Good morning, everybody, and welcome to the last day of the UBS Global Healthcare Conference. I'm Kevin Caliendo, Healthcare IT and Distribution Analyst, and we are very, very happy to have with us today the management from Align, and specifically John Morici, CFO. John, good to see you.
Good to see you.
So I'm going to start with a little history lesson. Years ago, pre-COVID, you told me that Align would generally make incremental growth investments. You called them growth investments with long-term growth targets in mind. When you made these investments, you always were looking at those sort of targets. We did analysis of this. Every time you announced this, it was always rewarded by investors. Your stock outperformed in the months after you announced these investments, presumably because growth would accelerate. And specifically, historically, remember COVID, you were the only company that really made investments, and it was a massive success. It was a brilliant strategy. I bring this up because over the last year or so, it really seems you've been managing more to margin than to growth. And I kind of want to ask why. Is that purely a reflection of the economy?
Is it the market opportunity that you see? Is it you listened to investors who got really nervous that one time that your margin was low? Take us through why. I don't want to say it's a change of strategy, but it's clearly different messaging.
It's a good question. When we think about the company, we are always investing for growth. Our investments that we make, whether it's a new technology, and I'm sure we'll get into that about new products that we have with Direct Fab printing or expanding out to various countries, leveraging our brand to be able to grow. Because as we believe, and we still know, that we have a vastly underpenetrated market. 22 million Orthodontic case starts were very, very small. 600 million potential patients that we could be helping our doctors treat. We know that opportunity is still there. Very, very small market share on the opportunity. We want to invest in growth and have this. But we also want to be mindful of what it means from a margin and return on investment standpoint.
So when the market, like we've experienced over the last couple of years, that market opportunity is still there, but the market conditions are tougher to transact. People just take longer or sometimes don't even want to go to the orthodontist or dentist. So in those conditions, less traffic, it doesn't mean that we're still not investing and doing things to position ourselves to grow in this underpenetrated market. It's just an environment where you just have to be respectful of what conditions are happening. And indices that show this, like Michigan, we talk a lot about the Michigan Index, which is a snapshot for the US Prior to COVID, it was in the 90s, sometimes above 100. And it sits in 60s, low 70s now. That's a reflection of people not wanting to spend on some of these treatments.
When we think about investments, we're still investing for growth. We think that we are going to be the Digital Orthodontic Company that's still going to be the gold standard to be able to go after these Market Opportunities. You just have to be reflective of what's happening. We make adjustments to some of our investments, but knowing that longer term, we still have the opportunity to grow into this market.
So what do you think? I mean, I've told investors this. I think if you see them increasing investment in [Lumina], that is like the signal, the bull signal, even more than Michigan or anything else that we trade on every day. What, in your mind, would it take for you to come out and say, "Hey, you know what? Here, we've got incremental. It's getting better. We're going to put another $50 million or $100 million." It might be $100 million given the size you guys are at now. What do you need to see sitting in your chair to say, "You know what? Hey, Joe, it's time"?
You would start to see the signals of, and in some places we are seeing this, you would start to see more signals of patients coming back to just go to the office, go to their dentist or orthodontist to start. So patient traffic is a good early indicator. And then what we will track and measure is when someone goes in and gets a scan, doctor performs a scan and says, "Hey, here's a treatment that will fix, whether you're a teenager or adult, here's a treatment that will fix your teeth." How long does it take to go from that scan to treatment? And so as you start to see that gap narrowing, that's usually an indication that patients are now more willing to go into treatment. Because at their level, even a minor correction could be $3,000-$4,000.
And teens and some of these other cases could be $6,000, $7,000, $8,000. So it's expensive for them, and people make these decisions. But I think as inflation seems to be coming down in other areas, you start to see people financing things and feel more comfortable to finance things. Then you see it in traffic. And in many countries, I think Western Europe and maybe US, North America gets the headlines because we spent a lot kind of coming out of COVID or through COVID, and inflation is high. But other countries, Southeast Asia, Japan, Eastern Europe, Middle East, Latin America, there's a lot of places that didn't spend as much, and they're not seeing the level of inflation, and you start to see some of what I just described.
I was just going to ask. These are the countries you're starting to see the narrowing of that scan to treatment?
