愛齊科技 (ALGN) 2019 Q2 法說會逐字稿

Greetings.

Welcome to the Align Technology Second Quarter 2019 Earnings Conference call.

(Operator Instructions) Please note this conference is being recorded.

I'll now turn the conference over to your host, Shirley Stacy, Vice President of Communications.

Ms. Stacy, you may begin.

Good afternoon, and thank you for joining us.

Joining me today for today's call is Joe Hogan, President and CEO; and John Morici, CFO.

We issued second quarter 2019 financial results today via GlobeNewswire, 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 p.m.

Eastern time through 5:30 p.m.

Eastern time on August 7. To access the telephone replay, domestic callers should dial (877) 660-6853 with conference number 13691835, 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 third quarter of 2019.

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 SEC.

Actual results may vary significantly, and Align expresses -- expressly assumes no obligation to update four second quarter 2019 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 thank you for joining us.

On our call today, I'll provide some highlights for the second 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 third quarter.

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

Our second quarter revenues were at the high end of our guidance, reflecting Invisalign volume growth primarily from international doctors as well as very strong sales from iTero scanners and services.

Q2 Invisalign volumes were 24.6% year-over-year compared to 30.5% year-over-year in second quarter 2018.

It's reflecting continued adoption from teenage and younger patients as well as increased utilization and expansion of our customer base, which totaled over 60,000 active doctors worldwide.

From a product perspective, we had good growth across Invisalign portfolio with noncomprehensive products outpacing comprehensive led by Invisalign Go globally.

Total Invisalign case shipments for Q2 were lower than expected primarily due to softness in China related to a tougher consumer environment and slower growth in young adult cases in North America.

Now let's turn to the specifics around our second quarter results, starting with the Americas region.

The Americas region Q2 Invisalign case volumes was up 4.2% sequentially, 16.5% year-over-year compared to 22% year-over-year in Q2 2018, reflecting growth both in the orthodontist and GP channels as well as continued strength from teenage patients in Invisalign Go.

In Q2, we trained approximately 3,000 new Invisalign doctors in the Americas region, of which more than half were North American doctors.

On a sequential basis, Q2 Invisalign volume growth reflects increased utilization for the Americas region overall.

Driven by North American orthos at 18.9 cases per doc, with continued adoption of Invisalign with mandibular advancement and Invisalign First used to treat patients as young as 6 years old.

We also had solid performance from GP dentist with continued momentum from Invisalign Lite and Invisalign Go.

Invisalign Go is uniquely designed for GPs and features a digital chair-side experience using the iTero Intraoral Scanner and streamline tooth movement capabilities.

It's a really great product, and we're very pleased with this performance, including with our DSO partners who are using it to help their providers introduce Invisalign treatment into practice.

Invisalign Go integrates well with a DSO model, which remains a very important part of our overall business as we continue to see DSO growth rates outpacing the non-DSO doctors significantly.

Year-over-year, Q2 Invisalign volume growth in the Americas region was driven continued strength in the ortho channel with 19.7% growth compared to 25% year-over-year as well as increase of 11.6% from the GP channel.

In Q2, we saw adult case growth for North American orthodontists reflecting a more crowded competitive environment, especially for young adults in the 20- to 29-year-old demographic who really value convenience and costs.

We know there is about a 10% overlap with our adult demographic with SDC.

Given increased awareness for the direct to consumer clear aligners and heavy advertising spend from DTC players, case starts may be shifting away from traditional practices.

We also believe the doctors are sampling alternative products and are taking advantage of wires and bracket bundles that essentially gave clear aligners away for free or at very low prices.

These competitive dynamics are not surprising and were validated during our recent customer visits.

Nonetheless, they appear to be working themselves out in the first few weeks of Q3 and we've seen improving trends in North America.

In July, our executive team and I spent a week meeting with over 200 orthodontists in 4 major U.S. cities, Fort Lauderdale, Dallas, Denver and L.A., and did not hear anything that gave me pause about a competitive performance standpoint.

That's not to say that we didn't get feedback about how to make things better, especially around to help doctors compete more effectively against DTC offerings, but doctors consistently told us that the Invisalign system is the best product there is hands down, technically and clinically.

Given the changing DTC landscape, we're focused on further differentiation of Invisalign treatment for both consumers and doctors.

In Q3, we're increasing investment in consumer demand with a new advertising campaign for North America and expanding marketing programs such as our concierge service, which connects potential patients with Invisalign doctors, increasing conversion and stickiness.

In addition, we're launching new sales tools and professional marketing materials.

We also expect to see increased productivity from the 100-plus sales representatives we added in Q1.

We'll also look for opportunities to leverage Invisalign product portfolio that doctors -- to treat patients as needed and compete with DTC offerings.

Expanding on products like Invisalign Go and Lite will help close the gaps many doctors see with DTC patients who are looking for price and convenience.

