Good morning. We'll kick this off. Welcome to Jefferies Global Healthcare Conference. I'm Mike Sarcone. I'm an analyst on the U.S. Medical Supplies and Devices team. This is a fireside chat session with Align Technology. From the company, we've got John Morici, CFO. We've also got Madelyn Valente here, who's part of the IR team. John, thank you for joining us today.
Of course.
I guess just to kick it off, high level, just on the macro side, I'm sure you get a lot of questions there. Can you just give us an update on what you're seeing on the macro front in terms of patient demand? I know you've talked about continued stability in North America. We are seeing rates increase, inflation go up. Just give us an update on how things are trending.
Yeah. We've seen, as we've gone the last several quarters, some of that macro that's similar to what it is now. You still have higher inflation on things even prior to some of the things going on in the Middle East. We've been operating in that environment. When we look at our business and we've got double-digit growth outside North America. International growth has been strong for us, whether it's APAC or EMEA or Latin America. North America, even when we look at DSOs, the DSO, dental service organizations, they've been growing double digit. Where you see some of that pressure has been on the U.S. and North America retail side, those doctors. We've been doing and operating in that environment for several quarters. Where you have to go and really try to drive that conversion is be much more active.
Work with those doctors to be able to help nurture those patients and get them from being interested in treatment to actually going into treatment. We could talk a lot about the different tools and tactics that we have to be able to help our doctors, but it's been a similar environment that we've been in for a number of quarters now.
Got it. I do plan to get into some of those tools for the docs. Can you remind us what kind of assumptions you've got baked into your outlook for this year, like from the macro standpoint?
What when we expected from a macro standpoint, we guided to 3%-4% for the overall year and 100 basis point improvement in our operating margin. It's a reflection of things that we're doing, even in a challenging market, to be able to help drive growth, and we see that, and do it in a profitable way. We've taken a lot of cost actions from last year and into this year to drive and improve our productivity, and we're seeing good results of that. We saw 250 basis point at ex-FX, basis point improvement in operating margin in the first quarter, and we're very pleased with that in this environment. We have a lot of other cost actions that we continue to take to drive productivity. As we increase volume, we get the benefit of that operating margin leverage from that.
We feel good about how we've positioned this year, especially in light of the first quarter where we feel like we delivered in an uncertain environment, but we have a lot of things that we have in place that are executing.
Great. Just last question on the macro front. On the 1Q call, you did mention the conflicts in the Middle East. You're expecting them, they could have some impact on 2Q. Have things played out as you expected there?
No, when we look at the framework, when we go from 1Q to 2Q, if you looked at our business, if you go back last year before, in several years, typically we go from 1Q to 2Q, and we increase revenue, say, start with the top line 3%-4%, sometimes more. That's a reflection as North America gets into teen season, as you get Western Europe and others, they really start to increase some of their volume as they go from 1Q to 2Q. You also have the sequential improvement when you go on the systems and services side. First quarter seasonality is a little bit lower. It builds as you go to second quarter. Typically you have that, and when we wanted to talk about prudent guidance or get a lot of questions regarding that, we put it at the midpoint of 1%.
Okay.
When we go from 1Q to 2Q. It's a reflection of that. We're executing and doing the things that I mentioned in an uncertain environment, and we look forward to getting to the end of the quarter to be able to update people.
Okay, great. I did want to shift into the Comp Zero offering. I know you started rolling that out in 2025, and you're continuing to ramp that through 2026. Can you talk about what you've seen in some of the earlier accounts that have adopted that, particularly among the DSO customers and what that's done for utilization?
Yeah. The products that we have, when you think about the evolution of some of the products that we have, the earliest product that we had from a comprehensive standpoint, that was really the start of that was over 10 years ago, where we put out the comprehensive with unlimited refinements over five years. Really that was a testament to try to be able to make sure that our doctors would feel comfortable using our products and giving them the confidence that no matter what, they could get to a final outcome. We had five years with unlimited refinements. It was also a reflection of the fact that maybe our products back then, 10 years ago, they couldn't maybe finish all the cases. They were 60%, 70% effective.
With a lot of technology and other innovation that we've put in, we have products that with a comprehensive, they can go, and you don't need refinements, or you might need one refinement. Much of the technology has really enabled us to increase our portfolio to have a product like this, the comprehensive with no refinements. What we've been able to do, working with our DSOs, our dental service organizations, they've been able to essentially test this across a wide variety of doctors, and what they're seeing is good results. They're seeing that doctors now start to utilize those types of products more and more. That increase in doctor usage and that utilization is a benefit.
