Good morning. Why don't we get started? My name is Jeff Johnson. I'm the Senior Medical Technology Analyst at Baird. Our next presentation this morning is from Align Technology, a leading manufacturer in the $6.5 billion global orthodontics market with its Invisalign system of clear aligners. With us today from Align, we're happy to have Chief Financial Officer, John Morici, and VP of Finance, IR, and Global Communications, Shirley Stacy. This is just gonna be a full Q&A fireside chat, so, John, I think we'll just get into it.
Sounds good.
All right. Any opening remarks? Anything you wanna say, or you wanna go first question?
No, you could jump into the first questions.
All right. Well, I told you what it was gonna be, 'cause it's what all the at least hedge funds are telling me to ask, which is, and I'm not a mouthpiece for hedge funds, but how are you feeling? How are things?
You know, I think as we've talked about the last quarter, it's about executing on our strategy, so we're happy with some of our new products. I'm sure we'll get into a little bit on Invisalign Palatal-
Yep
...expander and expansion of that. Working to try to drive ASP and increase our submitters that we have globally. Trying to work to increase utilization to try to get those doctors to do more and more cases. So it's about, you know, the products that we have, whether it's Invisalign Palatal Expander or the new iTero Lumina scanner that came out recently, being able to drive more and more of the usage of our products. And really executing on our strategy has been our focus. You know, we can get into whatever-
Yeah, sure
... market discussion you wanna have, but we're focusing on what we can do as a company.
Yeah. Well, if I do try to dig into that just a little bit, I mean, you know, I think Joe, for multiple quarters now, has really described the end markets as stable, and stable is the word that he's used over, and over, and over. You know, I think there's some data out there that would suggest that whether it's our survey data, some of the Gaige data, that July was actually a decent month. Our survey took a little step back in August, but is stable still the right word for kind of the global markets? And maybe if you can talk about global markets, and then just U.S. perspective, you know, is stable still the right...?
I think it is. When you think of and I think the way we phrase it is just on an overall basis. Obviously, certain markets are better or worse than others based on how they're navigating through inflation, and interest rates, and other things that they face. But when we think of stability, you know, we've got markets where they're doing better, Southeast Asia, Latin America, Middle East, and others. You have other places that are still kind of waiting for maybe interest rates to come down, which will help overall demand.
But when we think of a stable environment, we're looking at that on a global basis, to be able to say, "Look, this is the operating environment that we're in, and that stability is there." When you do surveys, we know, we see the surveys and other things that come up on what July was versus August, and so on. I think that's, you know, you're gonna have all those fluctuations on a month-to-month basis. But broadly, you know, when you look at things, as long as interest rates ideally start to come down, inflation seems like it's coming down in many places, and that's a good thing for our business.
Okay. I thought you were gonna say those month-to-month surveys aren't helpful or valuable.
I think-
I watch what you say. I do them every month, so
... It just depends where you take them. I think the surveys are a bit biased, just kind of a U.S. view.
Yeah, for sure. For sure.
And I think that's just the backyard that people in, but we're a global business, and, you know, you have volume and operations in a lot of different areas, and U.S. is still a big part of our business, but there's other places that we're operating in.
Yeah, I think what's interesting, you know, and we've started to have these conversations just probably in the last quarter or two with some of the customers we talk to out there and some of the bigger customers. You know, I don't think it happens in the adult population. I think there, if they decide they don't have the money to spend on a clear aligner case right now, then maybe they'll do it so down the road sometime. But it's kind of just a, you know, off-the-cuff kind of decision sometimes they make. But in teens, there truly is that kind of limited time period, right? That three, four-year window where your kid's getting old enough before they leave the house, so you've got kind of that window.
You know, I've talked to some providers, including some large DSOs, where it does sound like there's, you know, an inordinate number of times kids have come in, or adults have come in even, gotten scanned, gone through the whole workup, and haven't yet pulled the trigger. Is there a backlog in any way you can measure or judge of teen cases, especially, that if we get the right macro environment, you know, no matter what your LRP is or whatever your long-term true growth rate's gonna be, we could shoot above that for a couple few quarters as we clear some of that backlog?
