Align Technology, Inc. ($ALGN)

William Blair analyst covering Medical Devices, Dental and Animal Health, where I am required to tell you for a complete list of research disclosures and potential conflicts of interest, please visit our website at williamblair.com. We're excited to have with us Align Technologies this morning. We'll have Joe Hogan, President and CEO; and John Morici, CFO, going through a corporate presentation. If we have a little bit of time, I might do a Q&A here. If not, we will go out to the breakout room as Maher after this for a follow-up breakout session. Thanks.

Yes. Thanks. So just to start off, this is our kind of our platform page overall. But when you think about aligners and how we go to the marketplace, I think it's best to think -- it's not just about clear aligners because obviously, we have a lot of competition out there from a clear aligner standpoint. It's like what kind of platform do we stand on. And if you just walk through the slide quickly on the Connect piece -- we really have the only brand in the orthodontic or dentistry market the consumers really understand. So we do a lot in that first part of connectives, connecting that consumer with a doctor. And then secondly, Scan and scan has come up now 95% of our cases are scanned versus 10 years ago and fiber scan. . Once you have that digital image, you diagnose, you plan, you treat and monitor and then retain all the way up to treat now in the plan and treat side, we can do these within 20 minutes of a patient being in a chair for about 20% of our patients. So the technology has really advanced that far in this platform. And you'll see us continue to work in different parts of this platform over time so we can improve speed, improve the confidence of our doctor base and also the consumer piece, too. Overall, when you look at it, 75% of my inclusions globally, that's a fancy name at people's teeth or cooked overall. The market breaks up into 30% adults and 70%, 75% teens. Our business is actually completely reversed in that. We're about 73% of our total adults and 23% teens. We can get in -- that has nothing to do with clinical competency or efficacy of our product line. It has to do with orthos choosing to use wires and brackets over digital over time. We have found that as we work the team marketplace, the most compliant part of the team market is what we call the tweens or young children before they reach a teenage. And this is where bone is most Malibu and you can move it. The traditional devices like we're showing down below braces and also that at Hira appliance that's shown below have been the traditional devices that have been used in orthodontics for Phase I treatment when patients are young and their there not coming in properly. We've introduced 2 products, our most successful 1 has been Invisalign Teen, which is for early intervention and expands a pallet and let those teeth come in. For very severe cases, we have an Invisalign pallet expander, a removable device, first 3D printed medical orthodontic device in the world that does that in about the same period of time, but just a lot better wave for a patient to be able to experience that and a patient going into someone's room every night and turning us through in some way. as what you have with the old high Rex device in some way. So we're seeing great use of these product lines, and this is the most compliant group of patients that we appeal to are the younger patients. They're actually still listing their parents at these age and before they hit the teenage. Invisalign system for all ages and cases. So down below, you can see that horizontal line. It shows the ages that we're working through anywhere between 5 up to 8 years old for pallet expansion, then teen our team product will give you 5 millimeters of expansion when you look at the Invisalign palate expander can go to almost 7 millimeters of expansion. So a doctor just makes looking at where that child is, they'll take a CBCT, understand how much expansion is needed and figure out the device. In between that 10 and 11, you see that in Invisalign, the Vera retainer piece. That will be our new 3D printed retainer. And you see the kind of odd construction of that. You need a combination of thickness and strange geometry and be able to hold kids' pallets at that age. And you can only do that with 3D printing. And you'll see that product begin to hit the marketplace in the third and fourth quarter this year. And then Phase II treatment, I think we all know is based -- our normal product and then our mandate advancement product for Phase 2, which is when you have a chin that's being recessed and you want to move that forward. You have to catch that patient in a bone growth era when that's going on. And if we do, you can -- when you look at Class 2, probably 60% of our cases are in Europe. It is almost -- it's like a genetic aspect, like Class III would be mainly Asia. John, you can hit this piece.

Yes. So with the portfolio that we have in terms of that Joe talked about, but really having a clin check. This is the AI version of what we have where we've been able to -- with our doctors 23 million-plus cases that we've been able to do. We learned a lot about how to how to treatment plan, what tendencies that doctors use and then we repeat that. So if they scan we can get them that treatment that doctor would like for that particular case that they have and many times right when they're having a conversation with the potential patient right there. So you're kind of hitting them in the moment so that they can visualize have that conversation. And then do the other technologies to be able to make sure once they go into treatment, are they tracking to what they thought with some of the virtual care and other AI tools that we have and then ultimately, getting them into retention. So a lot of technology that's gone in both on the appliance side itself, the actual product and then the treatment planning, and it's really a testament to all the cases that we've been able to help with and what we've learned from those cases.