We see that playing out more and more because that product specifically with no refinements is designed to go to an orthodontist who looks at a patient and says, "Do I put that patient into wires and brackets, or do I put them into Invisalign?" Typically, there's a big price gap where if that doctor, from a material standpoint, might pay $300 or $400, they say $350 for wires and brackets, it would be a higher price for Invisalign with the comprehensive unlimited. As you bring that price down to reflect what that product is, that cost to serve is much less. Doctors look at that price and say, "Oh, now maybe we'll use Invisalign because that price is a little bit closer." What I call that product and what it's doing in the marketplace is kind of winning those gray areas.
When that doctor then says, "I understand that I'm going to get benefits from Invisalign because of the digital technology versus the analog wires and brackets," they sometimes choose that. When they do, that increases our utilization. The added effect that it has as well is it's very competitive from a price standpoint. It's not designed necessarily, from a clear aligner pricing standpoint, to be as competitive with other clear aligner companies, but it's turning out to be because, like I said, it drives the utilization versus wires and brackets, but it's also very price competitive, and we're seeing customers come back to us as well. It really has a great effect, and we want to continue rolling that out. It's gone through the DSOs and now further into more and more doctors, and we're pleased with the results.
Yeah, it sounds like you've seen some good price elasticity of demand in those DSO accounts. Do you expect that should or could translate onto the retail independent side?
Yeah. We look at what we see in the DSOs, where they're looking for the efficiency. When we think of what DSOs look for from us, it comes down to usually three types of factors that they look at for. They want us to be able to drive the technology, newest technology, like a comprehensive with no refinements. It's very latest technology to give them confidence that they can finish the cases. Second part is the operational scale, to be able to scale the business and be able to provide product to them in days versus weeks. They leverage our marketing. You bring all that together with some of these products that we just talked about. It's a great combination. The gross margin that we have on our DSOs is equal to or better than what we see with even our retail doctors.
Certainly from an op margin, it's better because there's a lot of things that go on within those DSOs that we don't have to do. They'll do some of the local marketing. They'll do some of the treatment planning services across their DSO that we don't have to do. There's other aspects of it that they're taking the initiative to do to help drive their business. In the end, we're driving to more and more doctors that we sell to across those DSOs and increasing utilization, and that's a good trend, and we want to see that continue.
You are seeing some early signs of utilization increase in the retail accounts that have adopted?
We are seeing that it wins the gray area.
Okay.
That is a positive for us and anything that we can do. Because remember, on a wires and brackets basis, most regions, 80% of the cases are still done with wires and brackets. On the teen side, which this is really what it tries to help, sometimes the wires and brackets in a region might be 90% of the cases. Even in a tougher economy, those wires and bracket cases were going to happen anyway. I mean, teens go into treatment regardless of what's happening from an economy standpoint. If we can help our doctors win those cases so that they were going to go into treatment, and if instead of wires and brackets, they go into Invisalign, that's a win for us, and we start to see that utilization benefit.
Great. Are there any key markets where you haven't rolled this out yet?
Various versions are out everywhere.
Okay.
We see it in North America. Now, doctors need to adopt this. It's one of those where you want to make sure doctors understand that if they have a lot of refinements, maybe they need to ease into products that don't have as many refinements because in the future, they'd have to pay for them. We want to make sure that that is right for them. We see this rolling out in North America. There's versions of it in Europe and APAC as well. Look, for our business and in success, we'll continue to roll things out.
I don't know if you've kind of given the timeline here, but do you expect by the end of this year you'll have it pretty broadly-?
Yeah
rolled out?
I would expect.
Okay.