You start to see green shoots coming through, and what that is, is more of a reflection of back to normal, kind of more normal seasonality, more normal timing in terms of people coming to the office to start. Because we want to drive Traffic. We want to get people, potential patients to the office, and if they get a scan, they can visualize it, and the economics are right, chances are they're going to convert, and that's what we want to be able to bring back. Some of it's the Economy that we have to, but it goes back to your earlier question is we still need to invest to be able to help drive that. We want to drive that. We want to be mindful of the Economic Conditions, but we know the Market Opportunity is there.
Those markets that you're saying you're starting to see green shoots in, roughly what % of your market, what % of your business is that?
You look at 30%-40% of our business. You start to see benefits there. We start to see double-digit growth and parts of the business coming back in a way. And that's what we want. We want to be able to drive that. We want to be able to help drive traffic. We want our doctors and orthodontists to be busy because some cases, like in the US or Western Europe, when they're not as busy, some doctors maybe take the decision that I want to put them in like an orthodontist. I want to put them in wires and brackets because they're not as busy and they have the time. We want to change that. We want more people to come in and really kind of create the effect of, hey, the only way you can handle these additional patients coming through is to digitize. Digitize your practice.
We saw that when you go back to our numbers in the end of 2020 and 2021, there were so many patients coming back to those doctors' offices, orthodontists or GPs. The only way for those doctors to handle the patient flow and the traffic was to digitize, and then we saw a big boost. We want to replicate that now given the situation.
I used to be able to model this company, and I would always be within like 1% of cases. And I'm not that good anymore. And I think partially it's because of the mix of the geographies. How much harder is it for you to forecast now? Meaning, how much visibility do you have? You've been guiding quarter to quarter. Last year, you gave longer-term guidance for the year. But how much visibility when you reported in October and you talked about fourth quarter, how much visibility do you actually have to the end of the year? How much visibility do you have into 2025? And how do you do it?
You look at what we've had to do, and as we've gone through COVID, because some of what I was just describing, some markets are behaving a little bit differently. Some are a little bit slower to come back because there's a normal seasonality to our business. You see countries kind of ebb and flow. For example, China is the biggest quarter is the third quarter. It's a teen season. It kind of fits the need that they have. Whereas in Europe, especially Western Europe, it's more of a holiday season and so on, and that comes out. What we've had to do, and we've tried to do a better job, is you get it down to the country level because some countries are behaving a little bit differently. You used to say Europe was this and Asia was this. Well, it's not like that anymore.
It's much more at the country level. So you try to get it down to the country. For our fourth quarter, you have almost a month of actuals coming through. So we know some of the order rates coming in through October. So that helps. You know what your numbers are. And then you project down at the country level to really start to understand kind of what the flow would be and how we're going. But in the end, our business, and you say that it's not easy. There are challenges in the world where the economies and how people feel about things sometimes takes effect there in a different way. And it causes you to be off maybe more than 1% in your model, like you said. But the key is fundamentally for anybody to understand this business, we have this massive market opportunity that we're underpenetrating.
What shows up to show that you're penetrating this market, going after the market, comes down to two basic fundamentals in volume. It is, you got to sell to more doctors. So we look at the metrics around how many doctors do we sell to, what are our submitters. And we've seen sequential improvement in the number of doctors that we sell to. Because it stands to reason. If we're going to be the standard of care and there's two million doctors, we got to be selling to more than 87,000 doctors like we just did. It's a record amount, but it's got to be more. So it's got to come down to submitters. And then how many cases do those submitters use? And that's utilization. So can you get doctors to come in?
And many times they come in doing maybe a lesser case and more moderate or mild case. And then they start to do more and more cases as they get clinical confidence, as they start to digitize their practice and so on. So we've got to be able to focus in on submitters and utilization. You do that. You got to maintain ASP. But ASP will change in some of the mix that I've talked about where you have many doctors. They start out doing a lesser case. They're not doing a comprehensive, complicated case that has a higher ASP. Sometimes it's a lower stage case. That's okay because you're driving additional volume. And you know as they get more and more clinically confident, they'll start to do more.
