Align Technology, Inc.

Greetings. Welcome to the Elan Q122 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the former presentation. Please note this conference will be recorded. I will now turn the conference over to your host, Shirley Stacey with Elan Technology. You may begin.

Thank you. Good afternoon. 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 Marici, CFO. We issued first quarter 2022 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 today by approximately 5.30 p.m. Eastern Time through 5.30 p.m. Eastern Time on May 11th. To access the telephone replay, domestic callers should dial 866-813-9403 with access code 335004. International callers should dial 929-458-6194 using the same access code. 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 form 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 first quarter 2022 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 an overview of our Q1 results and discuss the performance of our two operating segments, systems and services and clear aligners. John will provide more detail on our financial performance and our view for the remainder of the year. Following that, I'll come back and summarize a few key points and open the call to questions. Overall, the first quarter proved to be a tougher than expected operating environment globally, and we believe our results primarily reflect three key factors. The continued impact of COVID-19 waves in every region, and especially in China, with its restrictions and lockdowns under their zero COVID policy. A weaker economic environment and waning consumer confidence driven by increasing inflationary pressures and supply chain disruptions. And the military conflict in the Ukraine and fallout across Europe. In addition, with approximately half our business occurring outside the United States, unfavorable foreign exchange rates negatively impacting our revenues, margins, and EPS. Notwithstanding these headwinds, Q1 2022 is total revenues of $973.2 million were up 8.8% year-over-year compared to Q1 2021 revenues of $894 million with a growth rate of 62% year-over-year. Our Q1 2022 operating income was $198 million and operating margin was 20.4%. In Q1, systems and service revenues were up 15.6% year-over-year but down 24% sequentially coming off our sixth consecutive quarter of sequential growth in record scanner and services revenue. Sequential results primarily reflect lower volumes from our aforementioned headwinds and from seasonality, as Q4 is historically a stronger capital equipment sales quarter. For Q1, clear line of revenues were up 7.5% year over year, reflecting revenue growth across regions and products, and were down slightly sequentially from Q4 at minus 0.7%. In the teen segment, 175,000 teens started treatment with Invisalign aligners, up 6% year-over-year. Invisalign First for kids as young as six years old grew sequentially year-over-year and was strong across all regions. Q1 non-case revenues, which include doctor-prescribed retention products, clinical training and education, and other dental consumables performed well and grew both year-over-year and sequentially. Our doctor subscription plan, or DSP, pilot was launched last year in the United States and Canada, and it continues to ramp nicely, driving strong revenue growth. DSP is a monthly subscription program designed for a segment of experienced Invisalign doctors who are not regularly using our retainers or low-stage aligners. We're very excited about the feedback and uptake we're seeing, and we'll expand the program into other markets this year. Here are just a few things from doctors are saying about DSP. Dr. Drew Ferris in Santa Barbara, California. We have shifted our retention model and workflow. We really like the material, the fit, and the precision of the product, and having everything in aligned systems versus printing in-house and having to maintain it ourselves. Dr. Sandra Tai in Vancouver, Canada. This program fits my business model very well. I'm able to pass savings to patients. Now let's turn to the specifics around the first quarter results, starting with the Americas. For Q1, Invisalign case volumes were down 1.5% year over year. On a sequential basis, America's case volumes were down 4.3%, primarily reflecting the impact from the COVID-19 waves. First experience in North America beginning in Q4-21 and continuing to Q1 and later in Latin America, causing customer staffing shortages and practice closures, as well as decreased patient traffic and increased appointment cancellations. The latest data from the Gage Practice Analysis Tool that collects and consolidates data from about 700 ortho practices covering more than 1,000 orthodontists across 1,600 locations in the United States and Canada showed weakening underlying patient demand trends in the first quarter for both adult and teens and across wires and brackets and clear aligner products. New patient visits were down 7.6% year over year, and ortho starts were down 7.2% year over year. In the DSO channel, in Q1-22, DSO practices grew faster than non-DSO practices, with utilization led by Heartland and Smile Doctors. Earlier this month, we announced a new DSO partnership with Dental Corp, Canada's largest and fastest growing network of dental practices. Dental Corp plans to extend its offering of Invisalign brand clear aligner treatment to Canadians nationwide through its Ortho Acceleration Program. This strategic collaboration also provides Dental Corp's network of doctors across nearly 460 practices with access to enhanced benefits, dedicated learning opportunities, and treatment planning support for the Invisalign system. Also this month, we launched a new Invisalign teen subscription program in the United States and Canada to help unlock the massive opportunity from teen orthodontics, which makes up approximately 75% of the 5 million annual case starts in North America. The teen subscription program enables orthodontists to buy clear aligners and case packs in advance, much like the way they buy wires and brackets today, offering