Treace Medical Concepts Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

There are 11 speakers on the call.

Operator

Good day and

Speaker 1

thank you for standing by. Welcome to the Treese Medical Concepts 4th Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Julie Dewey.

Speaker 1

Please go ahead.

Operator

Good afternoon, everyone, and welcome to our Q4 2023 earnings conference call. We appreciate you joining us. I'm Julie Dewey, Treese's Chief Communications and IR Officer. With me today are John Treese, Chief Executive Officer and Mark Hair, Chief Financial Officer. During the call, John and Mark will offer commentary on our commercial activity and review our Q4 and full year financial results released after the close of the market today, after which we will host a question and answer session.

Operator

The press release and supplemental materials can be found in the Investor Relations section of our website at investors. Treice.com. This call is being recorded and will be archived in the Investors section of our website. Before we begin, we would like to remind you that it is our intent that all forward looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results or performance are forward looking statements.

Operator

All forward looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward looking statements. All forward looking statements are based upon current available information and Treice assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. Please refer to our SEC filings, including our Form 10 ks for the full year 2023 to be filed on February 27, 2024 for a detailed presentation of risks.

Operator

With that, I will now turn the call over to John.

Speaker 2

Thank you, Julie. Good afternoon, everyone, and thanks for joining us. I'm going to focus my comments today on our full year and Q4 2023 highlights, the exciting progress of our SpeedPlate implant launch and our other growth drivers. Following my comments, Mark will cover the specifics of our Q4 results and our 2024 guidance. 2023 was a busy and productive year for Trez and we're proud of the significant progress that we've made.

Speaker 2

We successfully executed on our strategic plan resulting in full year U. S. Revenue growth of 32%, surpassing the high end of our previously provided guidance range and growth that we believe is significantly above our foot and ankle peers. We also continue to scale our operations, making encouraging adjusted EBITDA progress that was ahead of the prior year and delivering gains across our key operating metrics reaffirming our belief that we have the right strategies in place to expand the market penetration of our differentiated technologies. Here at Trieste, we're driving a fundamental shift in the surgical treatment of bunions through our proprietary lapoplasty procedure, which is well on its way to becoming a standard of care.

Speaker 2

Lapoplasty targets a $5,000,000,000 plus addressable market in the U. S. With continued strong adoption by the foot and ankle surgeon community and with nearly 1 in 4 adults in the U. S. Affected by bunions, we believe this represents the most compelling opportunity in the foot and ankle reconstructive market today.

Speaker 2

As of the Q4 of 2023, we have penetrated approximately 6.6% of the estimated 450,000 annual bunion surgeries in the U. S, up from 5.5% in the Q4 of 2022 and reflecting approximately 2.7% market penetration of the estimated 1,100,000 annual U. S. Surgical candidates that constitute our $5,000,000,000 plus total addressable market. We've also expanded our footprint in the foot and ankle market by adding complementary procedures and technologies to treat related deformities such as a ductoplasty and hammertoe correction, both of which frequently coexist with Bunions and are addressed at the same time.

Speaker 2

This has opened up new revenue opportunities and meaningfully expanded our TAM by 15% or approximately $750,000,000 without diluting our focus on the $5,000,000,000 plus U. S. Market opportunity for our core lapelplasty procedure. We initiated commercialization of several new technologies in 2023, including our Speed Plate Fixation platform, hammertoe system, several sterile instruments, as well as a limited release of our micro lapoplasty system. We expect all of these new technologies to fuel strong growth for years to come.

Speaker 2

As a uniquely focused foot and and ankle company, we believe we're distinctly positioned to drive innovation led growth and deliver long term shareholder value. Since our founding, we've pioneered elegant breakthrough solutions including our flagship lapoplasty and adductoplasty procedures that are designed to deliver predictable repeatable results supported by differentiating clinical studies. Along the way, we've also taken bold steps to grow and defend the markets we pioneered through our direct sales team, rapid product innovation and our patient awareness and education initiatives, all of which we believe have resulted in a sizable competitive advantage for Treese. With over 90,000 patients now treated with our laparplasty procedure, we recognize that our success is not only measured in our numbers, but in a transformative change that our differentiated therapies provide to patients. Turning now to our Q4 and full year 2023 results.

Speaker 2

Revenue in the Q4 was $62,200,000 up 25% over the prior year with full year revenue growing 32% over prior year. These results demonstrate the underlying strength and effectiveness of our strategic investments in our direct sales channel, targeted R and D initiatives and direct to consumer programs. 4th quarter was also our 1st quarter of positive adjusted EBITDA since going public in April of 2021. We continue to advance our key performance metrics in the 4th quarter, including substantial gains in the number of new surgeon users ending Q4 with 2,855 active surgeons, up 164 for the quarter and up 20% year over year. A year over year increase in trailing 12 month surgeon utilization with an average of 10.4 kits per active surgeon in Q4, up from 10.3 kits a year ago despite the dilutive effect of the large number of new surgeons added during the year and record blended average selling price of $6,437 per lapoplasty kit sold in the quarter, up 9% over the prior year, driven by the early impact in the quarter from our new Speedplate and HammerTose systems as well as increased adoption of our adductoplasty procedure and utilization of our new sterile instruments.

