愛齊科技 (ALGN) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Align Technology First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Shirley Stacy. Please go ahead.

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 is Joe Hogan, President and CEO; and John Morici, CFO. We issued first quarter 2018 financial results today via GlobeNewswire, which is available on our website at investor.aligntech.com.

Note that beginning in Q1 2018, the American region now includes the U.S., Canada and Latin America. Previously, Latin America was combined with the EMEA results for reporting purposes and included in the international total. While the Latin America region has been relatively immaterial to Align's overall results, we've adjusted our prior period regional breakouts to reflect this change so our year-over-year comps are consistent.

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 p.m. Eastern time through 5:30 p.m. Eastern time on May 9. To access the telephone replay, domestic callers should dial (877) 660-6853, with conference number 13678038, followed by #. 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 second quarter of 2018. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financial statements, including the corresponding reconciliations and our first quarter conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information.

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

Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide some highlights in the quarter then briefly discuss the performance of our 2 operating segments, Clear Aligners and Scanners. John will provide more detail on our financial results and discuss our outlook for the second quarter. Following that, I'll come back and summarize a few key points and open up the call to questions.

I'm pleased to report better-than-expected first quarter results and a strong start to the year for Align, with the revenue -- with revenues, volumes and EPS above guidance. Record Q1 revenues were up 41% year-over-year, reflecting continued strong Invisalign volume across all geographies and customer channels as well as iTero scanner sales, which are up over 84% year-over-year. Q1 Invisalign volume growth of 31% year-over-year was driven by increased utilization, including strong teen case growth globally and expansion of our customer base, which included over 4,200 new Invisalign-trained doctors worldwide.

Turning to specifics around our first quarter results, let's start with results of our Americas region. Within the Americas, Q1 was a good quarter, with Invisalign volume up 7.1% sequentially and 24% year-over-year, reflecting growth in both our orthodontist and GP dentist channels. In Q1, we trained 1,600 new Invisalign doctors in the Americas region, of which 455 were in Brazil alone. We're also seeing a continued ramp-up for Invisalign treatment. For the Americas region, year-over-year growth was led by ortho customers, with another record quarter for North America ortho utilization of 15.3 cases per doctor. Q1 Invisalign utilization for our North American GP dentist were also up year-over-year, although modestly, predominantly reflecting continued expansion of the GP customer base, which included 900 from new North American GPs who submitted Invisalign cases for the first time this quarter.

During the quarter, we focused on key sales and marketing initiatives intended to key -- to drive growth with certain key customers. And in Q1, we continued to see higher rates among doctors in these programs than among nonparticipating doctors.

We also saw a nice uptick in Q1 from our Dental Service Organizations or DSO channel. DSOs remain a very strategic part of our overall strategy, as they look to scale operations and accelerate growth for their practices through continued investment in our end-to-end digital workflow, including Invisalign treatment and iTero scanners. At the Association of Dental Support Organizations, ADSO, meeting in Austin last week, 2 of our largest partners spoke to major DSOs about their success in integrating Invisalign treatment and digital scanning into their organizations, and our special markets team continues to build on these wins across the region.

For international doctors, Q1 was another strong quarter, with Invisalign case volume up 6.2% sequentially and 43.4% year-over-year, reflecting strong Invisalign volume across the board, driven by both increased adoption as well as expansion of our customer base, which included another 2,645 new Invisalign-trained providers, with roughly half of EMEA and half in APAC. From a customer channel perspective, while we continue to see strong growth from both the ortho and GP practices, we're beginning to see more positive traction in the GP channel from segmenting our sales and marketing resources and programs specifically around each channel.

For Q1, we're continuing to help expand the market for clear aligner treatment with approximately 1,600 newly trained doctors in EMEA, of which half were new Invisalign Go GPs. Year-over-year growth in Invisalign volume in EMEA was up 36.6%, with record volume in all but one core country market. This performance reflects continued confidence in treating complex cases with Invisalign clear aligners as well as success in the GP channel, which was up over 67% year-over-year. The growth was led by Iberia and France, which were up over 40% year-over-year. And Iberia became our third largest market worldwide for the first time, following China, our second largest market after the United States. We also saw strong growth across our key expansion markets led by Central and Eastern Europe and Benelux, where we continue to increase our sales and marketing resources across the board and have begun to implement consumer marketing programs.

In APAC, Q1 Invisalign volumes were up 56.1% year-over-year led by China, Japan and Australia, with China solidifying as our second largest worldwide market. Our Q1 results reflect continued strong growth overall and especially from teen cases, which are up 73% year-over-year. In addition, we saw strong growth from our GP channel, which is up over 70% compared to last year. We also continue to see positive uplift from Invisalign customers with iTero scanners. For Q1, Japan had a record quarter and showed very strong growth from doctors who have previously purchased iTero Element scanners. Finally, Q1 was an all-time high for Invisalign volume in our smaller expansion markets in Thailand, Singapore and Korea, where we are still very early in their development and adoption cycles.

Now turning to the teen market. In Q1, 69.1 thousand teenagers started treatment with Invisalign clear aligners, an increase of 8.8% sequentially and 40.9% year-over-year, driven by continued strong adoption across all major regions and increasingly among younger teens and tweens. Q1 was the sixth consecutive quarter that Invisalign teenage patient volumes grew faster than adults. Overall, teen case growth is outpacing adult growth on both comprehensive and noncomprehensive products.

For Q1, year-over-year Invisalign Teen patient growth for North America's orthos increased 33%, and internationally was up 60%. The average age among teenagers continued to get younger and younger, falling 6 months over the last 7 quarters to 14 years old. This trend in average age should continue downward as we commercialize Invisalign products that support treatment of young teens and children, including Mandibular Advancement and Invisalign First, which we announced earlier this month.

