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

Good morning, everyone. Thanks for joining us for our next presentation. We're excited to have Align Technology with us representing the company. To my right is Joe Hogan, who's the CEO; to his right, John Morici, who's the CFO. And I think most of you may know, Shirley Stacy, to his right, heads the Investor Relations function at the company. I mean we have 25 minutes. So we're going to try to do some rapid Q&A here with Joe, John and Stacy. So let's just dive right into it. But thank you, guys, for taking the time, and thanks for coming to rainy London for us. We really appreciate it. All right. So maybe a good place to start, and I don't know, John or Joe, who wants to take this, but maybe a good place to start is the 3Q recap. Just give everyone sort of a refresher or any sort of highlights from the quarter that you think is sort of worth discussing positively or negatively, and then we can just sort of dive right into our more specific questions.

Yes. I think overall, we saw a good quarter in terms of teen growth for us, year-over-year growth, really led by some of the key markets in China and some of the other places that we had Southeast Asia, Latin America, Middle East and so on. We saw good volume there and led to good revenue for us. Obviously, we continue to see good growth on the iTero side with Lumina the launch that we started at the beginning of the year, and that continued into the third quarter. We are to deliver good op margin and profitability as we came through. We're very pleased with the submitter growth that we've had. That's a continuation of what we saw in the last few quarters. It was a record number of submitters that we saw in the third quarter. So it's an overall still challenging environment. I think when you look at Western Europe and North America in our business, we get into more of those details if you want. But we saw some good growth in other areas. Pleased to see the iTero and then selling to more doctors was a good surprise.

All right. Well, thank you for that, John. Joe, why don't we just sort of jump right into it? I mean, I think the #1 question is always on people's minds is sort of a aligner volume trends. As John just sort of mentioned 3Q maybe a little bit of a mixed experience by geography, sort of calling out specifically strong growth in Asia Pac, Latin America, maybe to some extent, EMEA offsetting some weakness in the U.S. Can you maybe just sort of unpack that a little bit for us what you think might be driving the differences, these regional differences, how durable these recent trends are and what you think just your high-level perspective?

Yes, I think you're starting with the areas of growth for us in Asia, whatever, Asia, Latin America, as you mentioned, and also Middle East has begun for us, Northern Africa. These are relatively large markets. They've done well for us, too. We feel good about our product portfolio there and our teams. Their economies, I feel, are much stronger than, I think, the United States and different parts of Europe overall. And that's the major thing when you look about what John just referenced to is the North America business and our European business has been -- it hasn't been strong. And we watch our Michigan consumer confidence indices and different things is -- this is a high consumer spend item. Consumers have to have a lot of confidence to spend $4,000 to $7,000 for moving their teeth and they've been pressured in the U.S. and pressured in parts of Europe overall. But hopefully, we think that if we watch those indices and economies hopefully improve, we'll see a meaningful uptick. I think -- and another question coming, Glen, I can imagine is wires and brackets cases and where we stand against that is we've seen a rebound in wire and bracket cases in United States and different parts of Europe. And I think it's simply orthodontists are below capacity right now. They pay a lot less for wires and brackets, than they do aligners. When they're in that situation, they'll try to push more patients, particularly teens, into wires and brackets, and we've seen that specifically in the United States, and we've seen it in some parts of Europe, too.

A lot to unpack there. So in your mind, you think it's sort of a macro uncertainty inflation issue that's maybe creating a little bit of strain around uncertainty or anxiety amongst the consumer base.

That's correct.

All right. Now let's get back to this wires and brackets comments because I have I have 4 kids. I had 2 brackets and wireless kids and I had 2 Invisalign kids.

We can give you a deal. We can give you a deal with them.

Yes, I should have got a deal. I should have asked you that for 10 years ago. But my youngest is 18. I can see the shift between my kid's friends. There was a bigger shift towards Align, which I feel like in the 20 teens. We were just sort of talking, I did a couple of calls this week. And I think you just sort of alluded to, maybe there's a little bit more of a shift back to brackets and wires being a consumer. I don't know if it's a consumer preference issue, you sort of made the case that you think it's maybe an economic decision being driven by dentists that they can buy those brackets and wires cheaper. They'll tell you that there's a lot more chair time. There's a lot more expenses attached to that. So when they break down the actual profitability of brackets and wires versus clear aligner that it kinds of it winds up being more of a push for them. So I don't know. I just wonder, is it an economic issue for the ortho or is it a consumer preference or are the moms and dads, are they trying to drive greater compliance? They're frustrated with that. So I don't know how you untangle those pieces.

