愛齊科技 (ALGN) 2014 Q4 法說會逐字稿

Greetings and welcome to the Align Technology fourth-quarter earnings teleconference call.

(Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Shirley Stacy, Vice President of Communications and Investor Relations.

Good afternoon.

Thank you for joining us.

I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations.

Joining me for today's call are Tom Prescott, President and CEO, and David White, CFO.

We issued fourth-quarter 2014 financial results today via market 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 12 months.

A telephone replay will be available today by approximately 5:30 PM Eastern Time through 5:30 PM Eastern Time on February 5. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13598471 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 without limitation statements about Align's future events, product outlook, and the expected financial results for the first quarter of 2015.

These forward-looking statements are only predictions and involve risks and uncertainties, such that actual results may vary significantly.

These and other risks are set forth in more detail in our Form 10-K for the fiscal year ended December 31, 2013, and our Form 10-Q for the third quarter of fiscal 2014.

These forward-looking statements reflect beliefs, estimates, and predictions as of today and Align expressly assumes no obligation to update any such 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 would like to turn the call over to Align Technology's President and CEO, Tom Prescott.

Tom?

Thanks, Shirley.

Good afternoon, everyone, and thank you all for joining us.

On the call today, I will provide some highlights from our fourth-quarter and full-year results, and then briefly discuss the performance of our two operating segments, Invisalign Clear Aligner and scanner and services.

I will also provide some color on our customer performance as well as progress in our geographies around the world.

David will provide more detail on our financials, discuss our outlook for the first quarter, provide some commentary on our overall business for 2015.

Following that, I will come back and summarize a few key points and open up the call to questions.

We are pleased to have delivered a good quarter and finish to the year, driven by continued strong growth in our EMEA and APAC regions, along with solid results in North America.

Q4 revenues of $198.6 million increased 11.4% year over year on Invisalign case volume growth of 14.2%.

For the full year, revenues of $761.7 million increased 15.4% year over year, reflecting growth across all customer channels and geographies as well as expansion of our customer base and increased utilization by existing doctors.

I am also very pleased to report that shortly after the new year, we shipped our 3 millionth Invisalign case destined for an Invisalign teen patient in the New Jersey area.

This is significant milestone for Align, for our doctors, and for our employees.

It took us 10 years to reach our 1 millionth case, another 3 years for the next million, and only two more years to reach 3 million patients now and counting.

On an overall basis, 2014 was another great year for Align.

Our results reflect continued execution of our strategic plan, including our three key strategic growth drivers, which are market expansion, product innovation, and brand strength.

I will provide a brief update on each of these before discussing our results further.

First, market expansion comprises the many ways we are working to expand the adult orthodontic treatment category with Clear Aligner therapy, increase our share of the largest segment of orthodontics, the teenage market, and open up new and existing markets and geographies around the world.

Over the past year, we have continued to invest in sales coverage, professional marketing and education programs, along with consumer marketing in select country markets.

We've also made targeted investments in opening up new geographic markets.

For example, we further expanded our directly covered country markets in Europe by converting 23 countries previously managed by our EMEA distributor back into direct sales geographies.

Today, we're announcing further expansion in the EMEA region, with three additional European countries, which are Belgium, the Netherlands, and Luxembourg, or Benelux, which are moving from distributor coverage to our direct sales organization this quarter.

As with the previous countries added, we will leverage our existing infrastructure from the adjacent country teams to build local sales coverage, drive long-term market penetration, and create a much stronger consumer brand for Invisalign.

In the near term, we do not expect a material impact from these new countries, but over the longer term, we believe these smaller individual country markets will support and extend the strong growth in the EMEA region.

In the very important teen segment, which accounts for approximately three-quarters of total orthodontic case starts each year, we continue to gain share against traditional brackets and wires.

This past year, over 117,000 teenagers started treatment with Invisalign, up 16.1% in an orthodontic market that is growing to low to mid single digits overall.

While we are pleased with our continued progress, we have yet to realize our full potential in the teenage segment in North America, not to mention in EMEA or APAC, where we are just getting started.

We intend to achieve more meaningful share gains for Invisalign among teen patients through expanded coverage and support as well as consumer demand creation programs that speak directly to teens and their moms to address common misperceptions about Invisalign treatment, letting them know the reality about how great teen compliances, the fact that Invisalign costs about the same as braces, and the excellent treatment outcomes doctors consistently achieve on teen patients.

Our second strategic growth driver, product innovation, aims to create greater doctor preference for Invisalign by delivering new features and functionality to increase our doctors' confidence in treating patients with Invisalign more often and on more complex cases.

As the science, technology, and clinical capability behind Invisalign evolves and expands, our ability to gain incremental share of orthodontic case starts expands with it.

In 2014, we announced multiple innovations designed to improve clinical applicability and predictability of treatment outcomes.

In March, we launched Invisalign G5 for Deep Bite, which includes comprehensive features that make it far easier for our customers to treat this large segment in the market.

We estimate that almost half of the orthodontic case starts in North America and Europe and almost a third of malocclusions that present to doctors in Asia are deep bite cases.

Feedback from doctors on deep bite continues to be positive, with some of our most experienced customers calling this a significant enhancement in predictability and citing increased confidence in Invisalign treatment of deep bite cases.

Not only are doctors treating deep bite cases with Invisalign more often compared to previous years, they also report increased confidence using Invisalign on more complex cases overall and we expect this trend to continue.

In March, we also launched ClinCheck Pro in North America.

ClinCheck Pro is the next-generation Invisalign treatment software tool.

It gives doctors more precise control over the final tooth position to better achieve their treatment goals.

ClinCheck Pro will be available in EMEA and APAC this quarter and we expect to see continued positive effects on treatment outcomes by enabling our doctors to show us, rather than just tell us, how they want their final setup.

In November, we announced the upcoming release of Invisalign G6 for treatment of severe crowding and bimaxillary protrusion, or first premolar extraction, a common type of malocclusion that affects more than 50% of patients in Asia along with 20% in Europe and 12% in North America.

We're excited to offer our customers a set of features designed to deliver greater predictability in severe crowding cases that require tooth extraction.

Invisalign G6 clinical innovations will be available in a limited release to Invisalign trained providers in North America during Q1, with broader commercialization efforts in our APAC, EMEA, and Latin American geographies throughout 2015.

We expect to release Invisalign G6 more widely in North America in early 2016.

Given the high relative complexity of cases Invisalign G6 will be addressing and the greater time required for treatment of these cases, we expect a gradual adoption, much like we are seeing for Invisalign G5, as our doctors try the extraction solution, be comfortable with the increased predictability Invisalign G6 provides, and over time, begin to start more Invisalign cases for this important indication.

Both the Invisalign G5 for Deep Bite and now Invisalign G6 build on our commitment to systematically address the types of cases our customers are routinely treating in their practices.

Our third strategic growth driver is brand strength, which we use to build category and drive demand.

Align is building a superior brand through a very integrated consumer marketing platform that includes TV, media, social networking, and event marketing.

Our goals are to make Invisalign a household name worldwide and to motivate consumers to seek Invisalign treatment.

In North America, we continue to speak directly to adults, moms, and teens, utilizing combined media programs across TV, social media, PR, and digital media.

In select markets across Europe and Asia, we're driving the Invisalign message through social media engagement and PR programs.

