Align Technology, Inc.

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. I would now like to turn the conference over to your host, Shirley Stacey, VP Corporate Communications and Investor Relations.

Good afternoon and thank you for joining us. I'm Shirley Stacey, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO, and John Marucci, CFO. We issued second quarter 2021 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. A telephone replay will be available by approximately 5.30 p.m. Eastern Time through 5.30 p.m. Eastern Time on August 11th. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13720779 followed by pound. International callers should dial 201-612-7415 with the same conference number. 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, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our second quarter 2021 conference call slides on our website under quarterly results. Please refer to these files for more detailed information. With that, I'd like to turn the call over to Align Technologies President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide some highlights from the second quarter, then briefly discuss the performance of our two operating segments, system services and clear aligners. John will provide more detail on our financial results and discuss our outlook. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report our first billion-dollar revenue quarter with record volumes reflecting continued momentum from both clear aligners, systems, and services. For Q2, systems and services revenues reflect strong growth across all regions and the strategic value of the iTero business with continued adoption of the iTero Element 5D Plus series of next-generation scanners and imaging systems, which launched in February. Increasingly, doctors are seeing the strategic impact and value of iTero scanners in their practices. In addition to its role in Invisalign case submissions, it's a true workhorse and digital enabler in every type of practice and across every type of orthodontic and restorative workflow. Q2 sequential clear aligner volumes were primarily driven by strength in both adult and teen market segments and across customer channels and regions, especially from the Americas and EMEA regions, reflecting the expanding opportunity for Invisalign treatment among adults globally, as well as the underlying orthodontic market, as we continue to build awareness of Invisalign brand and drive utilization among teens and younger patients. For Q221, Invisalign clear aligner volumes for teens were up 9.5% sequentially 156% year-over-year to 181,000 teens, representing one-third of total cases shipped with strong growth from North America and EMEA orthodontists. During the quarter, we hosted several teen-focused peer-to-peer events designed to build clinical confidence in teen treatment and highlighted teen digital treatment journey with Invisalign treatment. The recent APAC virtual symposium featured leading providers focusing on clinical excellence with teen treatment. And North America hosted the Invisalign Team Forum, virtual edition for Invisalign doctors bringing together clinical speakers, digital industry experts, and team patient panelists to share their insights. In May, Align focused on the Align Digital Platform at the 2021 AAO Annual Session, featuring a dynamic virtual lineup of Invisalign doctors describing how they have grown their practices through adoption of digital technology. Our Q2 results also reflect the positive impact of our investments in consumer marketing, generating billions of impressions and 33% year-over-year increase in leads for Invisalign doctors. During the quarter, we launched the next phase of our Mum Teen Multi-Touch campaign, as well as the new Invis is a Powerful Thing campaign, designed to engage teens and young adults. We also deepened our partnership with influencers like Charlie D'Amelio, with the first limited edition aligner case as part of our new e-commerce initiative featuring custom cases. Cleaning and oral care products as well as accessories like Invisalign stickables, all of which are available on Invisalign.com. These and other consumer initiatives are important in supporting doctors' practices, especially through the busy summer teen season and beyond. They also build out our investments in digital technology and innovation that are the foundation of the Align Digital platform, including integrated digital workflows and virtual tools, designed to improve clinical confidence, treatment, efficiency, and patient outcomes. A year ago, we released Invisalign Virtual Appointment and Invisalign Virtual Care Tools within our My Invisalign app in response to the global pandemic to enable Invisalign doctors to provide continuity of care for their patients. Today, Invisalign Virtual Care is available globally in 60 markets, and the My Invisalign app has been downloaded one million times with Invisalign patients worldwide. It was recently recognized as the best virtual care platform by the MedTech Breakthrough Awards Program and as a Digital Innovation of the Year by Healthcare Asia MedTech Awards. As part of the Invisalign virtual care, patients use my Invisalign app to stay engaged with their treatment and convey progress photos to their doctor, fostering two-way communications with the doctor through their Invisalign treatment journey. Now let's turn to the specifics around our second quarter results, starting with the Americas. For the Americas region, Q2 is another strong quarter, with Invisalign case volumes up 11% sequentially and 261% year-over-year, reflecting growth across the region, especially in the United States and Canada, from both comprehensive and non-comprehensive products, and increased Invisalign utilization from orthodontic and GP channels. DSO utilization continues to be a strong growth driver as well, led by Heartland and SmileDocs. For international business, Q2 Invisalign case volume was up sequentially, 12.7% on a year-over-year basis. International shipments were up 149%. For May, Q2 volumes were up sequentially, 17% and 265% year-over-year, with broad-based growth across all markets, led by Iberia, UK, and Italy, along with continued growth in our expansion markets. In Q2, growth from both channels was strong, with orthodontic channel growth reflecting increased Invisalign utilization and GP channel growth driven by increased Invisalign submitters. For Q2, EMEA growth also reflects adoption of the Invisalign First product, designed to treat a broad range of teeth straightening issues in growing children, from simple to complex, including crowding, spacing, and narrow dental arches. Aiding in treatment engagement for those younger patients, Invisalign Stickables are innovative accessories designed exclusively for use with a patented SmartTrac material in Invisalign Clear systems. Available in an array of designs, colors, shapes, and themes, Invisalign Stickables are a fun way for patients to show their personal style during Invisalign treatment. During the quarter, we also hosted a successful virtual edition of GP Growth Summit attended by over 1,200 doctors from the EMEA region. For APAC, Q2 volumes were up sequentially 4.8% and 50% on a year-over-year basis, reflecting growth across the region, led by Japan, China, and ANZ. despite new and extended COVID restrictions in several APAC markets. APAC performance reflects strength in GP channel with increased Invisalign submitters, especially in Japan, which continues to deliver strong growth. During the quarter, we hosted our China Forum, attended by over 1,500 doctors from private clinics, our APAC Virtual Symposium, attended by 1,400 doctors, as well as the China Public Hospital Forum in June. Our consumer marketing is focused on educating consumers about the Invisalign system, and driving that demand to Invisalign doctors' offices, ultimately capitalizing on the massive market opportunity to transform 500 million smiles. We have provided many of our key metrics that show increased activity and engagement with the Invisalign brand in our Q2 quarterly presentation slides available on aligntech.com. In Q2, we launched the Next Generation of Invis-Is multi-touch campaign, driving reach and awareness with adult, mom, and teen consumers yielding more than 200% growth in visitors globally to our websites and more than 82% increase in searches for an Invisalign-trained doctor. Leading with the Invis is not your parents' braces campaign, we connected with teens utilizing digital media such as YouTube, Twitch, and social media. We also continue with our Invisalign Changemakers program that celebrated and recognized teens driving change in their communities, which was covered by multiple media outlets such as Elite Daily, Refinery29, Yahoo, Unwind Hollywood Life, She Knows, J14, Yahoo Finance, Parents.com, Glamour, and New Beauty, and generated more than 600 million impressions. In the major region, our new marketing campaign to drive engagement and this is a powerful thing went live in the UK, Germany, and France during the quarter, resulting in more than 170% year-over-year increase in unique visitors, and 136% year-over-year increase in doctor locator searches. We will continue to roll out the campaign to additional markets in the region during the third quarter. We continue to expand our consumer advertising in the APAC region in Australia, Japan, and China, and saw more than an 800% increase in consumer engagement and 55% year-over-year increase in leads. Lastly, we continue to build strong relationship with global search and social media giants like Google, Snapchat, TikTok, in order to further leverage our best-in-class consumer demand programs more effectively globally. These partners recognize the power of the Invisalign brand and are helping us to amplify and gain efficiencies from our investments. For our systems and services business, G2 revenues were up 20% sequentially and up 214% year-over-year, reflecting strong scanner shipments and services. This represents the fourth consecutive quarter of sequential revenue growth. The ITERA Element 5D Plus imaging system continues to gain traction across all regions with strong adoption with new customers in the APAC and EMEA regions and with existing customers in the Americas region. In APAC, the ITERA Element 2 inter-world scanner did well during the quarter, helping to transform digital workflows and chair-side consults for doctors. During the quarter, we announced a new ITERA workflow 2.0 software and previewed auto-upload functionality in the ITERA Element 5D imaging system. The iTero Workflow 2.0 software advanced features include faster scanning, improved visualization, and enhanced patient communication tools. We'll roll it out regionally in all markets where the iTero Element Plus imaging systems are sold. The iTero Element 5D imaging system auto-upload feature will eliminate steps in streamlined and Invisalign case submissions with interaural color scan images that can be used in place of traditional interaural photos. The auto-upload functionality is scheduled for release during the third quarter of 2021. There's great symmetry between systems and services business with clear aligner business reflected in the positive correlation between the deployment of scanners and the increased utilization of Invisalign clear aligners. In terms of digital scans used for Invisalign case submissions, total digital scans in Q2 increased to 82.2% from 78.5% in Q2 last year. International scans increased to 76.2%, up from 72% in the same quarter last year. For the Americas, 86.6% of cases were submitted digitally, compared to 86% a year ago. Cumulatively, over 40.1 million orthodontic scans and 8.4 million restorative scans have been performed with iTero scanners. I'm also pleased to share that Align received regulatory approval for the iTero 5D Plus series in Japan on July 1st, with a formal launch event planned for August. Turning to ExoCAD. During the quarter, ExoCAD launched the Creator Center, the new ExoCAD one-stop shop for online and in-person educational events, with a database consisting of 35 educational webinars showcasing the highlights and add-on features of ExoCAD software solutions DentalCAD Galway 3.0, Exoplan 3.0 Galway. More than 2,500 users and distributors have been trained on the new software releases worldwide. ExoCAD has also expanded their market coverage with a new global OEM partner, Avoclar, Vivident, or we call IV, one of the largest manufacturers in the dental industry. This strategic collaboration will give ExoCAD access to thousands of new IV users worldwide. will also provide ExoCAD users with access to production processes with removable prosthetics in the future. Earlier this month, ExoCAD has released PartialCAD 3.0 Galway, its module for removable partial dental frameworks, which has new and advanced features for the design of high-quality partial dentures. This new release enhances digital CAD-CAM possibilities for ExoCAD users and dental technicians by providing simpler design solutions for complex cases. PartialCAD 3.0 GAUA provides both experts and new users with smooth, improved integration with DentalCAD, ExoCAD's leading software for dental laboratories. Bringing the iTero and ExoCAD businesses together makes us more viable within the GP segment and more relevant in day-to-day comprehensive dentistry for our customers. The combination of Invisalign clear aligners and iTero scanners have long provided a seamless workflow for orthodontic treatment. The integration of ExoCAD's expertise in restorative dentistry and implantology, guided surgery and smile design takes the aligned technical portfolio beyond our established footprint in orthodontics to ortho-restorative and restorative treatment and paves the way for new cross-disciplinary workflows that span from visualization and treatment planning to lab production to chair size. ExoCAD also broadens aligned platform reach in digital dentistry with over 200 partners and more than 40,000 licenses installed worldwide. With that, I'll now turn the call over to John.

