Align Technology Inc (ALGN) — Q4 2024 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 John Morici, CFO. We issued fourth quarter and full year 2024 financial results today via Business Wire, 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 one month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We've posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our fourth quarter and full year 2024 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. Joe?

Thank you, Shirley. Good afternoon, and thank you for joining us today. I will provide an overview of our fourth quarter and full year results, along with highlights from our two operating segments, System Services and Clear Aligners. John will share more details on our financial performance and outlook for 2025. After that, I will summarize key points and open the call for questions. I'm pleased to report that total revenues, Clear Aligner volumes, and Systems and Services revenues for Q4 were in line with our expectations, with both GAAP and non-GAAP operating margins exceeding our forecast. Clear Aligner average selling prices were lower than anticipated mainly due to unfavorable foreign exchange rates from the strengthening US dollar against major currencies from late October through December, which John will elaborate on. Year-over-year, Q4 revenues reached $995 million, reflecting a 4% increase, driven by a 14.9% rise in Systems and Services revenues and a 1.6% increase in Clear Aligner revenues. Clear Aligner volumes grew 6.1% year-over-year, supported by increased shipments across all regions, particularly in EMEA, APAC, and LatAm, along with stability in North America. In terms of channels, Clear Aligner volumes in the ortho and GP channels also showed year-over-year growth, with a strong number of submitters and utilization rates among the highest in recent years. Sequentially, fourth quarter revenue growth of 1.8% demonstrates continued sales momentum from iTero Lumina scanners and rising Clear Aligner volumes in the EMEA region, particularly among teens and growing patients, as well as growth in LatAm. In the Americas, Q4 Clear Aligner volumes reflected a seasonally weaker orthodontic channel but was somewhat offset by strength in the GP channel for adults. For the full year 2024, total revenues reached $4 billion, with Clear Aligner volumes at 2.5 million cases, both showing a 3.5% year-over-year increase. We achieved a non-GAAP operating margin of 21.8% for fiscal 2024, surpassing fiscal 2023 and aligning with our expectations for 2024. By the end of Q4 2024, we reached significant milestones, including 272,000 active Invisalign-trained practitioners, 19.5 million Invisalign patients—over 5.6 million of whom are teens and kids—and more than 2 billion clear aligners manufactured worldwide. In Q4, year-over-year growth in Clear Aligner volumes in the Americas highlighted strength in Latin America and improving trends in North America, particularly among GP dentists. The EMEA region saw growth from core European countries as well as strong demand in Eastern Europe, the Middle East, and Africa. EMEA's Clear Aligner growth included robust performance in ortho and GP channels, along with appeal among teens, kids, and adults. In the APAC region, year-over-year volume growth for Q4 was led by China and Japan, and strong increases from emerging markets like India, Thailand, and Korea. We recorded 85,700 doctors submitting cases worldwide in Q4, a record high for the quarter, primarily reflecting the rise in adult and non-comprehensive clear aligner cases. In the adult clear aligner segment, we were pleased to observe continuous growth both year-over-year and sequentially across all regions. In the teen and kids segments, approximately 216,000 teens and kids began treatment with Invisalign Clear Aligners during Q4, representing an 8.6% sequential decrease following a record Q3 teen season but a 9.8% increase year-over-year, showing growth across regions, especially with Invisalign First in APAC and EMEA. In Q4, the number of doctors initiating cases for teens and kids rose 6.2% year-over-year, driven by ongoing strength among practitioners treating younger patients. For fiscal 2024, total shipments of Invisalign Clear Aligners for teens and kids reached 868,000 cases, a 7.7% rise compared to the previous year, constituting approximately 35% of the total 2.5 million Clear Aligner shipments for the year. Our targeted marketing and sales initiatives for teens, along with the strong performance of Invisalign First for children as young as six and the Invisalign Palatal Expander system, are fostering global adoption. During the quarter, we advanced our commercialization of the Invisalign Palatal Expander, with steady momentum in submissions and shipments. In its first full year of availability in North America, the Invisalign Palatal Expander followed a similar growth trajectory as Invisalign First, which launched in 2017 but did not need region-specific regulatory approvals like we received for the Expander. In Q4, we obtained the CE mark to market the Invisalign Palatal Expander in most of Europe and completed registration with the UK’s Medicines and Healthcare Products Regulatory Agency, allowing broad patient applicability, including growing children, teens, and adults. These approvals represent a major milestone in our efforts to improve clinical outcomes and efficiency in orthodontics, paving the way for further commercialization of the Invisalign Palatal Expander in the EMEA region in 2025. We are making strides in proving the clinical efficacy and enhancing patient experience with the Invisalign Palatal Expander, which was recently featured on the cover of the Journal of Clinical Orthodontics, highlighting an article by Dr. Jonathan Nicozisis. Multiple peer-reviewed studies have confirmed the effectiveness of the Invisalign Palatal Expander alongside mandibular advancement. We are also receiving positive feedback from parents, as reflected in the article detailing reasons for their satisfaction with the Invisalign Palatal Expander System. Overall, the Invisalign Palatal Expander system is gaining popularity among orthodontists and patients due to its innovative design and ease of use. As more clinical evidence becomes available and practitioners gain experience, we believe that adoption rates will continue to increase. In Q4, our non-case revenues grew year-over-year, primarily driven by ongoing demand for retainers and our Doctor Subscription Program, which includes retainers for non-Invisalign patients. Non-case revenues comprise our Vivera Retainers, retention aligners ordered through our Doctor Subscription Program, clinical training, education, accessories, and e-commerce. Additionally, the Doctor Subscription Program includes Invisalign touch-up cases, which comprise up to 14 stages and are currently available in North America and select countries in Europe, with the latest launch in Brazil. In Q4, total Invisalign DSP touch-up cases increased nearly 37% year-over-year to more than 27,000 cases. For fiscal 2024, total DSP touch-up cases shipped exceeded 100,000, also a 37% increase compared to 2023. Clear Aligner volumes from DSO customers rose sequentially and year-over-year, boosting growth across all regions. Our DSO business continues to surpass our retail doctors worldwide, particularly in the U.S., driven by our largest DSO partners, Smile Doctors and Heartland Dental, alongside strong iTero scanner sales as DSOs invest in fully digital workflows. In December, we completed a $30 million equity investment in Smile Doctors, the leading orthodontic-focused DSO in the U.S. with over 450 locations across 32 states. Smile Doctors has a strong track record of developing affiliated practices by providing tools and technology that enable orthodontists to focus solely on patient care, and we are actively exploring collaborations with DSOs that share our vision of advancing digital dentistry. Each DSO has its own strategy and business model, and we are committed to working with those aligned with our operational goals and vision. We aim to partner with DSOs that recognize the advantages of digital workflows enabled by our diverse range of products and services, which enhance practice efficiency and profitability while also improving the patient experience through shorter cycle times and better access. Moving on to Systems and Services, Q4 showed continued strength with a year-over-year revenue growth of 14.9%. Sequentially, Q4 revenues from Systems and Services were up 5.2%. In Q1 2024, we launched the iTero Lumina designed for orthodontic workflows, either as a new stand-alone scanner or as an upgrade from our iTero Element 5D Plus scanner. Overall, we are very satisfied with the ongoing adoption of the iTero Lumina scanner, and we anticipate further success with the upcoming launch of its restorative capabilities. In Q4, we initiated a limited market release of our restorative software on the iTero Lumina scanner, and the feedback from doctors has been overwhelmingly positive. Our innovation with the iTero Lumina embodies our commitment to delivering exceptional value to customers and dental professionals globally. Doctors can currently purchase the existing version of the iTero Lumina scanner, which will receive a free upgrade to the new version when it is available at the end of March. With that, I will now hand the call over to John.

