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OrthoPediatrics Corp.  (NASDAQ:KIDS)
Q4 2018 Earnings Conference Call
March 07, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2018 OrthoPediatrics Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce Ms. Tram Bui with The Ruth Group. You may begin.

Tram Bui -- Investor Relations

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 Annual Report on Form 10-K which will be filed with the Securities and Exchange Commission later today.

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, March 7, 2019. Except as required by law, the Company undertakes no obligation to revise or update any statements 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.

Mark Throdahl -- President & Chief Executive Officer

Good morning, everyone, and thank you for joining us today on our fourth quarter and full-year 2018 earnings conference call. I'll begin with an overview of our performance, including the factors that are contributing to our success and the future. drivers of our growth. I'll then turn the call over to Fred for a more detailed financial review before opening the call up for any questions.

2018 concludes another year of industry-leading growth with record setting full-year revenue of $57.6 million, which represented 26% year-over-year growth. This is our tenth consecutive year of annual revenue growth exceeding 20%. The strong growth in 2018 was driven by consistent execution across all of our businesses and the growth initiatives, including a consistent cadence of new product introductions, increased investment in consigned sets, ongoing conversions of international stocking distributors to sales agencies, and a growing commitment to clinical education.

During the year, we continue to distance ourselves as the clear leader of the pediatric orthopedic market. We expanded our product offering to 26 surgical systems and invested $12 million in consigned sets. We saw significant and accelerating revenue growth from sales agencies in the UK, Ireland, and Australia, New Zealand, and we added sales agencies in Canada and we converted our stocking distributor in Belgium and the Netherlands to the sales agency model effective as of January 1st 2019.

Furthermore, we increased our ongoing support of clinical education to 3% of sales as part of our mission to train the next generation of pediatric orthopedic surgeons. While increasing investments in these growth initiatives, we also demonstrated continued progress improving the bottom line with adjusted EBITDA of $518,000 for the full-year 2018. We're extremely pleased with our performance and we're delighted that OrthoPediatrics is increasingly viewed by surgeons as the company dedicated to advancing the entire field of pediatric orthopedics having treated more than 150,000 children to date.

We started 2018 with a lot to prove during our first full year as a public company and we believe that our progress has well positioned us for a sustainable growth and continued market leadership in the future. Despite the achievements and revenue growth in 2018, we will remain conservative regarding guidance for our full-year 2019 revenue growth of 21% to 23%. Furthermore, with the strengthened balance sheet following our secondary offering in December, we anticipate increasing our investment in consigned sets to a range of $15 million to $17 million for the full-year 2019, while continuing to carefully manage the optimal allocation of set placements and their utilization. We also look forward to the opportunity to acquire new product technologies that could significantly expand our product offering and growth outlook.

Let me now summarize our progress on five growth initiatives in 2018, that will accelerate in 2019, starting with new products. One of the reasons that our scoliosis business grew 44% last year in an essentially flat market is our growing array of superior products. During 2018, we enhanced our scoliosis offering with expanded indications for the FIREFLY Pedicle Screw Navigation guides as an alternative to expensive navigation robotic systems. Critically, FIREFLY can eliminate intra-operative radiation during the case, thus considerably enhancing safety and reducing surgery time. This product continues to drive aggressive growth in our scoliosis segment and has been enthusiastically received by surgeons.

In the fourth quarter 2018, we filled an important gap in our scoliosis offering with the introduction of the RESPONSE 4.5/5.0 millimeters system, which significantly expands the surgeon's ability to treat more complex spinal deformities in smaller patients or those at a younger age. This system is used in approximately 20% of scoliosis surgeries and is critical to convert hospital accounts fully to OrthoPediatrics' scoliosis system. This was followed by our launch of the BandLoc DUO in February of this year, which is our latest enhancement to the BandLoc of 5.5/6.0 millimeters system and provides a simpler and more efficient solution for temporary stabilization as a bone anchor during the development of solid bony fusion. It can also aid in the repair of bone fractures during orthopedic surgeries.

Additionally, we are progressing with the development of our neuromuscular scoliosis system, which will further expand our capabilities to address some of the most complex cases, and we are also developing a suite of early onset scoliosis products, including our growing rod and spinal tethering technologies.

Turning to Trauma & Deformity, in early 2018, we launched our PediFlex advanced system, which represents a significant rethinking of flexible intramedullary nails for treating fractures with significantly enhanced inserter and extraction instrumentation. This was followed by the full launch of our Pediatric Nailing Platform FEMUR system or PNP|FEMUR, which significantly expands our Intramedullary nail offering to include adolescent as well as pediatric sizes. Some surgeons have called PNP|FEMUR the finest product system we've developed to date. Notably, our PNP|FEMUR system was designed as an instrumentation platform that could be applied to other nail implants. And so, we are making rapid progress on our PNP|TIBIA system for launch later this year.

