Good morning. Thank you all for coming. Clock just ticked to 8:00 A.M., so let me be the first person to welcome you to Piper's 37th Annual Healthcare Conference. If you're in this room, you are a client of our firm, so I, obviously they're not all here, but I'd like to thank you very much for your business and your partnership. We obviously couldn't do it without you. It's my pleasure to introduce John Morici, the CFO of Align Technology, and Jason Bednar as Senior Analyst and Managing Director at Piper Sandler. Gentlemen.
Thank you.
Thanks, Jim. Yeah, welcome everyone. I'm glad, glad to have you all here. I'm really happy to kick off the conference here with John. You know, John, we were just talking with, and we've had a lot of interactions here just in the last 24 hours at the dental conference yesterday and also dinner last night. I think I'll start probably the same way I started each of those times we talked with, I think what's very pertinent for a lot of investors right now, the U.S. consumer. It's probably a very common question you get, you know, the recent consumer confidence numbers didn't look great. I think we're also gonna have a little bit of a vacuum just with government data here. What are you seeing? I mean, is do you think that the consumer right now is stable? Is the consumer under pressure? How are you seeing things with respect to the US macro environment and the consumer you're selling into?
Yeah, it's a good question. You're right. We do get this a fair amount. When we look at the data that we see and kinda how the consumer is behaving, especially when it comes to our Invisalign and coming to doctors and so on, we would say it continues to be stable. We saw this in the third quarter. It really had stabilized, and that's kinda how we look at what's happening within the U.S. Obviously, there's puts and takes in different geographies and so on, but overall, we would say that stability is there. I think when you put that against some of the consumer metrics that are there, Michigan and others that people use, you know, slight changes, it's not really that noticeable. There's dramatic changes, then there's an impact maybe one way or another.
I think when you look at some of the indices that are there, you have not seen a broad, you know, dramatic change. That is good for our business. We want that stability. We want to be able to operate in that environment, especially the U.S., like you said, North America, big markets for us. When you have that stability coupled with the things that we are trying to do, and we can get into a lot of that to drive that conversion, it is a better environment for us.
Okay. Pretty controllable environment, you can characterize it as for, for yourself.
That's how we would look at it because there is work that we have to do with our doctors to be able to help drive active conversion. And there are a lot of new products that we have to get people interested in, in different types of treatment. There is marketing and co-marketing that we will have with our doctors and our dental service organizations and others to try to create that activity, get people interested in treatment, couple that with visualization, and if the right pricing is there for that potential patient, they will transact. It really starts from having that stable environment to be able to do that.
Are there any green shoots that you'd characterize as seen in, in the U.S., specific income bands, geographies, adults versus teens, DSOs? I'm sure you'd say DSOs, but DSOs versus private practice. Where are you seeing maybe some better performance, within your business in the U.S.? Then we can talk about the outside the U.S. as well.
Certainly within the U.S., when we talk about the dental service organizations, whether on the GP side or on the OSOs, on the orthodontic side, they're doing a good job of what we would describe as active conversion. They're doing a great job of scanning every patient, showing them the visualization of what your teeth will look like before treatment and after treatment with a lot of in-face and video visualization. They'll provide, in many cases, great pricing, that they'll fund to try to get that potential patient excited about treatment. Usually follow it up with some type of financing so that that per month payment is acceptable to that potential patient. The DSOs and OSOs are doing a great job with that.
I would say if you looked at other parts within the U.S., we're seeing good uptake in some of the various products that we have. When you think of the teen adoption, so products like IPE, the palatal expander, products that have mandibular advancement with occlusal blocks, they've really taken off, and we see better and better utilization as doctors get more familiar with those types of products. That's helping us. That'll help us on the teen side. As we go and really try to be, you know, selling to more doctors and driving that utilization, we're taking that active conversion approach with our doctors. The retail doctors are the most, the predominant number of doctors that you have in the U.S., and many of them individual practices, individually owned.
Taking products as well as the active conversion approach to help with co-marketing, help with helping drive patients in, taking some of those activities to try to turn those potential patients into patients. It is a ground game that you need. It starts with products. It is the way to go to market. DSOs are a force multiplier for us. They take all the tools and all the products that we have and be able to help drive that conversion. That is what we want to continue to do within the U.S. and other markets that we have. Once we can do that, we can be able to grow the business.
All right. When we, we didn't know that we touched on international yet, but we can on the, in maybe in this question. When we think about your business taking a step forward, I think we're, we're all trying to wait to see if we can get back to that, you know, kinda maybe the low end of that LRP that you put out there, earlier this year, plus 5%-15% on revenue growth. In order to get there, do you see that happening more with the US getting better in some of these active conversion efforts helping? Is that the bigger impact, or is it more international taking a bigger step forward than what it already has?