Teen definitely is a part of our business that is maybe less discretionary. I mean, overall, when you're aligning teeth, people will say, "Well, do I need to go into this treatment or not?" And you're right, adults might say, "I'll wait another six months when I go back to maybe my general dentist," and they said, "I wanna wait, and I'll maybe try something different." And they might be also interest rate sensitive to say, "Okay, do I wanna spend $5,000, $6,000, $7,000 on something?" when they have to finance it. So some people will delay that. You're right, from a teen standpoint, it's less of that.
Maybe parents have saved up for it, or maybe they're just a time in their lives where their teeth have need to be, you know, straightened, and they decide to do this. But I think there's also some that, under any circumstances, say, "Well, look, we're not ready to do this. It's, you know, financially, it's not right." But when you look at our teen growth that we've had, prior to COVID, post-COVID, still grows faster than adults. Because when you look at the general population that we serve, 75% of orthodontic cases are teens, when it's almost the reverse of that from our business. 70% of our cases are adult, and only 30% are teen.
So we have a huge opportunity to grow within that teen market, and our market share's low, and we have a lot of great products, Invisalign Palatal Expander, Invisalign First, and Mandibular Advancement. A lot of products that can help serve those, that teen market. You know, like I said, things get discretionary at some point, less so with teens, and we think we have both the market opportunity to go after and serve the, the teen business and the products to be able to do so.
Yeah, and I think a lot of those products are starting to get some traction on DSP, obviously, and IPE, and that we'll come back to those in a second. You've mentioned them a couple times. What else are you doing out there to maybe help facilitate, you know, we've been in a, what, two-year process here or two-year period now of higher inflation, less spending on higher costs, you know, the $5,000-$7,000 procedures, as you've said. You guys have such a strong balance sheet. You know, is there anything you're doing in the dental office? There's been talk about would you go out there and help support some of these payment plans or put money up on the payment plans.
What can you do just purely from a financing and helping, you know, doctors get more of those patients to pull that trigger in the chair?
We don't actually wanna do financing direct to the patients.
Sure.
I mean, it's just a difference in our model where we don't wanna finance the entire case. But if we can do things to help our doctors with their payments, that's something that we've looked at and do in many cases where if a doctor normally has sixty-day payment terms with us, and they're in good standing, we might go to something higher, and then therefore, that doctor has longer to pay us. Maybe they can provide some financing to those end patients. 'Cause you think about, broadly speaking, you know, it's usually from a patient that wants to go into treatment. There's three ways that ultimately they're gonna pay. Some pay in advance, great. They pay that doctor in advance, and maybe that's a third of the cases.
It varies slightly, but say a third of the cases. There's about a third of the cases that a doctor will provide some type of kind of internal payment plan. They pay some money upfront, and then every time they see the doctor, that patient or the parents pay kinda as you go, and then there's a third category, which is you know, and many times it's adults, where they'll do some external financing, and where we try to really give the doctor some benefit is that middle category of saying, "Can we do something from a working capital standpoint?" You're right, we're fortunate to be in a great situation from a company standpoint with a good business model, no debt, generate cash if we can use that to help. That applies both for the Invisalign side as well as iTero.
There's a lot of iTero business that we do nowadays where there's rental models, there's leasing models, and so on. So that helps the doctor not have to put so much money up front. They can use that money for whatever else they wanna use for, and they get access to the newest scanner and helps them run the practice with really just a low monthly charge for that. So we'll do a lot of things to be able to help try to convert those doctors to wanna utilize our cases, and sometimes the conversion process is about cash flow for the patients.
Are those efforts somewhat consistent over the past year, year and a half, or are they anything that you can increase in the near term to help grease those skids a little more? Any change there?
I would say we're increasing the number of... You know, our days sales outstanding has increased-
Right
... a little bit to that. You can see that in our numbers. When we think of iTero, there's a lot more that we lease than,
Yeah
... than we had in the past, and again, that's just a reflection of doctors wanna buy a certain way. Patients wanna buy in a certain way. We're fortunate to have a model that gives us flexibility to do that, and in any way that we can do that to leverage the cash benefit that we have to be able to help our customers, you know, grow their practices, we'll do that, and that's been a good model for us, and it's something that, especially in this day and age, where inflation and interest rates are high, there's things that we can continue to do.