As we look out into 2019, we plan to introduce a number of additional products including PediFoot, which will be the first pediatric-specific foot deformity system and Osteogenesis Imperfecta Nail System and a significantly expanded range of cannulated screws. I'm very pleased with our organization's ability to deliver a consistent launch cadence of innovative new products and line extensions. We have a rich pipeline of new product proposals, which I expect will continue to strengthen our market leadership in 2019 and beyond.

The second growth initiative is set deployments. In the years prior to our 2017 IPO, we deployed an average of $3.5 million of implant instrument sets, which are consigned to hospitals. Last year, we more than tripled this investment to $12 million, which was split evenly between our Trauma & Deformity and Scoliosis product lines and was driven by pent-up demand by hospital customers. Based on this continued strong demand, in 2019, we anticipate increasing this investment to a range of $15 million to $17 million. We anticipate that within 12 months to 18 months, these set deployments will produce approximately $1 of sales per $1 of consigned inventory, and thus are a key driver of revenue growth as well as a formidable entry barrier to anyone who might follow us into the pediatric market.

Set investment also plays a role in our third initiative, which is accelerating international sales growth by converting stocking distributors to the sales agency model we use in the United States. In this conversion, we put the sets we sold a stocking distributor on our balance sheet and then bill hospitals at the full construct price, thus improving gross margins approximately the level we enjoy in the United States.

In 2017, we converted our stocking distributors in the UK and Ireland and Australia-New Zealand to this model and quadrupled the revenue in those countries, because we could accelerate the set consignments required to penetrate those markets more aggressively. We now have a total of six international sales agencies following the transition of Belgium and the Netherlands at the beginning of 2019, and Canada at the end of 2018, as well as 35 stocking distributors, all servicing 39 countries outside the United States. We look forward to the incremental benefit from additional stocking distributor conversions, particularly in Western Europe in the future.

Our fourth growth initiative is clinical education, which is as important as products in the eyes of our surgeon customers. As the only company focused on advancing the field of pediatric orthopedics, we strive to accomplish more than just selling products. Therefore, with the help of an advisory board of nine eminent pediatric orthopedic clinical educators we aspire to train the next generation of pediatric orthopedic surgeons. Throughout 2018, we sponsored multiple courses, symposia and programs, some of which we have supported since their inception. These included our Diamond sponsorship of the 37th Annual European Pediatric Orthopedic Society Meeting in April where we supported a symposium entitled Management of Open Fractures in Children.

We also maintained our Double Diamond support of the 2018 Pediatric Orthopedic Society of North America meeting in May with two sub-specialty sessions focused on pediatric trauma and spinal deformity correction. In October, we were again the premier sponsor of the Annual Meeting of the American Academy for Cerebral Palsy and Developmental Medicine, and the 2018 Scoliosis Research Society's 53rd Annual Meeting, for which we sponsored traveling scholarships so that more surgeons could attend. We also continued our Double Diamond sponsorship International Pediatric Orthopedic symposium in November with the pre-course during which orthopedic surgeons shared lessons from challenging fracture repair, spinal fusion and limb lengthening cases, in addition to four workshops on topics such as early onset scoliosis, pediatric orthopedic trauma and deformity correction. It's gratifying that these sophisticated non-commercial courses are attended by so many surgeons, demonstrating the impact of our presence at these meetings.

Furthermore, we enhanced our partnership with World Pediatric Project, a foundation focused on providing orthopedic surgical care for children in developing countries. OrthoPediatrics provides surgical implants, instruments and financial support for surgical teams to travel to the Caribbean and Central and South America to operate on children who otherwise could not have access to life-changing surgery.

Lastly, our unique online community on DarkMatter more than doubled over the course of the year to nearly 1,000 followers, representing nearly half of the pediatric orthopedic surgeons in the world. This platform allows surgeons to interact with one another 24/7 by posting questions and problematic cases. We're excited to see this extraordinary level of participation, which is further evidence of the magnitude of positive impact our company is having.

Based on the success of our clinical education programs, in January 2018, we funded the OrthoPediatrics Foundation for Education and Research, 501(c)(3) charitable foundation under the leadership of our Chief Medical Officer, Dr. Peter Armstrong with a board of eminent surgeons. This organization will be the primary channel for our investments in non-commercial education and clinical research.

Our fifth and emerging growth initiative is acquisitions. In December, we raised $43 million from a follow-on stock offering. The purpose of this capital raise was to finance increased levels of future set consignments and to be well positioned to take advantage of acquisition opportunities that have increasingly come our way since the IPO. These opportunities are either in novel products or small companies with unique technologies. All have limited integration risk. We are optimistic that we will progress several transactions in 2019, which will significantly enhance our competitive position and in turn enhance shareholder value.

