small Stature to get approved in Europe.
We're throwing some really great months and quarters up with, but it's a small business, but it's gonna be a big component of the growth next year as well.
Got it. Okay. Speaking of new products, you guys introduce a ton every year. Maybe, you know, simplify, especially for me, some of the things that you've been coming out with recently. Like, I think about, you know, the PNP Tibia, PNP Femur, cannulated screws. I mean, all these things that are coming out. You know, maybe talk about some of the market opportunities you have with some of these new products. Maybe start with T&D first and then, you know, how your, your products kinda fit into these categories.
Yeah. Great question. So what I am very excited about is that, and I think I've told you this before, Matt. I feel like we're at the very beginning or the end, depends on how you look at this, of a cycle. We have invested a huge amount of money over the course of the last few years in some very, very novel NPD that hasn't gotten to the market yet. It's very close. We're starting to see this with Verticale on the spine side, eLLi, so hopefully next-gen spine. 3P is now out there. But, you know, that's been the work of the last three years of the business. And, you know, that is kind of R&D cycle, I guess, is coming to an end, meaning the new product development or the new product launch cycle is kicking off.
That'll start to impact us in 2026, but when you think of 2026 and through maybe 2029, I mean, big workhorse products that, from my perspective, are transformational for the business. Now, in the past, you know, we've launched the PNP franchise.
Mm-hmm.
PNP Femur, one of our largest, if not our largest, trauma and limb deformity product now. PNP Tibia is extremely rapidly growing at this stage, and I think both of those product lines still have a long ways to go, particularly on the tibia side. We're probably only about halfway through the launch, and we've really not launched it internationally. So still got some legacy kinds of products. Let's say PNP, the franchise is still gonna grow, but super excited to see PNP, the 3P system. So we've done the first 50 or 100 cases with the 3P Hip.
Yep.
I will just say high ASP, high margin, very unique. Feedback is extremely positive from customers. And this is gonna be the workhorse of our hip systems going forward. And then you saw the 3P Small Mini got approved.
Yep.
In advance, 52 days through the FDA, which I think is a near record for us.
Yeah.
And didn't expect that, but you'll start to see that launch early next year. And that is a system that's really expands the indications for all our plating systems. But I guess, in short, the 3P system, think of it like we thought about the PNP systems in the past that become the workhorse of our IM nail platform. These 3P systems are becoming the workhorse of our plating platform. And, they're gonna be huge for us over the course of the next several years.
How big are those markets?
Yeah. You know that we essentially are an orphan or a mutual fund of orphan devices in a lot of ways. And so the plating market as a whole is very large, but it takes a lot of different devices. And so the hips, the hip market is, you know, I don't know, Matt, it maybe it's a $20 million market opportunity, fully, you know, fully baked. We haven't. I don't know the specifics, but generally speaking, you know, we expect to take that whole market. We have some of it already, large chunk of it with the blade plates and the LPF. But, yeah, this is probably a $50-plus million collective opportunity for us.
Okay.
Something like that.
I mean, yeah, that's sizable for you guys.
Yeah.
So.
Big for us.
What about, you know, all these new products and something that I know from way back is the cost that it is to participate here from a getting into OPSB is great, right? It's much less capital intensive.
Yeah.
Are we gonna have another round of you needing a lot of instrument sets to support all these other products on the T&D and scoli side?
Yeah. So the way we view that is, you know, our push has been to aggressively drive to generating free cash flow. That's gonna happen, we think, here in Q4 for the first time. You'll start to see that probably go negative again in Q1 and Q2 because that's when we launch these new sets. But you've seen us limit set deployment this year.
Yep.
Albeit limiting set deployment has slowed the growth of the T&D implant side of our business. That's been purposeful.
Yep.
You know, we recognize there's a little longer cash conversion cycle on the implants on the T&D side. You'll probably see us use similar, if not less, cash next year on those types of devices. But the difference is the cash will all be used towards non-legacy-like devices. You know, we will still be launching PNP Tibia because that's still new. But we have generally, I think, extinguished most of the demand for the systems that we had developed pre-IPO over the last 15 years. And so all of the d evelopment dollars, all of the launch dollars, are focused on 3P, focused on Verticale, focused on these new product launches.
And so it's possible out in the next several years as the company grows even larger that we will, you know, and we start to generate cash that we'll make some decisions to increase the debt deployment, but not until we're solidly generating free cash.
Got it. Okay. Speaking of the scoli business, I know we're early stages for Verticale and eLLi. And I think eLLi's actually next year, right? Okay. You know, when do you get the impact of those? And then again, just back to the instrument question, like, are we gonna, you know, the scoli, some of the scoli systems, the instrument sets are crazy expensive. Is that another potential headwind?