All right. Fair enough. Let's move on to ASPs. I wanna come back to the new products in a second, but on ASPs, obviously, it was a big focus on the second quarter call. I think your blended ASP, help me out, globally, was down five points. Is that right, four, just over 5%?
On a year-over-year basis.
On a year-over-year basis.
Yep, yep.
Just over it.
$40, yeah.
Yeah, so down just over 5%. You know, about two hundred basis points of that probably was currency, so that's kind of you know, nobody can call that or get blamed for that. On the other two hundred and fifty basis points or so, maybe a little more than two fifty, you know, how much of that was, like, good ASP pressure, as I think about it? I mean, going to DSP, going to IPE, some of these things are, like, where the model's going, and that's good.
Mm.
You're getting more cases from that, and we'll come back and kind of define what DSP is and talk through that in a minute. But how much of that was kind of good ASP pressure, and how much of that was, you know, I don't wanna call it defensive, but having to change ASPs, give more discounts away because of competitive pressures or whatnot? How to bucket kind of that last 250-300 basis points?
Yeah, I'll take it into in terms of just overall dollars. If you just looked at it on a year-over-year basis in the second quarter, I know the ASP got a lot of visibility, but if you take it this way, down $40 year over year, like you said, currency of that $40 change was $22, so take that piece of it out of it. The other $8, an additional $8 was... and we put it in our disclosure, talked a little bit about earnings, but the U.K. changed their the VAT that is now needs to be withheld for selling clear aligners within the U.K.
And, you know, to comply with that, what we decided to do is discount our product down 20% in UK, and then add the VAT, which is 20% on top of that. So from an ASP standpoint, it shows up as a 20% drop in ASP when we're selling in the UK. We don't think that's good for our doctors to have a higher VAT on there when we're trying to get further adoption, and certainly not good for if they pass it on to their patients. So we made that decision. That shows up on a global basis as $8. So on a year-over-year basis, $8 is purely due to that UK VAT, and like I said, $22 was due to FX. So I say the remaining-
Yep
... ten dollars to the focus of your question is, look, there's gonna be as we're selling to more and more doctors, our submitters that we had, just over 86,000 last quarter, was the highest that we've ever had. When you have new submitters coming in, chances are they might not be buying your most expensive product. They're using some type of cases that are maybe more lower stages that have a lower ASP. And I think, you know, so you have that. You also have doctors that are growing. They're doing more and more cases. The volume, the utilization was up, and so on. You saw that in the second quarter, and that's doctors working their way to more and more cases and coming to some of these higher tiers that also give them some pricing benefits.
I think when you look at the cases that we did, and that's why you see our gross margin up and so on, the cases that we did, a lot of those cases, they might be lower stage cases, they might be lower ASP cases. And you mentioned DSP, which is our Doctor Subscription Program. In all those cases, there's either no additional alignments, no additional refinements that are needed, or very small amount. When they're very small amount, the cost to serve is very low, and therefore, the gross margin is better. So I think when you look at that remaining $10 or others, you have some of that is a. You know, you have more submitters who are doing cases that are lower ASP, but good gross margin, gross margin rate.
You have also doctors that are working their way through and doing, you know, more cases, and you end up they get a volume benefit from that. So when we look at that and we say, as we think of ASP going forward, I'm not saying it's not important, but I think the focus needs to be, if we're gonna be the standard of care and really drive this further and further, you have to sell to more doctors. There's over 2 million doctors in the world, and we're selling. You know, we had a great quarter. We sold to 86,000 of them.
So as you get to more and more doctors, you're gonna have that where you just have to meet that doctor where they're at, and it might be just a lower stage product, lower ASP product, but it still drives good gross margin. So that's the perspective there. It's not a competitive play to say, "Look, let's go and, you know, share shift and so on." I know some of our competition might take that approach to discount things down to try to share shift. We're about growing the category. We're about trying to get to sell to more than 86,000 doctors. We're about trying to get doctors to use this on a more regular basis, 'cause ultimately, the competition that we're driving against, and all of you know our story, is about wires and brackets.
How do we get more and more cases to shift from wires and brackets to Invisalign? And that's the effort that we're making.
Yeah, fair enough. And just to complete that thought, just on ASPs, as we think out over the next year or two, you know, that U.K. VAT issue should anniversary through by Q1 of next year, I believe.
