OrthoPediatrics Corp (NASDAQ:KIDS) Q2 2019 Earnings Conference Call August 8, 2019 8:00 AM ET
Tram Bui - The Ruth Group
Mark Throdahl - President, CEO & Director
Fred Hite - CFO & Director
Conference Call Participants
Frederick Wise - Stifel, Nicolaus & Company
Kevin Farshchi - Piper Jaffray Companies
Anna Nussbaum - William Blair & Company
Samuel Brodovsky - BTIG
David Saxon - Needham & Company
Jonathan Braatz - Kansas City Capital Associates
Good morning, ladies and gentlemen, and welcome to the Q2 2019 OrthoPediatrics Corp. Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host, Ms. Tram Bui. You may begin.
Thanks, operator, and thanks, everyone, for participating in today's call. Joining me from the company are Mark Throdahl, Chief Executive Officer; and Fred Hite, Chief Financial Officer. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of federal securities laws, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve material risks and uncertainties and the company's actual results may differ materially. For a discussion of risk factors, I encourage you to review the company's most recent annual report on Form 10-K, which was filed with the Securities and Exchange Commission on March 7, 2019.
During the call today, management will also discuss certain non-GAAP financial measures, which are used as supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period-over-period. For each non-GAAP financial measure referenced on this call, the company has included a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings release. Please note that non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for OrthoPediatrics' financial results prepared in accordance with GAAP.
In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 8, 2019. Except as required by law, the company undertakes no obligation to revise or update any statement to reflect events or circumstances that take place after the date of this call.
With that said, I'd like to turn the call over to Mark.
Good morning, everyone, and thank you for joining us today on our second quarter 2019 earnings conference call. I'm pleased to review our achievements in the first half of the year that have further strengthened our market leadership in pediatric orthopedics. I'll begin with a summary of our performance in the quarter and then review in greater detail the progress executing our growth initiatives. These initiatives include instrument set investments, new products, acquisitions, international growth and clinical education, all rooted in our engaging corporate culture. I'll then turn the call over to Fred for a more detailed financial review and update to our full year 2019 revenue guidance before opening the call up to any questions.
During the second quarter, we generated record revenues of $18.2 million and sales growth of 21% driven by improved Trauma & Deformity revenue growth, international sales growth despite strong comparables in the prior year and the favorable impact of the Orthex acquisition. Although there was 1 less selling day in the quarter compared to prior year, which accounted for almost 2% of unfavorable growth, we further expanded our market-leading position by growing our surgeon base and realizing the impact of new products, including PNP FEMUR, small-stature scoliosis and BandLoc DUO and Orthex.
The strength of this expanding surgeon base significantly impacted our scoliosis business, which grew 20% despite the fact that 5 key domestic surgeons were out of their practice in the second quarter, either relocating to other hospitals or on sabbatical. These surgeons would typically generate $800,000 to $1 million of sales per quarter during the summer surgery season. While we anticipate the favorable impact of these surgeons returning to practice in the future, we are confident that our scoliosis market share gains and robust sales growth at this time during the big summer surgery season will continue to drive revenue growth well in excess of 20% annually. As we look ahead, a growing surgeon base performing more surgeries with more products will continue to reduce the inherent volatility of our scoliosis business, which is still relatively small in size.
Our Trauma & Deformity correction business grew 21%, including Orthex. At the present time, we're also pleased to see continued robust revenue growth with record average daily sales in Trauma & Deformity, and this makes us confident that we are well past the selective deformity surgeries we experienced last February and March. The robust sales we continue to generate, together with the addition of Orthex, gives us [indiscernible] that we will achieve our updated full year 2019 revenue growth guidance of 23% to 25%. Furthermore, we generated a positive EBITDA in the quarter, which continues the trend over the past years of systematic improvements [indiscernible] while we drive aggressive revenue growth.
Let me now address the progress of our growth initiatives, starting with set deployments. Our first growth initiative is increasing children's access to our surgical systems through deployment of more instruments and implant sets. During the quarter, we deployed $9.3 million in consigned sets, and $12 million of sets were deployed in the first half year, an increase of 44% compared to $8.3 million for the same period last year. This has prepared us well for the strong sales we are now achieving during the summer surge in elective surgeries. It also keeps us on track to achieve our goal of $15 million to $17 million of consigned instrument set deployments for the full year 2019.
