All right. Good morning, everyone. Thanks for joining us today. I'm Jason Bednar. I cover med tech here at Piper. Next fireside chat is with Align Technology. Very happy to have with us today Align CFO John Morici. Thanks a lot for being here again, John. Always great to have you at our conference. Figured, you know, 25 minutes, we'll get right into Q&A. You know, why don't we start with, you know, the topic that everyone typically focuses on these days? That's the macro. No surprise. Just where do you think we stand on the macro? I feel like we've kind of had, you know, some good, some bad, and some, you know, kind of maybe right down the middle on some of the macro data points.
Is do you think this is the consumer still under pressure, or is there light at the end of the tunnel?
I think it depends on the location. I think broadly you would say it's stable. But I think you look at certain regions where we saw some strength coming out of the third quarter, Southeast Asia, Eastern Europe, Middle East, Latin America. You know, maybe they weren't under as much pressure coming out of COVID with stimulus, spending and therefore leading to inflation, whereas in Western Europe and North America, you had more of that. And inflation was a key concern for people. And they're making a discretionary purchase, whether they're adults or sometimes even for teens. So I would say it varies by region. But overall, when you factor it all together, we see that stability.
Okay. When you think about, you know, I think you and Joe have referenced green shoots mostly outside the U.S.. U.S. may probably still a little challenged, again, because it had some of that probably pull forward or benefits from stimulus funding and whatnot a few years ago. But maybe when we there, there still has gotta be green shoots here in the U.S. . When you think about those, are there specific income bands or, you know, parts of the country, adults versus teens, you know, anything that you're seeing that, you know, has you a little more optimistic about parts of the U.S. ?
We saw good growth in the third quarter in our teen segment. Overall, teens in the third quarter up 6% or 7%, which was good for us. Adults about flat. I think that's a reflection of a lot of the go-to-market activities that we have. New products that we've had with Invisalign Palatal Expander. Invisalign First has been growing very strong for us. Products like the 3-and-3, which allows doctors to finish cases in three years with three refinements, that's taken off very well. It's really become a very popular product for us. The efforts that we have going to market to make sure that those doctors have the capabilities that they need.
I think you couple that with Lumina putting out the Lumina new scanner that we had in the first quarter really has helped those sales. But it's also given doctors a lot more flexibility to use that scanner really make that part of their digital practices that they have. And it's driven good incremental growth for us. So we've seen that good growth on the equipment side, and I think some of the new products that really helped on the teens has helped growth as well.
Great. Mike, probably wanna, I definitely wanna come back to the Lumina and iTero maybe a bit later 'cause I think that could be a very nice leading indicator as you go into, you know, 25 and launch into GPs more than you have, but taking the macro data points out of the question, you know, any other business metrics that you look at that, you know, are good leading indicators that, you know, have you feeling better about the setup for 25, whether that's like exams or ClinCheck, anything just, again, for more of like an orthodontic or GP-focused business metric standpoint?
Well, there's a couple metrics. One that we talk about on an external basis that everybody can see is really looking at some of the consumer indices. You know, in the U.S., look at Michigan Index. And you get a sense of, oh, what that consumer's feeling. There that factors in a lot of things about that consumer. How do they feel about inflation? How do they feel about interest rates and so on? And then ultimately down to their own personal purchase. So you see that it's gone up. It's ticked up a little bit. You'd like to see that go, you know, go higher than it has. And I think once people see that, you know, see their own economy, personal finances feel better, I think that that metric goes up. So that's one thing that we'll look at on an external basis.
Internally, we look at, okay, how many people are actually coming to the offices? So we'll talk to our doctors, whether orthodontists or general dentists. Are people even showing up in the office? Do they come to the office for an appointment? And then internally, we can look at when they get a scan to when they actually go into treatment or get approved for treatment. So we'll look at that. Broadly stable, I think, right now. You'd like to see those times shorter. I think when you talk about some of the green shoots or maybe some of the areas I spoke about in Southeast Asia or Latin America and so on, you actually see the time.
