Align Technology Inc (ALGN) — Q4 2015 Earnings Call Transcript

Good afternoon and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO; and David White, CFO. We issued fourth-quarter and fiscal 2015 financial results today via Marketwire, 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 12 months. A telephone replay will be available today by approximately 5:30 PM Eastern Time through 5:30 PM Eastern time on February 11th. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13627358 followed by pound. International callers should dial 201-612-7415 with the same conference number. As a reminder, the information that the presenters discuss today will include forward-looking statements, including statements about Align's future events, product outlook and the expected financial results for the first quarter and full year 2016. These forward-looking statements are only predictions and involve risks and uncertainties set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary significantly and Align expressly assumes no obligation to update any forward-looking statements. We have posted a set of GAAP and non-GAAP historical financial statements, including the corresponding reconciliations and our fourth quarter conference call slides on our website under quarterly results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology's President and CEO, Joe Hogan.

Thanks, Shirley. Good afternoon and thanks for joining us. On our call today, I'll provide some financial highlights and then briefly discuss the performance of our two operating segments, Invisalign Clear Aligners and Scanners. David will provide more detail on our financials and discuss our outlook for the first quarter, including some commentary on our view for 2016. Following that, I'll come back and summarize a few key points and open up the call to questions. Q4 was a strong finish to another record year for Align. Better than expected revenue and earnings were driven by record Invisalign volume, which is up 26% year-over-year. These results reflect strong growth across our customer base and geographies from both an increase in the number of submitters, as well as cases per doctor. In addition, scanner revenue strong of 33% year-over-year exceeded expectations as shipments of our new iTero Element began ramping up this quarter, resulting in record scanner shipments. For the full year of 2015, over 0.5 million patients started orthodontic treatment with Invisalign, an increase of 22% compared to 13% last year. Our increased growth reflects continued adoption and utilization from international doctors and a solid rebound in North America, both driven by investments in territory coverage and sales and marketing programs, including clinical education. Product and technology innovation is also a key growth driver for the company and as a result in 2015, we continue to see increased clinical confidence in Invisalign treatment for our customers worldwide. For Q4, North America Clear Aligner volume was both sequentially and year-over-year up, reflecting record Invisalign utilization and a record number of submitting doctors. Sequential growth was driven by North American GP dentists with an increase in both the number of submitters and cases per doctor. North American ortho volume also increased sequentially, although less so given Q4 is a seasonally slower for teenage orthodontic case starts. On a year-over-year basis, Q4 North America volume growth was driven by both orthos and GPs, reflecting increased utilization of Invisalign and expansion of our customer base. For the full year, North America volume increased 18% compared to 8% last year and a three-year average of 12% reflecting the positive impact of our sales force expansion and go-to-market changes we announced on our earnings call last January. We're very pleased with the acceleration in growth rate and believe that we will see further progress in North America as we continue to drive greater adoption and utilization, and the ortho channel increased our share of the teen market and improved patient conversion. Q4 Invisalign volume for international doctors was up 17% sequentially and 35% year-on-year. Our international business continues to be very strong across all countries, driven by both an increase in the number of submitters and in cases per doctor in EMEA and continued expansion of our customer base in APAC. In EMEA, Q4 volume was up 34% year-over-year and we had a record quarter across all markets. We continue to see strong performance in our five core country markets and are building momentum in our new geographies. For the full year 2015, EMEA volume growth of 30% was balanced across both ortho and GP channels. We also saw strong growth in Spain, the U.K. and the Mediterranean country markets, using our new selling process which helps accelerate clinical confidence. In addition, newly integrated country markets previously indirect in the Nordics, Eastern Europe and Benelux are showing very good growth in their first full year of our direct focus. In Asia-Pacific, our Q4 volume reflected strong year-over-year growth of 37%, notwithstanding a seasonally slower period coming off a strong summer quarter. During the quarter, we celebrated our 10th anniversary in Japan with a full day customer forum with over 200 Japanese doctors. We also participated in the China Annual Orthodontic Society meeting with nearly 400 doctors, and in December we attended our first Indian orthodontic congress in India where we are beginning to invest in trained orthodontists in three key cities: Mumbai, New Delhi, and Pune. For the full year, Clear Aligner volume in APAC increased by 39%, reflecting both expansion of our customer base, as well as an increased utilization. In China, Invisalign volumes doubled over the prior year and Japan grew more than 50% for the third consecutive year. In the important teen segment, the total number of Invisalign cases worldwide in Q4 increased 24% year-over-year. This reflects continued adoption across our customer channels, but more pronounced in North America where we have the greatest sales and marketing focus on teens. For the full year, over 141,000 teenagers started treatment with Invisalign, reflecting 21% growth compared to 16% growth in 2014. In North America, the growth rate of our teenage cases continues to outpace adult cases. Our integrated consumer marketing campaigns in North America, EMEA and APAC combine traditional paid media, search, digital marketing, and social media to engage customers at every point in the consumer purchasing journey. Consumer interest in demand for Invisalign treatment continues to grow as we can see from increases in key program metrics worldwide. For example, social media engagement and lead generation increased across all regions in 2015 and more than 8 million consumers visited one of our Invisalign consumer websites and almost 1.3 million of those visitors searched for an Invisalign provider on our site, up nicely from the prior year. In Q4, our Scanner Sales & Services business revenues were up 74% sequentially and up 33% year-over-year due to the introduction of our new iTero Element scanner, which has been received very enthusiastically by our customers. For Q4, total Invisalign cases submitted with digital scanners in North America were flat from last quarter at 40%. We believe due in part to fewer scanner sales in Q3 as we transition to our new iTero Element scanner. While we are talking about our Scanner business, I want to mention someone who has been an important part of the iTero's growth and success. Tim Mack, Vice President Scanner & Services, will be retiring in March after 25 years in the medical device industry. Tim joined the management team at Align when we acquired Cadent and he has been instrumental in integrating the Scanner business into the company and bringing new innovations to market like iTero Element scanner. Over the next two months, Tim will transition his responsibility for our Scanner & Services business to Raph Pascaud, the Chief Marketing Portfolio and Business Development Officer, who will assume the role of General Manager for our Scanner business. We're going to miss Tim, but I know he is going to enjoy having a personal life again after some very busy years. Now, I'll turn it over to David.