Thanks, Joe. Let me begin by reminding everyone that for Align and many companies, Q2 2020 was significantly impacted by COVID-19. Business disruptions and comparisons of our results for Q2 2021 should be considered accordingly. Now for our Q2 financial results. Total revenues for the second quarter funding quarter a year ago. For clear aligners, Q2 revenues of $841 million were up 11.6% sequentially and up 181.9% year-over-year, reflecting Invisalign volume growth in most geographies. In Q2, we shipped a record 665.6 thousand Invisalign cases, an increase of 11.7% sequentially and 200% year-over-year. In addition, we shipped a record 83.5 thousand Invisalign doctors worldwide, of which approximately 7.2 thousand were first-time customers. Q2 clear line of revenues reflects strong growth across the Invisalign portfolio for both comprehensive and non-comprehensive products. Q2 comprehensive volume increased 11.4% sequentially and 181.9% year-over-year. And Q2 non-comprehensive volume increased 12.3% sequentially, driven by strength in Invisalign Moderate and Invisalign Go, and up 251.7% year-over-year. Q2 adult patients increased 12.6% sequentially and 220.4% year over year. In Q2, teens or younger patients increased 9.5% sequentially and 156.3% year over year. Clear aligner revenues were unfavorably impacted by foreign exchange of approximately $3.4 million or approximately 0.5 points sequentially. On a year over year basis, clear aligner revenues were favorably impacted by foreign exchange approximately 12.3 points. For Q2, Invisalign comprehensive ASBs decrease sequentially and year-over-year. On a sequential basis, Invisalign comprehensive ASBs reflect higher discounts, credits, and foreign exchange, partially offset by regional mix. On a year-over-year basis, comprehensive ASBs reflect the increase in net revenue deferrals for new Invisalign cases versus additional aligner shipments partially offset by foreign exchange. Recall, Q2 2020, ASPs increased as a result of more additional shipments of aligner shipments as doctors were focused on maintaining treatment progress for existing Invisalign patients. This trend reversed itself after practices reopened in Q3 and demand for new cases ramped up significantly. Q2 Invisalign non-comprehensive ASPs increased sequentially. non-comprehensive ASPs reflect lower discounts, partially offset by foreign exchange. On a year-over-year basis, Invisalign non-comprehensive ASPs were favorably impacted by foreign exchange, offset by higher mix of new Invisalign cases versus additional aligner shipments. Clear aligner deferred revenues on the balance sheet increased $101 million sequentially and $337 million year-over-year and will be recognized as the additional aligners are up 20% sequentially and up 214.7% year-over-year. The increase sequentially and year-over-year can be attributed to increased scanner shipments, higher ASP, and increased services revenue for our larger installed base. Our systems and services deferred revenue on the balance sheet was up 22% sequentially and up 135% year-over-year. and the deferral of service revenues, which will be recognized radically over the service period. Moving on to gross margin, second quarter gross margin was 75%, down 0.6 points sequentially and up 11.4 points year over year. On a non-GAAP basis, excluding stock-based compensation and amortization of intangibles related to our ExoCAD acquisition, overall gross margin was 75.4%. for the second quarter, down 0.7 points sequentially and up 11 points year-over-year. Overall gross margin was favorably impacted by approximately 1.1 points on a year-over-year basis due to foreign exchange and relative unchanged sequentially. Clear aligner gross margin for the second quarter was 76.9%, down 0.7 points sequentially due to higher freight costs and slightly lower ASPs. Clearulina gross margin was 12.4 points year-over-year due to increased manufacturing efficiencies from higher production volumes, partially offset by lower ASPs. Systems and services gross margin for the second quarter was a record 65.9 percent, up 0.5 points sequentially, primarily due to higher ASPs, partially offset by manufacturing variances and higher freight costs. Systems and services gross margin was up 6.6 points year-over-year due to higher ASPs and services revenues, in addition to improved manufacturing efficiencies from higher production volumes partially offset by higher freight costs. Q2 operating expenses were $489.6 million, up sequentially 8.4% and up 64.7% year-over-year. The sequential increase in operating expenses is due to increased consumer marketing spend increased compensation related to additional headcount and higher commissions, and other general and administrative costs. Year over year, operating expenses increased by $192.3 million, reflecting our continued investment in marketing and sales, NR&D activities, and investments commensurate with business growth. On an on-gap basis, which includes stock-based compensation and amortization of intangibles related to our exportation, Operating expenses were $461.2 million, up sequentially 8.6%, and up 73.6% year-over-year due to the reasons described above. Our second quarter operating income of $268.9 million resulted in an operating margin of 26.6%, up 1.4 points versus prior quarter, and up 47.3 points year-over-year. The sequential increase in operating margin was attributed primarily to operational leverage. The year-over-year increase in operating margin was primarily attributed to higher gross margin and operating leverage, as well as a favorable impact from foreign exchange by approximately 1.8 points. On a non-GAAP basis, which excludes stock-based compensation and amortization of intangibles, operating margin for the second quarter was 29.8 percent, up 1.2 points sequentially and up 40.8 points year-over-year. Interest and other income and expense net for the second quarter was a loss of 0.1 million down sequentially by $36.3 million, primarily due to the SDC arbitration award gain recorded in the first quarter. With regards to the second quarter tax provision, our GAAP tax rate was 25.7 percent, which was higher than the prior quarter rate of 23.4 percent, primarily due to lower excess tax benefits from stock-based compensation. Our GAAP tax rate was lower than the same quarter last year, which was 44.2 at lower rates. The second quarter tax rate on a non-GAAP basis was 19.5% compared to 20.2% in the prior quarter and 27.8% in the prior year. The second quarter non-GAAP tax rate was lower than the prior quarter and the second quarter of the prior year rates due to foreign income tax at lower rates. Second quarter net income per diluted share was $2.51, flat sequentially and up $3.03 compared to the prior year. On a non-GAAP basis, net income per diluted share was $3.04 for the second quarter, up $0.55 sequentially and up $3.39 year-over-year. Moving on to the balance sheet. As of June 30, 2020, cash and cash equivalents were $1.1 billion, flat sequentially. Of our $1.1 billion of cash and cash equivalents, $551 million was held in the U.S., and $535.3 million was held by our international entities. Q2 accounts receivable balance was $808.1 million, up approximately $12.4 Our overall day sales outstanding was 72 days, flat sequentially and down approximately 49.1 days as compared to Q2 last year. Cash flow from operations for the second quarter was $317.5 million. Capital expenditures for the second quarter were $124.2 million, primarily related to our continued investment in increasing the liner capacity and facilities. Free cash flow, defined as cash flow from operation, less capital expenditures, amounted to $193.3 million. We also have $300 million available under our revolving line of credit. Under our $1 billion repurchase program announced in May 2021, we have $900 million remaining available for repurchase of our common stocks. Now let me turn to our outlook and the factors that inform our view for the remainder of the year. Overall, we are very pleased with our second quarter results and our continued strong performance across regions, customer channels, and products. While there continues to be uncertainty around the pandemic and increasing restrictions related to COVID-19 in certain geographies, we are continuing to invest in our strategic growth initiatives, including sales, marketing, innovation, and manufacturing capacity to drive demand and conversion globally and are confident in our competitive position and ability to execute. At the same time, we are also anticipating more pronounced summer seasonality across all regions than we have experienced in recent years, as doctors, their staff, and patients take long overdue vacations. Notwithstanding seasonality, given our strong performance and continued confidence in the huge market opportunity, our industry leadership and our ability to execute, we are increasing our 2021 revenue guidance provided in April on the Q1 21 earnings call to a range of $3.85 billion to $3.95 billion. Additionally, we now expect our second half year-over-year revenue growth rate to be above the midpoint of our long-term operating model target of 20% to 30%. On a GAAP basis, we now anticipate our 2021 operating margin to be better than our prior guidance, in the range of 24 to 25 percent. On a non-GAAP basis, we expect the 2021 operating margin to be approximately three points higher than our GAAP operating margin, after excluding stock-based compensation and intangible amortization. In addition, during 2021, we expect to repurchase up to $75 million of our common stock through either a combination of open market repurchases or an accelerated stock repurchase agreement. For 2021, we expect our investments in capital expenditures to be approximately $500 million. Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity to support our international includes our planned investment in a new manufacturing facility in Poland, our first one in the EMEA region. With that, I'll turn it back over to Joe for final comments. Joe?