New products are our second initiative on which we have made significant recent progress. We continue to demonstrate our commitment to innovation that addresses the needs of pediatric patients, and we offer a unique channel to pediatric orthopedic surgeons who typically have no other means to develop new products.
In July, we received 510 clearance from the FDA on 2 new cannulated screws systems, which provide factor infusion treatment in small-stature patients. This week, we received 510(k) clearance on PediFoot, the first pediatric-specific system to address the most common foot deformities in children as well as fractures of the small bones of the foot, ankle and wrist. We also anticipate the launch of a new slipped capital femoral epiphysis system, which will be available in 2 sizes.
When these new systems are launched later this year, together with new products from Orthex, we will offer 33 surgical systems compared to 26 systems last quarter. We are continuing development of PNP Tibia, neuromuscular scoliosis products and a growing rod for early scoliosis treatment. As we have mentioned in the past, in addition to our highly productive internal product development programs, we continue to be approached with compelling opportunities to license or acquire novel technologies, which represents our third initiative.
In April, we completed a licensing partnership with CoorsTek Medical for rights to its variable angle technology that will be commercialized in our PediFoot system and the future Trauma & Deformity systems. In June, we acquired Vilex in Tennessee, Inc. and Orthex LLC, collectively [indiscernible] Vilex, which opened a new $200 million market segment and closed the biggest gap in our Trauma & Deformity business. While Vilex is primarily a foot and ankle company with 14 surgical systems targeting both pediatric patients and adults, we are excited about the potential of their proprietary Orthex Hexapod circular fixation technology and Cora-based x-ray planning software.
Orthex is one of the most promising assets in pediatric orthopedics with FDA clearance, significant hardware advantages and proprietary software used to treat pediatric chromatic injuries as well as congenital deformities and limb length discrepancies. Orthex has primarily been adopted by pediatric orthopedic surgeons and has grown rapidly since it was introduced in 2016. Developed by Abraham Lavi, Founder of Vilex, in conjunction with Dr. Dror Paley of the Paley Institute of West Palm Beach, Orthex' patented point-and-click software dramatically simplifies deformity correction planning and is a highly differentiated addition to our product line. We look forward to strengthening our long-standing relationship with Dr. Paley, who will conduct surgeon training courses on Orthex and continue amassing clinical data on its use.
Beyond Orthex, Vilex sells a number of surgical systems that expand to procedures beyond those addressed in our PediFoot system. With the Vilex systems and the imminent launch of PediFoot, OrthoPediatrics will be able to address most of the foot and ankle surgeries in children.
The Vilex/Orthex acquisition increases our coverage from approximately 60% to 80% of the total addressable market for Trauma & Deformity. It also expands our surgeon base to include deformity correction specialists who treat children that may not practice in a pediatric hospital, and it will create pull-through for our growing intramedullary nail system now being developed with the European partner. We are on track to integrate the Orthex system into OrthoPediatrics and to train our sales representatives on this revolutionary product.
We remain committed to an exclusive focus on pediatric orthopedics and, thus, have advanced the process of finding a buyer for Vilex' adult product line. We have formed a special Board Committee to supervise management's authorized disposition of these assets and have engaged advisors to assist in this process. We anticipate there will be significant interest in the assets to be offered for sale.
To support our growing number of consigned instrument sets, surgical systems and surgeon customers, our domestic sales organization, including Orthex, grew by 14 new sales consultants in the second quarter, bringing the size of the domestic sales organization to 152 representatives, up 22% compared to last year. We believe these increasing numbers are sufficient to support our near-term growth goals. We have a powerful sales and distribution system, which will allow us to leverage the impact of the Vilex acquisition.
This brings us to our fourth initiative, international growth. We seek to deepen our presence in international markets while also appointing new distributors and selectively converting stocking distributors to sales agencies. During the quarter, we expanded our international presence from 41 to 43 countries, increased international [indiscernible] distributors from 35 to 38 and maintained 7 sales agencies.
We continue to progress conversion discussions with several key stocking distributors in Europe. We established a new headquarters for OrthoPediatrics Europe in the Netherlands and appointed a new managing director. We also recently received 5 regulatory approvals in Canada. We believe that this systematic expansion of our global presence is strong evidence of the adoption and demand for our unique surgical solutions everywhere we go in the world.
