Align Technology, Inc.

Greetings and welcome to the Align Technology first quarter earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shirley Stacey, VP of Corporate and Investor Communications. Thank you. You may begin.

Thank you. Good afternoon, everyone. Thank you for joining us. Joining me today is Joe Hogan, President and CEO, and John Marucci, CFO. We issued first quarter 2020 financial results today via Globe Newswire, 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. Telephone replay will be available today by approximately 5.30 p.m. Eastern Time. through 5.30 p.m. Eastern Time on May 13th. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13701221, followed by pound. International callers should dial 201-612-7415 with the same conference number. As a reminder, the information that the presenters 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 set forth 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 statement. We have posted historical financial statements, including the corresponding reconciliations, if applicable, and our first quarter 2020 conference and earnings release and 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 Technologies President and CEO, Joe Hogan.

Joe? Thanks, Shirley. Good afternoon and thanks for joining us. I hope that you and your families are well. Given the significant disruption to our business caused by the extraordinary measures taken by governments public and private institutions and businesses around the world to fight the spread of COVID-19. Most of the performance metrics I would normally discuss are less meaningful. Therefore, on our call today, in addition to the highlights from our Q1 results, I'll discuss the trends that we're seeing through early March prior to the escalation in the COVID-19 cases that resulted in shutdowns across Europe and North America and compounded the initial impact from similar shutdowns in China beginning in January. I'll also talk about our view of recovery and strategy to help our doctor customers navigate this challenging environment and ensure our business continuity. John will provide more detail on our financial performance and comment on the current trends across our business globally, including the momentum we're beginning to see in China. Following that, I'll come back and summarize a few key points and open up the call to questions. With that, let me start with a few comments on our first quarter results through early March. At that time, China was progressing in line with our original guidance for Q1, which included approximately 20,000 to 25,000 fewer cases and 30 to 35 million less revenues for Invisalign and iTero products, and other regions were performing ahead of our Q1 outlook. However, the situation quickly changed in mid-March, as most governments in EMEA and North America closed down non-essential businesses initiated stay-at-home orders. As a result, a vast majority of Invisalign practices shut down and stopped seeing patients, and our business fell off sharply. We believe the incremental impact of COVID-19 on our Q1 results was approximately 50,000 fewer cases and approximately 85 million less revenues from Invisalign and iTero products. At the same time, While in May in North America and other parts of APAC fell off in mid-March, we began to see improvements in China as the country started to open up again. While it's still early in the recovery process and the situation is different in every city and for every practice, we're working closely with our doctors to support their current needs and ensure they have a game plan to resume operations in a very different environment for the foreseeable future. More on that in a few minutes. Now, let's go through our first quarter results. For Q1, total revenues were $551 million, down 15.2% sequentially and unchanged year over year, reflecting significantly a lower than expected sales of Invisalign clear aligners and iTero scanners due to the COVID-19 pandemic. Revenues from clear aligners were $481.6 million, and iTero scanners and services were $69.4 million. Clear aligner shipments were 359.4 thousand cases. Notwithstanding the impact of COVID-19, shipment volumes were up 2.9% year-over-year, reflecting solid growth from noncomprehensive products driven by Invisalign GO systems across all regions, as well as Invisalign Moderate. This was offset by a lower mix of comprehensive products, primarily due to the shortfall in China. For the quarter, we shipped Invisalign cases to approximately 61,000 doctors, of which 4,100 were first-time customers. We also trained over 4,600 new doctors in Q1, including 2,600 international doctors. Overall for the teen market in Q1, 104,000 teens and pre-teens started treatment with Invisalign clear aligners, representing 29% of total cases shipped, reflecting growth from EMEA in America's regions and across comprehensive products. During the quarter, we reached another major milestone. with our two millionth Invisalign teenage patient, Caitlin Ratliff, a student and athlete who started treatment recently with Dr. Tom Hartsook, a US-based orthodontist in Kentucky. Dr. Hartsook has been a terrific practicing orthodontist for about 30 years and credits Invisalign with revitalizing his practice at a time when a lot of doctors think