Finally, in Latin America, we continue to make great progress led by Brazil, in developing the emerging clear aligners segment in the world's leading market for beauty and cosmetic procedures.

In Q2, Invisalign volume in Latin America was up significantly year-over-year, reflecting our ongoing investments as we continue to build our business in the region, training approximately 1,300 Invisalign doctors during the quarter.

For our international business, Q2 was a good quarter with strong Invisalign volume growth of 36.7% year-over-year, reflecting increased Invisalign utilization and continued expansion of our customer base in both EMEA and the Asia Pacific region.

On a sequential basis, international volume was up nicely, reflecting growth in both the EMEA and Asia Pacific regions.

In Q2, we trained approximately 3,500 new Invisalign doctors internationally, over half of which were in the Asia Pacific region.

In EMEA, Q2 was another strong quarter with volumes up 39% year-over-year, driven by growth across the region, with record Invisalign volumes in all but 1 country market led by Iberia.

We saw strength across the Invisalign product portfolio with continued momentum from Invisalign Go.

We also continue to see strong growth across our key expansion markets as well led by Central and Eastern Europe.

For APAC, Q2 Invisalign volume increased 33.1% year-over-year, reflecting continued growth from nearly all country markets led by China, Japan and ANZ.

We also had strong growth from GP dentists, which were up 52.4% year-over-year.

On a sequential basis, Q2 Invisalign volume for APAC was up nicely led by Japan, Southeast Asia, Hong Kong and Taiwan.

We also had an uptick in adult patients in Q2 following a very strong quarter for teen cases in Q1 in conjunction with a teenage promotion to help drive trial and adoption in the very important teen segment.

During Q2, we trained over 1,900 new doctors in APAC.

Over 40% were in China.

Notwithstanding current consumer sentiment, we remain confident in the long-term opportunity in China.

We continue to invest in our manufacturing operations and training centers to ensure that we operate like a local company and have the capabilities to expand and scale our business as the environment improves.

We're also focusing on what we can influence directly to help mitigate consumer sentiment in China.

We're expanding our reach and scope in Tier 3 and Tier 4 cities across China, including investment in a GP dentist sales force and sales programs centered on Invisalign Go.

In the last year, since the launch of Invisalign Go in APAC, we have learned that doctors benefit from a differentiated approach in training and support, and we'll align our resources accordingly.

We're also increasing consumer marketing spend in APAC, including new advertising like our doctor-centered ad that is launching in North America next week.

Finally, in the second half of this year, we expect to have dozens of Invisalign pop-up centers in China to ensure we educate consumers and connect more with Invisalign doctors.

Outside of China, we have strong growth across APAC, including Japan, ANZ, Hong Kong, Taiwan.

We will continue to drive adoption and utilization by investing through sales and marketing programs and clinical education with new training centers like the one we just announced in Taiwan.

Through this center, we have also launched the first integrated postgraduate Invisalign training program in Asia with National Taiwan University Hospital.

Clinical education and peer-to-peer learning is one of the most impactful ways we help drive adoption of Invisalign treatment.

During Q2, we engaged directly with thousands of Invisalign-trained doctors around the world, providing them with the ability to learn from clinical experts and practice development leaders and share their experience and insights with each other.

In April, we held a 2019 Invisalign China forum in Xi'an, attracting 1,300 industry practitioners and gathering together over 40 experienced orthodontists from all over the country.

During the 2-day forum, participants held in-depth discussions on frontier topics, such as adolescent orthodontics, extraction and orthodontic treatment and digital dentistry.

In May, 300 high-volume dentists from 37 countries across the Americas, EMEA and APAC participated in an inaugural addition of the Invisalign Symposium on Digital Practice in London.

The 2-day doctor event featured specially designed sessions combining plenary interaction, small group of working sessions covering such topics as understanding consumers, practice optimization, challenges of building a digital practice, among others.

I was able to address specifically on the digital practice and driving the evolution of digital orthodontics with supporting talks on digital transformation and health care and the power of digital treatment planning along with the practice optimization with ADAPT.

ADAPT is Align's consultative program to provide practices with personalized support to help doctors and staff navigate the journey from a braces model to an aligner model in a timely, efficient and profitable manner.

Emphasis is on digital workflow, finances and consumer acquisition and early results from test sites in the Americas, EMA and APAC show significant improvements in conversion, revenue growth, practice profits and other key metrics as practices shift to a digital model and increase their Invisalign share of chair.

In June, we hosted the first Invisalign Scientific Symposium in EMEA located in Valencia, Spain.

The Scientific Symposium focused on evidence-based success cases for Invisalign treatment in growing patients with dedicated focus on treatments with Invisalign First and mandibular advancement feature, bringing together nearly 200 of EMEA's most experienced Invisalign doctors.

