Greetings. Welcome to the Align Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy with Align Technology. You may begin.

Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO, and John Morici, CFO. We issued third quarter 2024 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately one month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statements. We've posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our third quarter 2024 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon, and thanks for joining us today. On our call today, I'll provide an overview of our third quarter results and discuss a few highlights from our two operating segments, Systems and Services and Clear Aligners. John will provide more detail on our Q3 financial performance and comment on views for the remainder of the year. Following that, I'll come back and summarize a few key points and open the call to questions. Overall, Q3 '24 results were mixed and reflect strong Systems and Services year-over-year revenue growth, as well as good Clear Aligner volume in the Asia Pacific, EMEA and Latin America regions, partially offset by declines in the U.S. As recently reported by many analysts and third-party research firms, the underlying dental market in the United States remains sluggish and our doctor customers cite similar trends. Q3 '24 revenues of $978 million increased 1.8% year-over-year, and Clear Aligner volumes of 617,000 were up 2.5% year-over-year. Despite strong growth from Systems and Services revenues, a record 87,400 doctor submitters, a record 236,000 teens starting treatment, driven by record teen case starts in China, and a record 25,000 of DSP Invisalign Touch-Up cases, total revenues for Q3 were slightly below our Q3 revenue outlook in part due to more pronounced seasonality for Clear Aligners than expected, as well as continued weak consumer sentiment and a soft dental market, especially in the U.S. Q3 '24 non-GAAP operating margin of 22.1% was better than expected and increased year-over-year compared to 21.8% in Q3 of '23. For Clear Aligners, Q3 volumes were up year-over-year and down slightly sequentially. Year-over-year volumes were driven by strong growth in APAC, especially China, as well as growth from the EMEA and Latin American regions. On a sequential basis, Clear Aligner volumes were down from Q2, reflecting more pronounced seasonality and soft dental markets in the U.S., offset somewhat by strength in APAC and Latin American regions. In the teen and growing kids' segment, a record 236,000 teens and younger patients started treatment with Invisalign clear aligners during the third quarter, an increase of 9.1% sequentially and up 6.7% year-over-year, reflecting growth across regions, especially from Invisalign First in the APAC and EMEA regions. In Q3, the number of doctors submitting teen or younger patient case starts was up over 6% year-over-year, led by continued strength from doctors treating young kids, also known as growing patients. During the quarter, we continued to commercialize the Invisalign Palatal Expander, Align's first direct 3D printed orthodontic appliance. Q3 reflected steady momentum for doctor submitters and shipments in the United States and Canada. We recently announced commercial availability in Singapore, and we're excited to extend the availability of the transformative Invisalign Palatal Expander System to even more doctors and their patients in markets across the Asia Pacific region. We expect it to be available in other markets, pending future applicable regulatory approvals. Non-case revenues include our Vivera retainers, retention aligners ordered through our Doctor Subscription Program, or DSP, clinical training and education, accessories, and ecommerce. In Q3, non-case revenues were up year-over-year, primarily due to continued growth in retainers and the DSP program, including non-Invisalign patients getting retainers. DSP includes Invisalign Touch-Up cases up to 14 stages and is currently available in North America and certain countries in Europe. For Q3, total Invisalign DSP Touch-Up cases were up nearly 30% year-over-year to more than 25,000 cases. Q3 '24 Clear Aligner volume from DSO customers increased sequentially and year-over-year, reflecting growth across all regions. The DSO business in the United States continues to outpace our retail doctors, driven by our largest DSO partners, Smile Doctors and Heartland Dental. We also had strong growth in iTero scanner sales from DSOs investing in their member practices and end-to-end digital workflows. Q3 was another strong quarter for our Systems and Services business, and year-over-year revenue growth was up 15.6%, reflecting higher scanner ASPs and non-systems revenues, driven by iTero Lumina, wand upgrades, increased scanner rentals and certified pre-owned leasing programs, as well as increased services revenues, partially offset by lower scanner volumes. On a sequential basis, Q3 Systems and Services revenues were down 2.9%, reflecting lower scanner ASPs and non-systems revenues, particularly offset by higher scanner volumes. The iTero Lumina's new Multi-Direct Capture technology replaces the confocal imaging technology in earlier models and has a 3x wider field of capture and a 50% smaller and 45% lighter wand, delivering faster scanning speed, higher accuracy, super visualization and a more comfortable scanning experience. Lumina is currently available with orthodontic workflows as a new standalone scanner or as a wand upgrade from the iTero Element 5D Plus scanner. Overall, for Q3, we continue to be very pleased with the ongoing adoption of iTero Lumina scanner, with orthoworkflow and response from customers. We currently expect to begin a limited market release for the restorative software on the iTero Lumina scanner in Q1 '25, followed by full commercialization by the end of Q1. Today, we announced new iTero scanner product innovations to further enhance digital dentistry workflows and integrated treatment options in oral health, restorative and aesthetic treatment in general dentistry. Align Oral Healthcare Suite with new comparison tools that aid in multimodality assessments and personalized oral health records and reports. Invisalign Outcome Simulator Pro in multiple treatment simulations to drive chairside patient education about treatment options, and iTero Design Suite with intuitive design capabilities for in-practice 3D printing now commercially available in selected markets. We believe the iTero intraoral scanner innovations introduced today enable doctors to present a variety of treatment options to their patients, supporting chairside education and communications. That helps deliver a great patient experience and supports patients in making more informed choices about their dental treatment and consultation with their doctors. We're also pleased to share that Invisalign Japan was recently awarded the Golden Design Award for 2024 for the iTero Lumina Intraoral scanner, making this the second time we received this prestigious award in the past two years. The Good Design Award is globally known and recognized by domestic and international designers and is the only comprehensive evaluation and recommendation system of design in Japan. The award designation increases the recognition and reliability of awarded works of and companies, promotes problem-solving through design and focuses on the significance of design to people and society. Before I turn the call over to John, I want to comment on the employment actions we announced today resulting from a global reorganization and restructuring. As part of Align's 2025 annual operating plan process, we identified positions to be eliminated or transferred to other locations. These are difficult actions, and valuable employees will leave the company. As part of this restructuring, Raj Pudipeddi's position as EVP and MD Americas and Chief Marketing Officer has been eliminated, and he will leave in the fourth quarter. We thank Raj for his contributions to Align over the past five-plus years in leading our marketing and product innovation and management as well as overseeing the APAC and Americas regions. We wish Raj well. I'm pleased to welcome Frank Quinn back to Align. He is a well-established leader with a customer focus and a proven track record in orthodontics and digital dentistry. Frank's deep experience, understanding and insights into what digital means for our doctor customers is key, and he is excited to be rejoining Align. With that, I'll now turn the call over to John.

