SmileDirectClub, Inc.

Greetings and welcome to the Smile Direct Club third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. The question and answer session will follow the presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Allison Sternberg, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon. Before we begin, let me remind you that this conference call includes forward-looking statements. For additional information on SmileDirectClub, please refer to the company's SEC filings, including the risk factors described therein. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today. I refer you to our Q3 2020 earnings presentation for a description of certain forward-looking statements. We undertake no obligation to update such information except as required by applicable law. In this conference call, we will also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained on our website. We also refer you to this presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures. I am joined on the call today by Chairman and Chief Executive Officer David Katzmann and Chief Financial Officer Kyle Wales. Let me now turn the call over to David.

Thanks, Alison. Good afternoon, and thank you for joining us today. I'm pleased to report that Q3 results exceeded expectations and demonstrate continued execution against our long-term growth and margin targets. Q3 was a pivotal quarter for us, and we're especially pleased to have reached adjusted EBITDA profitability for the quarter while also outperforming our revenue growth expectations. We achieved EBITDA profitability one quarter ahead of plan, and we are now focused on ramping towards our long-term target of 25% to 30% adjusted EBITDA margins over the next several years. Our performance in Q3 was continued validation of the strength of our business model and the power of the competitive moats around our platform. It also demonstrated our continued focus on controlled growth with profitability. We outlined this strategy in Q4 of 2019, and we have been executing against it in the three quarters since, even with the COVID outbreak at the end of Q1. As a reminder, our controlled growth plan is firmly rooted in the integrity of the customer experience, and that is our central focus. As we have cited before, we are still in the early innings of a massive opportunity, and we believe our focus on the customer experience is the most efficient way for us to capture long-term market share. With this strategy, we expect to achieve continued growth into 2021 consistent with our long-term targets, along with profitability as reflected in our Q3 results. We made good progress on this front within the quarter with referrals reaching 23% of all orders, which is up from 21% in Q2. And we also launched our second generation manufacturing in October as planned. Both developments not only reflect meaningful advancement against our customer service ambitions, but also accrue to our margin profile. I would also like to highlight that we continue to see favorable industry dynamics with broader acceptance of telehealth and specifically teledentistry. minimal penetration against our total addressable market, no real competitor that provides an end-to-end vertically integrated platform for the consumer, and clear aligners gaining share in the overall industry. All these are powerful tailwinds that over time will help drive our controlled growth strategy forward off an increasingly efficient cost structure. These are nice tailwinds to have, but they don't change our long-term financial targets. We constructed that plan off of the amount of growth we believe we can achieve while optimizing our club member experience. That may change in the future as we mature as a business, but for now you should expect outperformance as a result of these tailwinds to accrue to more efficient customer acquisition costs versus outperformance against our 20 to 30 percent annualized revenue growth targets. Again, we believe that is the right amount of growth to provide the optimal club member experience based on what we have seen in prior quarters. For today, I'd like to first call out some of the notable highlights from the third quarter, followed by a summary of how we are tracking against our growth and cost initiatives. I will then touch on the regulatory environment before turning it over to Kyle to walk through our financial results and current trends in more detail. Turning to the results within the quarter, in Q3, we shipped roughly 93,000 unique aligner orders, which is 10% over the midpoint of the range that we provided on our Q2 earnings call. ASP came in at $1,794 flat with Q3 2019. Achieved $169 million in total revenue of 57% sequentially and representing 94% of Q3 2019 revenue with a much smaller expense structure. Saw continued strong performance in our SmilePay program with delinquency rates and first-pass credit card authorization rates remaining consistent with past history. generated positive $3 million of adjusted EBITDA for the quarter, a $23 million sequential improvement, and a $48 million improvement year over year. And we attained profitability one quarter ahead of our plan. I would also like to highlight that marketing and selling expenses came in at $67 million, or 40% of net revenue in a quarter, compared to 73% of net revenue in Q3 of 2019. Despite this reduced spend compared to Q3 2019, Approximately 70% of club members who purchased in Q3 were first-time leads. This again validates the sustainability of lower sales and marketing spend to support growth, much like we saw in Q2. While it is extremely difficult to predict the future given our current macro environment, I would like to try to provide some insight into Q4. In Q4, we expect to see unique aligner order shipments of 100,000 and revenue of 180 million, both up 7% sequentially. and tracking well against our long-term targets. This is over 90% of our Q4 2019 revenue, but that was a quarter where we spent 72% of revenue on sales and marketing, and EBITDA was negative $60 million. This year, we expect to continue to see the efficiency in sales and marketing that we saw in Q3, and we also expect to remain profitable. This is a dramatic change in a short period of time and positions us well to continue to execute against our long-term targets. I want to be very clear on this point. We are managing the business to drive towards our long-term financial targets, which include 20% to 30% revenue growth per year with sustained profitability. We are not managing to outsize growth at the price of profitability and the club member experience. Controlled and profitable growth remains our mantra, which will also drive the best club member experience. Now turning to progress against our growth drivers, In addition to our core business, we saw continuing momentum in the quarter across the three growth drivers we have previously discussed. As a reminder, they are expanding our customer acquisition channels, expanding our presence in the team demographic, and continuing our international expansion. On the first initiative, expansion of our acquisition channels, we continue to make good progress here. We've always been agnostic as to how consumers start their journey to purchase aligners. We started with doctor-prescribed impression kits, then smile shops, and now through our professional channel partnerships, corporate and insurance partnerships, and mass retail locations, we have expanded our reach to new segments of