Thanks Joe. Now, for our Q4 financial results. Total revenues for the fourth quarter were $995.2 million, up 1.8% from the prior quarter and up 4% from the corresponding quarter a year ago. This reflects an increase in clear aligner volumes up 1.9% sequentially and 6.1% year-over-year and revenue growth from Systems and Services of 5.2% sequentially and 14.9% year-over-year. On a constant currency basis, Q4 2024 revenues were favorably impacted by approximately $0.8 million or approximately 0.1% sequentially and were unfavorably impacted by approximately $0.9 million year-over-year or approximately 0.1%. For Clear Aligners, Q4 2024 revenues of $794.3 million were up 0.9% sequentially, primarily from higher volumes, geographic mix shift to higher-priced countries, and lower net revenue deferrals, partially offset by product mix shift to lower-priced products and higher discounts. Q4 Clear Aligner revenues were favorably impacted by approximately $0.7 million or approximately 0.1% from foreign exchange sequentially. Q4 2024 Clear Aligner per case shipment of $1,265 was lower by $10 on a sequential basis, primarily due to product mix shift and higher discounts, partially offset by favorable geography mix and lower net deferrals. Even though FX had a minor impact on our reported quarter-over-quarter results, our Q4 guidance did not forecast any substantial change from the October spot rate foreign exchange rates. However, the U.S. dollar unexpectedly strengthened in November and December. If foreign exchange rates in October had remained constant for November and December, then Clear Aligner ASPs would have increased approximately $10 quarter-over-quarter, or the equivalent of $14 million. On a year-over-year basis, Q4 Clear Aligner revenues were up 1.6%, primarily from higher volumes, lower net deferrals, price increases, and higher non-case revenues, partially offset by lower ASPs, reflecting the impact from unfavorable foreign exchange of $0.7 million or approximately 0.1%, product mix shift to lower-priced products and geographic mix. Q4 2024 Clear Aligner per case shipment of $1,265 was down $55 on a year-over-year basis due to the impact of U.K. VAT of $13, product and geographic mix, and higher discounts, partially offset by lower net revenue deferrals and price increases. During Q4, we reached a favorable outcome with the U.K. tax authorities regarding cumulative assessments of approximately $100 million for unpaid VAT related to certain Clear Aligner sales made during the period of October 2019 through October 2023. In Q4, we received a full refund of this $100 million from U.K. tax authorities. This settlement also relieved us of any potential assessments for sales through mid-October 2023. As a result, we have approximately $7 million of VAT paid for periods up to December 2023 that are still in dispute. We expect a ruling by the UK courts in the first half of 2024 for this remaining VAT amount. This ruling will also give clarity whether a 20% VAT is required to be applied to all Clear Aligner sales in the UK going forward. We believe that Clear Aligner should continue to be exempt from that. Clear Aligner deferred revenues on the balance sheet as of December 31, 2024, decreased $51.3 million or 4.1% sequentially and decreased $92.1 million or 7% year-over-year and will be recognized as the additional aligners are shipped under each sales contract. Q4 2024, Systems and Services revenues of $200.9 million were up 5.2% sequentially, primarily due to higher scanner volumes, higher non-systems revenue driven by iTero Lumina upgrades, partially offset by lower scanner ASPs. Q4 2024, Systems and Services revenue were up 14.9% year-over-year, primarily due to higher scanner volumes, higher ASP and increased non-systems revenues, mostly related to upgrades and leasing rental programs. Q4 2024, Systems and Services revenue impact by foreign exchange was approximately $0.1 million, flat sequentially. On a year-over-year basis, Systems and Services revenues were unfavorably impacted by foreign exchange of approximately $0.2 million or approximately 0.1%. Systems and Services deferred revenue on the balance sheet was down $4.1 million or 1.8% sequentially and down $40.3 million or 15.5% year-over-year, primarily due to the recognition of service revenues, which are recognized ratably over the service period. The decline in deferred revenues, both sequentially and year-over-year, primarily reflects the shorter duration of service contracts applicable to initial scanner purchases. Moving on to gross margin. Fourth quarter overall gross margin was 70%, up 0.3 points sequentially and flat year-over-year. Overall, total gross margin was not significantly impacted by foreign exchange sequentially or on a year-over-year basis. Clear Aligner gross margin for the fourth quarter was 70.2%, down 0.1 points sequentially due primarily to lower ASPs and restructuring costs, partially offset by lower manufacturing costs. Clear Aligner gross margin for the fourth quarter was down one point year-over-year, primarily due to lower ASP and restructuring costs, partially offset by lower additional aligners. Overall, Clear Aligner gross margin was not significantly impacted by foreign exchange sequentially or on a year-over-year basis. Systems and Services gross margin for the fourth quarter was 69.4%, up 1.9 points sequentially due to lower manufacturing and freight costs, partially offset by lower scanner ASPs. Systems and Services gross margin for the fourth quarter was up 4.7 points year-over-year due to manufacturing efficiencies and lower freight costs and service costs and higher scanner ASPs. Overall, Systems and Services gross margin was not impacted by foreign exchange sequentially or on a year-over-year basis. Q4 operating expenses were $552.8 million, up 6.4% sequentially and up 11% year-over-year. On a sequential basis, operating expenses were $33.3 million higher due primarily to restructuring costs. Year-over-year operating expenses increased by $54.8 million, primarily due to restructuring, advertising and marketing expenses. Q4 restructuring charges related to severance for impacted employees were higher than anticipated. On a non-GAAP basis, operating expenses were $474.7 million, up 0.4% sequentially and up 6.3% year-over-year. Our fourth quarter operating income of $144.1 million resulted in an operating margin of 14.5%, down 2.1 points sequentially and down 3.4 points year-over-year. Operating margin was favorably impacted by foreign exchange of approximately 0.1 points sequentially and unfavorably impacted by 0.2 points year-over-year. The effective restructuring on GAAP operating margin was approximately 3.7 points. Q4 non-GAAP operating margin was 23.2%, up 1.1 points sequentially and down 0.6 points year-over-year. Interest and other income and expense net for the fourth quarter was an expense of $3.4 million compared to income of $3.6 million in Q3 2024, primarily due to unfavorable foreign exchange movements of $15.3 million, partially offset by higher interest income and gain on investments. On a year-over-year basis, Q4 2024 interest and other income and expense was unfavorable compared to income of $1.3 million in Q4 2023, primarily due to unfavorable foreign exchange movements, partially offset by higher interest income and gain on investments. The GAAP effective tax rate in the fourth quarter was 26.3% compared to 30.1% in the third quarter and 28.3% in the fourth quarter of the prior year. The