Conference Transcript - ALGN 2026-09-15

Jeff Johnson, Analyst — Baird

Good afternoon. Why don't we get started? My name is Jeff Johnson. I'm one of the senior medical technology analysts at Baird, and our next presentation this afternoon is from Align Technology, a leading manufacturer in the six and a half billion global orthodontics market with Invisalign. Its system of clear aligners designed and manufactured by the company. Long explanation there. I'm just going to cut that. With us today from Align, we're happy to have Chief Financial Officer John Marici. John, thanks for joining us. I don't know if you have 30 seconds of prepared remarks or anything you want to say to open the afternoon, but we can go straight into Q&A whenever you're ready. Happy to go into Q&A. Yeah. All right. Well, let's start, you know, topic came up at dinner last night and it definitely is something I get from investors is just around kind of the U.S. growth rate. And, you know, I think a point of conversation last night was if I look at pre-COVID to today, your U.S. case volumes or America's case volumes, however we want to look at them, have grown at a compound annual growth rate, probably five, six, seven percent. Globally, I think a little higher than that, but the America's somewhere in that six, seven percent range. But if I look off 22, which was kind of that really, you know, 21 and 22 were those heightened years post-COVID, everybody sitting at home on Zoom deciding to get their teeth fixed, case volume hasn't grown since then. So is the U.S. and America still a growth market? Are there still growth opportunities? Have we hit just some ceiling of you can only do 1.3, 1.25, whatever million cases a year? Just how to think about the next few years of growth opportunities in the U.S. from a clear aligner perspective.

John Morici, CFO

Well, when you look at the U.S., the opportunities that we have, you know, you start with the backdrop of the overall market, and it has been challenged from an overall economy standpoint. You've got, you know, higher inflation you've got you know maybe a reluctant uh patient to to maybe want to go into treatment and that trickles into what the doctors how the doctors view things and and what they invest in and how they want to grow their practice but what you have in in the last you know the last couple uh couple years here really 18 18 months or so you've had a a challenged economy but it's been relatively stable, meaning this is the environment that we've been in, and this is something that we as a company are trying to push against. And to do that, you've got to be able to recognize that the predominance in the market is still wires and brackets. So we have a huge opportunity to grow in U.S., just like the rest of the world, to get clear lines, to have Invisalign. To be able to have that Invisalign and be able to make a difference in a market like the U.S., you've got to give your doctor options. That options could come from different types of products in our portfolio. So we push against that in terms of the economy to say, let's offer varying types of products that don't have as many refinements and therefore leave the upfront cost to be a little bit lower. And so that doctor then can look at, I'm going to use wires and brackets or I'm going to use Invisalign, the upfront price is, you know, closer, and you don't have to have them make some of these tougher decisions from an economic standpoint. Same way, offering flexibility to the potential patients. I think, you know, in the past, patients would come. Maybe they had financing alternatives. Maybe they didn't. What we've been able to do and really help with the overall market is to have more financing options to those potential patients. Give them an ability to, you know, they see what their teeth will look like with treatment, whether you're on the ortho side or GP side, and then as it eventually gets to the end idea of whether they're going to go into treatment or not, they want to see that the financing is affordable for them, and I think even in a challenging market that we're in, you make changes like that that can affect the doctor, the ortho or GP around products and what we do to go to market with them, as well as their potential patients, you can help overcome that. And that's what we're focusing on trying to drive.

Jeff Johnson, Analyst — Baird

Okay. And as I think about, you know, in the U.S., and this is true globally as well, but in the U.S., you've launched DSP, IPE, some of the Invisalign first stuff that's going back several years now. But you have been launching a cadence of new products. This year, at the start of the year, now no AA has launched. You've got the Smile Advantage, I think, program from HFD on the financing side, as you were kind of alluding to there. Have all of those efforts, I guess, in spite of all those efforts, the U.S. hasn't grown. Should we look at it as with those things in place, as the macro improves, now you've got all these things that, you know, theoretically make you a better company and a better opportunity when the macro improves to, like, get that growth back?

John Morici, CFO

Well, I think it's twofold. I think we're doing things to offset even the current macro and we're seeing improvement. You're seeing that the business can, you know, certain parts of it can grow and we can get some of that back. We need the overall business, especially on the retail side, for all the changes we're talking about to be able to help that grow. But I think we can see improvement even in the current environment. And then you're right. If there is maybe not as much headwind in the overall economy with inflation or concerns about fuel prices and so on, there's things that we can do that we're doing now that will become a benefit in the future if some of those headwinds move away. But we're focused in on helping our doctors at the point of sale that they have, what products and capabilities that they have, and then also translating that to the patients that they're seeing and finding that right combination to drive the conversion. Yeah.

