SmileDirectClub, Inc.

Smile Direct Club first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Alison Sternberg. Ms. Sternberg, 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 Smile Direct Club, 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 Q1 2021 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, and good afternoon, everyone. Thank you for joining us today. I'm pleased to report that Q1 results came in ahead of expectations. and similar to recent quarters are consistent with the cadence of our controlled growth plan. As a reminder, our controlled growth plan was enacted after Q4 of 2019 and positions the integrity of our club member experience as the centerpiece of the plan. Over the past five quarters, we have continued to lay the infrastructure to execute against this long-term strategy, which positions us to generate average revenue growth 20 to 30% per year for the next five years, and adjusted EBITDA margins of 25 to 30% by the end of that time period. Before digging into the quarter, I do want to take a moment to remind everyone why it is we do what we do. Above all else, our mission is to democratize access to a smile each and every person loves by making it affordable and convenient for everyone. We deliver on this mission by providing a doctor-directed digital end-to-end experience in teledentistry. with 24-7 access to orthodontic care and the backing of our lifetime smile guarantee. We have always first and foremost been a telehealth business, and we are excited to see the growing level of understanding and acceptance of telehealth, especially for dentistry. We believe there will only be increased consumer and clinical adoption of the telehealth model from here, and we continue to invest in our proprietary platform and features to innovate against unmet consumer needs and pain points. For today's call, I'd like to first call out the high-level results from the quarter, followed by an overview of some recent key developments, before turning to how we're continuing to execute against our long-term revenue growth and margin targets. I will then turn it over to Kyle to walk through our growth initiatives, Q1 financial results, and outlook in more detail. Specifically in Q1, we achieved an all-time high, $199.5 million in total revenue, up 8% sequentially Q1 over Q4. We shipped roughly 106,000 unique aligner orders up 4.5% sequentially. Our ASP came in at $1,860, which is up 2% on a sequential basis. We saw continued strong performance in our SmilePay program and generated positive 4.9 million of adjusted EBITDA for the quarter. This is slightly ahead of our expectations, but down 2 million over Q4 of 2020 and reflects two dynamics. First, an increased deployment of marketing spend given attractive seasonal ad rates in Q1 that allow us to build our lead funnel early in the year. And second, continued investment outside of the U.S. and Canada as we scale our business globally. You'll recall that we see 75% of the total market opportunity outside of the U.S. and Canada, and we continue to meaningfully invest in building our brand in those markets. This is reflected in our adjusted EBITDA by region, which came in at 11.6 million for USA and Canada, or 7% of revenue, but negative 6.7 million for the rest of the world as we have expanded into 13 countries. Since Q1, we have also had other important developments. Specifically, we launched in Latin America for the first time with our entrance into Mexico. While still early, we are seeing good booking volumes since the opening of our first two small shops in Mexico City in early April. We grew our professional network of dental partners to over 1,500 locations. We also have a strong pipeline of potential partners, both domestically and abroad, and we're starting to see healthy appointment volumes across our network of clinical partners. We saw continued momentum across our ancillary product portfolio, including our successful launch at the Walmart Canada and Shoppers Drug Mart late in Q1. Canadian shoppers may now purchase Smile Direct Club's award-winning oral care products at more than 400 Walmart locations and over 1,000 Shoppers Drug Mart locations. Across U.S. and Canada, our oral care product footprint now stands at over 12,500 retail stores. We debuted our Lifetime Smile Guarantee, an industry-first offering that guarantees our customers a straighter smile for life. Customers who complete clear aligner therapy through our platform and order two retainers per year will qualify for the program, which ensures customers can obtain one free touch-up treatment, if needed, on an annual basis to maintain the members' desired results. Our Lifetime Smile Guarantee ensures our club members can keep their new smile for life and reap the additional benefits from a lifelong straighter smile. We appointed Ted Ward to our board of directors. Ted is a highly respected marketing executive with over three decades of experience, most recently as chief marketing officer with insurance giant Geico, and brings invaluable expertise in guiding a challenger brand to unseat the incumbent market leader. Ted joins us at a pivotal time as we continue to educate consumers on the clinically safe and effective treatments Smile the Red Club offers. For too long, straightening teeth by orthodontists with invisible liners or braces has meant paying a huge markup. Orthodontists have traditionally purchased invisible liners from a wholesaler or manufacturer, marked up the cost by three times, and then sold them to consumers for $5,000 to $8,000. Our proprietary technology and platform offer consumers the ability to get a clinically safe and effective treatment, but without the three-time markup. Before I try to provide some insight into our expectations for Q2, I'd like to take a moment to address the systems outage that was caused by a cybersecurity incident on April 14th, as mentioned in our recent 8K filing. On the day of the attack, we immediately mobilized our internal engineering security team and promptly implemented a series of containment and remediation measures to address the attack, including temporarily isolating and shutting down affected systems and related manufacturing operations. We have also engaged a leading forensic information technology firm to assist with our investigation into the incident. As a result of these efforts, we were able to successfully block the attack, no ransom was paid, and SDC systems and operations are back online and performing normally. I am very proud of the team for their efforts in identifying, containing, and