The fifth growth initiative is clinical education, which may be just as important to our surgeon customers as our products. We are the leader in pediatric orthopedics because we aspire to do more than just sell products to surgeons. We want to advance the entire field of pediatric orthopedics, and training the next generation of pediatric orthopedic surgeons is central to this effort.
In the second quarter, we hired a new Vice President of Sales Training and Clinical Education, who is working with our Chief Medical Officer on expanding our current training programs for residents, fellows and young attending surgeons. We are also very excited to have more than 1,050 surgeons as members of our DocMatter surgeon community, the only one of its kind in the orthopedic industry.
We also continue to fund surgical societies at an extraordinary level for a company our size. Building on our Orthex acquisition, we have become the leading sponsor of the Baltimore Limb Deformity Course and a major sponsor of the Limb Lengthening and Reconstruction Course, 2 major annual education events. We were again the lead sponsor of the annual meeting of the European Pediatric Orthopedic Society in April where we organized a symposium entitled challenges in developmental dysplasia of the hip. This was followed by our Double Diamond support of the 2019 Annual Meeting of the Pediatric Orthopedic Society of North America, which included our additional support of 2 subspecialty day symposia as well as 25 scholarships to young surgeons who otherwise would not have been able to attend. We maintained our Gold level support of the International Meeting on Advanced Spine Techniques in early July, and we provided the Scoliosis Research Society with an additional grant to fund ongoing research and education in the field.
This brings me to our last, a foundational growth initiative, our corporate culture. As we have mentioned in the past, this is our company's greatest differentiator. OrthoPediatrics was again voted one of the best places to work in Indiana, and we believe we are increasingly viewed as one of the most attractive employers in the orthopedic industry. We are committed to providing a culture of engagement and commitment were the only hierarchy is that of good ideas, which come from everywhere in the organization. Our culture is our most critical asset. It has taken years to develop, it cannot be reproduced or reverse engineered and it drives employee satisfaction. For many years, studies have shown that employee satisfaction is directly correlated with customer satisfaction and, thus, higher levels of profitability.
Let me now turn the call over to Fred to review our financial results. Fred?
Thanks, Mark. As a reminder, the second quarter 2019 results include the impact of Orthex from June 5 to June 30. The impact of Vilex is included in discontinued operations. Total revenue in the second quarter of 2019 was a record-setting $18.2 million, up 21% when compared to $15.1 million for the same period in 2018. As Mark mentioned, there was 1 less selling day in the quarter compared to prior year, which accounted for almost 2 percentage points of unfavorable growth.
In the second quarter 2019, U.S. revenue increased 21% to $13.8 million when compared to $11.5 million in the same period last year, representing 76% of our total revenue. International revenue in the second quarter of 2019 was $4.4 million, a 20% increase compared to $3.6 million in the same period last year, representing 24% of our total revenue. Our second quarter revenue breakdown by product category was as follows: Trauma & Deformity revenue in the second quarter of 2018 was $11.9 million, a 21% increase when compared to $9.9 million in the same period last year. This growth rate has improved from the first quarter of 2019 when we experienced a temporary slowdown in elective deformity surgeries, and we are very encouraged by the sales performance during the significant summer selling season.
Scoliosis revenue in the second quarter 2019 was $5.9 million, a 20% increase compared to $4.9 million in the same period last year, which, as Mark mentioned, reflects new surgeon conversion and new product adoption partially offset by 5 key domestic surgeons temporary out of the practice due to changing locations or on sabbatical. Similar to trauma and deformity performance, we are very encouraged by our scoliosis sales during the significant summer selling season, which provides us confidence in increasing our total year growth guidance. Lastly, sports medicine/other revenue in the second quarter of 2019 was $447,000, representing a 40% increase when compared to $320,000 in the same period last year.
Moving down the income statement. Gross profit in the second quarter [indiscernible] was $13.6 million, a 21% increase compared to $11.3 million in the same period last year. Gross margin in the second quarter 2019 was 75%, which is flat to comparable last year. Sales and marketing expenses in the second quarter 2019 increased 12% to $7.6 million when compared to $6.8 million in the same period last year. General and administrative expenses in the second quarter 2019 were $6.6 million, an increase of 20% when compared to $5.5 million in the second quarter 2019. The increase in expenses was driven by approximately $600,000 of acquisition-related expenses. Excluding these fees, G&A grew by 9% over prior year.