Thanks, Joe. Now, for our Q3 financial results. Total revenues for the third quarter were $977.9 million, down 4.9% from the prior quarter and up 1.8% from the corresponding quarter a year ago. On a constant currency basis, Q3 '24 revenues were not significantly impacted by foreign exchange sequentially and were unfavorably impacted by approximately $14.6 million year-over-year or approximately 1.5%. For Clear Aligners, Q3 '24 revenues of $786.8 million were down 5.4% sequentially, primarily from lower volume, higher discounts, product mix shift to lower-priced products, and geographic mix, partially offset by lower net revenue deferrals. Q3 Clear Aligner revenues were not significantly impacted by foreign exchange sequentially. Q3 '24 Clear Aligners per case shipment of $1,275 was lower by $20 on a sequential basis due to higher discounts, product and geographic mix, partially offset by lower net revenue deferrals. On a year-over-year basis, Q3 Clear Aligner revenues were down 1%, primarily from lower ASPs, reflecting the impact from unfavorable foreign exchange of $11.7 million or approximately 1.5%, a 20% price reduction in the UK to offset a 2024 ruling by the UK tax authorities in Q1 of '24 that requires a 20% VAT be applied to Clear Aligner sales in the UK, product mix shift to lower-priced products, geographic mix, and higher discounts. This decrease was partially offset by lower net deferrals and price increases, along with higher volumes and higher non-case revenues. Q3 '24 Clear Aligner per case shipment of $1,275 was down $45 on a year-over-year basis due to unfavorable foreign exchange of $18, impact of UK VAT of $12, product and geographic mix, higher discounts, and partially offset by lower net revenue deferrals and price increases. Our Invisalign Comprehensive 3-and-3 product is available in North America, EMEA, and in certain markets across APAC. We are pleased with the continued adoption of the Invisalign Comprehensive 3-and-3 product and anticipate adoption will continue. Comprehensive 3-and-3 provides doctors the flexibility they want while allowing us to recognize more revenue upfront, with deferred revenue being recognized over a shorter period compared to our traditional Invisalign Comprehensive product, which in turn allows us to benefit from more favorable gross margin. Clear Aligner deferred revenues on the balance sheet decreased $6.2 million or 0.5% sequentially and decreased $25.8 million or 2% year-over-year and will be recognized as additional aligners are shipped under each sales contract. Q3 '24 Systems and Services revenue of $191 million was down 2.9% sequentially, primarily due to lower ASP and decreased non-system revenues mostly related to fewer upgrades, partially offset by higher scanner volumes. Q3 '24 Systems and Services revenue was up 15.6% year-over-year, primarily due to higher ASPs, increased non-system revenues, mostly related to upgrades in our leasing rental programs, and higher services revenue, partially offset by lower scanner volumes. Q3 '24 Systems and Services revenues impacted by foreign exchange was approximately flat sequentially. On a year-over-year basis, Systems and Services revenues were unfavorably impacted by foreign exchange of approximately $2.9 million or approximately 1.5%. The Systems and Services deferred revenues on the balance sheet was down $1.5 million or 0.7% sequentially and down $40.6 million or 15.4% year-over-year, primarily due to the recognition of services revenue, which are recognized ratably over the service period. The decline in deferred revenues, both sequentially and year-over-year, primarily reflects the shorter duration of service contracts applicable to initial scanner purchases. Moving on to gross margin. Third quarter overall gross margin was 69.7%, down 0.5 points sequentially and up 0.7 points year-over-year. Overall gross margin was not significantly impacted by foreign exchange sequentially and was unfavorably impacted by approximately 0.4 points on a year-over-year basis. Clear Aligner gross margin for the third quarter was 70.3%, down 0.5 points sequentially due primarily to lower ASPs and higher mix of additional aligners, partially offset by lower manufacturing spend. Clear Aligner gross margin for the third quarter was down 0.5 points year-over-year due primarily to lower ASPs, partially offset by lower manufacturing spend. On a constant currency basis, Clear Aligner gross margin was unfavorably impacted by foreign exchange by 0.4 points year-over-year. Systems and Services gross margin for the third quarter was 67.5%, down 0.7 points sequentially due primarily to mix, partially offset by lower manufacturing spend and freight costs. Systems and Services gross margin for the third quarter was up 6.5 points year-over-year due primarily to higher ASPs, partially offset by higher service and freight costs. On a constant currency basis, Systems and Services gross margin was unfavorably impacted by foreign exchange by 0.5 points year-over-year. Q3 operating expenses were $519.5 million, down 9.7% sequentially and up 4.6% year-over-year. On a sequential basis, operating expenses were down $56.1 million due primarily to non-recurring legal settlements, advertising and marketing, and employee compensation. Year-over-year, operating expenses increased by $22.7 million, primarily due to employee compensation. On a non-GAAP basis, excluding stock-based compensation, amortization of acquired intangibles related to certain acquisitions, restructuring, legal settlements, and other charges, operating expenses were $472.7 million, down 5.4% sequentially and up 3.1% year-over-year. Our third quarter operating income of $162.3 million resulted in an operating margin of 16.6%, up 2.3 points sequentially and down 0.7 points year-over-year. Operating margin was favorably impacted from foreign exchange of approximately 0.1 point sequentially and unfavorably impacted by 0.8 points year-over-year. On a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles related to certain acquisitions, restructuring, legal settlements, and other charges, operating margin for the third quarter was 22.1%, down 0.2 points sequentially and up 0.3 points year-over-year. Interest and other income and expense net for the third quarter was an income of $3.6 million, primarily due to foreign exchange compared to an expense of $3.2 million in Q2 of '24 and an expense of $4.2 million in Q3 of '23. The GAAP effective tax rate in the third quarter was 30.1% compared to 32.9% in the second quarter and 25.1% in the third quarter of the prior year. The third quarter GAAP effective tax rate was lower than the second quarter effective tax rate primarily due to adjustments related to tax return filings, partially offset by a small increase in uncertain tax position reserves. The third quarter GAAP effective tax rate was higher in the third quarter than the third quarter effective tax rate in the prior year primarily due to recognizing a one-time benefit related to the application of tax guidance issued during the third quarter of the prior year. Our non-GAAP effective tax rate in the third quarter was 20%, which reflects our long-term projected tax rate. The third quarter net income per diluted share was $1.55, up sequentially $0.27 and down $0.03 compared to the prior year. Our EPS was favorably impacted primarily due to foreign exchange by $0.03 on a sequential basis and unfavorably impacted by $0.08 on a year-over-year basis. On a non-GAAP basis, net income per diluted share was $2.35 for the third quarter, down $0.06 sequentially and up $0.21 year-over-year. Moving on to the balance sheet. As of September 30, 2024, cash and cash equivalents were $1,041.9 million, up sequentially $280.5 million and down $197.1 million year-over-year. Of our $1,041.9 million balance, $285 million was held in the U.S. and $756.5 million was held by our international entities. We have $500 million available for repurchase of our common stock under our January 2023 repurchase program. Beginning in Q4 2024 and continuing into Q1 '25, we expect to repurchase up to $275 million of our common stock through either a combination of open market repurchases or an accelerated stock repurchase agreement. Q3 accounts receivable balance was $1,010.6 million, down sequentially. Our overall day sales outstanding was 93 days, up approximately four days sequentially and up approximately eight days as compared to Q3 last year. Cash flow from operations for the third quarter was $263.7 million. Capital expenditures for the third quarter were $29.8 million, primarily related to investments in our manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $233.9 million. Turning to our 2024 outlook. Assuming no circumstances occur beyond our control, including foreign exchange, we expect the following business outlook for the fourth quarter. We expect Q4 '24 worldwide revenues to be in the range of $995 million to $1,015 million. We expect Q4 '24 Clear Aligner volume and ASPs to be slightly up sequentially. We expect Q4 '24 Systems and Services revenues to be up sequentially, consistent with typical Q4 seasonality. We expect Q4 '24 GAAP operating margin to be slightly lower than 14%, primarily due to restructuring charges related to severance for impacted employees. We estimate these restructuring charges will impact Q4 '24 GAAP operating margin by approximately three points. We anticipate Q4 '24 non-GAAP operating margin to be slightly up sequentially. For fiscal 2024, we expect investments in capital expenditures to be above $100 million. Capital expenditures primarily relate to building construction and improvements as well as manufacturing capacity in support of continued expansion. As we have said many times, we continually evaluate and evolve our business model to provide doctors with the best tools and resources that they need to help them treat their patients while managing our operations responsibly. Today's restructuring action is designed to adjust our business to more closely align with the existing business environment. We expect the restructuring actions we announced today will give us margin accretion for full year in 2025 even as we scale up our next-generation direct 3D printing fabrication manufacturing. With that, I'll turn it back over to Joe for final comments.