We are pleased with the progress we are seeing with programs like our EMEA regional city initiative, which has been launched successfully in 10 target cities.

In these markets, we have been able to raise awareness of the Invisalign brand and continue to reposition the attractiveness of orthodontic treatment with Invisalign.

There are plenty of highlights to share here, but since we included some details on our consumer activities in our webcast slides, I will skip those details and let you review this yourself.

Taken together, these three key strategic growth drivers -- market expansion, product innovation, and brand strength -- provide us with a set of levers to build the business, giving us confidence in our plan for continued long-term growth.

With these strategic growth drivers in mind, let's talk about how we did in Q4 by sharing some customer and geographic highlights, starting with our fastest-growing business: internationally.

Q4 was another strong quarter for our international business across the EMEA and APAC regions.

On a combined basis, total international Invisalign case volume for Q4 was over 30% of our business for the first time ever, reflecting an increase of 17.1% sequentially and up 29.2% year over year.

Our strong performance was driven by combination of increased utilization by orthodontists in all countries as well as a continued effort to add new Invisalign-trained doctors.

On a full-year basis, international case shipments increased 28.6%.

This progress was driven by combination of all three strategic growth drivers -- market expansion, as we continue to grow in new markets and achieve better penetration in existing markets through investments and coverage; product innovation, as our doctors' confidence and clinical results continue to improve from important evolutions in our products; and brand strength, as we begin to more effectively reach consumers and help them get the smile they've always wanted.

In the EMEA region, Q4 Invisalign case volume increased 27.5% year over year, reflecting record quarter results across all major countries.

In the APAC region, Invisalign case volume increased 32.7% year over year, reflecting continued strong growth across all countries, with Q4 being a record quarter for Invisalign volume in Australia, New Zealand, and Japan.

In China, despite Q4 seasonality due to multiple industry trade shows, conferences, and lengthy national holidays across the region, year-over-year growth continues to outstrip the rest of the region and more than doubled again.

The Asia-Pacific region is leading the growth story across the line by execution on the same integrated use of the strategic growth drivers as in EMEA, combined with an extremely strong focus on excellence in clinical education.

We are proud of our teams there and expect this good execution to continue.

For Q4, North America saw solid progress, with Invisalign volume up 1.7% sequentially and 8.4% year over year.

On a sequential basis, Q4 growth from North America GPs exceeded historical Q4 over Q3 trends, which was offset by an expected slight decline from North America orthos, who typically have slower growth coming off the summer teen season.

On a year-over-year basis, both customer channels were up and growth was driven primarily by continued expansion of our customer base and increased utilization from North America orthos.

Now turning to our scanner business, intraoral scanning in general and with iTero in particular represents a key future trend in dentistry and a means of connecting all areas of a practice.

We are continuing to build a great digital footprint through a growing installed base of iTero scanners.

In Q4, our scanner and services business revenues were up 3.6% sequentially and up slightly year over year.

Our scanner business continues to benefit from leveraging our combined Invisalign and iTero sales and marketing resources and taking full advantage of Invisalign and industry events.

We generated a lot of interest and sales of iTero scanners at the ADA Greater New York dental meetings as well as our North American Orthos Summit in November.

Our customers have recognized that having an iTero scanner at chair side is a great way to improve the orthodontic experience for their patients and overall practice effectiveness with Invisalign.

This underscores the reason why we continue to see substantial growth in utilization among customers with an iTero scanner.

As of Q4, the percentage of Invisalign cases submitted with a digital scan in North America rose to 37.8% compared to 34% in Q3 and 26.6% in Q4 a year ago.

Overall, the progress we see in North America is encouraging, but does not yet reflect the benefits we expect from optimizing our go-to-market approach in sales force structure, deployment, and coverage model, some of which we referenced at our analyst meeting last May as well as highlighted briefly in my presentation at JP Morgan Healthcare Conference a few weeks ago.

More than a year ago, we began a comprehensive assessment of the need for a significant evolution in our strategic and tactical approach in the North America business to drive real change and accelerate growth.

As a result, we developed and are currently implementing an updated go-to-market strategy with an expanded team and new structure to provide more comprehensive sales and service coverage.

Our intent is to provide better support and engage with our doctors and their staff members while earning a much bigger place in our doctors' practices.

Better understanding of customer insights is essential for improved segmentation of our customer base to ensure more effective sales coverage, delivery of products and services that are tailored to specific needs, and targeted selection of practices for recruitment.

Our diverse customer base varies widely, from the specialist to the general dentist, and their needs are quite different from practice to practice.

By bringing more analytical rigor to segmentation of our customer base, we are able to derive more holistic effective measures of practice potential other than simply relying on the current run rate of the business.

Accordingly, we can organize and deploy sales coverage and customer support far more effectively, while reducing sales territory size and significantly increasing the face time our field team has with these high-value partners.

In order to ensure our North America sales and marketing team can increase time in office and help each practice become more successful, we are in the process of adding a significant -- adding significant headcount to a North America field team that is also evolving a bit in structure.

While creating some new roles, the primary change is an addition of another 50 sales heads, most of which is in place as of today.

While smaller in scope than the percentage increases in sales coverage still going on in our APAC region, this infusion of additional talent and expansion of coverage will ensure we can accelerate growth in our North America business.

This approach is similar in some ways to how we restage growth in EMEA and accelerated growth in APAC a few years back.

We developed solid plans for each of those regions and invested appropriately in sales coverage, marketing capabilities, and acceleration of product development to address more complex cases.

The international teams have executed well against our plans, celebrating very strong growth that we expect will continue, partly based upon our intent to continue investment into these attractive growth opportunities.

In retrospect, while we are busy increasing investment and building the teams in APAC and EMEA, we underinvested in North America business, especially relative to the size of the opportunity.

The combination of greater analytical rigor, improved segmentation, and a more effective deployment model makes us confident the North America team will also be successful in re-accelerating growth rates.

Additionally, these increased investments in the North America go-to-market strategy and sales force expansion dovetailed very well with other key infrastructure projects underway.

These projects will ensure expanded capacity to handle additional growth, with another manufacturing plant in Juarez as well as implementation of improved enterprise systems, which will allow for more cost effective scaling of the business while enabling better ways of exceeding customer needs.

Combined with new product and technology initiatives, these investments will ensure Align's market leadership for a long time to come.

An exciting time to be here at Align.

We're accelerating progress in market expansion, product innovation, and brand that we continue to see even more opportunities ahead.

We have a robust pipeline of new product initiatives and a long list of high MPV projects in virtually every area of the Company.

Even with all that, we still see significant potential to further leverage our unique core competencies, which include digital treatment planning at significant scale, the ability to create software algorithms clinically informed by more than 5 million Invisalign and iTero cases, and computerized and precision control manufacturing for customized appliances.

For some time, we've been considering a few opportunities adjacent to orthodontics in restorative dentistry, which could potentially leverage the core competencies I just mentioned.

One of those is a large market for a serious and growing medical condition -- obstructive sleep apnea, or OSA.

Increasingly, dentists are becoming involved in the treatment of and management of patients with mild to moderate OSA conditions, principally through the use of devices called mandibular advancement or mandibular repositioning devices.

We believe our core competencies line up very well with this therapeutic approach and have been working with several players in the dental treatment of OSA.

While still a bit in stealth mode, we are now ready to share a little more about our plans, including a relationship with an innovator in the OSA market that is working with us to develop new products for dentists to treat mild to moderate OSA with oral appliance therapy.

