Align Technology, Inc. (ALGN) Earnings Call Transcript & Summary

Good morning, everybody. This is Kevin Caliendo, UBS Healthcare Supply Chain and Dental analyst. Thank you, good morning, and welcome to the UBS Virtual Health Care conference. We are very happy and proud this morning to kick off our conference with Align Technology. From Align management, John Morici, Chief Financial Officer; and Shirley Stacy, Vice President, Finance, Corporate and Investor Communications. John and Shirley, thank you so much for joining us.

Happy to, Kevin.

Thanks, Kevin.

John, why don't you give us a quick update on Align? Sure I know we spoke to you a couple of weeks ago for your earnings, but I'd love to get a quick catch up.

Sure, Kevin. Well, as people know, we are the leading technology company when it comes to moving teeth. And we've been around for 20-plus years and have a platform built on digital technology. And we look at the market that we serve as a vastly under-penetrated market in the traditional orthodontics space and the evolving expansive market where many opportunities exist for moving teeth to the general public and the larger group. And we've been built on digital technology. Over the years, have invested in our company to provide visualization for doctors, visualization for their patients to be able to understand how teeth are moved, invest in technology to be able to move teeth predictably and reliable and have built technology that can help doctors be able to provide the type of care that they expect. And our latest earnings report, obviously impacted by the COVID-19, and we explained that. But we look at the opportunity in front of us as a way to be able to continue to improve our market share and be able to grow our company after some of the impact that we see here, and I'm happy to answer any questions that you have regarding our company or the future.

Great. Thank you. Thanks for that. Let's get an update. I know it's only been a couple of weeks, but I think we are all anxious to sort of understand what a recovery might look like. Any updates from China, which I -- on your last call, you had mentioned it sort of started to open in early March and it had gotten somewhat consistently better over the period of time. Can you give us an update on China?

Yes. As we discussed, Kevin, China was the first country and first region that was impacted by the spread of the virus. Early February, things were locked down for a period of time. And China, like other regions, as things start to open up, and as you are able to transact and even go out in public, start to see doctors, dentists very much in China set up in a way to be able to -- kind of government controlled, to be able to see if you can go out and be able to see your dentists and so on. And as those restrictions are lifted, we see volume improving in those areas. And at the time of earnings, we talked about being able to get to 80% of where we were prior to the spread of the virus. And it's in -- in China, it really varies region by region. As those regions open up, then we have access to be able to sell to those doctors, those doctors end up seeing patients. And we start to see some volume. It's a slow process, but we look at each area that is available. We have sales people and other operations to be able to support them as they start to transact and see volume.

Is China a good proxy for the rest of world when we -- because I think all of our eyes are sort of situated on China given that they were first, and hopefully, will be the first ones out -- first for an area that was truly and really meaningfully impacted. Is there anything unique about China that maybe suggests it wouldn't be a great proxy? Or should we really be focused on how China recovers when we think about a U.S. recovery or a European recovery?

Well, there are a couple of points on China. One, being more of a centralized government, things are either open or closed based on how the government directs, whether it's public hospitals, private clinics, doctors' offices and so on. So it's very, very much controlled that way and spread by region-by-region, set that way. But it is a good proxy from the standpoint that you have, as doctors' offices open up, as the ability for people to come out and be able to start transacting and start interacting with businesses, you see that volume come back, and you see it come back region-by-region as the availability for transacting in those areas. So I think it's a proxy from the standpoint that offices are open, the need is there. It's a vastly under-penetrated market, just like many of our markets are. And as things start to open up, people go and need dental care, need their doctor whether you're a teenager or an adult. And from that standpoint, it's very similar across all markets.

Have you seen any changes in mix or demand? Are people still looking for the same treatments? Are they looking for lower price treatments? Are they looking for shorter duration? I mean, is there anything that's -- I know it's early in the process, but is there anything that's changed about the way demand is coming through when it comes to your product offerings in China, I mean?