In July, more than 175 general dentists from all across Europe attended the second annual Invisalign GP Growth Summit in Berlin, focused on peer-to-peer learning and emerging industry trends.

We also just hosted our first Invisalign Teen Summit with about 300 doctors and staff in Los Angeles.

The Summit program was focused completely on teen treatment and teen culture and included a tie-in with VidCon, the top teen culture and community event where Align held a multiyear relationship and strong brand presence.

Teen Summit is designed to turn low teen submitters into high teen submitters by combining Invisalign specific clinical and practice how-tos with an immersive teen culture experience, social media support and training and insights from teen influencers.

Speaking of teens, in Q2, over 100,000 teenagers started treatment with Invisalign clear aligners, an increase of 32.2% year-over-year, driven by continued strong adoption across all major regions.

For Q2, year-over-year Invisalign teen patient growth for North America orthodontists increased 25% and international doctors were up 44.4%.

Invisalign First and Invisalign treatment with mandibular advancement continued to ramp globally and are helping to increase our share of teenagers and younger patients worldwide.

Overall, we're very pleased to see the use of Invisalign treatment among teenagers continues to outpace adults and that Invisalign First is driving really strong growth in the kid/tween segment.

In fact, we reached our 7 millionth Invisalign patient during the quarter, a child in the United States being treated with Invisalign First.

Since the launch of Invisalign First a year ago, kids under 10 years old have become our fastest-growing demographic, up 140% year-over-year, which also bodes well for the continued adoption of teens too.

Our consumer marketing efforts are designed to build the category and drive demand for Invisalign treatment through a doctor's office.

We invest over $120 million each year in consumer marketing programs, including TV, digital and social media, PR, event marketing and our patient concierge service.

Our goals are to make the Invisalign brand a household name worldwide and to motivate consumers to seek Invisalign treatment through a doctor's office.

In Q2, we continue to see strong digital engagement with the consumers, reaching nearly 4.3 million unique visitors on invisalign.com sites worldwide for a total of 57.5 million visitors to date.

Our other key metrics show increased activity engagement with the Invisalign brand and are included in our Q2 quarterly slides.

During the quarter, we developed a new consumer advertising campaign for 3 largest markets, the U.S., Canada and China.

This new multichannel campaign, which launches across North America this Monday, educates consumers on the significant benefits of Invisalign treatment, highlighting our patented SmartTrack technology based on years of research, which moves teeth more predictably and comfortably, combined with the personalized care of a doctor.

We are more than doubling our media investment behind this new multichannel campaign to extend our reach across adults and parents of teens, increasing our reach frequency from 50% to over 70% in order to capture even more of our targeted audiences.

In the U.S., our new campaign will run across all media channels, including broadcast in TV networks; connected TV, such as Hulu and other streaming services; digital media; and all social media channels.

In Canada, our new app will go live on digital channels first, and then we will layer in TV in the coming weeks.

And China will follow suit in the second half.

Q2 was another outstanding quarter for our iTero scanner and services business, with revenues up 82.4% year-over-year, reflecting continued strength across all regions and customer channels, including large account DSOs.

On a sequential basis, revenues were up 30.4% sequentially, reflecting higher scanner sales following a seasonally weaker Q1, especially in North America and Asia Pacific.

Industry Services revenues reflect higher subscriptions from installed base growth and multiyear deals.

During the quarter, we saw continued adoption of the iTero Element 5D imaging system in EMEA, APAC and Canada since its commercial launch at IDS in the first quarter of the year.

Cumulatively, over 13.7 million orthodontic scans and 3.6 million restorative scans have started with iTero scanners.

Use of the iTero scanners for Invisalign case submission continues to grow and remains a positive catalyst for Invisalign utilization.

For Q2, total Invisalign cases submitted with digital scanner in the Americas increased to 77.3% from 69.6% in Q2 last year.

International scans increased 60.8%, up from 47.8% the same quarter last year.

Within the Americas, 92.3% of cases submitted by North American orthos were submitted digitally.

We continue to expand the iTero portfolio to address doctors' needs and enable them to more easily adopt Invisalign treatment in their practices.

In June, we announced the iTero Element Foundation, extending the portfolio to offer dentists digital workflow capabilities to address their restorative and patient monitoring and intraoral scaring needs.

The streamlined workflows to dental laboratories includes an option for on-demand chair-side milling, an exclusive time-lapse technology for patient communication and monitoring with the iTero Element Foundation, which provides dentists with capabilities beyond basic STL support scanners.

Software upgrade pathways are also available for Invisalign clear aligners.

The iTero scanner and services business has become an integral part of our business and is key to our end-to-end digital workflow.

We believe that every exam should begin with an iTero digital scan because it's a better experience.

It improves treatment outcomes and it provides doctor with a chair-side tool that enables patients to visualize their full -- their future smiles at chair-side in less than a minute without any goop, which increases treatment acceptance and drive practice growth.