Research and development expenses was $1.2 million in the second quarter 2019, which was an 11% increase compared to $1.1 million in the second quarter 2018. Total operating expenses in the second quarter 2019 were $15.4 million compared to $13.4 million for the same period last year, and operating loss in the second quarter 2019 improved to $1.8 million compared to a loss of $2.1 million in the second quarter 2018 driven by higher revenue and controlled spending.
Adjusted EBITDA for the second quarter of 2019 increased to $575,000 of profit compared to a negative $938,000 for the second quarter of 2018. Please note that there has been an adjustment to our previously reported reconciliation of 2018 adjusted EBITDA and that we no longer adjust for public company costs as well as unusual legal fees. Interest expense in the second quarter of 2019 was $632,000, a 13% increase compared to $562,000 in the same period last year. The increase in interest expense was related to our increase in debt related to the Vilex and Orthex acquisition.
Net loss from continued operations in the second quarter 2019 improved to $2.5 million compared to a loss of $2.7 million in the same period last year. Total net loss, including discontinued operations, was $2.6 million or a loss per share attributable to common stockholders of $0.18 per basic and diluted share compared to $2.7 million or a loss of $0.21 per basic and diluted share in the same period last year. It is worth noting that our second quarter 2019 EPS includes the unfavorable impact of $159,000 for the loss from discontinued operations as well as $589,000 of deal-related expenses. Turning to our balance sheet. As of June 30, 2019, our cash balance was $21.9 million, which reflects the cash outlay of $20 million for the Vilex/Orthex acquisition as well as our significant increase in deployed sets. This cash balance compares to $52.8 million as of March 31, 2019. As a reminder, we funded a portion of the cash consideration for the Vilex/Orthex acquisition through a new $30 million term loan from Squadron Capital.
Purchases of property and equipment during the second quarter 2019 were $3.6 million compared to $1.4 million during the same period last year, reflecting the increase in set deployment. Including implants, $9.3 million of consigned sets were deployed during the second quarter compared to $2.8 million during the second quarter of 2018. We have now deployed $12 million of sets in the first half of 2019 compared to $8.3 million in the first half of 2018. This is a 44% increase and brings us on track to our total year 2019 set deployment plans. As of June 30, 2019, total debt was $51.2 million, including the $30 million term loan. As Mark mentioned, we have had -- advanced the process of finding a buyer for the Vilex adult product line. We have formed a special Board Committee to supervise the management's authorized disposition of these assets and have engaged advisors to assist in the process. We anticipate there is significant interest in the asset to be offered for sale, and when completed, we expect a significant reduction in our outstanding debt balance.
In terms of guidance, we updated our annual revenue guidance for 2019 to 23% to 25% growth, including Orthex. Additionally, we remain on track to increase our annual investment in consigned sets to a range of $15 million to $17 million in 2019. As a reminder, on 8KA, incorporating the financial statements of Vilex and pro forma financial information for OrthoPediatrics is expected to be filed no later than August 20, 2019.
Now let me turn the call back over to Mark for closing remarks.
Thanks, Fred. Overall, our second quarter results reflect OrthoPediatrics' ongoing momentum as we widen our lead in pediatric orthopedics. Our success is the product of rigorous focus, systematic execution across multiple growth initiatives and the commitment of our extraordinary employees. We are pleased to report significant increases in instrument set deployments, new products and new sales representatives as we scale our business. We look forward to the ongoing contributions from these growth initiatives and the exciting growth opportunity of the Orthex acquisition.
With that, I'd now like to open the call up [indiscernible]. Operator?
[Operator Instructions]. Your first question comes from the line of Mr. Rick Wise from Stifel.
Lots of exciting things going on, clearly. Let me just start with the selling day topic. Thanks for calling out the single day in the second quarter. As we look to second half, are there anything extra or fewer selling days we have to think about there? And just to follow on to that, you had a tough comp anyway in the second quarter and clearly grew over 20% and all the moving pieces. But the second half comps are a bit tougher than the first half in total. Maybe help us think through the drivers that are going to help you get to your targeted range. So any second half selling day issues? And help us think through, more specifically, how you're going to -- how we should think about the second half.
Yes. Good to hear from you, Rick. The 1 less selling day was unusual, so we had that in the second quarter hurt us by about 2 percentage points of growth. We picked that back up in the second half of the year. So obviously, for the year, it will be whole. Typically, that's not an issue. So we haven't called it out in the past.