Speaker 2

Our strategic investments and commercial focus have continued to support the growth of our business giving us confidence that we have a well defined, proven and scalable commercial strategy. We intend to continue these targeted investments in 2024 with the goal of increasing our market penetration by expanding the footprint and coverage of our Bunyan focused direct sales channel, advancing our patient education and awareness DTC initiatives and driving more targeted R and D innovations into the market. We have a highly specialized team at Treice, including an established and growing direct sales channel, one that is 100% focused on bunion and related midfoot surgery, the only such one in the industry. We increased the size of this team by 35% during 2023, exiting the year with 227 quota carrying direct reps that produced roughly 82% of our revenue mix in Q4. When you include our associate sales reps, clinical specialists and sales managers, our total employee fleet in the field totaled approximately 340 employees at the end of 2023 versus 267 at the end of the year 2022.

Speaker 2

We plan to appropriately grow this specialized team during 2024 to ensure strong surgeon coverage and support and continued market penetration. As I mentioned earlier, we saw strong growth in our active surgeon base in Q4 and for the full year. As our surgeon base continues to develop and gains tenure, we anticipate utilization gains with increased use of lapoplasty and adductoplasty as well as further adoption of our growing portfolio of complementary products, all supported by our expanding direct sales channel, differentiated clinical datasets and patient education and awareness DTC initiatives. Now I'd like to turn to our product launches. First, our new Speedplate fixation platform.

Speaker 2

Our Speedplate launch is off to a great start and we saw very strong demand in the Q4 despite its limited availability. In fact, Speedplate represented about a quarter of our case volume in Q4 and about 20% of our active surgeons have already used Speedplate. We are on track to have full market availability of Speedplate at the end of Q1 and expect broadening adoption and growth throughout 2024 and beyond. Our Speed Plate Fixation technology is designed to deliver the stability of a titanium locking plate with the speed of insertion and compression of a staple, a very attractive combination for many surgeons. We believe this technology is not only enhancing the experience of our existing customers, but it's also allowing us to attract and onboard a new audience of surgeons, specifically those who prefer NITINOL staples for fixation.

Speaker 2

While broadly applicable across lapoplasty and adductoplasty procedures today, we previewed new Speedplate implant configurations at the recent ACFAST meeting that are designed to expand the versatility of our Speedplate platform to address an expanded range of fusion procedures throughout the foot. These new Speedplay configurations are expected to be available by Q3. Next, our microlapaplasty system. This is an advanced instrumentation option designed to further reduce both the incision size and related tissue dissection with the lapoplasty procedure. This exciting evolution of our instrumentation allows the patented lapoplasty procedure to be performed now through a 2 centimeter incision utilizing our new Speed Plate fixation technology.

Speaker 2

Our microlappoplasty system is now fully available. While we are excited about the growth opportunity that all of these product launches represent, there's even more to come from our robust product development pipeline. In fact, inclusive of the launches I've just discussed, we have 10 new innovation launches slated for 20 24 and more in our R and D pipeline to ensure a steady cadence of new innovations in 2025 beyond. We were excited to highlight many of our new 2024 innovations at including our new mini adductoplasty system and our Redpoint preoperative planning and patient specific instrumentation. Mini adductoplasty features advanced instrumentation designed to allow the adductoplasty midfoot correction procedure to be performed through an approximately 50% smaller incision and leverage a speed plate technology for fixation.

Speaker 2

The mini adductorplasty system is currently in limited clinical release with full commercialization planned in the second half of 2024. We believe this new innovation can drive increased adductoplasty adoption and market penetration for years to come. Our Redpoint patient specific instrumentation is our first to market technology designed to deliver preoperative planning and patient specific guides for bunion and midfoot deformity corrections. We believe this technology can make challenging procedures more approachable to a greater number of surgeons while reducing steps and or time. Redpoint PSI is currently in limited clinical release with full commercialization planned in the second half of twenty twenty four.

Speaker 2

As pioneers in the procedure markets that we have developed, we believe Redpoint PSI is a core technology with capability to achieve broad market adoption in the years ahead, further strengthening our leadership position. Finally, we're looking forward to introducing a significant new technology platform in the back half of twenty twenty four. We believe this platform will speed our penetration of the bunion market, expand our market opportunity and further reinforce our position as the leader in 3 d bunion correction. We will provide additional updates on our new product innovations as we continue to develop our pipeline centered around our core technologies and IP aimed at improving surgeon user experiences, patient outcomes and supporting continued market penetration. As we look specifically to 2024, our guidance provided today reflects our expanding commercial capabilities and increased contribution from the sales rep additions that we made throughout last year, continued adoption of lapoplasty, adductoplasty and other complementary procedures, as well as multiple new launches that we expect to drive strong growth while we also advance our pipeline opportunities.

