Align Technology, Inc. ($ALGN)

Good morning, Jon Block at Stifel, and welcome to day 2 the 2026 Stifel Jaws and Paws Conference. We've got another really good day. We've got 13 total panels across both public and private companies. We have a couple of dental physician panels as well. and also our conversation with IDEXX's former CEO, John airs around the middle of the day. I'm happy to kick it off with Align Technology. John Morici, CFO; Shirley Stacy, Vice President of Finance, Global Communications; and Investor Relations. Guys, thanks for coming back and being a Jaws and pause again this year.

John, I'm actually going to start a little bit differently than I normally do. You guys had an Analyst Day or sort of meeting yesterday where you talked about some initiatives and innovation that Align has been working on and I think some of these initiatives might help spearhead growth or drive growth even in an ongoing modest macro environment. But let's start there. Tell us a little bit about what went on yesterday. And if you had to highlight 2 or 3 initiatives, what would you call out?

Yes. Thanks, Jon. We had a technology update that we provided yesterday. And like you said, we wanted to just give an update as to important things that we're working on. And Really, when you think about some of the products that we've had, it's really moving from just the product to more solutions that what we're able to bring such that you've got Invisalign palate expander that would expand the upper pallet, but making changes to that so that it could also have hooks and buttons and other features to it. So it really can help address some other skeletal issues and products like mandibular advancement with occlusal blocks that move teeth, but also adjust the jaw and adjust some of the skeletal issues at the same time. So you see really more of an evolution of some of the product portfolio moving from just the product to a solution and direct fab really helps enable that. It really starts to be able to make things easier for doctors to treat multiple issues with, especially teenagers, at the same time. So you see some of that evolving. The other part that we really wanted to emphasize with at this technology view is really some of the active conversion opportunities that we have, and maybe we'll touch on it later as we go through this. But things that we've learned from some of our DSO partners or other big doctors, are able to take more of an active conversion to drive volume in a tougher market, such that you're working with outside financing companies like an HFD and others to be able to not only provide affordable pricing for those potential patients, but then put them into financing options that are favorable for them where there's a high acceptance rate to get them into treatment and be able to see that they can benefit from treatment. So it's a wide variety of updates that we get, but it's really around some of the new technology and how it can benefit those doctors and then some of those conversions techniques that I spoke about.

Okay. It's really helpful. And I know nothing sort of turns on immediately or overnight, but do we think about some of those financing initiatives, maybe gathering momentum into next year? I think there were some ortho restorative initiatives as well that might bring in the labs. These are things that should hopefully slowly build as we think about coming quarters. Is that a fair assessment?

That's right. I mean what we do a lot when we trying these new initiatives is pilot and learn from the pilot of what's working, how do we tweak things and so on. So when we think about some of the the ortho products that we have, you start with a pilot, you see the adoption and then you can go more of a general release. Some of the things that you just said about labs and how we can get labs kind of in the ecosystem to help us with our ortho restorative initiatives that we can bring. Those are pilots that we've tested and start, and then you start to bring those out same way with the financing. So I would say we've learned a lot as we've gone through last year, many of them have been piloted, and now it's a matter of that rollout, and we've seen that roll out starting last year and certainly into this year.

Okay. Very helpful. So I'll stick with thematically innovation, and I'll talk about direct fabrication. Just help us sort of benchmark. When I think about gross margin implications, this has been dilutive. I think it's still dilutive to gross margins here in 2026. Is it neutral next year and then accretive in '28? Or does it take sort of longer to get there?

No, the framework that you have is broadly how we think about it. When you have some of the direct fabricated products, they come out and there's some dilution in margin. And it really comes down to the amount of product that we put out because when you have that resin that you're scaling up the new resin that we have for the direct fabrication as well as the utilization of the equipment until you get to more scale over 10%, over 15% of your volume for products like that, then you can start to get at least to be neutral, like you said. So if you think about this year, some of the products coming out being negative and then next year, more of that neutral that you said. And then certainly, as you start to reduce the material cost because that's the big piece of this where you have less material when you direct fabricate something versus the traditional manufacturing, which you have to make the negative and then essentially throw that out. This allows us to see that material savings that really starts to come with scale.

Okay. And so if 10% or so, give or take, is what allows from a scale perspective, you to get to neutral from GM implications, then when do we start to see a broader rollout of some of these directly fabricated products. We talked a little bit about it last night, but what I think 10% of volume, it can't just be like Invisalign First retainer with all the respect, it's got to be more like retainers, aligners? And can you sort of walk us through that pathway a bit?