Jeff Johnson, Analyst — Baird

And there's been some pressure on your stock just over the last several weeks. You know, an independent data source that's out there talked about a week July for ortho demand. You guys gave your third quarter guidance, though, in late July. So I guess, you know, regardless of what the market did in July based upon that data source, which, by the way, has been variable and all over the place. And it's one of the reasons we don't actually buy the data. But would you argue that your visibility through July, at least, you're still comfortable with that third quarter guidance?

John Morici, CFO

Look, we gave guidance at a point in time based on all the conditions that we see, whether it's the U.S. or the rest of the globe. Obviously, we have the benefit of several weeks into the quarter and understanding where things are at. I think you rightly said that some of the data, it becomes very much what subset of doctors and orthos are they using, what's the period in time, whether it's July or August. I think it's less to do about some of these monthly fluctuations that comes through some of the data and survey. The reality is, from an overall macro standpoint, we've been in this environment for six, seven quarters. And this is the reality that we're in, but it's what we do as a company to drive that initial demand generation, marketing and advertising, being able to arm our doctors with various types of tools to help their patients visualize what treatment's going to look like, and then really partnering with them so that they can find the right financing. And what you do see during this time over the last five or six quarters, you start to see much more of financing playing a big part, and that affects the U.S. You see it with HFD and other lenders that come into it. We're also seeing that shift in Europe and other places where that last mile that you have to overcome sometimes is around that financing where you can get that monthly payment that's maybe more affordable for those potential patients. And if you drive that right combination, you can see good results.

Jeff Johnson, Analyst — Baird

Yeah, fair enough. You talked about Europe. I mean, I think if I look at your European numbers, your EMEA numbers, I guess, to be more precise, and your Asia-Pacific numbers, I think in those two markets, you've grown double digits now, four quarters in a row. One, what's different about those markets? How much has something like IPE helped case volume growth in those markets? given that does count as a case in your case volume calculations and that. So what's different about those markets and how much has been new product-driven versus the end markets themselves?

John Morici, CFO

It's really a combination. And in those markets, they're more under-penetrated. Much more wires and brackets are done compared to even North America, which is still under-penetrated. 75% of the cases in North America are still done with wires and brackets when you include teens and adults together. So underpenetrated market, they've responded well to new products. So you have, you know, IPE and some of the touch-up cases. We expanded that into Europe. Now we've expanded that into APAC, very receptive to new types of products that really fit with the types of cases that they do. But if you dig just on a broad basis, you say 55% of our business is outside of North America. And as you said, it has been growing double digits. And even if I looked at North America and say 45% of our business, a third of that is DSO. And those DSOs have been growing double digits. So the focus and the focus that gets to the macro and trying to drive that conversion is really on that 30% of our business, that's North America Retail, that we've got to be able to try to reach those potential patients and ultimately help our orthos and general dentists drive conversion. And that's our focus that we've been working and trying to overcome. And through all that, we've still been in the mid-single digits as a company, but our expectation is we can grow faster.

Jeff Johnson, Analyst — Baird

Okay. And when you cycle through now in EMEA and APAC to those double-digit comps, third quarter will be your first time coming up against those tougher double-digit comps. Anything we should think about there? I mean, is it tough to grow mid-single digits on a double-digit comp? I mean, just how should we think about the split of your business between the Americas and EMEA and APAC, which has been much more biased from a growth perspective the last few quarters in those international markets?

John Morici, CFO

The international markets still have a huge opportunity because, like I said, underpenetrated market to start with, and then introducing many new products that take some time to get the adoption. And now you start new, just in the second half of this year, it's having the DSP in Asia, the touch-up cases that you have. The no AA products goes to other locations as well, and you see some of that with moderate and other products that don't have refinements, and many doctors like that. You see tremendous growth in places that we have invested our go-to-market resources with sales and marketing in places like India and Southeast Asia and Brazil and other places that we've seen really good growth. So we think that it starts with an under-penetrated market. There's markets that we can find ways to win with our technology and products there. And then you add to that some of the consumer financing, which is just as important, if not more important, in some of those markets where that patient is reluctant to maybe go into treatment. And if you get that financing right, get it down to a monthly amount that they're more comfortable with, you can end up with varying degrees of success from a conversion standpoint. And that's what we want to play for in those markets.