Invisalign Teen with Mandibular Advancement, or MAF as we call it, continues to ramp internationally. It is currently pending FDA approval in the United States, which is slotted for approval in the second half of this year. The lift analysis that we have suggests a direct halo effect from MAF users that results in a higher percentage of teenagers treated with Invisalign clear aligners.

Invisalign First clear aligners is a new Invisalign treatment designed with features specifically for younger patients with early mixed dentition. Phase I treatment, which makes up roughly 20% of case starts each year, is early interceptive orthodontic treatment, traditionally done through arch expanders or partial metal braces before all permanent teeth have erupted, typically ages 6 through 10. To date, Invisalign First clear aligners have been used to treat over 600 patients and will be commercially available beginning July 1 in 2018.

Earlier this month, we announced an expanded Invisalign product portfolio that includes new options and greater flexibility to treat a broader range of patients. The revamped Invisalign product portfolio offers doctors more choices by extending desirable features across the entire portfolio and creating Invisalign treatment packages as well as the new Invisalign First option to treat young patients with early mixed dentition. The new Invisalign clear aligner treatment options will be effective July 1, 2018.

Today, we announced a new more user-friendly version of our Invisalign Go product and digital platform that offers greater flexibility and expanded treatment options for simple teeth straightening cases. Invisalign Go offers intuitive Invisalign experience design for GPs worldwide, who are seeking to integrate clear aligner therapy into their thriving comprehensive dentistry practices.

We started the year off with strong consumer interest in the first quarter, over 4 million unique visitors to Invisalign websites worldwide, up 54% from the same quarter last year. More than 500,000 potential patients searched for an Invisalign provider on our doc locator webpage, up 27% from the same quarter last year. Almost 220,000 consumers opted in for follow-up, and the Invisalign social media community grew over 20% year-over-year, adding 688,000 consumers, who are following the Invisalign brand worldwide. All metrics for tracking consumer interest are up, with especially strong growth in website visitors across APAC and opt-ins in the Americas region.

During the quarter, we also expanded on our customer outreach through the addition of our second Invisalign pilot store near our headquarters in San Jose, California. We're seeing great initial ramp-up in both San Francisco and San Jose stores as we connect consumers to authorized Invisalign providers, and we'll continue to monitor store activity. The Invisalign stores are a doctor-based model. Consumers who visit an Invisalign store are referred to a doctor's office, where a doctor performs a personal clinical examination of the patient and a treatment plan. The doctor will follow the patient until the case is completed. In Q2, we are opening 2 additional pilot stores on East Coast, one in Bethesda, Maryland and another in the Philadelphia area. We look forward to continuing to learn more from these 4 locations and sharing our progress throughout the year.

As we head into our highest investment period of the year for our consumer marketing program, which includes the very important summer season for teenage case starts, we plan to increase spend across mom and teen marketing programs to focus on raising awareness and turning more consumers into Invisalign patients through our doctors' offices.

In Q1, iTero revenues were down 10% sequentially as expanded -- as expected, following a strong Q4, which reflected year-end seasonality in the capital equipment business. Year-over-year, Q1 scanners were up 84%, reflecting very strong growth across all regions and reflects how central a digital approach is to overall customer utilization of Invisalign treatments. Use of iTero scanners for Invisalign case submissions in place of PVS impressions continues to expand and remains a positive catalyst for Invisalign utilization. For first quarter, total Invisalign cases submitted with a digital scanner in the Americas increased to a record 67.2%, up from 65.3% in Q4 last year. International scans increased 43.1%, up from 41.4% in Q1 last year. To date, more than 7.7 million orthodontic scans and 2.7 million restorative scans have been started with iTero scanners.

Today, we announced the expansion of our iTero Element portfolio, with the launch of the iTero Element 2 and the iTero Element Flex scanners. These additions build on the existing high precision, full-color imaging and fast scan times of iTero Element portfolio while streamlining orthodontic and restorative workflows. The next-generation iTero Element 2 is designed for greater performance with 2x faster startup and 25% faster scan processing times compared to iTero Element. The new iTero Element Flex is a wand-only device that transforms compatible laptop computers into a highly portable scanner that works anywhere. It's perfect for practices with multiple locations who need a scanner that is both convenient and easy to transport. The new scanners will be showcased at the AAO meeting next week.

Today, we also announced that we'll have received market approval for iTero Element Intraoral Scanner for the -- from the CFDA. That's the China Food and Drug Administration, and we have begun offering the iTero Element Scanner in China. Intraoral scanners have less than a 2% penetration rate in China today and are expected to grow 6x by 2020. The iTero Element Scanner launch in China not only supports growth of our base Invisalign clear aligner business but also represents a major milestone for digital dentistry in China.

Finally, in the doctor-directed, at-home channel, Align is a third-party supplier to SmileDirectClub, with a 19% equity investment in the company. We manufacture a portion of SDC aligners, which are non-Invisalign clear aligners. For Q1, shipments to SDC were down sequentially as expected, reflecting SDC's desire to produce their own clear aligners. Today, we issued a separate press release commenting on SDC's allegation that the launch and operation of our Invisalign store pilot program constitutes a breach of noncompete provisions. As disclosed previously, we dispute SDC's allegations and intend to continue Invisalign store pilot program, and we oppose and defend ourselves in these proceedings. While this dispute does not impact our existing supply agreement with SDC, which is in effect through 2019, we anticipate minimal volume from SDC in Q2 in the second half of 2018.

With that, I'll turn it over to John.

