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

All right. Good afternoon. I think we're going to get started here on our next session. And as many of you hopefully know, my name is Jeff Johnson. I'm the Senior Medical Technology Analyst at Baird. Our next presentation today is from Align Technology, a leading manufacturer in orthodontics with its Invisalign clear aligner system. With us today from Align, we're pleased to have Chief Financial Officer, John Morici; and Senior Corporate Communications Manager, Madelyn Homick. John, I think you have a few prepared comments or you just want to go make a few overarching statements. Why don't I turn it over to you, and then we'll go into some Q&A.

Yes. Happy to take questions. I think -- and thanks for having us here. Appreciate the time and great discussions that we've had so far. I think when you look at our company coming into kind of the pre-COVID, we look at our company as being in a vastly underpenetrated market. We've been at this for 20-plus years, trying to turn orthodontics from an analog to digital process. We've made a lot of investments and improved our platform to be able to do so. Obviously, COVID hit impacted a lot, as we noted on our second quarter and so on, but we continue to make investments. We continued to make investments during the crisis, kept our people, didn't cut things and continued to make investments because we know we are in this underpenetrated market, where the vast majority of cases are still done with wires and brackets, and we're trying to change things to use Invisalign. The investments are important because as we recover we want to be able to start fast and aid in that recovery, and that's why it was very critical. And that's how we've gotten through this, and we're just anxious to get back to more normal world. But in the meantime, we're going to do everything we can to help support our doctors in this new environment. And I'm sure we'll have questions that you could have to get into any of these details.

Yes. Sure. No, well, I think a couple of comments you made there are kind of right in line with where I wanted to start the conversation, which was, as you said, it's been 20 years, you've been trying to kind of cross-mobilize or whatever the word is here about clear aligners and really push adoption. I think in the teen market, we're probably still only about 10% to 15% penetrated. I want to talk about the evolution of where that penetration goes over the next few years? But just to put things in context for investors, especially, I think 5 to maybe 7, 8 years ago, some of the headwinds to penetration may have been just outcomes: could docs get the finish they wanted; could they get the consistency out of the cases. But over the last 3 to 5 years or so, it seems like a lot of the technology has improved, the efficiencies have improved. More and more docs want to do clear aligners. But it also feels like to me, there's still kind of that hurdle of the parent. Is that in the real kind of adoption hurdle, you think, over the last several years? Or where is the limit? Why we're at 15% penetration? Is it convincing mom-and-dad or what is it in clear aligners right now?

Well, it's a great place to start, Jeff. So when you think about the orthodontic market, globally, 12 million orthodontic case starts every year and 9 million of those are teens. So 75% of the orthodontic cases are teenagers. And when you look at that marketplace, it's been growing a lot for us. Some of it comes down to products. We've improved our products to be able to have mandibular advancement to be able to move the jaw as well as straighten teeth. And then 25% to 30% of the cases, they have some jaw alignment that's needed. So that was introduced. We've had products such as Invisalign First, which can treat cases and create some expansion so that children, 6- or 7-year-olds, can have some space creators so permanent teeth can come down. So huge advancements there. We continue to advertise and make it more aware, becomes something that kids can recognize, parents can recognize as something that's available for them and provide the outcomes and get something to the doctor, so that the doctors understand this is a very predictive and very effective way to move teeth. So we've been spending on all that to try to improve the overall experience, and we haven't seen our market share increase. Still 90% of the cases are done with wires and brackets, and we've made progress, but we're still, say, 10% penetrated within that market. But usually, you have to get -- there's 3 stakeholders that are involved with teens. You have the teen themselves. He or she may or may not want to go into Invisalign. So you have to try to win that teen over: the advertising, social media, other ways to get at that. The parent is involved. The parent is who is ultimately paying for this, usually. And so that you need to make sure that they understand the benefits of this, the fact that the child is going to continue treatment and so on, and then you have the doctor. And again, it's the products and the training and other things. And usually, we have to win 2 out of those 3, and then you're going to get that teen to go into treatment. So we're continuing to pull the levers that make sense. We know that this is -- our product can help these doctors treat 80-plus percent of the cases that they see, day in and day out, for teenagers for all these complicated cases that I spoke about. And when you're 10% market share, you should have this opportunity to be able to grow, and we'll try to remove as many of the barriers that are still there to try to get that growth.