And you can start to see how the business is reacting when you get a scan to the time you actually go into treatment. You wanna see that time shorten. And when you see that, then you see that more of that demand that comes from a consumer. So a lot of metrics that we look at, it's just really getting close to our doctors and making sure that we give them the tools and the capabilities that they need, visualization, and sometimes helping with financing and doing things to really make sure that that consumer that comes in feels like they're motivated and wanna go into treatment. And if they are, then most likely they will. And you see the benefit then.
You've seen those scan-to-case timelines shorten in Southeast Asia, in Latin America, any other regions or any other?
The Middle East has been strong. Eastern Europe, you know, even parts of Europe. I mean, it depends on the region. You really try to push. You wanna create that urgency or that demand coming to the office, get them into the dentist's or orthodontist's chair, provide a lot of visualization and tools so that as a potential patient, you get excited about what your teeth would look like with treatment, and you get excited about that.
If we can help make the financials work, we're not taking the debt on ourselves for those patients, but working with the doctors either to give extended payment terms to the doctors so that they can pass that on to the patients or things we could work with outside financing to be able to try to drive that connection because that's usually the last effort that you have. Everybody could be excited about going into treatment, but then it turns into, can they afford it? And if the financing is right, they can. You know, remember, 70% of our business is adult.
Yeah.
That's where it turns into a bit discretionary at times. That's part of what we have to overcome. I think once the economy continues to improve broadly, I think you see that benefit and that time to conversion starts to shorten.
Okay. What are the macro ingredients you think we need to see to get this the clear aligner market broadly growing back to that double digits? Like, not yet 15% or 20%, just like how what do we need to see to get the market growing to double digits again?
I think, you know, we'll continue to do the things we're doing internally to be able to drive things, so the new products that we've had with the Palatal Expander and growing some of the key products that we have to really reach kind of those preteens, you know, Invisalign First and mandibular advancement and so on, that's great to be able to help, especially a lot of those are new products and new markets, so that's a benefit, so there's things that we can do internally to help drive that and grow into that space that I think overall you just need that stability to continue, externally, so people feeling good about their financials, be able to go into treatment. It's less discretionary on the teen side. Many times parents save up for their teens.
They get to a certain age and they wanna go into treatment. We wanna be able to help with that. But I think you just need, you know, a little bit more of that stability to continue. Ideally, some of these consumer metrics improve. We're not necessarily counting on that. We'll drive the growth that we can drive with all the different products that we have and how we're going to market. But, you know, you do want that consumer confidence to improve a bit.
Yeah. Okay. Shifting gears a little bit, and I think I thought, you know, from, you know, one of the more overlooked or maybe underappreciated updates from the most recent quarter was, you know, bringing Frank Quinn back into the fold at Align. You know, what do you, I guess, what do you think changes under Frank as head of Americas? What does he bring to the table that maybe his predecessors didn't?
I think, you know, Frank has. He's been in the business. He ran the U.S. business prior to this job. He brings a great focus on customers and meeting the customer where they're at. I think, you know, you think about we have some large customers that we'll sell to, the dental service organizations. But in general, you're selling to small businesses, and you have to have that mindset when you come into those small businesses of understanding what they need. Sometimes it's clinical capability. Sometimes they don't necessarily understand the new products and capabilities that we have. They might not have the latest iTero or any iTero to be able to do the scanning and so on.
They might not quite understand some of the how they could handle some of the patient financing and other things to be able to help grow their business when they have to be in that situation. So I think he brings a great understanding of what's needed at the practice level to be able to meet those customers where they're at. He's got a great focus on that. I think customers really have reacted well to him coming in. I think internally he has a great understanding of the sales and the team and what their capabilities are and what they need to do. So I think he brings that right focus back to the business. He's been a good addition. He's been in five, six weeks.
Yeah. Yeah. Are there—I mean, I know it's super early, but are there one or two things he's done so far, things that he's talked about doing that you say like, "Okay, like that's, that's gonna be impactful or that's resonating"?
