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

All right. Hello, and thanks for joining Piper Sandler's 33rd Annual Healthcare Conference, again, in a virtual setting here this year. Hopefully, we can all be back together again in person next year. This is Jason Bednar from Piper's Medtech team, and I'm pleased to have with me today from Align Technology, Senior Vice President and Managing Director of the Americas, Simon Beard; VP of Corporate Communications and Investor Relations, Shirley Stacy; and Director of Investor Relations, Madelyn Valente. Team, thanks for joining us today. Thanks for being with us.

Glad to be here.

Thanks.

So just to get started here, I'll get started with questions in a moment. [Operator Instructions] So with that, why don't we get started? Simon, let's begin with the real-time development since the third quarter report and your Analyst Day at the GP Summit. COVID cases have been creeping higher here in the last few weeks in Europe, also in the U.S. We have some obvious unknowns with the recent Omicron variant. What are you seeing on the ground in those European markets like Germany and France? I guess, are offices still open? Are patients still pursuing orthodontic treatment as we've seen over the summer? And again, loading a lot here upfront, but it's super early and really fluid right now, but how do you see your business navigating the Omicron variant?

Well, I think you've kind of nailed it there with -- it's too early, really, to really understand what the ramifications are of the new variants. I think we've obviously experienced varying before with the Delta variant earlier this year. I think what we've seen -- we continue to learn over the last months, if not years, that as a business, we have to just focus on what we can control. So I think the key thing is offices -- if doctors' offices are open, then we can go about doing our job and do what we do best, which is supporting doctors. So we're very focused on this huge market, whether COVID exists or doesn't exist. There's a huge market out there. It's vastly underpenetrated. We've got very clear strategic growth pillars that we focus on as an organization. We continue to invest across the business, both commercially and also from an innovation perspective. So we'll obviously keep a close eye on what's happening across the world. But from a day-to-day perspective, we just like I say, focus on what we can control.

All right. That's helpful. And maybe a follow-up just on -- I know you've overseen the Americas now, but anything that you can speak to with respect to you've been sitting on all the executive meetings with the leadership team. I mean what's -- what are you hearing on the ground out of Europe with respect to some of those case spikes that we have been seeing in some pretty key markets like Germany, France, U.K. to some extent? The cases have been rising, is it still business as usual over there? Are they navigating through these waves like they have with past waves? Is this one any different? I'm just again curious from what your team is seeing and hearing on the ground over in Europe?

I think we're seeing and we're hearing what everyone else is hearing, which is -- yes, we're seeing spikes across Europe. We see in certain parts of the U.S. where we're seeing spikes. We're not seeing it impacting our businesses yet. As I say, I think the key variable in all of this is when a doctor's office remains open for us, as far as we're concerned, it's business as usual, which means that our sales reps can go out on a day-to-day basis and support the business. So we -- I think we've kind of been through a similar pattern several times over the last 2 years, and we'll continue to -- so there's nothing kind of peculiar. I think I'll go back to what I said right at the beginning, it's just too early to -- what we've learned through COVID is trying to predict these kind of things is nearly impossible. So I think we take it a day at a time, a week at a time. But we stay absolutely focused on what we can do to drive the business forward. And I think that's what I try to communicate to my team and I know Marcus in Europe is doing exactly the same thing.

All right. That's fair. And it's -- I find it interesting as we have these conversations around real-time challenges with business when your business is as well positioned as any really -- any dental company, at least to power through the COVID ways. I know the discussion 6 to 12 months ago at this time was how COVID has accelerated the conversion to digital, which makes a ton of sense to me, I'm totally there. But I guess, what have you seen through subsequent waves that have happened here. We're just coming out of one from Delta, maybe going into a new one. Are you seeing that conversion to digital still play out with each subsequent wave? And then, I guess, what does the utilization curve look like for those practices that have adopted Invisalign during the pandemic, how does that utilization compared to those offices that were utilizing Invisalign prior to the pandemic? Just curious if there's any -- I guess, any comparisons you can draw or any differences you can draw from those 2 adoption cohorts?