Thanks, John. In closing, for Q3, I was pleased to report another strong Systems and Services quarter, and I'm excited about our next-generation Lumina scanner and its continued positive impact on our customers' digital workflow, with ortho software today and restorative software expected to be released in Q1 of next year. Q3 was also strong for our Invisalign Clear Aligner business in the Asia Pacific, EMEA and Latin America regions. Those markets are our fastest-growing regions and help to balance outperformance in other geographies. We understand that the operating environment is more challenging, and we are adapting and driving our growth strategy despite continued weak consumer demand trends, especially in the United States and a sluggish dental market. In the face of inflation, high interest rates, less patient traffic, and longer conversion cycles, especially for adult patients, orthodontists and dentists are facing challenges in practice growth and profitability that impact the way many of them approach orthodontic treatment. It is more important than ever that we differentiate our products and services and become the best partner for our customers by creating solutions that drive more patients to their practices, accelerates treatment conversion, and improves their experience and bottom line. As the innovation leader in digital dentistry technology, it's our job to ensure we have the organizational structure, focus, and rigor to help doctors realize the full potential of this opportunity by doing more to engage our doctor customers, support their practice growth, and help consumers and potential patients connect with these practices to get to smiles that they love. We continue to evaluate and evolve our business to provide doctors with the best tools and resources they deserve. Align is the leader in digital orthodontics, and we are committed to supporting doctor customers and the future of digital innovation. We're excited about the next wave of growth drivers that we believe will revolutionize the orthodontic industry in scanning software and direct 3D printing. We're in the midst of several key technology developments that are critical for the business. We will take the needed actions to get us through this, while at the same time investing in the key areas that we know will transform our industry and our business. The restructuring actions we announced today focused on ROI investments and activities that drive revenue and enable margin expansion while making room for investments in critical future technologies, including scaling our direct 3D printing operations. With that, I thank you for your time today. I look forward to updating you on our continued progress over the coming quarters. Now, I'll turn the call back over to the operator for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from Brandon Vazquez with William Blair. You may proceed.