Thanks Joe. Now for our Q1 financial results. Total company revenue for the first quarter was a record $436.9 million, up 3.7% from the prior quarter and up 40.8% from the corresponding quarter a year ago. Year-over-year revenue growth includes a 5-point benefit from favorable foreign exchange. Clear aligner revenue of $385.5 million was up 5.8% sequentially on higher-than-expected volume. Year-over-year clear aligner revenue growth, up 36.5%, reflected strong Invisalign shipment growth across all customer channels and geographies and increased Invisalign ASPs. Q1 Invisalign ASPs were up sequentially, approximately $5 from Q4 to $1,310, reflecting favorable foreign exchange and product mix, partially offset by sales promotions and revenue deferrals. On a year-over-year basis, Q1 Invisalign ASPs were up approximately $40, reflecting favorable foreign exchange, price increases and product mix, partially offset by sales promotions and deferrals related to additional aligners.

For the first quarter, total Invisalign shipments of 272.2 thousand cases were up 6.7% sequentially and up 30.8% year-over-year, driven by growth across all regions. For Americas orthodontists, Q1 Invisalign case volume was up 8.5% sequentially and up 27% year-over-year. For Americas GP dentists, Invisalign case volume was up 5.1% sequentially and up 19.6% year-over-year. For international doctors, Invisalign case volume was up 6.2% sequentially and up 43.4% year-over-year. Our scanner and services revenue for the first quarter was $54.4 million, down 10% sequentially due to the lower volume from the Q4 seasonality effect and up 84% year-over-year, primarily due to higher volume, partially offset by lower ASPs due to promotions and discounts.

Moving on to gross margin. First quarter overall gross margin was 74.9%, down 0.6 points sequentially and down 1 point year-over-year. Clear aligner gross margin for the first quarter was 77%, down 0.6. points sequentially, primarily due to increased aligners per case and higher training cost, partially offset by higher Invisalign ASPs. Clear aligner gross margin was down 0.9 points year-over-year, primarily due to regional expansion of our manufacturing activities, partially offset by higher worldwide ASPs. Scanner gross margin for the first quarter was 59.2%, down 2.8 points sequentially due to lower scanner ASPs related to promotions and discounts. Scanner gross margins were up 3.1 points year-over-year, primarily due to lower services costs, partially offset by lower scanner ASPs.

Q1 operating expenses were $229.2 million, up sequentially 10% and up 31.8% year-over-year. The increase in operating expenses reflects continued investment in our go-to-market activities, including higher advertising spending, geographic expansion as well as increased compensation related to expenses due to higher headcount and our planned annual increase in employee compensation programs.

Our first quarter operating income was $98.2 million, down 10.4% sequentially and up 59.2% year-over-year. Our first quarter operating margin was 22.5%, down 3.5 points sequentially and up 2.6 points year-over-year. The sequential decrease in operating margin relates primarily to lower gross margin due to operational expansion activities; higher operating expenses, as just described; and lower SmileDirectClub-related revenue. On a year-over-year basis, the increase in operating margin primarily reflects higher revenues from both clear aligner and scanner and services as well as favorable foreign exchange rates.

With regards to the first quarter tax provision, our tax rate was 2.9%, which includes $23.3 million in excess tax benefits related to stock-based compensation and is down by approximately 89.5 points compared to 92.4% in Q4 of 2017, primarily due to the U.S. Tax Cuts and Jobs Act enacted in December last year. First quarter diluted earnings per share was $1.17, up $1.04 sequentially and up $0.32 compared to the prior year. Recall that Q4 2017 diluted earnings per share of $0.13 included $86.6 million expense or $1.06 per diluted share impact due to the U.S. Tax Cuts and Jobs Act.

Finally, Q1, we adopted ASC 606, revenues from contracts with customers using the full retrospective method. While the impact to the Q1 2017 and Q1 2018 P&Ls are immaterial, the condensed consolidated balance sheet as of December 31, 2017, has been recasted to comply with ASC 606 requirements.

Moving on to the balance sheet. As of the first quarter, cash, cash equivalents and marketable securities, including both short- and long-term investments, were $673 million. This compared to $761.5 million at the end of 2017, a decrease of approximately $88.5 million, primarily due to $100 million in stock repurchased during the quarter. Of our $673 million of cash, cash equivalent and marketable securities, $236 million was held in the U.S. and $436.2 million was held by our international entities. Q1 accounts receivable balance was $361.5 million, up approximately 11.5% sequentially. Our overall days sales outstanding, DSOs, was 74 days, up 5 days sequentially and down 3 days from 77 days in Q1 last year. Even though our accounts receivable aging profile has improved, the Q1 DSO was up sequentially as a result of increased sales with extended payment terms that are available in certain regions.

Capital expenditures for the first quarter were $57.6 million, primarily related to building purchases and improvements, equipment purchases for additional manufacturing capacity as well as our global expansion efforts, including the new manufacturing facility in Ziyang, China mentioned last quarter. Cash flow from operations for the first quarter was $77.3 million, up $29.7 million compared to the prior year. Free cash flow from the first quarter, defined as cash flow from operations less capital expenditures, amounted to $19.7 million.

During the first quarter, we also repurchased approximately 400,000 shares of stock for $100 million under the April 2016 repurchase program. We have $100 million remaining available for repurchase under this existing stock repurchase authorization. Other significant cash flow activities during the quarter included the receipt of $30 million from SmileDirectClub for repayment of their existing line of credit, and we paid $47.8 million in employees' taxes upon vesting of restricted stock units.

With that, let's turn to our Q2 outlook and the factors that inform our view, starting with the demand outlook. We expect our international business to grow significantly on a sequential basis as the European market is coming out of their winter season and most of the APAC market were observing Lunar New Year in the first quarter. For the Americas region, we expect Q2 to grow as our ortho and GP customers are seasonally busier and as we continue to make progress in our Latin America expansion. We continue to invest in our iTero go-to-market activities. We started selling iTero Element in Brazil in Q1, and we have started selling iTero Element in China in Q2. We expect sequential increase in iTero units sold and revenues.