I would say it's both because when you look at our business, over 50% of our business is outside the U.S. When we think of all the things that I just described in the U.S., we want to be able to, you know, we start with a stable environment and then all the active conversion, ways that we go, including the DSOs, that gets us some improvement there. When we build outside the U.S., which we have seen good growth where, you know, places like Southeast Asia, Latin America, Eastern Europe, really other parts of Europe, you know, India and Turkey and so on, those places are growing double digits. We're at that double-digit growth. You're seeing good adoption of the products, a lot of the new products that I've talked about.
You're seeing good adoption of things that we have to go to market with, some of the products like the doctor's subscription program where they're doing touch-up cases and others, which really helping drive a significant amount of volume for us. When we think about growing as a company, we wanna continue the growth that we've seen international. That's come back faster for us, certainly, since COVID. We wanna continue to grow there. As we build back in North America with the active conversion approach, DSO, big piece of that, but then all the work that we're doing on the retail side.
All right. Do you think you have enough, call it demand forecasting ability to say we can, we can sit here today and say what the U.S . is, we see the path, the U.S. getting better from where we're at right now as we look ahead to the coming quarters?
That's the plan. I mean, we're not guiding for next year yet, but the plan is that we wanna continue to see incremental improvements. And if you looked at the year so far, you've seen that. I mean, first half, much different than I think what you're seeing in our second half. Some of it volume, some of it that revenue improvement, that we see on a year-over-year basis. It comes from having stability in the various markets, but we wanna be able to push, to try to drive growth both in North America as well as outside.
Okay. Maybe the last question just on this macro topic. Can we do all of that and wrap it back together with where we started? Can we do all of that on the improvement and driving active conversion if the U.S. macro simply stays stable?
That's, that's we're not planning for. When we think about our, our overall plan, if macros get better, that's a tailwind for us. We're expecting that, based on what we see now, it stays the same. If there is some improvement in macro or some benefit that they see, say, you know, inflation gets more in check in certain countries or interest rate changes, and that, you know, helps stimulate demand, that's a good thing. That's a positive for us, but it's something that I would look at as a tailwind. We're not factoring it in.
Okay. All right. Perfect. Maybe transitioning over to some of your international markets, some of your bigger international markets. Those have been better. Europe's been doing pretty well. As I say, across all dental, it seems like, just from our conversation last night, I thought you sounded, you know, pretty good on the overall China market and demand environment as it stands right now. Maybe just to revisit, you know, some of those points, where are you seeing some of the investments pay off the most in Europe? When you focus on APAC, let's bring in the conversation on China, because you seem actually probably more an exception than the norm, on, you know, having a more positive view or rosier view on China relative to other parts of MedTech where it's a little choppy right now.
When you look at our international business just as a whole, when we think about even comparing it to North America, our international business is very underpenetrated. In many cases, as we've gone direct, and we're working our way through those markets, the vast majority of cases are done with wires and brackets. We start with that where we think that as we come in, be able to come in with new products, training doctors, getting them to understand the digital orthodontic process that we bring, scanning every patient, visualization, helping them with ClinCheck to be able to help these doctors get through these cases, and then build confidence to do more and more cases. That's a model that we've run. Internationally, there's a lot of runway for that.
When you look at markets that are, you know, relatively new to us, but we're seeing tremendous growth, even places like India where we were almost nowhere just a few years ago, now it's a, it's a significant part of our business and growing, strong double digits. You look at, you know, Korea and other places that we've been for a while, but just the underpenetration of market gives us huge opportunity. Same way in Brazil, same way in Turkey, Eastern Europe. You mentioned other parts of Europe. We're seeing great growth there. It's coupled with some DSOs that we have there as well. Then it's also really the introduction of a lot of new products there that they've just started with. IPE just started this year. DSP, our touch-up subscription program, just started this year.
As you get further and further adoption, it accelerates case growth. Great opportunities are there in some of the newer markets that we're in because of just the newness of that and the underpenetration. Even in markets that we are, as we introduce new products and work with DSOs and so on, we're seeing an acceleration there. With China, it goes to the fact that the vast majority of cases, over 85% of the cases there, are done with wires and brackets, and less than 15% are done with clear aligners. We're the biggest within the clear aligner, but, you know, it's one where there's not a lot of reimbursement, especially on the private side. People pay for brands. They pay for quality. And in many cases, it's out of pocket.