Well, look, I think in general, Jason, I think we've seen -- obviously, we're seeing doctors and practices continually -- continue to adopt digital. So I don't know whether the pace is kind of accelerate. We obviously saw coming out of the pandemic, a little bit of an acceleration there. But I think you can see from our last quarter results and probably our previous quarter results, I think a good measure of that is obviously through the iTero scanner. Once again a vastly and a penetrated market for us. So we're seeing great adoption of the scanner. Both doctors invested in more scanners, and other doctors buying our scanner for the first time. I think as far as kind of correlates in all the different variables that you raised is pretty different. I think we see -- we deal with 50,000-plus small businesses, and they all operate slightly differently in the U.S., particularly. So I think we're seeing strong adoption. Doctors who used a lot of Invisalign, we've seen them adopt it even more. And then we've seen doctors who have been below a volume, who've increased their share of share over time. So I think the adoption curve is just very, very different for different customer types, but certainly a huge amount of interest in our technology. We've spent a lot of time really segmenting our business over the last few years. That's been a really strong foundation for that how we allocate our resources from a commercial perspective and focus on those customers who are, I would say, further along the adoption curve from a mindset perspective. And then we developed a lot of programs to meet customers where they're at, both for Invisalign and iTero to really drive that adoption. So there are some customers who we've seen -- if you think about the second half of last year, we did the brackets buyback where customers were essentially getting rid of wires and brackets and invest in totally in digital than we did the swap as well where they had patients Invisalign brackets where they swapped patients out and put them into aligners. And that's been kind of varied. So I think we're continuing to see a trend of people moving towards digital orthodontics and that will continue. And I don't think we've got a correlation in the business that just each wave necessarily impacts that, but I haven't seen that data, but we're certainly seeing a continuing trend. And look, it's inevitable, right? I think the more and more people see the value, the convenience, both for them as clinicians, but also to their patients. I think we'll see more and more doctors kind of make that jump.

All right. Yes, that makes sense. And maybe dig it in here just a bit more. I mean you can speak just to what you're seeing maybe in the U.S. or North America plus Brazil, Latin America. Align has brought on a lot of doctors, new doctors to the platform over the last 18 to 24 months, that's definitely been a big focal point, probably an underappreciated point from investors. Could you speak to that for a moment from what you've seen for the region that you oversee? Maybe how has that trended quarter-to-quarter here over the last several quarters? And then how do you see that evolving here going forward? Does it accelerate as you focus even more resources on a market like Brazil?

Yes. Well, I'll talk about probably U.S. and Canada differently to Brazil because we're in a very different phase of our journey as far as we've only really been present for about 5 years directly in Brazil. I think in the U.S. and Canada, what we've seen, I think we've seen really consistently over the last year or so is just a really broad impact across all of the different tiers and segments that we operate in, both ortho and GP. So it's not been one particular area. And I think in many ways, that probably talks to a broader adoption across the marketplace. And we see that continuing. We continue to train doctors. We're investing a lot in early career orthodontists. So orthodontists who are just graduated out of orthodontic school. So we'll continue to do that in North America, training new doctors, but then also supporting doctors who are either at an earlier stage of their digital adoption and then helping doctors who have 70-plus share of share to drive even more efficiency, clinical confidence and also patient throughput. We drive patients into those practices as well. On the LATAM side, we're training an awful lot of doctors. Like I say, we're at a much earlier stage, primarily focused on orthodontics, the orthodontist channel. There's such a huge number of orthodontists in Brazil. As there is across the whole of LATAM, we're still kind of working at that. But then the team are pivoting to really drive growth in doctors who have been certified as well as bringing in newly certified doctors on. But less than 5% penetrated in that overall marketplace, huge aesthetic and beauty market, as you know, Brazilians, particularly coming from the U.K., I appreciate how Brazilians want to look after themselves and the teeth and oral hygiene is just a part of that as well. So we're really excited about our business and how the team are essentially taking best practice from around the world, and they've really driven that. So it reduces our learning curve and then refine it as we've gone along. So that's why we've seen such strong growth in Brazil as well as the rest of Latin America over the last 2 to 3 years.

Got it. Maybe shifting gears a little bit. There has been a lot of, I'll call it, competitive noise out there in the last few months, discussions around things like seasonality and reallocated consumer spending, privacy changes on Apple's iOS platform and the impact that's had on digitally native platforms like Invisalign. I'd love to hear just how you think these factors are influencing Invisalign demand in the Americas.

Well, look, I think Joe talked to this during our Q3 earnings call. And I think clearly, the change we've seen a little bit of impact. But we've got a pretty broad marketing mix when you look at how we go to market. And what our consumer teams do remarkably well is that we're always pivoting. We're always looking at whether it's search, social, digital or TV. We're always looking at how we can pivot to move those resources around. So it's difficult to really predict what the long-term impact of that is, but we certainly can and been able to pivot around that. But as I say, we're keeping a very close eye on it because as you know, we invest very, very heavily in driving consumers into doctors' offices. So really, it's a key part of our overall strategy.