Yes. It varies, Kevin. Obviously, we have a portfolio that can help doctors treat the easiest of cases or all the way to the most complicated cases and everything in between. So we have a portfolio that can address all these needs. At this time of the year, you run more into teenage cases, it's just the time of the year where many teenagers, whether you're in China or other parts of the world start to come in to those cases where that demand is greater in this part of the year as they progress through summer. So you have some of that mix that happens. But that happens every year where you have teenagers that will need some type of teeth straightening, and we'll help provide that. But from a product standpoint, we have a wide variety of products. And if somebody just needs simple teeth straightening, we can help a doctor provide that. And when we look at that market opportunity, that's part of the $300 million plus potential patients that are out there and we'll help provide that. And then when you get into the teen, more orthodontic cases, those are the 12 million to 14 million case starts that happen every year, that we're a part of. So it varies. This time of the year, it gets more into teen season, but our products help all types of cases.

That's helpful. So why don't we -- I want to get into some of the products and talk about the teen market penetration a little bit later. But let's just stay on this topic of sort of the reopening of -- let's talk about some of the other markets. You had mentioned Germany on your call as being somewhat back. Let's talk a little bit about Europe, what's happening in Europe? What are you seeing in Europe and maybe the Middle East? Any changes there? Any updates you can provide us since earnings?

Yes. At earnings, we talked about Germany. And really, what we're conveying is just as those markets open up, we start to see activity. And Germany was one where maybe just on how they closed. And then as they were one of the first to open up, we start to see volume and transactions and see that recovery. And I think the point of really everywhere, including Europe, is, as things open up, it goes country-by-country and then even region-by-region. And as those doctors' offices are open, as people are able to come out and want care, we see increased volume and increased activity. So it really depends on what country and what region it starts to open up and be able to transact. But once these restrictions are lifted, we see volume. And it's all types. Some of it teen, like I had mentioned, and some of it is regular teeth straightening that they want, maybe it's part of restorative work that they wanted done and they had to put off over this time and was maybe more elective, and now they're able to come back. But it varies. But in all cases, when we see the restrictions lifted, we see volume improvements.

Okay. That's helpful. Are there any countries in Europe that are -- you mentioned Germany, is there anywhere else that you're more concerned about opening up or more optimistic about opening up? We've heard France has been a little bit more restrictive. Italy obviously has its own -- that's hit pretty hard by this. Are there any countries that we should be looking at as reopening as maybe being favorable? Or a positive sign for Align?

Yes. I think when -- you mentioned Italy. Italy was -- Northern Italy, obviously, impacted. And that there you can use an example of mainly more regions within a country, Northern Italy, maybe a little bit slower to come back because of some of the intensity of the virus and therefore, the restrictions that have been placed. Southern Italy may be better because you didn't have as much of the -- of some of that virus in areas within Spain, the same way a U.K. But as those countries start to lift restrictions, we see the volume improvement. And remember, we're a company that has no finished goods, everything is made to order. So as we start to see some of that volume, those immediately translate from a scan to an order to finalizing the treatment plan and then ultimately to a shipment of the product. And that time window is very, very small. So just as we saw the impact early on in China, and we're able to talk about it and explain what was happening. The converse happens when you start to see that activity come through. So as things start to open up, you see that reaction very quickly in the marketplace. So that's what we're watching. We're working through. We're making sure our doctors are properly equipped from a -- as they start to open up, do they have the right financing to the doctor? Can we help with the doctor and their patient from a financing standpoint and really work with external financing to help them? There's been a lot of work that we've done as we've kept our teams together during this crisis to be able to help train doctors and to provide virtual training and online training and do a lot of work with them while we've been shut down in these areas. And we think that pays dividends and helps those doctors as soon as those markets start to open up, those doctors now are able to use the latest technology that we have, the latest tools that we have to be able to help drive that conversion and do that right away as those countries open up.