Thanks, John. Q2 is a terrific quarter. We're very pleased with the improvements we're seeing in recovering doctor practices. We truly value their increasing adoption of digital treatment approaches, their confidence in the unique aligned digital platform that spans from iTero to the world's most sophisticated treatment planning, the world's largest 3D printing business on the globe, to a patient app worth over 1 million consumers, along with the world's most recognized orthodontic brand, has driven strong performance across the business. Our performance over the last year confirms the incredible size of our target market and demonstrates that our strategy and investments in recent years have helped further solidify our competitive positions. We have numerous growth drivers and a vastly underpaid and traded market. And while we continue to see some lasting impact and continued uncertainty due to COVID, we remain confident in both the enormous opportunity we have to lead the evolution of digital orthodontics and comprehensive dentistry with our doctor customers and in our ability to execute our strategy to increase adoption of Invisalign treatment globally. We're also confident in and excited about the benefits of digital treatment that more and more doctors are experiencing by transforming their practices with Invisalign, digital orthodontics, and Itero scanners for chair-side treatment planning and visualization. In fact, Invisalign treatment requires, on an average, 30% fewer doctor visits than fixed appliances, creating efficiency gains for the doctors and a better patient experience. And 85% of orthodontists surveyed agreed that adopting the aligned digital platform have made a huge difference in their practices. It provides ways to improve their efficiency and productivity. I look forward to updating you at the GP Summit and Investor Day in October in Las Vegas and sharing more examples of how Align is helping doctors transform their practices and their approach to treatment. Now I'll turn the call over to the operator for questions. Operator.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Nathan Rich with Goldman Sachs. Please state your question.