As Joe mentioned earlier, we are currently in litigation with SmileDirectClub regarding our Invisalign store pilot, and while this does not impact our supply agreement, the state of our relationship, we are assuming minimum volumes for SmileDirectClub in Q2 and the second half in '18.

With this as a backdrop, we expect the second quarter to shape up as follows. Invisalign case volume is expected to be in the range of 296,000 to 301,000 cases, up approximately 28% to 30% over the same period a year ago. We expect Q2 net revenues to be in the range of $460 million to $470 million, an increase of approximately 29% to 32% year-over-year. We expect Q2 gross margin to be in the range of 74.2% to 75%, reflecting higher expenses as we regionalize our treatment planning and manufacturing operations, partially offset by higher ASPs. We expect Q2 operating expenses to be in the range of $245 million to $250 million, up on a sequential basis to reflect our continued investment in go-to-market activities. Q2 operating margin should be in the range of 21% to 21.8%. Our effective tax rate, including an excess tax benefit of about $10 million, should be approximately 13%. We expect a $1 million to $2.5 million loss related to our share of SmileDirectClub. And diluted shares outstanding should be approximately 81.6 million, exclusive of any share repurchases. Taken together, we expect our Q2 diluted earnings per share to be in the range of $1.02 to $1.06. In addition, as we continue to operational -- our operational expansion efforts, we expect CapEx for Q2 to be approximately $65 million to $70 million, and we expect depreciation and amortization to be $10 million to $11 million.

Now let me turn to our view of 2018. Based on the momentum in our business to date and our planned investments for the remainder of the year, we now anticipate 2018 total revenue growth rate to be above our long-term model and in the low 30s. We also expect Invisalign volume and -- revenue and volume to be -- growth in that same range. Notwithstanding continued investments in our strategic growth drivers, we expect the operating margin for the full year to be flat to slightly up from 2017 operating margin of 24%.

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

Thanks, John, and thanks to those for joining the call today. I'm pleased with our start to 2018 as well as our continued progress in execution of our strategic growth drivers. There are a lot of changes happening in dentistry and orthodontics today, but the industry remains healthy, and I think customers are starting to see new opportunities for how they treat patients and reach new customers.

We're looking forward to an exciting and productive AAO meeting in Washington, D.C., where we'll get to showcase our new products on the scanner side and also with Invisalign First. We're also going to have a pop-up version of our Invisalign pilot store as a way to answer customer questions and to get their perspective on our program. Then we'll be in Singapore at the end of May hosting our third Asia Pacific summit, where we'll be expecting about 1,000 delegates from across the region, attending a 2-day peer-to-peer education event. We've got a lot going on in Q2, and I look forward to sharing more with you at our upcoming financial conference at our Investor Day in New York on Monday, May 20 -- I'm sorry, on May 23.

Not a Monday for sure.

On May 23.

With that, I'll turn it over to the operator, and we'll open up to your questions.

(Operator Instructions) Our first question comes from Robert Jones of Goldman Sachs.

Joe, just looking at the expected new revenue growth rate for the year now above the long-term model, I'm sure it's a combination of several factors. But I was hoping maybe you could just, maybe in rank order, attribute what really has gone better than expected so early in the year if we think about teen off to a good start and the new product launches. Obviously, iTero seems to be pacing much better than certainly we were expecting. Could you maybe just give us some insight into what out of the gate this year has gone better than planned?

Well, we had an aggressive plan for the year. But to start off, I'd say -- we look at the international business. It continues to be very strong with APAC and EMEA. Really good performance in the Americas, particularly around North America, too. If we start to segment it, you mentioned it, our teen product is up pretty substantially that way. iTero sales have been terrific in that sense. We talk about how customers more and more are recognizing that whole digital workflow and how important it is. And you can see with our scanning now in North America and being close to 67%, that's just really working out well. And we know when they purchase iTero scanner, we see more Invisalign sales.

Lastly, I'd say our segmentation, I mentioned it in my script, too, is the segmentation of GP and ortho very specifically and also segmenting consumers in the sense of our concierge service and how more and more we target consumers and lead them into the specific docs from a doc locator standpoint. That's gone a little better than expected, too. So overall, the company has been executing well across geographies and across our segmentation and product plans.

Great, and I appreciate that. And then it looks like you're seeing some early traction already from Invisalign First. I was wondering if maybe you could share with us how that launch of a product like that changes the addressable market that you can actually go after. Just getting some thoughts from you would be helpful around how much more expanded the younger market becomes with a product like First.

Yes. First of all, those 600 cases we did -- that product launches in July. Those were actually just cases we put in place from a clinical study standpoint to prove the whole thing. So really, that 600 is -- I mean, you're going to see us do more and more clinical work like that to do a lot of cases, Bob, just to make sure that we have good evidence for our customer base as we go out there to work on. Secondly, when you look at the teen marketplace, palatal expansion, or what we call Phase I, represents about 20% of the marketplace.

Now this is dental expansion. It's not morphology or bone expansion like you have in rapid palatal expansion. So in the past, we've said we've been -- roughly can do 60% to 65% of the cases with Invisalign. What Invisalign First dental expansion does is expand that market served opportunity another 10%, and then we'll follow that with the rapid palatal expander that we're currently going through now, and that will increase it another 10% too so we can cover that whole 20% Phase I part that you have with teens out there.

And that also has a good entrée for us because often it's Phase I, Phase II treatments, where teens or young children, they're at 7 age or 8 age, have the palate expansion play, and then it goes on to dental kind of work from an orthodontics standpoint later on in their teens. And so there's a good transition period for that too. So it's a great product. It's targeting that segment of the marketplace that we haven't had technology at before, and it's specifically an orthodontic product that we've developed here.

Our next question comes from Brandon Couillard of Jefferies.

Joe, to the extent you're comfortable, would love to just hear your view on kind of what the path forward is with respect to SDC, SmileDirect. And then, John, any chance you could share with us the percent of cases that you manufactured for them in the first quarter?

