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

All right. Good morning. Sorry, we're running just a minute behind here. So good morning. I think we'll get started. My name is Jeff Johnson. I'm the senior medical technology analyst at Baird. And our next presentation this morning is from Align Technology, a leading manufacturer in orthodontics with its Invisalign clear aligner system. With us today from Align, we're happy to have CFO, John Morici; and SVP of the Americas, Simon Beard. And we also have Madelyn -- you changed your last name on me, Madelyn. So now I'm going to blank on that because it's not on the screen, so I apologize for that, but we'll get it before the end of the presentation here. John, I'll turn it over to you for a few minutes if you have any prepared remarks you'd like to make and then we'll move right into Q&A for the rest of the time.

Thanks, Jeff, and thanks for having us today. We're happy to talk about the company. And as we talk about and we've seen in our performance, we're very pleased with our results over the last several quarters. When we look at the underlying opportunity that we have as a company, we talk a lot about the traditional orthodontic case starts, the 15 million-plus orthodontic case starts every year and the 500 million potential case starts that could happen with people who need some type of teeth straightening, we feel like we have a huge opportunity in that market. It's vastly underpenetrated. And we've taken the approach over the last several quarters, just like we always have, to be able to invest in that market, various types of investments, sometimes products, sometimes in salespeople, adding to train and access these doctors and then other marketing and so on. And we've done that throughout the time, throughout even this crisis and now the recovery. And we feel good about the way that we've been able to access the market and do things that we can control over this time period and put us in a position that we're at today.

Good. Well, great. Thanks for that overview. And yes, the last few quarters and really the last few years have been quite impressive. But I want to start on some shorter-term questions. I want to actually come back to that 15 million patient population number, the 500 million you mentioned. I want to come back to both of those in a bigger-picture way in a minute. But just from yesterday, we had a couple of dental companies present, Shine and Envista, we have Dentsply later today, had a few other kind of hospital-based companies present as well over the last day or so of our conference. And what's been interesting is there's a clear delineation, like those that -- companies that have hospital exposure, Delta variant has definitely caused some concern, some pressures on patient volumes, things like that. But from Shine, from Envista, it sounds like dental office traffic flow has remained pretty consistent throughout the summer from some of our aesthetic companies. It sounds like patient volumes have remained pretty steady over the summer. I know you don't give intra-quarter updates. But in general, how have you been feeling about patient volumes? I know your 3Q guidance did take into account some expectations around some more pronounced seasonality. We're not necessarily seeing that or hearing that in our surveys on dental or elsewhere. But I'd just like to get kind of your take as much as you can offer on kind of what you've been seeing in the last couple of months.

Yes, I think you're right. When you think about the opportunities there, I mean, there's always going to be puts and takes. You get some countries, some states get more or less locked down based on the Delta variant and others. It's not something that we haven't seen before. We know how to operate in that environment, where we're able to get into offices where we can. As long as those offices remain open, and broadly they have, and that's good. And as you said, many of the doctors' offices and practices that you have are coming back to 100%, 90-plus percent we see in most cases, and that's good. It allows us to get in and be able to talk to doctors to be able to help drive utilization, be able to meet with new doctors and do things to be able to help get them to understand the Invisalign platform and the systems that we have and so on. So broadly, it's more of what we've seen, and we know how to operate in this environment. And as long as those offices remain open, we have a very good chance to be able to continue to sell and be able to continue to grow our business.

Yes. Good. Well, that's good to hear. All of our checks or most of our checks, I guess, I should say, tend to be focused in the U.S. So it's just where our contacts are, and that makes sense. But outside the U.S., we did see a softer retail number out of China, retail sales number out of China this morning. Just wondering again kind of same thing, it is your second-largest market. Anything you've been seeing in China, it seems like it came back very nicely early on, it was an early recovery. Anything that would change that kind of gating of what we've been seeing in the last few quarters?