Hi, good afternoon. Thanks for the questions. Joe, I wanted to start with the increased guidance and the expectations around the back half of the year being at the high end of the long-term range. I guess several of the factors that you highlighted on the call, you know, the growth in new customers, the strong ITERO placements, those have all historically been good leading indicators of growth in Invisalign. It also sounds like you're seeing better uptake from the DSO channels. That's obviously an opportunity that you guys have been going after for a long time. So I guess at this point, you know, does that change how you're thinking about what the right target is for top-line growth kind of next year within the long-term range that you have?

Hey, Nathan. Look, I think you cited, you know, really well what we're seeing right now, what we're experiencing overall. And we are calling strong growth, you know, for the second half of this year. But You know, look, our revenue guidance is for long-term for the business is 20% to 30%, and we continue to work within those boundaries. So we're not prepared to change that at the moment. John, any thoughts on your end?

No, that's exactly. We feel good about what we're seeing in the marketplace, and our guide reflects that.

Appreciate that. And then, John, maybe a follow-up for you. maybe go into a little bit more detail around your comments on the more pronounced summer seasonality, just how that impacts your expectations for the sequential growth we're likely to see in 3Q and 4Q of this year, maybe versus what you would expect in a normal year?

Well, as we know, I mean, there's a summer period where people take vacations, holidays, and so on, and EMEA and other places, and we expect And I think what we see in our own lives is you take longer weekends or maybe more pronounced vacations, people doing things in advance of shutdowns or lockdowns that might happen, and I think we're just being reflective of that but really looking at all the variables that we normally see and talking to what we expect for the second half, which is to the upper point or upper side of our midpoint on a year-over-year basis.

All right, thanks for the questions.

Our next question comes from John Block with Stifle. Please go ahead.