Yep.
We've seen maybe a little bit of U.S. dollar weakness here over the last few months, so hopefully currency isn't a big drag. We'll see if it's gonna be a positive contributor year over year over the next few quarters or not. But theoretically then, as we get beyond Q1 of 2025, we should be down to just those, as you bucketed it, kind of $10 of pressure. None of those are probably gonna go away or change in a big way. Is that the way to think about your ASPs over the next few years? Maybe a point of decline, which would be pretty consistent with what you've seen over the last five years or so, if I put that on a trend line.
About a point a year, is there any reason to think it should be outside of that -1%, plus or minus a little bit, range for the-
No, that's in the range. I mean, I would... If I would project out, you know, you'd say flat to slightly down.
Okay.
For the reasons that I said, as you're expanding out to new doctors, you're giving them different ways to buy. But again, it's up to us to make sure that the products and the services that they want give us the right gross margin rate, and that's the focus. But from an ASP standpoint, flat to slightly down is how to think about it.
Okay, and your palatal expansion products, if we go into the new products now, your palatal expansion product has been on the market about six months now. You know, I think we've seen a little bit of pushback on some of your advertising from an ADA perspective and that. Any issues there that we need to flag or be concerned about?
No, I mean, we advertise, it's part of our portfolio of products. We're showing, we're trying to be reasonable in terms of here's a current technology with the 3D-printed product that slowly expands the upper palate for that child and compares that to the current technology, and I think some doctors, you know, maybe don't want that comparison.
Yeah.
But in the end, we're advertising to patients and, in this case, parents, to let them know that there's alternatives.
Yeah, fair enough. And so on that product itself, you know, I think 20% of young kid cases, orthodontic cases, need palatal expansion over time. You know, how has the initial demand been? Do you think you start taking a meaningful share of those 20% of orthodontic cases over time with IP? How long does it take to scale and really start impacting the model?
Yeah, when you look at it, and so far, it's really just been North America, ANZ, just a select countries. It'll get further released as it gets approved in different countries. But like you said, if you're looking at 15% to maybe 20% of the teen cases, you know, think about if there's 22 million orthodontic case starts every year. Let's just say 16 million or so of those are teen. You're talking about products, the product that can help service, you know, a significant amount of cases that are out there.
Yeah.
So you look at say, a couple million cases that are out there where we weren't servicing really at all. Maybe Invisalign First was doing some arch expansion, but this is actual skeletal expansion to be able to help a child, you know, that has a palate that's that needs to be expanded. We look at it as it's incremental to our business where we weren't selling before. You know, we see doctors that try it. They like to see that they can see the results, and fortunately, it's 30-40 days. They can actually see that it's working to what they thought. Doctors have tried it. They're learning more and more, and then as they see the success, they end up utilizing it more and more.
And we think this is a good way in to be able to help patients understand kind of this technology, parents understand that there's a removable device that is 3D-printed like this, compared to the metal apparatus that they currently have. And we think it lends itself to the fact that we would call this phase one, and you expand the upper palate, and then when that child has permanent teeth coming in at 12, 13, 14, we think that lends itself to being able to use Invisalign for that upper for straightening their teeth. So, it's a good way into a market that we really weren't in, and we think it has further benefits down the line.
Yeah. Two questions to follow up there. One, you know, how's the $500 price point going over on IPE? Is that reasonable price point to most-
I think it's reasonable. It's more than what a doctor, you know, the traditional metal device-
Right
... but it gives them so much flexibility in terms of how they move the teeth, and the ease of taking it on and off and some of the other problems that it solves compared to that. So I think doctors understand that there's more technology that's gone into it, and the price point isn't that much more than the wire.
Yeah. Fair enough. And we've looked at, you know, kind of we build out the TAM. We think it's maybe a $1.5 billion TAM, something like that. If we do the math on your, you know, 16 million, 20% of that, $500 per case, things like that, you get to about $1.5 billion, I think, if I remember the math. You know, is it crazy to think you could take 10%-20% of the palate expansion market over the next couple years? Is that too high of an expectation to have over a couple-year period?