Broadly, no. I mean, when you look at China at this time, third quarter is -- it's mainly a teen season for us on the comprehensive side, so we see teens going into treatment. There are pockets of China as well as other places around, especially in Southeast Asia, where things get closed or they limit the patient traffic to some of these practices, public hospitals and so on, but broadly, nothing different. And like I said, we know how to operate in this environment. And China is a great opportunity for us. We know we've invested in China, as we've talked about, where we've put our first outside of the Americas manufacturing plant, treatment planning, training centers, a lot of different investments in that market because we know of the huge opportunity. It's a huge population. Most are done with wires and brackets. And we have an opportunity to really grow in that market. And so those investments and the growth that we've seen, we want to continue this. Practices have to stay open and broadly, they have. And as they have, I think the doctors are understanding the digital technology that we bring, patients are accepting this more and more. And we think that's a good combination for future growth.

Yes. Maybe two follow-ups on China, if I could, John. One is it is one of your highest, if probably not your highest, ASP market. You did have the IPO this year of Angel. Obviously, you've been competing against Angel for a number of years. So it's not like their IPO signaled a new market entry, anything like that. But I think as Angel has expanded, they do come to market with a lower price option. How comfortable are you with kind of your ASP trend in China?

I think when you look at China and how we've grown in China, it's typically been on that orthodontic side, the more complicated cases, teens, as I described it. And those are at a higher ASP. Where you see other competition on the clear line of sight, it's mostly on the kind of the more moderate to mild cases. And we have a product line that will compete in that as well, the non-comprehensive, where you have 5 sets of aligners, 7 sets of aligners, 10 sets of aligners to be able to compete in that market. So I think if you separate it out, like we try to do to say, "Look, look at comprehensive ASPs and compare that." And then look at it separately, when you look at non-comprehensive ASPs. We have a product portfolio that can compete in that market. Where they've broadly gone or other competition has gone is to maybe the Tier 2, Tier 3 cities and maybe on the GP side. And that's a perfect opportunity for us to continue to grow. Like I said, we focused more on the orthodontic side on many of those more complicated cases. But do we have a product portfolio that can meet the needs of our customers at all different levels. And you're right in saying we've been competing against Angel and others for years since we've been there. And I think it really comes down to in China why there's such an opportunity as it's a vastly underpenetrated market, on the teen side, especially low single-digit market share, and it's less about the competition across clear aligners and more about just shifting from wires and brackets to Invisalign. That's what we really see as our opportunity and why we continue to invest in China like we have.

Yes. Fair enough. And last one I had on China, just we saw the press release with Julie stepping away. She was always great to talk to, so knowledgeable of that market and helpful from an investor standpoint in talking to us each year. But one comment from the press release on that change that stuck out to me was it said that Julie is going to stick around through February next year as the company evolves the strategies for several of our emerging high-growth markets. Is there anything going on that we should talk about or that's worth talking about in kind of an evolution of your go-to-market strategy in some of the emerging markets?

No, I think that's just a reflection of the fact that we have talent within the company with Raj to be able to -- and he's operated in that environment for a number of years at previous companies. He knows that business in APAC, obviously a very diverse region. There's many different countries that make up APAC, China being one of the big ones, as we previously talked about. But it's having somebody like Raj within our company to be able to help out and Julie from the standpoint of being to help make sure that there's a smooth transition. So I wouldn't read anything more into it, other than executives move for various reasons. But as a company standpoint, we have a bench that can step in and really help us when those moves happen.

Yes. And I know there's puts and takes on all the different geographies, like you said. Australia and Japan are two of the markets that we keep watching closely, just some of the incremental restrictions, especially in Australia here more recently, Japan maybe a month ago or so around some of the Olympic stuff in that. But anything to talk about there? Are those markets still at least flowing from a patient visit standpoint? Or is everything shut down hard?

No, they're still flowing. And we hear about Japan, and rightly so, around the Olympics and kind of -- and I think -- and same with ANZ, a lot of those restrictions are travel into and out of the country. But when you're in the country, you have access to two things. You have to use your social distancing, PPE, vaccination, all the things that are going on when you're in the country. But a lot of the restrictions are around coming and going to the country. And so if that's the case, then those offices remain open. It's -- we're transacting. We're doing things that we've been working with them for the last 18 months during the crisis and now into the recovery.

Yes. All right. Fair enough. A couple of other short-term questions and then I promise you, we'll hit some bigger-picture, kind of more strategic things that I'm sure you enjoy talking about more. But we have heard obviously input costs going up for a lot of companies. Yesterday, a couple of our companies were talking even about resin costs, things like that. I know your margin guidance, at least down to the operating line. I think you were over -- a little over 29% in the first half of this year. What's your guidance? It's 3 points higher on a non-GAAP, so I think it's 27% to 28% in the second half. Does that take into account some of those input costs and some of those kind of things and some of the T&E that will be returning, things like that?