Hi, John. Hey, Joe. Good afternoon, guys. I think, Joe, I'll start with you with the first one. I think it was 5.3 North American GP utilization number was huge, and I think we all waited for a while to get to four. Now it's worth a five. Just talk to us on what that is. I mean, I'm assuming it's what? It's more scanners? Is it also just increased utilization with even those that have had the scanner for some time? Would love some color, and maybe just more importantly, is that five handle on the North American GP utilization, do you view that as sustainable going forward? And then I've got to follow up.

Hey, John, I consider everything we do has more than a single variable to it. And that's the platform that we work with, which you know as well as anybody. But I'd say, yes, scanners serve that very well. Our increased advertising helps to drive that, too. It brings more patients to the GPs. You know, and thirdly, new products like Working iGo and different derivatives of that product line that are very efficient for GPs to use, and it gives them a huge amount of confidence in our product line when they use it, John. So it's a combination of our brand. It's a combination of digital platform with iTero. It's a combination of product piece. And then You know, we don't talk about it a lot, but we split our sales force, you know, years ago. And we have a specific focused sales force on GPs. And the GPs speak a different language, John. It's different than orthodontists altogether. And that team has been incredibly effective in being able to work with doctors, how they can integrate Invisalign into their workflow, and, you know, from a restorative standpoint, how you use this proactively. So, you know, I'm confident. That's a great market force. We know that 500 million patients we talk about globally. sits broadly in that segment. But you need a different kind of a product approach, a different sales approach, and a strong platform geared for those guys to keep that going. And we feel good about it.

Thanks. Yeah, and actually, you brought up an interesting point. I think that the sales force forces, I believe, bifurcated international more recently in North America. So I guess we're starting to see that come through. Second question, John, just let me try to be as detailed as possible. So you've got solid 2Q21 sales upside that you just reported. Then you raise the back part of the year from roughly 25% year-over-year revenue midpoint growth to closer to 27%, yet you call out some more pronounced summer seasonality. And those seem at odds with one another. So can you just reconcile those two data points? In other words, you're alluding to more seasonality, yet you just took up the forecast in the back part of the year, even in the face of that. So any color would be great.

I think it really reflects the timing between quarters and kind of, as you said, looking at the second half in a way, not knowing how vacations and holidays and lockdowns potential might play out, but looking at it in totality and kind of looking at it from a second-half standpoint.

Thanks, guys. Thanks, John.

Our next question comes from Jason Bednar with Piper Sandler. Please state your question.

Yeah. Hey, everyone. Good afternoon. Congrats on another strong quarter here. Joe, I wanted to follow up on Nathan's question there. You can go back to the first one. Maybe if you can unpack a bit further, you know, what you're seeing here as we look ahead to the next couple of quarters, especially now that we've lapped the easiest of your comps. Your guide here would suggest momentum is strong across the business. But the key question I keep getting from investors is really, how that adult consumer in the second half of the year and then into 22, how they're going to respond. The question, I guess, for you is just how you're seeing the adult consumer respond in your various geographies as economies have opened back up and as we start staring down some tougher comps on the adult side that I've got to follow up.

Well, you know, I think, Jason, what we see with adults, and we see this really all over the globe, is We obviously had a big uptake from an adult standpoint, but you can see our team numbers up pretty substantially, too, at the same time. So there's a good balance. The previous question that John asked, too, with GPs, it comes into broadly an adult segment and that segment also. And, you know, my explanation in the sense of why we've been effective in that segment, we think we can continue to be, helps to contribute to that. Now, when we talk about, you know, third quarter and seasonality or John's talking about whatever, A lot of that is around adult patients and vacations and different things, too, and it affects different parts of the organization and how we go to market. But in general, we just feel good about the direction of the business, the signal and words that we're getting from our doctors and what they're explaining they're seeing out there, and that's all incorporated into what we've been forecasting for you. And, you know, the one thing to never forget about, too, Jason, is the size of this marketplace. You know, we talk about 500 million patients, and I know you hear from a lot of other companies in different industries about oversize, SIMS, and whatever. This is true, and if anything should have shown, like I mentioned in my closing comments, that this market is as big as we talk about being, is what you've seen from this business over the last year, and in the adult segment of that part, too, which is a big part of that 500 million patients that we talk about.

All right, that's all for Joe. And then just looking at least relative to our model in the quarter, it looks like most of the outperformance or disproportionate amount came from the Americas. I'm sure that's U.S., but also maybe Brazil. And you've made some pretty strong comments in the past on what Brazil could do for your business in a pretty short window of time. So just wondering if you could update us here on where you're at with expansion in Brazil, maybe how much that market in particular is contributing to sequential case growth.

Yeah, no statistics for it. Brazil continues to be strong. I think you know it's a big aesthetic market. It's one of the biggest aesthetic markets in the world. It parallels Iberia in a lot of ways, how we have to go in there and move We're primarily in the orthodontic segment there and not in the GP segment right now and how we've done it. And it's a different market that way because orthos play in a much more broader sense in that country than what we do here. But we have a very experienced team there. We funded it well. I feel good about our position from a product standpoint and Itero scanners. And, you know, it's a big market for us. And don't just think about Brazil, too. Latin America in general has been a big expanding market for us. So Brazil leads because of the size, population, and the studies we talked about. But, you know, overall, our Latam market is extremely strong, and we're well positioned there. John, any thoughts on that? I think we covered it.

All right.

Thanks, guys.

All right, Jason.

Thanks.

Our next question comes from Aaron Wright with Credit Suisse.

Please go ahead. Okay, great. Sticking with that international topic, can you speak to the growth in the quarter in Asia-Pac and what you're seeing across that market? Are you still seeing some COVID-related lingering headwinds there? And can you speak to some of the competitive landscape dynamics as well? And then also your efforts in terms of expanding the consumer advertising effort across that geography as well. Thanks.

