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

Good afternoon. Jon Block with Stifel. We're sticking with the dental theme and coming off the doc panel and moving to the companies. And we're fortunate to have Align Technology joining us today. We have Joe Hogan, CEO; John Morici, CFO; and Shirley Stacy, Vice President of Corporate Communications and IR. A long list of topics and questions to ask.

And so Joe, I want to actually start things off a different approach with Invisalign virtual tools. We did some recent checks and we see the demand for a platform like this. We had the majority of high-volume providers using some form of communication to hold remote virtual check-ins with their patients during the lockdown, it looks like you guys accelerated your tools platform rollout. Maybe just talk to us tools, what it is and how that differs from traditional forms of communication, like just a doc taking phone -- and using the phone for pictures?

Yes, Jon, we did roll that out, we were hoping to get another 6 months to get that platform more solidified. But fortunately, when it went out, it was robust enough, and a lot of our customers are using it now. We have 6,000 globally using it, 3,000 in the United States, which, as you know, Jon, in this industry, that kind of rapid uptake is kind of unusual. What the tools process does is, it's broadly around workflow and visualization. So the workflow goes through IDS, our Invisalign doctor system, and that's how you initiate any episode with Invisalign. You start by iTero scan or whatever, but it all goes through our IDS system. And so we've worked with this -- the virtual system to work through IDS. And there's an app on IDS, just click it. And a doctor -- there's 2 parts of this. One is doctor can do a Zoom call, which is kind of just a FaceTime, kind of deal to assess a patient's viability or to check to see how a patient is doing at any point in time. And then secondly, there's a patient tool, which -- there's cheek retractors used to allow you to show enough of the teeth to take a few, really, iPhone shots, and for a doctor to be able to assess if a patient’s ongoing treatment is in line or not. Now when you talk about -- some docs are using this whole heartedly. Others are waiting for the tools to mature in some way. There's a lot of work we're going to do with this platform in the next 6 months to improve it and get -- screen a team on it in a big way. But this is a big part of our Invisalign digital platform. And in this case, it fits well obviously with the COVID environment and not having to have patients come to the office, if they don't have to come to the office, or you just can't see them for infection control reasons in some way. But we'll facilitate this with artificial intelligence, machine learning over time. It's basic image recognition that we have a core competency in. And we'll be able to take a look at these patients through those pictures and be able to tell a doctor, by default, if they should look at these patients or not and not have to look at everyone. So it's workflow, Jon. It's a lot of technology. But it's, again, an extension of our digital platform that really takes advantage of a digital system versus analog.

That's helpful, Joe. And so what does the Invisalign case look like longer-term with uptake on the remote platform? Where I'm going with this is a noncomprehensive case, hey, 3 to 4 person in visits, and you don't need more, and maybe comprehensive is 5 or 6 times coming to the office. When you look out 12 to 24 months and you get more and more people on this platform, is that how you see this evolving over time?

Yes, I think it will evolve. Remember, it's always doctor discretion, Jon, how they want to use this, right? And we have doctors today that give you all the aligners at one time and they ask you to come back in once or twice, even without the virtual treatment but -- I mean the virtual capability assessment. But with this, what it will allow is -- even with a product like iGO, we talk about just 3 doctor office visits, and what this would do is just assure along the way in the midterm aspect of that clinical episode that if the patient needs to come back because they're out of line in some way. And one of the biggest reasons is compliance, is -- are patients really wearing their aligners to the extent that they should be wearing their aligners, the 20 and 22 hours. And this is -- and this helps compliance, too. We know that through our work that if patients know that they are going to be checked in by the doc every so often, it really reinforces patients' compliance around those to keep things on track. So Jon, what's it look like long term? I think long term, it looks like a comprehensive case, you come in once for a scan, you come in again to get your, probably, attachments in some way. And then if you don't have an attachment adjustment or any additional IPR as part of that sequence, you're looking at a 2, 3, 4 touch kind of an episode even on very difficult cases, if a doctor, again, wants to work that way. And then again, it's in the doctor's hands as how they want to utilize it.