I think it's simplifying some of the, you know, some of the go-to-market activities that we have. We have a lot of different promotions, a lot of different products that gets confusing for some of the customers that we have. Like I said, we sold last quarter to 87,000 customers worldwide. Each of them have different needs. I think if you can simplify the approach, meet the customer where they're at, and he takes that approach to be focused on that. That's his main role that he's focused in on. He was at the show yesterday and talking to customers, really trying to understand what they need and what he could do to help. You know, you see that in these shows. You see that what he's doing in the field.
I think just having that focus and make sure you deliver to what the customer wants sounds basic, but that's been his approach.
Okay. Why don't we shift gears a little bit? You know, big topic for amongst investors over the past couple weeks with your stock has just been some of the proposed policies, tariff situation from the incoming administration because you have a decent-sized China business, but even more importantly, you've got a big operation in Mexico. We'll come back to the Mexico piece first. Maybe first, how large is your business in China? And then I think for everyone in the room, you know, do you see any direct implication from proposed tariff policies on, you know, from the administration on China and then maybe reciprocal China on the U.S. ?
With our business in China, it's less than 10% of our business, of our total company. The way we've gone to approach China, prior to all this and really our go-to-market strategy has been to have a local business within China, so we have manufacturing. We've got a large facility there that manufactures for China, treatment planning that's there, direct sales force, so our business in China is really in China for China, and that's been the way we've been operating like that for a number of years. Nothing really exports out from China back to the U.S. , so there's nothing that heads that way, and then, like I said, our business in China is serving that market there, so not an issue there.
I think on the Mexico piece, we've got manufacturing in Mexico as well and also in Poland, and I think if you think back to maybe where we were five or six years ago, we're a different company than when we were back then. We didn't have our operation in Poland. A lot of you have talked about, you know, kind of the ramp-up in Poland and asked about margins and so on, and we've been slowly adding our capacity there, so we have more flexibility than we've really ever had as a company. It wasn't designed for maybe handling some of the changes in administration. It is really more designed to provide manufacturing flexibility. We didn't want all of our manufacturing in one location. It just, we wanna be closer to our customers.
So that's why we built up our European operation in Poland. It serves Europe. Should we have to change things and move things around between production in Mexico and Poland, we're capable of doing that. It's not something you'd wanna do, but depending on if there's tariffs or other things, we have flexibility to be able to manage through that.
Yeah. And I think that, you know, maybe the misunderstood or maybe less, not as much appreciated piece of this market is you have that flexibility, whereas, you know, I think you look at a lot of your peers in the clear aligner market may not have that same, anywhere near that same flexibility and could get hit pretty hard, right? I mean, you don't have to comment on necessarily on other players, but, you know, I think it's, would you agree it's a fair statement that, you know, anybody that's manufacturing out of China, importing to the U.S. , could run into some challenges or manufacturing out of almost exclusively out of Mexico, importing to the U.S. could also face some challenges?
I think in this business you wanna be. We've developed, you know, a clear view that we wanna globalize and be as close to our customers as possible. That led to the strategy of having operations in China and in Poland to really manage those hubs. You know, we've been around for 20-plus years, and that's allowed us to really expand to the right areas. We wanted to diversify risk. We wanted to shorten cycle times. We wanted to minimize freight and so on. All those operations do that. I mean, the way we've gone to approach our business to have these three manufacturing is, you know, it's the same material. It's the same equipment. It's the same process, same systems, and so on. And so the same exact product could come out of each of those regions.
It's just a matter of how we administer that so we wanted to have flexibility. Companies that don't, I mean, it just limits their flexibility, and we can accommodate what our needs are for our customers as they grow, and we sort that based on the locations, and if there's changes in tariffs, you know, you never wanna make, you know, react to some of the short-term things, but if there's something that we needed to do that was impactful for our business or our customers or ultimately patients, we'll make changes.