Hey everyone. Thanks for taking the question. I wanted to start on a little bit just the macro backdrop. Last year, the year-over-year comp also had a little bit of weakness in the September period, if I remember, in 2023. So, things are a little bit worse now. I'm just curious if you can talk about did things get worse from last year, which was already a little weak. And in case that doesn't make sense, the crux of the question is essentially just talk to us about where macro is going into year-end? Is it stable? I think you guys have used that phrase before. Is it worsening? Just any thoughts you guys are seeing on end markets?

Yeah, Brandon, it's Joe. I'd say, first of all, the third quarter is always a tough quarter because of the discontinuities we have with Europe shutting down and different countries being on vacation at different times. So, I wouldn't say that the third quarter this year was worse in some way than the third quarter last year. I'd just say that it was the kind of seasonality in a difficult market. What we try to call out, as you could see, is that the United States market seems to be one of our most affected, and it's really one of our largest markets, too. And so that's been a challenge in that sense also. John, do you want to add anything?

No, that's accurate.

Okay. And then, as my follow-up just quickly, as we look towards 2025, right, and if we just assume end markets are stable, right, let's say things remain stable, how should we think about what the top-line on this business could do and what the P&L could look like in a year where things are stable, right? You guys are somewhat macro-hindered right now. So, is it a continuation of what we're seeing in '24? Are there reasons to get a little bit more excited and accelerate the business? Any expectations around that would be helpful. Thank you.

Hey, Joe, again. I'd just say we'd like to see some increased consumer confidence obviously in the United States and just an economy that feels better to consumers. We feel that this is more of an external issue than it is an internal issue when you look at Align overall in our growth rates, particularly in the United States. And so, any kind of increase in economic activity and increase in consumer confidence, we think would be really positive for our customers and then for Align in turn.

Thanks, Brandon. Next question, please?

Thank you. Our next question comes from Jon Block with Stifel. You may proceed.

Hey, guys. Good afternoon, Joe. Joe, maybe just to start with you, and it sort of picks up on that last question, anything to call out with the different results in the U.S. versus international? In other words, I think I've got this right, but cases up 2.5% globally, but as you mentioned, down in the U.S. So, is it just the consumer? Is there anything to focus on from a go-to-market strategy? Do we have to think about incremental competition that might be more acute in the U.S. versus OUS? Just would love your thoughts on that dynamic.

It's a great question, Jon. I believe the challenges we are facing are mainly external. There haven’t been significant competitive changes in the marketplace. In both our ortho and dental channels, we are experiencing issues with patient throughput and closing rates. This morning, I spoke with some of our largest dental service organizations, and the situation is similar. The closing rates for our customers have become more challenging. Customers express a desire for dental treatment, but they lack confidence in their ability to afford it right now given the current economic climate. I wouldn't highlight any specific external competition; this seems to stem more from economic factors and consumer confidence in the United States. We observe similar trends in Europe, but the situation there is somewhat better and varies by country. However, the effects are more pronounced in the U.S. because of its size and uniformity.

Got it. Okay, thanks. And then, for my second question, John, I want to be clear that you are committing to overall operating margin expansion in '25. If that is accurate, it may be impacted by the direct 3D printing fabrication initiative. Can you confirm that? Also, do you have any insights on the top-line? That will be the first question, or Part A. And Part B, sorry, go ahead, John.