quarter GAAP effective tax rate was lower than the third quarter effective tax rate primarily due to the release of uncertain tax position reserves, partially offset by one-time deferred tax adjustments in certain foreign jurisdictions. The fourth quarter GAAP effective tax rate was lower than the fourth quarter effective tax rate of the prior year, primarily due to the release of certain tax position reserves, partially offset by one-time deferred tax adjustments in certain foreign jurisdictions. Our non-GAAP effective tax rate in the fourth quarter was 20%, which reflects our long-term projected tax rate. Fourth quarter net income per diluted share was $1.39, down $0.16 sequentially and $0.25 compared to the prior year. Our Q4 2024 EPS was unfavorably impacted by a stronger US dollar, which amounted to approximately $0.14 per diluted share due to net foreign exchange losses related to the revaluation of certain balance sheet accounts. On a non-GAAP basis, Q4 2024 net income per diluted share was $2.44 for the fourth quarter, up $0.9 sequentially and up $0.02 year-over-year. Moving on to the balance sheet. As of December 31, 2024, cash and cash equivalents were $1,043.9 million, up sequentially $2 million and down $106.4 million year-over-year. Of our $1,043.9 million balance, $188.7 million was held in the U.S. and $855.2 million was held by our international entities. During Q4 2024, we initiated a plan to repurchase $275 million of our common stock through open market repurchases. As of December 31, 2024, we had purchased approximately 0.9 million shares at an average price of $222.94 per share for an aggregate of approximately $202.9 million. The remaining $72.1 million of the $275 million was completed in January of 2025. As of January 30, 2025, $225 million remains available for repurchase of our common stock under our stock repurchase program approved in January of 2023. As Joe mentioned earlier, during the quarter, we completed a $30 million equity investment in Smile Doctors, the largest ortho-focused dental support organization in the US. Q4 accounts receivable balance was $995.7 million, down sequentially. Our overall days sales outstanding was 90 days, down approximately three days sequentially and up approximately five days as compared to Q4 last year. Cash flow from operations for the fourth quarter was $286.1 million. Capital expenditures for the fourth quarter were $23 million, primarily related to investments in our manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $263 million. Before I turn to our Q1 and fiscal 2025 outlook, I'd like to provide the following context around pricing and potential new tariffs. On March 1, 2025, we will raise the list price of clear aligners by about 3% on average in the Americas and EMEA regions. At the same time, we will remove the $10 to $15 per order processing fee for all new clear aligner orders, all new clear aligner refinement orders from past cases and non-DSP Vivera cases. We expect the net effect from these two actions on ASPs to be zero for 2025. We currently manufacture clear aligners in Mexico and ship them to the US primarily for our US customers, with the remainder eventually shipping to other international locations. The US-Mexico tariff situation remains very fluid, and we are unable to predict whether new tariffs will go into effect in the future. We are monitoring events closely. Our Clear Aligner COGS include material, labor, overhead and freight costs. We expect an incremental tariff, if implemented, to be applied to transfer prices from Mexico shipments to the US. These transfer prices would not include treatment planning costs, freight and other overhead and similar costs. Align's global operations have evolved significantly over the past several years, and we have greater flexibility to support our global business. However, assuming a new 25% tariff on shipments to the US from Mexico, we believe it still would be more economically viable to ship clear aligners from the US to the US for Mexico due to a variety of factors, including the incremental additional freight costs incurred, where we shipped from our Polish facility. Regarding China, we currently manufacture our products in China for the benefit of our customers in China. With that as a backdrop, assuming no circumstances occur beyond our control, including foreign exchange and new tariffs, for Q1 2025 and fiscal 2025, we provide the following outlook. We expect Q1 worldwide revenues to be in the range of $965 million to $985 million, down sequentially from Q4, primarily due to the impact from foreign exchange rates at current spot rates and lower capital equipment sales, reflecting historical Q1 seasonality. We expect Q1 Clear Aligner volume to be up slightly sequentially and expect Q1 Clear Aligner ASPs to be down sequentially, primarily due to unfavorable foreign exchange at current spot rates as well as continued product mix shift to non-comprehensive Clear Aligners. In addition to seasonality, we expect Q1 Systems and Services revenue to be down sequentially due to the timing of commercial availability of our iTero Lumina scanner with restorative software, which is expected at the end of March. We expect our Q1 2025 GAAP operating margin to be below Q1 2024 GAAP operating margin by approximately 2 points, primarily due to unfavorable foreign exchange at current spot rates. We expect our Q1 2025 non-GAAP operating margin to be below Q1 2024 non-GAAP operating margin by approximately 1 point, primarily due to unfavorable foreign exchange at current spot rates. For fiscal 2025, we expect 2025 year-over-year revenue growth to be in the low single-digits, which reflects approximately 2 points of unfavorable foreign exchange at current spot rates. We expect 2025 Clear Aligner volume growth to be up approximately mid-single-digits year-over-year compared to up 3.5% year-over-year in 2025. We expect 2025 Clear Aligner ASPs to be down year-over-year due to unfavorable foreign exchange at current spot rates and continued product mix shift to non-competitive, non-comprehensive Clear Aligners. We expect 2025 Systems and Services year-over-year revenues to grow faster than Clear Aligner revenues. We expect 2025 GAAP operating margin to be approximately 2 points above 2024 GAAP operating margin, and we expect 2025 non-GAAP operating margin to be approximately 22.5%, which both reflect the impact of unfavorable foreign exchange at current spot rates, partially offset by the benefits from restructuring actions we took in Q4 to improve profitability and give us margin accretion in 2025, even as we scale our next-generation direct 3D printing fabrication manufacturing. We expect our investments in capital expenditures for fiscal 2025 to be between $100 million and $150 million. Capital expenditures primarily relate to building construction and improvements, as well as manufacturing capacity in support of our continued expansion. Overall, I am pleased with our fourth quarter and fiscal 2024 results, particularly the year-over-year Clear Aligner volume growth, the record number of submitters, the continued momentum from our Systems and Services business, and our operating margin improvement. After repurchasing $353 million of our Align common stock during 2024, we concluded the year with no debt and approximately $1.044 billion in cash and cash equivalents. Our goal, as always, is to deliver value to our shareholders. Now, I'll turn the call back over to Joe for final comments.

