愛齊科技 (ALGN) 2016 Q2 法說會逐字稿

Greetings and welcome to the Align Technology Inc., Q2 2016 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions).

I would now like to turn the conference over to your host, Shirley Stacy, VP of Corporate and Investor Communications, please go ahead.

Good afternoon and thank you for joining us, I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO and David White, CFO.

We issued second quarter 2016 financial results today via Marketwired, 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 August 11. To access the telephone replay, domestic callers should dial 877-660-6853 with conference number 13640324 followed by pound. International callers should dial 201-612-7415 with the same conference number.

As a reminder, the information that the presenters discuss today will include forward-looking statements, including statements about Align's future events, product outlook and the expected financial results for the third quarter of 2016. These forward-looking statements are only predictions and involve risks and uncertainties such that set forth in more detail in our recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary significantly and Align expresses no obligation to update any forward-looking statements.

We have posted a set of GAAP and non-GAAP historical financial statements, including the corresponding reconciliations and our second quarter conference call slides on our webcast under Quarterly Results. Please refer to these files for more detailed information.

With that, I'll turn the call over to Align Technology President and CEO, Joe Hogan. Joe?

Thanks Shirley, good afternoon and thanks for joining us. On our call today I'll provide some financial highlights and then briefly discuss the performance of our two operating segments; Invisalign Clear Aligners and Scanners. Dave will provide more detail on our financials and discuss our outlook for the third quarter. Following that I'll come back and summarize a few key points and open up the call to questions.

Q2 was driven by a better than expected revenue due to continued strong year-over-year Invisalign volume across our customer base and record utilization with international case volume up 38.3% and North America up 15.3%. we also had continued strong demand for our iTero element with record shipments this quarter resulting in revenue growth of almost 200% year-over-year.

Q2 North America Clear Aligner volume was up 4% sequentially and 50% year-on-year. On a sequential basis, Q2 growth was driven by both orthodontists and GP customers, utilization among our orthodontist customers continued to increase and we reached record levels in both ortho and GP channels for a total of 10.7 cases per doctor this quarter.

On a year-over-year basis our Q2 volume growth rate continues to outpace our three-year average driven by increased ortho utilization as well as expansion of our GP customer base.

Q2 Invisalign volume for international doctors is up 17% sequentially and 38% year-over-year. Continued strength reflects record international utilization driven by EMEA as well as continued expansion of our customer base in APAC. We're also seeing increased use of Invisalign G5 for deep bite in EMEA as well as our Invisalign G6 for extraction cases in APAC both showing momentum in the quarter and nearly equaling the overall growth rate for each respective region.

In EMEA, Q2 volume was up 37% year-over-year led by Spain, France and the Netherlands. Smaller country markets such as the Nordic and Eastern Europe also had strong year-over-year growth although off a smaller base. Execution of our [High Touch] TFM program is expanding our focused approach across all of our markets in Europe and starting to deliver stronger growth. Our low stage Lite and i7 product continued to contribute incremental growth. In Asia-Pacific record shipments in Q2 resulted in 42% growth year-over-over. Growth is very strong again in China, Japan, South Asia and Taiwan.

Q2 was a busy quarter for customer events, it's more than 700 doctors and clinical staff attending our second annual Invisalign APAC summit in Macao. In addition, we had more than 500 orthodontists attend our country-focused forum in China. We've continued to ramp up doctors training in APAC with particular focus on developing doctors in newer markets such as India, Korea and Taiwan. In fact, more than a hundred doctors in Taiwan were trained in June alone. The important team segment, the total number of Invisalign cases worldwide in Q2 increased 20% year-over-year, reflected continued adoption of Invisalign treatment for teenagers 11 to 19 years.

We typically began to see an increase in teen case [starts] in late Q2 as more teens go into treatment during the summer timeframe in North America. Teen volume grew 19% year-over-year among our North American orthodontists. In addition, we continue to make progress internationally among teenagers where we had 35% year-over-year growth. In Q2 in APAC for example, we held a teens forum for the Australia and New Zealand markets where 200 doctors attended which was twice what we expected. We also participated in a separate teen forum sponsored by SiChuan University. On a 12-month basis, 155,000 teens started orthodontic treatment with Invisalign with an average age of 15 years old. Our investments in the teen segment continue. As discussed at our Investor Day last month we are currently developing products that will [span] Invisalign applicability over the next two or three years enabling our doctors to treat more teen patients and address younger kids for the first time.

Specifically, we will preview a mandibular repositioning product for teen Class II correction as well as our prototype, palate [expansion] used for Phase I treatment. With these additional offerings and features, we'll give our doctors a complete set of clear and removable appliances capable of any orthodontic treatment for patients of all ages.

Our integrated consumer marketing campaigns in North America, EMEA and APAC leveraged traditional paid media, [search] digital market, PR and social media to engage consumers at every point in the consumer purchase journey. Consumer interest and demand for Invisalign treatment continues to grow. In North America a key focus area for Q2 was sharing the stories of real patients who have used Invisalign treatment to improve their smile. These patient's stories have driven high consumer engagement with 136,000 video views. New program launches included an partisan -- a partnership with Bravo TV on a network that reaches millions of women who could benefit from Invisalign treatment. The Bravo integration weaves Invisalign treatment into the storyline of the hit show Odd Mom Out.