I'd like to make one final point. We believe that a company's most valuable asset is its culture. While culture is not a growth initiative per se, it is the foundation for a rapidly growing enduring enterprise. It is the one thing that cannot be duplicated or reverse engineered and it takes years to develop. Some time ago, we set the objective of becoming The Employer of Choice in the orthopedic industry. In 2018, we saw tangible evidence of progress toward this objective by being voted for the second time, One of The Best Places to Work in Indiana. Last month, we learned that we had received this recognition for a third time. Again, the only company in Warsaw to be so named.

In January this year, we hosted an all-associate meeting rather than a typical national sales meeting. This large gathering brought together most of our sales representatives and virtually all our Warsaw-based associates for a two-day meeting in Nashville. The meeting demonstrated the energy and engagement of our associates, the 131 independent sales representatives, who work for our domestic sales agencies and many of our international partners. It bridged the typical divide between headquarters staff and the field and it was so rewarding to see the power of our culture to unify everyone at OrthoPediatrics in the cause of transforming the lives of children with orthopedic conditions.

On the subject of sales personnel, I think it's appropriate to move to reporting the total number of sales reps instead of just full-time equivalents. By the end of 2018, we had a total of 131 total sales reps versus 110 at the end of 2017. Two-thirds of these personnel sell OP products exclusively, while the others have unique relationships that allow us to expand our reach into scoliosis accounts or to particular pockets of the country. While the decision to add more sales reps is not ours alone, we are now working closer than ever with our 33 domestic sales agencies on developing the strategies to scale their headcount to keep up with our launch of new surgical systems, increase set consignments, our clinical education programs and potential acquisitions.

In summary, these drivers of current and future growth are having a cumulative effect at some of the major pediatric centers where we have built solid sales positions that have the potential to significantly increase. This is why we can look forward to another year of outstanding performance in 2019 and over the planning horizon.

Our performance is not only attributable to solid execution of the right strategy, but also to a market opportunity that remains largely unmet.

So with that, I'll now turn the call over to Fred for a review of our financial results. Fred?

Fred Hite -- Chief Financial Officer

Thanks, Mark. Total revenue in the fourth quarter of 2018 was $14.6 million, up 25% when compared to $11.7 million for same period in 2017. US revenue in the fourth quarter of 2018 increased 24% to $10.9 million when compared to $8.8 million in the same period last year, representing 75% of total revenue. International revenue in the fourth quarter of 2018 was $3.6 million, a 27% increase compared to $2.9 million in the same period last year, representing 25% of total revenue. Total revenue in 2018 was a record-setting $57.6 million, a 26% increase compared to $45.6 million in 2017.

US revenue in 2018 was $43.5 million, a 24% increase compared to $34.9 million for 2017, representing 75.5% of our total revenue. International revenue in 2018 was $14.1 million, a 32% increase compared to $10.7 million in 2017, representing 24.5% of our total revenue.

Our fourth quarter revenue and full-year 2018 revenue breakdown by product category was as follows. Trauma & Deformity revenue in the fourth quarter of 2018 was $10.2 million, a 20% increase compared to $8.5 million in the same period last year, and $39.7 million in 2018, a 21% increase compared to $32.8 million in 2017, driven by new product introductions and the increase in deployed sets. Scoliosis revenue in the fourth quarter of 2018 was $4.1 million, a 38% increase compared to $2.9 million in the same period last year, and $16.7 million in 2018, a 44% increase compared to $11.6 million in 2017, driven by continued product acceptance and customer adoption.

Lastly, Sports Medicine Other revenue in the fourth quarter of 2018 was $365,000, representing a 28% increase when compared to $286,000 in the same period last year. Sports Medicine Other revenue in 2018 was $1.2 million, a 3% decrease compared with the same period in 2017. Nearly, all of our revenue growth continues to be driven by increased unit volume.

Moving down the income statement. Gross profit in the fourth quarter of 2018 was $10.5 million, a 19% increase compared to $8.8 million in the same period last year. Gross margin in the fourth quarter of 2018 was 72.2% compared to 75.6% in the fourth quarter of 2017. The lower gross margin was attributable to a higher increase in international sales as well as aggressive growth of our scoliosis distributed product sales. Gross profit in 2018 was $42.6 million, an increase of 24% compared to $34.5 million in 2017. Gross margin in 2018 was 74.2% compared to 75.5% in 2017.

Sales and marketing expenses in the fourth quarter of 2018 increased 21% to $6.6 million when compared to $5.4 million in the same period last year, and full-year sales and marketing expenses increased 29% to $26.6 million, compared to $20.5 million in 2017. This increase was driven by an increase in unit volumes sold and associated commissions in the United States, the additional commissions been paid in the international market when we transitioned to the agency model, and ongoing marketing expenses.

General and administrative expenses in the fourth quarter of 2018 were $4.5 million, a decrease of 32% compared to $6.7 million in the fourth quarter of 2017, which did include $2.0 million of expense related to the accelerated vesting of restricted stock. Total year 2018 general and administrative expenses were $20.9 million, an increase of 23% when compared to -- $17.0 million in the same period.