Yes, I think you untangle by saying what are the big variables in that equation because they're all meaningful variables, but which ones are the strongest. First of all, I think you have to divide our market between general dentists and orthodontists. General dentists, by nature, just don't do wires and brackets. So they're going to push clear aligners, and we've seen that in our marketplace and how it works. So let's just take general dentists off the table. I think general dentistry isn't growing, it's more from a macro standpoint than it is a share shift. If you move to the orthodontists for a second, I think predominantly, the big variable in that equation is that decision is pushed by the orthodontist and they walk in and think, okay, I'm not at capacity. I know I can make another a case in the United States, another $900 a case, maybe 7%, 8% because I'm under capacity from an overall wires and brackets case. And they'll say things like they might offer a lower price or wires and brackets. They might say, I don't think your daughter or son would qualify for Invisalign. It's too difficult of a case, which isn't true because we do 95% of the cases today or it might be the comment I see often that teens don't wear aligners. And so those -- if someone is not -- if a doctor is not really set predominantly with Invisalign or with an aligner kind of case, they can push for an analog piece and we see that a lot. And we're not -- look, I think consumers in general, when we look at it, if you ask any adult out there, 80% of adults will say they'll take -- and this is just -- this isn't our data. This is general data that's out there. 80% of adults say I want clear aligners versus wires and brackets. Teams say, teens, 50% to 60% say they want clear aligners. When they go to the orthodontic practice in the United States, those teens, 90% of the time, will walk out with wires and brackets. And the adults that want 80% -- 50% of the time, they take wires and brackets. And that's being again pushed by those orthodontists. And I don't want to carve out orthodontists being bad. They're just -- these are just people that are looking at their wallet, and they love to do wires and brackets and they understand it, and they think it's a good option for patients. We -- our data says patients actually would favor clear aligner.

Okay. And what about China? You talked about record teen starts again this quarter in China. Like how do you sort of decipher the geographic differences in what you're seeing, for example, in that market versus U.S. market, for example?

Well, broadly, our Asian market was double-digit growth, which is good. If you take China specifically, third quarter is our biggest -- it's a big teen quarter. And so we normally see a good uptake and the volume didn't surprise us. It was a good quarter. Remember, it's -- our biggest shift is Europe goes down in the third quarter, China goes up and you see that. I mean, traditionally, you have a European business, you kind of understand that. So we felt good about our performance in China this year. And I can't say that China's economy is really strong. But again, in a one-child economy primarily where parents are saving for their children, they really do lean into that teen season to push their patients.

Could we maybe spend a minute or 2 on the competitive landscape? And for those who don't know, I used to cover Align for well over a decade, and then I kind of moved away for it for a few years, but I'm happy to sort of be back covering the company. In that time, SmileDirectClub kind of came and went, right, and now more recently Bite is sort of no longer -- they pull their product market. And so there's been a lot more talk about Angel line. There's been more talk about Spark. Like where are we in this competitive journey? And is that starting to become more of an issue for you relative to maybe what it might have been 5 or 10 years ago?

Yes, I'll just start off by saying if you want to be successful in this business, you better bring technology. We could do 100% of the cases out there today. You better have a strong sales force that can door kickers that go out there and call on individual practices, you better have a brand. because you're driving consumers through the -- insistent on our product line. What we saw with direct-to-consumer, SmileDirectClub, Bite or whatever, Smile Docs, Straumann out of Germany, their tents all folded, right? It's just -- that business model doesn't work. And so it's just a matter of time with other companies that are out there trying that. It's just -- it's not the right price point. It's not the -- it just doesn't work. So let's just take them off the table. We see -- what I'd say, subscale conglomerates like Invista getting into the marketplace, they have a good orthodontic business. They came in at too lower price, technology somewhat questionable in finishing cases and we've seen the results of that overall. Look, that's a good company, Invista. They have a good orthodontic. It's just difficult to do aligners and do it well. You have to have deep technology in the other variables I talked about. Most recently, we're -- the last thing I'd say, Glen, too, is you have to know how to account for clear aligners, too, is when you're doing 5 years additional aligners, whatever certain accounting procedure that came up that you have to carry through that makes it more difficult in a sense of how you handle deferred income, but John can hit that more. And now Angel Align is the most recent company coming in. again, at too lower price, we see them at prices that are sort of ridiculous prices that are 40%, 45% under what they're selling in China that we know that that's not a sustainable kind of a thing.