Thanks, Joe. Let's go over our financial results for the fourth quarter. Our revenue for this period reached $230.3 million, reflecting a 10.9% increase from the previous quarter and a 15.9% rise compared to the same quarter last year. When comparing year-over-year, our revenue growth rate for the fourth quarter was approximately eight points lower due to the Additional Aligner Policy we introduced last July and the effects of foreign exchange rates. Clear Aligner revenue for the fourth quarter was $214.0 million, an increase of 7.9% sequentially and 14.8% year-over-year, primarily driven by higher Clear Aligner volumes. The average selling prices for Q4 dipped slightly by about $5 because of foreign exchange fluctuations and a shift towards our lower-end products. The year-over-year revenue growth reflected an increase in Invisalign case volumes across all customer segments and regions, somewhat offset by lower average selling prices due to the policy change and foreign currency effects. During the fourth quarter, total Invisalign shipments were 160.4 thousand cases, which is up 8.8% sequentially and a 26.4% increase year-over-year, fueled by growth from our international North American customers. In North America, orthodontists saw a sequential rise of 1.5% in Invisalign case volumes and a 24.5% year-over-year growth. North American GP dentists experienced a 9.4% sequential growth and a 20.3% increase year-over-year. Internationally, the case volume for Invisalign was up 16.8% sequentially and 34.8% year-over-year. Global utilization of Invisalign in Q4 reached a record 4.9 cases per doctor, up from 4.4 cases in Q4 last year. In North America, orthodontists averaged 9.9, a rise from 8.6, while North American GPs recorded a record 3.1, up from 2.9. Internationally, utilization also set a record at 5.0, compared to 4.5 in the same quarter last year. Throughout 2015, we achieved high Invisalign utilization across all channels. In Q4, we welcomed 2,670 new Invisalign doctors globally, including 1,270 from North America and 1,400 internationally, maintaining our growth from the previous year. Over the full year, an additional 9,795 doctors became Invisalign providers, demonstrating our expanding customer base, particularly outside the U.S. Our Scanner & Services revenues for Q4 reached $16.2 million, a 73.7% sequential increase and a 33.4% rise year-over-year. We are thrilled to be increasing production and dispatching our new iTero Element scanners, following high preorder volumes since their announcement in March. Regarding gross margin, our overall gross margin for Q4 stood at 75.0%, a decline of 0.9 points both sequentially and year-over-year, mainly due to lower average selling prices caused by currency effects and the Additional Aligner Policy change. Clear Aligner's gross margin for Q4 was 77.9%, down 0.9 points in both comparisons, mainly affected by higher freight costs and increased trading activity, which have lower margins. The gross margin for our Scanner segment was 37.7%, marking an improvement of 23 points sequentially attributed to higher scanner average selling prices and reduced manufacturing costs associated with the new iTero Element. Year-over-year, Q4 gross margin increased by 7.5% due to a favorable product mix towards the lower-cost iTero Element and decreased service costs. Operating expenses for Q4 totaled $113.5 million, a decrease of $6.1 million sequentially, primarily due to reduced marketing and media expenses, and also reflecting costs from Q3 related to severance and the termination of certain product development projects targeting obstructive sleep apnea. Year-over-year, Q4 operating expenses rose by $14.3 million, or 14.4%, due to our sales expansion and European implementation initiatives. Our operating margin for Q4 was 25.8%, an increase of 7.5 points sequentially and relatively stable year-over-year. This sequential improvement mainly stemmed from increased Clear Aligner volumes and reduced expenses. Year-over-year, the operating margin experienced a decrease of about three points due to foreign currency impacts and the Additional Aligner Policy. Moving to our Q4 tax provision, our tax rate of 18.1% was down 6.3 points from Q3, influenced by a more advantageous earnings mix and lower tax liabilities after filing certain returns, alongside the renewal of the U.S. R&D tax credit. These factors contributed to an additional benefit of approximately $0.04 per share during the quarter. Our diluted earnings per share for Q4 was $0.60, compared to $0.34 in Q3 and $0.48 in the same quarter last year. The fourth quarter EPS was affected by about $0.07 due to the Additional Aligners Policy. On a year-over-year basis, the Additional Aligner Policy and constant foreign exchange rates impacted our Q4 by about $0.11 per share. Turning to the balance sheet, capital expenditures for Q4 were $16.8 million, mainly for equipment purchases to enhance our manufacturing capabilities in Juarez, Mexico, as well as for our ERP implementation. Cash flow from operations for Q4 was $79.4 million, leading to free cash flow of $62.6 million when capital expenditures were deducted. During this quarter, we repurchased 179,000 shares, totaling $11.2 million in market repurchases. Notably, our stock repurchases over the past 12 months, along