So Clinic software-enabled scale. This is just a chart to show you what's happened in 5 years. We went when you look at 2021, that was our first year that we really got off of individual computers and ended up being able to clean check on servers and do ClinCheck in the cloud. And since that period of time, we've had put a lot of technology into being able to incorporate whether it's a ClinCheck live, which is you do the ClinCheck, you immediately understand where that patient would be, how many aligners it would take to finish that at some point in time. All the way when you look at like plant addition and ClinCheck software, we can make those changes. I call that almost like Photoshop, where ClinCheck will come up the treatment plan will be done. The doctor can make some teeth adjustments or tooth adjustments that they might want to compensate from what was uncovered in our algorithms in some way. . You can send that on the manufacturing, again, about 20%, 25% of our cases are done live that way today. We talk about these global clinical preferences. This is used a lot in the general dentistry community, meaning that we've done 24 million cases. We scan a patient, we've seen that case before in some way. We understood how it comes out. we'll tell the GP in that sense, you should run this play, you should run this -- these algorithms in order to make this work. Again, in 20%, 25% of those cases, they just flow through and work. So that's -- you see a tremendous amount of automation since 2021 of using the cases that we have done and using advanced algorithms in order to put these cases together. A 3D face scan today, which a lot of doctors, particularly orthos want to understand the bone structure and how you change your teeth, how it's going to really change your overall physical appearance, both Chin and cheeks. And you can do that with incorporating CBCT scans and 3D face scans and then ClinCheck live plan, which is you scan, you basically get a case. They're based on your protocols as a doctor or protocols that we suggested that you'd give to other doctors or 2, you can check ClinCheck live and you can go right to manufacturing without any kind of back and forth. Remember, if you flash back like 2021, most of these ClinCheck cases took 2 weeks. Today, it's odd to see them take over 3 days or 2 days. Most of them are done in a day.

And to further that many doctors or dentists and orthodontist we have, they want their own ClinCheck, they want their own technique and an idea where they have the plan. We were able to incorporate that plan into that treatment plan that comes right to them. So it's very personalized for these orthos and dentists. And it just makes it much easier for them to be able to get that treatment plan back, how they want it. kind of in that moment when they're thinking about that patient, and many times when that patient is right there, the potential patient is right there. They can be able to get a treatment plan based on the preferences that they want, and that's something that we've been able to build over time. And as Joe said, it used to take us days, sometimes weeks to have this. Now you're down to minutes, and you're able to give chairside view of a clinical experience to that potential patient.

And it's kind of an orthos workflow, too. That's the way they think when they're doing wires and brackets. They're actually thinking through what that treatment plan is going to be. And so this kind of mimics the normal workflow that an ortho would have. Patient compliance, digital engagement, monitoring and support. So we have a product called Virtual Care today, where we can track through AI algorithms every week, you take a picture of your teeth as you're going through treatment, we can tell if you're on plan, if you're not on plan. If you are, we tell you to advance to the next piece -- it takes about -- now it's about what, 30%, 35% fewer trips that a patient has to go to a doctor because you have this kind of advanced technology that can see the patients outside and be able to flag if there's going to be some issue in some way. Remember, if you're in North one, you're doing wires and brackets 35% of your day is emergencies. -- patients running in because of wire came loose or something came done or whatever. You go to a digital plan like this, you go broadly digital, you change, you cut your real estate in half, you cut your staff and have to make that work if you really adopt this digital technology. Profitability, John, your outlook.

As Joe was saying, I mean, this fewer office business. When you have digital technology and you really encompass a very predictable, reliable way to be able to treat patients. You don't have the emergencies as you would have with wires and brackets. You have fewer doctor visits just what it is. You have a certain set of aligners, you stay on track with some of the monitoring tools with virtual care and so on. you just don't have to have the staff and because you just don't have as many visits. So it's really a benefit on the doctor side where you can staff that appropriately. But think about it as a patient or as a parent, where you don't have to take your child or yourself to the dentist or orthodontist is off it because you don't have the emergencies that you don't have as many office visits that you need you get done faster. There's a lot of benefits that from a time standpoint, the patient or the patient's parents get but also on the doctor side from a profitability standpoint.