Okay. Okay. Very fair. A related question came in from the investor group regarding consumer spending. We've seen COVID pull forward demand in various sectors like housing and cars. In assessing recent clear aligner and bracket and wire sales, it looks like there's also been a pull forward in demand for orthodontics. How manageable are these headwinds going forward?

Well, definitely, there was some pent-up demand coming out of COVID. I think we all saw that. But I'd just take a step back here and think about the market that we're in. We're not in the car market or the housing market. I think we're in a market that's just got some very different dynamics. We've got -- like I said a while ago, just a huge untapped market. So even if you look at the 21 million cases that happen on an annual basis, there's still another 500 million patients out there. So I think that's the way that we really -- we kind of think about it in that way is not necessarily some of these major minor fluctuations that occur but look at it more for the long term. And we're still as a company, we're still so underpenetrated that there's a lot of market share we can go after as well. So not something that I lay awake at night thinking about in, to be honest with you.

Got it. Got it. Okay. One other question that came in, you brought up iTero -- but discussed in iTero earlier, Simon. Just the question from the investor was what's the typical upgrade cycle of the iTero or how often does a doctor replace one?

Well, I think it's just there is by doctor. I think there are some doctors that will stay with their iTero for 3 to 5 years. And then there are others who just always want the new as to [indiscernible]. I think the one thing we did see is that when we launched the 5D last year, that was a real significant kind of differentiator, particularly for the general dentists because you're moving more then into diagnostic. But even we've had orthodontists that invested in 5D within Neritechnology. So we probably saw a more aggressive upgrade from doctors there because they really saw that as something very, very different that they could really gain value from by investing in that business. So -- but I don't think I could possibly give you a number as to it every 2, 3 -- 2 years or 3 years.

But It sounds like, on average maybe every 2 to 4 years, I know It's a wide range, but that sounds like...

Depends on the technology, Jason. Yes. It depends on what we've got coming out that would drive it.

Okay. Okay. Very fair. All right. Maybe let's talk about competition that actually gets to another investor question that came in, then I'll get to it in a second. But the -- I think, this category has all the elements of multiple players winning with so much growth across a variety of channels across the globe. I guess with everything that you're seeing out there, how are other clear -- let's first talk about clear aligner players, how are other clear aligner players attempting to compete with Invisalign? Is it simply a price game that you're seeing from these competitors?

Well, I think the short answer is yes. I think the way we view is, we've been facing competition for a number of years now. And I think during that time, we've not seen any significant innovation out there that would differentiate against our own digital platform, right, which includes Invisalign. Best not to say that we're [indiscernible] enough to think that those things might not happen, but we're spending over $250 million a year on research and development, which is probably more than all of our other competitors put together. So I would still answer that question by saying our biggest competition out there is wires and brackets. That's still 80-plus percent of the market. So that's really what we're trying to compete against on a day-to-day basis is how can we convince doctors and consumers that Invisalign is the right product for them. And then with other competitors, yes, they're mainly focused on price. But whilst we're vigilant, we're not really focused on that on a day-to-day basis.

Okay. And I guess from my perspective, since you do have oversight of the Americas, I tend to think the U.S. is the most competitive market out there right now in iTero aligners. And this is a tough question, but I know it doesn't happen often, but when you lose an account mean you lose an Invisalign account, like why is it? -- or if you have shared that declines within an account, so you don't lose it entirely, but maybe half of the business goes elsewhere. Why do you see that happening? Or when that happens, is it the price game? Or is there some -- is there a relationship on the -- with the ortho and the rep or what is it that drives that shift?