So you anticipated my next question, which is, I looked at consensus estimates. They expect the company to grow mid-single digits next year, sort of 5.5%, and high single digits in 2026. That's well below your long-term targets, but it's faster than you've seen the last couple of years. So there's some kind of anticipation in the marketplace that things are going to get better, right? I mean, I think that's how we should do it. Obviously, Lumina and new product launches that help. But if I was to ask you the algorithm, you mentioned the variables. You mentioned the number of doctors. You mentioned utilization. And you mentioned ASP. Those are the things you report. Those are the things we model.
When we think about the algorithm to see accelerated growth, when you think about it, should we think about it as what's going to be the most important deltas of those three? Is it going to be utilization? It's going to drive from 5.5 to 9. Is it number of doctors? Take me through for us to hit those numbers, what needs to happen in your mind?
Again, it'll vary by country and region, but we're going to want to continue to sell to more and more doctors. There's a lot of new doctor onboarding, training, and efforts that we have to bring doctors globally. You're doing this. You have a lot of sessions where people come in. They want to learn about Invisalign. They want to learn about the digital orthodontics and kind of the digital ecosystem that we have. It's training them. Part of that equation too is as you bring new doctors in, you don't want to lose doctors. Because doctors, especially if they don't do a lot of volume, they come and go. They'll come in and use our products, and then maybe one month or one quarter, they don't. They don't have a lot of volume coming through.
And there might be a general dentist who mostly do restorative. But it's about training new doctors, not losing doctors, so you can increase your number of submitters that you have. And then there's a lot of programs that we have. Some of them are what we would call advantage programs, which are programs where as they go and do more and more cases, they get a different discount. And it helps drive that utilization. In the Western world, we've done a lot of that to be able to grow. But there's other ways to be able to help those doctors. You mentioned iTero. iTero is another great way that we can leverage a sale to a doctor who they're mostly doing an analog, and we want to be able to help digitize their practice. iTero is a great way. And you're selling that iTero.
You're helping them with the patient flow, digitizing their practice. And as they digitize, then they start to do more and more cases. So we know that the data is very clear to us that once there's an iTero scanner in that practice, so you get a new doctor, you have that scanner there. iTero Lumina helps, and we might talk more about it, but iTero Lumina really helps. It's a very good field of view, easy to use, very forgiving. So it's great for new doctors who want to be able to use this.
Feedback is always good.
And then you can have them do cases through this digital ecosystem. And if they add another scanner, the case volume increases dramatically. So we know the equations that we need to try to help drive to be able to get more doctors, not lose them. And then once we have them, how do we get them to do more and more cases? So there's a lot of utilization type initiatives that we have to be able to have. And then ultimately, if they're doing more patients, it's because they've digitized. They have patients coming in asking for our products by name. They might have patients that come in where we can show them a video or show them on the iTero screen exactly what they're going to look like with treatment. It helps sell.
We do some things around financing and other things where we don't take on the financing, but we help try to get that connection with third-party financing so people can go and see.
Is that new? The financing is at a relatively low?
I think it's new from the standpoint that we have, I think, really good partners now in the finances, so some of them are offering very low interest rates, or some are 0% interest, so they're trying to drive that conversion and take some of the financials out of it and doing things to try to stimulate that growth, so there's a lot of things at play. We always talk about being a multi-variable equation, it truly is, but fundamentally, it comes down to submitters and utilization.
And to think about it, utilization has the greater delta. Presumably, you've never really grown doctors, at least in the last four or five years. You haven't grown them 5%, 10%. Utilization has moved that. So presumably, utilization drives the vast majority of this.
Utilization does because you have a doctor. It takes time to kind of work your way through. But the key is once you get doctors to start doing maybe more than 50% of their cases through Invisalign, digitizing their practice, then you continue to see this acceleration. So if they're not doing any cases, they start to do some. Maybe they start doing adults more. If you're an orthodontist, you still do teens, mostly in wires and brackets. But then as they start to digitize their practice, usually led by adults, then they start to do more and more teens. They see the productivity benefits. They see additional patients coming in. And that productivity turns into profitability for those doctors. That's a real key part to this. And as doctors do more and more cases, then they see the benefits of it.
They see the benefits of it that maybe they don't need to be at the office as much. They can do ClinCheck and review cases, especially with virtual care from anywhere. They can just monitor things. So it gives the orthodontist and dentist and their staff much more flexibility. And so they see the digital benefits. And then if they want to do more cases, now they have the flexibility to do so. And we saw that, like I said earlier, that was what had to happen as we came out of COVID. That's how they had to treat patients. It seems like forever ago, but that's how you had to treat patients in the past. They had to digitize. We have to work to try to make that sticky and continue.
