Good morning, everybody. Hopefully, this mic is working. For those of you who don't know me, I'm Glen Santangelo. I cover a number of things inside of Jefferies, healthcare, information technology, spec pharma, animal health, and will soon be, you know, focusing more and more on the dental space. And with that in mind, we're very happy to have Align Technology here with us today. Representing the company is John Morici, who's the CFO, who I think most of you may know. And Madelyn Valente is here representing IR here in the front row. So feel free to hit her up if you have any questions. But unfortunately, Shirley Stacy was a little bit under the weather, and so she stayed behind. So I think most of you know, Shirley does the investor relations.
A lot to talk about here, so we're excited to get started. You know, with that being said, welcome, John.
Thank you.
You know, why don't we start... I mean, I get 1Q results are, I guess, five weeks old at this point, but, you know, maybe I think that's probably a good place to start to kind of level set the conversation. I think there's been a lot of focus on just the sort of volatility in clear aligner sales, and I think the message in 1Q, and I don't want to put words in your mouth, was stability. You had the opportunity to bump up the guidance on the revenue side from mid-single percent up to 6%-8%. And so maybe could you just talk about, you know, what gave you that confidence, where your level of visibility sits in terms of the balance of the year?
Maybe that's a good place to start. Welcome.
Good morning, everybody. Thanks, Glen. Yeah, when we talked about first quarter and really the operating environment that we saw, from an overall demand standpoint, we talked about global stability. Obviously, there's certain markets that are better or worse than others. You know, where we saw more of a stable operating environment, Asia was good, yeah, Eastern Europe, Latin America, places like that were in a good operating environment. A little bit more challenged in Europe and North America, but we were able to operate in that stable environment. That was something that we had really into the fourth quarter and kind of carried into the first quarter.
And then when we talk about that operating environment that we're in, we also couple that with some of the new products that we have, whether it's on the scanner side with Lumina. We're very pleased with that. We'll probably talk a little bit more about that, but Lumina was a new scanner that we introduced midway through the first quarter. Very good sales, a lot of trade-ins, as well as new equipment that was sold. So we're pleased with that. We also introduced a new product called Invisalign Palatal Expander, or IPE, as we talk about. It's in North America, rolling out to ANZ and then soon to be other countries.
But that was, again, another way that in that stable environment, we could talk about new products, how this product can help doctors treat very young patients, six or seven-year-olds, to expand their upper palate. So you couple that with the stable environment as well as some of the new products that led us to a stronger than we had expected in the first quarter with beating consensus and even our high guidance. You took—we took that, plus what we saw in the second quarter, we're able to adjust kind of that second quarter to raise a bit, then that translated to total year.
So when we look at what that meant for kind of that first half and what it means for the second half in that stable environment with some of the new products and how we're executing, we were able to take the guidance to 7% up at a midpoint for-
Right. So maybe just to summarize and just focusing on Clear Aligner for a second, because we're going to come back and talk about Lumina and the palate expander in a second. But essentially, you kind of found it sounds like Asia's gotten a little bit better, Eastern Europe and LatAm, where maybe still a little bit less visibility in North America and Western Europe.
Yeah, that's accurate.
Anything to mention between teen versus adult in terms of visibility?
Overall, what we see for teens, I mean, there's certain seasonality that we get with teenage patients. And based on the market opportunity, where we're, our market share is relatively low from a teen standpoint. We see great opportunities in teen with some of these new products that we spoke about. But then we also have, you know, teen season that we're going into second quarter and into the second half, where we have the expectation, as we've seen prior to COVID and now even post-COVID, teen grows faster than adults. So we feel good about our positioning with the products as well as the go-to-market.
And can we talk about ASP? I know this is always an area of concern. I mean, what are the ASP expectations for the balance of the years? Is up slightly the fair characterization, and I'm not, you know, not sure how to think about it as mix versus the price increase that you took earlier this year.
I would say on an individual product basis, up slightly, because we did take some price increase, you know, maybe a little bit favorable from a foreign exchange standpoint. But, but there's also that mix. We have some new products that are just—they're more of a moderate to low stage product, which carries a lower ASP. So on a product-by-product basis, we should be, you know, flat to slightly up due to our price increase that we took. Depending on how the mix shakes out, you could see some fluctuations.
Yeah. So maybe let's shift gears and talk about Lumina. Obviously, having a big impact on systems and services, you know, this has been, is it five or six years in the making in terms of-
Yeah.
-investments-
It's over five.
that you made here, and so this is really a decent size step change for the doc. So could you maybe talk about how that launch is proceeding?