Speaker 2

We also expect to make solid progress on our pathway sustainable profitability as we drive towards adjusted EBITDA breakeven for full year 2024. I'm proud of another great quarter of execution at Triste with solid performance from our talented team of employees. With continued strong additions to our surgeon base, increasing productivity of our direct sales channel and a robust pipeline of new technologies fueling our commercial momentum. I'm confident that we have the right strategies in place to continue to deliver industry leading foot and ankle growth and profitably scale our business in 2024 and beyond. With that, I'll now turn the call over to Mark to review our financial performance and guidance.

Speaker 2

Mark?

Speaker 3

Thank you, John. Good afternoon, everyone. Revenue for 2023 was $187,100,000 representing 32% growth over the prior year. 4th quarter revenue was $62,200,000 a 25% increase compared to the prior year. Growth in the 4th quarter was driven by increases in procedure volumes and increases in blended average selling price due to increased adoption of the company's newer technologies and expanding portfolio of complementary products.

Speaker 3

Although the 4th quarter included one less selling day than the prior year, the month of December actually had 2 less selling days. On an average daily sales basis, we grew 27% in Q4. We sold 9,665 lapiplasty procedure kits in the 4th quarter, a 15% increase compared to the same quarter last year. Blended average selling price was a record $6,437 in the 4th quarter, up 9% over the same prior year quarter. This higher blended average selling price was driven by lapoplasty and the additional contribution from our expanding portfolio of complementary products such as our ductuplasty system, sterile single use instruments and some early impact from Speed Plate and Hammertoe as our direct sales channel continues to increase their procedure volumes across our surgeon customers.

Speaker 3

For the full year 2023, revenue was $187,100,000 a 32% increase over 2022 at the top end of our preannounced revenue expectations of $186,700,000 to $187,100,000 and above the high end of our prior 2023 revenue guidance range of $182,000,000 to $186,000,000 We sold 29,675 lapoplasty procedure kits for the full year 2023, a 20% increase versus prior year with a blended average selling price of $6,306 a 10% increase over the prior year. Gross margin was 81.6% in the Q4 of 2023 compared to 81.9% in the Q4 of 2022. This 30 basis point decrease was primarily due to changes in product mix and an increase in overhead costs due to headcount to support the growing business, partially offset by lower royalty rates and a decrease in inventory provisions. For the full year 2023, gross margin was 81.2%, down from 82% in the prior year period, primarily due to changes in product mix, an increase in inventory provisions and an increase in overhead costs due to headcount to support the growing business, partially offset by lower royalty rates. Total operating expenses were $57,500,000 in the Q4 of 2023 compared to total operating expenses of $44,200,000 in the Q4 of 2022.

Speaker 3

The increase in operating expenses reflect strategic investments in our expanding direct sales channel, investments in product innovation, increased capacity requirements, as well as support for our commercial initiatives. For the full year 2023, operating expenses were $203,400,000 compared to $151,200,000 in the prior year period. The increase in operating expenses reflects increased investments in commercial initiatives as well as other G and A investments supporting our growing business. 4th quarter net loss was $6,300,000 or $0.10 per share compared to a net loss of $4,400,000 or $0.08 per share for the same period of 2022. We ended the 4th quarter our seasonally strongest with adjusted EBITDA of $2,600,000 compared to an adjusted EBITDA loss of $467,000 for the same period in 2022.

Speaker 3

As John said, this is our first quarter of positive adjusted EBITDA since going public in 2021. For the full year 2023, we had a modest improvement in adjusted EBITDA compared to the prior year. Cash, cash equivalents, marketable securities and investment receivable totaled $126,200,000 as of December 31, 2023. Our total available access to liquidity, including our debt facility is approximately $190,000,000 We believe we have a lengthy runway in terms of our current cash level with sufficient balance sheet strength and flexibility to continue aggressively executing on our strategic investments and growth initiatives as well as a clear path to achieve positive adjusted EBITDA. Before I discuss our 2024 guidance, I wanted to mention that we will now update our key operating metrics annually at the end of the year rather than quarterly.

Speaker 3

There has been and we continue to anticipate that there will be variability in these metrics from quarter to quarter due to seasonality and the timing and impact of new product launches, surgeon training events and DTC investments. Therefore, our plan is to update these key metrics on an annual basis, is much more relevant for our business at this point in our growth trajectory. Let me now turn to our outlook for full 2024. We are providing full year 2024 revenue guidance of $220,000,000 to $225,000,000 which reflects an increase of 18% to 20% compared to 2023. We remain encouraged by the underlying strength and momentum in our business with our strategic investments clearly delivering on growth.