This investment, in addition to other potential high-impact projects, fits extremely well within our overall strategy and can form the base for a new set of OSA therapeutic offerings at Align.

These new products will benefit from continued evolution in our world-class manufacturing technology base and over time, help make us far more relevant to our dental customers as they begin to treat a wider definition of oral health.

We are very interested in this new adjacent market opportunity and the potential for commercial entry in the next year or so.

As I said a moment ago, these are exciting times at Align.

We are in a period of substantial investment in a series of initiatives that give us even greater confidence we can accelerate top-line growth, generate incremental operating income, and extend our market leadership in Clear Aligner therapy and digital restorative dentistry.

And with that, I will now turn the call over to David for a review of our Q4 financial results.

David?

Thanks, Tom.

Before I get into the details, I would like to note that unless stated otherwise, all of the financial information I will discuss will be presented on a GAAP basis.

With that, let's review our fourth-quarter and full-year financial results.

Revenue for the fourth quarter was a record $198.6 million, up 4.6% from the prior quarter and up 11.4% from the corresponding quarter a year ago.

Fourth quarter Clear Aligner revenue of $186.4 million was up 4.7% sequentially and up 12.2% year over year.

Sequential revenue growth reflected strong volume from our international doctors, offset somewhat by a decrease in ASPs.

Q4 ASPs were down sequentially $22, of which approximately $18, or $2.3 million in aggregate, was primarily related to the weakening euro.

Our year-over-year revenue growth reflected Invisalign case volume growth across all customer channels, offset by lower ASPs, again primarily related to foreign exchange rates and higher discounts.

For the fourth quarter, total Invisalign shipments of 126,900 cases were up 6.1% sequentially, reflecting continued strong international growth, which was up 17.1% sequentially, whereas North America was up only slightly.

Year-over-year case volume growth was 14.2% reflected in increased utilization, primarily from North American orthodontic customers, as well as expansion of both our North American GP customer base and international doctors.

For North American orthodontists, Q4 Invisalign case volume was seasonally down 1% sequentially and up 12.6% year over year.

For North American GP dentists, case volume increased 4.9% sequentially and 4.1% year over year.

For international doctors, Invisalign case volume increased 17.1% sequentially and 29.2% year over year.

Worldwide, Invisalign utilization in Q4 was 4.4 cases per doctor, unchanged from 4.4 in Q4 2013.

North American ortho utilization of 8.6 increased from 8.0 in the prior year.

North America GP utilization of 2.9 was slightly down from 3.0 the prior year.

And international doctor utilization of 4.5 was essentially flat with the prior year.

In Q4, we added 1,170 new North American doctors and 1,255 new international doctors.

In total, we added 2,425 new Invisalign doctors in Q4.

Fourth quarter revenue of our scanner and services segment was $12.2 million, a 3.6% increase sequentially.

On a year-over-year basis, our scanner and services revenue was slightly higher by 0.8%.

Moving on to gross margin, fourth-quarter overall gross margin was 75.9%, down sequentially 0.5 points and 0.6 points year over year, primarily as a result of the impact of FX on ASPs.

Recall that the prior year's fourth-quarter gross margins also benefited from one-time items, of which warranty costs were won, that amounted to approximately 1.5 points.

Clear Aligner gross margin for the fourth quarter was 78.8%, down 0.4 points sequentially and 1 point year over year.

Both the sequential and year-over-year decreases were primarily the result of lower ASPs, substantially attributable to a weaker euro and one-time benefits, as previously discussed.

Q4 gross margin for our scanner segment was 30.2%, down 3.3 points sequentially and 0.9 points year over year.

The sequential decrease was primarily the result of higher product costs and to a lesser extent, lower ASPs due to year-end promotions.

The year-over-year decrease was primarily the result of lower ASPs due to higher promotional programs, partially offset by a more favorable product mix.

Prior-year results were unfavorably impacted by the sale of older end-of-life products.

Q4 operating expenses were $99.2 million.

This represented a sequential increase of $6 million due primarily to higher sales and marketing spend attributable to key customer events, legal and related expenses, and to a lesser extent, our first investment in the obstructive sleep apnea market.

On a year-over-year basis, Q4 operating expenses were up $16 million, reflecting continued investment in new and existing markets and geographies as well as new products and technology.

Our fourth-quarter operating margin was 25.9%, down 1.2 points sequentially and 3.8 points year over year.

The sequential decrease was principally related to higher operating expenses and to a lesser extent lower gross margins, as just described.

The year-over-year decrease in operating margin reflects higher operating expenses.

And as previously mentioned, the prior year's operating margin included one-time gross margin benefits as well as approximately a $2.5 million benefit for stock compensation expense as a result of executive departures.

These results increased last year's operating margin by three points.

Our income and expense included $2 million of charges or approximately $0.02 per share, primarily related to FX losses due to the weakening of the euro to the US dollar.

Further, the quarter-over-quarter impact of currency on revenue, net of the benefit we get on the translation of expenses at a lower rate, was $0.01 per share.

With regards to our fourth-quarter tax provision, our tax rate was 20.6%.

Fourth-quarter diluted earnings per share was $0.48 compared to $0.47 reported in Q3 and $0.51 reported in the same quarter last year.

Moving on to the balance sheet.

For the fourth quarter, our accounts receivable balance was $129.8 million, down approximately 0.2% sequentially.

Our overall DSO was 58 days, down 4 days sequentially and up 1 day over the same period a year ago.

Capital expenditures for the fourth quarter were $7.1 million, primarily relating to manufacture and capacity additions.

Cash flow from operations for the fourth quarter was $69.4 million.

And free cash flow for the fourth quarter, defined as cash flow from operations less capital expenditures, amounted to $62.3 million.

Cash, cash equivalents, and marketable securities, including both short- and long-term investments, were $602.6 million.

This compares to $472 million at the end of 2013, an increase of approximately $131 million.

The Company repurchased approximately 417,000 shares of stock for $20.8 million during the quarter.

These repurchases were part of a three year, $300 million stock repurchase program we announced on April 23, 2014.

Before we move to the Q1 outlook, I would like to make a few comments on our full-year 2014 results.

Revenue was a record $761.7 million, up 15.4% year over year.

In 2014, we shipped 478,000 Invisalign cases, up 13.2% and reflecting 28.6% volume growth from our international doctors.

Full-year operating income was $193.6 million or 25.4% of revenue.

While this was better than the 2014 outlook we described at the beginning of the year, more importantly, it marked the first time our operating margin has been within the range of our long-term financial model target for the full year, albeit at the low end of that range.

We generated $224.7 million of cash flow from operations in 2014 and had free cash flow of $200.6 million.

In addition, we repurchased 1.9 million shares for $98.2 million.

2014 diluted EPS was $1.77.

With that, let's now turn our attention to the outlook for Q1 and provide some commentary on 2015.

Prior to doing so, however, I would like to start by reviewing the framework under which we operate and drive the business.

We have consistently talked about three pillars of investments that together, work in tandem to drive top-line growth and deliver bottom-line results.

Tom talked about them in his remarks: market expansion, product innovation, and brand strength.

At the start of 2014, our plans anticipated significant incremental investments in new programs, most of which focused on market expansion and product innovation.