We can't really get into specifics. And obviously, we're going through litigation, and we have to work through litigation. I'd just say we continue to have a good relationship with David and his team, and we just have a disagreement in the sense of obviously the contract that we're in and we're going to work through this from a litigation standpoint. So as that develops, we'll be able to be more clear with you as to what's going on.

Fair enough. And then one more, Joe. With respect to the Invisalign store model, would be curious to hear your views on how that's tracking relative to plans. It looks like you pulled forward perhaps by a couple of quarters, the East Coast buildout. What are some of the things you're learning? And what have you learned so far from the initial experience?

Brandon, first of all, we didn't pull those forward. That was in our plan as we had for 2018, and we're just sequentially putting them in. And we've learned -- honestly, these stores, we've learned a lot in a sense in these -- what we learn helps our doctors an awful lot too about how you take a basic consumer and you turn them into a patient. We learned that visualization is really important. The speed of that visualization, I mean, you scan, you can show a patient what their teeth are going to look like with certain kind of treatment options. It gives them a lot of confidence then to go to a doctor and to see a doctor and to complete that treatment piece.

We've learned a lot about our software, too, in the sense of how it has to respond from a patient standpoint. There's also a lot that we're doing from a marketing standpoint in a sense of turning interest from a consumer over to a store and then back to a doc. In other words, turning consumers into patients also. Through all that, I'll tell you the iTero Scanner again is really critical in being able to do this. It's really the key on the visualization piece. But also our treatment software planning in a sense of making it as realtime as possible so the patients can see how their teeth will move and what their smile will look like, those combinations become really important, not just in the store but as we translate that software to our doctor partners.

Our next question comes from John Kreger, William Blair.

Joe, can you give us a sense in terms of the feedback that you're hearing from your field sales force on the competitive front? Are you seeing any changes, perhaps in promotional activity or pricing from competitors at least at the low end?

No, we haven't seen any change at all, John. I mean, we -- I mean, the same cast of competitors are still out there that we had before. Obviously, we expect the 3M product at the AAO. We are pretty sure to see one there. We saw the DENTSPLY announcement with the MTM expansion in the 510(k) that they've done. But we haven't seen that translate into any kind of strategy or implementation in the marketplace yet. We [only] expect to see that in the second half.

Our guess, John, is pretty much what we've been telling you and the rest of the teams over the last couple of years is we expect this to be midrange products, so in the [26 aligner] or less kind of an area. We expect a kind of a slow ramp-up just because of the nature of how you have to scale in this business, take some time in treatment planning and also manufacturing. So I mean, you can see with our kind of bullish forecast for the second half of the year that John just called that we're pretty much -- have this in place in the sense of what we thought we would face, and we haven't really changed that analysis since we put the plan together last year.

Great. And one quick follow-up on the Scanner business. Did you see any kind of stocking by Patterson in the U.S. that might cause sales to slow as we move through this year? Or do you view that as [in-demand] tracking as well as it would appear?

No stocking here, John. In demand. That's a policy we have here.

Our next question comes from Erin Wright of Credit Suisse.

Can you speak to the more recent financing pilot? I guess, any surprises with that sort of initiative and when that would be a more meaningful contributor to growth?

Yes, the filing -- this is John. For -- Erin, the pilot that we have is -- took place in end of fourth quarter and through the first quarter. We saw great results, and it is going wider across the U.S. starting this quarter, where customers now -- customers and ultimately the patients have a lot more flexibility in terms of how they want to finance and work through the different financing options that they might have.

Okay. I'll follow up later there. And then on -- can you speak, I guess, on China and the opportunity there, I guess, as well as the competitive landscape, not just maybe from the clear aligner segment but also the broader iTero opportunity with the launch announced today?

I think -- it's back to Joe, Erin. We're excited about that. I mean, our growth to China -- China is our second largest market. Our growth over there has been tremendous. It's hard to believe that right now everything we do in China is basically PVC impressions (sic) [PVS impressions]. So -- and I mentioned in my script about 2% penetration of intraoral scanners in China. So from a competitive standpoint, the market is wide open in a sense, and you could see that from those kind of -- we have to sell. We have to train. There's a lot of things we learned in Japan because of the iTero Scanner being approved in Japan last year in the sense of how you have to ramp up, and a lot of technology and people to bring our customers up to speed, and so all that friction we're anticipating for this year as we ramp up in China. We're putting people in place and training in place to be able to get that done.

Our next question comes from Matt O'Brien of Piper Jaffray.

This is Kevin on for Matt today. Wanted to start with the mandibular advancement ramp abroad. Kind of what's most driving that strength? I've heard about it being incredible for the last 2 quarters. And then secondly, with that assuming approval here in the U.S., how fast exactly is the U.S. ramp? Is this something that ortho customers have been asking for, for a long time?

Kevin, it's Joe. First of all, I'd say from a mass standpoint, the ramp overseas, this is just a product that's unique, right? You obviously addressed mandibular issues, and these are people or teens that are between the ages of 10 and 12 usually [with that] bone development from a jaw standpoint. And there's really nothing in the world to tell you, you have twin block and things like this. This looks like a torture device basically with metal that's used to move kids forward with [also] composites. This -- what this does is move your jaw forward with removable aligners and also straightens your teeth at the same time. So it's a true breakthrough for that end of the market, and I think that's why you see really good pickup.

Secondly, is all of these products, as it moves in the United States, I wouldn't model some kind of huge increase in teens because of mandibular advancement in the United States. Because there is always a slow takeup of this because orthodontists want to try it, they want to see success with their patients, they build that kind of credibility with the product line, they continue to move on. So from a North America standpoint, this is more of a 2019 discussion with MAF in the sense of maybe significant kinds of opportunities than I would say in the second half of this year.