And it's interesting, Joe, because we just has this doc panel, so literally I'm just coming off of that. And I've been following you guys for 12 years. And Dr. Hamilton threw out something that I've only heard 2 or 3 times, which is when I asked him how he prices Invisalign versus wires and brackets, he said on par or in certain cases, he charges more for wires and brackets. If they look at the case, and they know it's pretty straightforward, they know they're going to have to barely see the patient after the first couple of visits, he charges more for wires and brackets due to the efficiency. So it seems like that's what this remote platform can do is just further highlight the workflow advantages of Invisalign and maybe help you get around that friction point that's been there for years that "your lab fees are higher than of wires and brackets," is that fair?

Yes. I mean it's fair. That's the momentum you had hoped for, Jon, in this whole thing. I think it really comes down to how much a doctor really values their time. I have always felt a doctor standing over a wires and brackets patient for 45 minutes every 2 or 3 weeks, but thinking they're saving money because they only purchasing the wires and brackets for $300 is kind of crazy because their time is worth thousands of dollars an hour when you think about the capability of an ortho or GP. And so it's -- this just allows, I think, as you indicated, it's just more apparent that you can actually leverage this digital process to be more efficient in your office and more efficient with patients.

Okay. Great. John, I'm going to pull you in, in a little bit, but I want to stick with Joe for a moment. Debonding -- in our recent checks, we also explored, what I think is a relatively aggressive approach in the marketplace, with some orthodontists, not many, but some actually talking about debonding recently started wires and brackets cases and opting to put that patient in Invisalign due to the workflow advantages in light of COVID-19. So let me ask you sort of real time, anecdotally, Joe, are you hearing about any of these cases, either in the U.S. or maybe in other regions like APAC?

Oh, well, I mean, we hear about it all over the world, as doctors talking about this, Jon, we've had debonding programs in Japan for years, and they've been pretty successful. Now that had nothing to do with infectious diseases or anything. It was just patients that were in wires and brackets and wanted to go into Invisalign, we debonded and put them in. So anecdotally, are we hearing this? Sure. I mean if you're a doc, too and you couldn't track your wires and brackets patients and do anything for them during this whole lockdown. And there's concern about section -- secondary infection rates and all going through the country. I think docs, from a workflow standpoint, will consider this. And then long term, I think it's less of a debonding, really, discussion, it's more of a what percent of my practice do I want to do digitally, and we hope that COVID helps to push them in the right way, too.

Okay. And John or Joe, just when I think about if I'm a doc, that would be a double hit paying for wires and brackets and the Invisalign lab fee for the same patient. So have you guys implemented from a pricing program perspective? Is there anything official in place from Align to help that doc navigate the additional hit on the lab fees from Invisalign for debonding?

Yes, we have some programs that we're announcing, Jon, that can help to facilitate that. I wouldn't worry about it from a long-term ASP standpoint. It's just more of a reflex of trying to help doctors through this COVID period.

Okay. Let me shift gears to Invisalign Swift. And so we heard some chatter about this program back in our checks in February. We did some work, early work, but what is it, hey, it's a lower acuity, it's 14 stage aligner sets, it's just under $3,000 for the consumer, or importantly, $75 per month. And you ran a pilot in Arizona. And I know COVID hit right around the time of that pilot. But Joe, can you talk to the learnings? In other words, is the $3,000 price point? Is that the right hit for the consumer? Is the $929 lab fee, the right price for the doc? Maybe if you can just discuss that.

Yes. Jon, when you say it kind of hit with COVID, it was like COVID dropped right on top of it. Jon, you couldn't have picked, in the last 15 years, a worse time to launch a product like this, right? To say that in like 3 days or 4 days, we got enough of a signal from our advertising and whatever to tell you, if that's the right price point or not. Now we think it is as far as the price point to the patients because obviously, we've done a lot of work in that area. We had a lot of doc uptake on it, too, a lot of excitement in the Phoenix area about doing that. So we're going to have to go back to that and run that play again. But I don't want to do it in the middle of the COVID crisis. Right now, we're just trying to work with docs right now to get them back on their feet and to get their practices back at equilibrium, and we'll revisit that later this year or early next year, Jon.

