Good morning, everyone. Welcome to this session of the Leerink Partners Global Healthcare Conference. I'm Mike Cherny, the healthcare tech distribution analyst. It's my absolute pleasure to have the Align Technology team here, CFO John Morici and Madeline Valenti from the IR team in the audience. I'm happy to say that they brought no slides so we just have a nice fireside chat we'll dive right into. Maybe, John, building off last quarter, starting with North America, like you saw pockets of strength that saw sequential improvement over the last couple of quarters versus what you'd have. You talked about the dynamics of the market being more stable than what you'd had. Can you give us a little bit on what that means in terms of practicality, what you're seeing from your customers, from individuals on where that level of stability is starting to dive in?
Yeah. It's you know, what we've seen as we went through last year, that stability, meaning that there weren't as much unknowns within the market where people were transacting. I think people understood that there was still some volatility around, you know, tariffs and kinda inflation and other things. I think people were getting more and more used to that, from a consumer standpoint, and they were transacting based on that environment. Of course, there's things that happen, you know, we've seen with some of the conflicts and other things that happen that people are aware of. I think broadly in North America, it's been you know, that stability continues and it's good to see.
From that standpoint, we do everything we can do to be able to help drive the conversion. We do things to you know continue to advertise, train more doctors, try to sell to more and more doctors, increase the utilization, do things in this environment from a relatively stable standpoint. DSOs may be a little bit more active conversion, and they're able to capitalize on that. Some of the other doctors that we talk about, some of these more retail orthos and GPs that just are a little bit more passive, they kinda get the patients through as they come.
in an overall stable environment, we want that to continue, and then we wanna try to drive as much active conversion, be very much around driving local advertising, doing things to be able to help drive that conversion with those doctors.
What does the strategy look like on the conversion side on a typical DSO versus typical individual practitioner? How does Align go at it to make sure that you're getting for your clients, the customers, the right metrics, the right returns on the push for conversion?
DSOs, when you think about those enterprises, they're looking for benefits that we can bring to them, and it's usually around some operational scale. They're looking for a quicker turnaround in terms of the products that are being provided to their patients. They're looking for technology. What's the best technology to be able to help move teeth in a predictable, reliable way? Usually something around brand, being able to have a brand that really drives those potential patients to those practices and then ultimately drives that conversion. When we work to you know find some of those metrics, it's being able to make sure that those DSOs take that active approach by local advertising, get those potential patients just to their doors, whether you're an ortho or a GP.
Once they get to the door, doing scans to be able to make sure that they have an iTero scan, to be able to help visualize and almost simulate what their teeth are gonna look like before and after treatment, get people excited. The DSOs and/or even regular retail doctors, those that take that last-mile approach help drive conversion. That last mile is usually around, especially in this environment, getting the right pricing, get decent pricing to those potential patients. Then, if that patient is still reluctant to put that money forward initially, if they can have some type of financing to be able to help, and put it to a monthly payment that they can afford, that's that active conversion.
It's the journey that those patients go through from getting the awareness to seeing what they're gonna look like with treatment, to understanding kind of the pricing and financing piece of it. If you take that active approach, those are the doctors that are ultimately powering through a relatively stable environment. Doctors who don't take that approach, they just don't have as high of a conversion. Their utilization is a little bit lower and it's up to us to be able to work with DSOs because they are leveraging the benefits that we bring, but then also work with those other retail doctors who maybe don't have that approach, but there's things that we can do to help them.
Sticking on the DSO side, there's a logicality in my mind on where you've been able because they're professional organizations, because they're typically have business offices where the conversion opportunities would tend to work better. But you're also empowering them to be better through obviously iTero and the Lumina launch, which I'm sure we'll touch on a little more, but also the workflow enhancements that you're making. As you think about your DSO market as a whole, how do you think about the optimal DSO customer and how many of your DSOs are truly optimized on workflow solutions on the right level of iTero scanners versus where there's incremental opportunity for them to continue to be better organizations, better businesses? Part of our review.
DSOs are at various levels. Some are, you could think of it as DSO where just a few practices together and they're still relatively small and trying to grow. You're right, those DSOs are really trying to optimize their profitability, just trying to drive that return on investment. Most DSOs, let's face it, in the U.S. for sure, are private equity owned or investors, and they're looking for that return on investment. Some DSOs are more equipped. They have infrastructure. They do all the things I just said about trying to drive that active conversion, and they take it even further. They have treatment planning services. They monitor refinements.