Speaker 3

Given that it's early in the year, we feel comfortable at the midpoint of this range. We expect to make significant improvement in adjusted EBITDA for the full year 2024 and anticipate adjusted EBITDA to improve approximately 50% compared to full year 2023. Excluding any consideration for the effect of potential future acquisitions or any other material business developments, we anticipate being close to cash flow breakeven for the full year 2025. Our blended ASP has historically grown mid single digits and given ongoing surge and adoption of laparoplasty, complementary products and procedures and future pipeline opportunities, we expect this trend to persist. As we previously stated, we believe adding approximately 250 to 300 active surgeons annually is a reasonable baseline over the next few years with utilization increases expected to drive higher procedure penetration and the tightening sales rep to surgeon ratio should support increased case coverage and adoption.

Speaker 3

These new surgeon additions and training our large active surgeon base on new procedures is expected to expand utilization and drive blended ASP increases. Consistent with previous years, we expect a sequential revenue decrease from Q4 to Q1 due to normal seasonality coming off our usual strong year end performance. Similar to last year, there has been some carryover of bunion procedures into the Q1 of this year as patients entering the surgical funnel late in the Q4 timeframe are often scheduled for bunion procedures into the following year. Given this carryover, we now expect a very slight revenue increase from Q1 to Q2, Q3 to be roughly similar to Q2, followed by a seasonally strong Q4, which is historically the largest revenue quarter of the year. Now before we open up the call for questions, let me turn it

Speaker 2

back to John for concluding comments. John? Thanks, Mark. In closing, we delivered another year of significant progress in 2023 and expect to remain on track to drive strong growth and profitably scale our business in the years ahead. We are driving a market conversion in a large underserved market as the fastest growing company in foot and ankle.

Speaker 2

We believe we're in a great position strategically with best in class bunion, midfoot and related complementary offerings and expanding TAM with the addition of new technologies such as a ductoplasty, hammertoe and speed plate with more innovations to come supported by differentiating clinical studies, continued strong additions to our surgeon base and a powerful and established direct sales team. We look forward to aggressively pursuing these significant opportunities to drive the performance of our business and I couldn't be more excited about the accelerating momentum we expect as we move through 2024 and beyond. With that, now let me turn the call over to the operator to open the line for your questions.

Speaker 1

Thank you. At this time, we will conduct a question and answer session. Our first question comes from Drew Ranieri with Morgan Stanley. Please go ahead.

Speaker 4

Hi, John and Mark. Thanks for taking the questions. Maybe first just for both of you. On the top line guidance for 2024, just help us parse that out a bit more. You're looking for incremental revenue of about $35,000,000 to $40,000,000 But just talk to us about how some of the new product launches might contribute to that?

Speaker 4

And with those, should we be thinking more that this is going to drive utilization or more drive your blended ASP higher? I know you said mid single digits, but just curious what the bigger lever for you is in 2024 with some of these new product launches? Thank you.

Speaker 3

Yeah. Thanks Drew. Great question. Good to hear from you. Let me tell you a little bit about how we're thinking about the guide as well as what that revenue increase is largely going to come from.

Speaker 3

We continue to have our focus primarily on our flagship So we think a lot of that revenue growth is going to come from the volume increases. We will as I talked about in the prepared remarks that we're going to have some traditional seasonality. We saw some of that more pronounced last year and we expect to see something similar. So that's why we've given some color around what we expect to see the standard drop down in Q1 versus Q4 and then Q2 to be right around Q1 level slightly ahead of that and then Q3 in line. So again, we're planning to build for the strong Q4 again this year.

Speaker 3

But the most of the revenue growth is going to come from having new customer surgeons that we continue to add those that were added in 2023 and then the volumes that will be driven primarily through lapoplasty. So we will have some incremental and additional complementary products that will also increase our blended ASP as well. So we've talked about having mid single digit growth there.

Speaker 4

Got it. And then just on the profitability side, it's encouraging to see more progress there towards breakeven, But you're still kind of in a unique position. You're still a high growth company, more opportunity ahead. So maybe how are you thinking about dropping through potential top line upside down to EBITDA for this year? And is there necessarily anything that could change in terms of being a capital light business model as you're thinking about further portfolio expansion with some of these new products that have been disclosed or undisclosed?

Speaker 4

Thanks for taking the questions.

Speaker 3

Yes. So when we think about the profitability, we're really excited about what we have in store for 2024. As we mentioned in the prepared remarks, we had positive EBITDA in the Q4. So we know that given scale and higher revenue volumes that we're definitely poised to have that improvement in our bottom line that adjusted EBITDA line. So I think a lot of it is just going to come through some leverage that comes primarily through the sales and marketing line item.