Jeff Johnson, Analyst — Baird

And just kind of a gut check on the third quarter guidance. You know, you are guiding to mid-single-digit year-over-year case growth against a mid-single-digits. because, again, the MEA and APAC both hit double digits for the first time in a while last year in the third quarter. So that your third quarter comp this year is five or six points tougher than it was last quarter, but you're guiding to about the same level of year-over-year case growth. It just doesn't feel like in this economy that a comp adjusted acceleration. But what am I missing there?

John Morici, CFO

I think you have to look at kind of what you do when you guide. You're looking at our business. We're looking at what we've been doing recently. Where's the marketplace now? Let's start with that, where the marketplace is. And then you layer in new products that you're introducing that you didn't have last year. DSP didn't exist in APEC last year. It exists now. And for the most part, really wasn't much in Europe. Now it is. And then you go into a lot of the patient financing and other things that was just a small part of what you had in the past. So you have to look at what you've been doing to understand that I'm going to look at what I did prior month, prior quarter, and then be able to say, okay, based on that, here's the expectation that you have. You go into teen season in China, you know, Europe becomes a little bit slower for holidays on a sequential basis, and you build your guidance off of that. But it's more relevant to see what's actually happening, you know, in the prior month or prior quarter, and then be able to project that forward. And then you look at those numbers. I think if you looked at just from an overall year-over-year standpoint, first half, our volume grew about 7% or so on average. And if I just looked at the year-over-year in the second half, our guidance reflects 5% or 6% on a year-over-year basis. I get your stack point, but it's relevant when you think of what are you doing lately to be able to help change that trajectory in a relatively stable market, and then you use that current data to be able to project forward and year over year just more or less becomes a result.

Jeff Johnson, Analyst — Baird

Yeah, fair enough. And then just remind us where you are with the rollout of the NOAA product or the NOAA refinement product. How broadly rolled out is that in the U.S. at this point but also then across other markets, the plans?

John Morici, CFO

In the U.S., it started with some of the DSOs that we have. They look for different options to keep their upfront costs at a lower point and then pay for a refinement as it goes forward. We're happy to do that. Revenue recognition-wise, we'll make that trade. You're just going to get maybe less cash up front, but you get the cash later and that revenue later. So we can manage through that. And I think our technology has really evolved to really allow for many times you can do a comprehensive case or even a moderate case with just no refinements or maybe one refinement. So we're seeing that adoption across DSOs. We're introducing that across many of our retail doctors, and the adoption has been good. Doctors need to make sure that they plan a case properly so that they expect to be able to finish in a relatively short period of time with not a lot of refinements. And if they were used to a lot of refinements, they have to make sure that up front they manage that setup. But once they do that and they understand some of those tradeoffs, the whole purpose of a no-refinement type product is to keep that up front cost more manageable compared to wires and brackets. This is a utilization expansion. This is getting doctors who would say, I don't want to pay the up front cost of the lab bill. I'm going to stick to wires and brackets we're trying to offset that and say look it's a little bit more expensive than than wires and brackets but it's not the bigger difference that you'd have if it was a comprehensive unlimited and I look at that as like wanting to win in the gray areas with those doctors when those doctors are deciding do I use Invisalign do I not sometimes this upfront pricing can help with that and when we look at that it it ASP is is is very manageable because you recognize the same up front. But the important part is, and as we see our shift more and more to these comprehensive or moderate without refinements, it helps our gross margin. And we've been able to see that. You looked at really second half of last year when it was starting to take off and then into this year, our gross margin has improved. A lot of it's around productivity and programs that we have, but some of it due to some of the mix that we see with these no AA products.

Jeff Johnson, Analyst — Baird

Yeah, just one question on no AA and then I want to move on. But on no AA, so let's put some round figures on things. If it was $800 up front for no AA case, let's say that doc would have been paying $1,200 for a full comprehensive. You know, one of the things you've talked about is docs are getting more comfortable going to a no AA product because the need for refinements are going down because the system is getting more and more predictable. But at the end of the day, does that run the risk that instead of charging them, that physician, that doctor, for a couple refinements in year one or two, if they do no refinements, you ultimately still are ending up with less per case. And your deferred revenue is going to start coming down pretty aggressively in years two and three post no AA.

John Morici, CFO

You get trade-offs on that, but what we find is many doctors are still doing, you know, similar amount of refinements. But the bigger point on this, Jeff, to drive is we want to drive utilization. So you might get trade-offs with this, just like we'd have, you know, a touch-up case might only be a $500 ASB product. But it's for, you know, 10 sets of aligners that you would do, and that meets the needs of that doctor. If we can meet the needs of that ortho or GP so that they use more of our product and they want to use a product that has, you don't need, you know, comprehensive unlimited for five years and unlimited refinements, we'll take that tradeoff. Because in the end, what we're seeing when we saw across our DSOs and what we see with the doctors that we're rolling it out to on the retail side, they end up doing more cases. And if that's what happens, and therefore they do less wires and brackets and more Invisalign, that's a win for that product.