They use products that don't have a lot of refinements up front, and then really manage refinements and time for treatment and profitability that they have. Those DSOs have evolved. You know, we've invested in them. It's like a Heartland or Smile Doctors and so on. There's other DSOs that are middle level and lower level where they're trying to grow too, but they're all on that journey to be able to help digitize, help drive efficiency to ultimately drive that conversion. We have special teams that work with those DSOs no matter what level they're at, and we wanna continue to help them train their doctors that they have in their practices and ultimately drive a higher and higher utilization. It's certainly the way things are going.
DSO revenue for us in North America is about 1/3 of our revenue.
Mm.
It's consolidating that you see. We think we're properly positioned there because again, they're looking for scale, they're looking for technology, and they're looking for a brand, and we bring all three of those together and really help them be more efficient and grow in their space.
Along those lines, for DSOs, one of the things I think I hear you saying and something I believe in is the idea of standardization, the fact that they want one system, one solution. The more that they can do with you, the better it is for them. How do DSOs play into the competitive environment relative to the Invisalign brand in the U.S., and how important is that role of not only the brand, but also the entirety of the workflow in ensuring that you're driving better same-store sales with your DSOs?
They're equally important because those DSOs are looking for that efficiency. They're looking. If you're a general dentist, a majority of what you do is not orthodontics. The majority of what you do is restorative. We fit into that workflow where they're scanning every patient, but they're doing whatever restorative or hygiene that they need, and then they start to visualize, and we fit right into that. Then while that person's in the chair, they can look at a treatment plan and be able to say, "Yeah, that looks good. I like to see that." Or we have SmileView where you can have a patient talking, and it would be on one side it's the normal video of them, and then one other side it's with orthodontics or orthodontics and restorative.
There's a part of that workflow that we wanna be a part of, and I think that really helps standardize across. There's a model that they can follow that it's working for these DSOs. It's driving a higher conversion. It really goes to show that even in a tougher environment, you can still see this volume benefits. That applies to U.S. and North America, but that's also what we're seeing. Even though DSOs are a little bit more, they're just not as big in some of the other markets in Europe and APAC, but that same play that we're talking about in North America applies to other regions as well.
Maybe turning to product launches. You recently launched zero refinement cases rolling out in various different forms. Maybe talk to us, what's been the early feedback from not only your customers, but also patients relative to the new offering?
Early feedback is, we started with our DSOs and they have been using this for a number of quarters now. What I think those doctors like, and maybe ultimately the patients like, is flexibility. When you buy something, you don't always have to buy a product that has essentially a service plan, because that's what those refinements are. You're providing additional refinements to be able to have that patient get the completed care that they want. With no refinements, it just offers flexibility, and it's really an evolution of our portfolio. When we introduced, if I rewound the tape, 10 years ago, our main product was the Comprehensive Unlimited, which was 5 years of treatment with unlimited refinements.
That was at a time where we're trying to drive utilization, especially on our comprehensive products, but we had technology that maybe wasn't as good as it is now. We had to offer 5 years, we had to offer refinements. We've evolved in terms of putting more technology into the product such that you can have a comprehensive case that maybe you don't need a refinement or maybe need 1 refinement, but let's let the doctor decide that they want to do a refinement because they didn't get the exactly right, and then that doctor pays for it. And what it does is it reduces the upfront cost to those doctors. They still might do a refinement or 2 or 3 later. They kind of pay as you go, and it gives a doctor much more flexibility.
I think with the product evolution that we have, with the doctor capability. Remember, 10 years ago, majority of cases, they didn't even use an iTero. They were using PVS impression and it was kind of an old kind of digital, but it wasn't really as elegant as it is now. Now, 90+% of the cases go through a digital scan through iTero. The quality is better, the products are better, and we've really improved things so that you don't need to have that. I would say as a side note to that, when we had the Comprehensive Unlimited. It used to be our number one product. 3 years ago, we introduced the three-in-three, which is this comprehensive over 3 years with 3 refinements. That's our number one selling product.
Now as you give more options to doctors, I think you're gonna see a portfolio. Some still might take the comprehensive unlimited because they like that security. Some might do three years with three refinements. Some might do zero. But we just want to give that flexibility in the marketplace, and I think doctors appreciate that, and I think patients appreciate that too because they know that they're getting quality of care in whatever level of treatment that they need, but ultimately let the doctor decide.