Before I turn the call over to John, I want to mention the decision to terminate discussions regarding a possible development and distribution agreement that was disclosed as part of the patent settlement agreement with Straumann.

As part of this settlement, Align and Straumann signed a nonbinding letter of intent to assess the possibility of a 5-year global development and distribution agreement whereby Straumann would distribute 5,000 iTero Element scanners.

Additionally, we considered exploring the possibility of offering existing iTero users access to Straumann's prosthetic and surgical planning workflows.

In June, after months of deliberation, we announced a decision to terminate these discussions, and as a result, we received an additional $16 million from Straumann for a total of $51 million settlement.

With that, I'll now turn the call over to John.

Thanks, Joe.

Now for our Q2 financial results.

Total revenue for the second quarter was $600.7 million, up 9.4% from the prior quarter and up 22.5% from the corresponding quarter a year ago.

Year-over-year revenue growth includes approximately $19 million or 4 points of unfavorable foreign exchange.

For clear aligners, Q2 revenue of $496.7 million was flat sequentially due to Invisalign volume growth in most geographies, partially offset by lower Invisalign ASPs and lower SDC volume.

Year-over-year clear aligner revenue growth of 14.6% reflects strong Invisalign shipment growth across all customer channels and geographies, partially offset by lower ASPs.

On June 1, we had a minor issue with a standard software release that impacted some ClinCheck modifications.

It was addressed and communicated to customers quickly.

However, it required some Invisalign doctors to rereview their treatment plans.

This disrupted the workflow for many doctors, which was compounded by an increase in call volumes to our treat operations and customer care center that degraded service levels and customer experience.

While it's impossible to quantify, on the margin, it probably didn't help the quarter.

Q2 Invisalign ASPs were down sequentially by approximately $15 to $1,230 primarily due to unfavorable foreign exchange and discounts.

On a year-over-year basis, Q2 Invisalign ASPs were down $85 primarily reflecting promotional discounts, unfavorable foreign exchange, higher deferrals related to additional aligners and product mix shift, partially offset by price increases.

Total Q2 Invisalign shipments of 377,100 cases were up 8% sequentially and up 24.6% year-over-year.

For Americas orthodontists, Q2 Invisalign case volume was up 3.7% sequentially and up 19.7% year-over-year.

For Americas GP dentists, Invisalign case volume was up 4.9% sequentially and up 11.6% year-over-year.

For international doctors, Invisalign case volume was up 13.4% sequentially and up 36.7% year-over-year.

Our scanner and services revenue for the second quarter was $104 million, up 30.4% sequentially, reflecting growth across all regions and channels, including DSOs, partially offset by lower ASP.

Year-over-year revenue was up 82.4% primarily due to higher scanner units across regions and related services revenues, partially offset by lower ASP.

Moving on to gross margin, Second quarter overall gross margin was 72%, down 1.2 points sequentially and down 2.6 points year-over-year.

Gross margin was impacted by approximately 1 point year-over-year due to unfavorable foreign exchange.

Clear aligner gross margin for the second quarter was 73.7%, down 1.2 points sequentially primarily due to cost from seasonally higher doctor training and freight.

Clear aligner gross margin was down 2.8 points year-over-year primarily due to increased aligners per case and lower ASPs, as just described.

Scanner gross margin for the second quarter was 63.6%, flat sequentially and up 4 points year-over-year primarily due to increased manufacturing efficiencies, partially offset by lower ASP, driven by mix.

Q2 operating expenses were $255.8 million, down sequentially 18.6% and up 5.3% year-over-year.

The sequential decrease in operating expenses reflects a benefit of $51 million related to the Straumann litigation settlement, partially offset by our continued investment in sales and R&D activities.

Additionally, Q1 operating expenses included $29.8 million related to Invisalign store closure costs.

On a year-over-year basis, operating expense increased due to sales and R&D activities and was partially offset by the Straumann settlement.

Second quarter operating expense included a $51 million benefit from the Straumann litigation settlement, which increased Q2 operating margin by approximately 8 points and diluted earnings per share by $0.57, respectively.

This settlement was higher than anticipated in our Q2 guidance because it included an additional $16 million benefit from the termination of development and distribution agreement, along with $5 million that would've been incurred for development.

Our second quarter operating income was $176.5 million, up 101.2% sequentially and up 43.8% year-over-year.

Our second quarter operating margin was 29.4%, up 13.4 points sequentially and up 4.4 points year-over-year.

The sequential increases in both operating income and operating margin are primarily attributed to the $51 million benefit related to the Straumann settlement recorded in the second quarter and the Invisalign store closure costs recorded in Q1 2019.

On a year-over-year basis, the increases in operating income and operating margin primarily reflect the benefit from the Straumann settlement, partially offset by lower gross margin and continued investments in sales and R&D.