Speaker 3

We've talked about this in the past that as we've hired a lot of sales reps as they continue to get more experience and they are able to drive higher revenue volumes in their territories that actually plays very well from a leverage perspective. And so we'll see that. We also have some opportunities to have some increased leverage in the marketing line item or marketing expenses as well. So that's where a lot of that leverage is going to come from. And then as far was there one last question on the back end of that Drew?

Speaker 4

Or just anything in the portfolio, yes, sorry, the 50 questions in one. But just in terms of just the portfolio expansion, is there anything that would change like you're being a capital light type of business model? Thank you.

Speaker 2

Yes, Drew, it's John. Yes, really nothing that will change there. We've got this really well established ingrained philosophy to have this capital light model. So the products and technologies that we continue to put out are designed with that intent. We talked about the margin from 1 lapoplasty case covering for the cost of the instrumentation tray.

Speaker 2

Speedplate, we do one Speedplay case and the margin pays for 2 Speedplay instrument trays. So it's a very capital light model. It will continue to be that way.

Speaker 1

Thank you. One moment for our next question. Our next question comes from Robbie Marcus with JPMorgan. Please go ahead. Great.

Speaker 5

Thanks for taking the questions. 2 for me. Maybe first, Mark, you talk about the typical drop Q4 to Q1, the Street sitting at about $49,000,000 for Q1. Is that where you feel comfortable on what would be deemed typical?

Speaker 3

Yes. Great question, Ravi. And that's where we do feel comfortable given the carryover that we've seen. So historically, we see carryover that comes from the Q4 into the Q1. And given where we are in the quarter, we feel comfortable with that current number.

Speaker 5

Got it. And then maybe down the P and L on adjusted EBITDA, you talk about progress towards breakeven. I think you have a 50% improvement, which would be about a $12,000,000 loss for 2024. You talked about profitable in 4th quarter, I believe. Should we think about similar cadence as in 2023 where 1st, 2nd, 3rd quarter are negative and 4th quarter makes up the majority with the positive and offsets that?

Speaker 5

Or should we think about it improving throughout the year sequentially? Thanks.

Speaker 3

Great question, Ravi. Yes, I would think about it largely similar to what happened in 2023. We tend to have larger losses earlier in the year as we begin some of our marketing programs early in the year, some of our medical education programs that we start early in Q1 and Q2. And then as the revenue can increase, we will have positive EBITDA in the 4th quarter. So I would expect similar to last year losses in the 1st three quarters and then there's going to be some positive adjusted EBITDA in the 4th.

Speaker 5

Great. Thanks for taking the questions.

Speaker 1

Thank you. One moment for our next question. Our next question comes from Rick Wise with Stifel. Please go ahead.

Speaker 6

Good evening, John. Hi, Mark. I'm going to come back to the 2024 guide, if you wouldn't mind. And I guess from 2 perspectives. 1, when you're giving us this guide, what was your mindset?

Speaker 6

I mean, I could argue that the market seems strong, the sales force is doing a good job. You're clearly training the physicians. The portfolio is expanding. This paid played launched and demand seems incredibly strong. You get the picture.

Speaker 6

I could go on and on and on. Help us understand why growth would be realistically 18% to 20% relative to the 30% -ish you grew last year. Why shouldn't we expect you to be more optimistic? Could you just talk about your thinking there? Thank you.

Speaker 3

Yes, Rick, this is Mark. A great question. I appreciate that. And I like embedded in your question all the positives that we have going from the company because that's the way we see it too. We've got a great sales force.

Speaker 3

We've got some great products. We've got some products launching in the back half of the year. But the one thing that we see right now is you talked about 32% for the full year, but the last two quarters, Q3 and Q4 were a little bit below that. And so it's really early in the year, so we just want to be very prudent as we're considering how we're laying out the way we're thinking about 2024. And admittedly even with the seasonality it leaves more of a back half loaded guide, but it's very early still and we don't see it representing any loss of our momentum going into 2024.

Speaker 6

So there's nothing about the market, the technology, the training that's making you anxious, which leads to my second question on competition. Clearly, it seems clear to me from ACFS and from AOS that there's more competition than ever, more new products, folks seem to be imitating waking up to the market and also imitating your strategy. Nice compliment. To what extent is this more of a challenge, less of a challenge? And to what extent is that maybe making you more careful, thoughtful thoughtfully conservative as you start the year?

Speaker 2

Hi, Rick, John. Thanks for the question and I'll take that one. We've been seeing progressively more people enter the space over the past 3 years and so new competitors entering the space is kind of nothing new to us. It's a really exciting market that we've sort of strategically redirected in terms of 3 plane bunion correction. So no surprises to other companies want to enter that space, the space that we pioneered and developed.