Okay. Maybe pivoting over to the direct-to-consumer market. This market seems really challenged. I mean, I think it's on life support. Maybe that's even being generous. But, you know, the challenges here aren't new. They've definitely grown. Yep. Is this an opportunity for Align? There's a lot of volume that was going through the DTC channel, Smile Direct Club, other players that are out there. They're facing new challenges. But I guess, do you think that's an opportunity? Did you see much benefit, do you think, from Smile Direct exiting? I'll probably have a couple follow-ups.
I think it's there are a couple things on this. I think when you talk about direct-to-consumer, just going direct to the consumer, we've seen that business model doesn't work. They're not bringing really the technology. I think you find that you need to have a doctor, you know, being very close to the treatment and being able to understand how that dentition, you know, is set, X-rays and just the whole process that they need to have. So we found that business model doesn't work. We've never believed in that. We've always believed that we sell to a doctor who ultimately provides the treatment to the patient. But what it did highlight is there's potential patients that are out there.
And when we talk about the industry on a worldwide basis, that there's hundreds of millions of people who are in the dental chairs on a regular basis that have some type of malocclusion that maybe they could get corrected. And that's when we are able to provide tools to our doctors to be able to help, you know, provide the scan, provide that visualization. And like I said earlier, if we could find that connection with the right finances or the right incentives for those patients or potential patients to go into treatment, you can drive that conversion. But I think the DTC overall, kind of the players there, they really highlighted that there's potential opportunities out there. It's just a matter of how you reach them.
And what we see is a lot of those, mostly adults. If they're now gonna go into treatment, they're going to treatment through their general dentist. And again, if you make that equation where they can see what their smile's gonna look like with teeth, you know, with orthodontic work, and then they can actually afford it, they'll go into treatment.
Different competitive angle, but a lot of discussion. We talked a lot about it last night. Angel, AngelAlign out of China. You know, they've made some inroads here in the U.S. How do you see their competitive approach being similar to others that you've encountered, other players, other clear aligner players in the U.S.? Or are they taking a different approach to try to win over orthodontists?
Many of the competition, when they come in, and I don't think Angel's any different on that, they come in with a low price. So it's either do a few cases at this low price or, you know, commit to certain volume at a low price. You know, it's a strategy that we've seen before. I think when you find, especially when you get into big markets and complicated markets like the U.S., you've gotta be able to bring technology. You've gotta be able to have, you know, treatment that a doctor's gonna be able to rely on. It's predictable, and it drives the right results that they need. So I think that's first and foremost. You know, leveraging just price. I think what you've seen other companies come in and do is they inevitably have to raise price.
You cannot operate at that level such a low level. So, you know, we've seen things like this before. We've, if you mentioned Angel, we've been competing with Angel for a decade in China. We know their strategy. We're still the largest within China. I think price is, you know, their strategy and some other company strategy. But when we think of our business, this is less about share shifting across, you know, clear aligner business. This is about competition, which is wires and brackets in the end. 80% of our business or 80% of the orthodontic business worldwide is still done with wires and brackets. That's what we have to try to overcome. That's the movement that we need to be able to create a larger category, grow the clear aligner business. We're not really focused on that share shifting part of it.
Okay. Okay. Maybe a tough question, but, you know, I'll ask it anyways. Is there, you know, ASPs have gotten a lot of focus from the investor community probably since the middle of this year when we got, I think we all got surprised a little bit on the ASP movement, you know, quarter- over- quarter and year- over- year. Is there a scenario that you see where ASPs can return to being positive and independent of FX, but can they return to being positive year on year?
I think it depends on certainly the regions that we have. I mean, remember our ASPs; it's a combination of a lot of different products. We are not just a comprehensive type product that we've had. We have all different products from, you know, three or four sets of aligners all the way up to multiple sets of aligners that have a higher ASP. And our focus has been, you know, when we think about how we drive the business, it's around growing submitters. We want more doctors to be using our products. And then once we have that doctor, we want them to do use our products more and more, drive utilization. That creates that volume. When you take that approach, last quarter was the highest number of submitters that we've ever sold to, more doctors that we've ever sold to in the history of the company.