Thanks, John. In closing, 2024 was a year of solid progress across the business. Record full year total worldwide revenues of $4 billion, record full year total worldwide System and Services revenue of $769 million, record teen shipments and growth in both teen and adult markets, record 130,400 doctors shipped to, 19.5 million total patients treated, with 5.6 million teens and kids. We ended the year with over $1 billion in cash and equivalents after repurchasing 1.5 million shares for $353 million. In another year where the dental industry is down, we continue to grow. I feel good about where we ended the year and I'm excited to kick off 2025 with a team focused on building the innovations introduced in 2024 that drive efficiency and growth for practices and that are committed in delivering the best customer and patient experiences in the industry. I want to highlight just a few of the Align innovations that we introduced in 2024 that we believe will continue to drive adoption and utilization. In January 2024, we unveiled a breakthrough technology, the iTero Lumina intraoral scanner with 3x wider field of capture and a 50% smaller wand that delivers faster scanning, higher accuracy and superior visualization for greater practice efficiency and with orthodontic workflows. We look forward to introducing at the end of Q1 2025, the iTero Lumina intraoral scanner with software capabilities to enable efficient restorative and ortho restorative workloads to help general practitioner dentists deliver exceptional restorative outcomes. The iTero scanner is the front end of Align's digital platform, designed to give doctors the capability to run simulations and communicate with patients, so the patients can see their smiles and the time that it would take them to get that outcome. It's also a big part of our growth algorithm, and we've had good accretive margin on the iTero Lumina scanner product since its launch. We also started rolling out ClinCheck in minutes, delivering treatment plans based on doctors building personalized treatment preferences for almost touchless digital workflows, which we'll expand to more doctors this year, bringing an unprecedented level of speed and customization to digital treatment planning. Changing the paradigm for how doctors can treat growing patients is one of our biggest opportunities. As we continue to deliver innovations that help doctors achieve more treatment at younger ages, we potentially decrease the amount of orthodontic treatment that younger and teen patients need overall. As we continue to commercialize the Invisalign Palatal Expander system, Align's first direct 3D-printed device that provides doctors with a solution set to treat the most common skeletal and dental malocclusions in growing children, we anticipate introducing the next in a series of direct 3D-printed devices with a pilot for Invisalign First direct printed retainers in the first half of 2025. We have also Invisalign mandibular advancement with the occlusal blocks now in limited market release, giving doctors and patients a better option for Class II correction in younger patients while simultaneously strengthening their team. We're also excited about the future of digital orthodontics focused on growth opportunities as a company while driving margin improvement and our unique ability to leverage aggregated and anonymized data from approximately 19.5 million Invisalign cases to continue to gain more knowledge about the science of orthodontics to move the industry forward. And while we're now in our 28th year, in the same way, we're just at the beginning. It's that motivating and exciting for the whole Align team. With that, I thank you for your time today. I look forward to updating you on our continued progress over the coming quarters. Now I'll turn the call back to the operator for your questions.