I think it comes down to orthodontists, in many cases, general dentists, too, but it comes down to is the doctor willing to give alternatives? So that's part of why we advertise to let parents and patients know about this. But look, I think in these cases, you're gonna see with the right product to be able to solve these needs, you're gonna see higher and higher adoption. And we're also seeing that doctors are talking about or coming to us to say, "Well, is there a combo that we can have?
Can I have Invisalign, palate expander plus Invisalign First or plus something else?" So they're almost coming to us saying, "Can I have a phase one and phase two type of product that, you know, can do the skeletal expansion as well as straightening teeth?" And that's a good sign. We wanna be able to have doctors thinking that way, holistic, so that it, it'll grow, you know, due to, you know, the indication of, of being able to expand the upper palate, but then also straighten teeth. And if doctors think that way more and more, we think that's good for the patients as well.
Yeah, no, we've talked to docs, and I think what I hear is, you know, it's also kind of a good patient capture tool. If you can get IPE going on the uppers, and you do start first on the lowers-
Yeah
... you're kind of now starting in the clear aligners. The patient's now captive to going forward with the treatment beyond just palate expansion, things like that.
Right.
You've kind of got them locked into a full, case there. So good. Let's maybe move on to DSP. You know, I guess, question on DSP, you know, first off is it's been about... It started out at about 1% of your case volume a couple years ago. It's up to about 4% of your case volume today, I think. Been going up, you know, maybe 30 to 50 basis points per quarter as a percentage of those total cases. I think a lot of that, though, has been as you've moved it, you've started moving it into other countries and all that. I mean, does DSP grow to be 10% of your case volume, 20% of your case volumes over the next, you know, couple, few years, or do we kind of level out somewhere below that?
You know, I think DSP is, you know. For those that don't know, it's a doctor subscription program, and it really was designed mostly going after orthos who they were doing a lot of cases with us on the comprehensive side, but they weren't doing a lot of cases with us on the non-comprehensive side, kind of the touch-up cases, or retention. So what this was designed to be able to do is say to those doctors, "Hey, keep giving us the comprehensive cases, but we also have a solution for you for the touch-up cases and retention and so on." So where we have this with doctors, they see the benefit. They were making things themselves or going to other labs.
Now, they've given us the business, and essentially they're saying, and the idea is that that additional volume comes to us, and we're able to provide. Because I think the reality is doctors, you know, we've gotta meet doctors where they're at. They're looking at their practice. They're looking at the volumes that they have. They're looking at how they wanna run things. Many cases, we're the most, you know, from a material standpoint, we're the highest cost, you know, for their lab bill, and they wanna be able to have flexibility there, and this provides them that flexibility. That's why you see the incremental cases go up and up. In most cases, when doctors start the program, they start at a lower, and then they end up going higher. They end up committing to more and more cases as they go forward.
There's a utilization benefit that we're seeing that's grown the number of cases. There's also a number of doctors that have started, and now there's a lot more doctors. You're right, we've put it into different countries. We've gone into Europe this year and other places. I think it's just a further reflection of being able to meet doctors where they're at. We've got the capability from an operations standpoint to be able to turn these cases very fast, get them the products that they need, and that's been a big selling point for them.
Okay, and to be clear, if a doctor uses a DSP set of aligners for Vivera, that goes into other-
Yeah
... aligners.
It's not a case.
It's not a case.
It's not a case for it.
You have the technical ability to see are they using these aligners for a case versus-
Yes.
They order it as a case.
Yeah.
They order it as a case.
They order it as a case.
Okay.
They say, "Okay, as part of the allotment of-
Yeah
... aligners they have, this is a case for that," and then the others just come through as-
Even in those cases, not just in Vivera, it is gross margin accretive?
It's gross margin accretive. So you're gonna... Look, these will be lower ASP.
Yeah.
I mean, you might be $500-$700
Right
... touch-up case. Those are cases that we wouldn't have had. Those are cases where there's no additional refinements or anything else. It's here's the case that they needed for that child or parent or, you know, adult, whatever, to be able to put them into treatment to do the minor movement that they needed. And from a gross margin rate standpoint, that's good. So when you, you know, your earlier question about the other mix, some of it is this.
Yeah.
This is the other-
That's why I say, I mean, there's actually, if there's a point of pressure from DSP on your ASPs, that's actually a good thing. You wouldn't have gotten those cases, like you said, and it's gross margin accretive.