We largely executed on that plan, as evidenced by the exceptional 2014 growth of our international business and the release of various new product offerings, which Tom mentioned.

It was the largest year-over-year incremental investment in new programs we'd ever made.

As Tom just described, our plans for 2015 are no less ambitious.

This year, we expect to invest substantially more year over year in new programs.

While much of that will again focus on growth drivers, particularly market expansion, there will be some new areas of concentrated focus, like obstructive sleep apnea and enterprise systems.

Together, we believe these investments will position us to increase our top-line growth, deliver earnings leverage, and produce operating results that will further penetrate our long-term operating model range, as we demonstrated in 2014 with outstanding international growth and operating performance.

We are already executing on many of these investments, recognizing that there will be some lag between investment and returns.

Consequently, our outlook reflects that impact.

With that backdrop, let's now turn to our business outlook for the first quarter and the factors that inform our view.

Starting with the demand outlook, consistent with historical trends, we expect demand in North America to be up slightly in Q1, driven primarily by demand from orthodontists.

Turning to our international business, our first quarter has historically been a slower period for doctors and fewer days in the office due to the winter holidays in Europe and the Lunar New Year in Asia.

So while we expect continued double-digit growth year over year, we expect international volume to be down slightly on a sequential basis.

As for our scanner business, Q1 has historically been a slower period for equipment sales, following strong tax incentive-driven demanded at year end.

And accordingly, we expect this segment to be down in Q1.

We expect gross margin to be slightly down in Q1, primarily as a result of foreign exchange, additional liners per case as we treat more complex cases, as well as increased manufacturing costs that I will talk about momentarily as a part of OpEx.

Operating expenses will increase quarter over quarter, consistent with historical first quarters, based on several factors.

First of all, employee compensation-related costs will increase in Q1 for two reasons.

As a company, we operate on an annual cycle for all worldwide employee compensation reviews, including salary increases and promotions as well as annual stock grants.

These increases are effective in the first quarter.

Further, employee paid payroll taxes, such as Social Security taxes in the US, reset at the start of the new calendar year.

Second, incremental investments in market expansion, particularly in North America but also internationally, will increase operating expenses as we add additional coverage resources.

And finally, investments outside of our historical core business, like obstructive sleep apnea and enterprise systems, will also be incremental to our baseline spending coming out of Q4.

With this is a backdrop, we expect the first quarter to shape up as follows.

Invisalign case volume is anticipated to be in the range of 124,400 to 127,400 cases, flat to a slight decrease from Q4.

We expect net revenues to be in the range of $187.3 million to $192.4 million, a sequential decrease from Q4, primarily as a result of lower ASPs driven by a weaker euro.

We expect gross margin to be in the range of 73.5% to 74%, down sequentially from Q4 as mentioned above.

We expect operating expenses to be in the range of $105.2 million to $106.5 million, a sequential increase from Q4, also reflecting the aforementioned investments.

Our operating margin should be in the range of 17.4% to 18.6%.

Our effective tax rate should be approximately 23% and diluted shares outstanding should be approximately 82.1 million, excluding repurchases as mentioned earlier.

Taken together, we expect diluted EPS to be in the range of $0.29 to $0.32.

And based on today's exchange rates, Q1 earnings would be impacted by about $0.04.

With that, let me now provide some additional comments with respect to 2015.

We believe our investment plans will continue to drive long-term sustainable growth that will far outpace the industry and further perpetuate our market share gains.

While 2014 marked the first time we delivered full-year operating margin results within our long-term model, albeit at the low end of that range, FX and our new investments will make that more challenging in 2015.

While we haven't had a practice of providing full-year guidance, let me see if I can put these into context with respect to our actual 2014 results and our long-term model.

First of all, from a revenue standpoint, we see year-over-year growth in both Invisalign case demand and revenue when measured on a constant currency basis to be in the high teens and within our long-term operating model.

Based on today's exchange rates, however, the euro has fallen approximately 16% from the 2014 average.

As a result, 2015 revenue growth will face headwinds in the range of six to seven points.

If this rate prevails through the year, this would put our growth somewhere in the low double-digit range and below the bottom end of our long-term model.

From an operating margin standpoint, if we exclude investment in obstructive sleep apnea, which is outside of our core business, and investment in enterprise systems, which will have a limited duration, we believe 2015 operating margins at constant currency would be very consistent with our 2014 results and would again fall within our long-term model.

To be clear, this does include all of the other incremental investments for market expansion and product technology that Tom referred to in his remarks.

Including these two investments, along with a weaker euro, however, will impact 2015 operating margins on the order of four to five points.

This figure is net of the benefit we realized from lower OpEx as a result of the weaker euro.

All said, this would place us below the low end of our operating model.

We believe these investments present high quality opportunities important to driving customer adoption, accelerating our growth in North America, continuing to expand and grow internationally, and together, building a foundation for long-term sustainable growth.

While many of these investments will take time before they realized meaningful returns, others should begin showing returns in the second half of 2015.

Hence, we see our earnings falling in the second half of the year as stronger than the front half of the year.

With that, I will now turn the call back over to Tom for closing comments.

Thanks, David.

On an overall basis, 2014 was a year of solid financial results and excellent strategic progress.

Our teams continued to deliver in virtually every area.

In the few where we are not satisfied, like our North America business, we are taking important steps to accelerate growth and become even more relevant to our customers.

We believe the evolution in the go-to-market strategy for the North America business, including the strategic deployment of more optimal coverage and the right technology, tools, and support for our combined marketing and sales teams, is the right thing to do.

I am confident these investments will deliver a great return for our customers, our shareholders, and our employees, and result in getting Align back to the mid range of our long-term target growth rate.

Given the number of attractive investments to grow the topline, derive improved customer outcomes and satisfaction, and better profitability, we are making the choice to manage the business carefully through this cycle of heavier investment with a commitment to restage growth towards that middle of our long-term model range and deliver improved operating margins.

The entire Align team is committed to making this happen.

I'm extremely excited about our progress and I look forward to discussing this with many of you as we get out to dental tradeshows and investor events over the next few months.

And with that, we will move to take some questions.

Operator?

(Operator Instructions) John Block, Stifel.

Yes, I've got a handful, but I will try to keep it to two and then I will try to follow up with you guys offline.

I think -- I will keep it big picture.

Tom, I'm looking at 3 to 5 year models that say op margins of 25% to 30%.

And it looks like because of the investment, [I know I said] you are thinking about going down in the near term in some currency, but maybe down to around 20% or 21%.

How quickly are these accretive?

I'm just trying to think of if you were to even get to 25% op margin in 3 or 4 years, your leverage would have to go something like 20%, 24%, 26%, 29% to even get to the bottom end of the range.

So can you just help us with your confidence that you can get to 25%-plus op margins in 3 to 5 years?

And why you think they're going to be that accretive that quickly?

Thanks.

That's the first question.

Sure.

Thanks.

Or maybe 1A.

I will start and then ask David to come in behind me.

The biggest thing here is FX.

As everybody adjusts to it, we got plenty of company.

That's the biggest single move pushing us down.

Secondly, we have some transitory investments, like initiation into sleep apnea, that is more development focused, that is a little bit of a deferral for revenue streams.

And I say that I think within the next year or so, we will have a least some initial commercialization.

From that point on it should start to be closer to accretive.

Third, we've got investments in the factory and some other places in infrastructure that are period investments and then amortized over time.