And what I heard, Joe, from some docs in that pilot is like, "Hey, look, it just got feet in the door, right?" Like whether it was Swift that they proceeded with or iGo or Moderate, then it was left up to the consumer. And so that's the goal here, right? It's just sort of bring eyeballs to the offering, let them know that there is an affordable option. There could be arguably a monthly payment plan, but then get them into the docs offices and see how it shakes out across sort of a wide array of lower acuity offerings that you have at the company. Is that fair?

Yes, that's fair. I think what we've learned over the years, Jon, is that patients, they have an opinion, too. Doctors have an opinion, patients have an opinion. And I think Invisalign has been pinned in a corner one-time often is a very expensive $5,000 to $7,000 kind of an episode. And many patients don't understand them. And we've been doing low acuity cases for years, 15 years, we can address a lot of the malocclusions that are out there. And so just what you said, getting patients in, having a conversation with a doctor, they might want a low acuity kind of episode or they might understand that their bite is an issue, and they want to go for a full episode, but how do you really get engagement between consumers and doctors? And that' the goal.

Okay. China. I want to go to China, first long-term and then more as a leading indicator. So long term, from an analyst perspective, I can't figure it out. I mean the long-term growth rate has been vexing certainly. You're growing -- hyper growth 60% year-over-year and then it [ decelerated ] to 20%, and then you had a modest balance before COVID took hold. I would just love your current view of that market in a normalized environment? Where I'm going with this is, when we think about China, Joe, is this still Align is devoted to 20% to 30% top line growth, right, in your long range plans?

That's correct.

And China should be a premium to that top line corporate growth rate.

Oh, yes. Definitely. And Jon, look, full treatment planning capability over there. We're ramping up rapidly on the manufacturing capability to make sure, and in our IT tools making sure that they're specific around what China requires from an overall standpoint of patient protection on identity. And China, it's a big market. Yes, we were growing 60%. We dropped down to 20%, a lot of speculation in the marketplace. We were losing share Angel Align or whatever. That wasn't -- look, we have share -- trading share with Angel Align back and forth, I'm sure in areas we wouldn't even know, right? But this was primarily an economic issue that we saw in China. And patients were going back to wires and brackets because it was about half the price of what an Invisalign episode is. We're happy to see it snap back, the 80%, so that came back in the -- we announced at the end of the first quarter, and we're optimistic that we'll continue to see that play out. But this is us, I think if we make the right moves in the marketplace, we have the right doctor relationships, we expand to those Tier 3 and Tier 4 cities we talked about a lot. Yes, our growth has to be accretive to what our normal 20% to 30% growth rate is for the business.

Okay. And part of that is, I think you recently added roughly 100 reps in that region. So what are they attacking, Joe? Is it, hey, they're going deeper in the current account and trying to increase the utilization? Are they going after new accounts? You always hear about Tier 2, Tier 3 cities that were more sort of greenfield opportunities for you. Maybe you can talk about where the reps are focused in order to help reaccelerate volume growth?

Yes. It's -- first of all, there's a line of demarcation between public hospitals and private institutions, right? And so that's where you'd start. So regardless if you're in 3, 4, 1 or 2 tier cities, you have that line of demarcation. So a certain amount of those assets, those salespeople will go in the private, certain of them will call on public institutions. And then secondly, we're actually -- we have more opportunity in Tier 3 and Tier 4, and we allocate some of them that way, too. So we get a great return on investment with our salespeople in China, too, Jon. It's a real quick return. John and I understand it well. And we know it's a good investment at the right time.

Okay. So that's sort of a long-term China. I want to shift gears, stick with China, but more leading indicators. So all eyes are focused on China. They were first into this COVID-19 mess, the thought is they're first out. On the call, you guys gave some helpful data points. The fact that China case receipts in April were about 80% of the pre-COVID volumes. John, you talked about, hey, remember, there's that lag between case receipts and revenue rec, maybe if you want to remind us there because I think it's an important part? And then, Joe, is that the analog that we want to use on that sort of 3 months later, you're running at 80% of pre-COVID? Or when we extrapolate that to the U.S. and Europe, do you think we want to be a little bit more conservative there just because of different regions, lifestyles, et cetera?