Yes, when we guide and we kind of give that update, we factor in all those, Jeff. And you're right, there's inflationary pressures across any global business like other companies face. But when you talk specifically about some of the inputs, resin, some of the plastics and so on, we have long-term supply agreements. Many of these agreements actually take price down in terms of an input based on how the -- how our contracts have been set up. So broadly, we'll face some freight costs, maybe some of the things that's just dependent on the oil prices. And you'll see some impact from that. But many of the other raw materials that we can control, we feel good about that. And even on the component side, too, I know you hear some shortages of certain types of components, especially like on the iTero side on some of the circuitry and batteries and other different things. Those are all things that we manage. We can manage by having more inventory. We can manage by having alternative suppliers as well. So it's factored in our overall. And I think the good thing about our company is it's very global, very diverse. You have a lot of different raw material inputs. But with the size that we are and the contracts that we have set up, we feel good about our overall inflationary pressure. And we have a lot of things within the company that we can do to offset that with productivity. So our guidance have factored all that in.

Okay. And chip supplies for iTero, not an issue right now?

Not an issue. I mean, obviously, we monitor it close. We want to make sure. I mean, that's a growing business that we have, and we want to make sure that we have that supply. But we have things managed in a place that we can manage some of that uncertainty.

Yes. And one thing we've been hearing on the provider side is just staffing issues. Obviously, some of these dental offices, the hospitals, and so it affects a lot of the different companies we cover, having some staffing issues. Anything you're hearing on that level, number one, in the ortho office? And more importantly, it seems like to me, if you are having trouble getting back some staff, and we've heard that clearly in some of the ADA surveys and what have you, that might play into the efficiency gains that Invisalign brings versus standard brackets and wires and things like that.

I could talk maybe overall. But I think maybe, first, Simon, it might be good to see -- talk a little bit about what you're seeing in North America and kind of the Americas around staffing and some of those practices.

Yes. I think, Jeff, it's -- it depends on the state. We've got some states that are mandated vaccination for health care employees. So I think overall, there has been some disruption. But I agree with what you say, which is I see that as an opportunity to essentially encourage more customers to use digital, which plays into the whole efficiency and productivity. But there are a lot of moving parts at the moment. But I think there is a theme out there. But I wouldn't say it's a huge topic at the moment, maybe more in GP than ortho, to be honest with you. But I think once again, it's very state-specific.

And overall, I would say, Jeff, we're not seeing anything different than we've seen in the past. I mean, there's things that will come up. And in the past, if someone had a COVID exposure, those offices were shut down as well, whether it's a doctor or the staff and so on. And we're managing through that. And we find ways to be able to make sure that when it's safe and following the protocols, we could be able to get our salespeople and our people from Align into those doctors to be able to see them. And you're right, from an overall standpoint, it really helps support the digitization of orthodontics, I mean, being able to be -- be able to serve in a way that drives productivity within the practice and ultimately that productivity turning into profitability. But COVID and kind of the restrictions and other things have really forced that upon doctors in many cases. And it's also created expectations for patients. They want to have flexibility. They want to be treated kind of on their terms. And the digital orthodontics gets to that, faster appointments, scanning, doing things in a way that gets them in and out quickly. They don't have to come back as much. They can get some remote monitoring and other tools to be able to see, check on progress and so on. So it really lends itself to where the market is really changing, too.

Yes. No, that all makes sense. All right. Well, good. Well, let's move on maybe to some of those higher level or at least more strategic points that might be more interesting to talk about. And that is, first, you mentioned that 15 million patient bucket of those kind of hard-core ortho cases that are performed each year, they come into the office every single year. 75% or so of those cases tend to be teenagers. We do the math, everybody does the math. We're probably, what, maybe 15% penetrated in clear aligners in that bucket. I think what's really interesting around that 15% number, and we've seen that move up from 10% to 15% in the last couple few years, is if you look at any kind of product adoption curves, 15% seems like it's right about that level where you move from early adopters into the, what it is, the majority or something like that. I mean -- and when you look at those adoption curves, when you get to 15%, there's a good chance then you're going 15% to 50% pretty quickly. Now whether pretty quickly is 3 years or 5 years or 7 years, we could all debate. But I mean, how do you feel about that kind of uptake in that $15 million bucket? Are we way beyond the tipping point and now it's just really into that core adoption phase of the curve?

