Align Technology, Inc. ($ALGN)

Okay. Good morning. We'll kick this off. Welcome to Jefferies Global Healthcare Conference. I'm Mike Sarcone. I'm an analyst on the U.S. Medical Supplies and Devices team, and this is a fireside chat session with Align Technology. From the company, we've got John Morici, CFO; and we've also Madelyn Valente here, who is part of the IR team. So John, thank you for joining us today.

Of course.

I guess just to kick it off, high level, just on the macro side, I'm sure you get a lot of questions there. Can you just give us an update on what you're seeing on the macro front in terms of patient demand. I know you've talked about continued stability in North America, but we are seeing rates increase inflation go up. So just give us an update on how things are trending?

Yes. So we've seen, as we've gone the last several quarters, some of that macro that's similar to what it is now, you still have higher inflation on things even prior to some of the things going on in the Middle East, and we've been operating in that environment. When we look at our business, and we've got double-digit growth outside North America. International growth has been strong for us, whether it's APAC or EMEA or Latin America. North America even when we look at DSO, the DSO dental service organizations, they've been growing double digit. Where you see some of that pressure has been on the the U.S. or North America retail side that those doctors, but we've been doing and operated in that environment for several quarters. Where you have to go and really try to drive that conversion is be much more active. Work with those doctors to be able to help nurture those patients and get them from being interested in treatment to actually going into treatment. And we could talk a lot about the different tools and tactics that we have to be able to help our doctors. But it's been a similar environment that we've been in for a number of quarters now.

Got it. And I do plan to get into some of those tools for the docs. But can you remind us what kind of assumptions you've got baked into your outlook for this year, I think on the -- from the macro standpoint?

So when we expected from a macro standpoint, we guided 3% to 4% for the overall year and 100 basis point improvement in our operating margin. It's a reflection of things that we're doing even in a challenging market to be able to help drive growth, and we see that and do it in a profitable way. We've taken a lot of cost actions from last year and into this year to to drive and improve our productivity, and we're seeing good results of that. We saw a 250 basis point ex FX basis point improvement in op margin in the first quarter, and we're very pleased with that in this environment. And we have a lot of other cost actions that we continue to take to drive productivity as we increase volume, we get the benefit of that operating margin leverage from that. And so we feel good about how we positioned this year, especially in light of the first quarter where we feel like we delivered in an uncertain environment, but we have a lot of things that we have in place that are executed.

Great. And just last question on the macro front. On the 1Q call, you did mention the conflicts in the Middle East, you're expecting then they could have some impact on mean have things played out as you expected there? Or anything you can...

When we look at the framework when we go from 1Q to 2Q, if you looked at our business, if you go back last year, a year before, in several years, typically, we go from 1Q to 2Q when we increase revenue. So start with the top line 3% to 4%, sometimes more. And that's a reflection as North America gets into teen season, as you get Western Europe and others, they really start to increase some of their volume as they go from 1Q to 2Q. And you also have the sequential improvement when you go on the Systems and Services side. First quarter seasonality is a little bit lower, it builds as you go to second quarter. So typically, you have that. And when we wanted to talk about prudent guidance or I get a lot of questions regarding that, we put it at the midpoint of 1%, and so when we go from 1Q to 2Q, it's a reflection of that. We're executing and doing the things that I mentioned in an uncertain environment. We look forward to getting to the end of the quarter to be able to update people.

Okay. Great. I did want to shift into the comp AA offering. I know you started rolling that out in 2025, and you're continuing to ramp that through 2026. So can you talk about what you've seen in some of the earlier accounts that have adopted that particularly among the DSO customers and what that's done for utilization?