But do you think it's just -- they're using that as a sort of a Trojan Horse to gain market share?

They're trying to do the same thing that Ormco did or whatever. Well, what happens is when you go through these cases, you better be able to finish them because the last -- it takes sometimes 18 months. So those last 3 months, are really minute movements that you have to do to land those cases, and it takes doctors a while to figure out, in a lot of cases, they're going to have trouble with that based on the plastic and the algorithms or whatever. So just again to summarize, technology, breadth of product line, really, you have to have a strong sales force, you better have a brand to be able to drive that and that's what we promote.

And so it's clear that Align is the premium player in the market and maybe let's translate or segue the conversation into ASP, right? ASP, the last several years has been flattish. You've guided ASP to be up a little bit sequentially in 4Q, John, if I'm not mistaken. And -- but how should we think about that longer-term trend just sort of given the conversation we were just having on the competitive landscape?

Look, just given the makeup that you have as you have more doctors that you sell to some new doctors, they'll end up maybe doing lower stage cases that are at lower ASPs or if we grow products like the Doctor Subscription Program where you have touch-up cases, those are at a lower ASP as well. So when we think about it longer term, you think about it being flat to slightly down, but it's not because of different promotions or programs that we have. It's just a fundamental as you grow, sub doctors will come in at a lower stage product, and those will be at a lower ASP. Now what we do see and some of these lower ASPs, just based on the product it's up. Many of them don't have additional refinements. They don't -- the cost to serve is much lower. So we end up with a good gross margin rate from those. So that's what we try to talk about kind of the balance ASPs, kind of a leading indicator in terms of what that product is. And sometimes it's determined by mix. But on that lower stage products, we end up with a better ASP rate.

We'll talk about that gross margin in 1 second's. In 1Q, you're sort of lapping the U.K. VAT issue? Anything else that we should be thinking about as it relates to 2025, that might be influencing that number?

That's the one that's kind of out there that we just made the decision to do and started in the first quarter, and we'll see what the rulings come down with, but like you said, we'll lap that in the first quarter.

And the mix of products that might be moving that number like the palate expander, for example?

Yes. We do have some pallet expander. And those are just from an amount of aligners and what that pricing is in the market. a lower ASP, but that's the mix that you have that we talked about.

So maybe let's talk about gross margins since you just brought it up. I mean you've been in the low 70s for the last sort of several years. I mean, the company is making some investments, right? We've talked about 3D printing and other ways to maybe try to expand that gross margin? I mean, how do you do that in an environment where you're making investments? Well, maybe those investments will start to bear fruit at a time where pricing might be flattish to slightly down. But those investments hopefully outweigh the modest erosion on the ASP.

You've got to manage it with productivity. You've got to -- we're constantly taking costs out of our ecosystem. So whether it's product costs, material costs, treatment planning. We talk about the 5-minute ClinCheck and some of the touchless product that we have, where we have more processes in place that -- to drive a lot of productivity, you've got to be able to maintain that productivity because if you have flattish ASPs, you've got to be able to show that productivity. 70% is a key metric that we have because we know we have to invest a lot of other costs in OpEx to be able to help drive conversion, whether it's product -- new products that we have, R&D that we spend or the marketing that we spend or go-to-market efforts with sales and so on, there's a certain amount that we need to spend and to be able to help drive that conversion. And we want to make sure that we start with a good gross margin.

And so maybe let's just go down the P&L to sort of that operating margin, right? I mean when you think about -- that margin has also been flattish for a few years in the low 20s. Now on this third quarter, you announced a restructuring program, I think was that the headcount reduction was about 700 people. So you talked to us about how you expand that op margin? Is it really a function of, hey, let's pull some costs out quickly. And then over time, we'll get some modest benefits on the gross margin line, and that should slow down the operating margin line? Or is there some other way to achieve leverage down that P&L to a higher operating margin?

