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

All right. Good morning. I'm Jason Bednar. I cover med tech here at Piper. Thanks for joining us for day 2 of our conference here. The fireside chat we have this morning is with Align Technology. Very happy to have with me CFO, John Morici. Executive Vice President and Head of the company's Americas and EMEA region, Simon Beard, and Chief Communications Officer, Shirley Stacy. So thanks a lot to all of you for being here. Really happy to have you.

Why don't we get right into the Q&A. And we only have 25 minutes here. So I'll get maybe right to the point actually where we started last night during dinner. What happened between 2Q and 3Q that really made such a -- cause such a shortfall business in the third quarter and led to the guidance adjustment that we have?

Yes. As we said during the earnings and kind of spoke about as we came out of the summer season, which it does have some seasonality to it, especially in Europe, there's a lot of people who take holidays and vacations. But with that as well as the rest of our business, we expect people to come back into the office, come back into treatment in September. And where we saw some softness was mostly on the adult side. We just didn't see that seasonality like we had expected in September. So our teen business was very strong for the quarter, up 8.5%, a sequential improvement of about 10%. So we felt really good about that. We had the highest teen volume that we've ever had in the third quarter. So good execution there. A little bit less discretionary when it comes to a teen standpoint, where they get to certain age, maybe their parents have saved up and they go into treatment. On the adult side, what we saw is just not as many people coming to the offices. We saw that in a lot of the data that we track our doctors had said that. And then even those adults that came into the offices, they didn't say no to treatment. They just said not right now. And that delay was part of what we saw in September and that's what impacted third quarter.

You're obviously not alone. I mean there's been a lot of, call it, mixed reports out there from the dental players. But when we think about your updated guidance for the fourth quarter and the assumptions you're making. I think you said, hey, look, we're basically assuming October, November, December is the same as what we saw in September. September was weak. So I guess, simplistically, why was that the right assumption when we have a lot of other historical data points that suggest that maybe that's not the right seasonality or the right cadence of how volumes play out?

Well, when we forecast and give guidance, remember, we're a real-time business. So there's -- majority of our business is just the demand that's created at that time. And so when we're using the real-time information to try to give us the best information on our guidance we're using September, we're using first part of October as we go through kind of where those volumes are and what we think is happening, and that's the basis that we use for our guidance. Not having a backlog, not knowing what -- if there's going to be other economic or other concerns. Obviously, there was things going on in the Middle East and others that were causing some concern. So it was just a matter of using a forecast based on the most recent information, and that's similar to how we always forecast.

I guess philosophically, John, did you -- because of how 3Q played out, did you take a more conservative approach with how you set guidance and also knowing that you had the Mid-East conflict that was just really developing at that time.

It was the same forecast that we -- the data that we use for that forecast was the same as we've done in the past. So nothing one way or the other. It was just using that information and then being able to project that forward.

Okay. All right. I know this came up last night as well, and [indiscernible] John or Simon weigh in. But we did have your Investor Day back in early September. There's a lot of discussion leading into it and also coming out about your LRP, the 20% to 30% revenue guide from a long-term perspective. I think the question I keep getting is, why is 20% to 30% the right number. So I guess I'd love to hear from each of you is why is that the right number today, even though you have history on your side that 20%-plus historically has been very achievable.

Well, I think When we look at the market opportunity, when you look at also the investment we made around technology, we're still dramatically under-penetrated within the market versus traditional treatment and then new opportunities we see within general dentistry. We think that long term, we think that's the right number. Absolutely.

And so to build on that, some of the investments that we've made and continue to make in better technology, whether it's around the product itself, some of the direct fab printing and opportunities that we have, some of the new market opportunities with [ Invisalign palatal expander ], which is for even preteens into a market that we really haven't touched before. We look at the software improvements and productivity that helps doctors, do cases faster, the visualization, the virtual care, so they can monitor patients remotely, and so on. We feel we have the best products to be able to go to market. And as we've said, we know that there's a market opportunity. There's 22 million orthodontic case starts. And most of those are teen and our market share teen is very small. It's in the single digits, most countries. The vast majority are wires and brackets. So we feel that teen opportunity is tremendous. We saw that even in the third quarter, growing 8.5%. And when you look at the general adult population, still a lot of wires and brackets and other ways that treatment is being done. And this gives us the opportunity to be able to really grow into that market. And like you said, historically, it's been 20-plus percent. Right now, we just need a little bit more certainty around the economics because 35% of our business, our business is adult. When we know the opposite occurs in the marketplace, but we know we have that opportunity.