GP opportunity is a big 1 for us because in general, GPs aren't taught in dentistry school how to move teeth. That's changing in some universities today. But obviously, we bring those skills to them through our sales force and our training programs and our key opinion leaders. -- overall. And this, when you look at this a GP opportunity overall, again, that 75% is every -- 75% of the people in this room, if you haven't had your heat treated, you have some kind of malocclusion that should be treated not because of aesthetics because you're teeter wearing. If they're not going to match an inclusion in some way, your teeth of wearing every day and there's a big push more and more about oral health and the vector of oral health from a standpoint and someone's overall health through their lifetime. So maintaining your decision through life, a big part of that upfront is the right hygienics but to make sure that your teeth aren't eroding themselves because they don't have the right occlusion in some way. The other side is comprehensive dentistry and comprehensive dentistry is when you're doing implants or particularly, I'll show you on the next slide when you're doing aesthetics or whatever, we can use our product line, too, to help to move teeth to save enamel that normally would be ground off in some way in those procedures. And we'll show you a few pictures overall. But when we talk and say, if you were going to do an implant and you had missing a tooth for 6 to 12 months. those teeth that are next to it, if it closed. So when you put the implant in, you're going to shave off the enamel or the adjacent molders to put that new implant in. When we talk about Invisalign Art, and we'll walk you through it and those kinds of things, and this is why -- we made significant investments in these areas. You can save that enable on those teeth. You could save the lifetime of those teeth. If you just take another 2 or 3 months, move the teeth apart to insert that piece. When we talk about art, it's restorative treatment that we're trying to move into the mainstream of dentistry. Before you had digital, you can never think this way, you'd never do that with wires and brackets, but obviously, with obviously, plastic aligners in a digital kind of a footprint, you can make changes like this in dentistry that weren't available before. Global trends toward preventative health patients and consumers, dental professional societies, government and health care systems. That's a piece that they're talking about. It's not just aesthetics, it's about how to make sure that your teeth are a vector for health and how do you take care of those teams. Go ahead, John.

So when you think about the oral health, it fits into our overall workflow -- the digital workflow that we have where you get that scan, you're able to start to get an idea of what is the overall health of your dentition or your teeth moved in the right places you have carries or other cavities or other restorative things that you might need, but really trying to make sure that when you look at the comprehensive treatment -- it starts from the beginning of getting some identification of people who might need to go in for some type of treatment and then working them through that journey to get to that ultimately to provide better oral health. And that's a big push that we have when you think about the comprehensive dentistry and what we're trying to go to. Many of these patients, they're in those dental chairs on a regular basis. Do they understand their oral health. And these capabilities that we bring to those dentists give them that capability say, "Hey, this is a problem, this is clashing here, this is how your teeth are wearing. This is what you would look like with treatment." And improving the overall oral health, there's a really big, very good visualization tools that we help doctors with.

That diagnosis piece is really important. If you're going to a dentist today and that doctor is walking in the room saying, "No, what I see back in your third molar or whatever, you know you're in the prehistoric days right? There should be a screen in front of it. You should be looking at your teeth -- they should be pointing at those state and say, here's where the issue is and what are we going to do next or whatever, that's modern day dentistry. And honestly, in your personal lives or whatever, you should be looking at that because it's a completely different world. When we have somebody kind of explaining to you. And if you think in medical, John and I grow medical devices too, I can't imagine with a CT scan or MRI when you knee hurts, you want to see it, right? You want to see if your ACL separated, you want to what loss instead of some doctors saying, I think this is what you have, right? . So visualization in dentistry is what's coming. We're really leading that when you think about the diagnostics that we offer with iTero and what we're doing. One integrated solution for comprehensive exam, so have an overview what your tooth health, not teethealth but individual tooth health overall. -- gum health is huge. We'll be able to read that the diagnostic to say, "Here's where your guns were 6 months ago, often iTero, here where they are today. You have a certain amount of recession somewhere do less of this do more of this overall? What's your bite that's your inclusion? Is it an inclusion or not inclusion and what's the alignment overall. So this is the digital platform that we talk about. These are the different components of it. but it really is the road to modern day dentistry and I think how will be treated and the tools that we're bringing the dentistry overall.

Yes. This is some of the treatment planning and the personalization, just another slide of that. Just every dentist, every clinician, people within -- they have preferences that they want to follow. We look at the cases that they've done. -- be able to give them treatment plans in real-time that follows the overall journey that we have. And again, getting those doctors to be able to have those treatments in the moment while that patient is there. it increases the conversion tremendously. When -- as Joe said, you can show them exactly and you're really taking that potential patient along for the journey to say, "Hey, this is what's happening. -- let me show you this. Let me show you what your treatment would be and help them visualize they can see themselves before and after, they can see themselves before ortho after restorative and get to the end result that visualization is very powerful and it's very powerful when you put it into a treatment plan that the doctor will follow. The video piece is a key piece of the conversion, not only just a static view of like before and after treatment to what we started with really now you get into this where you have a video. Somebody's talking and they're talking and when they're talking, they're showing their upper and lower teeth just as they're talking about whatever it was before. Now as they take a scan, it goes into that plan that, that doctor has in terms of how they want to treat the patient, then it shows up in that Smile video as after treatment. So that person can see what they're clinically going to look like with a treatment and they see side-by-side before treatment after treatment, and it's very powerful and it helps doctors close a lot of these cases. So we've been able to develop this more and more, and it gets potential patients very excited about their treatment.