Yeah. So Verticale, where you have started to do cases here since Q3, and you're seeing cases in Q4, cases are going well. You know, we've talked to you in the past about our goals that maybe earlier on in the days of our company when we were much smaller, we weren't as sophisticated in terms of planning the development cycle, and that included limiting the capital required to develop, you know, to send these products out, looking at asset utilization metrics and into the development cycle upfront. How do we develop something that gets better than $1 of sales, $1 of inventory? It gets two, it gets three, it gets four. I would say, products like ApiFix, we've talked about, it's like a 10 to 1 in terms of what we have to deploy or what we get back in sales.
Verticale is one of those without question. ASP is $40,000-$50,000 per procedure. No discounting. I mean, this is an orphan device, and we're solving huge problems, and we haven't had any pushback there. The kit itself in and of itself is probably $100,000. So you can see that, like, it doesn't take too many of those kits. They're all elective procedures, so there's very few emergency early onset scoliosis.
Right.
Again, you can see why we've done some of that type of development. And so I don't think we're gonna see the need necessarily next year to load in terms of putting a lot of capital to work there. A lot of those sets for next year have already been deployed or already been purchased. Some of them have already been paid for. And so from a cash standpoint, you know, it's not gonna take a ton of cash on the Verticale in particular. eLLi is a similar thing. When it comes out, eLLi has no instruments. eLLi is just a growing rod that fits into our existing systems. It can assume very high ASP and in a sterile box or two.
These are some of these things are more complicated from a development standpoint, but from a cash usage standpoint, fit the model that we're moving or we're working towards.
Yeah.
Does that make sense?
Totally. And so I'd love to spend a little bit of time. I do wanna get to OPSB and then a little bit on the financial side, but the, you know, you know how much I love the EO, you know, early onset scoliosis space. Not that I love it for the kids. They have to go through it. But talk about the portfolio you're developing, where we're at in that development process where you can really treat, you know, really young kids all the way up until they're more skeletal, skeletally mature, you know, to, to get fusion. Where, where are you at in that process? And then how does eLLi differ from these other growing rods that we're all familiar with?
Yeah. Great question. So the goal here, the strategy of our business has been to, on the Scoliosis side, is to differentiate ourselves by taking on the most complicated surgeries with, unfortunately, some of the sickest kids that the other companies have not wanted to focus on. And you can understand.
Yeah.
It's not their business, and so early on, a couple of years ago, we launched the Rib & Pelvic System that's an adjunct to our RESPONSE fusion system. We get to see that being used in major centers that we have not had a great strong scoli presence, maybe because of contracting. And so we're breaking walls with that and certainly proud of what we've seen there. That was one of the three, you know, important product strategy. Number two is Verticale. And so Verticale is, you know, gone extremely well. We are running a post-market clinical study with FDA at the International Pediatric Orthopaedic Symposium, the early onset symposium this last month, we had more than almost half of all the surgeons were in a breakout session to see Verticale.
Okay.
We can't support that demand yet, but the very hot topic in terms of that. And I could tell you that where it is being used, again, are in institutions where we have been historically contractually locked out for fusion. And certainly we wanna use this to get in. And then the eLLi is a little different in that it is actually not guided growth. Verticale is a guided growth system we licensed from Medtronic years ago. eLLi is an electromechanical device. And while other systems, the one system that's available, uses the big magnets, they're spinning big magnets to grow this, there's challenges with power, there's challenges with energy transmission, and then wear debris. We have a device that uses RF technology. So it actually radio frequency technology that triggers a micro miniaturized electronic motor.
Surgeons have all the power they need with no dissipation of power the further it gets away from the motor. All components are either PEEK or, well, PEEK on titanium such that we've limited wear debris. This is a very compelling technology. It also is very intelligent, and that can tell surgeons exactly how much motion it's getting through the device as well as how much forces are applied to the device. So there's no guesswork where you have to go back in, take a look, and say, "Hey, did we actually move 2 mm today or, or not?" You know without question, and then the next time it syncs to that device, it actually tells you the history of the patient and exactly what you've done.
Very compelling digital technology, a very compelling research tool as well as super compelling for the surgeon and patient not to have to go through the kinds of surgeries they have to go through for the.
Absolutely.
They have all that we think is gonna leverage the whole portfolio.
I think.
I think we're already seeing some of that.
Okay. Yeah. I'm very glad. It sounds like it's, it's fantastic. What are you seeing on the ApiFix side? Or I guess, how does ApiFix fit into the portfolio?
Yeah. So not pushing you to transition on OPSB, but when you think about what we're doing on OPSB, here's a kid that comes into one of our clinics through our surgeons that doesn't need fusion, hopefully never needs fusion. And we're treating that patient with bracing, and hopefully we can keep them out of the OR. Then it transitions to, "Well, maybe this patient is a good candidate for an internal brace." And we are seeing very strong results with ApiFix in our clinical study in a fairly narrow band. So I would say our surgeons, we are seeing more and more surgeons use ApiFix. We're seeing some of the surgeons that we're using it in wider indications narrowing that indication. And so in some ways that's not ideal. In others, we're like, "We've got a good device here.
We just need to educate the customer as to the patient that it's appropriate for.
Right.