So it's a little lumpy here.

If I come back to maybe the most predictable returns, they're on the go-to-market side.

And with some exhibits we put out, some slides, I think we tried to -- given the size of the investments and the intensity of what we're trying to do, we want our owners to understand where that money was going, as we provide a lot of information this quarter.

If we look at what's going on in Asia, in EMEA, and what we believe will play out now in North America, we believe that will start to return within two, three quarters -- increments of coverage, doing better things in the right places, better programs for customers, all that.

So if I start at the go-to-market side, reasonably good track record there of demonstrating.

And even in North America, where we haven't been where we want it to, we have delivered incremental results in the back half of the year virtually every year, where we put incremental results in maybe in Q4, Q1.

We expect that to accelerate a bit more with a bigger investment and going about it in a different way than we have done for years.

Peeling that down to product and those flows, we've got a series of new product releases coming out that we expect will have impact.

And again, our cadence is investing coverage, support, marketing programs, some consumer earlier on in the year, bring product releases right in behind them, and then built that through the year.

And virtually every year, I think David talked about more normalizing for FX and a few other things that are different this year.

We've been able to show that operating leverage in the model every single year.

2014 was a great example.

We wound up speaking about some bigger investments, especially outside the US.

We grew into that as the year progressed.

We had a good operating margin at year end, and for the first time, live within that model for the full year.

So confident, comfortable.

FX is a bit of a wildcard for everybody.

We are not apologizing, but we're trying to be very clear about the relative impact.

And I will let David pile on a few things if I missed anything.

Yes, I guess I would -- I'm not sure there's much to add there, actually, John.

As we said in our remarks, if you look at 2014, we delivered within the operating model.

And we continue to believe, holding aside FX, our business will continue to grow year over year within that operating model.

And so that incremental leverage that we should get off of the growth we expect to see this year would, under almost all other circumstances, fully cover the incremental investments we are making this year.

The only carveout we made was those two carveouts -- one for OSA, which is outside our core business.

And then the another, which was enterprise computing, which is -- or enterprise systems, which is certainly inside our core business but is more of a limited duration in terms of how long that investment would be ongoing.

More on the order of a year or a year-plus.

So we feel like we're already getting leverage off of the scale as the business grows from the fact that we believe we can absorb all those investments with those two carveouts only.

So --

FX aside, yes.

Yes.

FX certainly aside.

We can go to 1B.

Yes and then I guess 1B.

And again, I will follow-up with you guys on some more of it, but just -- Tom, you didn't discuss your exact plans long term with OSA and selling, but why now?

You've been slugging it out and trying to re-accelerate growth here in North America.

And I think it's been, in your words, a little bit tougher the maybe you had assumed 12 months ago.

Why deter management focus, sales focus, by going after OSA now instead of continuing to trying re-accelerate growth in a market where you say 25 million to 30 million people are looking for a solution to straighten their teeth?

Thanks.

Sure.

They are not mutually exclusive.

These are different resources going to development cycles and upstream marketing, not in clinical development, clinical trial, etc.

Not to sales, downstream marketing, anything.

Secondly, as we dig a lot deeper into the North America GP and we really come back and one of our critical objectives for a long time has been how do we become even more relevant with our average customer doing 10 cases a year doing -- against 3,000 dental procedures they do a year or more in a bigger office.

So increasingly, they are interested by and working with new opportunities, as patients think about expanding how oral health fits with their dentists and with physical health.

And this is a very fast-growing area and we think it's an opportunity that directly leverages our strengths.

The other part of this is globally, we probably now, I believe, have the largest specialty sales force in the world.

And the reality is here that we're going to have an opportunity over time to put more high-value products into that team covering the right GPs, doing the right things.

That's not today.

There is zero distraction for this team.

They are off and running.

But over time, we will have an opportunity to add more to the basket in an area that is not a bolt-on just have something.

It's an area where we think we would add real value to and can leverage our core competencies to the better.

So there's never a perfect time.

We've said for a long time that we don't have the money burning our hole in a pocket.

It's more that can we find opportunities that fit our strategic direction that would leverage our core competencies and would extend our ability to add value to customers.

And in this case, it's all three.

So that's why now -- and obviously FX just allows you time for everybody.

But we're not apologizing or complaining.

We do believe these are the right investments to push through for the business.

I'll follow-up offline, thanks.

Okay.

Next question, please?

Glen Santangelo, Credit Suisse.

David, just wanted to follow up on some of the stats you gave.

I think if I heard you correctly, you seem to suggest that the euro -- the exchange rate has fallen 16% from the average level in 2014.

And you thought that that would impact your revenue run rate by 6% to 7% and your operating margin by 4 to 5 points.

Did I hear that correctly?

Number one.

Pretty close.

All except for the last part of the four to five points.

The four to five points included not only the impact of foreign exchange rates, but also included the two investments that I talked about earlier, which was OSA and enterprise systems.

So that is also in that 4% to 5% bucket.

Okay.

And if I look at your Q1 ASP levels, I think your revenues and your case shipments kind of implying something in the low 1,300s.

This -- it seems to be down about 6% year over year and maybe down about $50 on a sequential basis.

You did a good job quantifying how much of that was FX this quarter.

How much of that do you think is FX-driven next quarter?

Because I'm trying to assess whether there's any sort of mix or mix changes in that number.

Well, I have no idea what foreign currency rates are going to be for second quarter.

So --

I'm guessing you are making some assumptions, right, when you are giving these revenue numbers.

So I'm kind of curious about what -- I'm trying to back into maybe what you are assuming from a currency perspective in this quarter.

Yes.

Fair enough, fair enough.

So right now, the best indication we have for currency rates for 2015 are the current rates that prevail today.

We're not in the habit or we are not experts on projecting foreign exchange rates and I would guess there's probably anyone that is.

So all the assumptions we talked about for 2015 assume that the rates that prevail today prevail throughout the entire year.

And so to the extent those rates change in either direction, that will have some bearing on how 2015 ultimately shapes up, as we have talked about here.

That's perfect.

Tom, maybe could I just squeeze one more in on some of these investments you're making in North America.

Could you give us a sense for how many bodies you have on the ground right now, how many you think you need to hire.

Because I think we are all trying to assess what -- how much of these -- how big the incremental investments are going to be and then how we should think about them as a percentage of ongoing cost versus maybe one-time in nature.

And then I will hop off.

Thanks.

I will answer the question consistently with what we have previously discussed.

Given that we continue to invest into growth and market expansion, which is a fairly -- reasonably predictable lever for us, you should expect us to invest into each of our geographies each year to a greater or lesser extent.

Over the past few years in North America, even with some meaningful bodies on a percentage basis, it was less and less, as we were really throwing more percentage increases into EMEA and APAC.

Secondly, I think when I talked about in addition to just getting behind the curve a little bit in North America, our game didn't evolve as well as it should have in terms of what we were doing, who we were doing it with, and how effective we could measure and deliver.

And so over the last year or two, we've been looking at overhauling a lot of that.

So besides just headcount, there are a lot of positive changes about how we're doing it.

With that said, we threw a slide in there somewhere.

I don't have a number, but it's -- we basically showed in North America, EMEA, and APAC with a bar to the left -- I'm not going to give you absolute numbers.

You can get yourself pretty close -- showing what our total headcount is and then also showing what our incremental increases are over 2014 in each of those geographies.