with cash for employee tax payments tied to stock award settlements, accounted for 66% of our worldwide free cash flow. We feel our free cash flow generation and these repurchases align with our capital allocation goals of returning surplus cash to our shareholders. As of now, cash, cash equivalents, and marketable securities totaled $679 million, up from $603 million at the end of 2014, reflecting an increase of approximately $76 million. Of this, $236 million was held in the U.S., while $443 million was with our international entities. Before discussing our Q1 outlook, I want to summarize our full-year results for 2015. We shipped a record 583.2 thousand Invisalign cases, which represents a 22% increase, driven by 32.5% growth from international doctors and 17.7% from North American doctors. Our revenue hit a record $845.5 million, marking an 11% year-over-year increase, including influences from foreign exchange and the Additional Aligners policy. Operating income for the full year stood at $188.6 million, or 22.3% of revenue, which included impacts of 1.6 points from the aligners policy and foreign currency on a constant currency basis. We also faced around $12 million in costs related to ERP implementation, alongside a one-time medical device tax refund of $6.8 million, which won’t repeat in 2016. Our free cash flow totaled $184.5 million, or 22% of revenue, aligning with our long-term target. Over the year, we bought back 1.7 million shares of Align stock for $101.8 million, resulting in a 2015 diluted EPS of $1.77. In summary, 2015 was a robust year for Align, and despite several challenges like foreign exchange fluctuations and the new Additional Aligner policy, we exceeded expectations across the board. Strong Invisalign growth mitigated these challenges, resulting in revenue and operating margin growth that surpassed our original projections. Now, let’s move on to our business outlook for the first quarter and the factors shaping our expectations. Starting with demand, we anticipate that North America volumes will see sequential growth in Q1, led primarily by the ortho channel. For our international business, we foresee ongoing strong year-over-year growth, though Q1 typically experiences a seasonal slowdown in Europe due to winter holidays. Despite expected sequential growth from APAC, we foresee an overall decline in international volume. In terms of our scanner business, demand for the new iTero Element scanner has been robust, leading us to project significant sequential increases in Q1 scanner shipments. Given this context, we anticipate that Invisalign case volume will range from 161.3 thousand to 163.7 thousand cases, indicating growth of approximately 23.4% to 25.2% compared to last year. We expect Q1 net revenues to be between $232.5 million and $236.6 million. Our Q1 gross margin is predicted to be around 73.5% to 74.1%, slightly lower sequentially due to a higher mix from our scanner business, which has lower margins. We estimate Q1 operating expenses will fall between $130.9 million and $132.4 million. As seen in previous years, operating expenses tend to rise quarter-over-quarter in Q1 due to various factors such as employee compensation adjustments, increased investments in sales and product development efforts, and nearing the completion of our European implementation program which will affect cost capitalization. We expect our Q1 operating margin to be between 17.2% and 18.2%, aligning with historical trends if we exclude ERP investments and the influence of the scanner business mix. Our effective tax rate will be around 25%, with diluted shares outstanding expected to be about 81.1 million, not accounting for any share repurchases. Overall, we project our Q1 diluted EPS to range from $0.37 to $0.40. Moving on to our full-year outlook for 2016, we predict year-over-year revenue growth in the low to mid-20s percentage range and towards the higher end of our long-term operating model. We foresee continued strong growth in Invisalign case shipments. Regarding scanners, given current backlog and demand for the new iTero Element, we anticipate scanner revenue approximately doubling compared to 2015. However, we expect operating margins in 2016 to remain consistent with those of 2015 due to several factors. This year, we will fully encounter the impacts of the Additional Aligner policy, estimating a revenue reduction of about $25 million to $30 million. We anticipate a higher mix of iTero scanner revenue, which, while more profitable than its predecessor, still carries lower gross margins than Invisalign Clear Aligners, impacting overall margins. Lastly, even as we aim to complete most ERP implementation by midyear, a smaller portion of these costs can be capitalized at this stage, leading to increases in operating expenses. We expect ERP expenses in 2016 to mirror those of 2015, as we consider these investments vital for fostering customer adoption and accelerating growth. Similar to last year, many of these initiatives will take time to yield substantial returns. Overall, we project that our earnings capacity in the latter half of the year will outperform the first half, with the second half accounting for approximately 55% to 60% of our total annual results. With that, I will hand it back over to Joe for his final remarks.