I was going to give the op margin. The op margin, yes, we made the restructuring actions, given us room, so that we can get the year-over-year margin accretion, while still investing in all the things that we've talked about with direct fab and five-minute ClinCheck and Lumina and so on. So, we're going to continue making those investments. The restructuring gives us some room to show that margin accretion.

Okay. And again, the other part of that question was, any thoughts on the top-line? If you're committing to the OM expansion, what does that mean from a top-line perspective? And the second one, Joe, just if I can pivot and if you can talk to some of the initiatives out there? In other words, it seems like Costco is off to a slow start, per our checks. Do you need to be in the store? And then, more recently, we picked up on a new financing initiative that it seems like you're rolling out and sort of guarantees the case approval, denials have been a problem. Where are you with that initiative? And when do you expect it to have a more sort of prominent impact on the overall P&L? Thanks, guys.

We've had some success with Costco, but it’s not significantly impacting the business right now. We view it as part of our brand strategy. As the number one brand globally, we're exploring various ways to leverage that to encourage more consumers to consider Invisalign treatment. We understand that many customers are currently facing financial challenges when it comes to orthodontic treatment. John and the team are working hard to address this, and our major DSO partners are also striving to provide financing options that will help consumers feel more confident about moving forward.

And on overall revenue, Jon, we'll give more of an update as we get closer into 2025. But as we've said and as we've made the adjustments, we're committed to driving growth, investing where we can find that growth, balancing our investments on some of the new technologies that we have that we know will transform this business. So that's all at stake now and things that we're mindful of, but we'll give more of an update on 2025 as we get closer.

Thank you.

Yeah, you're welcome, Jon.

Thank you. Our next question comes from Elizabeth Anderson with Evercore ISI. You may proceed.

Hi, guys.

Hi, Elizabeth.

Hi. I want to ask a two-part question as that's the theme. First, regarding the restructuring and Frank's return to the organization, you hinted at some points. I understand it's a bit early, so a high-level overview would suffice. What changes do you anticipate in his approach to managing the business? Additionally, you've mentioned the goal of getting closer to the consumer. Could you elaborate on that aspect? Secondly, it was encouraging to hear your positive remarks about China. I would appreciate more insight on that market and your perspective on consumer outlook there. Thank you.

Hey, Elizabeth, it's Joe. Regarding Frank's return, he has been involved in the business since 2013 and left in 2022 for another opportunity. This business relies on three key factors. First, it's all about relationships. It's essential to foster trust with doctors, and Frank excels in this area from a leadership perspective. Second, it's crucial to have a strong grasp of technology and the types of programs that can facilitate growth. Frank is highly knowledgeable in this domain and has demonstrated his expertise over the years. The DSO program, which he developed when I first joined in 2015, has proven to be very effective. Third, you need someone who has a broad understanding of the industries, knows the competition, and understands how doctors and orthodontists make their decisions compared to general practitioners. Frank possesses all these attributes and is a trusted asset within the business. We are thrilled to have him back.

And then, the last part of your question, Elizabeth, on China, we're pleased with China results, sold to more doctors, pleased with the utilization. It's a great teen season for us in China. We saw good adoption of various products, including Invisalign First and others, where we saw good utilization there. So, China, for us, from a teen standpoint, especially, played out really well for us.

Got it. Thank you.

You're welcome.

Thank you. Our next question comes from Jason Bednar with Piper Sandler. You may proceed.

Hi, Jason.

Good afternoon. I want to revisit one of Jon's questions. Many of us have been trying to gauge the potential margin improvement or impact from 3D printing over time, considering the cost benefits from this initiative. However, with the mention today of restructuring potentially offsetting some of your investments, it seems that this initiative might negatively affect gross margins in 2025. Can you clarify your thoughts on this, reconcile these comments, and, if possible, outline the various factors at play?

Yeah. I'll take my best at this. So, overall, we're talking op margin. We think that the restructuring that we're making is going to be op margin accretive on a year-over-year basis despite all the investments. You're right, from a gross margin standpoint, as we scale things, the direct fab printing, while gives us a lot of capability and a lot of benefits for our doctors, there is a higher cost initially until we start to scale that. But we're committed to that op margin accretion on a year-over-year basis for next year despite that. And then, as we have new products that come and we know the doctors are going to love what we're bringing to market, that will scale up. And as that scales up, then that really drives the overall productivity that we will see on the gross margin side, primarily from the materials and the less material that we need to go into the product.

Understood. Do you have any timeline on when we might see the gross margin benefits or expansion from historical norms once 3D printing scales? Additionally, with the teen season mostly complete, what is your assessment of that part of the market both in the U.S. and internationally? The data we've observed has been somewhat mixed regarding the clear aligner and bracket and wire segments in recent months. Your business has shown decent growth over the past year and a half, so do you have better visibility on this market? I'm trying to understand this in light of your broader comments about the U.S. market being a bit softer. Thanks.

So, Jason, this is John. I'll take the first part of your question on gross margin. Look, we've talked about it being like a two- to three-year journey to be able to help scale this up. I can say this, we're very pleased with the progress that we're making around resin and being able to scale that and get it at the right cost. So that's good progress there. As well as on the equipment side, we're making good progress around being able to scale up the actual manufacturing of this. But in terms of when you scale this and get it to a larger extent, it's really two to three years, but you will see some new products that we have on the direct fab showing up next year and in doctors' hands to give them those capabilities.