In EMEA we focus primarily on the Real Patient campaign which continues to drive interest for Invisalign treatment online with web visits growing 112% compared to the same period last year. In Asia-Pacific new consumer campaigns kicked off in China and Australia and New Zealand and programs continued in Hong Kong and Japan to drive consumer awareness and patient demand.

In Q3 we're planning a big bang consumer campaign in China which will leverage Paris Fashion Week. In Q2 our scanners business revenues were up 36% sequentially and up nearly 200% year-over-year reflecting a record number of units shipped in the quarter. Demand for the iTero Element scanner continues to expand fueled by primarily North American customers. This past March we began shipping the iTero Element for restorative workflows to customers who had preordered and were awaiting the new iTero Element. In EMEA we received a record number of iTero contracts and in APAC we received strong orders upon launching iTero Element at our Invisalign APAC Summit in May. We continue to work through a backlog of iTero Element scanners which remain at roughly six-months lead time as demand for our industry leading intraoral [scanners] continue.

Use of iTero scanners for Invisalign case submissions [in place with] PVS impressions continue to expand. The Q2 total Invisalign cases submitted with a digital scanner worldwide increased 37.4% which reflects a record 46.4% for North America and 20.5% from international doctors. While these scans are predominantly from our iTero scanner, we are also seeing some uptick from 3M's True Def and Sirona's Omnicam; the other two third-party digital scanners that are qualified for Invisalign case submission.

Before I turn the call over to David for our financial review, I want to talk to you about a supplier agreement we announced today with SmileDirectClub for their doctor-directed at-home aligner program for minor tooth movement. The field of orthodontics and dentistry had changed tremendously in two decades since Align Technology was founded. Many of the greatest changes we have been and continue to be driven mass customized clear aligners, 3D treatment planning, restorations, digital photography, x-rays, scanning, laser therapy, practice management, software and mobile devices; the list can go on and on. Technology has changed the demand of potential patients as well. The Internet, ecommerce and social media get consumers access to more information and more options for every type of treatment and procedure including where and when they want it and at costs much lower than traditional options.

We've been watching the intersection of these technology advances and changes in consumer behavior and particularly we attracted different approaches to at-home teeth straightening with Clear Aligner. I'm talking specifically about doctor directed treatment shipped directly to consumers, not consumers trying to treat themselves in a do-it-yourself fashion.

The at-home model follows an established trend of direct-to-consumer, ship-to-home options for eyeglasses, contact lenses, hearing aids and more. Logically, this type of at home treatment in orthodontics is only possible with Clear Aligner and as the leader in Clear Aligner technology, we believe Align has to participate in and help shape this evolving market.

Emerging leader in this market is SmileDirectClub. It's a privately owned business based in Nashville, Tennessee. They were founded in 2013 and are doing business in 49 out of 50 states so far. Potential patients can either visit a Smile shop to get scanned, schedule an in-home scanning appointment or submit photos and impressions online to begin the evaluation process.

SmileDirectClub offers a device for cosmetic treatment that includes up to 20-stages with no attachments and no IPR, interproximal reduction, primarily for adults with permanent dentition. They have a network of remote licensed orthodontists and general practitioner dentists who evaluate, review and approve the patient treatment and monitor progress of a case throughout treatment. In a separate release today we announced a supplier agreement with SmileDirectClub. Specifically, Align will provide a digital case setup which is made available on SmileDirectClub's Smile Check Portal. A SmileDirectClub licensed orthodontist or general dentist will review and approve the treatment and Align will then manufacturer aligners and ship them directly to SmileDirectClub.

These aligners will be manufactured per SmileDirectClub specification which does not include attachments and IPR. To be clear, this is not Invisalign. Invisalign brand and system of Clear Aligners will not be used for this kind of direct-to-consumer market. Invisalign system requires in-office doctor involvement throughout the course of treatment and will only be made available from an Invisalign provider.

At Align we're investing nearly $100 million in R&D and marketing to further advance the science and technology for our Invisalign brand, the most advanced Clear Aligners in the world so our doctors can continue to achieve great outcomes for their patients. We will continue to [pass] the innovation we have delivered over the last 20 years [to] further advance of science and technology through our Invisalign doctors with new products such as Class III, teen Class II (inaudible) and Phase I palate expander that we indicated again recently in -- that will be available in 2017. These type of Invisalign [advances] will significantly increase the applicability of Invisalign Clear Aligners to our in-office doctors.

The goal of our agreement with SmileDirectClub is to help expand the market and opportunity for Invisalign doctors while supporting SmileDirectClub's effort -- SmileDirectClub protocol is described which means we expect there to be little cannibalization of the existing market.

In addition, we are creating a new Invisalign doctor referral program similar to our Invisalign Doc Locator that will ensure that the 30% of SmileDirectClub potential patients that did not fit these protocols and who are interested in straightening their teeth will be channeled back to existing Invisalign in-office doctors.