Okay. So maybe let's pick up on the teen point. One of the issues that I've really seen in the data that I look at is that bracket of teen bracket and wire cases are growing faster than clear aligners for a good 1.5 years. I think all of '22, first half of this year. But then we saw that flip back, I think, just this last quarter, July, August, September, and what I'm seeing in October, same thing where teen clear aligner cases are growing faster than bracket and wires. So I guess why now? Why do you think that's happening? And again, I would love to hear from each of you if you -- what switch flipped in the most recent quarter to allow teams to start recapturing some of that share?

Yes. I think there's always a combination of things. One of them, what you would hope to think this is we launched some new programs this year around tea. I think one of the more significant ones was are what we call Teen Guarantee. Because sometimes when the doctor is talking to the parents, there may be some concern about compliance. And as the team actually wear in the aligners. So we launched the program where we said if the team is in complain within the first 100 days, then we'll credit the case back and they can move them into a wiser brackets. And doctors fan that a really useful tool in conversations with parents. And within that program, we did a lot of stuff around staff training. If you look at most orthodontic offices, it's a staff that were in the practice. So we're trading around conversion, around using our technology, et cetera. And then just general clinical confidence. As John said, a smaller proportion of our business, and therefore, a lot of our customers tend to use Invisalign on adults and less on teen. So they're not as clinically confident. So we did a lot of clinical work with them as well to support that. So I think that's really helped how we've kind of developed the business. And I also think from a customer point of view, there's -- I think over the last few years, a bit of a shock where they saw kind of demand going down and their immediate kind of reaction is to go out look at acquisition cost. But then when they think about it over a period of time, they tend to readjust as well. So I think you said that combination of that. Also, we still heavily advertise in teams. If you look at the number of teams that are going into practices now actually requested Invisalign, we've made huge strides in the last couple of years because of the investments that we've made there, the influencers, the digital marketing dollars that we spend. So I think it's a combination of those factors coming through.

Do you think that we're on the front end just with some of these programs, some of these initiatives that maybe you're just now starting to have an effect in a tough macro? Are we just now starting to see that share come back and we can see multiple quarters that internet share can really sustain itself?

Well, we're very focused on that segment. It's by far the largest segment. I think the thing that gives us a degree of confidence there as well as if you look at the new innovation that's coming through. So we've seen really strong growth with Invisalign first, which I know is not teen, it's kids, but it's kind of a precursor. If you can treat kids effectively, and we're seeing amazing results or our doctors are seeing amazing results with Invisalign First. We've got the palatal expander, which we just launched in Canada and we'll roll that out next year. We've also got a product called [indiscernible], which is, I would say, a similar type device to Twin Block, which is more of a conventional way that customers advance demandable. So we've got a series of innovations that are coming through. I think the way that we do what we call personalized pathways for doctors as so as how we train them, how we support them. I think we've got the right ingredients. And we've also -- we've got the largest orthodontic sales force out there. So we've got people out there supporting customers, whether they're salespeople or clinical personnel as well. So I think we've got the right ingredients there, but we'll keep driving that.

Okay. And for the last several years, we've seen teen growth faster for the reasons that Simon said as well as just the market opportunity. So we saw that in the last couple of quarters and even during the pandemic. And so our team held up a little bit more resilient. There's discretionary parts of our business for sure. and mostly on the adult side, but teen, a little bit less so to get to a certain age, whether they -- permenant teeth coming in or jaw adjustment and so on, it's age related. They need to go into treatment. And I think their parents have saved up for at least have money set aside for that on the adult side, a little bit more discretionary. They don't necessarily say no, but they say not right now.

Okay. Do you think you need to have the adult market come back to really to the teen market take off? And I know it may be an odd question, but do you need practices to be busier with adults to then have those practitioners say, you know what, I need to free up some chair time and do that and to allow for our patients. I'm going to put more in more of my page -- my teen patients in clear aligners.