Good afternoon, and thank you for a ton of detail already. Maybe if I could just dive in a bit to the guidance, especially on the Clear Aligner side. Is there any way to give a little bit more of a breakdown as you think about the dynamics on volume versus price? Hear you loud and clear on the ASP impact from FX. But curious how to the growth dynamics on aligners as a whole, especially coming off of the mix of, obviously, easier comps in 2024 versus what's still an uncertain macro environment? Thank you.

Yeah. Michael, this is John. When we discuss the overall outlook for the year, we expect volume for Clear Aligners to increase in the mid-single digits. This will vary by region and time of year, but that's our perspective for the year. We were pleased with our exit from 2024 and the volumes we achieved, which is the guidance we have for the year.

And just along those lines and the volumes, mid-single digits, obviously, a really solid number. How do you think about the competitive dynamics in the market now? And are there opportunities either in terms of other competitors exiting? Or how do you think about the components of what drives that in terms of market dynamics, competitive dynamics, share gains, anything more to break down that obviously strong number would be great as well. Thank you so much.

Yeah. And Michael, it's Joe. I think on the competitive dynamics, I don't see a big change in the dynamics when you look at 2024 and 2025. Overall, we feel our new innovation continues to put us ahead. Obviously, the Minute ClinCheck really drives our super users to a level of productivity they haven't had before. So I feel really good about our competitive ability all around the world, including China, including some specific areas about it. So as we move into 2025, I really feel that we're gaining momentum in that sense.

Hi, everyone. Congratulations on the quarter, and thank you for the question. I would like to discuss two things. First, regarding the Lumina and the broader scanner business, it seems you have the launch coming up in the first quarter. Could you share your expectations for that, particularly in light of what you've learned on the ortho side for Lumina? Second, you mentioned the impact of increasing leases compared to capital equipment sales. Can you help us understand the growth in that business on a unit basis? I think that would be helpful. Additionally, could you clarify some of the growth dynamics, especially in North America, between DSO and non-DSO customers? Thank you.

Elizabeth, it's Joe. I'll take the first part of your question. When you look at what we learned in the orthodontic release of Lumina, it was a product that was everything we hoped it would be. I talked about the wider field of view, the speed. I didn't talk a lot about the optics. So image quality is fantastic on the product line. The lightness of the wand and all that was really important for the technicians that use wand day in and day out because in the past, we had a lot of complaints in the sense of the heaviness and bulkiness of the wands that are in the marketplace right now, particularly on the confocal imaging side. So as we move that into more of the restorative marketplace, remember, we had a good take-up of GPs using that product line last year, too. This will complete the whole system for GPs because they can do the restorative work they had on it and not just the orthodontic side. So we're excited about it. We're looking forward to it. Obviously, we'll talk about it coming up at the IDS, and we look forward to launching it in March and then bringing you through the second quarter.

And as Joe said, kind of to your second part of the question, Elizabeth, look, this rounds out our portfolio. We've got a complete portfolio from the most advanced scanner and the latest with Lumina to all other types of products that we have, all the way down to certified pre-owned. And so that portfolio is rounded up, but we also, as you mentioned, the leasing and other rental, we offer a lot of options for our customers. Some customers want to buy, and they want that legacy equipment, that's great, and they'll buy that new equipment, or trade in or just add another scanner and so on. But some also don't want to put that capital up, especially in this environment. So we offer them a lot of different opportunities to lease that equipment to use external financing that gets them at a good rate for external financing to purchase, or some just want to rent it. And so we feel like we can offer that customer any which way that they want to be able to utilize our equipment. And as we continue to release new products, we keep bringing pre-owned in and so on. We're just expanding our base, which is helpful for our overall business.

Thanks, Elizabeth. Next question, please.

Hi. Thanks for taking my question. Hey, Joe, I also want to follow up on this volume issue because it seems like in the fourth quarter and into 2025, you're forecasting some pretty decent volumes. And I'm kind of curious, could you put that in the context of where you think the overall ortho industry is now? Do you feel like you're kind of getting some share back because in 2024, in 2023, the theme was macro uncertainty, but you're not really talking about that anymore? And I'm just kind of curious if you think maybe the industry has gotten a little bit better? Or is some of these DTC offerings that may have faded into the background, like what's enabling you to improve your volume, you think? And then I just had a follow-up for John.