about slowing down. He says his approach is to lead with Invisalign and he's got a new digital mindset now And we're excited he's going to share more about that at our upcoming Invisalign team forum virtual edition this July. The team segment represents the largest portion of existing orthodontic case starts each year. And as we head into the summer season, the busiest time in an orthos practice, we are working to help doctors capture as much of the team season as possible under the circumstances. Now let's turn to specifics around our first quarter results, starting with the Americas region. For the America's region, through early March, solid sequential growth was driven primarily by North American GP dentists and DSOs, along with continued strength from Latin American doctors. On a reported basis, Q1 Invisalign case volume was down 5.5% sequentially and up 5.2% year over year, reflecting significantly less than expected Invisalign case shipments in March due to the impact of COVID-19. Year-over-year growth for Q1 reflects growth from both orthodontists and GP dentists channels, which were up 5.6% and 4.6% respectively. Latin America volume was up 83% year-over-year, led by strong growth from Brazil. For our international business, through early March, with the exception of China, the EMEA and APAC regions were performing well. On a reported basis, Q1 Invisalign case volume was down 22.3%, sequentially reflecting significant decrease in APAC, primarily China, due to the impact from COVID-19. Partially offset by growth in EMEA, on a year-over-year basis, international shipments were flat, reflecting growth from EMEA, offset by a decline in APAC. For EMEA, Q1 volumes were down sequentially and up 11.1% on a year-over-year basis, driven by growth in Spain, the UK, and Germany. along with our expansion markets led by Central Eastern Europe and Benelux, including the teen segment. For APAC, Q1 was down sequentially as expected, reflecting a significant reduction in volume in China due to COVID-19. On a year-over-year basis, APAC was down 18.2% compared to the prior year, reflecting a longer duration of COVID-19 measures implemented in China. It was the only region down year-over-year. Japan, Taiwan, Korea, and India saw continued year-over-year growth in Q1, and as noted earlier, we began to see signs of improvement in China in early March as the government began to relax some or all of the restrictions and business began the road to recovery. Our consumer marketing is focused on building the clear aligner category and driving demand for Invisalign treatment through a doctor's office. In Q1, we saw strong digital engagement globally, including 7.1 million unique visitors to our websites, and 274,000 leads, both metrics growing by more than 40%. Consumer engagement growth for Invisalign was enabled by the launch of our new consumer campaign, strong media spend and a robust omnichannel presence. Our Invisalign concierge team is nurturing consumer leads in virtually until doctors' offices open, which is key to realizing and converting consumer interest into cases. Further, our modeling indicates that consumer marketing drove incremental growth in Q1 and reinforces our strategy to invest in brand building and maintain high visibility with consumers through the COVID-19 crisis. Other key metrics show increased activity and engagement with Invisalign brand and are included in our Q1 quarterly slide. For our KRO scanner and services business, Q1 revenues were down sequentially as expected, following this seasonally strong Q4 and consistent with trends in the capital equipment market. Q1 also reflects the impact of COVID-19 across all regions, and especially North America, Australia, China, Japan, and other APAC countries. On a year-over-year basis, itero-scandal revenues were down 13.1% due to slower sales in North America and APAC regions, primarily due to COVID-19, despite increased revenues in EMEA and Latin America, reflecting the addition of Zimmer Biomed Distribution Agreement. the introduction of our iTero 5D going direct to Mexico, and additional left-hand distributor markets. The total year-over-year decrease in scanner revenue was slightly offset by increased services revenue from a larger iTero installed base. Cumulatively, over 23 million orthodontic scans, 5.2 million restorative scans, have been performed with iTero scanners. For Q1, total Invisalign cases submitted with a digital scanner in the Americas increased to 80.5% from 76.1% in Q1 last year. International scans increased 68.7% up from 59.3% in the same quarter last year. We're pleased to see that within the Americas, 93.6% of cases submitted by North American orthodontists were submitted digitally. I'm also pleased to share that we received FDA 510K clearance for our Terra Element 5D imaging system. The ITERRA Element 5D imaging system seamlessly combines three scanning technologies, 3D data, inter-oral color photos, and NERI images. NERI is near-infrared imaging technology, which allows you to see caries in different aspects from a dentition standpoint. It's an integrated scan, and we're excited to bring the advancement in inter-oral scanning technology to the United States market to help doctors provide better oral care for their patients. At this time, we're mindful