That's like a 50% higher close rate, if you show the video. And it's because, like John said, you can see the bottom teeth. So just to entertainment sometime, get a Netflix, find a British movie like 1950s and watch it, okay? You'll see a huge amount of opportunity. Okay. Comprehensive dentistry. We have a program called -- we have a business we bought over in Germany. Back in John, we get held hands on that 1 in 2020 exocad. The idea always is how do we do comprehensive dentistry, right? How do we actually move teeth out of harm's way in order to -- that demo treatment would be less invasive in some way. So that's what the purpose of the exocad acquisition was. I hate even showing this chart. But when you talk about the Social 6, at your upper what has been normally done around the world for aesthetic treatment as you see up on top is the initial smile. What they do is they dentist will grind those teeth down to those pegs that you're looking at on the bottom right-hand side of that screen, they'll order caps and crowns from a local lab and then temporarily give you almost like a plaster cast to put over these. So you live with that for a couple of weeks or a week. -- and then you put the caps on. What we're talking with Invisalign and John and I will get into it is, you don't have to do that. We're going to spread those teeth out, so you don't have to grind them and then you can use veneers. Over top of those teams without losing all that enable and losing all that tooth light that you'd have. So if you're talking about this to your friends, family or yourself when you're looking at that, and some aesthetic dentist says, I'm going to fix that. You don't have to go that route.

You might get instant gratification if that is to get those veneers put on or something, and that's what it is. But if you just look at the size and just the dentin that's there, just how it's going to last, you're going to need something later on those other teeth. Whereas if you move them, you're keeping your healthy dentition that you have, yes, you still need to do some restorative or whatever else, but you're starting from a much better position. It takes a little bit more time. But I think if you go back to taking that patient along for the journey of some type of treatment. I think all of us would look at that and say, well, okay, what does that take in time? How much more does it cost. If those are reasonable and they are I think most people would choose for give me the right solution.

And this is what we call advanced restorative treatment. That's Invisalign art. We don't go through each 1 of these pieces, but we're basically talking about the 6x6, which would be your top 6 and bottom of how you can move those out of harm's way and use veneers and other things rather than grinding those teeth down and having caps and crowns. And we do that through a lab more than we do it through a doctor or through an ortho in some way because labs are the ones that basically set up those restorative treatments for the general practitioners overall. So we use the Exocad program that all those many labs around the world are using and we embed in that the tooth movement that we have in ClinCheck so that they can make those corrections and send it back to the doctor with a choice of, hey, you want to take another 2 or 3 months to move those teeth or you want us to grind them down. to give the patient that option were to do it. And here's what the pricing outcome would be about. Continuous evolution of breakthrough technologies. This is just this business is a really interesting and fun business. It's an incredibly large software business and how you do ClinCheck, how you do diagnostics, iTero, all these things is used. -- but it also has a big material science and production piece with the 3D printing that we do and the kind of plastics that you need. And so what this basically shows is just a lot of just breakthroughs that we've had over the last several years, along the way. And so I don't want to go through each 1 of these, but the truly huge breakthroughs coming through obviously, is machine learning and AI that we've done on 24 million cases in order to be able to project a much better in the sense of where these cases are going to end. And the material science in the 3D printing piece where we're moving into direct 3D printing rather than making molds, it gives us much more control over the wall thickness and the shape of these aligners and then as a result, their clinical efficacy and efficiency on what they do. And so -- but along the way, this takes a huge amount of R&D and time in both software and hardware and now in processing technology in order to do that. which John is so painfully aware of right there. If you look at this chart really on the right-hand side of the chart is about customer experience and clinical effectiveness and on left-hand side of the chart, the kind of technology we brought to bear in order to change dentistry and to make digital dentistry a reality out there in digital orthodontics. Go ahead, John.

Yes. I mean, different types of movement that we have that we've introduced at the chart that Joe just showed, a SmartForce moving teeth in the right manner, positioning things the right way based on a lot of the cases that we've done, having the right material, the smart track that we use now soon to be additional with some of the direct fab material and so on. And then how you move teeth in terms of the staging, what tooth moves first and how you change things? And anchor as you want to move to be able to move the teeth. But again, based on what the clinical preferences are for that particular doctor.