Yeah. The Lumina launch that we had, it's a new scanner, new platform that we developed, camera-based scanner that really is revolutionary. It's more of a medical device-type product versus even what it replaced. But it's a camera that really allows that scanning to be very clear, very fast, better field of view. It turns out to be a much smaller wand than what it replaced. So it's really, on all levels, a much better scanner than what's been out, you know, whether what we had or what was in the industry. So we're very pleased with the launch that we had. We were expecting upgrades, and it was mostly, at least the first iteration of the Lumina scanner, was really more of an ortho scanner.
The restorative will come into the fourth quarter. But what we saw in the first quarter is a lot of orthos as well as GPs being able to purchase the scanner, upgrade the scanner, and we feel really good about how it's added to our portfolio. It's a higher ASP, we get the premium there. But it also allows doctors to provide some trade-ins, where they either have an existing scanner, and they'll trade that in, and they'll be able to use this scanner, or they just add to the portfolio of scanners that they have.
John, how should we think about the launch? I mean, were you warehousing a bunch of orthos and docs that were just waiting for the launch, and so we get this initial bolus? Or do you think it'll be, like, a more of a slow, steady climb?
I would expect a climb out. I mean, I think people saw it. I mean, it's like anything in this industry. People want to see things for themselves. They see it, and they're very happy with it, and then it takes off from there. So I would expect it would continue. There. It really fills a void that we have. We have about 100,000 scanners in our installed base. About 30,000-35,000 of those scanners can just go with an upgrade, which is essentially a wand replacement from the old scanner to the new. So I think it fills the need that we have in terms of our installed base, as well as lend itself to new.
So that's what I was gonna ask about, you know, the launch. I mean, is there a discount or sort of trade-in program? I mean, kind of get a sense for, you know, what programs specifically exist out there. And then maybe, I don't know if you can give us. You just mentioned there were 100,000 scanners out there. Maybe talk a little bit about your installed base, the age of that installed base, and, you know, how many are ripe for a trade-in basis.
So of that 100,000, you know, say a third of those are ready for an upgrade there, and so we'll see that. We saw some of that in the first quarter. I would expect that to continue second, third, fourth quarter as we go through. Like I said, the restorative scanner, which is really a software upgrade, will come into the fourth quarter, so that will be exciting as well. And we really see a mix of some of the trade-ins, as well as, many of our doctors, they start with a scanner, they're really starting to digitize their practice, and then they add another scanner, and this lends itself to that. So look, when we talk about our digital platform or the digital ecosystem that we've created, this is the front end of it.
And so it's a really good addition to that ecosystem that we've created.
You know, having covered the name for so long back in the 2010s, it was interesting when I was reading the transcripts, you know, from the last X number of quarters, how much China came up within those transcripts. But now it seems like in the more recent quarters, China comes up a lot less. And so I know maybe that says something about where we are. And in your initial comments, you were talking about how improved visibility you have within Asia, and I'm assuming, you know, China is a decent part of that. So can you just give us a little bit of a state of the union update on China and then maybe, you know, about the value-based pricing initiative going on in China and how you think about that market in general?
Yeah. For us, China's an important market. And as you know, we've a while ago, decided that we wanted to have manufacturing there. We have treatment planning, we have a direct sales force. It's a huge market opportunity for us. We're very under-penetrated there. So China continues to be a great opportunity there. We continue to invest. Obviously, the last four years, there was a lot of puts and takes, given everything going on in the world as well as in China. But we've been in a much more stable operating environment there, and we're operating accordingly. The Volume-Based Procurement, you know, for our business, over 85% of it is private, and not really in the public sector.
So there's some small impact due to Volume-Based Procurement, but for the most part, we're outside of that in terms of the products that we have, how we go to market, and so on.
In your opening remarks, you talked a little bit about the palate expander, and I know you, you've recently got that approved in the U.S. and Canada. Could you maybe talk about this product a little bit? And how meaningful of a driver can this be on the top line relative to some of your, you know, your historical sort of product launches?
Yeah. So Invisalign Palatal Expander, when you think about the overall opportunity, what this is, is, you know, many, many children, they're six or seven years old, their upper palate isn't wide enough to be able to allow some of those permanent teeth to come in, and if that isn't wide enough, many of the teeth come in crooked. It's just the way the biology works. So the product that's available now, or at least before our product, was a metal device that was attached to the top of a child's mouth. Maybe some of you have kids that have had to deal with this, where you have to crank it every night, and expand that upper palate and create space for those permanent teeth to come in.
So what our product does, it's our first digitally direct fab product, where it's a 3D product that we make, and it's a series of, you know, aligners essentially that expand the upper palate. And so you-- the child will have that in, it'll expand out slowly over that 24 hours, pop that out, put the next one in, slowly expands out, and creates a, without pain, movement to be able to open that upper palate and provide kind of that phase one treatment. So when you think about the overall opportunity, you know, if you have 22 million orthodontic case starts every year, and let's just say 17 million or so are teen cases, of that 17 million, about 10% of these, in this case, preteens, need their upper palate expanded.