The process will work like this. Beginning in October we will create a new (inaudible) doctor referral program much like our Doc Locator works today. Consumers will request the SMILECHECK Case Assessment from SmileDirectClub but whose cases outside of their treatment scope will be systematically referred to an Invisalign provider in the area.

We believe this will provide incremental growth opportunities for Invisalgin doctors by connecting them with new potential patients that would not have sought treatment otherwise.

The at-home direct-to-consumer market is growing rapidly and while it's still very small today we believe the incremental growth potential that the [student] market represents is compelling; providing consumers who had very simple malocclusions with access to more affordable treatment from the convenience of their own home is accelerating and will only expand the overall market for orthodontic treatment. With that I'll now turn the call over to David.

Thanks Joe. Let's review our second quarter financial results. Revenue for the second quarter was $269.4 million, up 12.8% from the prior quarter and up 28.6% from the corresponding quarter a year ago. Second quarter Clear Aligner revenue of $243.4 million was up 10.8% sequentially and up 21.2% year-over-year. The sequential revenue increase was primarily related to increased Clear Aligner volumes and to a lesser extent our price increase in North America.

On a year-over-year comparative basis the growth rate for both total revenue and Clear Aligner revenue was lower by approximately four points related to the additional Aligner policy change we implemented in July of last year. Q2 ASP's were up sequentially from Q1 about $30.00 reflecting a price increase in the U.S. as well as favorable foreign exchange rates.

Our year-over-year revenue growth reflected Invisalign case volume growth across all customer channels and geographies as well as our price increase in North America and international. These increases were partially offset by lower ASP's primarily related to the additional Aligner policy change made last year. For the second quarter, total Invisalign shipments of 177,000 cases were up 8.1% sequentially reflecting growth from both our international and North America customers. Year-over-year case volume growth was 22.4% driven by growth across all regions.

For North American orthodontists, Q2 Invisalign case volume was up 4.7% sequentially reflecting higher adoption and utilization rates across the channel and up 20% year-over-year. For North American GP dentists, case volume was up 3% sequentially and up roughly 10% year-over-year reflecting continued solid performance from mid high volume GP's offset somewhat by our large base of lower volume GP's.

For international doctors, Invisalign case volume was up 16.8% sequentially and up 38.3% year-over-year reflecting increased adopters and utilization.

Worldwide Invisalign utilization in Q2 was 5.1 cases per doctor, up from 4.6 in Q2 last year. North America ortho utilization was a record 10.7, up from 9.5 in the prior year. North America GP utilization was 3.1, up from 3.0 in the prior year and international utilization was 5.0, also a record up from 4.6 cases per doctor in Q2 last year driven primarily but increased utilization in EMEA which was a record 5.5 cases per doctor in Q2 compared to 4.8 cases a year ago.

In Q2 we added 2885 new Invisalign doctors worldwide; 1125 of which were new North American doctors and 1760 of which were new international doctors. This compares to 2470 in Q1 and 2455 in the same quarter last year. Our scanner and services revenues for the second quarter were $26 million up 36.3% sequentially and up almost 200% year-over-year. As Joe mentioned, we began shipping the iTero Element for restorative workflow in Q2 and as a result almost half of the scanners shipped were for our GP customers who have been patiently waiting for their new iTero Element. We're pleased that the demand for scanners continues to be strong as we continue keeping pace with shipping, shipments.

Moving on to gross margin; second quarter overall gross margin was 76.2% slightly better than expected, up 0.5 sequentially and year-over-year. Clear Aligner gross margin for the second quarter was 78.6%, up 0.3 points both sequentially and year-over-year. The sequential increase was primarily driven by higher ASP's partially offset by seasonally higher training activity.

Year-over-year gross margin increase primarily reflects the benefit from leverage of our fixed cost over higher case volumes partially offset by lower ASP's as a result of the additional liner policy. Q2 gross margin for our scanner segment was a record 53.6%, up 8.6 points sequentially and 38.6 points year-over-year.

Both the sequential and year-over-year increases in gross margin were primarily a result of higher ASP's and the lower manufacturing costs of our iTero Element scanner. Q2 operating expenses were $140.1 million, up sequentially by $12.8 million or 10% primarily due to a full quarter of employed compensation related costs such as annual wage increases, stock-based compensation awards and new hires as well as go-to-market investments. Q2 operating expenses were lower, however, than our outlook due primarily to slower higher and investments in sales territory coverage, same go-to-market activities that were delayed in the second half of the year and more ERP costs being capitalized and anticipated during the quarter.

On a year-over-year basis, Q2 operating expenses were up $23.8 million or 20.4% reflecting increased headcount and continued investment in our go-to-market activities incidental to the growth of our business as well as our ERP implementation project.

Operating margin, our second quarter operating margin was 24.2%, up 1.9 points sequentially and up four points year-over-year. The sequential increase in operating margin reflects primarily, relates primarily, to higher Clear Aligner volumes and higher gross margins overall. On a year-over-year basis, Q2 operating margin was impacted by 2.3 points on the additional liner policy change.