Sometimes when there's a new doctor, they're not gonna do the most complicated cases. That's okay. They're coming in, doing, you know, maybe some minor adjustments, moderate case or whatever. That's at a lower ASP. The key that we wanna make sure, you know, when we think about the cost to serve on those lower ASP products, the gross margin is higher. So you see as we go into those new doctors, as we start with some of those more simple cases, the gross margin rate is higher. It's less gross margin dollars, and we have to manage that as we work through the P&L. But from a gross margin rate standpoint, those are good trades for us. But I'd happily will take that trade to be able to get incremental volume.
If we can get incremental volume either by getting new doctors to use our products or be able to have doctors used more and more through the utilization and other programs that we have, I think ASPs are kind of an after effect in some ways. We're not, if you look at product by product, we're not taking a disproportionate promotion or anything else. It just comes down to, as certain countries grow faster or slower, they have a higher or lower ASP. And then when doctors have different choices in terms of what they wanna use, some take, you know, more complicated versus other products.
Okay. Real quick one on Lumina. I guess, how important is the restorative launch for Lumina? And maybe I'll ask it as, you know, is year two more like, more important than what year one was just launching into orthodontics? Like, is year two the year where, like, Lumina really shines?
Look, Lumina has been a breakthrough from a technology standpoint. It moved from confocal imaging to camera-based focus. And, you know, it gave a lot of benefits to that. It stitches together the image much easier, much more forgiving, better field of view, better cycle time in terms of how fast it moves, and recombines the images. Smaller wand. There's a lot of features, and that's why it's done very well for us since the, you know, the launch in the first quarter. The restorative piece is a software change that we're working through, and we'll have in the first quarter.
That software change will allow, as an image comes through, the lines on the images, especially around if you're doing implants or you're doing restorative work for many dentists, they wanna have that crisp, clear image to be able to know how they're putting those restorative features in. That'll come into the first quarter. We think that opens up even more opportunities to grow. I look at that as the initial launch, very successful. It's been on the ortho side as well as GP. That's really it's spanned both sides of that. I think once we have the restorative piece that comes through with the software upgrade, it's gonna open more opportunities. What we're seeing with Lumina, it's really a gateway for more and more doctors to come in, be able to digitize their practice.
We know that if they have a scanner there, it lends itself to more and more Invisalign cases.
Okay. Got 30 seconds. I got two questions. I'll pack them in, at the same time. Fourth quarter, there and we talked about both these last night, so hopefully they're pretty easy. But fourth quarter, you know, there your guidance assumes an acceleration in growth. But you talked at the start of this conversation, things are broadly stable. Like, how do you get to that acceleration in growth? That's question one. And then question two, street sitting out there, mid-single digits for, for 2025 revenue growth. Is that the right starting point that you think people should have in their mind for 2025?
Well, we haven't guided to 2025, but I can, you know, kind of the first part of your question about, about Q4. I mean, really, we look at, you know, kind of how the business is trending on a month-over-month, quarter-over-quarter basis. So when you look at how we're expecting the fourth quarter to play out, we talked about sequential improvement in our business on the systems and services. That's the, you know, the equipment business right at the end of the quarter should help, should be one of the bigger quarters that you have. So that adds to that in the fourth quarter. You've got other new products that we have with the Palatal Expander and other products that are really hitting the market in a bigger way in the fourth quarter. So you start to see that improvement.
Europe, you know, has a slower quarter. In the third quarter, it picks up in the fourth quarter. So you have some of these at play to be able to help us on a quarter-over-quarter basis. And I think really the comparison to prior year was more of the challenges that we had in the business, in the second half of last year. We saw, you know, continued inflation, some of the consumer confidence, other things impacted in the fourth quarter. So we're comparing to a quarter that for the fourth quarter last year was sequentially down from the third quarter. That typically doesn't happen. So I think, you know, we're focusing on what we're doing to drive the business going forward. When it then compares to the prior year, it just has a comparison that's a little bit more favorable.
Okay. All right. Well said. We are out of time. Thanks so much, John, for being here with us again this year.
Of course. I appreciate it.
Thanks everybody.