I appreciate you brought up the three-by-three dynamic 'cause I think we're all looking for corollaries on what something like a zero refinement rollout looks like and penetration looks like. How do you measure the success of the new product rollout? Or maybe do you set targets for yourself of where you want zero refinements to be as a % of your overall share?
It's not so much of a target. What we're looking at that one is, you know, especially on the ortho side because I think that's where this plays the most, where an ortho now is making a decision, "Do I put this patient into wires and brackets or do I use Invisalign?" I think when you have the comprehensive unlimited comparison pricing compared to wires and brackets, a big gap. Comprehensive unlimited, doctor could be paying $1,500 for, and wires and brackets they might pay $300 for the material. Big gap. Now when you look at the comprehensive with no refinements, that might be $800 to that doctor. Still more 'cause there's the digital aspect and the workflow and the time savings it has, but it's now closer, and it closes that gap.
I'm really looking at this as certain doctors, how do you see their utilization play out? Can we get a higher share of chair for the comprehensive with no refinements? Can we increase that utilization, get it into doctors who maybe were making the switch or hesitating to make the switch because they saw the pricing? We'll see that evolution, but it's not so much of a target. If I went back again 3 years ago before just when we launched the comprehensive with the 3-year, that was zero because we were just launching it, and 70% of the cases were done with the comprehensive unlimited. Now 1/3 of our cases are done with the comprehensive, the 3-in-3.
I would expect, you know, it's gonna increase. I don't know if it'll be our number one selling product, but it'll certainly take away from some of that. We're really looking at this as an evolution of the portfolio because of the technology is there to be able to make sure we get this done in the right way and also to drive incrementality. We should be able to see higher utilization, especially amongst those orthos who would've normally used wires and brackets versus Invisalign.
Along those lines, I would love to just dive in for a second on price. I think you've been very helpful in talking about the mix dynamics and the fact that if you're selling a zero refinement case, the math on the ASP is gonna obviously bring it down. But how do you feel on a product-by-product basis your pricing power currently sits right now? It's not about comparing the price on zero refinements versus comprehensive unlimited, because obviously they're two different products. But how do you feel within your, especially your key product categories, your, where your price sits currently in the market?
I think when you look at our pricing, it's really when you think about ASP, the two dynamics that hit ASP the most is, one, where do we sell the product? If you're selling a product in Turkey or Latin America or India, it's a lower ASP. It's just that list price is lower there compared to our overall average, and it happens to be that we grow the fastest in some of those areas, so you have this mix effect that hits ASP. The other part to our ASP mix effect is around the products, as you said.
If you're selling into markets like that maybe they just, they want a moderate or they just want these touch-up cases that we have that's only 5 or 6 or 7 sets of aligners, that ASP's lower, and the reality is it's lower just because that's what it costs for a product like that. Now, when we see that mix effect, especially on the product side, what we're seeing is most of those products that doctors are picking do not have refinements, and for us, refinements impact our gross margin in an unfavorable way. When we sell a product like that doesn't have refinements, that ASP might be low. It might be a $500 ASP product, but that will also be an 80% gross margin product for us.
We look at it as, look, we want to sell to as many doctors as we can, increase the number of doctors, and then also increase the utilization. To get to that, you have to meet the doctor where they're at. In some cases, they're gonna wanna have a product that just to suit their needs, doesn't have as much refinements. That's fine. We still get a higher gross margin rate on that, and we have to be able to manage the gross profit dollars in terms of what's that cost to serve to be able to get to that. I would say our product portfolio has just evolved.
It's evolved based on technology and based on the fact that we're reaching more and more doctors, and those doctors have different behaviors, and we want to be able to sell to them, the way they want to buy and, we're doing more and more of that.
Yeah. There's been some moving parts within the U.S. about potential for consumer-oriented relief. Obviously, we have last year's tax reform and the one big beautiful bill that could unlock some personal consumer spending. Looked like we may have had tariff dividends. Now it looks like we won't, thanks to Supreme Court decision. Within your guidance, what are you baking in relative to the, call it, financial health of the consumer?
We're really not forecasting that in. Our guidance is a reflection of kind of what we've seen and not taking that future. Now, to be clear on that guidance, it's I want stability. I want overall stability. You know, we know that if there's stimulus, if you call that stimulus, if people get more of a tax refund, look, in the end, a large part of what a potential patient pays for is out of pocket. There's not as much reimbursement. Some reimbursement. That discretionary piece, especially on the adult side, it certainly can help from a tax refund. We're not factoring that in, but if people get more of a refund, they'll spend it on many things, but we think they'll also spend it on some type of treatment.