Hey, Aaron. This is John. I can address the start of that. Look, APAC is an important region for us, a huge market opportunity. We've invested, as we've talked about, with manufacturing and treatment planning and other places. We recently have added some advertising, additional advertising in APAC, and we see great results where there's a lot of interest, a lot of awareness that it drives. People come to our website and look for doctors and so on, and we think that translates effectively very well. We're very happy with the quarter for Q2. You know, you do have pockets of areas where there's more of a COVID impact, Southeast Asia, parts of China, other areas that we're always mindful of. But when we look at the investments we're making, the return that we're getting from those investments, we feel really good about APEC.

Okay. And then how should we be thinking about the quarterly progression of the gross margin from here and the run rate going forward? Is this Is there anything to call out in terms of NICs or ASPs or some of those seasonal dynamics you were talking about that we should be thinking about as we think about the third and the fourth quarter gross margin trend? Thanks.

Nothing of major note, Erin. I mean, you know, we've seen that, you know, as we... you know, drive utilization, have more coming through our factories is very productive for us. We're very mindful of the tradeoffs that affect our margin, and you're seeing that come through. So as we look at some of the investments that we're making, how we're going to market, products that we have, how we view things, there's nothing that should be too different than what we've seen from a gross margin standpoint.

Okay, great. Thank you.

Thanks, Sarah.

Our next question comes from Jeff Johnson with Lovett W. Barden Co. Please go ahead. Thank you.

Good afternoon. Hey, Joe. How are you? A couple questions here, I guess. One, on the seasonality, again, I hate to keep harping on that. You know, typically by this point, late July, you guys now know July numbers. You probably know pretty much what's lined up for August, given cases that are in treatment planning phase right now. So are the seasonality comments driven by something you're seeing so far in the numbers? Is it something that you're just expecting could come in late in the quarter? Is it focused on the adult side? Just kind of any more color there would be helpful as well.

Hey, Jeff, it's based on our experience with the season. I think you know, you've been following our business long enough. Third quarter is a real transition quarter from a vacation standpoint. Teams coming in here, European vacations, which are really big. And our comments are just reflecting what we're hearing from our customer base, our doctor bases, not just in the United States, but all over the world. And we're just trying to share that with you. But at the same time, the guidance that we've taken up, you have to remember we're at the upper end of our growth model. And um, for the second half. And when you think about it, we had two real strong quarters last year, Jeff, third, fourth quarter. So it's just a lot, a lot of confidence in, in what we see and what we feel.

Yeah. Understood. And then on ASPs, John, maybe for you, uh, You know, it sounds like some of the rebating or some of the promotional activity, I guess I should say, maybe has stepped down just a little bit. Obviously, you were running some bigger trade-in programs in that late last year and the early part of this year. Is that an opportunity then for ASPs to float a little bit higher into the back half in next year? Or does, you know, do other promotions... pop up and just think about ASPs kind of straight lining from here. Thanks.

Yeah, I would say the latter. I mean, look, there's always promotions that we're running to drive that right utilization and you try to find that right mix. And what we talk about, and I think everybody gets, is it has to translate to gross margin. And we feel good about the gross margin that it's ultimately driving and our out margin that it brings to our bottom line. So There'll be some tradeoffs, but I don't expect too much of a change, you know, in ASB. And the way we've looked at it, and just because some grow faster than others, you know, look at it from a comprehensive standpoint versus a non-comprehensive standpoint to be relatively stable.

Yeah, understood. Thanks, guys.

All right, John.

Our next question comes from John Krieger with William Blair. Please go ahead.

Hi, John. Hey, guys. Thanks much. Maybe just one more follow-up. I would assume the seasonality comment is mainly sort of one about adults, but curious if you've got any thoughts on how the teen season might differ this year. Is it shaping up to be sort of a normal year as we assume schools are open again, or maybe more spread evenly across the second half?

I think you look at it, John, just from the standpoint that there are unknowns around COVID and vacations and other things. COVID is one of them. Some places we hear, some of the countries and regions, schools are going to open up earlier. Some are saying that it's later. We're just trying to be mindful that there's going to be changes that happen to this and try to give as much information about that as possible.

Great. Thanks, John. Then maybe one follow-up on ASP. It seemed like the year-over-year trend was different in comprehensive versus non-comprehensive. Could you just explain that again? Why would the comprehensive change have been greater than a non-comprehensive? And when you think about that metric longer term, do you assume the trajectory is similar across those two buckets or not?

Yeah, the biggest change from last year to this year is really around the additional treatment that doctors were providing. So remember last year, they didn't have as many new patients coming in, but they were still keeping existing patients along in treatment. And it doesn't count as a new case. It really just counts as additional revenue, and therefore ASVs are higher as a result of that. Conversely, as now they focus more on primary cases and new patients coming in, we see that shift. We saw that shift really started in the third quarter of last year. It's kind of progressed relatively steady from third quarter on. And that's kind of how we think of it. It's not a promotional change or there's nothing of that nature. It's really more just on how we're recognizing revenue between a primary shipment and then an additional treatment that a doctor provides. Okay, makes sense.

Thank you.

Thanks, John.

Our next question comes from Elizabeth Anderson with Evercore. Please go ahead.

Hi, guys. Thanks so much for the questions. Hey, so my question is, in terms of the second quarter, could you talk about how you saw volumes progressing maybe in the U.S. across the three months?

I think when we look at Elizabeth and John, you know, we saw strength across our business. We're, you know, not going to get into kind of month by month, but we I think what we saw and you saw in the print for second quarter, very strong across geographies, products, and so on. And, you know, what we're seeing is a reflection of that with our guidance.