Research and development expenses increased 36% to $1.3 million in the fourth quarter of 2018, when compared to $0.9 million in the same period last year, increased 38% to $4.7 million compared to $3.4 million in 2017. This increase was due to significant product launches as well as incremental projects to accelerate our product development and future pipeline.

Total operating expenses in the fourth quarter of 2018 were $12.4 million, a decrease of 5% when compared to $13.0 million in the fourth quarter of 2017, which again included $2.0 million of expenses related to the accelerated vesting of restricted stock. Total operating expenses in 2018 were $52.2 million, an increase of 28% when compared to $40.9 million in 2017.

Operating loss in the fourth quarter of 2018 was $1.9 million compared to an operating loss of $4.2 million in the fourth quarter of 2017. In full-year 2018, it's a loss of $9.6 million compared to a loss of $6.5 million in 2017.

Adjusted EBITDA for the fourth quarter of 2018 was a negative $125,000 compared to a negative $658,000 for the fourth quarter of 2017. Adjusted EBITDA for the full year of 2018 turned positive, $518,000, as compared to a negative $58,000 for the full-year 2017.

Interest expense in the fourth quarter of 2018 was $533,000, a 16% decrease compared to $633,000 in the same period last year, and was $2.3 million in 2018, a 9% decrease compared to $2.5 million for 2017. The decrease in interest expense was due to incremental interest income generated on our cash balances during 2018, as compared to our pre-IPO cash balances during 2017.

Net loss in the fourth quarter of 2018 was $2.5 million, compared to a net loss of $4.8 million in the same period last year, which again included $2.0 million of expenses related to accelerated vesting of restricted stock. Net loss per share attributable to common stockholders in the fourth quarter of 2018 was $0.19 per basic and diluted share or $1.41 per basic and diluted share in the same period last year. Net loss in 2018 was $12.0 million compared to $8.9 million in 2017. Net loss attributable to common stockholders in 2018 was $0.96 per basic and diluted share compared to a loss of $5.86 per basic and diluted share in 2017.

Turning to our balance sheet, as of December 31st 2018, our cash balance was $60.7 million compared to $24.5 million as of September 30th 2018. As a reminder, in December, we raised $43.4 million in net proceeds from our follow-on offering after deducting underwriting discounts, commissions and offering expenses.

The change in net purchases of property and equipment during the fourth quarter of 2018 was negative $58,000 as compared to $1.3 million during the same period last year and was $5.3 million in 2018, a 1% increase compared to $5.2 million in 2017, which did include the conversion of the UK, Ireland, Australia and New Zealand agencies.

During the fourth quarter of 2018, we deployed $1.3 million of new and signed instruments and implant sets and for the full year of 2018, we deployed $11.9 million of sets. As Mark mentioned, this is a dramatic increase over our $3.5 million of annual deployment prior to our IPO and a key growth driver for 2018 as well as 2019.

As of December 31st 2018, total net debt was $21.3 million, down from $25.5 million as of December 31st 2017. After our $43.4 million follow-on offering in December of 2018, we did pay off all of our $4 million outstanding under our revolver line of credit. We now have available our entire $15 million line of credit. And as a reminder, our term note as well as our line of credit does not expire until January 2023.

In terms of guidance, we anticipate 21% to 23% annual sales growth for 2019. Additionally, we plan to increase our annual investment in consigned sets to a range between $15 million to $17 million in 2019.

Let me now turn the call back to Mark for any closing remarks.

Mark Throdahl -- President & Chief Executive Officer

Thanks, Fred.

To summarize, our performance in 2018 reflected the systematic execution of multiple initiatives that strengthened our position as the category leader in pediatric orthopedics. First was superior products, which will continue to drive growing adoption and utilization. Second was growing investment in consigned sets which will in time produce at least $1 of revenue for $1 dollar of investment. Third was continued conversion of international stocking distributors to sales agencies with an immediate increase in sales and gross margin, and we believe, an acceleration of volume growth due to more aggressive penetration of converted markets. Fourth was clinical education programs, which expose young surgeons to OrthoPediatrics at an impressionable point in their careers. Fifth was the acquisition of novel technologies, which can allow us to meet unmet needs and further strengthen our competitive position. These five factors will continue to allow us to maintain our 10-year track record of commercial success into the foreseeable future.

Efforts to build an engaging non-hierarchical culture will continue to be the foundation of our work in building OrthoPediatrics in one -- into one of the great medical device companies. As we look ahead to the remainder of 2019, we will continue to growing our R&D investment, we will consign the $15 million to $17 million in new sets with appropriate scaling of our sales organization, convert more international stocking distributors to sales agencies and increase our commitment to clinical education programs. We remain confident that the investments in these initiatives will allow us to achieve our full-year revenue growth guidance, and with our recent follow-on offering, we have the capital to make acquisitions that fill holes in our product line and have the potential to increase our total addressable market.

With that, I'd now like to call out to open the call up for questions. Operator?