consumers. This supports our mission of democratizing access to care, which is foundational to what we do. On our corporate and insurance partnerships, we continue to see progress across all of our programs, including those with Allianz, Anthem Blue Cross Blue Shield, Empire Blue Cross Blue Shield, United, Aetna, and others. We continue to deepen our relationship with our existing partners while also identifying other partnerships, and we expect to announce more on this in the near future. On the retail side, our oral care products, which are available at Walmart and CVS and soon to be available at Walgreens and Sam's Club, continue to perform well and serve as a highly efficient lead source and brand-building opportunity. These products provide consumers access to premium oil coat products at an affordable price point while also increasing the lifetime value of our club members. Turning to the professional channel, on our Q2 call, we announced our partnership with Smile Brands, an exciting first step in our efforts to partner with GP and ortho providers. With the recent addition of Decadental and Unified Smiles, our partnership network has now extended across more than 1,000 practices in the United States, and we have a deep sales pipeline both domestically and internationally. As we have highlighted before, this acquisition channel is complementary to our current offering and represents a new on-ramp for consumers who want to start their journey in a dentist chair. This also allows dentists across the country the ability to offer Smile Direct Club clear aligner therapy to their patients. On our last earnings call, we detailed the various go-to-market strategies we are employing as we operationalize this channel. While each one accommodates a different use case, all are highly efficient, margin-accretive sources of lead flow for both SDC and our partners. Equally as important, this effort has again reinforced the flexibility and adaptability of our platform in accommodating a new and different segment of consumers. Recall that only 30% of GPs offer clear aligner therapy today, and most of the ones who do offer aligners are low-volume providers. So we see ourselves at the very outset of an incredible opportunity, both domestically and abroad. As these partnerships mature and grow, we will continue to share more in future quarters. Our efforts to extend our value proposition to the teen demographic is also making progress, bolstered by the launch in August of our first-ever campaign targeted to this important segment, which saw over 4 billion impressions on TikTok and which was executed across multiple digital, social, and broadcast channels. On the international front, within a quarter, we announced our expansion into Spain. Entrance into this market further extends our international footprint, and we plan to launch into additional locations in Europe, Latin America, and Asia Pacific throughout the remainder of the year and into next. As you can see, we've made very good progress on our growth initiatives since the second quarter, and we will continue to update you in the future quarters as we execute against them. Turning to progress on the cost side of the business, you'll recall that we've focused across three key areas to right-size our cost structure, and we have made good progress against those initiatives. These efforts drove our outperformance on the adjusted EBITDA line this quarter and will continue to drive margin expansion going forward. These efforts include the following. Continued advancement in automating our manufacturing and treatment planning operations to allow us to reduce our scrap and keep pace with consumer demand. Our second-generation automation production platform is live and currently producing over 10% of our aligners. We expect this to increase meaningfully during Q4, and while still early in the rollout, we are already seeing very positive trends. We expect these new capabilities to reduce our turnaround time, reduce our scrap, and provide a more consistent and superior product for our customers. Second, continue to discipline around the deployment of marketing and selling dollars, including a focus on pushing more demand through our existing SmileShop network and leveraging our referrals, aided awareness, and highly efficient acquisition strategies as demonstrated in the third quarter. All of these together allowed us to come in on the low end of our long-term sales and marketing targets as a percent of revenue. And last, continued cost discipline across the business. While we saw a modest sequential increase in this line item, primarily as a result of team members returning from furlough, G&A across the quarter largely remained stable, resulting from our enterprise-wide cost control initiatives. One important fact is that G&A labor and other costs remain down 22% since Q4 of 2019. We plan to remain vigilant on this front throughout the remainder of this year and beyond as we continue to drive towards our long-term target of 15% of revenue in G&A spending. As we have stated before, we believe streamlining our cost profile through operational efficiencies will not only improve our margin profile, but more importantly, will provide a consistently superior customer experience that meets our expectations and upholds our brand promise. Turning to the regulatory environment, as we've noted in prior earnings calls, we are well positioned in our continued efforts to protect the access to care that consumers want and deserve. We continue to see more states passing teledentistry-friendly laws and refusing to pass laws that put up barriers to access to care. In addition, we continue to see growth in the adoption and use of teledentistry by the dental and orthodontic industries. This is understood even further by the expansion of our professional partnership with well-established and respected national DSOs, which is further testament to the adoption of telehealth by the dental community. In summary, Q3 represents continued execution against our controlled growth plan and meaningful progress towards our long-term financial targets. On growth, we are making good progress against our initiatives, and the professional channel, although early, is off to a good start with over 1,000 practices adopting our partnership model. On cost, we achieved adjusted EBITDA profitability ahead of plan, enabled by our manufacturing initiatives, our sales and marketing efficiency, and our continued cost discipline across the business. And we are now on our way to achieving our long-term targets. Lastly, and a very nice tailwind, is that we continue to see favorable industry dynamics with broader acceptance of telehealth and specifically teledentistry, minimal penetration against our total addressable market, and clear aligners gaining share in the overall industry. All of these trends, We expect to continue and position us well for long-term success. None of this would be possible without the support of our team members, club members, and investors, and we thank all of you for your support as we work to capture this massively underserved market. We remain laser-focused on our mission to democratize access to a smile each and every person loves by making it affordable and convenient for everyone. Our most recent quarter keeps us well on our way to achieving that mission. And now I'll turn the call over to Kyle, who will provide a detailed overview of our Q3 results and our financial outlook. Kyle?