SmileDirectClub, Inc.

Greetings and welcome to the Smile Direct Club fourth quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jonathan Fleetwood, Director of Investor Relations. Thank you, Jonathan. You may begin.

Thank you, operator. Good morning. 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 Q4 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, Interim Chief Financial Officer Troy Crawford, and Global Head of FP&A and Investor Relations Jesse Weaver. Let me now turn the call over to David.

Thanks, Jonathan, and good morning, everyone. Thank you for joining us today. Last quarter, we talked a lot about the decisions we've made over the past seven years to fulfill our mission to democratize access to a smile each and every person loves and deserves by making it affordable and convenient for everyone. Some decisions have been easier and some tactics have been more impactful than others, but they're all consistent with our mission. One of the hardest decisions we made over the past several weeks was the late January announcement to reevaluate our international footprint for near-term profitability, right-size our operating structure, and allocate capital to our core growth initiatives that can produce the highest return on investment. These initiatives include expanding our professional channel, the Smile Direct Club Partner Network, funding innovations in our aligner products to successfully attain our share of high-income households, growing the oral care product business, and returning to profitable expansion of our small shop footprint in markets with strong consumer demand. We have to part ways with many of our team members in the Americas and rest of the world that made contributions to our success and dialed back some expectations in existing markets. By stressing the importance of generating near-term profitable growth, we are focused on markets and businesses that best support our mission and have existing or a more direct line of sight to profitability. Troy will discuss what impacts these decisions will have on our 2022 forecasted results in a moment. And I will close my remarks later with what all this means for re-engaging growth, profitability, and positive cash flow within the next five years. First, let's talk about one of the primary reasons that we have needed to evolve our tactics this past year. There are economic realities influencing our core customers' consumer spending. Recall that this is a customer base with median household income of approximately $68,000. This customer traditionally has been priced out of teeth straightening options, but with our offering, we've been able to expand the market to this demographic and bring teeth straightening to more than 1.5 million customers worldwide. Since late in the second quarter of last year, we have pointed to economic factors such as inflation affecting their ability to spend on discretionary items. With inflation existing everywhere now, I don't think we need to make our case as forcefully as we have in the past on that point. I think there is broad consensus today that not only is our customer base challenged, but that the lower to middle income consumer is as well. We have included several updated charts in our earnings deck that provides a little more color on what we are seeing, such as inflationary pressures appear to be the most logical source of consumer friction this past quarter, and consistent with what we've experienced for nearly three consecutive quarters, as the cost of non-discretionary items has increased sequentially every month since early to mid 2021. In January 2022, the cost of non-discretionary items was even higher with an 8.5% increase. All this reinforces our decision to expand our reach upstream with higher income demographics that are less price sensitive and have more capacity to spend on discretionary goods and services. With the child tax credit ceasing in January, that could have impact on the capacity to spend. This last July, approximately 36 to 38 million households have been pre-receiving half of their credit on a monthly basis. Given the income qualification requirements, we believe this payment stream of more than $400 per household has benefited households with less than $150,000 in adjusted gross income. These headwinds are clear and ongoing challenges to the business, but we've overcome a lot of adversity the last several years. Unlike other small, non-vertically integrated DTC competitors who have followed their tents and moved on in the past few months or have a dramatically curtailed online marketing presence over the last few months, our differentiated assets allow us to be nimble with our offering to our existing customers or expand upstream and develop additional customer acquisition channels. These assets include 30 patents issued for innovation, the only vertically integrated MedTech platform for straightening teeth at scale. an unparalleled customer experience, a state-of-the-art FDA clear technology and registered facility, home to one of the largest fleets of 3D printers, and the largest clear liner manufacturer in the U.S. We believe these assets, along with our SmilePay captive financing, are incredibly difficult to replicate and necessary for long-term success. While we have the assets for success, tea straightening is a highly considered purchase, and choosing a brand to trust your smile with is an important decision. When making that brand decision, we know that customers rely on three important channels for their information. They go online to check reviews, they talk to their friends and family for references, and they solicit the opinion of a dental professional. This is why we have spent the last seven years investing over $1 billion in marketing to build a brand that customers know and love and believe that's important that we continue to build our brand credibility across all three of these channels. Last July, we launched our Challenger campaign to target Invisalign's end users with our value proposition and ramped up the ad buys throughout the quarter. Our Challenger campaign ads are demonstrating excellent breakthrough and recall. They have really cemented our position