simple and more predictable billing for doctors. It also includes exclusive practice development benefits with the Invisalign brand and requires an incremental volume commitment from doctors. The timing of the new teen program coincides with the beginning of the summer teen season, and we're excited to continue partnering with doctors to grow their practice with Invisalign treatments. With less than 10% share of teen case starts, the teen subscription program has the potential to help accelerate Invisalign adoption in the largest segment of the orthodontic market, teens. For our international business, Q1 Invisalign case volumes were up 3% year over year. On a sequential basis, international case volumes were down 6.1%, primarily reflecting the headwinds described earlier, especially the impact of COVID-19 restrictions and lockdowns in China, and the fallout across Europe from the military conflict in Ukraine. For EMEA, Q1 Invisalign case volumes were up 2.1% year-over-year, with core growth in our core markets led by Italy and Germany and DOC, along with the growth expansion markets led by Turkey and MEA. The Q1 year-over-year Invisalign case volume in EMEA was driven by increased submissions primarily from the orthodontist channel, especially in the teen market. During the quarter, we launched our first-ever Direct-to-Teen campaign in EMEA, focused on educating teens about the benefits of Invisalign treatment over traditional wires and brackets, increasing consumer demand as part of our wider teen growth plan, combined with our Parent of Teen campaign, and to help give teens critical influence in the parent decision by driving peer word of mouth. More recently, we launched the Invisalign Go Express system, the latest addition to the Invisalign Go portfolio for general dentists. First launched in May in 2016 as a 20-stage aligner treatment offering, the Invisalign Go portfolio system is designed for general dentists to treat mild to moderate malinclusions and to integrate tooth alignment into restorative and comprehensive dental care. Additionally, building of our European manufacturing facility in Warclaw, Polar remains on track to go live this quarter, increasing our flexibility and timeliness in supporting our valued doctor customers across the EMEA region. Turning to APAC for Q1, APAC Invisalign case volumes were up 4.7% year over year, with strength in the GP dentist channel, primarily through increased Invisalign submissions with the Invisalign Go product, and in the teen market with increased submissions from the orthodontic channel. On a sequential basis, APAC was down 2.6%, reflecting a larger impact from surges in new COVID-19 cases that led to significant lockdowns in China. Alternatively, despite headwinds, Japan and Taiwan performed well. We had strong growth in emerging markets like Korea, India, and Thailand on a year-over-year basis. Earlier this month, we expanded the Invisalign Clear Aligner product portfolio with new offerings that better serve the expanding market in China. The two new products, Invisalign Adult and Invisalign Standard Clear Aligners, are designed for more specific types of malinclusion cases and private doctors and their patients with a more clinical and affordable options for moderate to complex cases. Invisalign Adult and Invisalign Standard Clear Aligners build on our proven technology for a wider range and scope of malinclusion. During the quarter, we announced new Invisalign innovations for the Align Digital Platform, a proprietary combination of software, systems, and services designed to provide a seamless experience and workflow that integrates and connects all users, doctors, labs, patients, and consumers. These new Invisalign innovations include ClinCheck Live Update, the Invisalign Practice App, Invisalign Personalized Plan, or IPP, Invisalign Smile Architect, and the Combine Computer Tomography, CBCT, integration feature for ClinCheck digital treatment planning software. These innovations will revolutionize digital treatment planning for orthodontics, and restorative dentistry by providing doctors with greater flexibility and real-time treatment plan access and modification capabilities. Each of these innovations is designed to enhance Invisalign treatment planning quality, efficiency, and scale, and contribute to a better doctor-patient experience. More recently, we introduced a new enhancement for the Invisalign System with Mangebular Advancement feature. The Invisalign System with Mangebular Advancement is the only clinically proven clear aligner product in the world today that addresses Class II correction with simultaneous alignment. Using feedback from customers, we've enhanced the original design with new enhanced precision wings that provide increased durability and comfort, as well as great overlap to help ensure the aligners remain seated and properly engaged to more effectively address Class II malinclusions in growing pre-teen and teen patients. Our consumer marketing 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. In Q1, we built on a successful Invis-Is multimedia campaign across the Americas, EMEA, and APAC, driving awareness and interest in Invisalign treatment with adult, teen, and parent consumer segments. Globally, we delivered strong impression volume, with over 23.7 million visits to our websites, with a 1113% year-over-year increase, and over 7.8 billion impressions delivered, representing a 32% year-over-year increase. In the US, we continue to amplify our campaigns across the top social platforms, such as TikTok, Snapchat, Instagram, and YouTube, to increase the awareness of Invisalign brand with young adults and teens. Our campaigns featured collaborations with some of the largest influences in social media, including Charlie D'Amelio, Laina Kandor, Devon Key, Michael Lay, and Josh Richards. Each of these creators shared their personal experiences with Invisalign treatment and why they chose to transform their smiles with Invisalign aligners. To continue growing our young adult business across the Americas