So 1.7 million, 1.6 million cases a year that have been done with this metal device. Our product is, you know, it's much more in line with our digital footprint that we have, much more in line with that direct fab. And so there's a product that we sell that will get that, and we'll have revenue from that. Like you said, it's in North America now, ANZ, with a rollout based on approval in Europe and Asia the rest of this year. And really, what it gives us is kind of an opening into that type of treatment, getting that child to be in phase one treatment with a product that we have.
We hope it lends itself to other types of treatment, where that's phase one, maybe after that, permanent dentition is, is in, and those permanent teeth come in, maybe there's a phase two. That would be great. They would use Invisalign for that. So there's a lot of opportunities to start with this, and you could- we can get revenue from that based on the, the number of cases, but it lends itself to other-
And the pricing on that product?
Pricing is, list price around, $700 . The ASP will be, end up maybe based on discounts, closer to five hundred dollars. So we get that, as a part of this, and that's new revenue for us, but it really, we think, creates a more halo, effect of other products that will come to those children as they grow. It maybe gives the parents a little bit more confidence that their child's going to wear aligners if they wanna, if they wanna do aligner therapy later. And it also gives some confidence to the doctors. They can see the results, they know it splits the suture, it gives the skeletal expansion that it needs, and like I said, it hopefully gives, those doctors opportunities to use our product.
I mean, it's early days, but are you starting to get some feedback that you think this can help unlock the teen market a little bit?
Well, we see more and more. I mean, when we look at doctors, if I just break it down between submitters and utilization, more and more doctors are using this. That's good. They're seeing the effects of it, and so more and more doctors are, for the most part, being trained, seeing the results. And the nice thing about this product is, in 20, 30 days, the treatment's really only 30-40 days at the end, they can see the results. So they'll see the results quickly, and now that they've seen it, we see doctors increasing their utilization. So it's doing what we had expected, and like I said, hopefully, it unlocks some other opportunities.
Sorry, maybe just one more quick question on the guidance. So when I look at the guidance raise, you know, kind of encouraging that you raised on 1 Q, more of that come on the systems and services side, or with sort of keeping the aligner expectations constant, or is it a mix of the two?
It's a mix of the two. We certainly saw strength in the systems and services. As many of you cover equipment companies, for that part of our business, typically fourth quarter's the biggest quarter that we would have. We actually saw sequential improvement from fourth quarter to first quarter. That's not something that we normally see. So we're very pleased with the new scanner launch, with Lumina. That helped give us some increase in the first quarter and what it meant for the year on the systems and services, but we also saw some strength on the clear aligner, which caused us to increase as well.
Can we talk about gross margins?
Sure.
Talk about the recent trend, kind of flattish to slightly down. I mean, what sort of, you know, causes that decline in the gross margin, and can we think about an environment where we have expanding gross margins?
Well, that's the expectation. When we think about our outlook and how we how we expect to be able to manage our pricing and and product portfolio, to be able to see that those products be able to to deliver what we need. So much of our gross margin is dependent on on volume leverage through our facilities. We have three major facilities across the globe. You want to be able to utilize those as much as possible, drive that utilization, increases productivity, to be able to take to be able to take that cost out. There's always balancing that goes on. We want to be able to increase that. With that higher volume, we'll see increased productivity, which will translate to gross margin. So, there's also other inflationary pressures that we all face that we'd also try to offset.
Once we get those plants more fully utilized, as volume increases, we'll see that benefiting.
What about mix of the products, too, while we're doing that?
Some of the mix, I mean, IPE is early. I mean, as we scale IPE, the gross margin will be accretive. Early on, it's you're scaling up a 3D printed product that, again, relies on utilization to drive that productivity. So once you have some of that, the volume that comes through, we'll see the benefits there. But typically, our lower stage products end up with a really good gross margin. When you don't have as much additional refinements and other changes that you make, the cost profile is a good is good for us, and we see that productivity.
So is there some incremental operating expenses? Because when I look at sort of the operating margin, I think it sort of stays roughly the same, despite the slight increase in revenue. How should we think about costs, you know, that you... because it kind of feels like some of the spending is not going down, but in some areas, but maybe up in other areas. Like, how should we think about the margin trend throughout the balance of the year, even considering the higher revenues that you're forecasting?
Well, if you look, typically, the way our op margin goes through the year is, you know, you kind of start that first year, you have a certain amount of volume and then other expenses that you start with, and it gets progressively better, and you get that leverage as you go through the year. Last year was a good example of that. I think every quarter sequentially was an improvement in op margin. And it really comes down to a reflection of, you know, you get through the first quarter, there's investments you make in advertising and other go-to-market activities as teen season comes in, in North America, and as you ramp some of that expenses up. That's really what we see there. We're constantly looking to find that right return on investment.