All right. I definitely want to get into that in a second. Let's just go through the Americas, first and foremost. We're starting to see some states opening here in the United States. I think Brazil has actually maybe gotten a little bit more of a hotspot aspect to it right now. But can you talk about what you're seeing in the United States? Are you seeing demands come back in the United States yet? Or is it still too early? I know there's been some states now that have been open for a couple weeks or a week. Have you seen any demand in the U.S. and if so, is it sort of what you expected? Is it in the same ramp as when China reopened? Any color there would be really helpful.

Yes. As you mentioned, the U.S. is -- as those states start to open up, and even within those states, as counties within those states start to loosen restrictions and allow for more of that -- those business transactions, allow for people to go out, and allow people to help if they want to go and get some care, as that opens up, we see activity, and it goes region-by-region where we see this. So that's not much more to comment on that other than as we saw within China, region by region, we start to see activity as things open up, that happens everywhere. And there's demand, as I mentioned, for some of those teen cases that maybe don't wait as long, and those parents want to get that teenager into treatment. And there's demand for restorative and other work that many things have been put off as a result of the virus and now people come back for that. But it really varies region by region. And we see that. We have our sales team that we've kept intact throughout this. And like I said, we provided a lot of tools and training to our customers, our doctors to be able to give them the latest technology so that as they start-up and as they start to do things where maybe they're trying to help with visualization or doing things more to try to take care of patients that they already had and to provide some of the remote care and some of that visualization that helps check on progress and other things with their patients, being able to provide those tools to make things easier for our doctors as they open up.

Let's talk about that. You mentioned it earlier, you wanted to make sure that the physicians and the patients were properly equipped. You used a third-party financing. Pardon you're using third party financing, you, yourselves are not extending terms. Is that correct?

That's correct, Kevin.

Okay. So when you're going in, are you expecting to have any sort of impact? I know you mentioned DSOs would likely, that mean day sales, not dental service. You're expecting DSOs to get a little worse, payment terms to be extended during this period of time. What -- can you just give us an example of the sort of work that you're doing with your orthodontists? What are you providing to them? If one of your rep calls and the orthodontist says, hey, I'm getting ready to reopen. Take me through sort of what that conversation is, what are you offering to help? What are orthodontists asking for or requesting out of Align at this time?

Well, there's really 2 parts to what we're trying to help with our doctors. One is as doctors are -- have been impacted, obviously, all businesses have been impacted where either they're not seeing patients so maybe some of their patients aren't paying those doctors. Those doctors have kept on staff and kept their business going. Obviously, cash flow is critical for all businesses right now. Given the -- our healthy balance sheet, strong business model, the financials that we have as a business. There's areas where we could help doctors directly where when we talk about day sales outstanding, there's some extended payment terms that we've been able to provide and other things to be able to help our doctors weather the storm. So that's more direct working capital benefit that we can provide to our doctors. In addition to that, as those doctors start to open up and are able to transact, we're working with doctors and external financing to be able to make sure that as new patients come in and they come in with financing questions, maybe they're looking externally. In many cases, these doctors would have taken on that financing kind of internally and just gave monthly payment options to their patients. What we've been able to do, and really, it's been an evolution. But what we have is really trying to make this seamless so that as a patients wants to go into treatment, what are the financing options that they have available that's working with our sales team, the doctor and so on to be able to provide financing options, our concierge team that we have can answer questions. And that patient now can come into that doctor's office with financing available. And maybe even prequalified for financing. So they'll come in and want to do a case, have financing available. That's with an external financing company, not on our books, as we said. And now that doctor, instead of cash flow negative, doing kind of this internal financing, now the doctor can get paid upfront and will get paid upfront as well. And so from our cash standpoint, from a doctor's cash standpoint, it's improved, much more cash positive. And from a patient standpoint, now they have payment flexibility and more options. So we think as you restart this economy and as you restart these practices, having cash brought into those businesses, we think, is a very positive effect and something that's needed for our doctors. So this is something that we're doing in really all parts of the world. And it's really a continuation of work that we have been doing. But this tries to help formalize it. And really, when you think about the health of the business and for our customers, our doctors, this is a way to help provide that.