Interest, other income and expense of $17.4 million includes the $15.8 million gain that is related to our sale of equity investment in SmileDirectClub during the second quarter.

With regards to second quarter tax provision, our tax rate was 22.2%, which includes approximately $10 million of tax expense related to gains from the Straumann settlement and the sale of the SDC equity investment.

Second quarter diluted earnings per share was $1.83, up $0.94 sequentially and up $0.53 compared to the prior year.

Moving on to the balance sheet.

As of June 30, 2019, cash, cash equivalents and marketable securities, including both short and long-term investments, were $765.9 million, an increase of $33.4 million from the prior quarter, which is primarily due to higher cash flow from operations, partially offset by $49.5 million used to repurchase approximately 161,000 shares of our stock.

Of our $765.9 million of cash, cash equivalents and marketable securities, $582.4 million was held in the U.S. and $183.5 million was held by our international entities.

Q2 accounts receivable balance was $520.1 million, up approximately 8.5% sequentially.

Our overall days sales outstanding, DSO was 77 days, down 1 day sequentially and up 9 days from Q2 last year.

Cash flow from operations for the second quarter was $177.4 million, up $37.6 million compared to the prior year.

Capital expenditures for the second quarter were $45.3 million primarily related to our continued investment in increasing aligner capacity and facilities.

Free cash flow for the second quarter, defined as cash flow from operations, less capital expenditures, amounted to $132 million.

During Q2 2019, we purchased on the open market approximately 161,000 shares of our common stock at an average price of $307.48 per share, including commission, for an aggregate purchase price of $49.5 million.

We have $400.5 million remaining available for our repurchase under the May 2018 Repurchase Program.

With that, let's turn to our Q2 -- Q3 outlook and the factors that have formed our view, starting with the demand outlook.

As we exited Q2 and now into the first weeks of Q3, we are seeing improving volume trends.

For international, we expect Q3 volumes to be down sequentially, reflecting a seasonality slower period for EMEA, partially offset by seasonally stronger period for the APAC regions.

However, given the uncertainty in China, we are reflecting a more cautious outlook for APAC growth.

For the Americas, we expect Q3 volumes to be up sequentially, reflecting growth across all key country markets as well as a seasonally stronger period for North America.

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orthodontists as with the peak of the summer teen season along with increased media spend and the launch of our new customer advertising campaign, as Joe described earlier.

As we typically see, we expect overall Invisalign volume to be flat to slightly up from Q2.

We expect our iTero business to be down sequentially coming off of another very strong quarter and record growth in Q2.

Year-over-year, the iTero business continues to grow across all regions.

And regarding SmileDirectClub, we expect no clear aligner volume from SDC in Q3.

With this as a backdrop, we expect the third quarter to shape up as follows: Invisalign case volume is expected to be in the range of 370,000 to 380,000 cases, up approximately 16% to 19% year-over-year on a tough comp from Q3 last year, which had record shipments that benefited from the teen and adult promotions by approximate 2% higher growth rate; we expect Q3 revenue to be in the range of $585 million to $600 million, up approximately 16% to 19% year-over-year.

Our Q3 revenue outlook assumes no SmileDirectClub volume compared to the same quarter a year ago where aligners supplied to SDC contributed about $8 million to revenue.

In addition, as just mentioned, in Q3 2018, we had higher Invisalign volumes due to promotions, but lower ASPs.

We expect Q3 gross margin to be in the range of 71.9% to 72.5%.

Q3 gross margin is up slightly compared to Q2 as we expect improvement due to price increases and manufacturing productivity.

We expect Q3 operating expenses to be in the range of $305 million to $312 million.

Our Q3 operating expenses are expected to be significantly higher sequentially as a result of the benefit of $51 million Straumann settlement in Q2, which reduced operating expenses.

We are very pleased with the settlement and are putting the funds to work by stepping up our investment in consumer advertising with a brand-new campaign and stepping up our reach and coverage.

The new ads focus on the significant technical and clinical advantages of our Invisalign system and differentiates our doctor-centered model for consumers.

It will launch next week in North America and soon after in China.

These ads will carry on throughout the second half of 2019.

Q3 operating margin should be in the range of 19.8% to 20.5%.

Our effective tax rate is expected to be approximately 24%.

Diluted shares outstanding is expected to be approximately 80.6 million, exclusive of any share repurchases.

Taken together, we expect our Q3 diluted earnings per share to be in the range of $1.09 to $1.16.

In addition, we expect to repurchase at least $100 million of our stock in the open market in Q3.

As we continue our operational expansion efforts, we expect capital expenditures for Q3 to be approximately $50 million to $55 million, and we expect depreciation and amortization to be $24 million to $26 million.

Given our Q3 outlook, I want to make a few comments on the full year.