If that helps us down the line, that would be great.
Maybe shifting a bit geographically. I think North America stood out because of the improved stabilization, but it was still, if I recall, the slowest growing geography for you in Q4, which means that the other segments were clearly doing better. You know, starting with Europe, like, there's a lot of seemingly macro uncertainty across various different parts of the continent, yet you're outgrowing in Europe. Maybe talk about some of the characteristics that have underpinned that level of growth.
Europe has been great for us. I mean, we've seen good growth across mainland Europe, UK, in Nordics, you know, Spain, Italy and so on. It's been very good growth for us. If I broaden out EMEA and get into Turkey and Middle East, and so it's been very strong growth for us. I think that's just a reflection of the under-penetrated market. It's digitizing with iTero. We've got a direct sales force training more and more doctors, getting them to understand what treatment options they can bring, and then ultimately driving utilization. We've seen good growth there because there's been new products that have really hit there, especially last year, Invisalign Palatal Expander, some of the DSP, some of those doctor subscription program which have those touch-up cases, and that's been good adoption there.
I think it starts with Europe's just been under-penetrated market where we have opportunity, and then you have some of the new products that have come there, and we've seen good double-digit growth across Europe.
As you think about, I hate to use the baseball analogy, but I'm going to use it, you know, how would you compare what inning we're in for North American penetration versus EMEA penetration?
Look, I think, you know, we've been in North America the longest. Really, we started out more as a US focus and then expanded out from there. I would say, you know, when you think of US and North America, I mean, you're in the middle, you know, kind of third or fourth inning. I think in Europe, I mean, it's early. It's earlier than that because the utilization difference that you have between doctors and orthos and GPs. I think also the DSO is a little bit younger in Europe, and it gives us a lot of opportunity to continue to grow there. I think in both regions, we're not the standard of care yet. Wires and brackets are.
I would always say we're not even to the seventh inning stretch, you know, type. You know, we're in the earlier stages in both markets. Europe a little bit earlier because of the under-penetrated market and I would say the DSO is just younger compared to North America.
Just to make sure we're touching on the current news environment, and you have a manufacturing facility in Israel. Hopefully everyone's okay there.
Yeah.
Any dynamics we should be thinking about relative to shipment availability? Anything tied to the current Middle East?
Yeah, it's a good question. Everybody's safe and able to manage in a difficult environment. It's just a testament to that team and what they continue to have to go through. We've got a global supply chain where, you know, some of the manufacturing is there, some of the technology comes out of there, but we're very good. They're very good about shipping it to the regions that need the product. We have hubs in all different regions that are outside of Israel, and the teams have done a really good job of getting the products to where they need to be to those hubs. Then as that customer needs an iTero, they pull from those hubs. Our supply chain is pretty well established.
Sadly, they've had to establish it in this way, because of these unforeseen events, but they've been able to manage and I don't see any issue from iTero's standpoint in terms of supply chain for the quarter.
It's helpful. Thank you. Maybe shifting to wrap up the world to Asia. Obviously a tale of, I would say, two areas, China versus non-China. How are trends progressing between the two areas? Maybe I'm just bad at tracking this, but have we heard anything more about how the VBP process is going to roll out at this point in time?
Well, APAC has been double-digit growth for us, we feel really good about that. That includes China as well as the rest of APAC. When you roll it all together, it's been very strong for us. Again, under-penetrated market. Some of the new products of kind of the Europe play, very underrepresented from a DSO standpoint. There's opportunities to continue to grow just like Europe would be. If you were talking innings, I would say it's even a little bit earlier than EMEA in terms of what APAC can bring. VBP, it's been talked about several times. It was supposed to start last year. Maybe it hits this year. Typically, it goes into the public, you know, kind of sector first.
85% of what we sell to in China is private. It's a little bit different there. Not to say it won't go to private. It usually does. We have a product portfolio that can help manage through this, and, you know, sales team, and we're very local within. I think if we were kind of an outside company coming in, you'd have more of a challenge. I think companies have had that challenge. I think for us, you know, we've got a sales team that's local, we've got treatment planning local, we've got manufacturing that's local, and we'll be able to manage as we go through. But I think our product portfolio will put us in the right spot there and keep us in that right spot.
We'll see what comes out of the government actions as we go forward.
