SmileDirectClub, Inc.

Greetings. Welcome to the Smile Direct Club second quarter 2021 earnings column. 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, Tripp Sullivan of SCR Partners. You may begin.

Thank you, operator. Good afternoon. 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 Q2 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'm joined on the call today by Chief Executive Officer and Chairman David Katzmann and Chief Financial Officer Kyle Wales. Let me now turn the call over to David.

Thanks, Tripp, and good afternoon, everyone. Thank you for joining us today. Before we begin, I want to acknowledge the tragic event that occurred in our manufacturing facility last Tuesday. Unfortunately, these incidents of workplace violence are all too common in our country. Our thoughts and prayers are with our impacted team members, security personnel, and their families as they begin to recover. We are grateful for the swift actions taken by our team members, our onsite security personnel, and Metro Nashville police in responding to and quickly containing a situation that could have been much worse. Now to the events at hand. I hope you've had a chance to review our earnings release and supplemental deck. We're not going to spend time with commentary on those documents as they speak for themselves. So, we can focus our time today on some highlights of the quarter and provide some color on recent announcements. I want to also make sure that we leave this call today with the proper context and understanding of how we view the business presently, the investments we are making to drive our growth over the next several years, and our continued opportunity to leverage our telehealth platform to execute against our mission to democratize access to a smile each and every person loves and deserves by making it affordable and convenient for everyone. On today's call, I will highlight our newly launched challenger campaign that is targeted directly at Invisalign's customer base as we work to move upstream with our customer demographics. Other aspects of the business I will touch on will be some recent regulatory wins and what those mean for us, as well as some of the unique aspects we have developed with our vertically integrated platform that are incredibly difficult to replicate. I will also provide a brief update on the cyber attack, how we've responded since then, and its impact on Q2. I'd like to start by first walking through what happened in the second quarter and the reasons why we fell short of both our stated revenue targets and adjusted EBITDA goals for the quarter. This was the first quarter that we have missed our expectations since Q4 2019, where we have consistently beaten expectations over the last five quarters through Q1 2021. While we are clearly not happy with the results here in the short term, the long-term growth and profitability potential of this company is intact, and we are well-positioned to continue to execute against the multi-year targets that we have previously outlined. The missing Q2 is primarily due to three main factors. I will cover each one briefly, and then Kyle will provide more details in a few minutes. First, new international markets are taking longer to scale than anticipated, particularly some of our larger markets, like Germany and Spain, which have felt the lingering effects of COVID. Second, top-of-funnel weakness has been associated with the lasting effects of COVID on our target demographics in the U.S., as well as all-time high costs per lead metrics on social platforms such as Facebook, which we believe is driven by some changes associated with Apple's new iOS update. We've conducted a significant amount of internal and third-party economic research on the effect of COVID on our core demographic, some of which we've highlighted in our supplemental deck, and what it shows is the following. Our core demographic, which has a median household income of $68,000, likely experience outsized pressures in their capacity to spend on discretionary items given the significant inflationary headwinds facing the nondiscretionary categories like transportation, utilities, and food. Additionally, as the economy emerges from a pandemic-induced economic shutdown, our target consumer appears to be favoring products over services, given the pent-up demand for apparel, automobiles, home-related goods, and child-centric spending like sporting goods. Further contributing to the unfavorable condition of constrained capacity on spend on discretionary items and a general consumer preference for products over services, Joblessness remains pervasive in four of our larger states, California, New York, Texas, and Florida. Through July 10, 2021, these four states represent 40% of the nation's continuing jobless claims. In addition, we believe reduced levels of supplemental federal unemployment insurance benefits could be contributing to additional capacity headwinds. Third, broad conversion rate pressure across our customer acquisition funnel through a combination of the macro factors noted a moment ago and the residual impacts of the cyberattack in mid-April. I would note that the backlog associated with the cyberattack was 100 percent caught up during the second quarter, but it still had a material impact on conversion as we expected it would. Over the past six quarters, we have continued to invest in our infrastructure to execute against our controlled growth strategy, which positions us to generate average