So the initial is to some of the products that we talked about, when you have attachments and then some of these specialty retailers because that's just about trying to get the scale, making the resin and the utilization of the equipment. But you're right, you need to get more in the mainstream which would be more wider variety of retention and then into aligners. And that will be something that as you go through some of the scaling this year, you start to get into more of the mainstream products next year and then ideally, aligners on a more regular basis really into the later part of next year.

Okay. And 1 more here, and I should probably know this but I don't. Are these -- do these need FDA approval right? It's a different manufacturing process do you need FDA approval for direct fab retainer, a direct fab aligner if you do, where are you in sort of that process?

You'll need it for direct fab on the aligner side -- and so we're in the process of going through that. But the biocompatibility and the other effects that we need are well along. So we don't see that as an issue. It's really more just the scale up of the process that we have both on the resin side as well as manufacturing. .

Okay. Very helpful. And guys, I usually have my head down, but if you have a question, throw up your hand and obviously, I'll get to it. That was great on innovation. I'm going to pivot a little bit to the business, and I'll try to keep this somewhat structured. So the U.S. John, what are you experiencing in the U.S., everyone is usually fixated on consumer confidence, Michigan hit an all-time low last Friday. So just what does that mean or not for U.S. trends?

Well, look, obviously, U.S. gets a lot of the visibility. I think just a lot of the surveys and so on, and it's over 40% of our business. We still have a lot outside of the U.S. But when we think of the consumer confidence in and so on. We look at that, and we've been operating in that environment, roughly in that environment for a number of quarters now. And so that was minor changes that happened. It's it's not really an impact to our business. This is an operating environment that we've been in for a number of quarters now. And we feel good about how we've been operating in the last several quarters just in terms of being able to understand what's happening in the market and then do everything we can, and we can get into more of those conversion opportunities that we have to be able to get to some of those reluctant potential patients to be able to go into treatment, whether it's getting the right pricing that they need or some of the financing and other things. So I would say it's really been what we've been experiencing for a number of quarters now.

Okay. So hey, when Michigan goes from 50% to 46%, it's like, hey, it hasn't been good for so long. We don't feel...

Because it goes from 50 to 80, that's a great thing. If it goes from 80 down to 50, that's there's ... And the ups and downs that you have got on these every couple of weeks, it comes out, those are the minor changes that are very similar to what we've been operating.

Okay. So you mentioned U.S. about 40% of the business. I think you and I have discussed LatAm, maybe 10 or 12 and then obviously, we know international outside of Americas, pardon me, the other 48%, call it, let's stick with Americas or the U.S., pardon me, is it still, call it, the tale of 2 worlds between the DSOs and the independents? And are you seeing any thawing of the independents, you try to bring some of these conversion tools to the forefront of them?

Yes. Because when you look at our business, and you characterized it the right way, especially in the U.S., you have you have maybe some that are part of doctors are part of DSOs, but they're just much more of an active approach to driving conversion. And so you look at DSOs that are in the U.S. they're growing double digits. You're seeing that double-digit growth. And in the same environment, you talked about the Michigan index and so on, do you have some doctors that take an approach many times push from the overall DSO where they're scanning every patient, they're providing visualization of what your treatment would look like. . They couple that with better pricing in many cases and then HFD or other financing opportunities to get those low monthly payments down to those potential patients, they're winning. They're seeing double-digit growth. The other doctors who are taking maybe some of the retail approach where that's much more passive, they kind of take the patients as they come and they're not as aggressive about driving conversion. They haven't grown as much. And -- but I think what we're seeing is, over time, they're less negative, which is good on the retail side. And certainly, as we push with the DSO as well as those retail doctors to help them provide that active conversion, we're seeing improvements there. And against a tough comp in Q1, we were about flat in North America, which was good to see that we've seen that improvement coming from a point last year where it was much more negative.

So actually I was going to go down that road. I think you guys called out slightly negative 1Q, but that was against your most difficult comp, right, a year ago. You're bringing some new initiatives, the financing, et cetera, the comp eases is the hope we could see even with this backdrop, U.S. pardon me, North America returned to growth?

That's the expectation that we have the initiatives in place to be able to help drive that. We're seeing some improvement there, and we want to continue that. Obviously, there's a macro that everybody faces with inflation or concerns that they have and so on. But it's that active approach to be able to help drive that conversion that hopefully sets us apart. .