As far as the comp goes, in the first quarter of 2018, our international business grew by over 40%. In the second quarter last year, it grew by 39%. So to grow our international business in the second quarter by 20% on top of that comparison is pretty impressive.
In the second half of the year, the international businesses returned to more of a normalized 20%-ish growth, but the domestic picked up a little bit in growth, driving some higher comps. But we feel good about where we're at today, particularly during the summer selling season, which is June and July. What has been completed in those 2 months is really extraordinary record performance on both the Trauma & Deformity business as well as Scoliosis. And that, combined with our new sets up to $12 million in sets being deployed, we feel very confident about the second half revenue included in our guidance, for sure.
I think we're very encouraged by the fact that, recently, 4 new systems that we have developed have been approved by the FDA and will be entering the market. We have seen very strong new user conversions in scoliosis. We have just over 100 scoliosis users, and 30 of them have been added in the first half of the year. So these are not total conversions. These are guys who began using our system and then market share expands from that point, but it's extraordinary, I think, to have that sort of surgeon conversion. And then, of course, finally, there's Orthex, which, in the first 3 weeks that we owned it in June, already showed very encouraging signs. And we have seen some of our large surgeon customers evaluate it, and were [indiscernible] of an option.
Good stuff. And following on to that, Mark, I was wondering if we could get -- I know it's a few weeks, what was the Orthex contribution in the quarter? And how do we think about it as well in the second half and going forward? I know in '18, you did $3.7 million. You're an owner for 6 months. Just help us understand how we should frame our expectations for Orthex and maybe what you're doing to create -- to take it to even faster growth than we've seen in the past, potentially.
Well, Fred won't let me disclose much about that unless he has a change of heart here at this moment because of your persuasive question, Rick. But I think we can safely say that there was a very limited contribution of Orthex in June. And from that standpoint, it was not a significant contributor to the growth of the company. But on the other hand, we have divided our selling organization into 3 groups. And the first group of individuals who had experience selling competitive external fixation devices when they worked for other companies, that group has now been trained and is out soliciting our customers, trying to interest them in conversions. The second group will be trained this quarter, the third group will be trained in the fourth quarter. And so we will have an entire selling organization through the course of this year trained in this technology. So I think we are encouraged that there will be a pull-through of Orthex from the current surgeon base that we have. Fred, would you like to make any other comments about that?
That's absolutely right. This is much more like our Scoliosis business in that -- number one, these are high-value surgeries, very complex and long, and the conversion cycle takes time to get our people trained so that they're confident in that long surgery to be able to help the surgeon. The initial signs are very, very positive and we're very encouraged by that, but it's a long process that will continue to add growth to the business for years to come. It's not an immediate, overnight, all of it gets converted.
Great. And just one last one from me on guidance. Obviously, you bumped up from the 21% to 23% to the 23%, 25% range. Is that -- I just want to be clear, is that only Orthex? Or is it everything else plus Orthex? Just if you could just clarify that. And the second part of that, and I know Fred is going to love this, it seems -- I know you guys are conservative. It seems a bit extra conservative. Given Orthex, given the sets, given the new products, given the expanded sales force, given the potential OUS, it just -- Gosh, it seems extra conservative. But anyway, I'll let you answer the question.
Right. So that revenue, obviously, includes both our core business and it does include the impact of Orthex. When we look at the monthly sales of the Orthex business that -- what they had in their hands, it's very volatile. They have a very -- they had a very limited number of surgeons. They had some stocking distributors outside of the U.S., which is great, many of those are our same distributors in Canada and Colombia. And so yes, it is conservative. I don't want to get ahead of myself. We're obviously very, very excited about the impact of what Orthex can do for this business, but I don't want to get ahead of myself until we see that thing in our hands, delivering consistent revenue and just having more experience with it and seeing how it comes in. We only had three weeks of it. We've obviously had some July, which is great to see, but it's just very conservative on my part such that we don't build in too much expectations and then disappoint on something that's just a tremendous asset in our hands.
Your next question comes from the line of Matt O'Brien from Piper Jaffray.
This is actually Kevin Farshchi on for Matt O'Brien. A few quick ones for me. The first, following up on the previous question. Just wanted to think broad strokes on the demand side of the equation in your business and the set investment strategies for the rest of the year. And specifically, with the outperformance on deployment now up to $12 million, how conservative of an approach is this from the company to keep that range the same? And if not, and it is just risk adjusted, what are the drivers that get you to the top and the bottom of that range? And then I have a few follow-ups.