Okay, that makes sense. And then turning to the cash flow, I appreciate the capex increase this year is largely a function of the new facility in Poland. Is that something that sort of should continue on at that kind of pace going forward, or do you see kind of all of that wrapped up in this year's expense and then we should go back to sort of more normalized levels afterwards?

Yeah, I think what you'll see with kind of the convergence of what we have now, we have a lot of capacity that we're adding to meet the demand in the markets that we have, and you have that unique event with Poland kind of going on from a land purchase, building, and equipment that goes in. So this year will be a little bit heavy from that standpoint, and then going forward it should just be more about the expansion and growth that way, but not as much as this year with the building as well.

You know, Elizabeth, I just, Joe, you're thinking about, you know, we're talking about 200% growth rates, right? And now, you know, we're talking about growth rates on the upper end of what our, you know, revenue models we've given to you guys. So it requires capacity in that kind of investment, and it's a good question. But like John said, you know, we hit it hard this year, built some more capacity, and this will lay in over time.

Yeah, no, that certainly makes sense, especially as you have to build it ahead of the growth. So thank you.

Our next question comes from Liza Garcia with Wolf Research. Please go ahead.

Hi, guys. Can you hear me all right? Yeah, we can hear you fine. So I guess just digging into kind of how you're thinking about the exoskeleton expansion with the ibuprofen. and kind of how you see the opportunity building there. You've mentioned a couple of things, but also, should we view this kind of as like a first move for ExoCAD and going forward, the strategy into more CAD camps?

Yeah, you know, that's a good question, right? When you think about, we talk about the GP segment, we talk about ortho-restorative, and I think most people, if you study this, you know that ExoCAD is one of the few companies out there that actually offers a digital type of restorative platform for dentists all around the world. Our vision for our business is we've become a big part of restorative and saving enamel and moving teeth before you actually do implants and you do different things. And that's what we think is the revolution of orthodontics because that wasn't a tool that was really used before. And so Exocad and Itero plug in really well behind that. Never forget that our strategy is always about selling more Invisalign. That's what ExoCAD's about, that's what iTero's about too, but they also have to have credibility as units in those segments. And that's when we talk about what we're doing with ExoCAD and iTero, we're expanding that technology, but always with the thought of how we can be more effective and more restorative. John actually runs the business, I'll let him talk about it.

I think you summarized it well. It's been just over a year, we're very pleased with how the business stands. as it stands alone, and then the technical and commercial integration that's been going on. And we see more and more synergies and feel good about the digital platform that this helps us move forward. So more to come on this, but after a year, we're very pleased.

Great. Awesome. And then I was just wondering if you were hearing any indications from your customers about staffing as a potential issue that's kind of limiting their availability anywhere. It doesn't, obviously the report doesn't certainly seem that way, but channel checks have kind of indicated some more limited staffing.

Yeah, and as Joe again, I think I wouldn't call it a hindrance right now. They have to pay more to find these people. There is concern out there in the sense of, you know, how much people have to pay to bring them in. But we haven't had that as an excuse of doctors saying, I can't do more cases because I can't find staff. It's just harder to spend more time doing it.

The one thing that you do hear, and it's just the reality when we talk about some of that, people take vacations. There's doctors on vacation as well as staff and patients, so they might fall into that bucket as well to limit some of that staff at their offices.

Great. Thanks so much.

Our next question comes from Richard Newider with SVB Lear Inc. Please go ahead.

Jamie Crosbie- Hey guys, it's Jamie on for rich quick question for me on team, obviously our checks specifically within the ortho channel have been Jamie Crosbie- Very bullish over the last couple of months. And, you know, now with it representing greater than a third of total case. Jamie Crosbie- Shift. Is it fair to say now that teen adoption is finally hitting that inflection point in the US, and if not, kind of, what are some of the things that you think still need to happen to really start to take on this sort of viewpoint.

It's Joe. Look, this is not a tipping point, as you referred to it. It's been a ground war, actually. And that ground war has basically started with product viability. And obviously with Invisalign first and mandibular advancement and some of our other innovations that we've had, we've really opened up that segment and made it available to us, too. Now the work is primarily with orthodontists to make them confident that they can service these teens, not just clinically, but from a business standpoint also. That's why our programs like ADAPT and different things we put into place. And remember, the war here is not against other clear liner companies. It's about braces and fixed appliances, and that's what we really have to break through and get done. And honestly, orthodontists just have to be comfortable not clinically, but also from a business standpoint. And I feel like we're making progress in educating teens and educating moms, but on the other end, educating orthodontists to how they can properly do this clinically and also be efficient in their practices in doing it. And that's the groundwork part. I feel we're well positioned, and obviously our numbers say we're making progress. But we're not declaring victory here at all.

Got it. And then just one follow up back to kind of some of the more pronounced summer seasonality. If I look back kind of through 2017 through 2019, it seems like you guys have seen anywhere from, you know, flat to maybe mid single digit sequential improvement. Consensus is currently standing at something that would imply a decline. So is there any reason to be thinking that it shouldn't at least fall within the bounds of a zero, a flat to mid single digit improvement versus, you know, what consensus is, currently implying which would be a decline, just trying to get better calibration there.

Yeah, David, this is John. Look, we're trying to give you color to the second half, kind of, you know, because it's implied in our total year, and you can kind of defer what, you know, kind of infer what that means from third quarter and fourth quarter, but just trying to give you as much color without giving quarterly guidance is all that has been.

Okay, thanks.

Thanks, James.

Our next question comes from Michael Ryskin with Bank of America. Please go ahead.

Hey, guys. Hey, dude. Congrats on the quarter on the guide raise. I want to ask first on the, I guess for John, on the operating margin, especially on the non-GAAP side. Had another really good quarter there, and you bumped the guide a little bit, but you still sort of, you know, your outlook for the second half still implies a pretty decent step down in operating margins. So I'm just wondering... What's going on there? Is there any incremental spend that you're budgeting? And just in general, sort of expand on that. Can you talk a little bit about consumer marketing spend? How are those costs trending? How's the return on that going?