Okay. That was great. Let's pivot to international, and this has been certainly a solid place for the company, double-digit growth EMEA, double-digit growth APAC. I thought Joe referenced APAC might have been a little bit stronger when we think about double digits last quarter, but break those down for us, John. Does this APAC momentum, has it continued and any choppiness on the EMEA side when we think about Middle East.

Really, when you look at our business and when we started with what we're talking about now, just North America, North America retail has been our challenge. And that's the things that we're trying to do to help offset that. But when you look outside of North America, you're right, we do see double-digit growth. And we've seen it for a number of quarters now in APAC, double digit in EMEA and also in LatAm. And those markets it's not every country, but the bigger countries are really driving that. We have an underpenetrated market, so a huge opportunity to be able to grow in those markets. . We've got a direct sales force that is really working to try to get more and more doctors. There's a big push to keep more and more doctors into our ecosystem so training doctors, keeping doctors from a churn standpoint and then increasing utilization. And we're seeing a really good mix there where some are double digit, but some are very strong double digit, where we've seen growth in Turkey and India and Eastern Europe and Southeast Asia and so on. So it's really good to see how broad it is outside of that. And then like I said, the challenge has been in North America, but North America just is, in some ways, is offsetting that, but there's really, really good performance outside.

Okay. And maybe just to sort of filter that down into overall. There's been a lot of questions on prudent and what that does or does not mean. Maybe talk to us how you feel currently about the level of prudence that you built into the 2Q '26 guidance. Is there any reference points that we can think about when we look at what sequential growth was last year versus what you embedded in this year's guidance?

Well, typically, when we go from 1Q to 2Q as a business, from a revenue standpoint, it's up 3% to 4%. If you go back even last year where we had some challenges in Q2, it's still up 3% to 4% -- when we guided the prudent guidance that we wanted to be able to give for Q2 this year at the midpoint is up about 1%. So we wanted to reflect uncertainty that we have on a geopolitical standpoint that affects these potential pain shots and so on. So that's what went into our numbers for Q2. And like I said, we've been in this environment for a number of quarters now, whether it's higher inflation or people making decisions about whether they want to go into treatment or not. We've been operating well in that environment, and we've reflected more of a prudent guidance for Q2 that was at that 1% at the midpoint.

Okay. And I just -- I'll worry about my own model in a way, but for others, if you're guiding 0 to 2 case volumes on at the midpoint, in flat ASPs and you take your total guidance range, I think -- the Street is a little bit off on systems and services. That's my comment on yours, but I would just throw that out there for others maybe to think about. Let's pivot Margins company is expecting 100 bps of margin expansion this year, that is benefiting from the restructuring. So I'm not asking for guidance, but just walk me forward, like how do we think about future years. You talk about gross margin from direct fab, it's dilutive and maybe that gets to neutral. But are there opportunities in both gross margin and OpEx leverage outside of the restructuring as we move forward?

So as we think about -- starting with mainly our product portfolio, when we talk about products like the no refinement type products, no AA products, those come with higher gross margin. It's 1 where there's a template that many doctors will follow -- we set up treatment planning that is more or less touchless, very efficient for us. And then you make the aligners and ship them and without refinance better gross margin for us. We see that -- we see that as a higher percentage of our products that we have, and it shows up in our results. We've seen good gross margin improvement as a result of that. If you looked at our overall manufacturing, there's a lot of productivity that we still bring not just the restructuring that we did to be able to retire some equipment, move equipment to be closer to our customers to improve our freight. But a lot of initiatives that we have to take costs out of our existing manufacturing, whether it's resin or labor or freight costs that we have and so on. So we've got a lot of productivity opportunities that we're still executing on that more than offset what we see from a direct fab standpoint. On a gross margin standpoint. And then the OpEx that we have, we're always trying to be very smart about making sure that we're getting the return on investment that we need to and looking at span of control and layers and other things to be able to make sure that we're as efficient as possible. And we get that overall operating leverage as we move forward with increased volume. So we saw good performance, even ex FX in the first quarter, a 250 basis point improvement on an up margin basis, 200 basis point improvement in gross margin. So we're seeing some of those effects early on this year. And we're excited about other opportunities that we could have to really not only grow the business and really push on that top line but grow in a profitable way.

And so just to also push on margins a bit. I mean, you mentioned, hey, direct fab is less of a drag, no AA will help, right, because of the way it's structured and the lack of refinements. Talk to me a little bit about R&D as a percent of revenue. right, that you guys were leading the industry at 6% and change percent of revenue, and then you went to 8%. And there was a lot there last night that looks like it's on the cusp of moving forward and getting to commercialization. Is it like, yes, John, that goes to commercial, but there's this whole tranche behind it? Or do we see that R&D as a percent of revenue, maybe normalize a bit over the next quarter?