Thanks, David. As you have seen from our record 2015 results, the investments we made in the onset of the year have helped us accelerate growth and increase adoption of Invisalign globally. These results reaffirm our confidence in and commitment to new investments in 2016. This year, we will continue to invest in international expansion in new country markets like India and Korea, sales in customer support resources, as well as product and technology innovation to address certain aspects such as treatment times, indications unique to teens, and predictability. In addition, we will establish our first order acquisition and treatment planning facilities in international regions, so we can be closer to our customers, improve our operational efficiency, and provide doctors with the great experience to further improve their confidence in using Invisalign to treat more patients, more often. All told, we believe these investments will further extend our competitive advantage and leadership in the market. Thank you for your time today. I look forward to sharing more details with you as the year unfolds. I'll now open the call to your questions.

Great. Thanks. Just on the revenue outlook for the year, based on the full-year outlook and the doubling of the scanners, it looks like you are implying high teens Invisalign revenue growth. I was just hoping maybe you can share a little bit more around the assumptions behind that, both from a volume versus pricing perspective. And then, if you could, share anything on geographically how you are thinking about the year, specifically curious about APAC, just given some of the concerns out there and the strong growth you've seen. Just anything you can share behind what seems to be very healthy Invisalign revenue growth would be helpful.

Yeah, Rob, David. So, I'll give you a couple of pieces. Let me kind of start with the scanners since that's where you started from. We announced the iTero Element scanner back in March of last year and really only began shipping that product back in September. And during that interim period, we were actively promoting the product and selling it and generating interest at all kinds of conferences and so forth and taking orders for the product at that point in time. And so since September to December, which we just began shipping that product, we have accumulated some backlog, and we've shipped what we had supply capabilities of. And we were starting the year with a very healthy demand profile for the product that is really driving the comment I made about we expect that revenue to double year-over-year. We wouldn't expect it to double in 2017, although we'd love to have that high-quality problem. But that's kind of how we are looking at 2016 as it relates to the scanner business. When you look at the Clear Aligner business, the only color I'll give you as it relates to volumes and so forth is that you can see by the slides and our commentary that our international business is growing at a faster rate than what North America is, notwithstanding the fact that we got a great rebound in North America. Our EMEA business is growing in 2015, grew roughly at the same rate as APAC did, although a few points behind but pretty close. And we expect to continue to see strong growth in each of those international regions as we continue to make investments in expanding our territory coverage. And as Joe mentioned in his comments, actually entering into some new geographies. When you look at North America, like I said, we had a great rebound. We're expecting that to continue. We have continued to add territory coverage here in the U.S. And we have seen the results manifest in not only volumes but higher utilization rates in both channels in North America. So, when you net all that together, we're seeing 2016 from a revenue standpoint being somewhere, as I indicated, the growth being in the mid to low 20s%. And I don't know if that gives you enough color there or not.