With regards to our second quarter tax provision, our tax rate was 23.2% compared to 23.4% in Q1 2016. Second quarter diluted earnings per share was $0.62 compared to $0.50 reported in Q1 and $0.39 reported in the same quarter last year.

Moving on to the balance sheet. Capital expenditures for the second quarter were $18.8 million primarily relating to equipment purchases to expand our manufacturing capacity in Juarez, Mexico and our ERP implementation.

Cash flow from operations for the second quarter was $76.20 million and free cash flow for the second quarter, defined as cash flow from operations less capital expenditures, amounted to $57.3 million.

During the quarter, as a part of our $300 million April 2014 stock repurchase program, we entered into an accelerated stock repurchase agreement to repurchase $50 million of our common stock under which we paid $50 million and received an initial delivery of approximately half a million shares based on current market prices. The final (inaudible) shares is scheduled for October and a number of shares will be based on our volume weighted average stock price during the term of the ASR less an agreed upon discount. Upon completion of the ASR we will commence the repurchase of $50 million of our common stock on the open market. These two actions together will complete our April 2014 stock repurchase program.

Cash, cash equivalents and marketable securities, included both short and long-term investments were $685 million. This compared to $678.7 million at the end of 2015, an increase of approximately $6.3 million. Lastly I wanted to comment on our ERP implementation which went live the first week of July. Over the past year plus our team has worked very hard to ensure successful data migration and integration of new systems and processes. Overall, our implementation went very smoothly. Given the magnitude of this process, [new] project, we're continuing to monitor and troubleshoot potential issues but at this time believe we are past any potential for significant business disruption.

We're pleased to have a foundation that enables new capabilities, improves our speed of execution and will be used to improve our customers experience. As part of this implementation, we also implemented a legal restructuring of our subsidiary relationships which will return an excess of $100 million of cash to the U.S. tax free in Q3.

As Joe mentioned earlier, in October we'll begin supplying aligners to SmileDirectClub's Aligner Program for minor tooth movements. As part of this transaction, Align acquired a 17% stake in SmileDirectClub for $46.7 million and gained a seat on SmileDirectClub's board of directors. As a result of our equity holding in SmileDirectClub, Align is required to account for this investment under the equity method of accounting. Thus, Align will include proportional share of SmileDirectClub's earnings or losses in it's financial statements beginning July 25, 2016.

Our financial results will reflect two components; commencing in October when we begin to supply aligners, the sale of aligners to SmileDirectClub and the income there from under the supply agreement which will be reported in our Clear Aligner business segment and in Q3, and going forward, our portion of SmileDirectClub's reported profits and/or losses will be included in our operating expenses.

We are excited about this incremental new market opportunity and the potential for our Invisalign doctors to benefit from an untapped segment of consumers with minor malocclusion who want a better smile. We anticipate this relationship will be incremental to our top-line revenue and earnings in 2017.

With that, let's now turn to our business outlook and the factors that inform our view starting with the demand outlook. As we head into the summer months and busy teen season, we expect to increase, an increase, of [teen starts, case] starts among our North America orthos. Our North American GP's typically have a seasonally slower quarter in Q3. Overall, we're expecting North America volumes to be seasonally down quarter-over-quarter. In our international markets our European doctors typically spend fewer days in the office due to summer vacations and extended holidays.

Our Asia Pacific region continues to grow and is beginning to offset some of the seasonality we typically experience in our European countries. We therefore anticipate international Invisalign (inaudible) to be flat to sequentially up from Q2. For our Scanner business, we expect scanner shipments to be up sequentially as the iTero Element continues to penetrate the market. We estimate the Q3 impact of the SmileDirectClub transaction will reduce diluted EPS by less than $0.01 per share.

With this as a backdrop, we expect the third quarter to shape up as follows: Invisalign case volume is anticipated to be in the range of 174.2 to 176.9 thousand cases, up approximately 18.1% to 19.9% over the same period a year-ago.

We expect Q3 net revenues to be in the range of $267.2 million to $273.5 million. We expect Q3 gross margin to be in the range of 74.4% to 74.8%, down sequentially primarily due to increased mix of scanner business and continuous investment in international manufacturing expansion.

We expect Q3 operating expenses to be in the range of $147.1 million to $148.1 million, up quarter-over-quarter primarily due to hiring, delayed marketing investments as previously mentioned and higher ERP expenses as the cost of the last implementation phase, [call] stabilization are not capitalized. Our Q3 operating margin should be in the range of 19.3% to 20.6%. Our effective tax rate should be approximately 24.5% and diluted shares outstanding should be approximately $81.4 million exclusive of any share repurchases.

Taken together, we expect our Q3 diluted EPS to be in the range of $0.49 to $0.52.

With that, I'll turn the time back over to Joe for final comments. Joe?

Thanks, David. Exciting time for Align Technology; demand and adoption of our Invisalign system continues to expand across all of our regions and with each new Invisalign innovation doctors are doing more and more with Clear Aligners and growing their practices. Today we announced a supply agreement with SmileDirectClub so we'll provide access to Clear Aligner treatment to more consumers than before while providing Align with an incremental revenue opportunity and helping us connect Invisalign providers with a new base of potential patients.