The majority of our business within China, 85% of our business is private. On the private side, we're usually in tier one, tier two cities. Doctors end up charging more for Invisalign, compared to other types of treatment, and people pay for it. We're a little bit insulated from that, in terms of how we go to market. In China, you know, we've been in that market for a long time. Even before COVID, we had manufacturing, we had treatment planning, we've got a direct sales force, we've got our entire China business contained within China. When we see the dynamics that go on and what you have within that market, we're able to navigate, because we're there. We've made those investment decisions and the growth opportunities that we've had there, for a long period.
All right. Maybe double-clicking on China and the whole VBP conversation that's very topical for investors right now. As you're going through your own strategic planning, budgeting process, and thinking about the puts and takes about potential VBP hitting the orthodontic industry, brackets and wires and clear aligners, how are you, I guess, planning for that today, knowing that it's, it's probably coming at some point next year?
You're right. It will, it will at some point. It was delayed a little bit this year. The expectation, just like most VBP plans that they have in China, it hits on the public side first, and then, then usually makes its way to the private side. Like I said, most of our business is private versus public, so maybe it takes a little bit longer. It's an interesting one because when you think about it, there's a big difference between the cost to a doctor to provide Invisalign or any clear aligner treatment compared to wires and brackets. Big gap, in terms of, you know, what we're providing. Wires and brackets might be $100 or $150 maybe, and clear aligner might be $800 in China. You're at a big difference in terms of the cost to the doctor.
VBP will affect some of those prices. It'll actually shrink the gap between wires and brackets and clear aligners, and say for Invisalign. The expectation is, and I think what happens a lot with VBP is the product that gets their cost impacted, the volume goes up, and you'll see that benefit in volume. Like I said at the start of the China discussion, the vast majority of cases are done with wires and brackets. If this gets us to a higher utilization, more doctors wanting to be trained, we've seen that within China, record number of doctors that want to be trained and signed up for things 'cause I think they understand the changing landscape and so on.
If it gives those doctors and then ultimately patients more access to clear aligners and, and therefore Invisalign, we think that's a good thing. On the private side, it's still gonna be paid, you know, usually externally anyway. So it'll kinda remain to be seen what doctors do in terms of how they pass things on or not. Also the fact that we're there kinda with our manufacturing and cost, kinda contained within China, as the volumes change and costs change, we think we're properly positioned. If we weren't in China and we didn't have the footprint that we had there, I'd be more concerned with it. I think given the fact that we've made these decisions and we've been operating in China, as a standalone basically there for a number of years, we think we have the right position.
All right. The glass half full view of all that is there might actually be opportunity to accelerate the conversion from wires and brackets to clear aligners because post-VBP, that dollar gap between the, call it the cost to acquire each of those for the doctor is going to be narrower than where we're at today, even if they both come down the same percentage. It's just the way the math works.
The math will work if you take, you know, if you take 50% out of both of those examples, $100 versus $800, okay, still 50% impact on both sides, but the gap is closer. In the end, if this can help drive utilization and get doctors to do more cases and ultimately pass that on to the patients, if your costs are positioned properly, that's not a bad thing. That drives our name of the game for the company and what we're trying to drive with Invisalign is to make this the standard of care. There are different ways to do that. That's maybe more of a top-down approach that the government takes, but ultimately we wanna be able to make Invisalign the standard of care, digital orthodontics versus the analog process that mostly exists today.
All right. We're gonna use this VBP conversation to segue a little bit into pricing. How are you thinking about, you know, you've got a lot of, a lot of moving parts that factor into pricing. We hear them every quarter, but DBP could be a new one, you know, maybe a new headwind next year depending on when it goes into effect and what the actual terms look like. I guess how does that factor into your thoughts on the pricing that you're going to be talking to all of us about here soon? I think you've been mentioning down low single digits, down 1%-2% is the right way to think about ASPs for Invisalign for the business over the long term. Does that still hold next year even with something like VBP coming into play?
That's the expectation. That down one or two points on a year-over-year basis is, I would look at that as purely mix. There's two types of mix that hit our business. One is the geographical that you're just talking about. China would be a good example of that. You're gonna have, there's countries that we operate in that are growing tremendous, you know, growing over 20% year-over-year that just have a lower list price for the products. You're in India or you're in China or you're in, you know, Turkey or Latin America and so on, the list prices are lower. It's just what that go-to-market is, what that market will bear. As they grow faster, you have that country mix.
You see that play out, and I talked about it in the third quarter where China was so, so much larger than, say, Europe, on a year-over-year basis, a quarter-over-quarter basis, than even Europe. Europe was down in volume on a sequential basis. It impacts ASP. You see the reverse of that on a country mix going from third quarter to fourth quarter where China is less as a part of the business and Europe is more. That's exactly what plays out on an annual basis as well. You have different growth rates for countries that have those different list prices. So that's one part of that mix that affects ASP. The other part is product mix.