No, no, that's helpful. I guess just to move away from revenue, it seems like obviously there's a lot of momentum there. But in the operating profit side, if I look at the 1Q guidance and then the outlook, even with the second half operating profits to account for 55% to 60%, it still seems like even with that back half ramp, you are expecting the year to be below those three to five-year long-term targets. So, either one of you, but maybe Joe, curious now that you have had a little more time with the business, is that 25% to 30% operating profit margin range, is that still the right metric to represent the profit profile for the company, or is it something different, in your mind?

Rob, I think it's still the right profile. If you take our end of the year operating profit, you add for Additional Aligners and you add for FX, we're right at the bottom part of that range right now. So, I mean I don't see any reason to change it at all.

Thanks Bob. Next question?

Great. Thanks. Good afternoon. One really high-level one, maybe for you, Joe, and then some specific ones for David on the guide. So, Joe, it’s going to sound like a little bit of a suck up question, but really you have got a base that is maybe 3X what it was back in 2007. You've got a product that is really not recurring, and yet you are recapturing the growth rate. And so can you just talk to us at a high level, what is allowing you to recapture this level of maybe 20%-plus Clear Aligner growth, and then how many more investments do you need to layer on from, call it, exiting 2016 from that level if you would going forward?

Jon, I’d just say the growth is deep and wide in a broad sense. And so, if you look at our utilization levels across the board, you see them going up even in GP and ortho, substantially. Secondly, from a breadth standpoint, where you look internationally, the growth from an international standpoint is in new markets, but also there is some depth in new markets too, like we're seeing in Spain and with TFM and things we've talked to you about before. I think there is also an adoption profile for plastic aligners versus metals and brackets that's starting to be accepted on a wider sense, and there is a lot more confidence out there in the sense of the use for it. I mean we see that in our discussions with orthodontists and doctors around the world too and people that have been with us for 11 years and people that have been with us for three or four. If I go off and I talk about the investment aspects, I mean, this is a high-growth business. It requires continuing investments in order to do that. I think a lot of what you have seen, Jon, we're doing this from a non-dilutive standpoint if you take out an additional aligner policy and you pull away some of the ERP. But these are investments. You take a look at the ERP, we need that. I can't tell you how much this business needs an ERP platform in order to grow in the future. We basically juggle this business on Excel spreadsheets in a way that's just not a good long-term way to conduct this business. There's so many things we do that are a lot of arms and legs around here that we should be used for really interpreting information rather than generating it at times. And I could go on and on about that. Secondly, to go into Korea, to go into Taiwan, to move into India, those aren't just salespeople. There are certain infrastructure, certain compliance, certain things that you just need to invest in to ensure that you adequately go into those markets, and we will continue to do that. But hopefully, Jon, and you know us well, you see that we're doing that in a sense of not telling you to hang on for three years. We're getting good returns on those investments. And what David and I are projecting right now, we'll see the same thing in 2016.

Thank you for that information. David, I have a few quick questions for you. You mentioned that operational margins have remained flat year-over-year, but I believe that the Additional Aligner program contributes an extra 12 or 13 over the full year compared to six months. Should I consider that on a non-GAAP basis, which would indicate that operational margins are up about 100 basis points year-over-year? Also, you brought up the ERP expense; how does it compare to 2015? Lastly, regarding the tax rate and R&D tax credit, does the tax rate moving forward align with what we saw for the entire year of 2015? Thank you.

We see flat operating margins in response to your question. If we exclude foreign exchange impacts, Clear Aligner effects, and certain non-recurring ERP components, we fall within our long-term model range. When we provided guidance for 2015, we were facing considerable foreign exchange challenges and stated our strategy was to grow through those issues. Looking at our results from last year, we largely managed to overcome a significant portion of that challenge. However, the dollar has continued to strengthen, so we are still addressing some effects. We don't expect as significant an impact in 2016 compared to 2015. When adjusted for these factors, we are within our long-term model and have seen a modest improvement compared to 2015 on an apples-to-apples basis. Regarding the tax rate, our guidance for Q1 was around 25%, in contrast to last year’s effective rate of approximately 22%. One of the main factors influencing this is the growth in our Scanner business, which is primarily taxed under U.S. federal and state tax rates, contributing some pressure on the current tax rate. Thus, my best estimate for you would be in that range.