Sure. Thanks, Kevin. So we are basically right on plan. A little bit of a delay in the March set deployment in the first quarter, but we caught that up in April. And so right now, that $12 million is perfectly on plan with what we expected. The goal is to get as many sets out into the field and in the hands of the surgeon before the summer selling season, the June and July, which -- they're so large for us on a monthly revenue basis. So as I mentioned that it was our plan to get $12 million out. We're right on plan. What we have left for the second half of the year is a few other legacy systems, but then a lot of that will be left available to us for our new systems. We've got 2 new cannulated screw systems, which we're very excited about. We have the PediFoot system, which is coming. So those will be launched later this year. And so we have funds available to get those sets out into the field and then additional -- some other legacy systems where there's strong demand. So we're right on plan, and we'll finish in that range, $15 million to $17 million. What will change that? It probably is just what kind of demand we have and what kind of deliveries we have coming in from our suppliers.
And just to amplify on Fred's comments, Kevin. These enormous set deployments have made it possible for us to meet the extraordinary demand we have seen in June, July and so far in August. We simply would not have been able to cope with this volume of business had we had any fewer numbers. So I think that those investment decisions have been very wise, and we're seeing the fruits of that investment already.
That makes a ton of sense. My second one is on the scoli side, you touched a little bit on it in the quarter. The surgeon base issue makes a ton of sense. It seems transitory. But can you put a finer point on the visibility on how many of these cases you think might return? And then additionally, I'm thinking about the market. And in the past, these larger competitors were not engaged in that space. Has anything changed from your perspective on that front?
No. We really don't see any dramatic change in the competitive posture in this area. In fact, in new product development, we see, if anything, reduced emphasis by the major competitors on pediatric-specific products. We track every potential surgeon target on a monthly basis. We watch that very, very closely. And of course, many of us are personally close to the scoliosis user that we have. I can assure you that there's absolutely no indication that these 5 large volume surgeons who were in hiatus over the second quarter have, in any way, converted to other systems. We have every expectation they will, when they return to practice, come back to us and utilize our response systems and our other products. So we would view that as a good thing for the future. And I'm just very impressed that we were able to maintain a 20% growth trajectory on the scoliosis despite the loss of something like $800,000 to $1 million that, otherwise, we would've expected to garner.
Your next question comes from the line of Margaret Kaczor from William Blair.
This is Anna on for Margaret. I want to jump in a little bit to Trauma & Deformity. How confident are you the temporary slowdown seen last quarter is behind you? And then could you discuss some of the growth drivers there in addition to Orthex, whether it be new products, continued momentum with FUMER, instrument sets or anything else notable? How should we view some of the tougher FUMER comps anniversarying and ability of new products to offset those things?
Well, thanks, Anna. Look, we are absolutely confident that this anomaly we saw in March and -- seen in February and March is well behind us. We were confident of that in April. In fact, during our last earnings call, we were confident of that, and we're confident of that now.
I think in terms of growth drivers, we've been very satisfied to see the continued uptake of our PNP FEMUR intramedullary nail system, which was launched in June of last year. But this is a long cycle of adoption that has been a significant contributor to sales, and we would expect that to continue. The cannulated screw systems are ones that will be adopted very quickly. And cannulated screws are almost omnipresent in the surgical suite on any given day. And since we've been in the cannulated screw business, this is a dramatic expansion of our offering as well as an improved instrumentation profile. I think that we'll see a very quick contribution of that product line. PediFoot will, although, be far more significant, but that will require a period of time because we're starting from 0. But I think we would expect to see PediFoot contribute materially to the company's fortunes in the back half of the year. Any other thoughts, Fred, on that one? Okay.
And then how do you...
Anna? Operator, do we...
I'm sorry, sir, her -- yes, she was being removed from the line.
Okay. Can we move on?
Yes. Let's move on. And if Anna comes back, perhaps we could -- you could let her ask her follow-up question. Thank you.
Sure, sir. Okay. Here, we have the line of Ms. Margaret. Would you like me to open her line again?
Yes. Yes. Yes.
Anna, are you back?
I just wanted to follow up on...
We thought we defended you and you'd hung up.
How should we view the sustainability of some of the benefits to your strong gross margin in the period? Where could we see other areas for leverage for the remainder of the year? And can you remind us for the expectations for the cadence of some of those pipeline international conversions?