Thanks for your time today, I'll now open the call for your questions. Operator?

Thank you. (Operator instructions.) One moment please while we poll for questions. The first question today comes from Robert Jones of Goldman Sachs, please go ahead.

Thanks for the questions. Most of the metrics in the quarter were ahead of your own guidance and ahead of our expectations. I guess one exception relative to us at least was North American cases and in particular case growth with GP's. So I guess I'm just curious, how did the 10% case growth in North American GP's compare with your own internal expectations and then just related to that, any view of what you can do or what you're doing that could reaccelerate growth in that group in the back half?

Yeah Bob, David. If you look at our business in North America and you compare that growth relative to the last few years we feel like our North America business is really taking a nice uptick this year and starting last year with many of the investments we made. We think it's still strong on both the ortho and the GP side where we're continuing to see at record or near record utilization amongst those classes of doctors. We still are challenged, you know, when it comes to low stage doctors, particularly low submitting GP's who engage with us one quarter and then maybe don't engage the next quarter. And so we struggle at times trying to reach those doctors and we've continued to invest in various go-to-market strategies that will engage them more fully with us but it does represent a challenge for us in terms of how we forecast those doctors in any particular quarter.

The other thing I would just mention is that when you look at our comps, particularly in the second quarter year-over-year, you'll remember that Q2 a year ago we had -- we were running an E5, an E10 promotion at that point in time which we're not running this year and so when you look at last year Q2, we had a very strong quarter from a case volume standpoint because of those promotions on those low stage products as well as the fact that we had additional Aligner program that was, you might say, an easier qualification bar for the doctors to qualify for. And, when you look at those two they have a bigger impact on our year-over-year volume but certainly a lesser impact on a year-over-year revenue basis.

Okay, that all makes sense and I guess just one on the SmileDirectClub agreement. It sounds like you're saying it could be incremental to the P&L and in particular top-line next year. Anyway we could put a little bit more numbers around that, you know, maybe how many members do they have today, how many do you anticipate will show up at Invisalign dentists offices? Anything just directionally to help us as we think about layering that in would be really helpful.

Hi Bob, it's Joe Hogan, you know, we can tell by the announcement that that will start in October, we'll start shipping then. It's hard for us to really triangulate around what that might mean as we go into next year but we'll give you as much transparency as possible when we come back, the third quarter earnings announcement.

Fair enough, thanks so much.

Okay.

The next question comes from Robert Willoughby of Credit Suisse, please go ahead.

Same line of questioning I guess. Do you -- can you give us any sense of how much you think the SmileClub deal expands your total addressable market here? This looks previously untapped, do you have a size of the overall opportunity?

You know, it's really hard for us to call the market. I mean, when you look at the run rate right now for SmileDirectClub, it's in the $50 million range. It has really been accelerating significantly over the last six months so it's really difficult to quantify this market. You can also see by the statistics that we threw out, you know, Rob, that this is a market that we really haven't serviced. It's less than 2% overlap with our current business. It's something that we're learning a lot from Doug and David, the key leaders in the business in exactly how this works so we're excited about it, we think we can help and make a good partnership. We're also excited about how we feel it can help our business too in the sense of referrals back that don't fit this protocol back to our Invisalign in doc's offices. But, again, this is brand new, it's hard for us to call it and we'll give you more data as it becomes more apparent and as we move into the supply agreement in October.

Maybe another factual question around it though, if they're kind of tracking along at a $50 million rate, I assume they're losing a little bit of money on that. Is that a safe bet?

Yeah, right now they'll be cash flow positive next year some time so this year they're still burning cash.

Okay, and just how it works, is there a liability if the treatment goes bad, that goes back to an orthodontist somewhere, correct, that does not come to you and just the last one on SmileClub, is there a bad debt number associated with the business?

I'll take the latter part. As it relates to the bad debt part, they have a very small cancellation rate amongst the people that are qualified. So they go through a process where a person identifies themselves as having an interest in being treated, they're screened in multiple levels from both a photographer, from a photo standpoint as well as from a scan or an impression and assuming the person passes their protocols and is capable of being treated, they have a very small cancellation at that point in time.

And Rob, on the question that you had about from a liability standpoint. Remember we're the supplier of these aligners. [SEC] -- will sell them to the customer, basically do it for their specifications. Our job is to make the cleanest best aligners we can based on those specifications. [SEC] obviously makes the transfer and something like that who has liability, obviously we all know in a lawsuit whoever has the deepest pockets are going to have some issues too but I think from a liability standpoint I think it's shared in that sense but I'll ask Roger to make a comment on it.

Hi, it's Roger George, General Counsel. The doctor is writing the prescription and is treating the patient. So, that's where they start. -- our common model.

Thank you very much.

Yep.

The next question comes from Brandon Couillard of Jeffries, please go ahead.