I think there's no doubt that having patient traffic is a plus, having more patients into the offices on the adult side to fill up the practices and then carrying that into the teen side, that's a positive. We saw that really coming out in COVID. 2021, There was a lot of pent-up demand, a lot of people go into those offices. What those doctors did in those offices is they tried to digitize. They started to digitize more of their practice. Now we want to make that sustainable. We want to make sure that as they digitize their practice, they stay digitized, and we fit right into that. But I think it all starts with that back tracking that demand. And then while they're in the offices, what can we do to help doctors convert those patients.

Okay. All right. You just took -- shifting gears a little bit. You just took a price increase, I think, last week, but not across our own portfolio, just on comprehensive cases or mostly in comprehensive cases. Maybe walk us through philosophically how you think about pricing and some of the pricing decisions you make as maybe you tried to encourage uptake of certain offerings that you have?

Yes. When we look at every year, as we look at the innovation that we spend upwards of $300 million in R&D, the marketing that we spend to help and drive patients -- potential patients to doctors' offices. There's a lot of efforts that we spend to really help our doctors and help them grow their practice and digitize their practice. We look at that portfolio. And in this case, like you said, we look at the comprehensive kind of the 5-year unlimited. And so that one gets the majority of the price increase. Some of the other lesser stage products even on the comprehensive side as well as the noncomprehensive side, we didn't increase price. So it nets out to May about 3% on a year-over-year basis. Our doctors get it. They understand it. I think it's well received from the standpoint that they know that, that price has increased on certain products, but we give them alternatives and other products that haven't seen a price increase. And I think you couple that, at least in U.S. with advantage changes where there's discounts that doctors get as they move through various tiers. We've modified those a bit be a little bit more structural in terms of the percent discounts that they have. So in many cases, you could have doctors who used products that didn't get a price increase like the 3 and 3 is a popular comprehensive product that we have that we introduced this year. It will not have a price increase and if doctors work their way through the various tiers that they have based on volume, they actual see a price decrease. So I think it helps to be able to give more kind of ownership or more control back to the doctors and seems to be well received.

Two questions. The 3%, is that a blended portfolio or type increase? Or is that on the 3% increase on the products that actually received.

That's a blended.

Blended 3%, so maybe similar to last year, maybe around 5%.

5%, 5.5%.

Okay. Perfect. And then the another question ahead now, it's escaping me. But I'll go on, maybe I'll come back to it. On the advantage changes, maybe what are you doing within advantage or what have you addressed it because it's been a few years, if I remember right, that you've had kind of the same structure in place.

Well, I think on Advantage, you know has been around for a number of years. I think where we wanted to focus was we now have a number of, I would say, higher volume customers who we want to -- I suppose, reward their continued growth. They do more and more volume. So we put in some additional benefits for them as they kind of move more of their practice to clear aligners, particularly now with all the innovation that we've got, obviously, there's greater applicability for the product. We can treat over 90-plus percent of cases. So there's a greater volume opportunity. And then we also wanted to do something of what we call the lower end as far as lower volume doctors. As John mentioned last night, we put in an additional kind of level what we call silver so the doctors could start to benefit as they kind of move through the tiers. And then we made a few little tweaks as we move up so that it kind of made a little bit more sense as they sequentially increased their volume, the kind of the discount benefit matches that as well. But overall, I think we only did this in the U.S. and Canada at the moment. and that was really, really well received. I think it made sense. It also, to John's point, it gave customers actually a way of almost negating the price increase. And really driving more of their share of share to clear aligners. So there's an economic benefit. And I think we dealt with where we tend to have to issues, which is how do we get more from our high-volume doctors and how do we encourage more lower volume doctors to kind of step into the franchise.

When would you look to take those advantage changes outside the U.S.?

Well, we'll look at it, yes. Absolutely. I think Advantage always had a slightly -- it's not the same worldwide. So we don't have the, I suppose, the same I would say their issues, but we don't have the same kind of dynamics that we're dealing with -- so yes, but we'll always look at it.

Okay. Maybe shifting over to iTero and your equipment and service business. So I think we talked last night is sort of the benefit of everybody in the room. It seems -- fortunately, it seems like the situation in Israel is not so far impacted negatively your supply chain, everything there is still functioning in a pretty good way.