Hey, Jon, I've always been careful in my career to extrapolate anything from China and the rest of the world. It moves fast, it moves with purpose. And I think what you're seeing in the western world, even take the United States and divide it, right? How fast New York and California come up versus the Midwest and southern states is going to be different. Because there's a cultural aspect of healthcare markets throughout the world and how they deal with things. So John and I refuse to use China, and we're happy with that vector, we're pleased to see it spring back so much. But we were very cautious about trying to use that and project them on other nations right now.

Right okay. And so maybe just stick to the U.S. if it's -- if we climb back to 80%, but it's not 3 months, maybe it takes longer, what are you seeing in the U.S. right now, John, I'm just curious, any notable differences? You just called out California and New York, reopening slower versus many of the other states. But any notable differences with the orthos and the GPs and how their volume is returning? Are you seeing one segment of the business returning quicker than the other when we think about those two?

Jon, we don't want to quote anything out of period. But I'd say, logically, we should project that orthos would come back faster than GPs because GPs obviously have so many invasive procedures that they have to worry about how they set up with COVID. That doesn't mean that orthodontists have to think differently. It's just it's not as an invasive procedure. Now if it's wires and brackets, obviously, there's some issues with that and some things that they can address. But their chance to go digital with us, obviously, and avoid some of that is pretty big. So I would expect that you would see the market in the United States come back faster on the ortho than the GP side but not phased in a big difference between the two. But I think orthos will lead.

Okay. I want to get back to new products and innovation, and then I've got a couple more topics to get through. But your products and innovations, you've got Element 5D out there in the U.S., congrats guys. Finally got it through the FDA. Earlier, Joe, you talked about, look, I don't want to go crazy with Swift in the midst of COVID-19 pandemic. How do we think about you guys rolling out 5D? Is that something that you do broadly here in the near-term in the U.S.? Or do you wait until COVID clears a bit before making a bigger push there?

No. I think we push hard now. I mean a lot of our patients -- I mean our doctors have been conditioned to this product line because it was approved all over the world, before it was approved in the United States. So anyone that's out there that's on any kind of blogs globally understands the capability of that product line. Secondly, this is such -- capital equipment purchase is such an important purchase in the sense of what you're going to do, these are big expensive purchases. And NIRI technology, which is the near infrared technology, allows you to see cavities or caries in places that you honestly can't see with your naked eye. It's pretty amazing technology. And it's not a -- the wand is the same size. It's not sacrificial with speed at all, Jon. It's all done on one process. So we think it's really important if doctors are considering buying a scanner that they really understand that this is an option right now. And obviously, it's more akin to the workflow of a GP than it is an ortho, but some orthos want to know if their patients might have a curious issue too that they should send to the GP first before they begin treatment. So we'll be all over pushing this. Swift is a different thing. This is something that we think that we got to push now because you don't want to -- doctors coming back to us in 3 months and saying, "Hey, you sold us this, but you should have sold us this". You don't want to be in that situation with that kind of a capital item.

And even in this environment, it seems like, Joe, because it's novel, it's differentiated. You still -- even in this environment, you can still have a decent appetite for 5D, it seems. Is that fair?

Yes. No, that's fair.

Okay. Okay. John, for a moment, we try to have a pretty good build on our scanners and services model. And I've got your scanner ASP, just calling it up around mid-20s on an ASP one. If you can let me know if that's right, $24,000, $25,000. And then on 5D, what do we think about in terms of that ASP premium of 5D versus your other portfolio of scanners.

Jon, we plan for about $10,000 higher ASP than kind of the traditional -- I mean, as Joe said, with the near infrared technology to be able to see inside the tooth and provide more diagnostic capabilities. That's what it would list at, and then we'd have to see where the pricing ultimately settles but higher to start with.

Got it. And my $24,000, $25,000 baseline overall in your current portfolio is a good one?