I look at tipping point -- and I'll make two comments on that. One, I think tipping point, you don't know that you reach a tipping point until after. I'll say that as a starting point. But then I know that as we continue to push and continue to accelerate, we still have to spend 15% or so of our revenue on OpEx. And that OpEx is designed around removing friction. It's removing friction to make sure you have the best products and the money that we spend on R&D and developing new products is significant. We spend money to create the awareness and the marketing and brand and get people to come in asking for Invisalign by name. There's still a certain amount of dollars we spend for that and then having a sales coverage and people calling on doctors and being able to understand their utilization and find ways to get them to use more and more Invisalign and increase the share of chair for those doctors. So while we still have to do that, we're not at the tipping point. When we get to a tipping point or get close to that, you'll see that it's just less friction within the system, more of a pull from those doctors that just becomes what their standard of care is. And you're right, then I think things accelerate through, and we'll see the leverage and the benefits from that. And we're positioned, we're the company that set this up. Now we'll hit our 25th anniversary next year. There's never been more awareness in clear aligners than there is right now in the history of our company. And we're well positioned to be the gold standard, the clear leader within that type of therapy. And we're going to continue to do things, continue to invest to be able to find that right return and ultimately get us to that tipping point.

Yes. No, that's interesting. I mean, it's hard for me to believe we're not there. I appreciate your conservatism and your view on not knowing if you're there until you've already passed it. But when I look at those curves, and one of the things, when at least I read about all this kind of product adoption and what have you and try to stay up on that side of the business, is you have to have innovation, which you guys have clearly had, from SmartTrack on up to all the different attachments and Invisalign First and all the different things you've been doing. But then to your point, you have to drive value. And in my mind, that value is chair time to the doctors, even more so than the price of the system, things like that. So one, maybe Simon, this is a better question for you. But how do you see the chair time for Invisalign today for the average orthodontist compared to even Invisalign 5 years ago or 3 years ago and especially relative to braces today?

I think I kind of look at it in two ways. I think -- well, three ways, actually. I think, one, we've obviously delivered a lot of innovation around enabling customers and their teams to be more efficient and productive. So from that aspect, if you look at virtual care, if you look at the iTero scanner, if you look at like the Invisalign mobile photo uploader, all these things just take time out of the equation. We had a recent one launched about 3 weeks ago, which is where a doctor can now scan. And historically, they needed to scan and take pictures to submit the case. Now they can scan. And actually, we patch the scan together to form pictures and that gets sent straight. And that saves 10 to 15 minutes per visit for the kind of the initiation of treatment. So innovation has made, I think, a critical change for us. I think the second thing is you're always going to have customers who embrace that very quickly. They understand how digital technology can save them time and money, et cetera. And therefore, they've adopted different workplace. I think COVID encouraged more customers to do that. I think they became -- become more confident actually to reduce the number of visits that a patient needs to have. I've had a number of customers who said to me that they didn't really believe in this -- all this virtual stuff. But actually, patients love it. They realize that actually the less they see the doctor, the more value they actually attach to that treatment, which is a little bit of a paradigm shift. And so I think COVID really towed a lot of our customers there. And I think the third thing is we, as a company, I think we're better now than we were a few years ago about actually understanding how do we integrate this tools or digital platform within an account and take the whole practice on that journey towards a different way of working. So through programs like that, I think we've seen some great results there, where people have gone from 10% or 20% share of chair to 70%, 80%, 90% share of chair. They either do more cases or their work lasts, right? Because they just -- they're able to offer -- be more efficient with their ClinChecks. Their staff are doing slightly different things. So yes, I think it's continuing learning and innovation and then doctors seeing either the benefits for them, but also see how their colleagues are using it as well. Peer-to-peer is very powerful in this in this business. So yes, we definitely reduced chair time over the last few years.