If that continues and it becomes more and more the standard of care, then you'll see it in utilization and more doctors.
We haven't talked about ASP. You talked a little bit about it earlier. Is the incentive program a way to the tiering? Do you adjust the prices to try to push volumes? There was a lot of debate in the marketplace. Hey, they're being more aggressive on price or they're doing more promotion. ASP, I think we model it sort of down a little bit going forward. For one, is that a tool that you use or have you used that to change the incentive tiers a little bit to try to drive more? I don't want to say it's lowering price, but it's.
I think the way that we look at it is there are certainly incentives to drive utilization. I want to get doctors in. I want to get new doctors in. And many times there's new doctors. And we see ASP as a result of this. Some doctors, they start doing a lower stage product or they use some of the doctor's subscription program that we have. Well, those are lower ASP products. And we say this a lot, and you see it in our numbers. Don't confuse ASP with gross margin. We are very mindful of gross margin. We know that those cases that there's no additional refinements, it's a very straightforward case. Many of those cases are becoming what we call touchless, where there's not really a human that's looking at this. It's AI that's figuring out how to move those teeth.
And the doctor maybe does minor adjustments, and then it goes into production. There's a huge savings for us to do. And we're starting to see more and more cases done this way. And those cases that are done this way are typically the easier, more straightforward cases. So we have a very high gross margin on some of those lower stage cases. You're right. It's less gross margin dollars. So we have to still manage rate that we get on those cases with the lower dollars. But if you look at those cases that you're driving, they should also be less cost to serve from an Opex standpoint. So we're mindful of the equation. What I talked about in terms of volume around submitters and utilization, that drives volume. You've got to be mindful of ASP.
But to make this the standard of care and to look at our product portfolio, we've got products that might be $300 or $400 to products that are over $2,000. It depends where they're at in the advantage. It depends where they're at in terms of where the patients are. But some patients come in and don't need a lot, or some patients or some doctors are really only treating some of the lower stage cases. That's okay. Our view is that we want to meet doctors where they're at, and this is a way to get there. But very mindful of gross margin, and then also very mindful of Opex spend and where we get to, kind of leading back to your earlier question.
We're doing things in a way that we can drive margin accretion, whether it's the products that we have, the gross margin there, or whether it's some of the productivity programs like touchless production or direct fab. As we scale that up, we have a significant reduction in material costs, doing things to be able to allow our business to still grow as much as we can. We want to do that, but also do it in the most profitable way. That's why we talked about next year being able to say, when you model things in, you might model in flat, slightly down ASP, but we do things in a way to be able to still show up margin accretion.
Gross margin. Okay. That makes sense. Do you think one of the signals would be that your mix changes and that you're doing more comprehensive and less? Do you think that's a signal too that the economy, people are spending more? Or do you think it's just, this is what the market is, and these are the people who are buying right now?
I think the market, I think it varies. When you're in certain countries and have new doctors, we do see a mix shift. I would say, and I've talked about it at earnings and some of the scripted is we used to just have a comprehensive product, which was the five-year unlimited refinements, and that was a product that came out in 2015, served us well, but then we looked at it and said, look, many doctors don't need this, and then from a margin standpoint, the cost to serve for us is high. It's five years, unlimited, and any minor tweak or anything that needs to happen was up to us. We had to work with them, treatment plan it, manufacture it, ship it, and there's a lot of extra costs, so we introduced product like the three and three, which is a little bit lower price.
We recognize more revenue earlier. The margin rate is better for us on that, and lo and behold, that product is now in many markets our number one product that we have.
What's the mix now?
We still have overall maybe two-thirds of our business is comprehensive, one-third non-comprehensive. Non-comprehensive grows faster for the reasons I said. As you move out to different areas or have new doctors, many times they start in that, but then within comprehensive, three and three is one of the biggest. Yeah, and then some markets, it is, but overall, it's the philosophy of, and we use this internally all the time, sell the way our customers want to buy. If you're selling them something that's more expensive and they don't really need it, and it costs you a lot to serve that, do something that gets us to a better spot. It was good for the doctors from a pricing standpoint and is better for us from an overall revenue and margin standpoint.