Okay, Joe, that's really helpful. I just had one follow-up on a previous question. On the competitive front and then additionally with the DTC effort, I was just curious. Are you hearing from your customers specifically becoming increasingly aware of additional offerings in your view? And secondly, are they pushing back a little bit on pricing and looking for better discounts and things like this as a result of the DTC effort increasing and then also kind of layering on new products in the next coming years?

Kevin, I'd say, look, there's increasing awareness because -- I mean, it's mainly SDC in North America has really extensive advertising, and so it's hard to watch TV and not run into an Invisalign ad or an SDC ad in that sense. But I wouldn't say -- our customers always want lower prices, like almost any other customers in the world, in anything else that you sell. So I wouldn't say that the SDC price range has created more sensitivity with our orthodontic and GP customers out there. I will say that there is a price elasticity curve, and obviously, that kind of lower very, I'd say, minor type of tooth movement kind of things that opens up a new segment of the marketplace that frankly hasn't been serviced in a big way before.

And so I think it just makes doctors aware of the more of a segmentation in the market, of not doing a full bite correction but just doing maybe your Social 6 or just correcting a smile that someone is not comfortable with. That's a new segment of the market. It's priced in a different way. And I'd say that's not a pushback on us on price. It's more of a look at how to service those patients and what's the best product to do that with.

Our next question comes from Steve Beuchaw of Morgan Stanley.

That's a new one. This GP number in the quarter kind of sticks out in a really good way, really on a tougher comp kind of inflects. Is there something going on in GP in the U.S.? I mean, we don't have -- I go out in the field. What was the magic there?

I don't -- it's not magic, and it's not a surprise, Steve. I'd say, first of all, STO -- I mean, the DSO marketplace has been big for us, right? So you know our work with Heartland, what's going on there and some other dental service organizations, teen, and North America has been very good at executing around those opportunities. Secondly, honestly, the increased advertising that we've been doing, okay, has an overall halo effect with driving patients to GPs asking for Invisalign treatment. And we have noticed that since last year, when we started cranking up advertising. So that is a kind of a residual effect or a second-order effect to help the GPPs.

Thirdly, Steve, is we're doing more and more segmentation on salespeople calling on GPs in a GP kind of a way. In other words, understanding GP workflows, they don't want to be orthodontists, having products like that are more simple for them to use in the sense of utilizing that within the workflow of a normal restorative kind of a dentistry type of workflow. So it's those 3 areas primarily.

Super helpful. And then you guys, you may have set a new record for press releases in one afternoon. I mean, you introduced a lot of new stuff today, and we could spend a lot of time on any one of them. But I wonder if there's any way to give us a sort of high-level view, Joe, on what you think these products mean for the growth profile of the company over the next 2 years, the sum total of getting iTero into China and getting the GP channel a little bit more automated, getting more cameras on the market. What does this mean for the next 2 or 3 years?

Steve, first to be completely honest with you, too, we're still learning, right? I mean, as you remember like a year ago, we were -- we wouldn't really be tied down, to tell you, that we sell more iTeros and we sell more aligners. Today, we'll tell you very concretely because we have enough data today that we sell more iTeros, we sell more aligners. We're gaining a lot of confidence in APAC as we continue to grow. Like I mentioned on a previous question is, in Japan, we learned a lot about what iTero can do, as you start to ramp up in a new market like Asia. Now Japan is completely different than China, completely in a sense of how you do business there. But we do -- we know how to go in there, and we can anticipate in a sense of what China will need and the kind of uptake we'll have with those kind of scanners.

So the iTeros that we just announced, the 2 products in iTero. Remember, this is equipment business. I grew up in equipment business and medical. You know that these are platforms, right? These are new platforms that we're moving forward on to help to extend what we already know in that sense. So like the Flex product allows you to put it into a compatible computer, move it around to different offices. It's what our customers are basically asking for. It's not break -- new breakthrough in scanner technology. It's an extension. You're going to see us continue to do that as we work off a successful platform that allows us not to just go wider from a geographical standpoint like China but to go deeper in the sense of the workflow and what our orthodontists and our GPs really want out there.

Now I would look at -- when you look at Invisalign Teen First, the product we just announced, that's truly a breakthrough. When you think for years, we really couldn't do teeth that weren't completely erupted, that didn't have permanent dentition. Now we threw a lot of technology and understanding over the year we can predict what those eruptions are going to be, and that's what we've programmed into that Teen First product line. That's why it opens another 10% market share for us. But you've been with us long enough, Steve, to understand that the takeup of those things are always cautious, and it takes time, but it does establish that. And when we do the rapid palatal expansion, that will establish another 20% of the marketplace that we haven't had before. So I mean, just look at this as the continual march of Align Technology to broaden overall our opportunities from a depth standpoint of penetrating the marketplace and from a breadth standpoint in moving into new geographies with those technologies, too.

Our next question comes from Ravi Misra of Berenberg Capital Markets.

Couple of questions, one on the store pilot. Just kind of trying to get a sense for what the revenue potential that you see out of that is in the long term. It sounds like you're having us moderate some of our expectations here based on what the contribution could be from SmileDirect itself as you guys work through your negotiations with them. And if you could give us some information on that, that would be great. And then secondly, maybe just a housekeeping question, just on the EPS line, the 5 points of currency. What was the flow-through down to the bottom line on that?

John, take that last question.

Yes, on the -- I'll take that first, Ravi, on the EPS. We saw 5 points on revenue. And the way our model works is, usually, we got about 3x the benefit on revenue as it is to profitability.