Yes. Great question. So as we saw last year, the second quarter gross margin dramatically higher than the first quarter, and a lot of that's driven on the mix. So second quarter domestic sales, much higher as a percentage of sales than it was in the first quarter. And with over 80% gross margin on the domestic side of the business, that increases the overall mix and the gross margin up to that 75%. So we are very encouraged by that. In addition to that, we've now added additional Orthex domestic -- primarily domestic business, which is, again, at that higher gross margin rate, which helps the overall mix. So third quarter, which is our highest sales quarter of the year, that will have another strong gross margin similar to last year. And then in the fourth quarter when our sales are lower, particularly on the domestic side, then our gross margin will fall down again because of the mix of the business.
As far as growth drivers of that gross margin, Orthex is going to have a very positive impact for us going forward, so we're excited about that. And then to your point and your second question, conversion of additional countries or additional distributors into our agency model will help that gross margin as well. We have -- very excited about the Belgium and the Holland -- Netherlands conversion earlier this year. We have a new headquarters. We have a new director, who's going to be starting there very soon. And we're confident that we will see at least one other conversion in the second half of 2019. And when that conversion takes place, that will help our gross margin a little bit in the second half of 2019, but more importantly, up our gross margin for all of next year.
Your next question comes from the line of Ryan Zimmerman from BTIG.
It's actually Sam on for Ryan. So just wanted to get back into the set dynamic a little bit. Do you have any updates on what revenue ratio you're seeing for the newly deployed sets of such a large deployment going out? And then are you seeing any dispersion between your Trauma & Deformity sets and scoliosis sets? And how should we think about that impacting the back half?
Yes. Great question, Sam. Good to hear from you. The as we've always -- as we've said since the IPO, we expect those sets to deliver $1 of revenue for every dollar that's being deployed. That -- full utilization at that rate does not happen immediately. It takes anywhere from 12 to 18 months to get all of those sets that are deployed into that high utilization rate. But since the IPO and all of the significant increased launches since then, we're very confident and very pleased with the utilization and the return that we're getting on those sets, which is in that range that we expected it to be. So all the sets that were deployed here in the first half, we're getting some benefit in the summer selling season, but it'll take up to 12 to 18 months to really get the full utilization of those sets.
As far as the utilization of the scoliosis business versus Trauma & Deformity, trauma & Deformity is a little lower. The scoliosis sets have a higher return, which traditionally is true, and that is our expectation. The Trauma & Deformity are a little lower, which is definitely standard in the industry. But the combination and the mix of those set deployment gets us to that dollar of revenue for every dollar deployed. And again, we're very pleased with what we're seeing, and we fully expect that to continue.
Great. And then turning to the small-stature system with it being the first summer season it'll be out. Can you kind of characterize how that launch has been going? And how your sales force has been able to interact with surgeons, whether it be increasing new surgeons or being able to convert more surgeons to a greater percentage of the broader scoliosis portfolio?
Thanks, Sam. Well, in fact, it has been very successful in terms of its uptake, and it was a significant contributor to the spine business actually throughout the first half, but certainly in the quarter just ended. And I think that as we have said, it has enabled us to remove a very legitimate objection by a surgeon that without a complete offering of both a normal-sized system and a small-stature system, he'll wait for a -- to consider converting to OrthoPediatrics. So offering the small-stature system has unlocked that potential. And I think that one could say from a 30,000 foot level, it has made us more relevant. And one could say that is our goal always is to simply become more relevant to surgeons through our product offerings.
Your next question comes from the line of Mike Matson from Needham.
This is actually David on for Mike. First, just a quick follow-up on one of Kevin's questions. When do you expect those 5 high-volume surgeons to be returning to their practice?
We don't have -- I don't have a specific take on that. I would expect that this would be over the next half year or so, and then we would see that impact occurring by the end of the year. I'd have to say, though, that, that has not entered into any of Fred's calculus in terms of guidance, and they will come back when they come back.
Okay. And then -- so it looks like your sales rep is up about proportionally with your sales. Are there any initiatives you can do to drive productivity? Or is it more about just adding reps? And then secondarily, can you just talk about the average rep profile for the new hires? Are these experienced reps?