Yes, that's a really great question. I think I'd say it can be for a combination of reasons, right? Sometimes it could be down to a relationship. We know that they are really important, which is why we invest so heavily in our direct sales force. And then sometimes, it could be price. But I'd say we've -- we have had customers who moved to competition but have come back because they realize actually any small price differential is not worth the hassle all losing really the -- both the innovation, the brand, the power of the brand and also the support that we offer. One of the things that -- I know Joe talks about this and I think it's so powerful is one of our biggest attributes as an organization is that we have a direct sales book, that all Align employees. We don't go through distribution. And through that, we're able to, I think, train our sales teams to really. And also shall we say, control our sales team so that they focus on the right customers, the right segments. So we've got a fabulous sales organization across the world actually, that really can support customers in a way that I think helps us not only differentiate through product but also differentiate through people. And I think that's really important because what I think you understand and many of the people on the call understand this, what we do as an organization is not easy, right? Convincing and supporting customers to make changes in the way that they treat their patients is a very challenging and complex kind of equation. So having that direct sales force enables us really to bring best-in-class support, best-in-class products on what we believe is the best-in-class platform as well. And I think that's what customers appreciate is when they try other competitor products, whether it's the appliance performance, whether it's the fact that they don't get the same number of patients coming in asking for that product, or whether it's like the whole platform that we offer as a business, they tend to realize that. And we've had a number of customers who have come back recently because they see what we're trying to do in the marketplace.

Okay. All right. Got it. Maybe you mentioned, Simon, the -- your main competitors more brackets and wires. And I would totally tend to agree, especially within the traditional work on it's category. But when we think about -- looking at historically, there hasn't been a ton of innovation. I'm sure there's plenty of companies out there that would cringe me saying that and say they're always innovating. But there hasn't been a ton of innovation in brackets and wires. But it does feel like maybe over the last couple of years, we have seen some of that innovation move forward, both with some of the traditional players but also some, what I'd colleagues more upstart or innovative players looking at things like 3D printed brackets and wires, things like lingual brackets, like from INBRACE. So I guess I'm curious from your perspective, how do you see the competitive market when you loop in or bring in some of those brackets and wires companies that are both large but also the smaller upstarts that are trying to also compete for that same bracket and conventional bracket and wire share that you're going after as well?

Yes. Look, I think I know the companies you're talking about, and there have been some interesting innovations. But I think what we -- what the proposition that we offer as a company is a truly digital workflow. So it's not only the acquisition of patients, the planning and the treatment and then the execution of that treatment. It's fully digital. You can't achieve that with a wires and bracket appliance. You -- so what you're getting there is, yes, they can plan and they can manufacture digitally. But though when it comes to the treatment itself, there's still a manual labor aspect that still needs to take place for that patient. So you losing huge amounts of efficiency for the practice and convenience for the patient. Not to say that it's still wires and brackets right? And many people, particularly adults, and we're seeing an increasing number of teams prefer to have a treatment that's more conspicuous, shall we say, and less visible. So I would say, maybe on the front hand when it comes to planning and manufacturing that appliance, you get that, but you don't get it on the back end. And that's not, and that's really not what a fully digital practice can really do as far as moving in that direction.

Okay. Last question for me because I know we're right about out of time here, but I did want to squeeze in one on Brazil. It really feels like this is still one of the most underappreciated parts in regions of your business. The data I'm seen looks like Brazil might be doubling year-over-year. I'm not asking you to bless that. But maybe where does it sit right now as far as like within your top 5 or top 10 within the broader line business? And then how sustainable is the growth that you're seeing in Brazil regardless of what it is? Is this -- does this have like a 2-year, 3-year, 4-year tail to it of what we've been seeing?

No. Look, I think I think Brazil is definitely within our top 10 markets now. And we see -- we're pretty excited that we still see good runway as far as growth is concerned. Whether that's a doubling every year, I don't think that's necessarily the case. But we certainly see a massive potential. Like I said, we're less than 5% the market there at the moment. So you'd expect us to be able to continue to aggressively grow as we bring more customers on and as they become more confident. The one thing -- the one can't probably underappreciate the fact about Brazil, apart from the fact that it's a huge aesthetic market is how digital the customers are. They're massively into new technology, very open to huge use of Instagram and how they connect with consumers, et cetera. So I think there's whilst there are always risks in a market like Brazil, the macroeconomic and political situation can sometimes be a little bit fragile. The basic fundamentals there of -- you've got lots of consumers who want to look, have beautiful smiles and you've got lots of doctors who are very innovative, very hungry for education and really love the digital approach. We'll continue to invest there, in the right way, in a profitable way. And we've got a great team down there who will continue to drive the business as well. So very excited about Brazil.

That's great. Well, we did probably do in to call it right there. We've covered a lot of ground here in the past 30 minutes or so, very helpful discussion, as always, Simon, and really looking forward to seeing how the next year unfolds. Thanks so much, team for joining us, and thanks to everyone on the webcast for tuning in. Be well, and enjoy the upcoming holidays.

Thank you, Jason.