And great results with that. And so that's the next step going from bracing to there's an early onset. If that unfortunately occurs, you've got that product portfolio. And then fusion on the backside of that, that if all else fails, we have a fusion device. And I think the value proposition of bracing through non-fusion, through early onset, all the way to fusion is something that we are uniquely offered by one company that's never been offered before. It's tackling the disease state as opposed to developing you another implant that's moderately unique to another to another competitor.
Yeah.
Does that make sense?
That makes total sense. It's a great portfolio. And, how big is EO? And I really wanna get to OPSB, but how big is the EOS market?
Yeah. In the U.S., it's probably a $50+ million market opportunity. OUS, you know, pretty large as well.
Got it.
So it could be bigger, but,
Yeah.
It's in that kind of range. There's really no competition in there.
Got it. Okay. All right. OPSB, you just launched two more products there, PediaHip Bridge Brace and then the PediaHip Modular Abduction System. You've got a lot of things that you already acquired that you have on your own. Now these two new things. Do you still have gaps in the portfolio there?
There's a ton of work to be done.
Like, how much of the portfolio are you covering now that you could be covering?
I don't, I think that patients get treated with these devices generally are kind of bastardized small adult devices. So I think there's a huge runway. I can't give a percentage, but there's a huge runway of novel technologies and ideas that are coming from our customers. As a good example, I just got Joe sending me pictures from IPOS where we're running labs, a ton of labs here for young surgeons. We had the highest attendance of any lab we've ever run standing room only at IPOS for the new PediaHip, PediaHip Brace. So, like, the demand for things like that are extremely high. And you've seen that with DF2. I mean, DF2 has grown faster and is bigger than I think we ever thought it could be. And now we think it's probably only halfway there kind of thing.
I think, you know, we actually are not clear what the hell, what the sizes on these markets are because some of the development is blue ocean stuff where surgeons may not have been bracing something because they didn't have the right tool to do it with. Then you could provide the right tool, and it's surgeons are going, "Well, I could use it this way. I could use it that way." We're seeing that market expansion opportunity. I would just say the pipeline associated with development, probably four or five new devices every year coming from us for a long time.
Okay.
These are low-demand development processes, right? These class one devices, fairly easy to get surgeon inputs. They get reimbursed high. There's no instrument sets. I mean, you can understand and they benefit patients in ways that are just, you know, we can be really proud of.
Got it. Okay. And so, you know, clinic expansion. I think when you acquired Boston O&P, there's 26 operational clinics.
Yep.
So now I think you're at more than 40 exiting Q3. You know, that's eight new territories. Your first international business. You've been growing OPSB, I think north of 20% with all of these new territories, international, new products. I mean, is that the rate or can it even be faster for you guys going over the next couple of years?
Obviously, it's getting bigger, so we're pushing up against a much bigger business, but it can accelerate. I mean, we were, we are definitely not gonna slow this train down. We have so many inbound opportunities from either small clinics that wanna be acquired and then focus exclusively on peds and then scale, which we call acquire, the greenfield opportunities when we buy a clinic in, you know, the state of Florida, for example, and then the opportunity to greenfield the next 10, very high. And the surgeon demand at the largest institutions is huge. We're seeing same-store sales growth out of those 25 or so. I would say it's a little lower than the rate of growth we're getting from clinic expansion only because of that $25 million or so in revenue Boston had when we acquired them.
The majority of that, a large percentage of that was at Boston Children's where they had 90% market share.
Right.
But same-store sales of clinics that are not in areas where they had high market share are growing rapidly. We're seeing greenfields that we've owned for six months every month growing, you know, up and up and up. Some of the acquisitions that we've done, we're seeing the impact of our sales force and the synergies growing those. And all the signs point to why wouldn't you wanna continue to do that?
Yep.
I think you'll see that. I mean, our aspiration is to have clinics in every children's hospital in the United States and then in the markets outside of the U.S. that make sense for us.
Got it. That makes sense. Okay, and about the last minute here, financial questions. Sorry. Lots of numbers here, so I think you've talked about a significant step up in EBITDA in 2026.
Yep.
Is that fair? The street's modeling about 65% EBITDA growth next year.
Mm-hmm.
That's like 36% of a drop-through rate. Does that make sense? And, you know, what would drive kind of that leverage?
Yeah. I think, you know, we haven't given guide yet, but I think you could expect in what we've said is a substantial step function increase. We went from eight, eight and a half this year to 15 to 17. You might see another bump up like that. Not to give the exact number, but a pretty substantial kind of growth number, again this next year. Listen, I mean, we've done a lot of things as the market has kind of demanded profitability or cash flow. Some of that, the restructuring costs you've seen, some of just, you know, slowing down hiring. OPSB takes less cash. I mean, those are kinds of things that we think are certainly starting to impact. You're gonna see it here in Q4. And I think you'll see that in 2026.
Got it. All right. Well, it looks like we're all out of time, Dave. So I have to go ahead and end there. Thank you so much for coming. Thanks for the feedback. Appreciate it.
Matt, thanks.
Thanks. Great.