I mean, you look at how we've done a product that was really the precursor to this, we had the Comprehensive Unlimited. The product that's kind of in the middle is what we call the 3-and-3. It's three years of treatment with three refinements. We introduced that three and a half years ago, it quickly became our number one selling product. The takeaway for something like this is many doctors. Just think about it as a consumer. You want to be able to purchase things the way you want to. Sometimes if you buy a product, you want a service plan. Other times, you don't want a service plan. I think giving these doctors the flexibility.
to add service at the beginning or maybe as you go gives them that flexibility. What we're seeing is when you give them choices, they respond in the right way. When we look at products like this, don't think of, hey, different pricing is going to affect ASP and so on. The way we defer our revenue. We're really indifferent-
Similar
for products like this, because you're just going to get the refinements later. Also from a gross margin standpoint, products that have less refinements, like this comprehensive with no refinements, has some of the highest gross margin rate that we have because there's not a lot of back and forth. They follow a template. It's ship the product, and then you're done. If there's refinements, we charge them for that going forward. It's really a good combination of driving utilization and doing the things that are right with the doctor, but then also driving what's right for our business, which is improving our margin.
Makes sense. I did want to pivot to some of the other things Align has been doing to help the docs. You recently hosted the Tech Talk, the tech summit. I thought that was really helpful. One of the things you talked about was the HFD partnership and the Smile Advance program, and I think it's something like $99 down payment for the patient, 0% APR for 24 months. I think you even disclose you have over 6,000 offices enrolled here. What types of benefits are you seeing among those adopters and could we start to see this play out in terms of growth acceleration?
Well, we already are seeing it play out with HFD and other financing. In this market, where it's been this more challenging market, really since the middle of last year, we've kind of leaned into ideas like this, where if we can help our doctors to be able to try to drive this patient conversion in their offices, that's definitely a benefit. What an HFD or other type of financing is, be able to provide those potential patients with low down payment options. They don't want to pay a lot of interest or any interest. Ideally, maybe a two year. Then also there's FICO scores that people are concerned with. HFD has done a really good job of having a very high acceptance rate without much money down and then getting the payments over the time. It's good from a patient standpoint.
It's also good from a doctor standpoint because they're getting a lot of patients through. They're getting much of their cash up front. HFD or others give a certain amount of money up front, and that helps from a working capital standpoint. Then they do all the collections.
There's an added benefit for doctors to be able to partner with this. Our role really in this is to be kind of the broker of all this, making sure that, even though it's not on our books, this is not our financing that we're doing, we're arming our sales reps to be able to go into those doctors' offices and give them alternatives and say, "Look, have you thought of this?" If you introduce this program, HFD and others have salespeople or kind of field people that come and help with this as well. This is an environment where you've got to win those gray areas, and I look at this as winning those gray areas. You want to be able to give flexibility to those potential patients to be able to go into treatment. People get concerned with inflation and so on.
If you have these strategies to be able to help drive the conversion, it can make a big difference. It's another type of tool that we've learned with our DSO involvement because they're seeing the success. We look at our big DSO partners, they're all doing this.
Okay.
This is another learning, just like we talked about the comprehensive with no refinements. We learn in the DSO. You start to see how it scales within those practices, and then we take it quickly to the rest of the organization. We're looking for these types of ideas. Really country by country is kind of how you have to go to this. Again, it's not on our books, but we are one that is trying to help facilitate this. Again, when you talk about winning the gray areas, this is one that helps.
Do you see a difference in kind of the decision to bring on a program like this between DSOs and retail? Is it just as easy a sell?
DSOs can go faster because you have maybe more of a top-down approach. They can put that out.
Okay.
I mean, Heartland's got 2,000 doctors that they can push that to, and it's maybe faster. The opportunity is there. The opportunity is there with those retail doctors. We'll do everything we can, whether it's product related that we spoke about, or in this case, kind of when we think about winning that last mile. This is a great opportunity.
Do you ever get pushback from if you're pitching this to an independent practice? Is there any standard pushback that you might get from a doc or a reason why they wouldn't want to sign on for something like this?
Something like this, they look at it. They hear about it. They actually want us-
Okay
to come there and help. Now, it's also maybe a little bit difference between the type of doctor. A general dentist, this is much more normal. You get a restorative procedure, you get something else, and there's a certain amount of out-of-pocket.
They'll finance it, and there'll be payments over a period of time, and you get more of it happening there. Whereas on the ortho side, many times it's pay as you go. They kind of have their own internal financing where you come back, and then you get a certain payment that you make each time. It's maybe more prevalent on the GP side versus the ortho side. If they're looking for the same type of opportunities. If we can help them drive conversion in their practice, if they get people there. Because really when they see the benefit of they scan every patient Invisalign, to talk maybe more general dentists. If they scan every patient, we do a lot of things to help them visualize. People get really excited, "Oh, wow, this is what my teeth would look like straightened and with restorative," and so on.