Yes. And I think it's interesting when you say getting 2 out of those 3 stakeholders or ideally even all 3. To me, the biggest change I've seen in covering your stock for the last 10-plus years and just in the last couple of years is the efficiency side. And it's now being able to take a case instead of 10 or 15 chair hours -- I mean, you're legitimately on some of these comprehensive cases, probably down to a follow-up visit every 2 to 3 months or case completes in 12 or 15 months instead of 24 months, so you are down to just 5 visits, something like that, at 20 minutes each. Talk to me about the efficiency improvements that I think not only are driving higher returns for these docs but this is, I think, what makes your stock so intriguing here is from a COVID perspective, being able to go to mom and dad, being able to go to the patient and say, "Hey, you only have to come in once every 2 or 3 months. You only have to come in for a progress check. We're not going to be digging around in your mouth to do a tightening of the braces, which is more intense dentistry over a 30- or 40-minute visit, something like that." So is there a coalescing here of that efficiency argument that's going to appeal to all 3 of those stakeholders or at least to mom and dad and the doc, both at the same time, that really could drive an inflection in your adoption rates here?

It's a really good question and a good to think about, Jeff. Like you said, pre-COVID, that was the goal. We were with our products, with the way to be able to treat patients, they would see -- a doctor would see a patient much less than they would see wires and brackets. By the very nature of wires and brackets, every couple of weeks, you have to come in to get something adjusted to be able to move the teeth. Whereas with Invisalign, it was pre-COVID. It was several weeks that you would have to go without having to come in and that doctor would just check on things to make sure things were progressing as he or she had wanted. Now in a post-COVID world, and part of the reason why we continue to make investments even during the crisis and shutdowns and so on was to accelerate some of the tools that would make it available to doctors so that they could do -- they could start a case and they could maintain and kind of visually see how that case was progressing with some of the remote tools and the visualization and other ways to be able to make sure that, that doctor's patient is -- their teeth are moving in the right way. They are moving and they are getting to completion. Things are moving. They can quickly see how things are progressing. And if there is a treatment modification that's needed, they bring that patient back in, but they are not in the chair just to see how things are progressing. You can be able to do that from home. So you can start a case in the office and then have a lot of tools to be able to check on things remotely. And I think in a post-COVID world, that almost becomes a necessity. You want to be able to alleviate some of the concerns that a patient would have for coming into the office in this world where they fear about getting infection. Parents would have that same concern for themselves and their children. And I think doctors in the practice has had concern where they get infected, the staff might get infected, then they have to shut down, and then that comes down to just a throughput standpoint. There are -- in the world that we're in now, especially for the doctors, they have to manage their practice differently. Now they have to worry about social distancing. They have to worry about PPE that has to go on and off when you come into the office. You've got to worry about waiting rooms where many times you're waiting outside the building or in a car or something and then you get a call to come into the office. So there's just a lot of changes that have happened that will affect that type of care, but we feel that the investments that we're making, the process that we're on to go from analog to digital really lends itself well in this post-COVID world. And we'll do everything we can to try to make it better for doctors and ultimately better for their patients.

Where do you think the follow-up schedule goes with virtual care, John? I mean, I think when we talk to orthodontists, at least pre-COVID, typically, it was an every 2-month, maybe an every 3-month, follow-up. Is virtual care going to get to the point where legitimately, these patients are just taking a picture of their progress to date at home? AI tools, we're going to look at that. Even take -- the doctor may or may not be involved, but AI will help decide, "Hey, you're fine. Check back in, in 1 month. Check back in, in 2 months, but you don't have to go physically back into the office." But what is it? Does it go from every 2 months to every 3 months or from every 2 months to every 4 months? Where do you think that schedule goes on the actual in-office visit standpoint?