Speaker 2

The TAM is really huge. It's over $5,000,000,000 in the U. S. And we continue to expand it with ductuplasty and our hammer toe entry. So but the bunion space itself still very under penetrated.

Speaker 2

We're way out ahead. Our retention rates with our surgeons are very high. Our IP makes it difficult for these copycats and tends to produce less elegant solutions that work more like the old freehand Lapidus than they do lapoplasty. And we just strongly believe that nothing works as well at the surgeon patient interface as lapoplasty does. And then you have to keep in mind these new entrants are entering the market, using multiline largely distracted sales forces.

Speaker 2

So they only get really a fraction of that sales force's time and attention. And we think our 3 pronged offense of direct focused sales channel, rapid product innovation and iteration and surgeon and patient education, while these are great offensive tools, they position us with a very strong defense as well. And we're just going to keep reinforcing that over time and continuing to grow and establish ourselves as the fastest growing company in the foot and ankle market, which is what we are today and where we're going to continue to be.

Speaker 6

Thank you for that. And I'm just going to be rude and just a quick half of a follow-up to that. Early in the year presenting at JP Morgan, you guided you described yourself as well positioned for 20% plus growth in 2024 and you're guiding to 18% to 20%. Why the change, John? I'm guessing folks are going to be curious.

Speaker 6

Thank you so much.

Speaker 2

No, I appreciate the follow-up and fair question. Like we are positioned to move towards EBITDA breakeven, we are positioned well to grow at that 20% range. We absolutely believe that. Our guide, as Mark said, is intentionally prudent. It's early in the year.

Speaker 2

We're excited about the accelerating momentum of this business both with the sales channel and the product launches that we have slated for the back half of the year. And I think we're just trying to be prudent and make sure that early here in the year we're allowing ourselves to build that confidence as we go through the year.

Speaker 6

Makes sense. Thank you.

Speaker 1

Thank you. One moment for our next question. Our next question comes from Simon Negan with UBS. Please go ahead.

Speaker 7

Hey, Mark and John. Thanks for taking the question.

Speaker 8

Hi, Simon. How should we think about the

Speaker 7

when thinking about the contribution potential from the new product launches over the next 2 years, how do you think about this? And do you think any of these products have the ability to emulate the success of lapoplasty? I know you recently highlighted a significant platform launch coming this year.

Speaker 2

Great question Simon. I'll take that one and Mark can maybe add to it. As we look at the market, the lapoplasty market opportunity is the largest opportunity we have, clearly. But anything we can do to build upon that and accelerate that and enhance our share over time we're going to be working on. Ductoplasty was a very obvious add on because 30% of our bunion patients had a mid foot deformity that nobody had a good way to correct.

Speaker 2

So we created a way to do it and we're democratizing that opportunity. And that's a $500,000,000 opportunity in itself. But Redpoint Technology that can add to our opportunity in bunions and midfoot corrections as well. And then yes, we alluded to another significant platform that we are developing right now and we expect to launch in the back half of this year that will help us accelerate our penetration into the bunion market and expand utilization. So hard to exactly say that any of them match the lapoplasty opportunity, but they all build on it and help accelerate our momentum into penetrating that opportunity.

Speaker 7

That's really helpful. I just have one quick one for you guys. How do you think about utilization increasing moving forward? Despite your surgeon base maturing? When we look at our model, we're not seeing utilization increase as much as we would have expected.

Speaker 3

That's a really good question. We've talked about this on prior calls. We've had nearly 40% of our active surgeon base has come on board in the last 24 months, so in the last 2 years. So we continue to make great strides in adding active surgeons year after year. So what that means, we have a little bit of a step function as surgeons come in initially.

Speaker 3

They're doing around 6 cases in their 1st 12 months and it continues to build up to nearly 20 cases after 5 or 6 years. So it's unique. They get experience with lapoplasty and then they tend to utilize lapoplasty more and more in their practices. And so if you were to mathematically if you were to take away all these earlier or more recent, I should say, more recent surgeons that have come aboard who typically do lower fewer cases per year, our average utilization is much higher than what we've reported. So I think that's a good problem to have, meaning we continue to to add a lot of surgeons and we know that those who have been around longer just do more.

Speaker 3

And so we expect utilization to continue to increase notwithstanding the fact that we will continue to add a lot more surgeons in 2024 and beyond.

Speaker 7

That's really helpful. Thank you.

Speaker 1

Thank you. One moment for our next question. Our next question comes from Richard Newitter with Truist Securities. Please go ahead.

Speaker 8

Hi, thanks for taking the questions. Maybe on guidance, I just want to make sure I'm understanding some of the assumptions here. On gross margin, you had either a little better than we were expecting in the Q4. I know you guided to adjusted EBITDA. Should we think gross margin basically holding steady with 2023?