If we're gonna expand the category-
So it's, yeah.
... these are ways to be able to go at. In this case, it's a product and a solution for doctors to give us those incremental.
All right, let me, let me just move on to the last couple questions here. If I look back at the adult business, you know, we're still kind of off those peak 2021 levels, which were obviously, you know, a fantastic year that we'll probably never see that kind of strength again, coming out of COVID with stimulus dollars, all that stuff. But, you know, what do you think the growth rate for the adult market is in clear aligners going forward? You know, we, you—even though you haven't grown that business in the last couple years, relative to pre-COVID, I think you're still up, like, 60% or 70% or something relative to 2019. So I mean, you're still doing a ton of adult cases today relative to pre-COVID. It's just, it's off that 2021 very, very tough comp, hard to get growth.
You know, is the adult clear aligner market a 5, 10, 15% growing market over the next five years? How to think about that?
Adults, like I said, adults will grow slower than teens.
Yeah.
Teens, just that huge opportunity that we have to displace wires and brackets to use Invisalign. So teen is a bigger growth opportunity. But adults, when we think of doing ortho before restorative, many general dentists have really taken the approach that, look, they can save a lot of healthy dentition by moving teeth first, then doing the restorative, veneers or crowns or implants or so on. Move the teeth first, then do the restorative, and you see more and more doctors doing that. As well as you see patients coming in, and you know, there are chips or grinding and so on, they need to move the teeth to be able to help save and to have that healthy dentition.
So look, I think, you know, once the economy improves a bit, you'll see that more from an adult standpoint, especially around financing. Those potential patients, I think, are there. They were there before COVID. They're coming out of COVID. Like you said, you had a lot of other factors that contributed to the growth, but, you know, coming out, I would say that this will grow, you know, into the, you know. As a market standpoint, it should grow faster than, you know, kind of the overall industry because I think there's a lot of demand from potential patients out there who need to get something done.
Mm.
We look at those patients. There's, you know, five or six hundred million potential patients out there who have a malocclusion that need to get it fixed, and it's just a matter of time when they will come in.
Okay. Three quick questions in one minute. So one, teen market then can still grow, you think, mid-teens, 20% when we get back into a normal macro? Is that a... As an overall market, is that crazy?
Teen market will go faster than adults, you know, but I think when you look at the opportunity, it should be in that double-digit range-
Okay
... roughly.
Lumina, did you guys get FDA approval for Resto in early August? We saw something come through that kind of looked like that-
Mm
... and I know we've been waiting for the Resto.
Not resto yet.
Yeah.
It's for the NIRIs.
Okay.
So the near-infrared technology. So that's been approved, so we have that scanner now is approved for, you know, kind of that NIRI technology. We're still working through, and we have the restorative release we talked about on the last.
Mm
... earnings call. Kind of limited release in the fourth quarter, general release in the first quarter.
Yeah, but to be clear, you don't need FDA approval for iTero Lumina. Okay.
Yeah.
That was the NIRI-
Yeah
... we saw that came through in the FDA.
Yeah.
Okay, and then last question in ten seconds. Just, you know, are we still in the early innings of Lumina kind of supporting that scanner and CAD/CAM? Do we have to think as we get into 2025 about big comps from 2024? Just is scanner and CAD/CAM still gonna be a good growth market over the next few years?
And when we look at the under-penetration that we have in iTero and kind of the IOS opportunities, still majority of doctors are not using the digital technology. We think we have the best scanner on the marketplace. You know, having Lumina out now on the ortho side, soon to be the restorative and general dentist side, we think that we have a huge opportunity for continued growth. Not just on the new product, so the flagship, you know, being Lumina, but as you work your way through that portfolio, there's others. You know, you get trade-ins, there's others, certified pre-owned, other different products that we can put into the market so that you can meet those doctors at the price point that they're at, and then some of the leasing and rental options that I talked about.
So we feel very good about the systems and services business with the new products that we have, as well as the rest of the portfolio products.
All right. Great. And with that, we're over time, so we will end there. Please join me in thanking John and Shirley for a great presentation here. And as a reminder, next presentation set to begin at 9:30 A.M., include argenx, Dentsply Sirona, QuidelOrtho, and Nevro.