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Rick Wise with Stifel. Please proceed.

Rick Wise -- Stifel -- Analyst

Good morning -- good morning, Mark and Fred. Thank you for another excellent quarter, and congratulations as well. Maybe I'll -- let's start off with 2019 guidance. I know Mark that Fred always likes to stay conservative, maybe you can give us a little more exuberant reflection on your assumptions for your guidance range? And when you say we'll remain conservative, what's that mean? And maybe just talk about some of the high and low-end drivers. Is it about sets or the timing of new products or these international conversions? Just give us a little more color on your thinking.

Fred Hite -- Chief Financial Officer

Yeah, absolutely, so, last year, going into 2018, our guidance was 20% to 22%. So we did increase that up to 21% to 23%. So, an additional point on both the lower and the high end, and that is really reflective of the additional sets that we have now that we've completed the follow-on offering in December and are increasing the sets that $15 million to $17 million, whereas a year ago, I was thinking that 2018 would be closer to $10 million in deployed sets. So that's the primary driver. As far as what could change that, clearly, the sooner adoption of the sets that were deployed in 2018 and a quicker adoption of sets deployed throughout 2019 could impact that in a favorable way as well as sooner addition of other international conversions in 2019 would have an impact on that.

Mark Throdahl -- President & Chief Executive Officer

I might add to that, that we see Rick, absolutely no deceleration or headwinds with regard to a number of these growth initiatives. There will be a number of new product launches in the first half and actually they -- at this point they should all be done by Q3, there is no shortage of demand from our selling organization for more sets, back if anything, I think Fred is having to restrain their exuberance in terms of conversions of stocking distributors, there are discussions ongoing now with certain stocking distributors in Western Europe and I'm very confident we'll be announcing some acquisitions in the first half. So it's really full steam ahead on all of that. We have, I think, a very prudent policy with regard though to guidance to the market and that is something that I think Fred and I believe very strongly, and just as a matter of principle.

Rick Wise -- Stifel -- Analyst

Yeah. That's helpful. Thank you. Turning to maybe more specifically to scoliosis growth, scoliosis did have extraordinary year by any measure, up in the mid 40s, we're modeling sort of low 20s kind of growth for '19 and again, the expanded sets, the FIREFLY launch, I mean, also some other factors I appreciate are driving, but why would scoliosis growth decelerate that much? Is there something we need to understand? Why wouldn't it look more like 2018 in 2019? Help us just think and understand a little more about that.

Mark Throdahl -- President & Chief Executive Officer

Yeah, it's a great question. So we would be I think remiss to say that our scoliosis business is going to grow by another 44% in 2019. 2018 was the first full year when we had FIREFLY technology. So we signed that license agreement in the middle of 2017 and we started selling it in the second half of '17 on a limited basis, but in 2018, we really got a full impact of that technology selling through. Not only are we selling the FIREFLY technology, but that also then brings along additional implant sales of our 5.5/6.0 system in '18, we'll continue to have some benefit of that, but it will be now comparable to the strong growth that we had in 2018. But I think we anticipate Scoliosis continuing to grow faster than Trauma & Deformity, but it's -- we're not going to forecast the continued 44% growth in that business obviously.

Rick Wise -- Stifel -- Analyst

Okay. Two last ones from me. The gross margins, you know, Fred, was a touch weaker than I thought, it was -- sounds like it's this international conversion, I mean is -- is the fourth quarter gross margin rate the new norm or does it move back to where it's been, in more mid 70s? Help us understand that, and I'll just go ahead and ask my last question now. Mark, you're talking about cash use and priorities beyond set expansion to acquiring new novel technologies. Help us understand what -- what are you looking at? What are you -- where are the holes in the portfolio? What kind of hurdle rates -- how do we think about this? Thank you.

Fred Hite -- Chief Financial Officer

Absolutely. I'll take the first one on gross margin. So what a new impact in the gross margin that we didn't have a year ago is actually from the FIREFLY product. So that product, as I mentioned, is a licensed product, and that product does have a lower gross margin than our normal domestic margin. Our overall domestic products are selling through at 85%, and because this is a licensed product, it comes through at a lower gross margin in the 50% range. As that grew dramatically in the fourth quarter, In particular, although grew all throughout 2018, it did have an impact on our gross margins. And so that's a bit of a drag on the margins in the fourth quarter. So, our overall sales are lower in the fourth quarter than they always are in the second and third quarter, summer selling season, and so that Scoliosis had a bigger impact. As we get into the summer selling season in 2019, our overall revenues are growing, it will have less of an impact. And as we have additional conversions, that could help the gross margins. So, I think to your specific question, the fourth quarter gross margins are a little lower than I would expect to see overall going forward. But 74%,75%, in that range is probably where I see it for 2019.