Hi, (inaudible) in for Brandon. David, if we look back four years ago, [3 through 12] was one of the very few periods historically that Align has come short of its revenue guidance and at that time you pointed to noise around Olympic as well as a pullback in advertising activity because of the event. So I'm curious if you applied an extra dose of conservatism or not with respect to initial 3Q guidance for the upcoming Olympics and to which extent did you consider that factor, if at all?

Well, I wasn't here four years ago but I think that's an interesting causal, I haven't heard that one before since I've been here. I can tell you as it relates to our Q3 guidance that we've given today, that didn't enter into our thinking at all and we basically, you know, approached our guidance the way we typically approach it looking at the strength of the prior quarter, the doctor engagement, etc., and that particular factor wasn't considered.

Got it, could you walk us through the impact of the [anniversary] of the Aligner policy change in the second half in both the revenues and P&L?

So it continues to be a drag on earnings and it will be a drag on earnings for, as we said, a year ago for at least a couple of years as we work off those grandfathered cases. But starting in Q3 however, it won't be a drag on a year-over-year compare because we Q3 2015 was the first quarter in which we actually implemented that policy. So I think those -- we won't talk about it necessarily so much on a year-over-year basis but it still will be a drag to some extent.

Got it, thanks.

The next question comes from Steve Beuchaw of Morgan Stanley, please go ahead.

Hi, good afternoon and thanks for the time. Just a couple of little small housekeeping items. The ERP, I mean once we get to the fourth quarter can you give us a sense for what the swing is on opex between 3Q and 4Q just [from] online purposes, once we get passed that ramp?

Yeah, so Steve it's going to be a little bit up in Q2, about -- a little bit less than a couple of million dollars primarily as I indicated in my comments that the stabilization phase is not capitalizable. So that will -- that's an uptick in Q3 and when we get to Q4 we would expect that principally to reverse itself almost dollar for dollar as those costs begin to drop off.

Okay, got it. And then just one Joe, reflecting back on your prepared remarks, probably the most positive I've heard you in your tone around third-party scanners and their contribution, I wonder if you could just expand upon that. What is it that you're seeing there that's incremental here and can you give us a sense for where you think volumes are headed there? Thanks.

Steve, you know, I think my enthusiasm is around just the scanners in general when you see the percent of scans we're getting right now that come into the organization approaching 50%. That means a lot to us from a quality standpoint in how we can deal with our customer base. So I think I interpret my enthusiasm more around just the scanning piece than it is third-party or whatever. Our scanning business obviously is having a really good year and we're projecting it to have a very strong ending this year too and it's not just selling scanners, it's just what it does, it reinforces from a customer base standpoint both with GP's and orthos and makes things easier for us and it gives us a wonderful platform in a sense to use that scanner for additional products making things easier for our customer base.

As far as the third-party piece, you know, Sirona and 3M or whatever, we're just seeing continued growth with those. There's nothing I would say that's asymptotic about it but it's just good strong linear growth going forward and so that's helpful also.

Thanks everyone.

Your next question comes from Jon Block of Stifel, please go ahead.

Great guys thanks and good afternoon. I might have two or three and the numbers look really good so I'm actually going to focus on the SDC deal that you announced. The first one Joe I'm just a little confused. You mentioned 1% to 2% cannibalized but when I look at your cases and sort of lean on the Analyst Day, you know, Express seems to be 15% plus so can you sort of [walk] those two numbers or rectify them? Why Express 15% plus, you're cannibalizing 1% or 2%, is that just because of the lack of attachments in the IPR?

Hey Jon, it's Joe. You know, when you look at -- there's different protocols on this and so it's not just a number of aligners, it's what's -- so just from an overall standpoint, remember there's no IPR as it's done on these, there's no attachments and obviously on E5 you wouldn't have attachments but E10 you do sometimes. Secondly is SmileDirectClub doesn't move [molars]. They've basically moving (inaudible) and they move them at different velocity and different rates and when you add that all up it really comes down to there's a very small overlap on that piece. Now, your question has to do with our Express line. I think those overlaps are like 4% on E10, 8% on E5, when you run it against our whole portfolio, that's where you get less than 2% for the whole thing. So we have a track pretty well, we know this well, that's why we're confident about the minimal amount of cannibalization we would expect to be going to market.

Okay, and maybe -- can you give any details on what you're going to ship aligners to, to SDC in terms of the cost that don't pay or the revenue that you'll recognize on those aligners?

So we've not disclosed Jon the pricing of those aligners. What we have disclosed is that the pricing is dependent upon volume discounts and as their business ramps they'll earn lower pricing. But when you look at it on an incremental basis, we've priced it basically on a per aligner basis, we believe it's going to be accretive to the company both from a revenue standpoint as well as from an operating margin standpoint.

So I get that and accretive to you guys but is it going to be dilutive to your customers and that's maybe my final question and I've got more and I'll take them offline but that's what I'm having a really hard time here with is Joe you came in and you did such a great job short of walking up to the customer, shaking hands and eliminating the main point of friction with the additional aligner policy and it seems like to me, is this a risk that you just sort of bring back in a main point of friction because you're going to have a subset of docs who believe their Express business and some other cases are now being pointed to an at-home business. Thank you guys.