Yeah, it's a good question. I mean, look, we're very pleased with our out margin that we've seen through the first half. As you noted, very strong performance, a reflection of a lot of the investments that we made and we continue to make to help grow our business. And we look at the second half as continuing these investments to expand from a sales and marketing standpoint. There's some, you know, the operating costs that we have to be able to grow our business like we have. It reflects those investments, and we're trying to continue to position ourselves so that we continue momentum and be able to start next year with that momentum. So it's really more of a reflection of that, and obviously as we go through the second half, we'll update on what that means for margin.

Okay. And then on the gross margin line, again, you've got the manufacturing facility in China. You're talking about the plant in Poland. up in 2022. Could you give us an update, a reminder of how we should think about progression there in terms of shifting some of the manufacturing there and how that should work its way through the gross margin lines? When do those plants reach more or less full capacity and you work through the ramp up there?

Yeah, you're right. You know, when we go live, there is, you know, until you get that capacity up, and we're really, you know, we know how to do that manufacturing. We've learned as we've gone through some of the China facility wrap-up, that'll get applied to how we wrap up in Poland. We'll move doctors over kind of country by country and wrap things up. That'll happen in the first half next year, but very mindful of what it means from a margin standpoint and do everything we can to minimize that gap. you know, inefficiency that you have when you first start up and be able to get those facilities up and running at near 100% capacity.

Yeah, you know, and one of the things that John knows better than me, you know, on this one, Michael, is when we ramped up China, remember, we started with a rental temporary facility that was not even close to scale, and it just pounded our cost. But we just wanted to get in place, get the workflow done. We built a building next to where our area was, then transitioned into it. So, That was a pretty big bump that we took there. We're not anticipating John like the same.

Right. And that happened, Michael, when we kind of quietly went live in Q2 of last year with that new Greenfield facility. And it's all about running that factory with a high utilization, having efficient labor, and the kind of productivity there that we know how to drive. But there is some wrap-up period, but we'll look to that in kind of the first half and then see improvement as we go into the second half.

Okay. Fantastic. Thanks.

Thanks, Michael.

Our next question comes from Ravi Mizra with Berenberg Capital Market. Please go ahead.

Hi, team. How are you doing? Hi. So I guess I have two questions, one more on the R&D side and one on China. So just on the R&D, you know, one of your competitors announced a new polymer. And I think, you know, one of the things that's actually turned up in our checks with Ortho's at least is that SmartTrack gives you an edge. Just curious on your view and whether that's kind of starting to have any sort of impact or is it too early and then how you plan to maybe position yourself to kind of keep ahead of the peers? And then secondly, just around China, I guess it's another kind of competition question with, you know, I guess your largest, but still relatively small competitor going public. How are you kind of viewing that market now with kind of, you know, another, I guess, well-funded competitor out there in terms of the ability to grow the market or kind of go after a potential segment of that market, whether it's the, you know, more luxury focused patient or how are you kind of segmenting the population there? Thanks.

Cameron, on your first question on the new polymer, I remember we do a multi-layer material, so it's various polymers that you put together, and we're balancing the equation between elasticity and overall rigidity or tensile strength. And it's like our other competitors are starting to figure that piece out and see pieces of it. We have strong patents around SmartTrack, and obviously improvement over time. There's a real important part about not just having the right materials, but having the right kind of system in place. And that's the treatment planning part that we talked about, you know, 25 years of understanding how to really activate those aligners and make that plastic actually work through those algorithms. And we don't use a displacement methodology, which is basically building an aligner, you know, that kind of leads things. It actually engages with these things in a different way. So, you know, I expect, you know, more companies to come out and work different polymers or whatever. We have a huge amount of experience with that, but don't forget about the entire system, the algorithms, how it works together. and how it works with attachments, the exactness of those attachments, where you put those attachments, how they're shaped. There's a lot going on there. We feel good about our position, and we'll continue to innovate in that space across all those spectrums, but there's nothing in the competitive marketplace that we're concerned with that would change the trajectory of where we're investing right now. From a China competitive standpoint, obviously, AngelLine, IPO, we watch that closely, and You know, give some clarity to everybody in that marketplace as they IPO-ed and what's going on. And I think you see they're strong in Tier 3 cities. They're strong with public hospitals in different areas. But, look, you know, I feel good about our position in China. You know, our manufacturing is strong. Our training centers there are strong. Our treatment planning is strong. It's close to accounts. You know, good growth, you know, in the quarter overall, good sequential growth, good year-on-year growth. I like our position there. John, anything?

Yeah, I mean, just to add in China, we've been competing in China with various companies since we've been there. So it's nothing new really with the IPO. It's really more of a reflection of this underpenetrated market in China. China is a huge opportunity for clear aligner business. And so we feel very good about our positioning there. Primarily cases are done with wires and brackets. And so this is less about share shifting amongst clear aligner and more about growth in the category.

Yeah. Thanks, Robbie. Thanks, Robbie. Yeah. Well, listen, thank you, everyone, for joining us today. We really appreciate your time. We look forward to speaking to you at upcoming financial conferences and industry meetings, including the International Dental Show in Cologne, Germany, September 22nd through 25th, where we'll be showcasing Align, Exocat Innovations, and a hybrid and multimedia exhibition space through physical and virtual experiences. We'll also be hosting an investor meeting in conjunction with our GP Summit in October in Las Vegas. In Nevada, we'll have that October 29th and 30th, so look for more information. And if you have any additional questions, please follow up with our Investor Relations Department. Thanks and have a great day.

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