and APAC, we built upon our successful Invis is a Powerful Thing campaign which highlights how powerful the smile transformation with Invisalign treatment can be for even young adults' self-confidence. We leverage top influencers like Liana Green, Elena Kandor, and integrated media campaigns. Further, we are expanding our collaboration with influencers globally and are excited to welcome Olympic gold medalist Suni Lee and creators Josh Richard, Chaim Riabro, and Scarlett Estevez, who have chosen to shape their smiles with Invisalign treatment. In the Maya region, we accelerated our media investments across digital media platforms, including YouTube, TikTok, Meta, and Snapchat, and expanded our Invisalign Smile Squad roster with new influencers. Additionally, we launched a pilot in the UK to reach teens with special campaigns to create awareness of the unique benefits of Invisalign treatment. Our consumer campaigns delivered more than 8.8 million unique visitors to our website, representing 170% increase year over year, with over 2.5 billion media impressions. We continue to expand our investment in consumer advertising across the APAC region, including China, resulting in a 278% increase year-over-year in unique visitors and a 265% year-over-year increase in impressions. We continue to strengthen our investments in Australia by expanding our reach via social media platforms such as TikTok, Meta, and YouTube In Japan, we build upon our successful consumer campaigns by expanding into Twitter and continue to see strong response from consumers as evidenced by a 373% increase in unique visitors to our site. For our systems and services business, Q1 revenues were up 15.6% year over year, reflecting strong scanner shipments and services, and down 24.2% sequentially, primarily reflecting lower volumes from the previous mentioned headwinds and capital equipment seasonality. During the quarter, we saw continued adoption of the iTero Element 5D Plus imaging system we launched last year that features innovative technology like near infrared technology that we call NIRI, which aids in the detection and monitoring of interproximal carry lesions or cavities above the gingiva without harmful radiation. A strong indicator of the digital adoption within dental offices is the number of inter-oral scans used for Invisalign case submissions. Total worldwide inter-oral digital scans submitted to start an Invisalign case in Q1 increased to 87.1% from 80.9% in Q1 last year. International inter-oral digital scans for Invisalign case submissions increased to 83%, up from 75% in Q1 last year. For the Americas, 91% of Invisalign cases were submitted using an interaural digital scan compared to 85.5% in Q1 of last year. Cumulatively, over 54.9 million orthodontic scans and over 11.4 million restorative scans had been performed with iTero scanners. During the quarter, the iTero Element 5D Plus won the Best New Imaging, or CAD-CAM, product from DrByCuspid.com, a CUSPI award. The award reflects our commitment to develop innovative solutions that help doctors transform lives by improving patients' journey to a healthy, beautiful smile. We are pleased to share that the iTero Element scanner received an OrthoTown 2021 Townie Choice Award, which seeks to recognize the top peer recommended products and services in dentistry. We're proud that the iTero Element 5D Plus imaging system provides dental practices with the latest in imaging technology cutting edge enhanced chairside visualizations, and applications that can drive practice growth and treatment acceptance. Continued growth in the iTero scanner installed base is driving increased services revenues, as well as ExoCAD CAD-CAM software solutions that integrate workflows to the dental labs and dental practices. Our Q1 ExoCAD CAD-CAM products and services, which include restorative dentistry, implantology, guided surgery, and smile design offerings, are included in scanner and services revenues, and are helping extend our digital dental solutions and broaden Align's digital platform towards fully integrated interdisciplinary end-to-end workflows. As we continue to lead the evolution of digital orthodontics and restorative dentistry, our goal is to make orthodontics a pillar of dentistry. April 2nd marked our second anniversary since welcoming ExoCAD into the Align family, and together we're working to ensure that every dental technician and every dentist planning and restorative treatment considers the benefits of digital orthodontics first. We're continuing to focus on integration and roadmap development to strengthen the Align digital platform by addressing restorative needs that facilitate both ortho-restorative and comprehensive dentistry. Two years after ExoCAD joined Align, we are more excited than ever about the opportunities ahead to shape the dental industry and with technology and expertise that complement the many benefits of the Align digital platform in bringing all key stakeholders together, doctor, customers, labs, partners, and users, as we continue transforming smiles and changing lives. During the quarter, ExoCAD participated in the 2022 Dental South China Show in Guangzhou, China, showcasing its newest software release, DentalCAD 3.0 Galway, plus other open software solutions like innovative smile design program called Smile Creator. The show allowed the ExoCAD team to deepen their relationships with the dental community to discover new trends emerging in the growing dental market in China. Attendees have both experienced and firsthand how ExoCAD's wizard-guided workflows and easy online communication programs streamline the treatment journey from consultation to final restoration. Finally this quarter, ExoCAD is opening its new headquarters in Seoul, South Korea, which provides a robust high-tech infrastructure to a key region of our business, Exocat has been working with a growing number of Korean manufacturers for many years, and this location will help facilitate strategic relationships in the region. With that, I'll now turn over the call to John.