When you think about some of the new products that we have with palatal expander and, and some of the, the touch-up cases that we have, they might be a ASP of 6 or 7 or $800. Now, the cost to serve on that is also very low for us as well. The gross margin on those products might be 75%-80% because it's, it's really almost touchless in terms of the AI that's used to be able to create that case. The manufacturing, there's no refinements and so on. It's very straightforward for us. The gross margin rate is, is better for us. That is just what the market is. The market is, is shifting in a way to be able to, doctors want to have, sometimes they do not want to have all these refinements built in.
They wanna have it just, maybe it's a simpler case. Or maybe as you train new doctors, those new doctors aren't gonna do more complicated cases to start. They're gonna start with more of the mild cases, and those are just lower list price products for us. You know, it's not, it, it, that the change in ASP is not due to discounting on a like-for-like product. It's really the doctor's behavior that operates within certain countries, as well as the product portfolio that they choose.
All right. That's also a perfect segue. The next thing I wanted to touch on, we're down to a few minutes here. Portfolio evolution, you know, this has been constantly aligned. I do think we might be on the cusp of one of the bigger evolutions in the portfolio as you move down this path of fewer or zero refinements, and fewer additional aligners. Am I wrong on that? Do you think this really shakes up the industry? I ask it that way because I'm convinced others can't follow you in doing exactly that and dropping the, effectively dropping the price if you're not dropping like-for-like. You're dropping the price or moving doctors to a certain product that I don't think that other competitors can follow you to. Am I right on that or is that, would you, would you refine any parts of that characteristic?
No, it's a good starting point. And just so everybody understands, you know, where we're coming from, when we came up 10 years ago, we had a product that was the comprehensive unlimited, the ultimate where it was five years unlimited refinement. And why did we do that? We wanted to drive orthodontists especially, but all of our doctors, give them the confidence that they can finish a case. Five years, you have five years to finish a case, unlimited refinement, and getting doctors to say, "Yep, I'm gonna use Invisalign to try to, to finish this case and we're gonna, we're gonna show it." 10 years ago, and you think about how many hundreds of millions of dollars we spent in investments to make our products better and better.
As that has improved over the years, what we're finding is that we can help doctors finish cases faster. Good example of that. Three years ago, we introduced a product that it's a comprehensive, but it's now instead of five years, it's three years. And instead of unlimited refinements, it's three refinements over those three years. That's our number one selling product right now. It, what it does is it gives doctors confidence to be able to finish cases. It reflects the technology that we put into the products, and they're able to finish faster. Now, as the products evolve, and giving doctors more options, we'll have a product that will be three years. It's a three-year treatment, but it's own, it's no refinement. If they want a refinement, then they can pay for it as they go.
Think about it, it's, it's a pro, these are products. They're still comprehensive products, but it's giving doctors the choice. Do I want essentially a service plan that I wanna buy up, upfront? That would be the comprehensive unlimited, unlimited refinements that'll help you finish the case. Or do you just wanna buy the product and do this and finish the case? Maybe you don't need a refinement. If you do need a refinement, then you end up having to pay for that as you go. We think, and we've seen this as we've tested, that that gives doctors choices. When they have choices, especially when they're comparing them to wires and brackets, and again, that initial cost that they have, that gives them the ability to use more cases.
If this can help drive that utilization and therefore get doctors to do more cases and move from the share of care where they're at to something higher, we think that's a good thing. This is just an evolution. It's technology that's gone into the product to make them better, to give doctors more confidence to finish cases in a predictable and reliable way. We think it's something only we can do given the technology that we've put in. It's just part of our portfolio. You're not retiring something else. You're just adding to the portfolio and give doctors more choices.
All right. Quick, quick one-word answers here in the last 30 seconds on two different things. Hopefully I'm not opening up a can of worms, but when do we end up seeing zero refinements rolled out across the globe? And then separate question, direct fab, what does that look like in 2026?
Two quick ones. You know, in terms of the zero refinements, it's already rolled out to some of our DSOs that we have in North America and other places. We'll see it broader in North America starting in the first quarter. We'll see what that uptake looks like. Again, giving those doctors options. Direct fab, we continue to work through scale-up. We'll start to see some of the first products coming out in the middle of next year. They'll start with retainers and maybe more of the complicated retainers to start that give doctors some unique ability to hold some of the spaces that they need in patients' mouth. As we build from retention, it'll get into some of the more complicated products that we have to manufacture, like mandibular advancement with occlusal blocks and some of these other manual processes that we have to do to aligners now. We'll start direct fabbing those later next year and then start our scale-up process on aligners in 2027.
All right. Excellent. Thanks so much, John. I appreciate it. We're out of time.
Great. Thank you.