Based on the current growth rates in our business to date and our planned investments for the remainder of the year, we now anticipate 2019 total revenue growth rate to be at the low end of our long-term operating model target of 20% to 30%.

We also expect Invisalign revenue and volume growth to be at the low end of our long-term operating model target.

We anticipate operating margin to be below the low end of our long-term model at approximately 22%, which reflect the impact from increased legal fees and the planned corporate structure reorganization as well as increased investment in consumer marketing, Invisalign store closure costs, partially offset by the benefit from the Straumann settlement.

Now I'll turn the call back to Joe for closing comments.

Thanks, John, and thanks for joining our call today.

Before we close, I want to comment on a few things that I think are important to remember, given our lower-than-expected Invisalign volumes this quarter and a more cautious outlook for China in Q3.

First, our fundamentals are squarely in place and our outlook for the remainder of the year is clearly within our long-term model, on top of a record 35% last year.

We don't believe the second and third quarter in any way reflects our full potential.

Our product technology, operational scale and consumer brand awareness are all significant advantages in a huge market that we're addressing with only 10% share today.

The opportunity to bring better smiles to millions is not a zero-sum game.

We're working hard to ensure that we continue to gain share.

So while we acknowledge competition, we also embrace it because it drives our own innovation, which ultimately is great for millions of global patients who have yet to reap the benefits of this.

Finally, before I open the call for questions, I want to take a minute to congratulate Simon Beard, who has taken on a new role as Senior VP for the Americas.

I also want to welcome Markus Sebastian to our executive management team as the new Senior VP of EMEA.

As many of you know, Simon was responsible for the market development and operational execution of all products and services in EMEA region since 2014.

Under Simon's leadership, the EMEA region has consistently grown more than 30% compounded annual growth rate with strong performance across the entire region and customer base.

His knowledge of the market and ability to drive strategic programs and initiatives across the region have delivered exceptional results and make him an ideal leader for the Americas region.

Markus also joined Align a year ago and has been responsible for Align's core European commercial organization focused on the orthodontic channel.

He's also served as the interim GM of Germany and France country markets.

Markus is an experienced leader and General Manager with a proven track record in global commercial operations in sales, strategic marketing, product development and change management processes.

His deep understanding of the health care markets in EMEA, Asia Pacific and the U.S. are an asset to Align.

We're very glad to have Markus assume responsibility for the EMEA region.

With that, I want to thank you again for joining our call.

I look forward to seeing many of you at upcoming financial conferences and meetings, including the Invisalign GP Summit in November in Las Vegas, where we'll host an analyst meeting.

Stay tuned for more information.

With that, I'll turn the call over to the operator for questions.

(Operator Instructions) Our first question comes from the line of Erin Wright from Crédit Suisse.

Can you parse out some of the components of the sequentially slower growth in Americas where maybe there were pockets of stronger growth that you could at least call out that were obviously offset by some of those competitive dynamics that you were speaking to?

And how should we be thinking about the quarterly progression there?

And also where are you seeing most of the competitions doing?

Is it mostly DTC?

Or is it some of component of the GP offerings as well?

And how do you expect that to progress?

Yes.

Erin, first of all, when you look at the Americas, this is split up because the Americas side includes Latin America and Brazil, which is growing over 100%.

There's terrific growth down there.

So our focus is mainly, when we talk about a little bit of a slowdown, has been in the North American marketplace, the U.S. and Canada.

And when you talk about segments that have done well was what I read in my script too is when you look at teens or we call them tweens, between 7 and 10, they're up 140% year-on-year in the Americas.

It's our fastest growing group and that reflects the technology we put in place around Invisalign First, which is made for dental expansion in that age of patient, and also our mandibular advancement product also that I think you know about, too.

So that's been a terrific segment for us.

And our adult segment too has been strong.

It's that 20- to 29-year-old that we saw some amount of slowdown over time.

But when you get into the older classifications, we're still seeing really good strong growth in those areas.

So yes, I feel well that our portfolio that I talked about in my script, which is iGo and also our Lite product, can address that segment of 20 to 29 that we think is looking for a price point and also some convenience that we're sure that we can offer through our ortho channels and also our GP channels, too.

On the competition in general is how I framed your second part of your question.

When you think about DTC versus I would interpret that as just standard competition, it's really hard to say exactly how to break this up.

But in general, we feel that when you look at that specific consumer segment, it's more of a DTC segment.

It's not necessarily a traditional segment that they would be appealing to.

So in general, I feel good about our positioning.

I think our position with orthos and GPs continues to be strong.

I mean look at our most -- it was great to be in the field.

We were in Asia last week.

We were also in North America that I mentioned the previous week, and we've been involved with a lot of customers and just what I said in my script.

I mean there's -- we know that things are being trialed out there from a consumer standpoint.