Ravi, on the store pilot, we were not going to share any data on the store pilot right now. We call them pilots for a reason because we're learning, and we're growing through that learning. And as this becomes more understandable because we have more data points, we'll be happy to share that with you. As far as the SDC and all, we haven't shared specifically what we expect from quarter-to-quarter. I have never wanted you to really [evaluate] Align stock on SDC, we sell to SDC. [I never wanted] to do that. And so when you say we're kind of moderating your views of volume, I would say we're talking lower 30% for this year. That's not a moderation in the sense of what we think the growth is. We just want you to not try to handicap that with the SDC volume. This is our inherent volume that we're generating in this business.

Yes, and I think that's pretty clear given your case start [flat] guidance in the low 30s now. So I appreciate that. And then finally just on the reapportionment of the Latin American sales. Can you just talk about whether that's going to -- is that just a reporting issue? Or are you going to be realigning some of the business units internally as well with that?

So I mean, that -- what that does, Ravi, is we have a regional strategy here, right? So we have APAC from an Asia standpoint. We have EMEA from Europe. We've always had this North American organization, and it's been kind of -- Latin America was reporting into another part of the organization. And so this just straightens out our organizational intention of having regions in each one of the 3 key areas in. But frankly -- and then we bought up our distributorships in those areas in Latin America and also Brazil, and we're moving forward in those areas. So you saw how many doctors we trained in Brazil alone. These are good opportunities for us and allows us to focus on it in more of a regional sense and be able to transfer best practices within the Americas throughout the organization. So it's just a move that's in line with our regional structure.

Our next question comes from Jon Block of Stifel.

So maybe 2. The first one, just on the new I Go sort of iTero offering, is there a price point on that product? I didn't see it in the release. And clearly, you don't seem overly concerned with competition. But with that new I Go iTero offering, I believe it's up to 20 stages. Joe, is that sort of the part of the market that you do view as most susceptible when the competition does come in the next couple of weeks, where they're going to try to crack the code a bit? And then I've got a follow-up.

Jon, you know this well in your analysis, right? If you take 15 up to 26, I mean, that's been kind of a vacancy in the product portfolio for years. And so I Go wasn't derived without an understanding of that, okay? Yes, we do -- I wouldn't call that -- when you do really stand back from this, trying to do a full case with all the complexity that has to do with full cases, if you were a competitor coming in here, it's a very difficult thing to do. You want to kind of gradually learn and ramp up to that. So the logical -- our logical conclusion is, yes, I mean, we'll probably going to see more competition in the below 30 area. The good thing about that, Jon, that's not new to us. We've seen competition from MTM and Angel Align, and you can go down the list of competitors we've seen globally, ClearCorrect or whatever in that specific area.

But when you look at [Maui], when you look at I Go, Maui was the structure we put in place or whatever, it just gives us more flexibility for our customers to be able to offer these products up and down the range than what we've had before. So yes, could we respond better to competition? Yes. Is that an area we think they'll come in? Yes, but we've already seen that, and this is just a continuation of how we've been working with our customers and how we structure our product portfolio.

Okay. Great. I appreciate you read the reports, Joe. I just need others to as well. Just to pivot for a moment. The scanners in driving utilization in the U.S., that's clearly played a big role over the past several years. And we're seeing the scanners playing a bigger role globally, and you mentioned just starting to get into China. When you take a step back, is there any reason why the utilization step-up, which you now seem much more comfortable sort of verifying that that utilization step up would be any different globally, especially someplace like China or Japan versus what we've seen in North America? In other words, when we look out 2 or 3 years from now, could that be sort of the next leg of growth in some of these more emerging markets?

To answer that question, just a flat out yes. I mean, I don't think it's going to be any different in China. It hasn't been different in Japan. We saw an uptake with the customers that took the initial iTeros there, Jon, significantly. So we expect China to be the same way, and other countries, too. In Brazil, I think we've been successful with iTero in Brazil also. So yes, that is another component of growth in the company overall. What's great is it's synergistic growth, right? You have equipment growth, but it really leads to the growth of our core product line, which is Invisalign.

Our next question comes from Richard Newitter of Leerink Partners.

Just the first one. On the tax rate, so 13% for 2Q, just wondering, what should we be modeling for the full year?

The guidance that we had given for total year was -- earlier on was 18%. So 18% in total would be what you should use, Richard.

Okay. So that's unchanged. And then, Joe, just going back to a question that was asked earlier on competition and how, if at all, it's factored into your outlook. I guess, can you comment on more specifically how you contemplated the impact of any incremental competition on your prior outlook? And I appreciate you've revised your outlook upward, and that's a bullish signal. But compare the current factoring of competition compared to kind of how you thought about it previously, and if could you get as specific as possible. Is it price? Is it maybe just a little less utilization you otherwise would've felt comfortable providing to The Street? Just how are you thinking about that and quantifying it.

It hasn't changed for a year, honestly. I mean, you can tell what we initiated during the beginning of the year. We didn't think we'd have any really major competitive plays in that sense. We knew we'd see more competition. But we've basically looked at our business with the momentum of the business and projected that forward, and you're seeing it within our numbers. There's no specificity that I want to share in the sense of what we think and how much in ASP and what areas. Just take a look at our bullish forecast going forward. And as competition becomes more visible to us and more in line, we'll share with you what we're seeing and how we look at the business.

And a similar follow-up to that line of questioning. Anything baked into your outlook specifically for mandibular contributing in the back half? I know you expect approval, but is there anything baked in for actual contribution to revenue? And same on iTero. It feels like that came -- the approval in Japan -- China came a little bit ahead of plan. I thought you had been talking about a second half kind of ramp for that and approval for that. Was that a little earlier than expected?

First of all, in MAF, no, I wouldn't plan on anything from a -- that would be material in MAF, as I mentioned, and the other thing for the -- for North America when we finally get it approved. On China, we were happy to move that through. We've had good work with our Chinese partners over there to move it through. Right now, we're not calling any upside on that. I mean, we're -- as we indicated, we've had good iTero growth. We think that'll continue. As we -- it's not just about how fast you can sell iTero in China. There's a lot of infrastructure work you have to put in place as far as training and putting things in place to be able to sell through China from an infrastructure standpoint. So what's great about that is we can kind of get a quarter up on that. If it would've been the second half of the year, then we wouldn't have as much opportunity to be able to move that product.