One last one on the market, and we'll get into manufacturing and Lumina and things like that. But Joe said, suggested the sentiment might improve when mortgage rates got low enough. I remember he told me that directly. And I think Stanley Bergman said publicly, 200 basis points of cuts, that might be the tipping point where all of a sudden things get better. I mean, we're not there yet, obviously. We haven't seen it. But a couple of countries have cut rates. I don't know if they're the same ones that you've mentioned. We did have a presidential election in this country. And I know you're loath to update anybody interquarter about anything, but have you seen any changes domestically at all from four weeks ago, three weeks ago when you reported?
I don't know if people's behavior changes instantaneously. I would say this. Kind of the variables that you spoke about are true. If you've got inflation, people are worried about where they're spending their money. In the end, this is an elective procedure. Even for teens, you might feel a little bit more that it's not as discretionary, but in the end, it's still discretionary, and it's a multi-several thousand-dollar purchase. When you have a better economy, lower inflation, that's good. Share of wallet is better. I think you couple that with lower interest rates because still in the US, if I average between GP and Ortho volume that we have, about a third of the cases are somehow externally financed. So there's a lot of external financing. Some, about a third, pay for it upfront. About a third do some type of doctor financing.
Usually, there's not an interest rate related to that. It's just kind of pay as you go type thing. Many times ortho's are like that, but about a third or so are external. And those are the ones that are subject to interest rates. They're subject to inflation and so on, maybe more. So as things get better, that's a good thing. You see maybe it's starting to show up in the Michigan Index. Well, I said it needs to get better, but I think when you now see maybe some of the results of the uncertainty around elections now become certain. And people are like, okay, now I know this is my operating environment. This is how I am. I think that's a help. I think if they keep cutting interest rates, that's a plus.
It just gives people confidence that, yep, I'm going to go into a multi-year treatment, spending thousands of dollars. I feel better about doing this. I think you see this maybe more in certainly North America. You see this in Western Europe. Like I said, in other countries that didn't have super high inflation and didn't have some of these things, we've already seen this in some of the performance in those areas.
I know I asked this on the earnings call. I asked about GLP-1s and if you thought it was an impact to your business and to demand where people were spending on that as opposed to here as opposed to here. And I don't know that you guys had ever three weeks later, four weeks later, I don't know. Have you commissioned the Align study and Venn diagram between orthodontic patients and Ozempic?
It's one where if it's we don't see a direct correlation here. We do look at in certain types of our doctor's patients, where are they coming from? Usually more middle class to above that. People who might have been spending on this already, they can also afford to go into treatment. So it's not necessarily. But it's an interesting theory. I think that comes down to overall from an inflation standpoint and kind of what people are spending money on. There are trade-offs. Whether there's spending on a GLP-1 or food or gas or whatever else, there's other types of expenses that take some priority at certain times, and I think in the end, if we have lower inflation, it's good for everybody. It's certainly good for our business, but the GLP-1s, I think they're here to stay. It's just a matter of.
And we do get, especially in some of the places where the GLP-1s have been more prevalent, our patients or the patients to our doctors, they get some type of reimbursement too. So many times the employer has some type of funding. So they get some benefit for using the orthodontic treatment. It's just I don't see a direct correlation.
Fair enough. I want to talk about the manufacturing and direct fab. You've talked about it. It can be very transformative to the operating returns of the business, both from a gross margin perspective and in terms of the kind of products that maybe you can introduce into the market, right? Can you speak over the next 12-18 months, maybe or even 2025 into 2026, are we going to start to see the impact of this? You've talked about it, hey, this is going to be a few years. But when do you think you can confidently say, we're starting to see the effects of this and it's going to show up on the P&L or it's going to show up, I guess it would be primarily the P&L?
For one, it's a process and really overall product dream that we've had for a long time. It really comes down to being able to have products that provide the ultimate design flexibility to a doctor, especially on the orthodontic side, is very, very powerful. These doctors, they use metal and other things to be able to get to move the teeth in a certain way. Here, with these products that will come out, it'll give them flexibility to make things thicker, plastic is thicker, or have buttons on them or other types of unique characteristics on a product that no one else has. Because the entire industry is the vacuum form, suck down kind of type approach. You can't vary wall thickness. You have to do manual things to kind of make those aligners unique. Here, you'll be able to direct fab.