revenue growth of 20 to 30 percent per year for the next five years, and adjusted the EBITDA margins of 25 to 30 percent by the end of that period. Especially with the macro influences I mentioned a moment ago, now is a critical time for us to have a singular focus on maximizing the global opportunity and achieving our longer-term growth targets without the short-term focus on one quarter's results. As a result, we have decided not to provide quarterly earnings guidance. We will continue to have our quarterly conference calls with commentary and Q&A, but our guidance will center around annual performance and expectations. We are a relatively new company with only $20 million in revenue a short five years ago when we launched our first Smile Shop. We are learning, we are agile, and we can pivot quickly to take advantage of the opportunities in front of us without the pressures of quarterly expectations. Let's talk about where the SDC brand sits in the eyes of the consumer and how well we are positioned. In customer experience, our persistent focus is paying off, and we have seen continued strength and aided awareness, which remains at approximately 50%. We are also seeing our Google review ratings register at 96% positive, which remains an all-time high. Our analysis of trends in consumer sentiment across multiple channels, including reviews, news coverage, blogs, Twitter, and other online forums continue to show significant positive trends, and online consumer sentiment remains at an all-time high. Referral rates also remain healthy at roughly 21%. All these efforts are positively 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 of the general population, 68% of consumers believe our network of dentists and orthodontists provides the best possible care to customers, up from 62% in Q1 2021 and up 26% since year-end 2019. Additionally, 67% of respondents surveyed noted that they view SDC as a trusted brand, up 5% from Q1 2021 and up over 30% from Q2 of 2020. This is an incredible improvement in a short period of time and demonstrates our 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 vast improvement in such a short period of time is largely attributable to our heightened focus on our club members and our industry-first doctor-directed telehealth platform. While we are always in pursuit of continuous improvement, we are pleased with our progress on this front over the past few quarters. Progress in brand sentiment and credibility against Invisalign is directly correlated to our club member experience, but is also closely associated with our recently launched Challenger campaign that began a few weeks ago in July. If you haven't seen the ads, I would encourage you to check them out. The Challenger campaign is outperforming our testimonials and functional spots and cost per sale, although having all units in rotation is helping to raise awareness. We have the data that shows these spots are driving a higher percentage of new users to our website compared to our non-Challenger campaigns. This campaign marks a shift for our brand from disruptors to Challenger as we take on Invisalign in the battle to become the teeth-straightening brand of choice. It asks the question, why would consumers choose to pay the three-time markup of Invisalign when Smile Direct Club offers a smarter, more affordable, clinically safe, and effective option that is guaranteed for life and can be achieved remotely with our doctors via our telehealth platform? Reflect on that for a minute. This is the question that everyone should be asking. Why would someone pay up to $3,000 more when they can get a clinically safe and effective option that has treated over 1.5 million people for up to 60% less, and their treatment plan results are guaranteed for life. That is the messaging that we will continue to reinforce as we scale up the demographic ladder to higher income groups in both adult and teen categories. 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. The 11th Circuit Court of Appeals recently ruled in our lawsuit pending against the Georgia Dental Board that dental boards do not have the right to file appeals until the conclusion of the litigation. As a result, the 11th Circuit Court of Appeals has also denied the appeal filed by the Alabama Dental Board in connection with our lawsuit against that board. We are pleased that we will now be able to proceed with discovery in both of these lawsuits and believe these rulings send an important message to other dental boards who have been engaging in or considering engaging in anti-competitive conduct to preclude our growth. We continue to see more states passing teledentistry-friendly laws and refusing to pass laws that put up artificial and clinically unsupported barriers to access to care. The trend from a legislative standpoint is very much in our favor. When it comes to legislative victories that help teledentistry, we have won in 28 states since the 2020 session and have successfully defended existing laws in seven other states. In addition, we continue to see growth in adoption and use of teledentistry by the dental and orthodontic industries. This is underscored even further by the expansion of our professional partnerships and well-established and respected national DSOs, which is further testament to the adoption of telehealth by the dental community. Today, there are more than 1,800 dental practices participating in our partner network, with many more both in the U.S. and in foreign countries seeking