That's a good baseline.

Okay. And Joe, if you don't mind taking a minute or 2, just talk to us about how exocad fits into the equation? I don't think anyone's really asking you that too much, too often. Again, I've been following you for 12 years and you made one other big acquisition, and it was Cadent, and I remember the company being crucified for making the Cadent acquisition. When I look back at things, it was probably one of the better strategic moves in the past decade in terms of where it positioned you long-term with digital dentistry. So maybe if you don't mind, just talk to us about the acquisition and why you're really excited to bring the asset into Align?

Yes. Jon, it's -- you have to start with the workflow of a GP, and workflows of GP are very dependent upon labs. And the digitization that we talk about in the orthodontic marketplace is going on in dentistry, as you know, with Sirona and all I see you write about and you talk about it. That's a big deal. And think about in this COVID environment, too, is that analog practice, taking an impression and shipping it in the mail and some lab picking it up and fingering it and figuring out how to go to build a wax model out of it. And I mean that is one of the most antiquated procedures that you can think of that exists in medical devices today. What exocad does, and there's only one other competitor in the world that actually can do this, is they have terrific software and great libraries that unite labs with practices through scanners. That's why iTero stands front and center in this. So having this capability, there's so many things that we can do with it. First of all, it legitimizes iTero in that workflow, that incredible -- it's a critical workflow between GPs in their labs. Secondly is it brings digitization to those practices and to those labs in a way that you really couldn't do by yourself. And this is sophisticated software. I mean it's -- it can be different all around the world depending on what in APAC, what in the United States and what exists in Europe also. And so it -- and then in the future of this, when we think about design architecture of the product is rather than just going to an ortho to have your teeth straightened or whatever, you'll see a lot of aesthetic dentistry going on in the GP community that will allow you to stage these things. Meaning you put these things together in a software program, you understand when you're going to straighten teeth, when you're going to move teeth to give space to save enamel on existing teeth that are there. When you'll place a crown or when you're going to place any kind of surgical procedures that's going to go on with implants, you design that all on a screen and implement that gradually. Sometimes between an ortho and a GP, sometimes at a GP. That kind of software capability with us and them we can bring that to marketplace closely, too. So it's this liquid short term and long term and a very global business, and frankly, a rare asset, given that there's really only one other company in the world with that kind of capability.

Okay. Perfect. Great color. Thanks for that, Joe. A couple more topics to hit on. One is competition. And I didn't think I'd be talking to you guys for 20 or 25 minutes at a 30-minute segment and not hit on competition. So all it takes is a global pandemic for that to get out of people's minds from an investor standpoint. But maybe just talk to us, any new developments there? Is there a company, Joe -- when we think about, call it, the half dozen clear aligners that are out there and most of which have now been out there for 2 or more years, is there anyone that has a little bit of a neck out in front? And I say that knowing that ClearCorrect, being Straumann, been out there for the longest. But when we think about the other 4 or 5 "new entrants", is there anyone that's resonating more than others when we think about the competitive landscape?

Well, no, there's not one that really stands out. I mean ClearCorrect, like you said, because of that, the history of ClearCorrect and where they've been, obviously has been in the market and it's a certain amount of viability at a certain quality of doc, clinical kind of episode. And then Envista coming on with their Spark Clear product line, but there's nothing that stands out on either end, Jon. I think what's often missed, and we get this question constantly about competition that's been going on for 2.5 years, and we stick to what we said so many times. It's difficult to do what we do. You put together a digital platform to have viable treatment planning, true treatment planning that you can count on to deliver the kind of cases that are delivered, and you can get it in a time frame that makes sense, to have the kind of manufacturing that you can get this product to you in a quality, FDA kind of a way. And then the digital platform we just talked about with iTero and the capability we have with virtual platform and what we're doing in the eminent launch of 2D, 3D, where right within a case, you'll be able to take the claim check that you've seen, Jon, even on different screens and different things and interface that with a person's face in some way. And the application that we have helped, doc loc, how we drive awareness of consumers for our brand. It's a big -- it's just difficult to do this in scale. And it takes time. And I think we're all seeing that. And again, I'm not seeing one competitor really stand out amongst the others right now.