Jon, it's a fair question and obviously it was something that we strategically had to wrestle with inside the company as we worked with the SmileDirectClub. But I think you can see that as we work through this, when you look at -- we keep the Invisalign product within SmartTrack, SmartStage, all of the pieces of that, the Invisalign brand name, all of that stays at the doctors office. And also see this is EX30, it's basic dental material that's been out there for years, there's no (inaudible), straight [rail] system, it's going to a group who we feel demographics that are a lot more concerned with convenience and cost and then when we ran those protocols that we just talked about and showed the less than 2% would be an issue for us, from a cannibalization standpoint. I mix that Jon honestly with when you look at what's going on overall in the marketplace right now with direct to consumer, you just saw the thing with Dollar Shave Club and what Unilever had to pay for that company because they were late to that game.

You know, I really felt that for a lot of reasons; both from an offensive standpoint and a new market standpoint, that this would be balanced well with concerns from a customer base. And we'll do our best to ensure our customer base that this is intended that way and we'll work with SDC to continue to target the demographic that they've been targeting and being successful with.

All right, thanks for your time guys.

Yep.

The next question comes from John Kreger of William Blair, please go ahead.

Hi, thanks very much. I have a capex question. I think at Analyst Day you talked about over the next few years moving both planning and fabrication to Europe and Asia. Can you just remind us the timing of that and if we should assume any sort of a step up in capex to do it? And when you layer the volume of SmileDirect on, will that have to -- will that prompt any sort of retrofitting in Juarez?

So John, you know, we've actually begun some of the activities incidental to expanding our base of international operating activities so as an example, we established in Europe a base where doctors who are submitting physical impressions can send them to a European address to have them scanned versus sending them all of the way to Juarez. So we've implemented that and you've seen -- there's been some capex associated with that and there's been some operating expenses for starting that activity up. We've also begun looking at establishing some [treat] capacity in some of our regions and begun piloting some of that with small numbers of people and experimenting with how we -- how those workflows might work. As it relates to a bigger piece which would be doing a liner fabrication, that's still further out into the future; 2017 plus.

And so we're beginning to see some of that now and when we look at our gross margins actually for guidance in Q3, there's a little bit of an impact from that. The -- as far as the capex standpoint is concerned, SDC won't really impact that very significantly, their volume is relative to our volumes are still very modest and we wouldn't expect the uptick to be meaningful. As it relates to the rest of our business, probably for the next two years or so, I think, as that infrastructure begins getting placed, you know, geographically, we'd probably see a little bit higher capex then what we'd normally experience and at which point as those operations are established and the brick and mortar is up, we would probably expect capex to return to kind of the nominal rates that we saw historically.

Great, thanks and just one more, Joe, stepping back if you think about your opportunity with Clear Aligners, the bigger opportunity would seem to be teens but that tends to have a little bit lower volume growth for you. What do you think you need to do to get teen growth equal to or outpacing your adult case volume?

Yeah, I think it -- at our investors meeting recently in New York I think we laid that out pretty well. When you look at first of all from an R&D standpoint, trying to move from a chronological standpoint back more to the palate expansion and mandibular expansion kind of devices that we announced that we'll have in the marketplace in 2017 is one part of that.

The second reason (inaudible) how we go to consumers and how we communicate Invisalign capability to the consumer base and honestly a lot of our approach to that marketplace over the years has been primarily about adults and adult demographic and we feel pretty strongly as we move into next year we're going to have to -- really, there's two sides to this teen equation. If you look there's three people involved normally in teens; you have the father or the mother and ten you're going to have the teen and then you also have the doctor. We found that over time you've got to win two out of three and I think often we win the one with the teen, we lose the mom or we lose the doc. And so we're working on both ends hard from an advertising standpoint to make sure that we do better in working with our docs in a sense of our teen capability and expanding it coming forward and then secondly is to get to the mom in a much better way, particularly around compliance. A lot of mothers or fathers have concerns that their teens really will wear these the amount of time that's needed to properly move the teeth. We found out over the years that actually teens are more complaint than adults and so we're very confident.

And frankly the dentition of teens are really helpful in the sense of how loose the dentition is and how fast you can actually move teen teeth. So as we speak, we're working hard in the sense of how we're going to approach teens next year. It is -- it's a great question because it is obviously 75% of the marketplace and it's one that we have not obviously penetrated thoroughly and I think we can make some really good progress in the next year.

Hey John, just to add a little bit of color to Joe's comments there, if you look at our teen growth, our teen growth is still north of 20% year-over-year which we think is really outstanding in a market that's only growing 3% to 4%, you know, that share that we're taking away from wires and brackets. And I think one of the -- when you look at the 20% it may lag our overall growth as a company by maybe a point or two but I think some of that is largely attributable to the fact that our international business is growing faster than what we're growing here in North America and their business is more dominated by adult -- you know, treatment of adults. And so our international business has been growing at those faster rates that it's had somewhat of a dilutive impact on our overall teen growth because our teen is more dominated here in the U.S.

So we still feel like the teen business is going great and still feel like we've got plenty of opportunities still ahead of us there.