to join in the near future. We remain confident in our long-term growth numbers because of the power and inherent value of the platform that we have built with its unique assets. In just a few short years, we have treated over one and a half million club members across 13 countries and built the only vertically integrated med tech platform for T-straining. No one has the combination of aided awareness, omnichannel presence, teledentistry platform, small pay financing, custom treatment planning, and manufacturing capabilities at scale that we have today. These core strengths uniquely position us to capture a large share of this incredible market opportunity over the long term, as the market shifts away from analog braces to digital clear aligners as the preferred choice for T Street. That leadership is also built on innovation, which we haven't talked much about publicly to this point. On an annual basis, we invest tens of millions into our innovation pipeline. We have dedicated teams working on AI machine learnings, material science, and 3D printing. We have made investments into enabling the treatment of more complex cases, automated manufacturing, new types of aligners, smile scanning technologies, our proprietary telehealth platform, oral care products, and a variety of other areas to continue our disruption. This investment has resulted in us securing 25 patents and dozens of patents pending in the U.S. and abroad on various technologies relating to data capture, treatment planning, monitoring, manufacturing, and consumer products. This is a very exciting part of our business, and we will update you more in future quarters as those projects come to life and are introduced into the marketplace. Of course, one of our strongest assets is the strong balance sheet that we have. We ended the quarter with $377 million of cash on the books, which will enable us to execute against our mission for many years to come. This cash ensures that we have the dry powder to focus on the long-term success of our business, and we remain more confident than ever in attaining that success. Before I close, I'd like to update you on the three growth initiatives 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 have always been and remain agnostic as how customers start their journey to purchase aligners. We started with doctor prescribed impression kits, then SmileShops, and now through our professional channel partnerships, corporate and insurance partnerships, mass retail locations, and pop-up events, we have expanded our reach to new segments of consumers and have strengthened our relationship with the dental community. On our corporate and insurance partnerships, we recently launched a new way for members to instantly check their insurance coverage on our website. This is now available for six of the ten largest U.S. dental insurers. We anticipate running advertising to this insurance flow and believe it could be a highly efficient lead strategy, along with being a great member experience. You can test it out by clicking on the insurance tab on SDC.com. On the retail side, our oral care products are now available at over 12,000 retail stores nationwide and serve as a highly efficient lead source and brand building opportunity. Our ancillary product portfolio is available through every retail channel, including drugstores, grocery stores, club stores, mass retailers, and through e-commerce. On the professional channel, we continue to extend our partner network and anticipate a strong cadence of additions over the ensuing weeks and months. We continue to schedule pop-up events to drive club members to our clinical partners, and our network is now extended across more than 1,800 practices in the United States. One critical data point is the success that we are having with referrals into our clinical partners for them to increase and introduce new patients to their practice. For one partner alone, we have already scheduled over 1,000 SDC patients into their practice for a free exam, which is a foundational part of our partnership. 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. On the international front, the same problem that exists in North America around access, convenience, and costs also exists globally. We launched into our first country outside of North America in the second quarter of 2019, and the rest of world countries already represent 16% of our revenue Q2, which is flat to Q1, represents only a fraction of the total opportunity we're targeting and reflective of early stages of penetration. We are now in 13 markets globally with plans to launch into additional locations in Europe, Latin America, and Asia Pacific throughout this year and next. To provide some additional context on this opportunity, I would like to highlight that we are seeing higher brand awareness much earlier on in our market maturity in many of our international markets, which is evidence that the investment in marketing is paying off. To be more specific, it took us five years in the US to reach the brand awareness that we are seeing in some international markets after only two years in the market. We will continue to invest heavily into brand building across these important regions to maximize our long-term share gains. And you will continue to see this reflected in our sales and marketing line item in the future. 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 and deserves 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 Q2 financial results. Kyle.