Jason, on the teen market, I mean, when you look at the international teen market, obviously, we had really good success in Asia in the quarter. We have really a terrific portfolio when you think about our Invisalign First product. Now, we have Invisalign Palatal Expander. With that also, it's what we call mandibular advancement with occlusal blocks, which are used for Class IIs, usually for patients between 10 and 11 years old. So, when you look at those pre-teen ages, we have a really good portfolio to line up in that sense. So, I think you're seeing that come through with our sales overall. When you reflect back on the United States, obviously, our orthodontic customers are really challenged. And on average, 75% of what they do are teens. And some of the close rates on teens, just talking to some of the DSOs and different doctors that we have on the orthodontic side, the close rates are even tougher on the teen segment than what it's been in the past, too. And so, times like this, where they're pressed for traffic and they're pressed for margin, they will reflect back to wires and brackets to support the profitability of their practice. We know that. We understand it. It's our job to communicate to consumers and to orthodontists what the benefits are, particularly this early treatment and what we can do. And so, this is a doctor-to-doctor situation, but again, it's an external environment where consumers are concerned with their pocketbooks right now, and they're reluctant to make decisions and close at times. And obviously, the orthodontists are responding from an individual practice standpoint accordingly.

All right. Very helpful. Thank you.

Thank you. Our next question comes from David Saxon with Needham & Company. You may proceed.

Great. Good afternoon, and thanks for taking my questions. I'd like to start on iTero actually. I'd love to get some color around how we should think about iTero growth with the ongoing Lumina rollout, particularly with the restorative workflow coming out early next year, but then in the context of interest rates remaining high and then lapping comps from the initial ortho launch?

Yeah, David, I think you have to start with, and I think I get the gist of your question, there's a lot of pressure on capital equipment sales in the marketplace given what we're talking about with customers being challenged in that way. I think what you have to do with the Lumina and think about it, it's truly a brand new platform. It's not an iteration of old technology like the next phase of our older technology. It's something that's really new and it's captured doctors' attention. And I think it's the size of our sales and how well we've done, particularly in a traditional third quarter, it's a little bit slower, I think it surprised a lot of people. So, I think this is a testimony to the technology we've brought forward and the uniqueness of that technology, why we've been able to have those kinds of sales at this point in time. We're excited about the restorative coming on in the first quarter. The team is making good progress on that. So, overall, it's just a great foundation to grow from. And what's wonderful about that platform, too, is we'll iterate from that platform going forward in different areas that will really help us to diversify the product line and target certain applications in the future.

And two things that really have helped iTero and kind of go through this, especially with the new product and so on, it's really given us a lot of opportunity on other products that we sell within the iTero kind of family. So, all the way from CPOs that we have certified pre-owned, all the way to the 5D. We actually sold a lot of 5Ds this past quarter. So that really helps us. And then, the added part, in a tougher economy, we're giving a lot more flexibility to doctors to kind of sell the way they want to buy. Some don't want to purchase outright because of the economic conditions and so on. So, we see a lot more leasing or in other places we see more rental. And for us, that's a great trade. It will get that recurring revenue off of those different selling options, but then it's great when a doctor uses iTero because we know they'll do use more Invisalign.

Great. Thanks for that. And then, on the U.S. side, on the Clear Aligners, can you give more color on kind of where that weakness is actually coming from? Is it the ortho channel or is it with GPs? And then, anywhere specifically from a portfolio perspective? Thanks so much.

Yeah. I mean, it's almost equal in both. We see pressure on the ortho side. I mean, if you look at any kind of industrial data right now as far as patients entering the dental industry right now, the GP space, it's challenged overall. So, we see pressure in both of those areas for the same reasons we talked about before.

Yeah. Thanks, David. Next question, please?

Thank you. Our next question comes from Jeff Johnson with Baird. You may proceed.

Hey, Jeff.

Thank you. Hey, Joe. How are you? Good afternoon, guys. So, Joe, let me ask one high-level question and then maybe just a modeling question for John. But from a high level, your R&D was down 4% year-over-year this quarter. You're making the headcount reductions. CapEx at $100 million is well below even the last couple of years, closer to $250 million those years. You're talking about increasing the buyback margin improvement next year. All of these comments kind of just point to a more mature company and that's not a critique at all. I think that's where we all know you are and see where you are. So, I guess my question is, how does this change your management style, your management objectives over the next few years? Obviously, you came into this business really pushing the top-line, but is there an evolution that's happening to go on with how you lead this company and lead this organization as well?

Hey, Jeff. I think it's a really good question. I'd say we're responding to the times here. Don't make it a reflection on what the opportunity the company is at all. We're so underpenetrated, not just in United States or North America or whatever, but all over the world. And there's hundreds of millions of people that need to have their teeth straightened. And the only way you could ever do that in a broad sense is with digital orthodontics. So, don't miss that point, Jeff. We are going through a spell right now. And what you see with the R&D down and CapEx and different things like that, CapEx is, you know we're not putting on any more manufacturing right now. We have enough manufacturing, and we're still bringing up our Poland plant, right? We're being responsible from a business leadership standpoint for our shareholders in this specific situation, but at the same time, Jeff, we're pouring a lot of money into 3D printing, five-minute ClinCheck, next phases of Lumina. All these things will really enter into just another growth cycle when this market starts to come back with brand new tech. This is the technology of the future if you really want to play in digital orthodontics. So, what we're doing is funding that, being responsible to our shareholders, but not losing our enthusiasm and what we think our opportunity is in the future.