We feel so good about the feedback we get about the clinical capabilities of Invisalign, the consistency of it, its interaction with iTero, which is it's really unmatched in the marketplace, and then all of them reaching out to say how they want to compete against that DTC segment, and we're the only company that can really join hands with them and help them compete in that area.

Our next question comes from the line of Jon Block from Stifel.

I'm going to try to ask 2 and I'll ask them one at a time.

So the first, long-term guidance is 20% to 30% rev guide, but the guidance for next quarter is 17% at the midpoint.

It looks like high teens, Joe, for the back half of '19.

I know you had some commentary, but I guess the real question is, 1 or 2 quarters don't make a trend, but how do we foot sort of that high teens to each year-over-year growth guide versus the long term of 20% to 30%?

And what would drive the reacceleration?

And then I'll ask, hopefully, a tighter follow-up.

Yes, Jon.

General, from a teens standpoint, you know what our product portfolio is and how well it competes in that sense.

When we talk about this slowdown right now, part of it is -- a huge part of it is China.

And China obviously is a big teen season as we roll into China now.

And we're confident we'll be able to perform in that marketplace too, Jon, and there's still demand there.

There's just -- after what we saw in the second quarter, we have some basic uncertainty there and that's reflected in what our guidance is.

But it certainly doesn't decrease our confidence in the sense of our portfolio, our positioning and the movements that we're making in the Tier 3 and Tier 4 cities that I mentioned in my script.

It's a really important part of us expanding in that geography and just giving us more mass in the sense of being exposed to broader patients across that area.

So overall, I feel good about that.

Okay.

And then just the follow-up there, can you just expand a little bit on the competitive dynamics?

You said things seem to work itself out in early 3Q, so what was that, Joe?

Was that commentary specific more to the traditional ortho channel where there might've been some trialing and then they said, "Hey, we don't have a comparable product." Or maybe you can just split what those comments were specific to?

Well, they're specific to North America in the ortho channel that you mentioned, Jon.

And we see in the first basic 24 days in July, we're seeing a significant uptick in that part of the marketplace.

So we say work that out.

It just seems that we've had doctors tell us they've tried these products, they haven't been satisfied with the software or the results that it had, the data, whatever.

And then we see an inflection point from a growth standpoint as we move into July.

That's significant.

Secondly is when we look at Asia and the July orders also including China, we've seen an uptick in China also.

So just in general, I'm talking about -- we're talking about as a team is, from a volume standpoint, we've seen an increase in that sense, it gives us confidence that those things are working themselves out.

Our next question comes from the line of Glen Santangelo from Guggenheim Securities.

Joe, I just want to talk to you about, clearly, the competitive landscape seems like it's getting worse, but yet you raised your prices on July 1. I mean are you seeing any price sensitivity in the market?

And then when you think about the competitive landscape, put the DTC channel beside for a second, but when you think about the traditional players that are also now selling into the GP and the ortho market, are you seeing any sort of price sensitivity from your customer base at all?

Glen, it's hard to say, our market has always been price sensitive.

And when you look at our portfolio in the sense of how we put things together with our comprehensive product and then our Lite products, products like E5 and E7 and the iGo that I talked about too these have all been positioned to hit a certain price point, not just for doctors but for doctors with their patients, too.

When you talk about competition and increasing whatever, again, it's out there, the traditional players that we know about.

I'll talk about the DTC channel in a second.

But in general, what we find is there's no scale yet, there's no scale in the software side, there's no scale in the supply side.

There's a ways to go, there's no challenge in the teen segment at all, it's primarily simple cases on the adult side.

And so it's not that we don't take it seriously.

It's just that we feel that we have a really strong sales force.

The iTero integration with our product line is so strong in that way, it makes it easier for doctors to work with us and to work with patients also.

Our operations are unmatched in the sense of now we produce 0.5 million to 600,000 aligners a day.

It's not easy to do those things.

So overall, is the landscape changing?

Sure it is.

I mean our key patents ran off at the end of 2017, as you know.

We're in the 2019 and we're seeing competition slowly ramp up, but we're not saying that it's been material this quarter, we're just recognizing that it's been out there.

On the DTC's channel price, again, I'll go back to our portfolio.

The products like Lite, products like iGo, our simpler products like E7 specifically, those are designed for simple cases.

Basically, that's what DTC does.

They do Social 6, lower crowding, things that are orthodontically simple.

These products have been aligned for that, too.

Our job is to get those products in our doctor's hands and to get in front of the patients and show them what an opportunity it is to work with a doctor and its product line to give them the kind of outcomes that they expect.

And also they give them a chance to be able to work with a doctor hand-in-hand.

If they don't like the treatment at some point in time, they can continue to progress with that doctor to make it better, too.

I appreciate those comments.

Anything regarding ASP's slight downtick sequentially?

Was it mix?

Was it discounting?

Anything you can add on that front?

Primarily, it was exchange, and that's what we're leaning into.

John, you can...

Yes.