Along those lines, I mean, I appreciate the commentary on the local presence. There's obviously China-bred manufacturers here from both your direct and indirect comments over the last who knows how long. You seem to be taking share in China. How much of that is the balance of local versus local in terms of the way your business is aligned, no pun intended?
Mm-hmm
versus the idea of having that product quality, product availability, breadth of product portfolio?
That's the key within China because look, there's not much reimbursement, really no reimbursement in China. So there's a lot of potential patients and people willing to pay, and they pay for quality. They pay for better, you know, cases that from us where there's, you know, product capability to be able to move teeth in a predictable, reliable way. Doctors want that. They want that premium brand. They advertise and co-market and other things. So there's that premium piece of it that we bring, as well as that local manufacturing and treatment planning that we bring. So look, we feel we're properly positioned within China. We've been able to grow within China. We think in the end, we're kind of taking share back. In the end, it's going after the wires and brackets.
If you looked at China broadly, 85%+ of the cases are done with wires and brackets. On a teen, it's even worse. 90%+ of the cases are done with wires and brackets. There's some share shifting that goes on. It's less about that for us. It's more about how do we grow the overall market. China's a huge opportunity. A lot of people and a lot of people who want to ultimately pay for good quality products like ours.
We've basically spent most of this discussion on the revenue line, but there's a lot going on to the positive below the revenue line as you drive towards margin expansion. In your guidance, you have 100 basis points of expected margin expansion this year. Can you walk us through some of the puts and takes on what gets you to that number and how much of it is offensive opportunities you can control versus just the general nature of the market, general nature of mix?
We took a lot of actions in the second half of last year, some of the restructuring that we've talked about. That was really focused on the cost line, the COGS line, where we wanted to improve our productivity. Some of the equipment that we needed to upgrade and go to more productive equipment. Some of it is around getting closer to our customers so we could minimize freight and some of the logistics that we have. We've taken those actions, and we feel good about how we exited from a cost standpoint.
There's a lot of initiatives that we have to be able to reduce our resin cost and reduce our labor costs and other things that, you know, across our business when you're making over 1 million unique aligners a day, vastly, you know, larger than anything else that in the market. If you could take a penny out of a product, it goes a long way. We're seeing more and more of that productivity show up on the cost side from the actions we take and the actions that we continue to take for productivity. We've done some things on the OpEx side too, around layers and span of control and other things to be more efficient there.
We feel like we're in a good place from a structure standpoint to be able to drive this 100 basis points improvement. That overall improvement is despite scaling up the DirectFab manufacturing. We wanna make sure people understand that there is some inefficiency when you scale up some of that DirectFab manufacturing. You've got to get some more scale there, both on the resin side as well as on the processing and manufacturing side. As you scale that becomes more productive. Initially, you need all these other cost improvements to be able to help offset that. We feel like we've taken the actions in place. Once you drive more volume through all the sites that we have, that drives a lot of productivity.
Like I said, getting more throughput out of those sites lends itself to a lot of productivity.
You laid out a lot of the timeline of the DirectFab opportunity at the Investor Day last year. How are you tracking on those metrics, and how is it progressing relative to where you hoped it would be at this point in time?
Yeah, it's we talked about having products this year, kind of middle part of the year where you start to have some retention and these retainer type products are gonna be, especially for children that need their upper palate expanded, and we have products to be able to help with that. After that product is used, they need some type of retainer to be able to hold that upper palate in the space that they've created. We'll have products that will actually go to that. Some of the retainers, some of the more challenging products that we make, like mandibular advancement with occlusal blocks, where you know, right now it's a very manual process that we have to actually, like, ultrasonically weld these the blocks on.
We'll have other products that have buttons where you actually have to stick those buttons on. It's very manual. That'll start to come through some of the DirectFab. We'll start to see that, you know, middle part of this year. We'll work to try to scale that, and we'll want to get to the more and more scale. Into next year, we'll have more and more commercial products that again, you know, initially it's unproductive, then you get to kinda neutral when you get a certain amount of volume through, and then ultimately it's more productive on the DirectFab because now you're just making the product. Our traditional manufacturing, the majority of the material that we use is essentially thrown away. It's the negative.
You make the negative, you make the mold, and then you vacuum form performance plastic on top of it. Going forward, we won't need that as much material and resin costs, which will help us going forward.
We're out of time. John, thank you so much for being here.
Of course.
Keep us updated.
Thank you.
Thanks everyone.