Yes. So the products that we have, so when you think about the evolution of some of the products that we have, the the earliest product that we had from a comprehensive standpoint that was really -- the start of that was over 10 years ago where we put out the comprehensive with unlimited refinements over 5 years. And really, that was a testament to try to be able to make sure that our doctors would feel comfortable using our products and giving them the confidence that no matter what they could get to a final outcome. And so we had 5 years with unlimited refinements. But it was also a reflection of the fact that maybe our products back then 10 years ago, they couldn't maybe finish all the cases. They were 60%, 70% effective. Now with a lot of technology and other innovation that we've put in, we have products that with a comprehensive that can go and you don't need refinements or you might need one refinement. And so so much of that technology has really enabled us to increase our portfolio to have a product like this, the comprehensive with no refinements. And so what we've been able to do working with our DSOs, our dental service organizations, they've been able to essentially test this across a wide variety of doctors. And what they're seeing is good results. They're seeing that doctors now start to utilize those types of products more and more. And that increase in doctor usage and that utilization is a benefit. And so we see that playing out more and more because that product, specifically with no refinements is designed to go to an orthodontist who who looks at a patient and says, "Do I put that patient into wires and brackets or do I put them into InvisAlign?" And typically, there is a big price gap where if a doctor might, from a material standpoint, might pay $300 or $400, they say $350 for wires and brackets. It would be a higher price for InvisAlign with the comprehensive unlimited. Now as you bring that price down to reflect what that product is that cost of service is much less. Now doctors look at that price and say, "Oh, now maybe we'll use InvisAlign because that price is a little bit closer," And what I call that product and what it's doing in the marketplace is kind of winning those gray areas. When that doctor then said a I understand that I'm going to get benefits from InvisAlign because of the digital technology versus the analog wires and brackets, they sometimes choose that. And when they do, that increases our utilization. And the added effect that it has as well is it's very competitive from a price standpoint. So it's not designed necessarily to go in from a clear liner pricing standpoint to be as competitive with other clear liner companies, but it's turning out to be because it's it's like I said, it drives the utilization versus wires and brackets, but it's also very price competitive, and we're seeing customers come back to us as well. So it really has a great effect and we want to continue rolling that out. It's gone through the DSOs and now further into more and more doctors, and we're pleased with the results.

So it sounds like you've seen some good price elasticity of demand in those DSO accounts. Do you expect that should or could translate onto the retail independence side?

Yes. We look at what we see in the DSOs where they're looking for the efficiency. And they come -- when we think of what DSOs look for from us, it comes down to usually 3 types of factors that they look at for. They want us to be able to drive the technology, newest technology, like a comprehensive with no refinements. It's very latest technology to give them confidence that they can finish the cases. Second part is the operational scale to be able to scale the business and be able to provide product to them in days versus weeks and then they leverage our marketing. You bring all that together with some of these products that we just talked about, it's a great combination. The gross margin that we have on our DSOs is equal or better than what we see with our -- even our retail doctors and certainly from an op margin, it's better, because there's a lot of things that go on within those DSOs that we don't have to do. They'll do some of the local marketing. They'll do some of the treatment planning services across their DSO that we don't have to do. So there's other aspects of it that they're taking the initiative to do to help drive their business. And in the end, it's -- we're driving to more and more doctors that we sell to across those DSOs and increasing utilization. And that's a good trend, and we want to see that continue.

So you are seeing some early signs of utilization increase in the retail accounts that have adopted?

We are seeing that it wins the gray area, and that is a positive for us and anything that we can do. Because remember, on a wires and brackets basis, most regions, 80% of the cases are still done with wires and brackets. And on the teen side, which is this is really what it tries to help sometimes the wires and brackets in the region might be 90% of the cases. So even in a tougher economy, those wires and bracket cases were going to happen anyway. I mean teens go into treatment regardless of what's happening from an economy standpoint. If we can help our doctors win those cases so that they were going to go into treatment and instead of wires and brackets, they go into InvisAlign, that's a win for us. And we start to see that utilization benefit.

Great. Are there any key markets where you haven't rolled this out yet?

Very -- it's really various versions are up everywhere. So we see it in North now doctors need to adopt this. It's one of those where you want to make sure doctors understand that if they don't and they have a lot of refinements maybe they need to ease into products that don't have as many refinements because in the future, they'd have to pay for them. And so we want to make sure that, that is right for them. But we see this rolling out in North America. There's versions of it in Europe and APAC as well. And look, for our business and in success, we'll continue to roll things out. .

I don't know if you've kind of given the time line here, but do you expect by the end of this year, you'll have it pretty broadly.