They're very excited in the moment. If you can then close that with, "Here's the pricing and here's the monthly payment.
it brings it all together, and that's a way that you can drive. When we talk about being active around conversion, this is a way to do it.
Got it. Then you also touched on ways to drive practice and workflow efficiencies for these dentists. One of the things you talked about at the Tech Talk was integrating with practice management platforms. You provided that example with Greyfinch, and you saw some pretty good results.
Right.
Can you talk about the key learnings from that first implementation? I think you have a pipeline of other practice management softwares.
Well, we want to integrate as much as possible because as you have that patient journey where somebody is interested in getting treatment, and they start with coming to our website, or they have interests that they have. It's being able to nurture that interest into actually driving. If you're integrating with some of the practice management systems that they have, where you can then get appointments scheduled, you could get follow-ups scheduled. You can, again, be a part of this and be integrated in. Somebody goes from being interested in this. They look for a doctor in their area that provides Invisalign. Well, if we can help them connect them to getting an appointment, and then they show up to it, you can take them through this journey that I was saying.
They get scanned, they get a visualization, ultimately maybe go into financing and get pre-approved, and so on. There's a lot of things that we're trying to do, and it makes it very sticky within our doctor network, so that they know that we are bringing them potential patients, and it's more of an integrated approach. When we can work with other DPMSs and different doctors because they all use different types.
Right.
Some, like a DSO might use across their DSO, but most of these doctors are kind of that retail side that it's kind of a one-off. We want to be able to integrate as much as possible. Again, to nurture that potential patient so that even in tougher economies, we can still execute and deliver and be able to help drive that conversion.
When you complete that integration like you did with Greyfinch, do you see kind of an immediate benefit, or is there kind of like a learning curve?
There's immediate benefit.
Okay.
Now you're integrated in, and that patient flow and the traffic that you see, you just have less handoffs. It's more integrated in, and I think that's key in this environment because sometimes you have a reluctant potential patient, and if you can take them through this journey, through the apps that we have and some of the online characteristics, you can up drive that conversion.
I think you had a slide up for the Tech Talk where you had maybe seven or eight other practice management softwares on the list or in the pipeline. Do you expect those to be largely integrated? I think it's Align Link is what you're talking about now.
Yeah.
By the end of this year?
Yeah. It's on our roadmap to be able to integrate in, and we're going to keep going system by system to be able to help that integration. Again, if we can do anything that we can do to help nurture that potential patient to be able to go into treatment, big benefit for that conversion. It's also a benefit for our doctors. They know that we're a partner that's going to give them. With our brand and what people know about Invisalign, we want to be able to leverage that name, leverage that brand. If we can integrate into that practice with those doctors, that's a good thing. We see that impact almost immediately because they start to get more and more patients flowing through. They have a chance to be able to get them into treatment through some of the active conversion methods that we talked about.
Given that kind of immediate benefit, you see, assuming you continue to roll through these integrations successfully, is that a case for maybe some growth acceleration, or how do you think about contribution in 2027?
All the things that we're doing to be more active about driving, whether it's product related. We want to give choices to our doctors integrated in some of these systems here. We know that the more seamless that it becomes, the higher growth that we can see. We are doing all these aspects to be able to help drive the improvement in our conversion and because those potential patients are there.
Some of them are there because they're on the ortho side, and they're going to go into treatment, and they're going to go in treatment either way. If we can get them to use Invisalign, that's a win for us. The other side is on the general dentist side. This is part of the $600 million+ potential patients that are out there who have a malocclusion, and they want to get maybe some treatment. If you can get them to kind of hit them in the moment where they're getting something done already in that dental office, and you can show them what your teeth are looking like now and what they could look like.
The other part of it, and we talked about it at the Tech Talk last week, was how do you integrate into the labs and some of the other restorative work that's being done and leverage the labs that are already working with these general dentists to provide restorative outcomes. How can we work with the labs to help with the alignment first? We've talked a lot about this, but when you think about the restorative and the ortho restorative work that you have. If you can align the teeth first and get them in the proper position before you do restorative, you're going to save much more of the tooth mass-
Right
that is healthy. Align them first. Don't have to remove as much. Some of the traditional ways that are done on the restorative side is they'll grind the teeth and you see some of these pictures where so much of the tooth is ground down.