Well, there's another sort of aspect of helping the dentists right now. And you guys just announced -- Align just announced the launch of a couple of new products. One was an update to ClinCheck. And then the In-Face model and also a new virtual appointment technology. Can you talk a little bit about those 2 new product launches? I know you mentioned it on the call that you were looking to help do things with some telehealth type of -- teledentistry perspective. Can you talk about how these new products work? What they enable your orthodontists and dentists to do?

Yes. I mean, our platform is built on digital technology. Right from the beginning, the start of our company has been about that. And these modifications, these changes that we have, these additional products that we all provide help doctors be able to effectively to be able to treat their patients. So when we think of some of the ClinCheck and some of the changes that we make there, now having everything cloud-based so that you could be on any device to be able to access ClinCheck. It's very important at this point, obviously, given the situation where many people are remote and using multiple different devices. Some of the visualization that we have to be able to have somebody take a picture, a patient take a picture in your doctor's office or a patient takes -- coupled with the scan to be able to provide that visualization to be able to say, this is what your teeth are going to look like and where they're going to move to and be able to provide that visualization capability both to the doctor and that doctor's patients is very, very helpful. So this is part of the journey that we have. This is part of the investments that we're making to be able to drive productivity in the case of the cloud and some of the work there. This is investments that we're making to be able to provide increased visualization to be able to give our doctors and ultimately their patients, more of an understanding of how your teeth are going to move. And it's been important in our history to have this, and it's even more important now as we have this kind of the pandemic and other issues that we run into with the lockdown.

Well, this gets into another question, which is in this -- is this pandemic really going to be sort of the black swan event which changes the way care is delivered in orthodontics? And will that drive increased demand for clear aligners versus wires and brackets? I know you touched on it a little bit. Does this allow -- remote monitoring and other things will allow orthodontists to see more patients or be more productive? Is it -- do you think that eventually, over time, this leads to increased share gains for clear aligners versus wires and brackets?

Well, when you look at the big picture, and it's a good big picture question. Our technology, the vision of the company and as it progress, we know that clear aligners, Invisalign will be the standard of care. It provides movement of faster, more comfortable for patients. It gives -- Invisalign gives our doctors the capability to move teeth efficiently, predictably and in the end gets to that right result. We know that this is the future of the technology built on digital technology. As we have with the pandemic and the crisis that it brings, that does -- a crisis like this doesn't create new things. It just accelerates existing [Audio Gap] as more and more volume ends up being done in teeth movement done with Invisalign because of the benefits that I offered. So that pandemic, the crisis that we have accelerates trends that are happening. But when you think of what's kind of the macro picture is happening, people are concerned. They're concerned about the spread of virus. They're concerned about an outbreak that could happen. So many patients will take the view or can take the view that they want to be able to be not be impacted by something not have to go out, perhaps, be able to have some of that treatment started with doctors. And then there are aligners, maybe they just pick them up or they get refinements with minimal activity or minimal interaction with their doctors. Doctors want the same thing as well. They want to be able to transact and support their business, and they want to make sure that they have a steady flow of patients, having patients that are providing through Invisalign, much more of a secure and really steady source of income versus wires and brackets where it's so dependent on getting to the office and the interaction there. And in some cases, if something is locked down, you're not able to get to the office. So -- and then I think then from a parent standpoint, especially with the teen cases, maybe they don't want to be exposed or don't want their kids necessarily exposed. So there's a wide variety of benefits that this provides. But fundamentally, we have the digital technology for now and in the future. And some of that crisis really enables us to grow that.