I would expect. I mean, you look at how we've done like a product that was really the precursor to this. We had the comprehensive unlimited, the product that's kind of in the middle is what we call the 3 and 3. It's 3 years of treatment with 3 refinements. And we introduced that 3.5 years ago, and it quickly became our #1 selling product. And the takeaway for something like this is many doctors just think about it as a consumer, you want to be able to purchase things the way you want to. And sometimes if you buy a product, you want a service plan, other times, you don't want a service plan. I think giving these doctors the flexibility to add service at the beginning or mainly as you go gives them that flexibility. And what we're seeing is when you give them choices, they respond in the right way. And when we look at products like this, don't think of hey, different pricing is going to affect ASP and so on. The way we defer our revenue, we're really indifferent some of these products like this because you're just going to get the refinements later. And also from a gross margin standpoint, products that have less refinements like this comprehensive with no refinements, has some of the highest gross margin rate that we have because there's not a lot of back and forth. They follow a template, it's shipped the product and then you're done. And then if there's refinements, we charge them for that going forward. So it's really a good combination of driving utilization and doing the things that are right at the -- with the doctor, but then also driving what's right for our business, which is improving our margin.

That makes sense. And I did want to pivot to some of the other -- some of the other things Align has been doing to help the docs. You recently hosted the tech talk, the Tech Summit. I thought that was really helpful. And one of the things you talked about was the HFD partnership and the Smile Advance program, and I think it's something like $99 down payment for the patient, 0% APR for 24 months. I think you even disclosed you have over 6,000 offices enrolled here. So what types of benefits are you seeing among those adopters? And could we start to see this play out in terms of growth acceleration?

Well, we already are seeing it play out with HFD and other financing in this market where it's been this more challenging market. And really since the middle of last year, we've kind of leaned into ideas like this where if we can help our doctors to be able to try to drive this patient conversion in their offices, that's definitely a benefit. So what an HFD or other type of financing is be able to provide those potential patients with low down payment options. They don't want to pay a lot of interest or any interest, ideally, maybe a 2 year. And then also the FICO scores that people are concerned with and HFD has done a really good job of having a very high acceptance rate without much money down and then getting the payments over the time. So it's good for a patient standpoint. It's also good for a doctor standpoint because they're getting a lot of patients through. They're getting much of their cash upfront. So HFD or others give a certain amount of money upfront and that helps from a working capital standpoint. And then they do all the collections. And so there's an added benefit for doctors to be able to partner with this. And our role really in this is to be kind of the broker of all this, making sure that even though it's not on our books, this is not our financing that we're doing, we're arming our sales reps to be able to go into those doctors' offices and give them alternatives and say, "Look, have you thought of this, if you introduce this program, HFD and others have salespeople or kind of field people that come and help with this as well." But this is an environment where you've got to win those gray airs. And I look at this as winning those gray areas. You want to be able to give flexibility to those potential patients to be able to go into treatment. And people get concerned with inflation and so on. If you have these strategies to be able to help drive the conversion, it can make a big difference. And it's another type of tool that we've learned with our DSO involvement because they're seeing the success. We look at our big DSO partners, they're all doing this. And so this is another learning, just like we talked about the comprehensive with no refinements. We learned in the DSO. It's -- you start to see how it scales within those practices, and then we take it quickly to the rest of the organization. So we're looking for these types of ideas really country by country. It's kind of how you have to go to this. And again, it's not on our books, but we are one that is trying to help facilitate this. And again, when you talk about winning the gray areas, this is one that helps.

Do you see difference -- a difference in kind of the decision to bring on a program like this between DSOs and retail. Like is it just as easy a sell.

DSOs can go faster because you have mainly more of a tops-down approach. They can put that out. On Heartland has got 2,000 doctors that they can push that to, and it's maybe faster. But the opportunity is there. The opportunity is there with those retail doctors. And we'll do everything we can, whether it's product related that we spoke about or in this case when we think about winning that last mile. This is a great opportunity. .

Do you ever get pushback from if you're pitching this to an independent practice, like is there any like standard pushback that you might get from a dock or a reason why they wouldn't want to sign up for something like this? .