Jeff Johnson, Analyst — Baird

All right, fair enough. I want to talk about China just a little bit. So you are predominantly in the private, not public, market in China. Obviously, we now know that the ortho VBP process has started on the public side. you know it seems as if most of the chatter in the industry has evolved that the privates will probably follow some of the public pricing changes that happen uh i think maybe a year or two ago there was some question on whether or not that would happen it does seem like it seems that way that's probably going to happen now um but we're also hearing that now procedural price which is typically comes down when the device price comes down as well the procedural price may not come down from hospitals or private payers. So one, what are you anticipating you might have to give up pricing-wise on even in your private side pricing for Invisalign, one. And two, if procedural price to the patient doesn't come down and we don't get an offsetting acceleration in demand from patients, then you're going to have to pick up some market share to be made whole on the lower prices. So how does all that work out over the next maybe six to 12 months?

John Morici, CFO

Yeah, I think you have to start with China in general for ortho market. 90% of the case are done with wires and brackets. So clear aligners are small. So you're coming from a different spot from a BBP standpoint. Typically, you have like a market and you're a higher percentage of the market share. We're very low, even across clear aligners. Our expectation would be is that there's a product portfolio of various products that will be put into VBP. We compete in that space. We've got a lot of different products from the most comprehensive cases to the lower, more moderate cases and lower stage cases that will be able to compete into this. We would expect that there'd you know, go through the public side, it will come to the private side. We look at that as opportunities to be able to increase our volume, being able to sell to more doctors who might not have used our product in the past because they'll look at pricing and other things, and incrementally we'd be able to get additional volume. We'll do things in a way because we're headquartered, We've got a huge operation in China from a manufacturing standpoint and treatment planning. So we've got other cost offsets that we can have there to be able to meet some of that, whatever pricing comes out of this. But we're set up to deliver in China in this environment. We've been expecting VBP for a number of years. As you know, it's been pushed many times because I think there is a question about what it means for the end patient. And is the ortho and the GP, are they going to cut their prices to be able to meet this? Or is it just on the supplier? Because you remember the majority of cost to the end patient or the provider or the health care provider is the doctor's cost. And so, you know, it still remains to be seen what that's going to happen. But look, we're coming as an industry coming from 10 percent of the market. And I know it gets a lot of visibility in terms of VBP and so on, but it's not your traditional VBP. You've got doctors who kind of have their margin and their costs kind of in the middle, and you're coming from a market that majority is wires and brackets. If in the end, VBP helps us get to a higher market share of clear aligners and therefore a higher market share of Invisalign, given our cost structure and our product portfolio that we have, that's a good trade. We will welcome that.

Jeff Johnson, Analyst — Baird

Would you expect to be, I think there are 5,600 hospitals across China in the hospital systems for clear aligners over the next year or two, or are you going to remain predominantly private?

John Morici, CFO

I think we'll have the opportunity to play on the public side, and that's opportunity for us that we don't really have right now. So this might give us access to some of those markets that we haven't had before.

Jeff Johnson, Analyst — Baird

Would you have to actively bid, though, into those tenders? And if you have 0% share there, historically, you know, I thought the Chinese government historically will pit the top two or three vendors in the hospital and say, okay, one of you is going to be out, two of you are going to survive. How would you as a new vendor, quote, unquote, new vendor in the hospital?

John Morici, CFO

Well, we're recognized. I mean, they know, you know, from a revenue and market share standpoint, you know, there's a few companies. And we're one of them within China that would be a part of that. So we would want to be able to at least be a part of it, be recognized in it, and then make a decision. If this pricing works for us and it's part of what we want to do, it's incremental. And you can manage your costs to show that there's still, you know, it's incremental revenue and incremental volume. But you can manage your costs in the right way. You can make those tradeoffs. and we would look at being in some of those markets that we might not have been in.