You will see it start to normalize for 2 reasons. One, we start to deliver these products and that R turns into more D and you're kind of in that, okay, you finalize some of the development and it goes to market. And so you don't have to spend as much examples would be is you're creating the resin, which we had to create for the direct rep as you've created it, now you have it. It's not like I need to spend on that particular aspect of it, and you can start to pull down some of that spending -- but then you also get the revenue benefit, where now you start to have products coming to market than your denominator increases there. So you end up with that percent coming down over time. So we feel good about the investments that we're making, what we're seeing in the marketplace. We'll make sure that we have the right amount, but we will start to see some of that R&D operating improvement.

Okay. Got about 10 minutes left, a handful of topics hopefully get to ASP dynamics. For the ASP, we obviously got the 1Q, you guided the 2Q. So on each 26 ASPs supposed to be flattish year-over-year. that's somewhat aided year-over-year by HMRC, FX. If ASP is down 2% on the year, it does imply a big step down specific to 28. So a little nuance, but our are the thoughts that were down closer to 1% this year because of FX and the HMRC tailwind and then maybe going forward, it reverts back to that 1% or closer to 2%, right? Because we don't know where FX is going to land. You mentioned some of those growth vectors for clear aligners or some lower ASP markets, but maybe just help us out?

That's the right way to look at it. I mean typically take FX out of it. You've got some mix effects that impact ASPs, and we talked about 1 to 2 points related to that. And really that mix is around the country mix. where you grow in certain countries that have a lower list price, that's an ASP impact. And then you grow with certain products that have a lower ASP like DSP and some of the other IPE and other products that we have that are at that lower list price. And I think for this year, you've got that FX benefit, HMRC with the U.K. VAT benefit as well. And it's a little bit less than that 2% closer to talked about.

Okay, for '26.

Yes, that's. Okay.

And then let's go to new offerings. 0 AA? Do I have a branded correctly was...

That 0 is one, but it's really a product that is a comprehensive product in some cases, moderate products but don't have refinements built in. .

Okay. And that's how we'll call it. Help us out with the pace of the rollout. I actually thought it was going to be more of it's not there and then binary and then it gets rolled out. But it seems like it's a little bit more of a step process. So who's getting that first orthos before GPs, high volume versus low volume, Walk us through the evolution?

It kind of goes region by region. And so some regions like I'll use the U.S. as an example. It's available, and it's a matter of available to orthos, GPs and it's a matter of that sales our salespeople working with those doctors to say, okay, is this product right for you? Because if they're doing a lot of refinements that might not be a product that they necessarily want. But if they're not doing a lot of refinements or if those doctors, their mix of products because really the no AA product and really what it's designed for is to go after those doctors who still do a lot of wires and brackets. . And typically, when they might order wires and brackets and they have that material cost of $350, it's a big gap to go from $350 to depending on their discount, they might be paying $1,300 for Invisalign. But now you go with the no product depending on their discount, they might be in the $700 or $800 range. And so it's much closer, still more expensive, but much closer and what it's doing as we've introduced this product, we're starting to win in those gray areas. We're winning in the areas where doctors are looking at it and say, okay, it's a little bit more expensive, but I know I'm going to get some digital benefits from this. I'm going to start to put more and more of my patients into no refinement type product. And really what it means for those doctors is it's a less upfront cost. And as they need refinements, they just purchase them. And if you're in the U.S., $170 and you purchase it as you go. And it forces that doctors focus in on that treatment plan, getting that right treatment plan being really hands-on and then being able to decide if they need refinements or not. And that flexibility, I think we all look at that in our lives and say, sometimes you order something with a service plan and some of them you don't. And I think a lot of people nowadays don't order a service plan that's exactly what this is. And I think our technology has really improved over the years such that we can have a comprehensive product that is a 1 and done. That patient can pretty much get to where they need to or if they need to do a refinement, maybe that's 1 refinement. We wouldn't have been able to offer this type of product 10 years ago. Our product that we had was the comprehensive unlimited 5 years with unlet. But it was just due to the product capability.

So you alluded to maybe the benefit relative to wires and brackets and it helps the doctor from sort of a cash out perspective, I think about 2 potential wins. One is the share of share with wires and brackets. The others might be some of the GPs or even those that are opting for a lower cost competing clear aligner for a really simple case, are like simple comprehensive, you get 12, 14, 16 stages you actually think the bigger 1 is going to be in the share of chair? Or do you think it might help claw back some of the defectors to other...