Our next question comes from Steven Valiquette of Barclays.

I guess for us, just 1 or 2 quick follow-ups here on the addressable market. First, probably an easy one, but just to make sure to clarify here. When we're talking about this 20% of untapped orthodontic case starts you can now treat with Invisalign First, that 20%, that is within the prior industry view of roughly 10 million worldwide annual orthodontic case starts. Is that correct?

Steve, first of all, it's not 20, okay? Invisalign First is about 10% because that's dental expansion, which means you're just really taking the teeth and rounding the arch, right? Rapid palatal expansion moves the bone, moves the palate out. So it's 10% that more of the market would be Invisalign First, another 10% would be for rapid palatal expansion.

Steve, you're talking 20% of cases are related to Phase I, and that's correct. What Joe is explaining is -- you're talking about TAM, right?

More on the TAM. That's correct. And really, I mean, the more important question I wanted to get to at the end of the day really was that when we think about the 10 million worldwide orthodontic case start TAM, I guess my real more critical question here is once Invisalign First is generally available and also once you do have U.S. approval for mandibular advancement, I'm just curious where we would spend after those events just on the approximate percent of that 10 million worldwide orthodontic case starts do you think you could treat right now overall with the overall Invisalign product portfolio and approval? That's really the more important question I wanted to ask.

I think the simple one on that, Steve, is that before Invisalign First, we said 60%. Invisalign First takes us to 70%. Once we get rapid palatal expansion, it takes us to 80%. And that's the 10 million case starts that are out there, though, that's based on 25% adult and 75% being teens. So if you really want to nail that number, you're going to have to take 75% of 10 times 0.8.

Your final question comes from Jeff Johnson of Robert W. Baird.

Let me go after the competition question, maybe one other way here. I think we're all trying to circle around different things. But you guys are launching obviously a ton of stuff right now with the I Go and the Phase I and iTero expansion, all that stuff. What's your view? In the second half here, you guys expand the market quite a bit, and so competition gets some share, but you guys are expanding market so fast that you can put up that solid -- that very strong second half guidance that seems to be implied there now. Or do you just really think competition doesn't get much traction? Your comps get tougher in that, so it's getting a little messy to try to figure out kind of how much of this is market expansion, how much maybe competition is or isn't having an impact. But just conceptually, how do you think it plays out that way?

Jeff, I think the best way to look at this is don't look at this as binary, the competition comes in and just takes our share. We actually think the competition to a certain extent will lift share because it'll give more legitimacy to clear aligners. And so possibly, in that lower segment of the marketplace, could we lose some share? Sure. Sure, we could, at the same time, we're expanding on the upper end with our product lines that you just saw with obviously mandibular advancement in teen and I Go in those areas. Jeff, the other side of this, too, is it's -- we've been saying this for a long time, it's hard to do this. I mean, treatment planning facilities; making sure that you can ship aligners and actually ship them in sequence, so first, second, third or really first, second, third aligners; putting a sales team out there that really can really walk through customers and hold their hand in a sense. But it takes time to do this. It's not -- this is not like a patent cliff we've been saying all along, that's something is a biosimilar, and you can put it in your portfolio and sell it the next day. It's not like that. It'll take time to ramp for our competition.

Yes. No, that makes sense. And then one last question for me. Just iTero, anything qualitatively you can talk about, maybe scanner sales in the U.S.? And are you seeing any traction outside of Invisalign cases with iTero on any kind of restorative procedures, anything like that? Just kind of trying to get to what is the mindset of the U.S. dentists right now? Are they willing? Are they at the point where they're wanting to use scanners for things, obviously for Invisalign, but for other things as well. Just what's your view there would be helpful.

Yes. I mean, if you look at the 3Shape and us, right, I mean, 3Shape has a good position with GPs in the sense of restorative workflow and with labs and whatever. They have helped from a GP standpoint to grow the marketplace. We're the same way. We have a good restorative scanner. We have a great scanner from an overall Invisalign standpoint. And both of us kind of raise the awareness and capability out in the marketplace. So honestly, when you look at this thing, Jeff, long term, this is -- you're going to have a scanner. One way or another, your workflow is going to be digital going forward in dentistry. It starts around these kind of application restorative versus aligners and those kind of things. It'll flow through for the rest.

So I don't know what you're thinking of in the sense of how to model that, Jeff, or what it means. But it just shows you more and more that this isn't just an -- for orthodontists. This is -- we're developing a scanner that's broad across the marketplace too. We want it to function well for a GP in restorative. If you go back to iTero's beginning, right, it was a restorative scanner. When we bought that business, it primarily was in the general dentistry segment. That's what it was developed around. And so I think I reported that we had 2.5 million restorative scans done on iTero. So when our team is out there calling on a GP, we're talking about not just that you can do our aligners with this, we get them confident you can -- this is a great, very accurate restorative scanner that can communicate very well with your dental lab. That's really important in that workflow.

Yes. And scanner sales growing in the U.S. still? There's still a good market there for you guys on the scanners side?

No question.

You saw the results of the iTero scanner business. You know the vast majority of the business is still in North America.

Yes. Just with the Japan approval and moving Brazil where you did into the Americas, and I just wanted to check on that.

Well, thank you, everyone. This concludes our conference call for today. I want to remind everyone that we will be hosting our Investor Day at the Park Central Hotel in New York City on May 23. You can find more information and register directly on our Investor Relations webpage. Hotel rooms under our group block are limited, and the cut off to make your reservation is April 30. We hope to see you all there. If you have any questions, please let us know.

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