It will definitely lengthen. I mean what we're seeing is patients will start at their care within that doctor's office, but then there will be an extended period of time where, like you said, the remote monitoring, we will be able to see -- doctor will be able to look qualitatively to see, "Okay, is that aligner sitting properly? Is the teeth -- are the teeth moving properly." The will be able to visually check. That's kind of where we're at now. Soon what we'll have is, through AI and machine learning, to be able to have that patient take a picture, we'll be able to turn that picture into a rendering that will show where the teeth are at and compare that to the treatment plan. So say you are on week 12 of your sets of aligners, that has a specific location of where all the teeth should be on week 12. It can now compare to that selfie that someone takes. And so quickly for the doctor, we'll be able to show the teeth that are moving properly and certain colored and then teeth that are not moving properly. So that becomes less of a qualitative and into a quantitative view of how things are moving. So that that doctor just has an added tool. He or she can look at it and see with their eye what's moved, but they will also be able to have essentially a visualization tool to be able to see how well things are tracking. And all that will lengthen the time that it takes to come back to the doctor and give them the flexibility to be able to treat those patients without having to be in the chair as much as they were in the past.

Any sense geographically of doctors in one country or region are, more or less, willing to kind of seed some of that oversight? And I want to be careful on that because I know they still have the oversight. But where do you think virtual care and these tools are going to really take off? Is it globally? Or are there any markets where this could especially play well to?

I think it's globally. We see that demand. When we've introduced these tools that came out right after the lockdowns in COVID, we saw adoption everywhere. Doctors were all looking for ways to be able to treat their patients effectively during this crisis. And it's really just an acceleration of the digitization that we have been heading towards. We -- the industry is moving from analog to digital. The crisis didn't necessarily create something new. The crisis has accelerated trends that were already happening. So doctors have taken this up. We see it pretty much globally, and they're finding ways to improve their productivity, reduce their share time, reduce the chance of infection to their staff for themselves and ultimately provide better care to their patients.

All right. And then I want to stay on teen just for a second, but any update on what you've been seeing from a recovery perspective here just in the last month or so? A lot of dental names, I know Patterson, Shine, even a Dentsply is not really applicable to your business or they are not correlated one-to-one by any means, but we've heard that July is so much better. August has held in at July levels. Any update kind of on what you've been seeing into August? And I think it was interesting that your Asia-Pac business actually grew year-over-year in 2Q. We know that the U.S. recovery has been maybe a couple of months behind China in some of those markets. So is that a fair read to think about the U.S. in 3Q being similar to where China and Asia-Pac might have been in the 2Q?

Well, Jeff, when you look at the recovery and what's happened kind of globally, it varies kind of region by region. Obviously, some were more impacted than others, and so therefore, the recovery is different. What we know, in all cases, is that an office needs to be open to be able to drive volume. We see the converse to that because in the April and May time period where the volume just dropped because you didn't have those offices open. Now you need those offices open. They need to remain open. And if they are, then we have the chance for volume and be able to see that recovery. So we talked about improving utilization in our second quarter earnings in June and seen some of that in North America, where we're starting to see some positive utilization come back. And those are things that we want to continue to keep our investments, be ready to go as that volume improves. You have some seasonality with teen we were just talking about. It's a little bit less discretionary, maybe over the summer because as teens get to that age. And it's a time in between classes and so on that they will go into treatment. So some of that plays into it from a seasonality standpoint. But ultimately, we're making investments to continue this growth. And that was consistent to what we had before COVID, and we're continuing to make those investments post-COVID, and we think that it will allow us to grow in this environment.

And to your point on seasonality, do you think that there can still be a normal teen season this summer? Obviously, we were just talking about your son at Michigan and my kids back in school now surprisingly in-person and that. Is there still kind of that normal teen season this summer? Or does home schooling and all that kind of throw that for a loop at all?

It's probably early to tell on that, but you have to think that some of that home schooling and kids staying at home might impact things, where I think there was more of an urgency in the past for a 2- or 3-month window into summer to get your treatment, get into treatment and then you start school and you're in person, then your life kind of continues. In some states, in some locations, that's still happening. But in other locations out here in California, there's less of that. Many of the kids are going to learn from home and be remote. Maybe there's less of an urgency for them to go into treatment right before they start school and they can still go into treatment later. So I think -- I don't know if there's a change in the overall numbers in terms of the orthodontic case starts. It just might be a question of when that actually takes place.

Okay. And if we shift over maybe to the GP channel. And I know teen cases get done in the GP channel, adult cases get done in the ortho channel. So it's not a perfect movement to just focus on GP in the lower acuity cases because some high acuity cases get done there as well. But that's where it seems like patient volumes have probably been a little slower to recover a little bit higher risk of infection in the general dental office, things like that. So is it fair to think that the teen business probably recovers faster and the adult or the lower acuity business could lag a little bit in the timing of that recovery?