Very helpful, thanks.

(Operator Instructions). Our next question is from Richard Newitter of Leerink Partners, please go ahead.

Hi, thanks for taking the question. Just going back to the SDC, the -- I'm curious if you could characterize for us the type of customer or consumer that kind of -- lead generation aspect of this, type of customer or consumer that's going to SmileDirect and how that compares to who's kind of learning or coming to Clear Aligners through your website? Did you do any research or do you have any information there about the type of consumer that's getting this type of product versus traditionally who goes through the doc locator and traditionally on the Align channel?

You know, I can say that we don't have exhaustive data on that. I mean, what SmileDirectClub has shared with us, there's -- it tends to be -- The demographic end tends to be heavily weighted toward women versus men which we see in our own demographic. These are people that are really often millennial's, they -- convenience is really important to them. It's -- they have a certain want from a freedom standpoint in the sense of visiting doctors offices. There's obviously a price point here too, it's something simple in the sense of what they want [to move] from a malocclusion standpoint. So it's not -- it's not necessarily a gender difference from what we've done or an age difference, but it's a preference difference in the sense of how people want to engage from what we can see so far.

Okay, and then maybe just turning one financial one on gross margin, I think you said that you have some manufacturing startup costs for your APAC kind of initiative there bringing 3M manufacturing closer to that part of the world. That's going to impact the step-down in gross margin in the third quarter. Can you just give us a sense as to whether or not that is kind of finite in nature or should we kind of think of that as kind of a go-forward kind of gross margin rate for future quarters and modeling or how should we think about that? Thanks.

Yeah, I would say it's probably more of a go-forward rate but let me give you a little bit more color to that because I was answering that question in the context of a capex discussion. When you actually look at the biggest impact on gross margins and the fact that they're declining just slightly quarter-over-quarter the biggest impact is from our scanner business which has a gross margin that is in the low 50s and as that business is growing, more than doubling on a year-over-year basis, it's having a little bit more of a dilutive impact on our overall gross margins.

But I would say that the guidance that we've given for Q3 is probably the best guidance we could give you on a more going-forward basis as well.

Okay, thanks and if I could squeeze one more in. I know you -- I believe you said you had the G6 product launching in the U.S. or you had anticipated that. I was just wondering, any initial feedback there on how that launch is going assuming it's already happened?

We've launched G6 in the U.S. and G6 functions well. I mean, we have good feedback on it but honestly when you look at the demographics again of this, it moves to Asia because extraction cases in Asia are way overboard in a sense of the number of cases they see. So, it's being used in North America, it's been successful, it's growing in that sense but predominantly it's been an APAC product.

Thanks Rich. Operator, we'll take one last question please.

Okay, the last question today comes from Chris Lewis of ROTH Capital Partners, please go ahead.

Hi guys, thanks for squeezing me in. I guess first just on the North American price increase, can you quantify what the increase was and the timing of that and the rest -- just what you've seen since you've implemented that pricing strategy?

Yeah, the price increase is effective April 1 so we saw just a partial impact of that in the second quarter. The magnitude of the price increase varied dependent upon the product but it primarily applied to our full stage products and varied anywhere from $50.00 to I think $70.00, $80.00.

Okay, good. So, it's reasonable to assume that at least in North America, ASP trend up in the third quarter from second quarter?

From a revenue standpoint, yes. There are other factors however though when you go into the third quarter because typically we have more promotion activity going on in the third quarter particularly for teens but holding that aside, you're right.

Understood. And then just turning to the iTero Element, understand it's going to increase sequentially. You know, are you still working through the backlog there and if so when do you think that will be kind of more on a normalized basis, I guess I'm looking beyond the third quarter and just trying to engage where sales go post 3Q, thanks.

So I think one of the things we've been very fortunate with is that the demand that we saw post the announcement of the product in March of 2015 has continued to almost outpace our ability to deliver and so we've had a very good first half of the year with orders, maintain that backlog in spite of our increased efforts to get ahead of it. We would expect that more nominal rate of backlog would probably be somewhere in half the levels that we have today and we think that would be somewhere in the -- maybe towards the end of the year by the time we'd catch up.

Okay, great. And then just one more for me. You know, as you think of that bolus of new scanners being placed, it sounds like mostly in the GP channel, you know, when do you think that will really start to translate into utilization and do you think -- is there an immediate pickup, uptick in utilization once a GP receives that scanner or is there a bit of lag effect there? Thanks.

Yeah, we still wrestle with that question, you know, honestly Chris. I think obviously there's an immediate pickup if there's a user today from an Invisalign standpoint, they turn all of their impressions over to iTero and you see an immediate flip but as far as it actually keeps doing more and more cases, we have more and more data to say that's true. We can't quantify exactly right now exactly how true that is and to what degree it occurs.

Okay, thanks for the time.

Thank you everyone for -- sorry operator, I'll go ahead and close. Thank you everyone for joining us today, we appreciate your time. If you have any follow-up questions please contact Align Investor Relations.

This concludes today's conference, thank you for your participation. You may disconnect your lines at this time.