Speaker 8

And then I think you'd also referenced mid single digit growth in your revenue procedure or ASP, however you want to characterize it. Is that the right way to think of what's embedded in your 24 guide? And then as a follow-up.

Speaker 3

Yes, Rich, really good question. I think you're right on all those fronts. Given a lot of new product launches and some of the mix shift, we're anticipating maybe the gross margin to come down a little bit until and we've talked about this in the past. As we introduce new products, we just don't quite have the same efficiencies in gross margin initially. And so I view 2024 as having maybe some slight pressure on the gross margin, but nothing substantial.

Speaker 3

So maybe a little bit less than what we saw in 2023. So all your other assumptions are right on.

Speaker 8

Okay. I actually have another follow-up, but I have a follow-up to the gross margin comment first. Just should we think of gross margin in the first half a little bit below what is going to be in the second half? And on a net basis for the full year, it's down? I mean, just to get the cadence right.

Speaker 8

And I'll ask my second follow-up right now, just on ASC. If you can remind us what your mix of businesses in the ASC setting. It's something that we continue to hear at AAOS. That's the trend that's materializing throughout orthopedics. Talk about your portfolio, how you're positioned there and what that will do to your pricing and margins going forward?

Speaker 8

Thank you.

Speaker 3

All right. Great, great questions Rich. There's 2 of them. I'm going to take the first one and I'll give the second one to John. With respect to gross margin, again, we're not expecting substantial decreases over 2023, but I think the way you articulated is the way we're thinking about it that earlier in the year it may be a little bit lower with some improvement in the back half of next year.

Speaker 3

So again, just a slight step down year over year. We don't view it we're still going to be over that 80% gross margin level, which is extremely strong. So we feel really pleased. I just wanted to say that we'll be tempered slightly versus last year. And then John, with respect to

Speaker 2

the ASCs and Hospital? Yes. Hey Rich, so I think there's a little bit of confusion out there on this topic because I know there's a lot of contemporary discussion about hip and knee volumes moving to the ASC setting that outpatient setting. Foot and ankle has been done in those settings for 30 years, decades. And we participate in ASCs, the private ASCs and then the hospital owned ASCs.

Speaker 2

Obviously, the hospital owned ASCs get a little better more favorable reimbursement, but we're market competitive in the private ASCs as well with different products that we have that have different price points. I would say it's the minority of our revenue that are in the private ASC setting and the majority is more in the hospital outpatient and or hospital owned ASC be that freestanding or at the hospital facility itself. So we're competitive there and we continue to make progress there. But there's not this huge surge and trend towards foot and ankle procedures there like there is in hips and knees and maybe even some spine cases that is kind of creating a lot of talk in the hip and knee world.

Speaker 8

Thank you.

Speaker 2

Sure.

Speaker 1

Thank you. One moment for our next question. Our next question comes from Ryan Zimmerman with BTIG. Please go ahead.

Speaker 9

Good afternoon. Thanks for taking the question. All right. I want to start on Speedplate. It's been off to a really good start.

Speaker 9

We've heard very positive feedback on it. I think, John, you called out that it's about 20% of cases today. Where do you think that can go? Because I mean just doing some simple math, it can account for a decent chunk of growth in 2024 and could probably swing higher if that 20% moves higher?

Speaker 2

Yes. Great question. I mean very exciting. We talked about this as being probably the most impactful technology launch for the company's central apoplasty. These are things that our surgeons say not me, but it's true.

Speaker 2

Very favorable response. We've had it in 20% of our surgeons' hands within Q4 and it made up 25% of our procedural revenue. So and we're just getting started with it. And the other piece of the momentum is right now our sales force really has 3 great shots on goal with lapoplastymicrolapoplasty, adductoplasty and the evolution of that and Speedplate, 3 unique technologies that can only get from our company. So one of those technologies is going to appeal to some foot and ankle surgeons sooner or later.

Speaker 2

And once they get interested in 1, if they want to use Speedplay, we're going to introduce them to lapoplasty. And we're going to introduce them to a ductoplasty because 30% of the cases they need to correct the med foot deformity. And if they like a ductoplasty, we're going to show them Speedplay because it makes the procedure faster and more convenient. So those three technologies are really powerful, and it's creating a very efficient model from a sales force standpoint. So we love Speedplay.

Speaker 2

We think it has a lot of opportunity not only in lapoplasty and adductoplasty but in a lot of other areas in the foot for foot and ankle procedures and you could see the ratio of our cases continue to rise as we get more sets out there and get into full commercial throughout the year.

Speaker 9

Okay. Fair enough. And then Mark, you talked about the cash on hand. You kind of know where spend is going. But you did you made a comment that I thought was interesting, which was the access to liquidity.

Speaker 9

And I'm just curious if your view on how you're thinking about your cash has changed? And are you looking at assets that are potentially out there in the field given those comments? And just your broader view on kind of where not necessarily what you're going to buy, but just your appetite to kind of bring in more into the portfolio?