Yes, Glen, that's a great question. We've been discussing stability for a while, and I think we still stand by that. Each region has its own characteristics. We felt optimistic about Europe in the fourth quarter and saw some positive momentum there, as well as in APAC, particularly in China and Japan, alongside increases in Thailand and various parts of the APAC area. In the United States, however, the orthodontic market has remained flat over the past three years. While we've made progress with our new products, we've faced challenges in that sector. It's less about competition and more about a regression towards wires and brackets. With fewer patients, doctors are focused on saving margins, which makes it tough to sell clear aligners when they're not operating at full capacity. On the other hand, we've experienced strong growth in general practitioners, not just in the US but globally, which has benefited us. Recall that we adjusted our channel strategy years ago to ensure that we targeted the GP channel with a dedicated GP sales force, alongside an ortho sales force. This has provided us with valuable industry insights and helped us position our products effectively. I believe our new technology contributes to our confidence, especially in the orthodontic channel with the differentiation we offer for those early patients we've discussed. We feel we have something unique for the orthodontic community, particularly for younger patients, and we plan to promote that aggressively as we approach 2025.

That's great. John, could you provide some additional insight on the ASP issue? Everyone is aware that ASPs will decrease, and you've mentioned foreign exchange and mix shifts. Can you elaborate on how much foreign exchange is influencing the ASP figure for 2025?

Yes. Yes, that's a good question, Glen. Overall, when we look at 2025 in terms of how we've guided, we have about 2 points of FX headwind on a year-over-year basis. It's just the strengthening of the dollar. We saw that as it came out October and it continues to be strong in November, December, January. We're basically forecasting what we see now on a spot rate standpoint and expecting it to be strong, and that impact is about 2 points unfavorable on a year-over-year basis.

Thanks, guys. Hey, Joe. First one, the 1Q 2025 revenue guidance is down around 2% at the midpoint. The full year revenue guidance is up low-single digits. And I think some of that is the 1Q comp, I believe also the scanner timing, if you would, due to the Resto launch. But I think it's an important question, Joe. Can you talk about other reasons why the rest of the year, you're arguably up, call it like low to mid-single digits versus the down 2% in 1Q 2025, again it's a guide? And then I think what people are going to be worried about is, is there an embedded assumption that things pick up in the guide? Or is it just sort of the moving parts again of the comp, the Resto launch, et cetera? And I'll sort of pause there and then I'll ask my follow-up.

John, I'd say we obviously introducing the restorative scanner in March, we don't get the full benefit of that in the first quarter, and you're accurate in the sense of reflecting that in your comments overall. I would say we're not talking about a build as we go through the year. I think you have to look at exchange on a whole thing, and John can explain that in a sense of how we've baked that in overall. But obviously, you have a full year of IPE coming in this year. We have the regulatory approvals for that going into Europe and different parts of Asia, too, and we think we'll hit mainstream in that end too. And may deal with advancement with a plus of blocks too is another one that we think is going to be a specific grower for us also. So I mean, that's how I'd pretty much tackle that is that we have new technology rolling in. You have the iTero restorative coming in also. And John, what would you add?

Yes. And we're not expecting, Jon, any overall improvement in the macro economy. If it happens, great, that will be good for the entire business. But we're not expecting an overall improvement there. We did see as we came out of Q4, I mean, just the 6% growth in volume in Q4, that's the highest growth that we've seen in three years on a year-over-year basis. So that's good to see. We want to continue to see that momentum. And like Joe said, we're doing everything we can with new products, new innovations, new ways to go to market to be able to continue that.

Yes, I understand we exceeded expectations for the first quarter. My second question is for Joe. For a few quarters now, maybe more than two, you've mentioned the quicker growth from the DSOs. Could you share a rough estimate of the DSOs' contribution to your North American business? More importantly, regarding the strategies you implement with the DSOs, which we've heard about, including the marketing support, do these methods translate to the fragmented GP market? If they do, how long would it take for that to show results on your end? Clearly, being able to project that quicker growth to individual practices would be optimistic and certainly something to be excited about. Could you also comment on the percentage of their influence on your bids? Additionally, do you believe you could employ the same strategies with individual practices?

That's a great question, Jon. First of all, I consider DSOs as a significant advantage. They can leverage our technology and the efficiency we've achieved, as well as what we've learned about branding in different demographic areas. Their ability to disseminate this knowledge within their teams is much more effective than our typical individual door-to-door sales approach, which is quite evident. However, this doesn't limit what we're sharing with the DSOs in terms of our knowledge and what they implement. Many of our salespeople have been with us for a long time and understand this as well. Their challenge is identifying the right orthodontists and general dentists who are willing to adopt these procedures in their markets. During our recent sales kickoff in Dallas, I mentioned that we face the toughest last mile of any company I've worked with because we are dealing with these individual family run practices. These practices aren't lacking in intelligence; they are very capable but often not business-focused. They prioritize clinical aspects, which means building their trust and moving forward can take time. DSOs really help to speed up that process, and that’s the best way I can put it.

Thanks for the color guys.

Great. Good afternoon Jon and John. Thanks for taking my questions. Yes, I had a couple of follow-ups on the guide for Clear Aligner. So, mid-single-digit volume growth for Clear Aligners. Joe, based on your answer to a previous question, it sounds like U.S. volume growth should probably be slower than international, but I just wanted to confirm that's how you're thinking about it? And then on the ASP side, to down year-on-year for the full year, first quarter ASPs look to be down high single-digits year-on-year based off of the first quarter ASP guidance. But you have this price increase starting in the second quarter. So, just I'd love to hear how we should think about pricing in quarters two through four on a year-over-year basis?