Yeah. No, that's all fair. You are holding a sell-side event or at least an investor event a week from Saturday. Would that be a time to evaluate though that LRP, that 20% to 30% intermediate longer-term top-line growth expectation?

I think until we get a better read on what the economy is going to do, Jeff, I think that 20% to 30% represents how we feel that market could grow in the future, but we have to have the right economic conditions, particularly in the biggest markets in the world like the United States that we participate in.

Okay. John, I have a modeling question. Regarding the ASPs, it seems that considering the VAT issue that will be resolved at the start of next year, can you confirm if that timing is correct? Additionally, we should expect currency headwinds to moderate depending on the U.S. dollar's performance post-election year. Excluding currency and VAT, it appears there was about a 1.1% decline in ASP year-over-year. Is that accurate? And should we anticipate a similar situation as we approach 2025, assuming VAT and foreign exchange normalize?

You're right about FX hopefully normalizes, it's hard to predict. VAT does anniversary at the beginning of next year. And what we've said in the past is that ASPs would be flat to slightly down. So, your percentage you're talking about is in that range.

Thank you.

Thanks, Jeff.

Thanks, Jeff.

Thank you. Our next question comes from Kevin Caliendo with UBS. You may proceed.

Hi, Kevin.

Hey, thanks. Hi, Joe. I appreciate you taking my question. This might be a bit off-topic, but I was curious if you have conducted any analysis regarding the overlap between people purchasing GLP-1s and those seeking Invisalign treatments. The costs for adults might be similar, and I wonder if there might be a correlation affecting the adult market, especially as the shortages in GLP-1s have decreased. Could it be that people are choosing to invest $5,000 in one over the other? Have you looked into this or seen any insights?

I can't say that we've quantified it much, Kevin. We hear that conversation often. Many medical device companies discuss similar topics related to the GLP marketplace overall. I can't dismiss it as a factor since it's a substantial expense, comparable to the annual costs of an Invisalign treatment. However, I prefer not to focus on that as a primary driver. The current economy seems to have a larger impact, given that consumers have limited disposable income and uncertainty about the future. GLP may influence this, but I can't say for sure. Additionally, some international markets, like Continental Europe, may not be as affected as the United States. I've also not observed that pattern. There's an old saying that correlation does not imply causation, so I would stick with that for now.

Fair enough. That's helpful. And just I know you don't want to talk about '25, but let's just think about the fourth quarter and sort of what you're implying for your guide in exiting the year sort of a midpoint of like 5%. Should we just sort of take that as a starting point, adjust for whatever we think the economy might do that might impact the adult side of the marketplace more and then think about Lumina as an add on to that? I mean, is that sort of how you're thinking about the business?

I believe we'll provide more information as we approach this, Kevin. Coming out of the year, that's a solid starting point to consider. We'll have a clearer understanding of how the economy will evolve, including factors like interest rates and elections, which will give us a better perspective. As you think about next year, consider the additional elements we've mentioned regarding Lumina restorative and others, and then build from there. We'll offer more specifics as the date draws nearer.

Appreciate it guys. Thank you.

Thank you.

Yeah, thanks, Kevin.

Thank you. Our next question comes from Michael Cherny with Leerink Partners. You may proceed.

Hi, good afternoon. I'd like to follow up on a previous question regarding the 3D printing work related to the products you plan to launch. Considering this new manufacturing approach, how do you envision the rollout of these products? Will the process differ in terms of the beta customers you aim to target? How should we approach ensuring that you are delivering the right customer experience, maintaining appropriate overlaps, and managing the introduction process as you bring what could be a highly scalable range of products and new opportunities to the market?

Hey, Michael, it's Joe. Regarding your question, when we consider our current operations, it’s clear that not differentiating the geometry of our products limits our opportunity to assist doctors effectively. The orthodontic community, especially those dealing with challenging Class II cases in young teens, will benefit significantly from products tailored to their specific needs compared to what we offer now. We plan to present these products in a way that appeals to them. Additionally, general dentistry is a substantial part of our market, and we see numerous ways to support them with this product line as well. I hope this addresses your question. The design flexibility we possess will enable us to work with various thicknesses and configurations for diverse clinical scenarios, which we believe will result in more predictable tooth movement and clearer timelines for treatments. We expect this to resonate with doctors and reassured patients alike, and we will certainly communicate these benefits to our patients.

No, that certainly does help. And then maybe just one quick question, I promise it's not an attempt to go at '25 guidance specifically, but obviously, you've mentioned numerous times the UK VAT that's impacting ASPs internationally this year. Is there any outliers or one-time dynamics that we should be thinking about or contemplating relative to next year, something that like the UK VAT or anything else that could factor into the modeling that's non-normal?