Yes. We have a great team there, dedicated -- just hard working, get to the issues that we need to have within Israel. And they've done a great job with the conversion of the product, getting the raw materials in. Our suppliers have done a great job of getting the raw materials in and the product has been converted. And so we're making the iTeros that we need. We have a process where it's manufactured in certain locations, but then it goes to distribution hubs that we have that are in all the different regions. So all we're doing is doing that conversion. They're working hard to get that product made and turned into finished goods and then it gets shipped out to the regions. And that's a business that, that is the part of our business that is more of a backlog business and it's not made to order like the Invisalign is. So it gives us the ability to build ahead as we need to, and we haven't seen any issues.

Has the risk mitigating move, does it make sense to create another production site, maybe in Poland or Mexico or some other locations? I know you produce out of China, but I don't know what your capacity could be to take that even higher.

We'll look at different things. We have other centers that we have for some of the refurbished equipment that comes in. We'll have that in Poland. We have that in Mexico. And like you said, we have manufacturing in China as well. We'll look to see what makes sense going forward, but really happy with the way the team has performed in this room.

Okay. It seems like some of the price competition in scanner market has calmed down a bit, but it's still fairly aggressive. I guess do you feel compelled to respond in any way? I know you have been in terms of offering some of the refurbished units certified preowned, you have leasing models. So it seems like you've responded in that way, but do you need a lower tier offering? Or do you need to introduce something else at the higher tier and knock everything else down tiers so that you can compete with the full portfolio?

Well, we have a portfolio.

I know you do.

So we have -- like you say, we have a CPO business, certified preowned, which enables certain customers if they want to access a lower price, we did a -- we've got a partnership with Desktop Metal, we lease scanners through which they place with certain customers as well. So we have kind of this, what we'd say is a lower-price CPO business, and then we have a performance and then a premium level. So customers do have a choice of where they enter the iTero portfolio. And as we were talking about it last night, I think we have a number of customers that initially will interact with us and look at our CPO business or CPO scanner but eventually we'll trade up to a higher tech option because they can see the value of the software, the diagnostic tools and also the processing speed, et cetera, those higher-cost scanners are pretty impressive.

Okay. I did want to -- we're coming down in the last few minutes. I do want to spend some time on 3D print, big focus at the Investor Day, and this is the direct printing of appliances. You acquired Cubicure. I think that's supposed to close here in the next few months. Can you talk a bit about that acquisition? How does it fit into your long-term strategy? And maybe give us some maybe milestones to look for in terms of what we should see over the next year or 2 or 3?

Yes. As you said, CubiCure, we hope to -- we announced that acquisition an Austrian-based company that we could close hopefully in the next couple of months here. Really what that gives us the ability with our technology around some of that direct printed materials to be able to really go down the path of creating direct fab printed products. So right now, we're the largest 3D-printing company in the world, but the way we make our product is you print the mold and then you vacuum form SmartTrack material on top and create your liner that way. The direct fab printing will be performance plastic that's used, but it's directly printed. So that aligner and whatever we decide to print will have abilities to be customized. You can have different thicknesses. You can have different properties built into the actual product itself so that you can get maybe more predictable treatment. You can do treatment that you might not have been able to do before. It will allow us to really help scale up the Invisalign palate expander. That right now is made -- it's a slightly different technology made 3D printed, but help us scale that up. That's for kids that even before their permanent teeth. There's other products that we'll have with occlusal blocks. Right now, it's more of a manual process to make. Ideally, you can just 3D print the entire aligner, and it will be a different process to make. And then you start to scale up around retention, customizing retainers or even mouth guards and then you start to get into the core of the business, which is printing our aligners. And so it gives us a lot of opportunities to be able to create a product that's unique in the marketplace that no one else has, to be able to create products that really could help us grow in the core business that we have as well as the businesses around that. And we know how to scale. We'll know how to scale that 3D printing capability. Cubic Cure helps us. They actually make the machines that are used for this 3D printing. And so we partnered with them for years, and now it just came to the right position to acquire them. So we think bringing all that together is going to give us a big advantage in the marketplace, and we're excited about this. It's an evolution, but this is one where the product will help differentiate. There's a significant reduction in material and labor cost once you scale up that 3D printing. So between the product, the cost situation, as well as just the flexibility in terms of where you're printing and so on, we think it's well-positioned for the future.

Great. Well, we're really looking forward to seeing that evolve here over the next few years. We are actually out of time. But join me in thanking John, Simon and Shirley today. I really appreciate you all being here. Thanks.