So we give you most of what you need there.

This is a bigger number of heads in North America and at a fully loaded cost, a little bigger of a load, but it's not as big as a percentage increase, which is more than doubling what is going on in, say, APAC.

So we tried to size that, knew you'd ask that question.

The second part of your question is do I need to pop this into my model each year?

The answer is probably not.

We're going to be tighter on our North America business in terms of managing that, our approach, and tweaking that model.

As I said, we've said for a couple quarters we've not been satisfied with the progression of that business.

The team is on it, we believe this is moving in the right direction, we believe this puts us in the right range.

That said, we trained over 4,000 doctors in North America last year and we got to the point where territory sizes were just increasing to be too big.

And we went out and sat down with a lot of our customers, did a lot of very detailed work, consistent input from customers that really wanted to elevate their practice.

They couldn't get enough face time with a rep.

They didn't have enough time to work on the tools and routinize procedures.

Our goal is to get a number of accounts down per territory substantially and then manage that in a relative way over time.

So this is a bit of a surge this year in North America, continuing significant investment in APAC and EMEA where we are seeing the growth, and our belief is we can restage growth in North America.

But don't expect you would have to see this kind of a lump every year.

Thanks, Glen.

Next question?

John Kreger, William Blair.

Actually, Tom, can you just expand on what you are just saying?

If you think about specifically your North American GP business, where growth has slowed a bit, can you just talk a bit more about what your strategy is to reinvigorate that?

It seems like that's a customer base that's going to be a bit more fragmented, probably lower volume ortho customers in general.

Do you think you can really reach them efficiently with a direct sales model?

The short answer is yes, John.

It's hard, but it's worth doing.

And there's two or three things that intersect here for us.

The first here are the 20,000-plus active GP customers in North America.

There are quite a few that would like to do more, whether they are 10 and they want to go to 30, with they're 30 and they want to go to 50, or whether they're at 5, they just got trained, but they are really ready to go.

We've found it very, very difficult over the last year, year and a half, to cover all of them.

And we've got some great success stories where we were able to work with the practice the right way and they've really built a terrific business, delivering great customer results, patient results, etc.

But that's not enough of those.

Part of this is a very detailed segmentation that we can help our reps, our region managers, our teams recruit better the practices that really do want in, that really are -- the wrong word is fit, but I'll use it for the moment.

And then also of the customer base we've got, work with those customers that really want to elevate their game, that really want to make Invisalign and some straightforward ortho part of their practice, fit it in with their restorative.

And there's thousands of such customers who want more access time and energy from us and are more than willing to partner.

We know who they are by address, by name.

Many of them have declared so.

And so our job is to give them the right coverage, the right tools and support to make that happen.

And so we're not going to move the needle on the whole base.

Fragmented is exactly the right word, John.

You are a good observer of the dental market and we're going to move the needle on those practices that can and will.

The second intersection here is scanners.

As we continue to evolve the scanner business and grow our installed base and over time work with other partners, that will help make that Invisalign experience plus other products we have work better.

And third, new offerings over time, like very high value oral appliance therapy for obstructive sleep apnea, which is more and more top of mind for some doctors.

If it's easy to do, which today, not generally.

Hard on the patient, hard on the doctor, a lot of visits.

Our view would be that ought to be able to be simplified, customized dramatically, and that again increases our relevance with those practices, gives us an opportunity to earn more share of mind and share of practice.

So collectively, it's a bit of a long journey within the GP side, but as I said before, this is very much worth doing strategically.

Great, thanks.

Just one quick follow-up, David, for you.

The 4 to 5 points that you signaled that EBIT margin could be down in 2015.

Would you be willing to break that into how much is FX driven, given current rates versus how much are coming from some of these new investment areas?

Yes, roughly two-thirds of it is FX and then the balance is the two investments we talked about.

All right, great.

Thank you.

Jeff Johnson, Robert W Baird.

Let me just focus on those two incremental projects here that we're talking about.

On the ERP side, I still consider you guys a fairly young company.

You're not a serial acquirer.

What is wrong with ERP systems now or why do you need a new ERP system, especially in a period where maybe you are investing heavily in the sales force, currency is going to hit margin, things like that.

Why now on ERP?

Yes, Jeff, this is David.

So first of all, the Company -- every year as we go through our strategic planning process and annual operating plan and so forth, we review a long list of projects that are worthy of investing in and helping focus on to grow the business, etc.

And ERP has actually been on that list for a long time.

But when you look at the ROI we've been able to get out of product innovation and ROI out of market expansion and so forth, it has just never gotten to a point where it's raised itself to a hurdle rate that made it make the cut, you might say.

But as we've grown and as our business has got more complex, it's become more clear to us that we have opportunities to streamline our business, to become more agile, to service our customers better.

And one of the things that we believe is standing in the way of that is having a unified platform as a company under which we can present our business to the doctor, under which we can execute the workings of the Company.

And so it's gotten to that point where it's made the cut.

And so we are biting the bullet to make it happen.

And we think it's going to be something that ultimately will give us not only better agility, but better scaling ability.

But perhaps even more importantly is going to give us some capabilities with our doctors that today we presently don't have or can't fully take advantage of.

All right.

And you think those are about one year of investment, David?

Yes, one, one-plus typically is the horizon.

Okay.

And then my second question is just on the sleep apnea.

As I think about that treatment area in dentistry, most of the companies I'm talking to in that area look at full airway analysis that needs a large imaging device, whether it's 3D imaging, something like that, as opposed to just your scanner technology.

So one, I'm trying to figure out what your competitive advantage might be.

And two, when I think about that competitive advantage, typically, I believe, it's just you order a mouthpiece.

And while you guys are good at maybe 3D printing that mouthpiece or generating that mouthpiece with your manufacturing technology, again, I think of your core competencies in high throughput, multi-aligner manufacturing, not manufacturing a single mouthpiece for patient.

So I'm just trying to figure out why you guys might be the company to do sleep apnea as opposed to a company that has bigger imaging technologies or is it -- doesn't have your core competencies that seem stronger to me elsewhere.

That is a very fair question.

And what I would say is we don't expect to replace all the other players.

Oral appliance therapy today is still a very small part of a pretty big market and it's a profoundly tough disease for people that have it.

And for people that have OSA, having BiPAP or CPAP therapy is the standard of care.

We don't expect that changes anytime soon, but A, there are people that are refractive to that treatment, just do not want to do it.

Or B, have a very mild to moderate and this is a rapidly growing area.

The second part of this is if you look at the intersection of treatment planning and algorithms to be very predictive, today, the titration process for figuring out how much advancement is necessary to keep that airway open, how comfortable that is for the patient, how many visits to the dentist office and the -- patient have to have, it's just -- it's very difficult.

We believe there opportunities to dramatically streamline that.

Building on all the diagnostic data that's out there, from the sleep doctor, the lab, and perhaps an MD who is also in the loop.

But dentists are in this business -- they're increasingly -- and they are the right ones to think about how much mandibular advancement can you do without impacting TMG or anything else.

So our job is to help them with clinical algorithms that make sense.

And whether we are making -- we make part numbers of one.

Every part number that goes through our factory is a part of one.

It's not a series.

And whether that's part of a case or one broke along the way, we can have a part of one go catch up with that case further on in the process.