So you spend in certain areas, you see a result or not, and then you can quickly pivot. So we've got that pretty well fine-tuned to make sure that we get that right return on investment. But, the way we've expected for the year is we would see year-over-year improvement in op margin. We put that into our guidance, and if you think about our quarterly profile, typically, there's a sequential improvement. Some of it based on volume and the leverage that you get there, some of it just based on the time of the year where you make some of these investments.
Is it reasonable for us to think, not that you want to comment on next year or beyond, but is it reasonable for us to think that algorithm continues to hold through 2025 and beyond, and so the initial plan is always to try to expand those margins? Is that still a fair way to think about it?
That's certainly in our plan. When we think about how we plan, both, you know, kind of like a long range planning and then what it means for the AOP and our plans, look, we want to grow this business. We want to grow revenue and grow volume, and, and we're working our way, you know, along that path. But it also has to be growing margin the right way. So you've got some startup where you have some of the direct fab and some other things with some of the new products and so on. We know how to make these. We know how some of that, you know, the R&D that we've been spending, when you think about that spend, a lot of it's been on the R side.
It's research to make sure that the polymers react the way we need them to, the production works the right way, just developing things. Now, you get to a point where you're starting to get leverage on those investments. So when we think about our planning, it should come with, you know, expansion from a volume and revenue standpoint and also margin.
Do you think that sort of the free cash flow profile and the return on invested capital story here might be underappreciated? Because, you know, what's interesting to me is if you look at... You had multiple years of investments, and now it seems like a lot of that is done. Your CapEx is coming down very sharply, I think. I saw $100 million as the estimate for this year, and that number was $1 billion not too long ago, right? And so when you think about the impact that's gonna have on your balance sheet with all the free cash flow in the next kind of couple, few years, that's a few billion dollars in sort of cash coming in the door. Like, how do you think about the impact of that on the capital deployment strategy?
Yeah. Cash is, you know, it's very important for our company, as any company would have. We're fortunate to be in a position where the model that we have generates a lot of profitability, which lends itself to cash. So first and foremost, we're investing in what we do from a product and, and go-to-market strategy to be able to increase revenue, increase volume, as well as profitability. So you invest back in the business that way. CapEx, like you said, has come down. You buy facilities, equipment, and so on. We tend to just buy them outright versus leasing and so on. So we buy them. It's a CapEx hit, but once you've done that, you don't have that CapEx in the future.
We've been also able to and fortunate to, like Cubicure, as an example, just use our cash to be able to buy the company that really can help us with some of the 3D printing out of Austria. And then we have other investments that we can make with our cash, like we did with Heartland, where it's a good investment. We've now invested to really help them grow and expand, which will help them grow, which helps us grow. And then other cash that we use is goes back to buybacks or other repurchasing. So we're fortunate that when you think about the cash that we generate, very positive position, we're utilizing that cash. It's not an or discussion in terms of some of the investments and other uses of cash. Cash is usually an and.
We're investing in a lot of things but to be able to help grow the business, and that's the philosophy there.
Since you brought up Heartland, let's talk about that, right? Because you invested $75 million last year, and now you just invested another $75 million, so it's $150 million in total. What did you learn from the first $75 million that sort of gave you the confidence to invest, you know, to double down on that investment? And what's sort of the longer-term plan here? What do you hope to get out of the relationship?
Well, Heartland is the biggest DSO in the world. They have a great operating system to be able to grow their practices, you know, through acquisitions and other things that they do. They use this cash as well as other cash that they generate to grow and put up new practices, which is very exciting. They really share the digital mindset that we have. They take our products, use our products, really help digitize their practice, be able to show the efficiency that that drives, productivity that that drives, and ultimately, for us, they end up doing more volume. They really showcase what we bring as a company and match that up very well within their company. First and foremost, it's a good investment.
We think we'll get a good return on that investment, and on a secondary basis, they share that same digital mindset. They're willing to grow and expand, and as they expand and grow, that helps us.
John, we're essentially out of time, but I wanna give you the last sort of 20 seconds. I don't know if there's any final messages you wanna leave with everybody?
Yeah. No,
as we walk out.
I appreciate the time, and like I said, we're in, we're working to try to grow our company as much as we can. We've seen strong performance coming out of Q1 and our Q1 results, and we're pleased with that. Allowed us to increase where we're at for Q2 as well as the total year, but it's about execution. We know we have a vastly under-penetrated market, where we can execute in that market, given that stability, and we're really excited about the new products that we have to be able to expand our business and really make digital orthodontics the standard of care.
Perfect. John, thank you very much.
Thanks, everyone.