Yes. Fair enough. And then if we move on beyond that 15 million, John, you mentioned the 500 million patient bucket as we think about it of those lower acuity cases tend to be the adult cases who didn't have orthodontics as a kid or maybe a relapse case, something like that. One, how much do you worry that there is a big pop of those kind of cases in the back half of last year and the first half of this year, just whether we call it Zoom effect, whether it's everybody was working from home and wanted to get that stuff taken care of before they go back to the office in the latter part of this year? Do we have to kind of think about a gap or a hole to fill as we get later into this year or early part of next year from that Zoom effect?

I think when you think about what the guidance that we gave and -- because you're right, last year, we started seeing some strong second half last year. And now we're anniversary-ing that and we're still being able to show, and we had said in our in our guidance, that we'd be at above the midpoint of our long-term growth model, so above 25% in the second half on a year-over-year basis. I think it's less about the pent-up demand, if you will, the Zoom effect of that, it's more of the overall opportunity. When you have 500 million potential patients globally, arguably more, and really the only way to access them on a scale basis is through digital technology. Digital orthodontics is the way to attack those. And I think when you look at the benefits that we bring to be able to provide what Simon was describing, the productivity at the dental offices, a lot of those 500 million-plus patients are showing up in the office for routine cleaning, cavities and so on. If they can also be scanned and as they get done with treatment, shown that, "Here's where your teeth have moved over a period of time," through iTero time lapse and then more importantly what your teeth are going to look like with some type of treatment and that can all kind of be covered as part of the normal treatment, those patients are right there. We can access them through our doctors. And I think that just -- it just kind of flows together and gives us the opportunities through our doctors to be able to access that market. And like I said, the only way to do that is through digital technology. And I think the key point that we provide to our doctors as well as those potential patients is flexibility, that they can get into treatment and they can get the treatment done the way they want it done with not having to come back to the office as much, being able to do things where they still get the care that they need but have more flexibility. And I think that's the key thing that we've learned from COVID that people come to expect, whether you're a patient or a customer.

Yes. Okay. Last two questions here in the last 2.5 minutes or so, we have one on DSOs. Obviously, you guys have had huge success on the DSO channel over the years. You did have one DSO move to a white label product from one of your competitors here recently. Just overall stability of your DSO business, you think that's going to -- one, does it continue to outpace growth in the rest of your business? The contracts, you feel good about that? Is there any risk of losing any other contracts over the next year or 2 that would at least be impactful to numbers?

Do you want mistake that, John? I think we feel great about our DSO business. We've got some fabulous partnerships out there, where actually we're dealing with really smart people who are in these organizations. So they come at it from a really kind of a win-win value perspective. They see what we bring. We see what they bring. And so we have good kind of synergies that we can work with them. I just see -- I see probably DSO like the normal retail channel, Jeff, which is there's still so much untapped potential. And we see a lot of -- really a lot of interest from those DSOs because what we offer is we offer an integrated platform. We offer a kind of a product where they can drive consistency, quality, efficiency and productivity. It's an additional service to pull patients in there, whether it's an orthodontic DSO or whether it's a general dentist DSO. So I feel really good about it. And we continue to kind of grow that business. And it kind of trends historically, like you say. It's a very, very buoyant area for us.

Yes. All right. In the last 30 seconds, just you've got the Analyst Day coming up in, what, about 5 or 6 weeks or so. Any reason to think, John, it might be time to reevaluate those long-range targets or anything like that? Or you feel good kind of with what you've been sticking with here in recent years?

Well, we'll update, we'll have earnings and then we'll get into our Investor Day and give any updates then. But look, when we think about our investments that we're making, we have those long-term targets in mind. We know in an underpenetrated market that we're in, the 20% to 30% revenue growth on a year-over-year basis and target 25-plus percent op margin. We'll talk more about the puts and takes at our Investor Day. But we're very pleased with the company's performance and how we're operating in this environment. And we really look forward to future growth opportunities. And we'll talk a lot about those at Investor Day.

All right. Well, something to look forward to. So all right. Well, thank you, guys. I appreciate the time. As always, it's good to see you. And as a reminder, our next presentation is set to begin at 11:25 Eastern Time, include AmerisourceBergen, [ iLife Healthcare ], Genocea Biosciences and Assembly Biosciences. Take care. Thanks, guys.

Okay. Thank you, Jeff.

Thank you.