Mark Throdahl -- President & Chief Executive Officer

And then speaking to your -- your very interesting final question. Since the IPO, we have amassed a list of some 30 potential acquisition opportunities and now have discussions ongoing with a handful of those that are at the top of the list. I think that in terms of gaps in our product line, clearly, we would see in early onset scoliosis, a whole new era with regard to the development of surgical treatments that would allow surgeons to intervene with much younger children before their deformities have progressed. External fixation devices are clearly the number one gap in our current Trauma & Deformity product line, and there are opportunities to expand into other treatment options to follow our pediatric orthopedic surgeons into other products they might use in a non-surgical way in the treatment of patients before they progress to the need for surgery, and here, there are a number of interesting technologies in bracing for scoliosis, for example. But in all cases, we would need to see criteria of filling a significant gap in our portfolio, proven growth potential and ease of integration into the sales bag with minimal integration risk, and for the most part, these are technologies or products. If it would happen to be a company, I think we would expect that that entity would have to be very small in terms of people, thus minimizing integration risk and built around a novel technology.

Rick Wise -- Stifel -- Analyst

Thank you very much.

Operator

Thank you. And our next question comes from Ryan Zimmerman with BTIG. Please proceed.

Ryan Zimmerman -- BTIG -- Analyst

All right. Good morning. Thank you and congrats, let me echo the sentiment. I want to follow up on Rick's earlier question on guidance. And just maybe help us understand a little bit about how you're thinking about the balance of growth between say the US market and the OUS market, it's historically been stronger outside the US on a smaller base. And just maybe help me understand where you think that's going in '19? And I have a follow-up.

Fred Hite -- Chief Financial Officer

Yes, we're very pleased obviously, with our overall international growth at 32% in 2018. What's really need about the business is that there is strong demand for our products across the globe. And so, we see as much opportunity outside of the United States, as we do in the United States, deploying more sets in the United States, we've talked a lot about that demand continues, there's also demand in our agency locations outside of the United States, UK and Australia and now Belgium and Netherlands. So we can -- there's a lot of demand, so we can assign more sets there to continue to grow. And then all of our other partners across the globe continue to grow very aggressively. So we see the international demand equal to or more than our domestic demand and growth in 2019 and really beyond, based on our future projections.

Ryan Zimmerman -- BTIG -- Analyst

That's helpful, Fred. And then if I could ask about the sales headcount for a minute here. You ended '19 or -- excuse me -- '18 with a 131 (ph) in your headcount, I think it was up about 18% or so from the start of '18. Help us understand where that maybe potentially going, may not from an America perspective, you're not comfortable giving that out, but where do you think that's going and the leverage you can drive off that because certainly you're driving higher leverage off that growth in headcount, based on the results in '18. Thank you for taking the question.

Mark Throdahl -- President & Chief Executive Officer

Well, you know, Ryan, I think in the final analysis, this is not a precise metric of performance. And therefore, the correlation between sales reps and sales growth is something that we simply cannot manage that precisely. We are now working or we believe that it is more important to work with our 33 sales agencies on individualized strategies, each of them would have to keep up with the growth of the company in all of its dimensions. And that number may vary from from territory to territory. But the key to it is that our guys are thinking strategically about how they will have to increase their headcount over the planning horizon, which in our case is three years. And it would mean that grosso modo they need to double their headcount, each of them. So I -- but how they do that, where they do that is an individualized circumstance. So yes, we've got a number in mind at this point. But on the other hand, it is not something that is is definitive or is the sort of thing that we can announce at this point in this sort of setting.

Ryan Zimmerman -- BTIG -- Analyst

Very understandable. Thank you, guys. And congrats on the strong end of the year.

Operator

Thank you. And our next question comes from Matthew O'Brien with Piper Jaffray. Please proceed.

Matthew O'Brien -- Piper Jaffray -- Analyst

Yes, thanks, good morning and thanks for taking my questions. I was hoping to start on the instrument sets side, just the $15 million to $17 million is pretty robust, would love to hear, what gets you to $15 million, I mean, what gets you to $17 million, and I don't know how much you want to disclose as far as the split between Trauma & Deformity and Complex Spine, but just help us think about where those investments are going to be really focused this year?

Fred Hite -- Chief Financial Officer

Yes, absolutely. The good news just like demand is across the globe, the demand is across all of our product line. So again, just like it was in '18, that investment will be deployed across both Trauma & Deformity, as well as the Scoliosis business. And I think the difference between $15 million and $17 million is really about timing of some of our new product launches, when those roll out, and how aggressive we get on rolling out new sets in those different launches.

Matthew O'Brien -- Piper Jaffray -- Analyst

Okay. So is it fair to think, Fred, that it's probably more back half loaded as far as the $15 million to $17 million goes?

Fred Hite -- Chief Financial Officer

No, both historically, and it's been true in 2018, most of this goes out in the first and second quarter. So, in 2018, of this $12 million, $5.5 million of it was in the first quarter and $2.8 million was in the second quarter. And I would say that in 2019, that trend -- that pattern would be probably consistent with that. We try to get as many of those sets in place prior to the summer selling season.