Okay, perfect. Works for me. Thanks guys.

Thanks Jon.

Thank you, Jon.

Thank you for taking the questions, and thank you to the operator for the best pronunciation of my last name I've ever heard. My first question is about Element gross margins. You mentioned that they are likely to be higher compared to the previous version of iTero. I get the impression that what we observed this quarter may not be a reliable indicator of their potential peak, given the current circumstances. Is that a fair assessment?

It would be, Steve. Given that we're just starting to ramp the product and so forth, we still have a learning curve that we're going down. We're still or were still experiencing a yield ramp on the product. So, we're expecting it to be reasonably better in 2016 than in 2015.

Okay. Got it. And then two quick ones for Joe. One is on expansion of the commercial force. Can you speak to the magnitude of ads in 2016, how they might compare to what you did in 2015, appreciating that 2015 was a big year? And then, normally, in January as you think about working with Align over the years, normally in January we hear a little bit about product launches, plans for innovation, it wasn't as big a focus. Could we see something interesting at, say, the AAO, or is this maybe a quieter year on the product launch front? Thanks.

Steve, first of all, from kind of a commercial investment standpoint as the basis of your question, I'd say very similar to 2015, but you would say more up in international and a little bit less in North America from a ratio standpoint. I think that expansion is something we just need to do. We know we get a decent return on it, as I mentioned before and we don't see it as being dilutive. I don't think we see it as being expansive. And Steve your second question was?

The question is about the product Launches for innovation cadence in 2016.

We'll have some announcements on product launches that we believe will be exciting for the industry. I can't discuss those details right now as we're still working through various clinical aspects. However, I can assure you that we are heavily focused on engineering. We have identified numerous malocclusions that our technology can address and will continue investing in this area to capture a larger share of the market. Expect some exciting announcements in 2016.

Well, looking forward to it. Thanks for all the comments.

Yeah, thanks Steve.

Hi, thanks very much. Joe, I know sometimes it can be hard for you guys to give a good market assessment, given all those share gains you have gotten, but what is your view, if you go around the horn, the U.S. orthodontic market, GP, and then Asia and Europe, does the market feel to you like it's getting better or worse based upon feedback you are getting from your sales reps?

John, my comment would be that it seems to be stable. I think we saw an uptick in the market in 2015, and you go through the statistics and you can see it. Fortunately, we just traveled around the world for sales kickoff meetings from North America, Pacific and also Europe. In each one of those cases, we talk about a market that's pretty much stable from year-to-year, in that sense. I wouldn't count on a big market uplift. So what we're basically expressing here in our 2016 forecast is continued penetration in those markets.

Great. Thanks. And then, maybe just to expand a little bit more about what you're hearing out of China, given some of the headlines in that region. How comfortable are you that the really strong growth that you guys have seen in the last year can hold up as we move through 2016?

China is quite intriguing in this regard. We experienced a doubling of our growth last year, as we dedicated significant resources to the market. The short answer to your question is that we are optimistic about China's growth next year. Just a week ago, we met with our team there, who are very enthusiastic as we approach 2016. They are not as concerned about the issues we observe from a Western perspective regarding Chinese GDP and certain industrial investments. I have enough business experience to remain vigilant, as circumstances can change unexpectedly. However, based on our current observations and feedback from our sales team regarding customer sentiment, we anticipate that demand in China will match the growth levels we experienced in 2015.

Great. Thanks. And then one last one. Are you seeing any uptick in electronic case receipts for Clear Aligners from any of your partner scanner companies or is it pretty much all still coming in through iTero?

It's pretty much all through iTero. We're seeing a little bit right now, but we're just on the beginning edge of the qualifications of those. So specifically Serono. You know that is done. There's a qualification aspect that they are going through with their customers to make that work, but there is nothing that I would say is material and meaningful yet.

Great. Thank you.

Welcome.

Hi, thanks for taking the questions. I have two. First, regarding the average selling price, I recall some comments from the company that I might have missed. Could you clarify the shift in mix you mentioned, particularly regarding the fourth quarter and the movement towards less complex cases? Is that correct? Additionally, does this relate to the observed strength and increase in general practitioner utilization? Are they planning to focus on less complicated cases?