remediating this attack as quickly as possible. As a result of the cyber attack, it is very difficult to predict how our conversion curves will mature in the near future. However, I would like to try to provide some high-level insight into the second quarter. In Q2, without the cyber attack, we expect the revenue to be in line with our long-term targets on a sequential basis, meaning up 5% to 7% over Q1 2021. We also expected adjusted EBITDA to come in slightly ahead of Q1 levels as we continue to invest marketing dollars to build brand equity outside of the US and Canada. In light of the cyber attack and the associated business disruption, we are adjusting our revenue expectations for Q2 based on our best estimates of the possible impact. As of today, we expect Q2 revenue to be approximately 195 to 200 million and adjusted EBITDA to be approximately breakeven as we recover from the cyber attack and continue to lean into marketing spend and international markets. As you can see, we are estimating approximately a $10 to $15 million sales impact in the quarter from this labor attack and the associated downtime we had in treatment planning and manufacturing. We maintain insurance coverage for certain expenses and potential liabilities that may be associated with the attack, and we plan to pursue coverage for all applicable expenses and liabilities. Before I turn it over to Kyle, I want to take a moment to discuss the customer experience and how we are evaluating our progress on that front. As we've said it before, our controlled growth plan is rooted in the delivery of a world-class club member experience. Our long-term revenue targets reflect what we believe to be the right cadence of growth to capture market share, while delighting our customers at every touchpoint. Our persistent focus on this is paying off, and we have seen continued growth and aided awareness amongst consumers, which currently sits at approximately 50%. Additionally, as we've continued to roll out our Gen 2 automated lines, we are also seeing our Google review ratings register at 96% positive, which is an all-time high. We've also worked to enact a higher touch approach to customer service in our customer contact center, including the recent appointment of Alvin Stokes, who's our chief customer contact officer. Alvin joins us with a distinguished career hallmark by developing and executing top-flight customer experience strategies and personalization platforms across multiple industries. Alvin will be responsible for leading our efforts to deliver a world-class experience for our customers globally, with oversight of a large multi-site team encompassing inside sales, customer care, dental experts, club member experience, and our center of excellence in both the U.S. and Costa Rica, as well as several outsourced locations in Malaysia, Greece, and the Philippines. While there is still plenty of work ahead of us, we are already seeing the benefits of these efforts. Our analysis of trends in consumer sentiment across multiple channels, including reviews and news coverage, blogs, Twitter, and other online forums, show significant positive trends, and online consumer sentiment is at an all-time high. Additionally, we have seen an almost 45 percent reduction in negative mentions year over year. Referral rates also remain healthy at roughly 21 percent. Lastly, all these efforts are impacting consumer perception around credibility. one of the core pillars of our brand alongside cost, comfort, certainty, and convenience. In our most recent independent U.S. brand tracker consumer survey, which polls the general population, 62% of consumers believe our network of dentists and orthodontists provides the best possible care to customers, up 20% since year-end 2019. Additionally, 62% of respondents surveyed noted that they view SDC as a trusted brand, up over 25%, over Q2 of 2020. This strengthening of brand awareness, consideration, and credibility demonstrates Smile Direct Club's transition from disruptor to orthodontic challenger as we make significant gains in this area, closing the gap to only a few percentage points versus Invisalign. This is a great improvement in a short period of time and largely attributable to our heightened focus on our club members and our industry-first doctor-directed telehealth platform. We are pleased with our progress on this front over the past few quarters and continue to focus on building awareness of our brand, product, and the benefits of remote dentistry. In summary, the most recent quarter represents continued advancement towards our long-term targets. On growth, we are making good progress against our initiatives and excluding the impact of the cyber attack in Q2, we're executing against our long-term revenue growth targets. On cost, we saw continued gross margin expansion in the quarter enabled by our manufacturing initiatives This, in combination with our sales and marketing efficiency and our continued cost discipline across the business, puts us well on our way to achieving our long-term targets. Since the enactment of our controlled growth plan in Q4 of 2019, we have completely reset the cost profile of the business. This is further demonstrated by the U.S. adjusted EBITDA margins in the quarter. One year ago, we lost $67 million of adjusted EBITDA in the first quarter. This past quarter, we made $4.9 million of adjusted EBITDA, which includes a loss of $6.7 million from our investments into expansion of our international markets. This is quite an accomplishment by our team members in a short period of time. Lastly, we continue to see favorable industry dynamics with broader acceptance of telehealth and specifically teledentistry, minimal penetration against our total adjustable market, and clear aligners gaining share in the overall industry. All these are trends we expect to continue and position us well for long-term success. I would also like to, again, highlight the fantastic cross-functional efforts of our team in identifying, containing, and remediating the cyber attack. These efforts ensure that even despite the business disruption, no data was lost or breached. Additionally, we maintain insurance coverage for certain expenses, and we do plan to pursue coverage of all applicable expenses and liabilities. None of this would be possible without the support of our team members, our club members, and investors. 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. And now I'll turn the call over to Kyle, who will provide a detailed overview of our growth initiatives, Q1 results, and our financial outlook.