Matthew O'Brien -- Piper Jaffray -- Analyst

Understood. That's helpful. Speaking of any kind of dovetails of what you just said, that $5.5 million in sets you deployed in March of last year, can you give us a sense for how those are tracking from a productivity perspective? I know you said one for one. Are we getting close to that one for one level? And are you seeing any signs of even it a little bit better on some of those sets?

Fred Hite -- Chief Financial Officer

Yes. So we do track those each and every set. We track the weekly sales against every set, so we can look at utilization. We deployed that $5.5 million mainly at the end of March of 2018 and so we're just now coming up on that 12-month mark. As we've talked in the past, it's usually 12 months, 18 months until the sets are typically fully utilized. And what I would say is that we're absolutely on track with that pattern based on what we're seeing, very pleased with the utilization, and hopefully longer term, we could get over that dollar-for-dollar. But right now, that still looks like it's a good number for forecasting.

Matthew O'Brien -- Piper Jaffray -- Analyst

Okay, helpful. And last one from me. Just on the small stature side launch, I know it's early. I'd just love to hear a little bit more anecdotal or just qualitative commentary you're getting from the field in terms of discussions that that product is opening up for you. I know it's not a huge chunk of the overall market, but I know it a very gating factor for Scoliosis business to some extent. So what have you seen so far in terms of new accounts' opening up or potential deeper penetration in existing accounts?

Mark Throdahl -- President & Chief Executive Officer

Well, Matt, I think we are seeing exactly what we had hoped, which is that surgeons are saying, OK, great, now that you've got this system, I do not need to keep the incumbent supplier around, and I think that's going to be further accentuated in hopefully the second quarter when we launch our neuromuscular scoliosis system which is should we say an even more exotic system, but on the other hand, is yet another reason that a dedicated user of a competitive -- of a competitor would not need to keep that competitor around at all. So, so far so good in terms of the rationale for launching that small stature system.

Matthew O'Brien -- Piper Jaffray -- Analyst

Very helpful, thank you.

Operator

Thank you. And our next question comes from David Turkaly with JMP Securities. Please proceed.

David Turkaly -- JMP Securities -- Analyst

Thanks. Just a quick follow-up on the $15 million to $17 million. Do we think that is essentially opening new accounts for you guys that both consigned sets or that further penetration into existing accounts primarily?

Fred Hite -- Chief Financial Officer

It's really both. I mean these are consigned sets which go for new product systems that are being launched. They go into current accounts, where we feel that additional sets are required. They would be the basis for penetrating new accounts. And remember, this is a surgeon-by-surgeon, system-by-system kind of game we're in. And so there may be a given account where one surgeon is using the product extensively and his colleagues now want to use it. So we've got to place an additional set or more at the account for that very system. So it's really this multi-dimensional demand for more instrument implant sets.

David Turkaly -- JMP Securities -- Analyst

Great. And I realize you're still pretty early in the FIREFLY rollout here, but I'm wondering if you might take a stab at guessing or estimating for us, what percentage of your accounts do you think have used this to date?

Mark Throdahl -- President & Chief Executive Officer

It remains a small number. And those that use it, it has an extraordinary sort of uptake and it's very interesting that there are several classes of surgeons here in terms of advocacy of FIREFLY. There are some who have converted totally, they use it on every case. There are others who use it only on their more complex cases and in most of these circumstances, these are not accounts that have been using navigation systems, robotic systems, but there are such cases as well and I think that's because there just aren't that many robotic systems that are in use in pediatric centers, which typically don't have the sort of volume of spine surgeries that large adult hospitals would have for whom those navigation systems really have been designed.

David Turkaly -- JMP Securities -- Analyst

Got it. One last one for Fred maybe. Looking at your guidance, your growth expectations, the set deployment, the new product launches, all kind of events happening early in the year. If we look at the P&L, on your operating income line, should we expect leverage in 2019? Do we think that the actual loss gets smaller, given that you have all these investments going on, but you do have again really nice sales growth?

Fred Hite -- Chief Financial Officer

Yes, it's a great question. We're very pleased with the progress that we've made really over the last four years in leveraging the sales growth into smaller operating loss. And now into 2018, where we've got adjusted EBITDA positive, we absolutely will continue to see leverage each year going forward, not to the same extent of the sales growth, but we'll leverage the G&A in the business to continue to improve on that adjusted EBITDA profitability, that will grow year-after-year-after-year. But one thing also to keep in mind, in 2018, we did have $2 million of accelerated vesting of restricted stock, that will not repeat in 2019. So we'll pick up $2 million of positive operating income just from that alone.

David Turkaly -- JMP Securities -- Analyst

Thanks a lot. Congrats on the quarter and the decade.

Mark Throdahl -- President & Chief Executive Officer

Thank you very much.

Fred Hite -- Chief Financial Officer

Thank you so much.

Operator

Thank you. And our next question comes from Margaret Kaczor with William Blair. Please proceed.