It sounds easy to say, oh, I'll just direct fab. But you've got to have something that is that plastic has to be set in a way that it's still performance plastic. It's in the mouth. There's viscosity, conditions, there's temperature and so on that affects plastic. And we've developed a plastic that is biosourced. It is a plastic that has unique characteristics and properties. That coupled that with the acquisition that we had of Cubicure, which is a partner. They actually make the printers out of Vienna. And we partnered with them for several years, got to a point now that their equipment can handle the resin that we have to be able to make these direct fab. And so what we'll start to see is certain types of retainers, certain types of unique products that we were never able to make before.
So think about it like, think about a child that would have phase one. They're six or seven years old, and maybe you need their upper palate expanded, or maybe there's arch expansion that they needed, and they'd use Invisalign first. Well, after that's done, you need to have that child needs to have a retainer to kind of hold it so the bone can kind of set and hold it and so on. Traditionally now, doctors kind of had to make them themselves, had some lab, but it was never really the exact thing that you needed. We will start to have, starting next year, direct fabricated aligners that will, in this case, retainers to be able to help set that and source that.
We'll also be able to start, as you start to scale this up, some of the more complicated products that we have, instead of doing the manual and the extra effort that we have to do on the vacuum form process, we can start to direct fabricate those. You'll start to see next year these products coming to market. It's unique. No one else has this. No one else has this process that we have to be able to make the direct fab. There's not this me too, all the other aligner companies trying. This is unique to us that we have. As we scale that, as your question kind of alluded to, we will end up seeing more and more productivity on this. Initially, there's a slight margin impact to make these products.
But as you start to scale these products, you see a dramatic reduction in material. We'll figure out a way to make sure there's less labor and processing and so on, so that as you scale, you start to also see productivity. So it's a combination of giving ultimate flexibility to doctors to be able to create products that move teeth in a more predictable, reliable way and be able to provide ultimate flexibility around retention and other products, but do it in a way that ultimately drives productivity. And that's the mindset that we have. And I know we're not talking too much about iTero, but on iTero, like I say, Lumina as an example, it's a revolutionary platform, new platform, better, faster, better field of view, smaller wand. It stitches the images together, does all these really, really great things. And it's at a lower cost.
So every time we sell one of those compared to what it replaced, it's at a better gross margin for us. That mentality that we have with Lumina and kind of iTero is the same thing we want to. And we want to couple that with doing something in a way that we know the time and the money and the technology that we've been able to put into this, that it's not easy for someone to follow. And that gives us a unique characteristic or unique opportunity within the business to be able to help grow in a marketplace that we know only Align can do and give us the flexibility to help ultimately going back to the earliest part of this discussion is we need to grow more submitters. We need to drive utilization. We need to do all those things.
This technology is a way to help us deliver that.
Two quick ones because we only have a minute left. Is Lumina still on track for Q1?
Lumina Restorative, we will release Lumina Restorative by the end of the quarter, in the first quarter.
End of Q4 or?
End of Q1, so by during the quarter, but it's very, very positive. The Restorative. It's not a physical part. It's just more the algorithms to support that from a software standpoint, so we will be releasing that, and then we're constantly refining that, but it's more on the software side to be able to get the Restorative.
Got it. And this is a bigger picture question, but if we think five, six, seven years from now, given some of the advancements we're seeing with 3D printing and the like, is Align going to be one where you license out your technology and your software and you become, I don't want to say SaaS margins, but people will be able to license in some of the things you're talking about with direct fab and other things into doctor's offices? And all of a sudden, your margins can explode to the upside. You're still capturing all that, but maybe not necessarily having the.
I think our business will evolve. There will be different selling models that we have. The fortunate part is the new technology gives us that flexibility because now you might not need a centralized manufacturing. We'll start being centralized because we know we get the economies of scale. But to think about kind of a hub and spoke technology to be able to help leverage that, those are all options for us. We'll explore as much as we can, but ultimately, we want to be able to drive this underpenetrated market. And however we can become the standard of care, if it evolves to that, we're excited for that.
Sir, thank you for the time.
Great. Appreciate it.
Fantastic. Thank you.
Thanks, everybody.