Yes. That's a very interesting question. Well, with regard to making them more productive, I think the thing that comes to my mind, top of mind, is that we have hired an absolutely dynamite VP of Sales Training and Clinical Education. This is a guy who formally ran the Zimmer Institute. He is a trained educator, and he is already proposing in the 1 month he's been with us a number of improvements we can make in creating a more dynamic learning environment where our people can learn both in the field and in the classroom here in training sessions. So hopefully, that will help reduce the 9 to 12 months that historically are required for a new sales representative to really feel comfortable representing such a large product line.
As to the profile, it is interesting that we see both experienced sales reps coming from large companies, like Smith & Nephew or some are Zimmer Biomets, many distributors, or we see our distributors hiring relatively inexperienced sales reps who are a clean sheet and who have not learned bad habits and who come with the expectation that they know nothing, and so there's the zeal to learn a lot. Ironically, some of the cases where a new rep has not been successful in our company have been experienced people who thought they understood pediatric orthopedics and they quickly discover they know nothing because it is totally different. So that's a very broad answer to your question, but I think that is the truthful thing to say that it is a wide array of people who perhaps are linked by a common denominator of attitude because we do participate in these hiring decisions, and many of us look first and foremost for attitude. Fred, do you want to comment?
Yes. The other thing I would say is since the IPO, I would say that the caliber of hire has increased dramatically. Prior to the IPO, many of these sales reps had heard of us but there was a lot of questions out there about how long are we going to last. Did we have enough funds to maintain this? And since the IPO, it's, I think, given a lot of people who were looking to come over to join us the confidence that we are going to be around for a long time to come and that we have the cash to sustain this level of growth and it's an exciting place to be. And so not just so much in the second quarter, but since the IPO, we've been very, very excited about the profile, which is a more experienced and highly energized individual that typically will bring some business with them, which is encouraging to see.
Great. That's helpful. And then last one for me. Any idea on the timing of the adult Vilex divestiture and any potential complications from unwinding any of the products from a distributor perspective?
Well, I think we're confident that this will be done in the fourth quarter. And with regard to unwinding distributors, it's a bit of a delicate situation, obviously, but we have brought into the adult side of the business a very experienced adult foot and ankle executive, who was formerly CEO of a small foot and ankle company. And so he, I think, has done a wonderful job of both stabilizing the adult distributors for Vilex as well as counseling us in the appropriate way to divide the product line and to unwind this thing in a way that is invisible to surgeon customers, which is the goal.
Your next question comes from the line of Mr. John Braatz from Kansas City Capital.
Sort of as a follow-up to the last question, Mark, what do you think the number of distributors -- number of reps are necessary to get full coverage geographically and product wise? And what is that number? And how long do you think it would take to get to that level?
Well, John, I think we see that when a given rep has a territory much in excess of $1 million or is generating much in excess of $1 million, he begins to find it impossible to attend all of the cases that are required. And one of the things that we are real sticklers on is that we want to attend as many cases as possible, not only to ensure that the case goes well and the patient outcome is the best, but also, it's a selling opportunity of all of our other surgical systems. So that being the case, there will continue to be a permanent increase in the selling organization that would roughly track the pace of revenue growth, and we would see that continuing through the planning horizon and indefinitely. That said, however, there are opportunities for us to achieve even greater focus in certain of our product areas, particularly scoliosis, by augmenting the number of distributors we have now by specialists in that area. We've not done that much, but that is something that is always an option. And so it well may be that, that would further increase the size of the selling organization but in a more specialized and focused manner.
Okay. And Fred, did you recognize -- and I maybe missed it, did you recognize any amortization charges in the quarter from Orthex?
Yes. Yes, we did. So we had an opening balance sheet that we put on for the Orthex, which does have intangibles, it has goodwill. Separately, we have all the Vilex stuff held in an asset ready to sell that's on the balance sheet. But we did have, in the month of June through the 5th and the 30th, increased amortization for those intangibles.
Did you disclose how much?
No. We have not disclosed how much. And I don't know off the top of my head, actually, what that number is, but I'll look it up and give you a call back.
I am showing no further questions at this time. I would now like to turn the conference back to Mr. Mark Throdahl.
Thank you, Operator. So in summary, I think we continue to see systematic execution across multiple growth initiatives. This multidimensional growth will continue to strengthen our market position. It will continue to enhance shareholder value. And so I'd like to thank you for your interest in our company as well as our cause of improving the lives of children with orthopedic conditions. Thanks a lot, and have a good day.
This concludes Q2 2019 OrthoPediatrics Corp. Earnings Conference Call. Thank you, and have a great day.