That's helpful. Do you think that this behavior will impact the teen market more, the adult market more? I mean who do you think will be more likely to move. I mean, at the end of the day, it's also partly the orthodontist's call, too. And I'm guessing in your conversations or your sales reps conversations, there's been some feedback with that. Where -- what part of the market do you think moves first in this sort of inevitable tide shift. Where do you think we start to see it first?

I think, as we mentioned, some of the teen cases, just from a timing standpoint, you're kind of in that teen season in U.S. and in China. So you're going to see activity with teen. But I think as you look at the broader market and the opportunities that we have in the overall market, whether it's mild cases as part of those $300 million plus potential patients, maybe it's restorative work or other activity that is happening. It really depends on the doctor and the need of the time. But I think teens are much more time-dependent. So we'll see how the things play out. This is that time of the year where teens maybe from a necessity need standpoint based on the timing is critical. So that's how we view that.

You mentioned a couple of times that the advantage Align has with its strong balance sheet and strong cash flows historically. Yet I think last quarter, you had your sort of first year -- first quarter of cash burn, which probably is going to happen again in the second quarter. Just remind us sort of your availability in terms of liquidity? Is there any interest in the company in doing any sort of additional financing? Or will you simply stick with your bank loans or the availability there? Sort of what do you think you need? And is there an opportunity? Or is there a chance to be opportunistic in the current environment to pick up liquidity?

Kevin, from a liquidity standpoint, obviously, we have a strong business model, and you start with that any good business has. I've been fortunate to not -- as a company, not have any debt, be able to make sure that our financials are secure and safe, that allowed us the opportunity to pay for the exocad acquisition in cash. And we have a line of credit should we need that. But the foundation of the company is built on our financials, the strength of our balance sheet. And we'll obviously assess as things go forward, but don't need to change anything that we have right now.

That's helpful. I want to lead into an investor question. And if anybody who's listening and has any questions, there is a portal, which you can e-mail questions or you can just simply e-mail me at [email protected] any questions you might have. But there's one question we had from investors which is that a lot of your competitors have come out and have announced pretty meaningful cost-cutting programs, elimination of headcount and the like, shutting down business lines. Obviously, your company, you didn't announce that you -- the cost-cutting plans are much, much simpler, putting off CapEx and the like. Is this going to end up being an advantage to you long term, meaning when you come out of this, is there opportunities for share gains? I don't want you to talk necessarily about your competitors, but what can you do -- what can your sales force do if they're fully engaged to help win more share?

That's a good question. So when I think about just structurally as we kind of looked forward when the pandemic hit and so on. And like you said, many companies did make some more drastic cuts, salary reductions, headcount reductions. Remember, we're a company, we're built on solid financials. That really was growing when we talked about our long-term growth model, 20-plus percent. So when we -- some of the restrictions or cost controls that we had in place and still have in place is -- would just limit the growth. You don't add people. It's not a matter of reducing when you're built as a company as we are to be able to grow that requires adding people. When you don't add people, you can really start to modulate some of that spend and be able to adjust for changes in growth. When we look at the company and the opportunity of keeping our salespeople, keeping our operations, the engineering going and so on, we're able to start coming up with during this time great visualization tools, productivity tools and some of the products that we talked about. Having care, remote care options for our doctors to be able to help them be able to treat and check on patients during this time. That's a tool that's going to really be helpful in the future. Be able to provide that training to doctors, to be able to help them. They'll continue to train in a different way, but allowing them to train and our sales group are working with those doctors during this time period. So whereas others have taken the approach to cut, we take the approach to slow our growth in terms of adding people to really be able to provide tools and the ability for our doctors. And as we start, we think we can restart fast. It's not about bringing people back and getting them set for -- to grow, again, we have people already here, and we can instantly turn that on. So it's a different philosophy, but our financials, our balance sheet, our other parts of the company, the growth of the company allow to have more flexibility.