of the current environment and the impact that COVID-19 pandemic is having across the world, and are focused on customer education and training regarding this new technology while so many dental practices in the U.S. are operating on a limited schedule. We remain confident that the iTero business will continue to help drive our overall long-term growth and help increase adoption of the digital platform with Invisalign treatment. To that end, during the quarter, we announced the acquisition of ExoCAD, a global CAD-CAM software leader and completed the transaction on April 1st. John will talk more about the acquisition in a moment, but let me say just that the rise in consumer awareness around dentistry extends beyond the benefits of straight teeth and orthodontics. There are significant opportunities for all kinds of treatments, from simple cosmetic fixes to ortho-restorative. That can help us accelerate growth of our digital solutions for ortho-restorative cases and really drive growth and adoption of the Invisalign iTero digital platform. I'm very excited about the addition of ExoCAD's proven restorative experience, expertise, and functionality to our platform, and I want to welcome ExoCAD founders Tilt Steinbrecher and Mike Gerth and the entire ExoCAD team to the line. Let me now turn to some of the initiatives we've taken to support our doctors and their patients. We recognize the enormous hardship that COVID-19 has caused Invisalign practices around the world. We're working in every region to support doctors and find ways to minimize disruptions to their businesses, and to strengthen the experiences their patients have with Invisalign treatment. We have learned a lot from our doctor partners and teams in the Asia Pacific region, and we've been navigating the impact of COVID-19 for months. We're applying their experiences and insights across all regions. Many of our customers are sharing creative ideas and suggestions as we all work to manage the situation together. One of the first things we did was address clinical education, an integral part of doctor engagement Across all three of our regions, we moved most of our education programs to online digital platforms. Continuing to provide hundreds of valuable Invisalign and iTero training and education resources, many peer-to-peer for doctors and their teams in a virtual setting. We also identified opportunities to collaborate with Invisalign practices to manage ongoing cases and explore new ways for doctors to conduct consultations. Early on, many doctors began using video calls, texts, and patient-submitted photos through a variety of platforms to help monitor patient progress, reduce in-office appointments, and ensure continuity of patient care during treatment. It quickly became clear that doctors needed a better way to connect and monitor patients, so we accelerated the launch of new tools that were still in pilot mode. The Invisalign virtual appointment tool enables doctors to easily set up HIPAA-compliant video appointments to monitor existing patients and to have an initial conversation with patients interested in learning more about Invisalign clear aligner treatment for the doctor. The Invisalign virtual care program can also use video appointments and enables doctors to monitor treatment progress and stay connected with patients through a virtual platform. Patients use the intuitive My Invisalign app to stay engaged in the treatment and convey progress photos to their doctor. who review these photos on their Invisalign doctor site, communicates any needed instruction, and ensures treatment is on track. These tools are available through our Invisalign doctor site, IDS, in the My Invisalign app, and work as part of the end-to-end digital platform for Invisalign treatment. While both tools are still in early stages of rollout, our goal is to provide doctors with a way to maintain care until patients are again able to visit the doctor's office. Feedback to date has been relatively positive, and we believe that doctors will continue using these tools to improve patient experience and increase office efficiencies well after COVID-19 restrictions have been lifted. We're also supporting doctors through financial and operating challenges and are providing additional resources, including industry experts to help them navigate this ongoing crisis. This includes webcasts, e-blasts, and microsites on IDS again, the Invisalign doctor site, with advice on extending aligner wear and holding patients at specific treatment stages. Options for redirecting aligner shipments and helping address customer cash flow concerns caused by the pandemic. We're creating programs with partners like LendingPoint that are part of recovery playbooks to help doctors with speed to cash that is expected to launch on May 1st. Before I turn the call over to John, I'd like to spend a few minutes talking about the strength and resiliency of Align. and our business model and our view of the path to recovery. There's no question that we are in uncharted territory. And while supporting our doctors in their current situation is still critical right now, planning for recovery is just as important. Overcoming challenges is not new to Align and our employees. Our response to COVID-19, decisions and investments we