I think you get the combined benefit. The first purpose of the product is to increase our share. We want to be able to go after that wires and bracket group that we want to be able to get more and more volume from that, expand our -- the market for us in that clear aligner market. What we will get and what we do see as an added benefit is many doctors who ship based on price. Do said, "Well, wow, you're much more competitive sure. You're actually lower than some -- than the competition. And what we've seen with competition going the other way, they've actually increased price and we haven't. So I think the combination of what we're trying to do to be -- to kind of get that share of chair wires and brackets at that price and then being able to have the added benefit of win backs. That's what we're seeing, and we're happy with that.

Okay. I think investors in -- the Street and myself included, were in the near term, curious about 2Q '26 in the balance of the year. But I do want to talk about the algo for next year, right? Because at a high level, -- the Street does have the rate of growth accelerating in '27 versus '26. And you do provide a reported revenue number. So if I think about your guidance this year of 3% to 4%, let's take the midpoint of $3.5 HMRC and FX is about a little over 1 point, maybe depending on currency. So that gets you -- let's even call it, 2.5, maybe slightly below that. And I think Street is closer to 5%, maybe 4% and change to 5 next year. So Outside of macro, right, because we don't know, and we haven't known or it hasn't improved for a number of years. Outside of macro, John, and we sort of started the conversation this way, but talk to some of the accelerants that you see in this business for next year because even with systems and services, my mind goes to like alumina product cycle that was really successful, but a little bit more aged in that regard. So what drives that acceleration?

So some of the products that we talked about when we have like the NOAA, no refinement type products, we're seeing good utilization there. More and more doctors using those, you start to see some of the growth opportunities there. And that really, in Mark's part when we talk about North America, especially on the North America Retail, that helps with that because when you look at our business as we started the conversation, double-digit everywhere except that North America piece. So we are growing double digits, and we're seeing that across and we expect that to be able to continue in -- outside the U.S. from a market standpoint. It's continued investment in with our DSO partners to be able to help them grow because they're growing at that double digit as well. And we've seen that. And then doing these active ways to be able to drive conversion, partnering with financing companies and others to be able to get those financing options and solutions to those doctors' offices because when they have that financing options and they have different ways that they can help convert those patients, they're seeing great success well. So it's not a 1 silver bullet there, but it's continued growth on the international side noninterest DSOs continue to come up with innovative ways to get that win the gray area with those no AA products and then do conversion opportunities to be able to help drive growth. Those are all things that we're seeing good growth with. And we want to be able to continue that and get through the Q2. We're excited about getting through the first half, and then we'll lay out what it means for second half of next year.

Yes, 1 thing I would build on that John just said, in addition to the technology is just the continued expansion outside of the United right? The emerging markets are still a very, very fertile opportunity. .

Okay. But had built up to your point, Charlie, where they're no longer insignificant. Like if they're executing and they're growing, you're starting to see there have some sort of an impact on the numbers. .

Maybe last couple of questions for me. DSOs, John, I'm getting more and more questions. In Americas, it's about 35% of your...In North America. .

In North America and outside of North America.

But total globe from Total worldwide,

Okay. And broadly speaking, -- do we think about it as lower gross margin, higher op margin because cost to serve is lower? Or how do we...

Say gross margin. I mean gross margins are very comparable to the rest of the business because -- they have -- they do a lot of work, the DSO partners, they create the templates with us to be able to have the product that they want based on the protocols so the treatment planning, some of the back and forth is not there. They've really migrated to mainly some of these more lower AA type products. And so for us, from a gross margin setpoint, we feel good about the work that we've had with the DSOs. And certainly when you get down to op margin in terms of the work that they're doing, the training that they provide, some of the efforts that they have from the local marketing and so on, that's something that they're driving and we're not having to spend on. So it's a really good partnership that we have with our DSO. They really take the approach that we could bring where we bring scale, we bring technology and we bring brand. And all of our DSOs are taking some aspect of what we bring to the business and being able to see that outsized growth.

So just to conclude sort of positive mix shift from a margin perspective as well if they continue to I'll be happy if independents leapfrogged them and go to 15% growth we see the...

But look, those are -- they are a force multiplier for us. We see that benefit through those partners, and we want to continue that.

Okay. Fantastic. Any last minute questions? Aline team. Thank you very much. Great to see you.

Thank you.