So this is about mass customization, very, very concise computer-controlled treatment planning and clinical algorithms, and I think -- again, I'm not going to go any further.

This is complementary to what other people are doing, but we believe better, cheaper, faster, and far more effective.

Fair enough.

Thanks, Tom.

Next question, please.

Steve Beuchaw, Morgan Stanley.

Could we just simplify the discussion around ASPs?

The comment, David, that you made was you were looking for revenues in volumes, both in the high teens, excluding currency.

Is that right and does that imply that ASPs are flat ex currency?

So number one, currencies don't affect volumes.

We think volume growth will be within our long-term model, number one.

Currencies does affect revenue, but if we neutralize that affect and we just simply look at cost and currency -- if the exchange rates in 2015 were roughly equivalent to 2014, our revenue, we believe, would grow within our long-term model and be relatively consistent with what we delivered in 2014.

Okay.

And then the commentary around the addition of manufacturing capacity in Juarez.

Could you give us a sense of what the impact is on the P&L from that capacity expansion, just in terms of incremental spend?

It's relatively small this quarter.

We are in the process -- I think we've talked previously about at some point, we would need to add additional brick-and-mortar in addition to just simply buying additional pieces of capital equipment that actually operate in the factory.

Well, we've gotten to that point.

That factory will come online sometime later this year.

And we will expect to bring up that capacity gradually over time as it's called upon.

And so we are trying to make sure that the -- make sure those capital additions of equipment, so forth, are staged commensurate with how our business is growing.

As it relates to the impact for the year, I think there's a modest impact a little bit on gross margin for the year, particularly the second half of the year.

But as I gave guidance for 2015, we ultimately believe that our revenue growth and everything else, holding currency aside, would absorb that and still deliver our business within our long-term model, including gross margins.

Okay, great.

And Tom, you made mention again of the possibility of working with additional partners in intraoral scanning.

Any updated thoughts on the right timelines for that kind of move?

Just that it continues to be a significant activity for the enterprise.

We have indicated as clearly as we could that this is strategically valuable for the enterprise to do and you ought to assume we are out working with logical players that have interest in the same.

This is one of these where until it's ready, we don't want to talk about it.

And that's about as far as I would like to go.

Thanks so much.

Bob Jones, Goldman Sachs.

David, you mentioned hurdle rates in deciding on some of these investments.

Any more you can share on how you decided whether these investments were the best return on capital?

I'm curious just as far as the decision-making process and how you contemplated the timing of doing all these investments at the same time, if we're thinking about the sales force investment, ERP, sleep apnea, etc.

Well, first of all, when we have -- we have an ongoing process for evaluating projects that are currently underway as well as -- we are already in the funnel in terms of our execution on them -- as well as projects that are in the top of the funnel or just kind of circulating around in the way of ideas.

Somewhere between those two points, a business case gets put together, a feasibility analysis gets put together.

And as those things come together, we are presented with an opportunity to decide whether or not we've got capacity to add resources to it and pursue that project or not, whether or not we can constrain it within our operating plan or not, etc.

And so I wouldn't say there is a single litmus test that we apply to all these, because there are certain -- many of these projects have intangibles associated with them that are not easily measured in a highly quantifiable way.

But as we look at those intangibles and we look at the tangible things that we can measure and we look at how they will -- our available resources and we look at how it fits in our envelope and so forth, those things all come together to make, you might say, an informed decision.

Now as we go through our strategic plan or annual operating plan process, there's a process we go through that based on that criteria, we begin winnowing some of that down.

And as it related to the projects that we are looking at doing for 2015, we felt like we had a significant number of projects that had high return opportunities on them.

We felt that we could basically fit them, you might say, within our operating model as our business grew and so forth.

And we've decided to execute on those and we approved them and we're staffing for them accordingly.

You know, the only two that I carved out were OSA, which is outside of our core business, but yet we feel over a longer term -- is a little bit longer horizon is going to be accretive as well.

And then as we talked -- as I mentioned in the prior question, enterprise systems as well at the same time.

Hey, Bob, if I could pile on just for a second.

In addition to a standalone business case or investment choice, there is significant interdependence between some of these investments.

There are things we want to do as a company -- I spoke briefly at a recent conference about saying we're going our own little -- in a small way, not grand -- digital ecosystem.

And it's a way of surrounding customers in a very different way with our scanner and others, bringing a much higher value set of work streams and new applications -- physical and digital -- and in that direction becoming a heck of a lot more relevant.

This is where you start getting to adjacent therapeutic opportunities that would trade well on our core competencies, like sleep apnea, and it became very compelling.

Now then you come back to ERP and if ERP can enable acceleration in some of these things, the payback for an ERP project -- we might have waited a year or two -- starts looking more attractive because it enables acceleration in other areas.

And then finally, you come back to number one, we were -- we will speak critically of ourselves here.

The last couple of quarters, we've not been satisfied with deceleration in growth rate in North America, especially in the GP side, and we are bound and determined to fix it.

So as we look at that and we look at what we can put into that team, with evolving products we haven't spoken about yet, with other things in the pipeline, we want to get a team in place, surround the customer properly with a whole lot of new capability, and then we can really start to leverage the topline for whole streams of other kinds of revenue as we are looking out here.

Again, we are trying to make the organic machine even better and so there is significant interdependence.

These aren't always so easily standalone.

That's fair.

And I guess just the related question to that would be around other uses of cash.

And you guys had had a three-year repo program out there.

I'm just curious is -- I guess twofold.

As you evaluated these investments on a return basis, how did they stack up relative to just a larger buyback?

And then any update on how we should think about the repo in light of these investments would be helpful.

Thanks.

I'll start and let David answer your direct question.

The simple fact is everything we're talking about has high NPV.

We're trying to be very good stewards here and yet we see this opportunity to accelerate impact and progress in the business certainly to the midterm.

We believe we can restage growth more closer to the middle of our range, where we've been hanging around the low end.

And let's put FX aside just for the moment.

We look at all that first and then we would come back and evaluate our capital allocation strategy in the context of our long-term strategy.

And then have thoughtful discussions with our Board about it.

I will let David comment specifically on our progress on the buyback and how we go from here.

Yes, I guess I would just add one thing to it.

And that is as we think about -- as we think about our investments almost each and every day around here, most of them are P&L investments.

They are not significant capital investments on the balance sheet, like plant and equipment.

Certainly, we've talked a little bit about that in our call today about adding capacity on the manufacturing side and so forth, but when you look holistically across all the investments we make, most of them are P&L related.

And so we do feel some -- there is a balance between how much we put into the P&L, how long it's going to take for us to recognize returns from that.

Because as we grow topline, as we grow leverage with scale and so forth, that brings more to the bottom line that either gets -- flows into cash and ultimately back to shareholders through repurchases or flows into our new opportunities for us to invest -- reinvest back into the business.

And so that's kind of the way we look at it.

And when we -- last spring, when we had our I think Q1 call and we talked about a definitive program for stock repurchases is in light of those trade-offs.

And at that point in time, as we looked at our long-term model and our long-term cash generating capability, we recognized that those P&L investment opportunities are only going to take -- are going only require some percentage of our cash flow generation over that time period.

And that excess above and beyond what we thought those needs would be, either for those projects or strategically for longer-term things, we should be able to return to shareholders.

And that's how we came up with number one, the $300 million stock repurchase plan, number one.

And number two, it's also what informed us as we expanded our business model to include free cash flow generation.