are making now to anticipate customer needs and adapt in a dynamic environment are based in part on the lessons learned throughout our history. and will further our competitive advantage and position us to capitalize on the market as it returns. We serve a huge under-penetrated market and our share of more than 300 million people who want a better smile is less than 3%. Teens are an important segment and our share is a small fraction of the market. And yet we know that teens remain the heart and soul of orthodontic practices and will drive their recovery. There is no single blueprint for us to follow in this recovery. Our underlying business is healthy We have an excellent balance sheet with no debt. And over the last five years, we've grown a business that has generated 25% compounded revenue growth and consistently delivered 72% gross margins, 22% operating margins, and generated cash flow from operations in excess of 22% of revenues each year. We also have operational resiliency in terms of global manufacturing that has taken us years to develop and is simply unmatched. and is a key reason why we're able to continue operations in the crisis and expect to ramp up quickly in recovery. The core components being supply chain, digital treatment planning, treat, aligner fabrication, AFAB, supply chain. During normal business, we carry enough buffer stock in our warehouse to handle two disruptions to the supply chain. So if a batch goes sideways, we can handle that twice. After COVID-19 broke in China, we anticipated that we needed to mobilize existing suppliers and add three to six months of additional inventory so that we could weather the potential storm. For many of our suppliers, we have alternative redundant suppliers in case of shutdown in one geography impacts a supplier. Treat, the investments we have made over the years in having treat in multiple locations allows us some flexibility in business continuity to respond to customer needs. Before COVID-19, we had evaluated the potential for doing treatment planning from home or remote locations and the applications to hardware needs, data security and productivity. When COVID-19 hit China, we ramped up our ability to do that and started transitioning our CAD designers to do treatment planning at home and have been successful in that sense. We are confident we could have maintained 80% of our normal output, but volumes fell off before we could prove that point. China hit first, so we load balanced with our other treat locations So, as this went from east to west, we didn't have significant issues in our treatment operations. This is our model, and we'll continue to strengthen it going forward. Aligner Fabrication, we have Aligner Fabrication operations in Yong, China, and Juarez, Mexico, and plans for a third facility in Europe that we're looking to accelerate into 2021. Our facilities have excess capacity built in, and while we never have 100% redundancy, we do have the ability to shift production volumes based on that excess capacity. Worst case scenario, if one of these facilities goes down, then customers wait a little longer for their aligners, but production will continue, and we believe we can recover swiftly. In short, when we have an issue in one part of the world, we have designed our operations to enable us to load balance across facilities. We've had to do this because of our growth and huge growth spurts that made it necessary to remain flexible. Additionally, the steps we've implemented during COVID crisis, like work from home for CAD designers, gives us even more flexibility, and we'll leverage that going forward as we evaluate facilities requirements and potential cost savings. Beyond our business strength and operational resiliency, we are at the forefront of digital dentistry, and this pandemic has exposed the weakness of analog approaches and strengthens and benefits the digital technology in every aspect of our life. You know, there's been a lot of concern over the years about digital driving us apart and keeping people from interacting. People focused on their screens and social media rather than with each other, interacting with businesses online rather than in person, et cetera. I think what we're seeing through this terrible situation is that digital actually unites us. It keeps us connected, gives us flexibility and options. Without digital technology during this crisis, how would kids go to school? How would any of us be productive working from home? How would universities and public health experts model the curve without data mining and AI? I am proud and thankful of our digital platform is able to keep Invisalign patients moving forward in treatment while physical practices are closed. That it can connect doctors and patients to monitor issues and track treatment. That because of digital, we can get a replacement aligner or some new retainers to a kid's sheltering in place. And together with doctors, we're going to leverage that power of digital for dentistry and orthodontics more than ever. Doctors are not going back to before. We all know that digital dentistry is the future, and that is a part of why Align is weathering this pandemic and why I believe we are well positioned for success going into recovery. With that, I'll now turn it over to John.