Michael, this is John. Nothing that we would say is non-normal. I mean, the nice thing about the anniversary of the UK VAT is, it does anniversary. Obviously, we're doing things to try to work with that government there to explain and ideally not have a VAT on our products, because it affects what goes to doctors and how much they pay and then passing it on to potential patients. But there's nothing like that, that we would see on the horizon as that type of impact.

Thanks, Michael. Next question, please?

Thank you. Our next question comes from Erin Wright with Morgan Stanley. You may proceed.

Thank you. Can you provide more details about the restructuring beyond the executive change today? Specifically, I'm interested in the timeline, scope, magnitude, and any quantifiable benefits for profit through 2025. Additionally, I'd like to understand how this development came about, what changes you were considering regarding the business outlook, and how your perspective has shifted given the ongoing sluggish consumer environment. What else has changed? Thank you.

Sure, Erin, I can provide an overview of our current situation. As part of our normal Annual Operating Plan process, we consistently evaluate our investment strategies, funding sources, and other critical decisions. This is an integral part of our planning as we assess our goals for the year and consider our path forward for the next year, including how to promote growth and achieve our objectives. The current restructuring is roughly double the size of what we implemented last year, where we made adjustments for about 350 people. This time, we are aiming for close to 700 individuals. There will be some restructuring costs, which we have discussed previously. The main idea is to concentrate on what we can effectively drive in our business and enhance our growth platforms, such as the direct fab, the five-minute ClinCheck, and Lumina restorative. Our goal is to fund these initiatives while also ensuring we demonstrate margin improvement year-over-year. By making these changes, we aim to position ourselves for significant margin growth next year.

Okay, great. And then, as we head into the fourth quarter, I guess, does your guidance assume a continuation of the same in terms of the sluggish environment in the U.S.? Or does it have any sort of changes across other regions that you anticipate either continued acceleration or deterioration across other kind of markets or geographies here? Thanks.

Yeah, Erin, it just kind of assumes what we've seen. I mean, like as we pointed out, U.S., North America not great, we kind of assume the same. Other places we actually saw good improvement in parts of Asia, Latin America, Middle East, other places, and we continue to invest and expect to grow in those areas. So, like any forecast, you take the best information you have at the time, you try to translate to what that's going to mean for the upcoming quarter, and that's what we did for the fourth quarter.

Thanks, Erin. Next question, please?

Thank you. Our next question comes from Mike Ryskin with Bank of America. You may proceed.

Hey, thanks, guys. Just a couple of cleanup follow-up questions. One, I think just kind of following up on what Erin touched there and John, you touched on this as well. Two years in a row now, and again part of that is just natural attrition, natural cleanup of the business, but should we expect this to be sort of the normal going forward in terms of the restructuring? You guys famously kind of held off on that for a while. And very famously during COVID, you actually reinvested and you refused to cut when others were cutting. So, just help us think in terms of how we should factor that in going forward.

Hey, comparing this time with COVID is a stretch, Michael, overall. When we didn't lay anybody off during COVID, our expectation was that wouldn't last as long as it did, but fortunately, that was a decision to pay off well when the market came back so strongly. Right now, we're looking at just a sustained economic malaise, I would call it, in the United States, and we're responding accordingly. We haven't lost our enthusiasm and our belief in how this business can grow and this market potential of this business. What you're seeing in the restructuring is we're responding to external pressures that we see and being responsible from a business standpoint and being sure that we fund these key technologies that we know will lead into the future from an overall digital orthodontic standpoint.

And that's the key point of it now. It's being able to make space and have a budget to be able to fund these key technologies, because we know that's going to drive the future and doing things that we know no one else can do, no other company can do what we're trying to do with this. So, it's really important for us now to keep that focus through these budget changes and so on. It's what companies do to be able to push the future and do it in a responsible way where we could show margin accretion. We know we always talk about levers that we could pull or not pull. This is a part of it, and it just comes about it on a more annual basis as you assess the current environment.

Okay. And then, quick cleanup, if I could, on the ASPs. You talked about earlier, I think, in the Q&A, you touched on some of the factors that impacted you in the quarter and your thoughts about next year, but just on 4Q, I think you guided up ASP sequentially, and you've had some of these mixed dynamics, some of the discounting and FX for a number of quarters in a row. Just what are you seeing so far through October that's giving you confidence that you'll be able to reverse that? Because I think some of those headwinds don't fade till next year.

I believe all our Advantage programs conclude at the end of June and then reset for the second half of the year. The changes in the third quarter reflect these Advantage updates, which appear in our discounts. I don’t anticipate this trend will continue. Additionally, as Europe becomes a larger part of our business in the fourth quarter, while China and some other markets diminish, this shift is beneficial in terms of product mix. Europe has a higher average selling price, whereas China has a lower one. Thus, although the mix negatively impacted us in the third quarter due to the lower ASP, we expect to see advantages from this shift in the fourth quarter due to seasonal factors.

Okay. That's helpful. Thanks.

Thank you, Michael.

Yeah. Thanks, Mike.

Thank you. And we have reached the end of our Q&A session. I'll now turn the call back over to Shirley Stacy for closing remarks.

Great. Thank you, operator, and thanks, everyone, for joining us on the call today. We look forward to speaking to you at upcoming financial conferences and for those of you who we'll see at the Invisalign Ortho Summit in Las Vegas next week. If you have any other questions, please feel free to contact Investor Relations, and have a great day.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.