And properties needed to align material deliver general forces I want to go through this, but we started off where we used to do displacement. Every aligner with base represent what the next stage looks like. What we do now is we actually program energy into those aligners. So it's not exactly a replicate of where it's going to be. It actually drives these teeth through how you place that energy inside that plastic liner when you form it. This is a material science equation, though, but all plastics aren't the same. And you have to find the right plastics. In this case, you need ductility, you need rigidity. And so that's why you have to do multifaceted plastics, which are layered plastics of polyester in this case and polyurethane in order to take those forces and be able to translate those forces into teeth. And our teams are expert in the sense of understanding what materials can do that and how you configure those materials. Innovation at scale always. Look, this is what we do is across the board, we're always driving innovation in this business because it needs innovation and there's opportunities for innovation in this business more than really any other business that I've been in.

When we think about what we're able to try to bring, it's innovation around the products, what we provide from service and treatment planning and so on, but also business models, working with our doctors, our customers to be able to help drive conversion, be more active about the conversion. And tools, especially in this environment, this economy around the globe, those doctors that take more of an active approach. We see it with a lot of our DSOs, our dental service organizations. They're really trying to nurture those potential patients through and drive that incremental volume. .

Go ahead, John.

So we would look at some of the things that we have you're able to come up with different innovative business models to be able to help those doctors who want to be able to drive potentially more traffic to their practice, they want to digitize, be as efficient as possible and then how do we partner. And that's why it lends itself well to work with dental service organizations because they're leveraging aspects of a company that are unique. Aspects around scale, the efficiency that we can bring, aspects around technology, what we're just talking about with a lot of the digital technology as well as the product technology and access to our brand, being able to leverage what they want to do at their practice plus leveraging our brand. So when you see some of the models that we have, this is a doctor subscription program, that's essentially saying a doctor wants -- they want to have a commitment of a certain amount of cases or certain aligners that they need. Some of those aligners are they going to be used for retention over a period of time. Some will be used for what we call like touch-up as cases that they just need to do minor movement and so on, but they want to be able to have flexibility. Maybe in some cases, you want to do a full case and that's how they purchase their product. In other cases, they just want a certain amount of aligners that they can commit to and use over a period of time, but giving them that flexibility, especially in this market has been great, and this is 1 of our most successful programs. And then so financial friction is a big piece, financial friction at the potential patient level -- you hear a lot about consumer confidence and what people are seeing from inflation or oil prices, whatever it is on their mind, you've got to be able to get to a patient financing, not on our books, we don't take the end risk from the financing, but partnering with many other companies, and this is a global issue that we work through where those external financing companies are finding ways to be able to finance potential patients because patients don't want to put a lot of money down and they certainly don't want to pay a lot on a monthly basis. So HFT is a great example here. I was talking a lot about that. It's very high approval rates. -- many times prequalification, -- it's great for the practice because the practice then gets more of their cash upfront. -- and they don't have to bother with the collections, HFD, -- in this case, we'll do that. And it integrates into many customers that we have. So when we think about the last mile and what we're trying to do to help conversion financing with the external patients is a key way. It's a big deal. And so you can see some of the benefits that we have. products that we have as another way to go after trying to drive utilization. You don't -- we used to have -- and we still have a product called Comprehensive unlimited, but that's 5 years with unlimited refinements. -- in this product, it's a, look, it's still a comprehensive product, but you don't have any refinements. You don't have any "service" built into that product initially. If they need service or need a refinement later, they can purchase it. But again, it's giving those customers of ours flexibility and how they want to purchase, maybe they purchase a service plan upfront, maybe they don't. And what we see is when they don't, the pricing is a little bit better for them, and it helps drive utilization. So this is more of that is basically rolling out to different areas. It really started with our dental service organizations. -- they really like that, having that flexibility. But again, we have a product portfolio that's really evolved through technology to be able to give them this type of product. So that's a quick snapshot of all the different things. I don't know, Joe, do you want to add.

No, I think that's our story, and we're sticking to it. Okay. That's it.

But it's an evolution. I mean we are pushing things forward, really trying to help drive conversion, especially in this environment. It's a lot of technology, a lot of breakthroughs that we've had, and we're winning in those places. We just have to be active about driving that conversion piece in this market. You especially in the U.S. right I can't wait for people to say, yes, I'm going to wait for something in the future, you want to hit those potential patients in the moment and drive that conversion and ultimately, it's going to drive more throughput for those doctors.

We didn't leave in much time there.

We will go to Maher for the breakout.