Jeff Johnson, Analyst — Baird

Okay, we're down to five minutes, so let's hit maybe two or three topics very quickly. So one on competition, one of your largest competitor, you've been involved in some IP litigation with back and forth. They do all of their treatment planning in China, so that means, as we discussed last night as well, taking patient data out of the U.S. into China, things like that i mean is there real opportunity for you risk to them that as these governments start to think about data transmission across country lines and especially to maybe not so friendly countries or countries we're not so friendly with uh that there could be some changes forced there look i think i think you know when you start with what we invest in in this marketing and really creating this market we were you know the one that you know created the the clear liner um market there are competitors that come in you know they they have varying um degrees of how they

John Morici, CFO

want to go to market and so on some competitors as we know uh as people might know that there's been some intellectual property that we think that it was is ours and it's been used by you know and by other competitors like like an angel and there's been you know a broad uh intellectual property effort um to to uh enforce our intellectual property across china europe uh u.s uh against angel uh in addition it's it's like you had said there's treatment planning and other things that are cross-border that i think is is is a bit of a challenge but we're focused in on on driving you You know, driving innovation, driving our business, meeting the needs of our customers, doing things so that, you know, they understand the tradeoffs. What we could bring them is technology and the scale and the brand, and we think we stand apart from competition. And I think doctors might try different competitors based on price or what they assume or what they think they get, and then might realize that it's different when they get to the other side. And I think that gives us an opportunity to, you know, if there's winbacks or other opportunities, we get those. But I think the focus that we have, whether you're in the U.S. or any other country, the majority of cases in every country are done with wires and brackets. Our focus is on that competition and trying to win those with Invisalign. The other clear liner companies, they're more into share shifting, but our focus is really on driving this business.

Jeff Johnson, Analyst — Baird

And you mentioned earlier that you're comfortable with the second-half guide of mid-single-digit 5% to 6% case growth in the second half, I think just below that in the third quarter. And you're still talking about 100 basis points about margin expansion this year. Is it fair to think about that 100 basis points of margin expansion being able to – well, you already have basically said that it's fair to think about that for 27. You've talked about this mid-single-digit case growth. So it seems the street is set up at about mid-single-digit revenue growth next year, 11% EPS growth, just a touch above that. It would seem like none of that is out of bounds relative to kind of what you've communicated so far from an expectation standpoint.

John Morici, CFO

Yeah, we haven't guided in that specific for next year. But I think when you look at the framework that we have, you know, growing as much as we can across all our markets and really focus in on that while continuing to work with our DSOs and being able to grow while doing it in a profitable way. And so a lot of the profitability, some of that is coming from the NOAA and some of the product portfolio that drives gross margin. Some of it's just on programs itself, localizing and making changes. We started a large part of this last year, moving things that maybe were made in Mexico and moving it to Europe or other parts of Asia to be able to reduce some of the freight costs and shipping times and so on and drive a lot of that productivity. We talked about a plant that we'll put up in India, really India for India, a smaller plant but focused in on reducing cycle times, improving productivity, customs, duties, all the other benefits that you get from being in. Those are the structural things that we're trying to build in, that whether it's a product portfolio that customers are adopting to or it's some of the other productivity things that we're doing, we want to be able to build in these structural productivity cost benefits while still going after as much volume and revenue that we can so that when we talk about the op margin benefit this year of 100 basis points and at least 100 basis points for next year, you know that despite doing all these things to help try to grow our business, we're going to do it in a profitable way.

Jeff Johnson, Analyst — Baird

Okay. Last one I have in the last minute here is, you know, R&D has gone from $160, $170 million a year pre-COVID to almost $400 million this year, right at $400 million or so this year. You know, is that something that can be leveraged going forward? We're now through not all of the direct fab, which we didn't get to today, but you're moving forward on direct fab but dsp ipe mandibular blocks lumina i know alumina 2 coming next year but you're through a lot of that heavy r&d spend it seems of the last few years can we start to see leverage at the r&d line going forward on an absolute dollar basis or as a percentage of revs i think you see the some of the leverage coming through because you know we're as a percentage of what we're spending within r&d it's gonna it's less on the r and more in the d You know, so more on the development that we start to see these products come to market.

John Morici, CFO

So I think as you get, you know, that migration happen, you know, where we've developed products, we know the technology for the resin and the direct fab manufacturing and some of the luminal platform and so on. That went from R to now it's moved to D. You start to get some benefit because you're also going to have sales and you're going to have that denominator is going to go up as well. So as a percentage, we'll see some benefit there. And as we migrate more and more to development, we'll also see some dollar improvement there. But we're constantly trying to drive this business. It takes a lot of R&D and resources to bring the latest technology to our customers. And we're focusing on being efficient as we can from an up-margin standpoint, and R&D is a piece of that.

Jeff Johnson, Analyst — Baird

Well, I think we're going to have to cut it there. We're about a minute over. So please join me in thanking John for a wonderful overview of Align. And our next presentation is set to begin at 3.45 p.m. Include Health Equity in the Grand Ballroom, Natera in the Grand Ballroom 3, Adapt Health in the Empire Ballroom, and Mirum Pharmaceuticals in the Empire Ballroom 2.