Something like this. They look at -- and we actually -- they hear about it. They actually want us to come there and how -- now it's also mainly a little bit difference between the type of doctor. A general dentist, this is much more normal. You get a restorative procedure, you get something else and there's a certain amount of out-of-pocket that finance it, and there'll be payments over a period of time, you get more of it happening there. Whereas on the ortho side, many times it's pay as you go. They kind of have their own internal financing where you come back and then you get a certain payment that you make each time. So it's maybe more prevalent on the GP side versus the ortho side. But if they're looking for the same type of opportunities. If they -- if we can help them drive conversion in their practice, if they get people there, because really when we see the benefit of -- they scan every patient is to talk maybe more general dentists, if they scan every patient, they -- we do a lot of things to help them visualize. So people get really excited, "Oh, wow, this is what my teeth would look like straight and with restorative and so on." So they're very excited in the moment. If you can then close that with here's the pricing and here's the monthly payment. It brings it all together, and that's a way that you can drive when we talk about being active around conversion, this is a way to do it.

Got it. And then you also touched on ways to drive practice and workflow efficiencies for these dentists. And one of the things you talked about at the Tech Summit was integrating with practice management platforms. And you provided that example with Gray Finch, and you saw some pretty good results. Can you talk about the key learnings from that first implementation? And then I think you have a pipeline of other practice management software...

We want to integrate as much as possible because as you have that patient journey where somebody is interested in getting treatment and they start with -- coming to our website or they have interest that they have. It's being able to nurture that interest into actually driving. So if it -- if you're integrating with some of the practice management systems that they have where you can then get appointment scheduled, you could get follow-up schedule. You can again be a part of this and be integrated in. So somebody goes from being interested in this, they look for a doctor in their area that provides InvisAlign. If we can help them connect them to getting an appointment and then they show up to it, then you can take them through this journey that I was saying that they get scanned, they get visualization, ultimately maybe go into financing and get preapproved and so on. There's a lot of things that we're trying to do, and it makes it very sticky within our doctor network, so that they know that we are bringing them potential patients and it's more of an integrated approach. So when we can work with other DPMSs and different doctors because they all use different types and some -- like a DSO might use across their DSO, but most of these doctors are kind of that retail side that it's kind of a one-off. And we want to be able to integrate as much as possible. Again, to nurture then potential patients so that even in tougher economies, we can still execute and deliver and be able to help drive that conversion.

And when you work -- when you complete that integration like you did with Gray Finch, do you see kind of an immediate benefit? Or is there kind of like a learning curve for you?

It's a learning curve because now you're integrated in and that patient flow and the traffic that you see you just have less handoffs. It's more integrated in, and I think that's key in this environment because sometimes you have a reluctant potential patient. And if you can take them through this journey through the apps that we have and some of the the online characteristics, so you can updrive that conversion. .

And I think you had a slide for the tech talk, where you had maybe 7 or 8 other practice management software on the list or in the pipeline. Do you expect those to be largely integrated? I think it's a Align link is what you're talking about now by the end of this year. which on our road map?

Be able to integrate in, and we're going to keep going system by system to be able to help that integration. But again, if we can do anything that we can do to help nurture the potential patient to be able to go into treatment, big benefit for that conversion, but it's also a benefit for our doctors. They know that we're a partner that's going to give them with our brand and what people know about InvisAlign, we want to be able to leverage that name, leverage that brand. And if we can integrate into that practice with those doctors, it's a good thing. And that will -- we see that impact almost immediately because they start to get more and more patients flowing through. And then they have a chance to be able to get them into treatment through some of the active conversion methods that we talked about. .

And given that kind of immediate benefit you see, assuming you continue to roll through these integrations successfully, like is that a case for maybe some growth acceleration? Or like how do you think about contribution in 2027?