Hey David, I'll address the first part of your question. Our forecast for next year suggests that U.S. growth will slow down compared to the rest of the world. We are simply projecting what we experienced in 2024 into 2025. Currently, we don’t have any data that would lead us to alter our view on consumer confidence, and there haven't been any significant changes observed in the past few quarters. As far as average selling prices go...

ASPs are significantly affected by our business, with over 50% of it being outside the U.S. They are influenced by a stronger dollar. I want to clarify our guidance based on the current spot rates and how that will reflect in the future. This situation is subject to change, but it serves as a reference point. For Q1, you will notice that ASPs will decrease, primarily due to foreign exchange effects. This will evolve throughout the quarters. By the year's end, the impact of the strong dollar we observed in November and December will diminish on a year-over-year basis. However, it will remain significant in Q1.

Hi, Joe. Thanks for taking my question. So look, we're all going around kind of this 1Q, trying to understand it relative to the rest of the year. The one thing I haven't heard and maybe I just missed it, but you guys are talking about a 200 basis point headwind for the year from currency. I think that is pretty much flow through to ASP as to ASP as well, about a two-point headwind for the year well on the Clear Aligner side. But I haven't heard you quantify Q1. My math and my currency math is terrible, but my math would put currency at almost a 3, 3.5 point headwind in 1Q to both ASPs and global revenue. Am I close on that? Is it bigger in 1Q?

Yes. That's the right way to phrase it, Jeff. It is bigger just based on what the dollar was doing last year compared to this year. So there is a bigger currency effect in Q1 than on average for the year.

Ballpark, am I close on that 3, 3.5?

Yes, you're close on that.

Okay. Thank you very much.

Hi, everyone. Thanks. Hey guys, thanks for taking the question. Joe, maybe for you on the IPE side, I think we're a little bit over a year after the launch of that product now. Curious if you could comment on maybe two things. One, what's the adoption curve looking like relative to your expectations now that we're about a year in? And then two, is this a product that could maybe be a catalyst within the teen market to let you get that next incremental leg of adoption given that that's kind of the third year end market that you guys are under-penetrated in?

The adoption curve has been promising, as I mentioned earlier, following the Invisalign First product, which we consider a dental expansion tool. While Invisalign First helps in moving teeth, IPE is focused on bone movement, which explains the regulatory processes we must navigate for each region. I’m optimistic about IPE because it represents a significant advancement and is distinct from our other offerings. It does take time for doctors to become comfortable with it, but we have received excellent feedback from patients regarding the product's comfort. Many patients have previously used devices like the Hi-Res and wrench, making them and their parents more open to trying the Invisalign Palatal Expander. We've also addressed some initial challenges relating to visualization during scanning and attachment improvements, as well as enhancements in wearability. I’m pleased with the progress we’re making, and it’s exciting to see our reach expanding from regional to global levels. We have a strong combination in the market with Invisalign First, and many doctors are utilizing it alongside IPE to ensure proper alignment of the bite during upper palate expansion. This synergy between the two products is encouraging. I hope this addresses your question and conveys the momentum we’re experiencing.

Yeah. Maybe as a quick follow-up on a separate note. International has been more durable for you guys in the Americas these days. Is that simply a result of just being earlier in the adoption curve and so things are doing a little bit better there? Or is macro and international just doing a little bit better than the Americas? Just trying to understand how durable international outperforming should be as we go into 2025 even if macro and Americas stays relatively muted? Thanks.

It's hard to be discrete on that answer. Overall, Brandon, I would say there are certain areas where, obviously, it's the initial penetration of our product line in certain areas, but I certainly wouldn't say that about Latin America. We've been now for many years, and we see continued growth in that sense. Middle East, Africa in those areas too, some of the places of Africa are new, and they'll hit a certain inflection point. But overall, I feel like we face better economies in those regions. They didn't necessarily, I think, over-extend their economies, the way we saw in the Western world and which has affected a large part of Western Europe and also in the United States. Specifically in Asia, outside of China, the other countries in Asia just came back out of COVID in a better position than we were before. But some of those countries are penetration, and some of those countries are just expansion too. So I think overall, it's just a good mix there, Brandon. And I like that. It's good to have. And then as you roll out these new technologies, remember it offers you new opportunities in those countries, too. So that expansion piece can continue.

Thanks, Brandon. Operator, we would like to address the covering analysts still on the line. If I could ask everyone to limit themselves to one question so we can ensure we address everyone's inquiries, please.

Good afternoon. Thank you for taking my question. I'll be brief. I want to ask about reducing frictions within the teen channel and addressing the challenges in the current orthopedic environment. Is there anything you can do through marketing initiatives to create better demand? Also, regarding friction, could you clarify the reasoning behind eliminating the $10 to $15 processing fee, especially since you've offset it with price increases? Have you encountered any pushback on these fees? Has this caused any issues with doctors that you’re trying to resolve? Thank you.

That's a great question, Jason. The friction in the teen channel largely stems from the current economics in orthodontic offices. Over the past three years, orthodontic practices in North America have not experienced significant growth. Individual practices are trying to optimize their profits, which has made them cautious in their business decisions. The issues you've mentioned regarding our processing fees are real. We faced considerable pushback in Europe and the US, though not as much in Asia. Consequently, we decided to retract those fees alongside an overall price increase, which received a positive response from our doctors. This issue created annoyance for our sales team as they had to navigate conversations with both new and existing doctors about these changes. I think this adjustment will be beneficial. John, I'm sure you have some thoughts on this.