I got a couple of other investor questions that have come through. How should we think about any promotional activity or flexible payment terms during this period of time let's say, the next 6 to 9 months or longer, however long this lasts? How do we think about this impacting ASPs, margins and cash flows for the business? And just general relative to where we were, say, a year ago?

Well, if I think about our business model, we have flexibility within our business model to be able to drive increased utilization, whether it's on the orthodontic side or the general dentist side, that increased utilization, and we've had promotions and run promotions as part of our history. We do that all the time to be able to drive that utilization, whether it's on the low stage activity, where we want to drive a certain amount of utilization, either through products or promotions, and on the more complicated cases to be able to drive that utilization because we start with the fact that in every market that we're in, we're vastly under-penetrated. We want to make this the standard of care. So there are certain types of promotional activities that we have. As we've said a number of times, you can get -- when you look at the overall ASP, it can be a bit misleading because when you drive into the $300 million plus potential patients with their doctors, that -- in many cases, that are at a lower ASP because they just aren't as complicated of cases. And that will drive rate lower. But we also talk about a lot about the gross margin. And at those more lower end cases, they come with a higher gross margin, less additional aligners to support not as complicated cases and give us a gross margin. So ASPs will be adjusted or changed based on some of that mix that we have, whether it's geographical mix or product mix. And that's how we expect going forward. But enough promotions we've been doing since -- for a number of years, and it's really to drive that increased utilization across the portfolio. From a financing cash standpoint, as we had said, helping our doctors weather the storm and as they grow with us, perhaps we give extended payments so that they can continue to grow and don't have to worry about paying everything back in a short period of time. So there's some flexibility there and then working some of the external financing to really make sure that those patients coming into doctors can come with the financing in hand. And as I said, that helps everybody. It helps doctors with their cash flow. We get paid right away, and that patient has flexibility when they go into care.

So just I got a couple of rapid and I hope these are rapid fire, but a handful of investor questions. When it comes to cash flow, are you opposed to making this an investment year, given that you may have negative cash flow for a chunk of it?

I think we look at our structure and our strategy as we want to continue to grow our company. We want to stay in the -- in this orthodontic space. It's vastly under-penetrated. We're making progress, but we have a ways to go. So we're first and foremost interested in growing our share in this category and doing things to help. We have got a lot of opportunity to kind of invest still within our business to grow, and we'll continue to. But nothing out of the ordinary. We know that we have an opportunity to grow our market share here, and that's what we're focused in on.

That's helpful. Have you -- I mean, Align has been around through economic cycles, but we've never seen anything like this. Have you tried to model out the sensitivity to higher unemployment and where the unemployment is coming from in the United States and globally and how that might affect your demand?

Yes. Like you said, it's tough to model things like this. What we do see is things vary region by region, within countries and within states. We see that teens and some of that growth, it becomes a little bit less discretionary. Of course, really, in the end, every product is discretionary in the end. And Invisalign is no exception to that. But as we start to see some of that care that's needed, as people have put off treatment, people have maybe even saved for some of this and they put money aside for those treatments, especially for teens. Those are the areas that we still expect to be stronger. Other areas, it will depend on the kind of the financial needs that those patients have, and associated with doctors. But there's a lot of flexibility from a financing standpoint that doctors can help provide external companies can help provide that really, in the end, giving those lower monthly payments, making them much more affordable even in these tougher times, it makes things easier, and it becomes less of a financial upfront burden for some of these patients. And much more manageable on a monthly basis. And that's some of the things that we can help from cash flow to our doctors, and that's some of the tools that we can provide to -- with those doctors, patients to be able to help them give them financing options.

Great. I think we're just about out of time. So I think we are out of time. John and Shirley, thank you so much for joining us today. Thanks, everybody, for listening in. Have a wonderful day and first day of the UBS Health Care Conference. And best of luck to all of you. Safe and stay healthy.

Great. Thanks, Kevin. Take care.

Thanks, Kevin.

Thanks everyone.