And it's that free cash flow generation that -- the excess of which we would expect to use for stock repurchases.

So you should expect that sometime over this year, we will commence repurchasing the second $100 million out of that $300 million.

And I think you should also expect that in line with that long-term cash flow model we're talking about, at some point, we will reevaluate that.

We just haven't gotten to that point where it makes sense to do that.

But that is certainly how we would see it playing out.

Thanks so much.

Thanks, Bob.

Next question, please.

Chris Lewis, ROTH Capital Partners.

Tom, I was hoping you could elaborate just on the revamped go-to-market approach in North America, specifically.

Beyond just adding the 50 heads, can you elaborate on the types of changes that are being made within the actual structure of the sales organization there?

Whether it's change in the territory size or level of support service or the compensation structure?

Yes, to all the above.

And more.

It starts, Chris, with making sure you've got the right people in the field and then doing the right things.

And importantly, at the right customers.

We have thrown a lot of heads out in the field over the last three to five years.

And we've trained a lot of doctors.

And I'm overstating for effect, but in some cases, we left the region managers and the reps to figure out who to call on.

And while we try to drive a more systematic -- I will call it scripted approach -- we were only partially successful with that.

Evolving go-to-market game plan is a bigger team, organized a bit differently, smaller regions, more line of sight, expecting longer calls in the office more, fewer customers, and calling on the customers that are -- that fit, that are committed, that really want to elevate and spend more time, not, as an earlier question said, they are fragmented.

Not every dentist even wants to do ortho.

And so -- and by the way, along the way, we are finding ways we can support low-volume customers that are very valuable to us, but really don't want to put more time and energy now.

15 cases year is just fine for them.

And we will find ways to support them.

We were struggling to do that.

One of these evolutions is we are finding a support model that could do that.

The important thing is here is we are already getting some very good feedback.

This actually started fairly early in Q4 in a small way.

And we pretty much had everybody on board before the end of the year.

So as we did kickoff meetings, we typically do that each year, all around the geographies.

Everybody is up and running and they are on the same page.

Finally, we've got better tools.

It seems basic, but the right people in the right account, doing the right things in a very systematic way and then measuring progress.

Literally day by day, account by account.

So far more prescriptive about our approach, far more consistent about how we block and tackle, very specific learning from segmentation about where we are spending our time and energy, and then finding more cost effective ways to support low-volume customers that today don't want to do more.

But they are still very valuable to us and they are great customers and someday they may.

And behind all that, our goal is to build a bigger installed base of scanners, ours and others, and leverage those with more applications, like the Outcome Simulator for Invisalign, and clinical applications at chair side, just to make everything easier for that doctor.

So that's -- I would call it earlier days there, but the team is managing through the churn very well so far and they are off and running.

So a lot of changes.

As I said, comp, structure, etc.

Great.

Appreciate the color there.

And then David, maybe a question for you on ASPs.

Maybe two parts first.

Are there any other levers beyond FX that is driving the implied sequential decrease from the fourth quarter to the first quarter internationally?

And then secondly, how should we think about ASPs in North America as we progress into 2015 versus 4Q levels?

Thanks.

So primarily, if you look at it year over year and you look at a quarter over quarter, FX basically drove 80%, 90% of the decline that we see in both those comparatives.

And the same would hold true Q4 to Q1.

There are other effects.

You asked about international and I think the same would apply somewhat to North America.

We do have periods of running various kinds promotions, which yield different kinds of discounts and so forth.

And they will sometimes have different seasonalities associated with them.

So for example, we will run specific promos and discounts heading into the Q3 for the teen season for the orthodontic channel -- orthodontist channel.

So there was some of that in the fourth quarter as it relates to some of those discounting programs running in Q4, but the vast majority of it is all FX.

Chris, maybe another way to jump on -- pile on was mix is not so much the issue right now, it's mostly FX.

Mix is pretty stable around the globe and we more or less expect that to be the case.

It's mostly FX and occasionally some promotion, but I'd say FX is going to overwhelm those other effects.

Yes, I was just going to say while we may see a little bit of perturbations quarter over quarter on ASPs, I've talked previously about a long-term trend in ASPs continuing to be up.

And I still believe that, to the point that Tom made.

If you look at the percentage of our cases that are full cases versus the express cases, that percentage has been relatively consistent over time, fluctuating on a quarter-by-quarter basis by less than a point.

When you look at the mix, however, though, between international and North America, with the higher growth rates international and the higher ASPs they have there, they just naturally are going to become a more significant piece of the total geographic mix of our business.

And that is, over the long term, holding FX rates aside, should continue to drive ASPs up.

Just to be clear, I was speaking of product mix, not geographic mix.

David is exactly right.

Okay, great.

Thanks for the time.

Operator, we will take one last question, please.

Brandon Couillard, Jefferies.

Tom, just wanted to get your perspective on how you are feeling about the US market.

Coming into the fourth quarter, it feels like it was off to a pretty good start.

Would be curious if you could give us some color on how it exited.

And then in terms of the 1Q case volume guidance of flat to down, weaker than history would otherwise suggest.

Can you parse out some of the dynamics there?

Sure.

I will start and David can pile on if he chooses.

First of all, we're not out of January yet.

I think the years in general -- we're getting off to a start we'd expect and that is captured in our guidance.

We've got a lot of moving parts here and all those factors are caught.

We -- I guess we've got a clearer line of sight to rolling out G6 in some of these other geographies.

You come back North America, that will really be more limited in the near term.

But in general, the team's off and running.

Feel pretty comfortable about our general direction.

I think if we look back to last year, it seemed like we were getting -- you guys -- I shouldn't say we, we're out here.

The sun is out.

But the Northeast and Midwest especially were getting slammed by storm after storm.

We're looking at last week or this week going geez, I think notwithstanding that and all in last year, that was not a very big effect for us overall over time.

So in our minds, we don't exactly track dental visits.

Maybe there's a lag effect or something.

But I think the market is reasonably solid, healthy.

I don't know what else to say other than that.

I will just add a little bit of color.

Because you're looking at historical trends, possibly.

You know, in my comments, basically what we said was the growth in North America quarter over quarter primarily would be in orthodontist channel.

And if you look at it historically, let's say over the last three years and so forth, I think our quarter-over-quarter growth in North America has typically been in the low single digits -- the mid-single digits from Q4 to Q1.

So I think our -- the guidance we gave for this quarter is not materially different from what we've seen over the last three years.

For North America.

For North America.

Okay, thanks.

And then on the new Juarez facility, could you quantify the aggregate amount of CapEx that will be needed to complete that facility?

The total amount for the year, of all in?

Not just the plant, but fitting it in and stuff?

Yes, I suppose.

And I guess in that context, when it normalizes or we go back to a maintenance level?

Yes, yes.

About $15 million, I think, for 2015, all in.

Okay.

Thanks.

That's about right, David?

Is that --

I think it might be a little bit more than that Tom, but not materially different.

There is brick-and-mortar in there as well as equipment.

We're certainly not going to fit up the entire building by the end of this year.

So probably not two different for 2015, but certainly over a longer time horizon as we build that factory completely out, you will probably be looking at more CapEx on top of that figure.

But that would be feathering in capacity.

It would be feathering in capacity.

Modules of capacity versus the lump you have to go through when you bring a new plant on.

Okay, thanks.

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