Okay. And are you actually seeing -- you never seeded a ton of clear aligner market share in the first place, but we've heard some chatter out there about certain divisions of other companies when we think about what they're trying to cut back in the current environment and preserve OpEx, they've actually looked at their orthodontic division, they've made some cuts. So have you heard about some of that with some of your "clear aligner competitors"?

You mean cuts as far as our -- the competitors for their...

I'm sorry. Yes. They may have had, going into 2020, an initiative to build out their orthodontic platform or initiative a little bit from a headcount perspective. And now due to COVID, they've actually pulled back from those plans and arguably eliminated some sales reps in that specific area.

I think what's visible is we've seen -- in different parts of the world, we've seen some sales forces affected by this, with some competitors that are coming out in that way, too. I got to guess also with some significant cutbacks by our competitors, too, that has to hit them in the technology area also. But we can spend a lot of time talking about that, Jon, and whatever. But remember, our balance sheet was really strong, even with the acquisition we did. We still feel really confident about our cash balance. We haven't had to lay anyone off. We could keep our salespeople in place. We can continue with our programs that are so important in building out that digital platform. So I just feel great that we can start off on a front foot and as the market comes back with any real delays.

Okay. Okay. And Joe, you only make a move like that, I would think, as CEO, a couple of things: one, you've got a really strong balance sheet, which you do have. But two, you have some level of conviction that it is a little bit more of a pause in a pronounced prolonged downturn. And as we sit here today, is that fair? You still have that same level of conviction? I mean we hear about a protracted return for dental. Some of that's because of sterility concerns around hygiene and aerosols, which you're not arguably exposed to. So do you still feel good in that decision to full throttle, not make a lot of cuts and move forward anticipating that the bounce back in Invisalign is going to be quicker to return than general dentistry, if you would?

I'd say more confident of it now than we were when we did it 4 weeks ago, 5 weeks ago, Jon. Because -- and you just have to see behind the curtain in the sense of just how important your sales force is and is seen. It's a high touch, Jon, as I mentioned before. You got to have a sales team that's ready to go and even reaching out to the doctors via Zoom calls or whatever doing this whole thing. We just put together a recovery package for docs that we have out there, too. It includes PPE and different things to help them put them on their feet. But -- and then secondly, the digital programs that you have to put in place to keep advancing your product line. Jon, you can't forget when you run a business that's this large, and it's growing 20%, 30% a year, you don't want to fall behind either, because if you do, it takes you a massive amount of time to catch up to. And so John and I are more confident than ever that we made the right call. And look, I don't think we ever thought it was going to be a de-recovery in that way but more of a protracted view. But given the breadth and depth of the company globally and what we can do from a clinical episode standpoint, we feel good about our chances on a rebound.

Okay. Great. And Joe one last one for you. Getting off, doing a lot of these doc calls that we have over here at Stifel over the past couple of months, you're hearing about what. I mean Invisalign grabbing higher shared share likely in 2021 versus pre-COVID because of all the workflow advantages. How do you preserve that momentum as an organization? In other words, how do you further it? So they don't go back to that analog mentality if and when virus fears subside?

The key to that is our program like ADAPT, Jon, and other kind of programs, which is Align digital practice and transformation is, once the doctor gets over 50%, 60% Invisalign, I'm talking about orthodontists right now, they don't go back. They really don't. They see how much many more patients they can process. They see how much happier their patients are dealing in a digital environment than an analog process or whatever. But until they get over that, that's key. So what do we do? We have to push as hard to incentivize these doctors as much and use this momentum to get doctors over that critical 50%, 60% threshold, so they can see for themselves how their practices can really flourish digital versus analog.

Okay, great. Perfect. Good ending, right on time. Joe, John, Shirley, thanks very much for joining the conference. Good to catch up with you guys. Best of luck in the back part of the year and look forward to catching up soon.

Thanks, Jon.

Thanks, Jon.

Thank you.