Ana -- William Blair -- Analyst

Hey guys, this is Ana (ph) in for Margaret. Can you guys talk about the rollout of FEMUR in Trauma & Deformity and rollout of RESPONSE Small Stature? I was just curious have the majority of those initial sets been rolled out now for these products? And then in RESPONSE Small Stature, particularly, where would you say you are in that launch? Thanks.

Mark Throdahl -- President & Chief Executive Officer

Well, I think we're still at a very early stage of both launches and I'd look to Fred with numbers of sets here that could be recited. But I think we have remained conservative with regard to the numbers of sets initially that we use for kind of our first phase rollout. And then we see how the uptake is and we will do more. Fred, would you want to elaborate?

Fred Hite -- Chief Financial Officer

Yes, that's absolutely correct. So we rolled out the PNP|FEMUR in the middle of 2018, with our initial launch, that's gone very, very well, and based on that, we've increased the number of sets that we're ordering for 2019, so those will start to roll out here at the end of March of this year and again into the second quarter. The Small Stature system launched in the fourth quarter in December of 2018, and we have more sets of that also being rolled out in 2019. So it doesn't all happen at once. We kind of continue to roll this thing out across the country and across the world. And that -- both of those programs have more sets being deployed in 2019, based on the initial successes that we've had.

Mark Throdahl -- President & Chief Executive Officer

And beyond the innate conservatism that we have in terms of preservation of capital and deploying it efficiently, there are a number of subtleties with regard to the launch of any of these sets because of the complexity of the instrumentation, and despite the fact that we've got a small team of surgeon advisors, who are working with us on developing these instruments, it is astonishing that when they get into the hands of more surgeons, suddenly the need for a left-handed free-dish row (ph) or a right-handed gimcrack (ph) comes up, or well, this handle is really a little too fat for female surgeons, or all of these subtleties and that requires then a modification of instrumentation, and obviously the smaller the installed base of systems that we've got out there with a new product, the easier the task of making those adjustments. So I think that will continue to be a -- shall we say, a force for being conservative in terms of the numbers of sets that we would initially launch with.

Ana -- William Blair -- Analyst

Okay, that's helpful. And then just pivoting to the international side for a bit. International revenue, we saw strong growth against the tough comp. Can you walk us through which product category contributed the strongest outside of the US? And then what were the largest drivers as compared to what we saw in the third quarter?

Mark Throdahl -- President & Chief Executive Officer

Gosh, as far as I'm concerned, we see a very similar profile with the possible exception of Scoliosis which is highly concentrated in markets like Australia and certain of the South American markets. We have very little Scoliosis sales in Western Europe, but it's across the board, we see it everywhere, in Trauma & Deformity, and in a place like Australia, we see it in Trauma & Deformity as well as Scoliosis. Fred, do you have any more color on that?

Fred Hite -- Chief Financial Officer

Yes, no, that's right. I would say that the international growth was similar to the domestic, very strong on the Scoliosis side, we did start selling the FIREFLY technology in Australia in the second half of 2018. So that was another growth driver. But Ana, your question is very relevant, particularly as we come up on the first quarter of 2019, because you'll recall, back in the first quarter and the second quarter of '18, our international business grew at 42% in the first quarter and 39% in the second quarter. And some of that growth was driven by selling incremental sets to our stocking distributors, post IPO, when we first -- for the first time had enough cash to order sets that we could actually sell to these guys. So we are coming on -- up on tough comps on those international segment's in the first quarter and second quarter of '19 (ph). But aside from that, we feel very good about demand of underlying products and that's continuing to be strong on the Scoliosis side, internationally, just like it is domestically.

Ana -- William Blair -- Analyst

Okay, thanks for those.

Operator

Thank you. And with that, that concludes our Q&A session for today. I'd like to turn the call back over to Mark Throdahl for closing remarks.

Mark Throdahl -- President & Chief Executive Officer

Just one final remark and that is, I think, one of the themes of today has been diversified sources of growth, superior products, increased investment in sets, conversion of international distributors, clinical education, acquisitions. These five levers of growth, I think, will enable us to maintain our industry-leading growth rate virtually indefinitely at least over the planning horizon. And all five contributed last year. All five will contribute this year. All five will continue to contribute over the planning horizon. And I think, that will enable us to continue to gain airspeed and altitude. So thank you very much for your interest in OrthoPediatrics.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.

Mark Throdahl -- President & Chief Executive Officer

Thank you.

Duration: 60 minutes

Call participants:

Tram Bui -- Investor Relations

Mark Throdahl -- President & Chief Executive Officer

Fred Hite -- Chief Financial Officer

Rick Wise -- Stifel -- Analyst

Ryan Zimmerman -- BTIG -- Analyst

Matthew O'Brien -- Piper Jaffray -- Analyst

David Turkaly -- JMP Securities -- Analyst

Ana -- William Blair -- Analyst

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