Yes, Rich. This is David. We announced in June or July a single arch option for both our Express 5 and i7 products, which are our lightest stages both internationally and domestically, as well as for the E10 and light products, which are the 10 stage and 14 stage, respectively. The goal was to address a need from doctors treating patients with only one arch. Previously, when doctors used an Invisalign product for a single arch, they had to pay for both arches. We separated that and offered the option to treat a single arch. In the fourth quarter, the growth of that product line was about 50% faster than our full cases. While we don't expect that growth rate to continue, it did influence our overall average selling price mix toward these lower-priced products, putting some pressure on ASPs. We analyzed the demand and identified how many dual cases we were selling before for doctors wanting to treat just one arch. The adoption of the single arch product has improved the way doctors use the Invisalign product compared to before. Therefore, we believe this has increased our volume at the lower end and generated additional margin income.

Got it. Thank you. Very helpful. And then, Joe, just with respect to some of the investments that you were talking about, we've heard you in China and getting closer to the customer, we've heard kind of some explanation around the initiatives there that you want to implement. Can you tell us kind of which ones in particular are the top priority as we move into the first half of this year and what kind of the payoff landscape or timeline might be for those? Thanks.

Our top focus right now is APAC. That's where we have the most diversity in the sense of a customer base and I think the most lag time just from a distance standpoint and with our current operations. We move over order acquisition, which is basically when someone takes an impression, we do a CT scan and then lower it to a digital file. We move that over, getting it close to the customer who will allow us to improve that part. And then we move treatment planning treatment, which I think is the biggest customer satisfier that we can move with quickly. And we will move that over to different parts of Asia as we go through 2016 and we'll begin probably with EMEA also to begin the foundation of that. Our resources are somewhat limited at times. So, we have to get started in APAC and we will figure out how much residual capacity we have from movement over to Europe on the treatment piece. But we'll move forward with both of those.

Thank you.

Yeah, Rich.

Hi, guys. Thanks for taking the questions. I wanted to start on the teen segment. You had a nice quarter there. You pointed out the continued strength in North America. Joe, I was hoping you could spend a minute or two just talking about where teen is internationally at this point? And what's the strategy there over the next call it one to three years to really start driving teen in international markets?

It's a good question, Chris. I mean I'll just stand on North America for a second. We saw good results this year and even though they are good results, it's still 75% of the marketplace and we're not even near the penetration rate that I feel our product deserves in the sense of that particular demographic. Taking what we have learned from a promotional standpoint and clinical confidence standpoint with customers, we are moving it overseas. There are parts overseas where we do see better teen engagement in different parts of APAC and some parts of Europe. But to tell you that there's a magic formula for North America that's transportable to these other markets, it's not. It's very similar to what I had in GD Healthcare too. When you start to move into these markets, they all have their different idiosyncrasies, so we're going to have to look at each one of the large ones and make sure that we bring our teen product forward in the sense that our customer base is comfortable with it and we're right kind of clinical information that supports that. So, we've known in North America we can do that. We're confident we will do it around the world and we can make those kinds of progress we saw in North America this year. But there's going to be a lot of work year-in and year-out both from a clinical standpoint and also from a sales standpoint and a channel standpoint in order to continue to penetrate that base.

Got it. You mentioned the importance of clinical confidence. Could you elaborate on that? How are the strategies you've implemented so far performing according to your expectations? What additional strategies are you planning for this year to maintain that momentum?

Starting in Europe, the TFM process has been going really well. This is our focused strategy to help customers learn as quickly as possible. Essentially, we're transitioning customers from an analog to a digital process, which can be quite challenging. Cases like E5 or E10 may be straightforward, but as we tackle more complex malocclusions, it becomes complicated. We need to help customers navigate this transition effectively, both clinically and in their business practices, as cash flow and other factors associated with their analog business change significantly when moving to a digital model. The key point is that doctors need to feel confident when they start a case that they can complete it without embarrassment in front of their patients. They want to avoid making multiple follow-up calls. The TFM process and other initiatives we are working on should enhance that clinical competence as we progress.

Appreciate it. And then, David, maybe just one more. In terms of Invisalign ASPs, you talked about that shift towards the lower end products. Just looking out in the guidance, it looks like maybe ASPs are down slightly sequentially in the first quarter. I guess first, is that correct? And then, second, any color you can provide on just how we should think about ASPs trending throughout the year in 2016, both in North America along with international markets? Thanks.