I mean, in the end, we want to focus on driving this business, category, driving our products too and less about some of the other minor things like this with processing fees and so on. So this is a good opportunity to kind of put this together, get it in the right place and talk about the future of the business versus some of the other past expenses like this.

Yes. Thanks.

Thanks everyone. Thanks for taking the question. So obviously, there's a lot of puts and takes related to the evolving tariff situation. But one area I was just hoping to get your thoughts on is given that there's a large competitor Chinese base as some investors are watching closely as that competitor tries to establish a larger market share in the US market, really, with this new political backdrop for the next four years under the new administration, I'm wondering whether some practitioners in the US may be a little more hesitant to want to buy into the ecosystem of really any competitors that are headquartered or based outside the US, just given the heightened risk of trade wars, et cetera. So perhaps I could play into your hands favorably, at least in the US market, which I think it's still your biggest market. So just a high level, just curious to get your thoughts on that potential dynamic? Thanks.

Hi, Steven. To confirm, the US is still our largest market globally. As I mentioned, the orthodontic market has not really grown in the past three years, and we have faced competition. I recognize that your comments likely refer to Angel Aligner or other Chinese suppliers entering the market. Overall, success comes from excellent customer service, technology, and relationships, which is what our sales team is focused on. We believe Chinese competitors have introduced unsustainable pricing. We have a clear understanding of the prices necessary to achieve a reasonable return, and we think these dynamics will sort themselves out, as has been the case with other competitors. While I can't speak for the many orthodontists or general practitioners across the US and their views on international politics, our priority is to maintain focus on providing the best technology, productivity, and brand to ensure our success in the market, allowing other factors to unfold as they will.

Thanks for the question. This is Dylan Kim on for Kevin. Thanks for the question. A quick question on direct fabrication. You guys previously have talked to potentially commercializing products this year, I believe, starting with the retainer product. So any update there on commercialization of products? And maybe detail on the P&L too into both revenue and investment into costs, into the manufacturing capabilities that you can call out?

First of all, I'd like to clarify that our IPE device is 3D printed, but it does not utilize the Cubicure process or the resin associated with it. As I mentioned earlier, we will begin with a limited release of the Invisalign First retainer. This retainer is quite complex; it requires a high modulus and a significant degree of variability based on an individual's arch at any given time. It aligns perfectly with our efforts to scale up our new Cubicure process with resin. As I stated, you'll see the initial stages of this in the first half of this year, and by the second half, we should be prepared for a general release in the third and fourth quarters of that product line. This is just the beginning. After that, we will advance into what we refer to as mandibular advancement. This includes any aligners that require auxiliary features, or challenging cases where varying wall thicknesses are necessary. We are genuinely excited about the efficiency of this technology, as well as the exceptional design capabilities and creative freedom it offers orthodontists. That’s about as much detail as I can provide at this time.

Thanks. Next question please.

Thank you for including me. I have just one quick question. John, I appreciate your comments on the tariffs to Mexico and understand that there are still many variables at play, but I want to make sure I grasp everything. Regarding transfer prices, I understand your points about overhead and freight costs and how treatment planning isn't included. How should we view this as a percentage of your cost of goods sold? If we consider something like $375 COGS per case, what would be the impact on the transfer pricing? Is it around 50% to 75%? Could you walk us through the transfer price calculations so we can have a better understanding?

That's a great question, Mike. I tried to provide some insight into this. We start with the cost of goods sold and there are certain hard costs unrelated to our activities in Mexico such as freight and treatment planning, specifically reflecting the value added and the work being done there compared to the transfer price. To give you some perspective, many people have been considering the potential impact based on your question. Typically, in an average month, a 25% tariff could add about $4 million to $5 million in costs. This helps illustrate how this affects our overall situation. As I mentioned in my opening remarks, if such tariffs were implemented, they wouldn't be significant enough for us to relocate manufacturing from Mexico to Poland, though we will assess the situation as we progress. I wanted to clarify this for you. We'll continue to evaluate things as they unfold, and we aim to maintain a clear understanding of the cost implications, which will guide our decisions for both the short and long term.

Thank you. Thanks.

Great. Thanks for squeezing me in. Just a follow-up on that last one. Just to clarify, so there's no buffer kind of embedded in your guidance as it stands today from a tariff perspective? And just on China, just the environment there, not necessarily from a tariff perspective, but just more so from demand trends? And even China from a competitive standpoint, I guess, expectations for the balance of the year, if you could touch on those? Thanks.

That's great, Erin. I'll take the first question regarding tariffs. In our forecast and the guidance we've provided for that margin of 22.5%, we haven't included any new tariffs. We'll see how things develop. However, if a 25% tariff from Mexico to the U.S. is implemented, it would result in an expense of $4 million to $5 million per month, depending on volume. As for China, Joe, do you have any additional insights on the market there?

I'd say the China market, we were pleased with the third quarter. The fourth quarter, obviously, is always less in China than what the third quarter was. There was nothing in that quarter made me think that anything was different in China and since its projected the business, from what we've seen. So overall, I'd call China stable right now.

Okay. Thank you.

Thank you.

You're welcome.

Well, thank you, everyone, for joining our call today. We appreciate it. If you have any follow-up questions, please reach out to Investor Relations. We look forward to seeing you at our next industry events, including the Chicago Midwinter Dental Show coming up here later in February. I hope everyone has a great day.