Speaker 3

Yes. Great question, Ryan. And the way I articulated just our cash and access to liquidity was just to give the same level of information that we've given the past just to say what we have access to. We have a great relationship with our lender and so we have access to financing if needed. John and I have often talked about if there are opportunities for us to expand the portfolio we did last year with some great technology Redpoint that's PSI.

Speaker 3

We're not saying that we're that we require any kind of acquisitions or additional products in our portfolio to have this growth that we're talking about this year. But we'd always be open to great complementary technologies if it were to match what we're doing here. So that was not in any way suggestive what we're planning to do or any strategy changes, but just to give the full perspective as far as what our cash on hand is and full liquidity.

Speaker 9

Okay. Maybe I read into that a little too much, but thank you for clarifying.

Speaker 3

No problem.

Speaker 1

Thank you. One moment for our next question. Our next question comes from George Sellers with Stephens. Please go ahead.

Speaker 10

Hey, good afternoon and thanks for taking the question. On the sales force, I'm just curious, what does the productivity look like for some of your top performing direct reps? And then how should we think about the capacity of your direct reps in terms of maybe the number of surgeons they can support or the level of revenue they can drive? How you all are thinking about it internally?

Speaker 2

Yes. Hey George, it's John. Good to hear from you. Good question. We have a broad spectrum of revenue productivity with our sales team today.

Speaker 2

You have some that have quite significant tenure several years and some of those reps can be in the several $1,000,000 range. And then we have newer reps that are still trying to climb to $300,000 and beyond those newer reps, right? So what we do know is when you get to the 2 year time point, most of our reps are operating at a level of revenue performance that we're very pleased with and we believe is very sustainable. And they're also operating at a cost of sales ratio that's very nice for the business and we know can create a lot of leverage going forward. So we feel good about the sales team.

Speaker 2

We feel good about their capacity to bring these other technologies forward. And part of it is because of the efficiency of this model and the way we're bringing these products out. We're not asking them to run around from one part of the foot to another part of the foot and do a trauma case and then do a hammer toe where everything builds upon. Lapoplasty and adductoplasty build on each other. Speedplate builds on both of those and the hammertoe fits into the bunion case.

Speaker 2

Our disposable instruments. They're problem solving for midfoot fusions that we specialize in and lapoplasty cases. So it's a very, very efficient way to sell. And we've proven that we can establish a powerful direct channel that's really well sustaining with room for future year nice cost leverage as well. So hopefully that answers your question.

Speaker 2

Let me know if you need more information.

Speaker 10

No, that's super helpful. Okay. I appreciate it. And then, Mark, maybe one for you. You talked about the marketing line as being an area where you can see leverage this year and in the future.

Speaker 10

I know you all have recently hired a new Director of Marketing. Could you just speak to some of the areas where you've been able to find maybe some more efficient ways to spend in that marketing line? And how you're sort of driving some better returns on those investments through that marketing line item? Thanks again for the time.

Speaker 3

Yes. Great question. This is Mark. Let me take a first stab at that and if there's any other color John can add to it. Yes, we've continued over the past several years, we continue to increase our spending.

Speaker 3

We've tested a lot of different marketing techniques areas whether it be social media, whether it be TV commercial spots. We've done a lot of marketing activities and campaigns. We do have a new Senior Vice President of Marketing who's been phenomenal. We're lucky to have him. He's got a lot of great experience and he's already been able to really streamline a lot of our efforts to get similar results or higher results with even less spend.

Speaker 3

So he comes as a professional great experience. We're leaning on him. So that's what we're saying. We can get the same kind of results or even better results without having to continue to increase our spend levels year after year. So that's where the leverage can come in because if we can hold some of that spending levels consistent yet have better outcomes that's where that leverage comes.

Speaker 3

John anything?

Speaker 2

No. I think you said it very well and comprehensively. We're excited about Nathan's expertise and the impact he's been able to have quickly on the business. So he's only been here 6 months and driven a lot of efficiencies and productivity, got us sponsoring the National Pickleball Championships, which has high demographic overlap with our patient group and a very impactful, very cost efficient way to reach a lot of potential patients and a lot more creativity coming out of him and more to come. Stay tuned on some new initiatives that we'll be launching here in the next 2 to 3 months.

Speaker 10

Okay, great. Thank you all for that color.

Speaker 2

Sure.

Speaker 1

Thank you. I'm showing no further questions at this time. I'd now like to turn it back to Julie Dewey for closing remarks.

Operator

Thanks everybody for joining us today. We appreciate your time and interest. If you have more questions, please reach out and we'll look forward to talking to you next quarter. This concludes our call.

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Earnings Conference Call
Treace Medical Concepts Q4 2023
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