in a two-horse race in the U.S. It's worth noting that this is not an all-or-nothing campaign. This ad campaign is just a piece of a much larger concerted effort to expand our brand's reach to high-income consumers. Based on our research, our product and customer experience remains competitive with Invisalign and is 60% less expensive. But we have to continue to change perception across the channels, as I noted earlier, to gain meaningful share in this demographic. Given that we have not previously focused on this end user base, which is the majority of the 21 million annual orthodontic case starts across the world, a fractional percentage could be very material to us. To further our brand reach with consumers, credibility with professionals, and capability in treating our customers, we accelerated many of the tactics we had underway during Q4 by deepening our investment in the partner network to drive adoption and utilization in dental practices. We appointed Brett Deaver as SVP, General Manager of Partner Network. Brett will help further build and ignite growth for this channel. He brings extensive knowledge of global commercial strategy, sales, customer service, and professional education from the dental and healthcare B2B space. We announced a partnership with celebrity cosmetic dentist Dr. Amira, who will help advocate for our shared mission of increasing access to care, as well as advocate for GPs to join the partner network. Expanding our brand reach with the formation of the Confidence Council, which included partnerships with Jonathan Van Ness, Tunde Oyanan, and Arielle Vandenberg to reach new demographics by harnessing their influence to shine a light on the transformational power of a smile. Introducing innovative oral care solutions through the launch of our new and innovative fast-dissolving whitening strips, which will hit 4,600 Walmart shelves by the end of February. The strips are our new convenient and easy way to get fast whitening results without the mess of traditional strips. In addition, we continue to launch other whitening innovations, including the wireless pro-whitening system and stain barrier. Finally, in spite of the right-sizing efforts I mentioned earlier, we continue to invest in R&D that supports our mission of providing accessible care. We announced our next-gen proprietary treatment planning software, SmileOS. The leading-edge AI software delivers enhanced treatment outcomes, more accurately predicts tooth movement, and enables doctors to better visualize their patients' treatment. SmileOS adds to the vertical integration of our business, creating a superior customer experience, and most notably will help our network of doctors treat a broader range of patients. Last week, we announced our partnership with CareStream Health to utilize their cutting-edge intraoral scanners throughout our small shops and partner network locations. This exciting partnership allows our partner network locations to leverage the openness of CareStream's platform for greater flexibility in how they can utilize a scanner for expanded functionality in addition to clear aligner treatment planning. As you can see, we continue to bring innovations to the market that we believe will further solidify our foundation for the next phase of our growth. In our earnings supplemental deck, you will see that we've described our long-term outlook on pages 31 and 32. This outlook encompasses 2022 through 2026. With our guidance for 2022 already in the release and Troy walking you through that momentarily, I want to focus on the next five years. Before I begin, I want to highlight that quicker gains in the higher income demographics and faster adoption of our partner network expansion could produce growth rates and require investments above the numbers that I'm about to present. Beyond 2022, we expect revenue to grow at a mid-teens compounded annual growth rate based on aligner shipments returning to 2019 levels by 2026. Annual price increases of 4% to 5% and continued strong growth in oral care products. Gross margin is anticipated to expand by 50 to 100 basis points each year based on increased aligner volumes leveraging our fixed costs with higher Gen 2 utilization. offset by the lower gross margin profile of the oral care products. Selling and marketing is expected to show 300 to 350 basis points of margin improvement each year as we gain leverage on marketing spend from annual liner pricing increases, modest gains on marketing efficiency, and higher shop utilization. DNA is expected to show 200 to 225 basis points of margin improvement each year as the total dollar spend grows at close to inflation resulting in increased leverage from continued revenue growth. CapEx spend to remain in the range of 7% to 10% of revenue. Doing the math here, that would imply that we would expect to return to EBITDA profitability by 2023 and to positive cash flow by 2024 or 2025. The global orthodontics market is large and underserved, and the total addressable market continues to expand. Between the U.S. and the rest of the world, there are approximately 500 million people for whom clear aligners would be an appropriate means to treat mild to moderate crowding and spacing, and who can afford treatment using our SmilePay program. Within that, there are approximately 21 million worldwide orthodontic cases start annually, and the penetration of clear aligners within that is still less than half. It's a tremendous global opportunity that we can't lose sight of during these challenging times with our core customers. We have multiple avenues to achieve outsized growth over and above what I've just walked through. These include organic volume growth and profitable small shop footprint expansion, retail partnerships and adjacent product expansion, professional channel network growth, and successful targeting of higher income consumers. As we've said before, we've only begun to scratch the surface on most of these opportunities. You can expect to hear more from us on all these avenues for growth in the months ahead. And now I'll turn the call over to Troy, who will provide more detail on our Q4 financial results, our liquidity, and 2022 outlook. Troy.