All the things that we're doing to be more active about driving, whether it's product related. We want to give choices to our doctors, integrated in some of these systems here. We know that the more seamless that it becomes the higher growth that we can see -- but we are doing all these aspects to be able to help drive the improvement in our conversion and -- because those potential patients are there. Some of them are there because they're on the ortho side and they're going to go into treatment, and they're going to go in treatment either way. So if we can get them to use InvisAlign, that's a win for us. . The other side is on the general dentist side. This is part of the 600 million plus potential patients that are out there who have a malocclusion and they want to get maybe some treatment. If you can get them to kind of hit them in the moment where they're getting something done already in that dental office, and you can show them what your teeth are looking like now and what they could look like. or the other part of it, and we talked about it at the Tech Talk last week was how do you integrate into the labs and some of the other restorative work that's being done and leverage the labs that are already working with these general dentists to provide restorative outcomes, how can we work with labs to help with the alignment first. And we've talked a lot about this, but when you think about the restorative and the ortho restorative work that you have, if you could align the teeth first and get them in the proper position, before you do restorative, you're going to save much more of the tooth mask that is healthy. Align them first and don't have to remove as much. Because some of the traditional ways that are done on the restorative side is they grind the teeth and you see some of these pictures where so much of the tooth is ground down and then they'll put a veneer or something over it it might look good at on the surface, but then underneath you have a tooth that's been shaved down and our view is move them first and then do the restorative and that's pilots that we have with some of our labs and that's something that we're rolling out to every region because there's so many -- when you think about the general dentists in the world, there's a couple of million general dentists, and we might sell to 5% of them. So this helps us access many more doctors that otherwise we wouldn't have seen.

And I do want to dig into that lab pilot, but we have about 5 minutes left. I did want to see if there's any questions from the audience. Okay. Yes, on the lab side, right, you've rolled out this pilot and you're actually getting labs to help sell into those GPs that wouldn't be doing the aligner cases. Can you talk about kind of the underlying economics to the extent you can and like what the incentive is for both parties on the lab side to participate in this and then to get the GP?

So the lab look, they're always looking for revenue opportunities just like like any practice has. So they essentially become a distributor for us. Think of it that way, where there's charge for the actual case that we have. But then on top of that, they have a markup that they'll provide for the services that they're providing because they're doing a lot of the treatment planning and education and so on with their doctor network that they had. So distributors are excited about this because there's a revenue and margin opportunity for them. The doctors are excited about it as well because many of these doctors now working with these labs, they weren't selling InvisAlign at all. And it's a revenue opportunity that they can have because again, when your chair side and you think about how you're nurturing patients, just like all of us, we want to be able to have an active role as to our health care. What's happening, how do we visualize it and so on? So right there, chairside, those doctors could show that patient and say, "Look, it's going to take maybe 4 months longer, I'm going to move your teeth first, but this is what it's going to save from a healthy tooth standpoint." And the time and money that, that patient would spend, it's well worth it. They'll see it and they see the benefit. So that doctor gets a little bit more of revenue because they're moving to teeth first and then doing the restorative. And then obviously, from a patient standpoint, they're getting better health care. And so it's a win all across. It's good volume for us. But Again, this is -- this helps leverage what we're already doing. We're already doing this on a smaller scale with many of these general dentists. But if we can use the labs to bear because the commonality across this is every general dentist [Audio Gap] and they trust their labs. And if we can work with those labs, it's not every lab that's going to want to do this. But every lab might service dozens of different general dentists. And in many cases, like I said, 95% of those general dentists, we don't really sell to. And if we can expand that out and make this more the standard of care that you move teeth before you remove -- we think that we have a great benefit here, and we feel like we're the only company who can really provide this integrated solution to the dentists and then ultimately their patients.

It sounds like a great opportunity to pick up incremental revenues. Given that you are kind of using the labs like a distributor, can you talk about what the margin impact is to Align or how it's...

So it's a moderate case. So we -- really, it's -- when we look at the them because it's usually 26 stages or less. So it's kind of just a more moderate movement, sometimes a minimal movement. So margin for us is -- and it's no refinements. So that's a nice part of 1 2. So again, going back to our earlier discussion, when you don't have a refinement, gross margin is great for us. So we're happy to do this. We're happy to be able to help educate those labs because there is some work to integrate those labs in and then have them expand out. But from a margin standpoint. This is incremental for us. So we're very happy with that. And I think the labs that we've worked with are looking at it that way, too, it's kind of a found revenue source that they just didn't have before.

So even with the fee that the lab is getting from that case, like there's no impact?

No, we'll charge -- we'll have a moderate case that this falls into. The markup really comes from the lab providing the service to those doctors. So they mark that -- so I don't have to discount that down to from a starting point, they're marking up for their service. And again, that doctor looks at it as this is a really positive benefit for their patients.

Great. Well, I think that's all the time we have. So John, thank you so much for joining us today.

Of course, thank you.