Yes. I mean, look, we made decisions when we look at some of the -- it's not like we're cutting the engineers that are actually doing the coding or the salespeople that are actually calling. You look at structure that you have, how can we simplify the organization, how can we remain an agile company look at span of control, look at what people are doing across the company. And there's ways that we can improve our structure, and that's what that focus was. To be able to give room to some of the growth platforms that we have, where we need to invest in some of the direct fabrication and some of the ClinCheck improvements and so on. So we wanted to create space for that with this focus around simplification and made those changes there. And then you look at in terms of what we want to return to our shareholders and so on. We want to be able to grow as much as we can and be focusing on our growth opportunities as a company, but do it in a way that still drives margin improvement. So this was a good way to really focus the company into the growth opportunities and the platforms that we have while still giving us a margin.

And I'm sorry, if you just -- how quickly can you action this headcount reduction?

We're making changes now. I mean -- and you're seeing those changes that will be broadly behind us in the fourth quarter. And then you'll see us as we continue to invest and do things as we go forward, we'll benefit into next year. And we'll be able to get that leverage that we talked about for next year.

And then, Joe, maybe let's just talk about sort of some of the new products, right? I mean, you mentioned Lumina a couple of minutes ago. It's been sort of a big part of your growth algorithm this year. We talked about the palate expander. Maybe if you could just give us 30 seconds on each and sort of where you are in sort of the execution of that, the rollout of each and how those two products independently can contribute to that 2025 growth algorithm at a high level.

Yes. Lumina, we launched it. Obviously, this year, it's been very successful, both in the orthodontic segment and the GP segment, too. Remember, it's a brand-new scanner line, a completely different technology. Most of the good scanners today are based on confocal technology. We took us about 6 years and obviously, a lot of money to get to where we are. We really like that platform. We'll have a restorative part of that platform that will come together in the first quarter of next year. The team is doing a good job on it. So I really -- it just -- remember, that's the front end of our digital platform that really makes doctors comfortable with running simulations and communicating with patients in a sense of how those episodes will go in a sense, patients and how they see their smile and the time it will take to get it done. So that's just -- it's a big part of our growth algorithm. You see we've had good accretive margin on that product line, too. Secondly, when you look at IPE, it's the first 3D printed product that we've had. Direct 3D printed, everything else we do is vacuum formed. It's gone very well. It follows almost Invisalign First, which is our most successful orthodontic product when you look at it. in a sense of the adoption rate. We just got clearance in Europe to be able to use it too, and so we'll be introducing it here shortly. And IPE, as John was explaining, is just -- it's not on patients anywhere between 6 and 10 years old, and it's to open up their -- you're actually moving bone to open up their space to allow teeth to come in more uniformly. And then you don't have to do as much or any adjustment after their permanent dentition. And then we did announce our 3D printed platform we're talking about with CubiCure and new resin. We're making good progress on that. We can answer specific questions about it. But it changes everything in a sense of the efficiency of our process, but also the design flexibility that orthodontists can use to direct -- to really address almost any clinical case.

And you said that Lumina will be sort of accretive to your margins. What about the palate expander, John?

Short term, as you scale up, there's some gross margin impact unfavorable. But it's like anything with the direct fabrication, it comes out to volume, get that utilization higher, things will come back. But short term, there's some impact.

Okay. All right. Maybe another numbers question, because I know it's on people's sort of mind. When you look at the growth this year, you've had your fastest quarter in 1Q, a little bit slower in 2Q, a little bit slower again in 3Q. And now based on the guidance for the full year, the implied 4Q number is sort of a re-acceleration. I mean what do you think is the catalyst for that re-acceleration in 4Q implied in the guide?

I think -- well, part of it is, I mean, when we look at kind of the quarter-over-quarter, I mean it's more or less a normal quarter-over-quarter when you look at third quarter to the fourth quarter. I think the comparison then on a year-over-year basis is kind of coming back to last year. Fourth quarter last year was more of a struggle. We saw that in the second half of last year. And so you're kind of comparing off of numbers that are a little bit lower. And I think when you look at this year, you have Lumina that's different. We didn't have that last year. You have IPE that's different. We didn't have that last year. So we have a lot of ways that we're going to market with new technology and better products. And also, you have some maybe not across the board, but in some areas, better overall markets that we can operate in.