Yes.
They'll put a veneer or something over it. It might look good on the surface, underneath you have a tooth that's been shaved down. Our view is move them first and then do the restorative. That's pilots that we have with some of our labs, and that's something that we're rolling out to every region because there's so many And when you think about the general dentists in the world, there's a 2 million general dentists, and we might sell to 5% of them. This helps us access many more doctors that otherwise we wouldn't have seen.
I do want to dig into that lab pilot, but we have about five minutes left. I did want to see if there's any questions from the audience. Okay. Yeah, on the lab side, you've rolled out this pilot and you're actually getting labs to help sell into those GPs that wouldn't be doing the aligner cases. Can you talk about kind of the underlying economics to the extent you can, and like what the incentive is?
Yeah
For both parties on the lab side to participate in this and then to get the-
Yep
the GP side.
The lab, look, they're always looking for revenue opportunities, just like any practice has. They essentially become a distributor for us, think of it that way, where there's a charge for the actual case that we have, but then on top of that, they have a markup that they'll provide for the services that they're providing, because they're doing a lot of the treatment planning and education and so on with their doctor network that they had. Distributors are excited about this because there's a revenue and margin opportunity for them. The doctors are excited about it as well because many of these doctors now working with these labs, they weren't selling Invisalign at all.
It's a revenue opportunity that they can have because, again, when you're chair side and you think about how you're nurturing patients, just like all of us, we want to be able to have an active role as to our healthcare. What's happening? How do we visualize it? So on. Right there, chair side, those doctors could show that patient and say, "Look, it's going to take maybe four months longer. I'm going to move your teeth first, but this is what it's going to save.
from a healthy tooth standpoint." The time and money that that patient would spend, it's well worth it. They'll see it, and they see the benefit. That doctor gets a little bit more of revenue because they're moving the teeth first and then doing the restorative. Then obviously from a patient standpoint, they're getting better healthcare. It's a win all across. It's good volume for us. Again, this helps leverage what we're already doing.
That's great.
We're already doing this on a smaller scale with many of these general dentists. If we can use the labs to be able to. Because the commonality across this is every general dentist uses a lab. It's just everywhere in the world. That's how they get their restorative products. If we can leverage those labs who already have those relationships, and why we can get in and get the benefit. Six years ago, we bought exocad, that is really good CAD/CAM type of view that they can provide in the tooth and proper positioning and so on. We leverage those relationships, be able to get to the lab, find the right ones, and be able to see good volume growth. Some of those labs that we've worked with, it's really high conversion. Again, it's volume that we never had before.
Right. These are GPs that are.
These are GPs .
have not done aligners at all.
They have not done, or maybe they did one or two.
Okay.
There's over 30,000 labs across the globe. They all have these relationships, and they trust their labs. If we can work with those labs, it's not every lab that's going to want to do this, but every lab might service dozens of different general dentists.
In many cases, like I said, 95% of those general dentists we don't really sell to. If we can expand that out and make this more the standard of care, that you move teeth before you remove, we think that we have a great benefit here, and we feel like we're the only company who can really provide this integrated solution to the dentists and then ultimately their patients.
Yeah, it sounds like a great opportunity to pick up incremental revenues. Given that you are kind of using the labs like a distributor, can you talk about what the margin impact is to Align or how it stacks up?
To us, it's a moderate case. Really it's when we look at the because it's usually 26 stages or less, so it's kind of just a more moderate movement, sometimes a minimal movement. Margin for us is And it's no refinements, so that's a nice part of it too.
Again, going back to our earlier discussion, when you don't have a refinement, of course margin's great for us, so we're happy to do this. We're happy to be able to help educate those labs because there is some work to integrate those labs in and then have them expand out. From a margin standpoint, this is incremental for us, so we're very happy with that. I think the labs that we've worked with are looking at it that way too. It's kind of a found revenue source that they just didn't have before.
Even with the fee that the lab's getting from that case, there's no impact?
No.
Okay.
Because we'll charge. We'll have a moderate case that this falls into. The markup really comes from the lab providing the service to those doctors.
Got it.
They mark that up.
Right.
I don't have to discount that down to From a starting point, they're marking up for their service.
Right.
Again, that doctor looks at it as this is a really positive benefit for their patients.
Great. Well, I think that's all the time we have. John, thank you so much for joining us today.
Of course. Thank you.