In response to your question about Q1 average selling prices, as our business expands, several factors can influence these prices. For instance, a change in product mix from full cases to lighter cases, or a shift from high-volume to lower-volume doctors due to our Advantage program, can affect ASPs. Looking into 2016, we anticipate a slight pressure on ASPs in Q1, similar to what we experienced in Q4, which I noted was around $5. Throughout the year, as our utilization rates increase, we expect that higher doctor engagement may create additional ASP pressure. However, we are also working on various factors that we believe will mitigate some of these effects. Overall, excluding foreign exchange and additional aligner policies, we expect ASPs to remain relatively stable throughout the year.

All right.

Thanks Chris. Next question please.

Thanks. Most of my questions have been addressed, but a couple of bookkeeping items for you, David. As far as the ERP program goes, should we expect that $12 million roughly of spend that is being absorbed in the P&L to go away in 2017? And could you sort of describe some of the benefits you anticipate on the other side of this?

The majority of that $12 million is expected to be eliminated in 2017. We have included a portion of the operating costs related to the new platform in 2016. Therefore, you won’t see the full benefit of the $12 million, but most of it will be realized. There are several benefits we anticipate, particularly those that enhance our ability to offer products and services to our customers that are currently difficult to provide due to system limitations. We have several ideas we are working on that we hope to launch shortly after going live with our new ERP system. We believe our doctors will appreciate these changes, leading to improvements in their customer experience. This will help align our business model more closely with theirs, making our relationship with them more akin to their relationships with their patients. I won't go into further details, but we expect significant enhancements to the customer experience. Additionally, from an internal perspective, launching new programs requires substantial effort, including updating and testing various systems before they can go live. We believe that having a single, consistent platform will enhance our agility as a company, allowing us to respond better to market opportunities and improving our time to launch new initiatives.

And then last one, can you give us a sense of what we should be embedding for the currency headwind on revenues next year and then any sense of CapEx full spend for the full year?

In 2016, we currently anticipate no impact from foreign exchange because our guidance for the year is based on existing rates. At the moment, the euro is around $1.08 or $1.09, and other currencies are estimated to be at similar levels. Regarding capital expenditures, our guidance for the quarter is approximately $20 million to $25 million, and for the year, it will likely be around $60 million. The majority of this amount will be allocated to expanding manufacturing capacity.

Thank you.

Operator, we'll take one last question please.

Hi, thanks very much. Can you hear me?

Yeah. Hi, Jeff.

Clearly hi.

I have two questions. One is a follow-up on Brandon's ERP question. You don't seem to be having the cost overruns and glitches that many other companies do when they get into this. Is that accurate? And is the timetables for going live roughly the same as it was when you started?

In response to your first question, changing an ERP system is a major task for any company. We have many people involved and there is significant energy and momentum behind this effort. I wouldn’t say it has been easy, but we are making substantial progress. When we announced the program a year ago at the end of Q4 of 2014, we expected it to go live around mid-2016, and we are still on track with that timeline.

Great. Thanks. And then, what I'm really interested in is India and coming on the heels of just marking your 10th year in Japan, because I know you spend a lot of time in Japan working through case complexities before you go into China and I'm just wondering how you view the potential in India relative to what you have seen in China, and is there anything that makes long-term potential there markedly different positively or negatively? Thanks.

I have been doing business in China and India for 15 to 20 years, and I believe there is a common tendency to compare these two markets as if they are similar, but they are fundamentally different. India presents a promising opportunity for us. We plan to begin our efforts in Tier 1 cities, where there are a significant number of orthodontic case starts similar to those in China; however, the resemblance ends there. We anticipate good growth, but I do not expect much of what we do in China to apply to India from a commercial perspective. We will need to engage with each city individually and learn to adapt as we progress. Focusing on India is essential for us, and we recognize the need to achieve success there. We will take a cautious approach, starting step by step, and I see 2016 as a foundational year for us.

Understood. Thanks very much Joe.

Thanks Jeff. Well, thank you everyone for joining us today. We look forward to seeing you at upcoming conferences and industry events, including the Chicago Midwinter Meeting at the end of February. We also hope you'll join us for our Financial Analyst Meeting, which is scheduled for Thursday, June 2nd, in New York City. More details will follow, but for now please hold that date on your calendars. If you have any questions, please contact Align Investor Relations. Have a great day.