Can we talk about sort of the investments you made in Heartland. I mean, what's sort of the rationale for that? What have you learned? I mean, do you feel like you'll get some sort of outsized return? Is there a bigger game here? I think people when they when they look at sort of your capital allocation, you have the benefit of generating all this cash and a great balance sheet. And so maybe talk about Heartland and kind of -- is there room for more investment? Could you invest in another DSO? Like just how do you think about that?

I'll start off, and John can give the specifics. So first of all, when you look at it, Heartland is arguably the most successful DSO in the world. And they're certainly the biggest one in the U.S. And we find that Heartland has a real growth mentality, Glen. We worked together with them so well in translating our technology through their doctors. And it's just a great way to amplify our -- because to ramp up in Invisalign, it takes a lot of focus for a dentist to be able to do that. And so we just find that we think like they're a good partner to invest in. At the same time, we think we'll get a good return.

John?

But I look at that and I've been asked this a number of times. I don't look at Heartland as an or, I look at it as an and. I mean, we generate cash as a business is great. We are able to invest back into the business with and other investments that we have. We're able to buy CubiCure and fund that with our cash that we have no debt and that we want to keep it that way. But then as Joe said, when we have opportunities like a Heartland that they share the digital orthodontic mindset similar that we have. And they're using that capital to put up new locations that are digital and we know that they're going to stay with Invisalign and not switch to something else because they don't have a wires and brackets or anything else that they do that way. So they share that digital orthodontic mindset that's a good combination. And so I think when we think about our capital allocation, think of it as an and because we're able to do all that and still do the biggest buyback in our history at one shot just as fast.

Yes. Maybe just quickly remind for people, John, the sort of capital deployment priorities, right? Because, I mean, the company has over $1 billion in cash on hand, you're generating over the next few years. another couple of billion. I think as of the end of the third quarter, did you have $500 million remaining on the authorization. So it's kind of a high-class problem to have, right, a lot of cash. Like how do you think about putting that money to work? And maybe is there an opportunity to get more aggressive in terms of repo if the market cooperates or fails to cooperate?

Well, it's first and foremost, we want to fund our business growth. All the things that we're talking about with direct fabrication and investments that we make in the business, we want to be able to do that. Sometimes you have to do with capital expenditures, and we'll do that where it's needed. We bought a company, like I said, be able to fund that with cash, be able to invest in DSOs or other like-minded customers that we have to be able to expand their growth, which also helps us as well. You mentioned the $500 million left on our authorization. Just this quarter, we are now doing -- we announced $275 million against that. So we're able to fund everything we need to really drive growth in our business and really take us to that next level and some of these growth platforms and so on, but then do it in a way that we're returning excess cash to our shareholders. And we think that's a good balance.

One thing I'd add to it, too, is we move teeth. We straighten teeth. Don't look for us to do some kind of crazy acquisition, it's parallel or whatever. We move teeth. We won't surprise you in any way.

Okay. Maybe, we're out of time, but I do have one last question I wanted to sneak in. And I know we're not in any way, given guidance here. We're not talking about next year. But one of the things that -- the questions I get that's on investors' mind, so I'll bring it up because when you look at the way consensus models next year, accelerating revenue growth, when you look at the way consensus models '26 accelerating further from there, right, amidst this period of uncertainty. The company has had this long-term guidance out there, which I guess is aspirational maybe, but I got -- not sure that people put a lot of stock in it at this point. Like is there anything that you think about looking out over the next couple of years, that can be a tailwind for you? Or where conversely, maybe a headwind for you? Like I'm just trying to think if there's anything at a high level I should be thinking about as we look out over the next kind of couple of years?

I'll just start off, Glen, to say we're only 20% penetrated in just the orthodontic marketplace. We can do 100% of the cases like who in the world wants to put metal on their teeth rather than using Invisalign? Eat what you want to take it out or whatever. And so for us to drop it and say, we don't think we can actually penetrate that market in a meaningful way going forward, be just announcing in a sense of how the company has been founded and what we look at. And John?

And look, we're not expecting kind of saying that the economy stay where they're at. If they get better in places, we'll see a tailwind. We know that as consumer confidence improves, that purchase, that discretionary purchase becomes more real and we see added volume from them.

Okay. Joe, John, Shirley, we'll leave it there. Thank you all very much. Appreciate your attendance.

Thank you.

Thank you.