I mean it's -- like you said, Glen, it's down about $15.

$10 of that was exchange and then the rest of it was mix.

So nothing material from the previous quarter.

Our next question comes from the line of Brandon Couillard from Jefferies.

Joe, just starting in the Americas region.

Why do you think the DTC channel is having a negative impact now?

You kind of talk about it perhaps having a positive halo effect.

And then can you speak to the productivity of the 100 new reps that you've hired and whether or not those are ramping in line with your expectations or not?

Yes.

Brandon, first of all, on the DTC piece is, look, I think it's -- there's light and dark in that, right?

I do feel that SmileDirectClub and Candid, they've raised the category of awareness significantly and we hear throughout our doctor base whether the orthodontic side or GP side, the patients come in asking about clear aligners much more than they have before, so it forces that conversation, it gives them an opportunity to engage at a level that I feel with just our advertising alone, it would have never gotten to that level.

So that's the positive side.

The negative side is it's -- there are some price competition.

That segment offers $2,000 or less kind of a case for a simple case and it's pushed some of the doctor office models and it's pushed our portfolio, too.

And what we're saying is that we've always known there's a 10% overlap.

And educating our customers, having customers be able -- which is our doctors, having those customers be able to use an iTero scanner to help to communicate and visualize exactly the treatment plan would be, getting patients some offering up in the sense that they have issues during the treatment time that they can be addressed by a doctor directly, all those things are things that we just have to make sure we take better advantage of with our doctors and the channels that we work with in order to take advantage of that increased interest that we see out there.

From a new rep standpoint, the second part of your question, Brandon, we put roughly 100 in North America last year.

We watch these statistics, I do, really closely, and it's amazing to watch the productivity, what happens.

It's almost like clockwork.

It takes 9 months, we're certain, before they're really up to speed and you can see the productivity versus what our normal territory managers would have.

And as we move into the third quarter right now, I'm looking at those statistics, we see their almost, we call it breadth and reach, and the number of accounts that they're calling on and the depth of those accounts are almost equal today.

So as we go into the second half of this year, we're really confident about higher productivity with these reps.

And you combine that with our new consumer ad campaign and the breadth of that consumer ad campaign that John talked about, we think, will help to drive that demand, and with the concierge service increase also which is significant, will allow us to be able to take advantage of that demand in a way we really couldn't in the past without -- with those resources.

Okay.

And for the follow-up, John, could you help us reconcile some of the components of the higher OpEx outlook or the reduced operating margin outlook for the second half?

And is the legal and corporate reorganization spend still 150 to 200 basis points in terms of headwind for the year now?

And is there any reason that, that extends perhaps into 2020?

No, Brandon.

It's the 1.5 to 2 points of expenses that's for the full year for that legal and reorganization, and we don't expect that to continue into next year.

Our next question comes from the line of Ravi Misra from Barrington Capital (sic) [Berenberg Capital].

Just 2 quick ones on (inaudible).

Number one, I think you had said on the last call the gross margin profile at the end of the year you'd still be kind of towards the low end of that 73% to 78% range.

Is that still the case?

And then secondly, just a little bit more detail if I may ask for on the dynamics in your North American business.

Just curious, are you seeing the detailing more on your lower volume GPs or orthos?

Or who is really feeling the most competitive pressure in terms of your customer base?

So on your first question, Ravi, on the gross margin improvement, we still expect to see sequential improvement.

So we've guided up from Q2 for gross margin in the third quarter, and we expect that improvement to continue into the fourth quarter.

Ravi, it's Joe.

Your second question is the dynamics of that.

It's a really good question.

When we look at that on the GP side, I mean it's hitting us both on the orthos and the GP side.

Our orthodontic data for the second quarter indicated that there was really a reduction in number of adults that were going through orthodontists, and we know we recognize that.

On the GP side, it hits the GP side also but what we see with our DSOs specifically is they're up significantly in growth.

I mean they have been focused on Invisalign and hit it harder.

So within that segment as GP, I think the individual practice was hit a little bit harder.

The DSOs have really grabbed products like iGo, institute that in your organization, done much better with it.

Our next question comes from Elizabeth Anderson.

Can you...

Elizabeth, can you -- like, we can barely hear you.

Oh, sorry about that.

Can you hear me better now?

Oh, that's better.

We got it now, yes.

Okay.

Perfect.

Sorry about that.

So just in terms of mix in between your comprehensive and noncomprehensive products, can you talk about if there were certain like areas, in particular, the noncomprehensive products, where you saw like a shift between the first and second quarters?

Elizabeth, when you look at that, our comprehensive held in there really well.

You remember -- it's really important to remember that comprehensive, our larger sized docs, like Diamond, Diamond Plus, Platinum, rely almost exclusively on those product lines because the discount that we give them really makes it easier for them to be able to move up and down the portfolio.

They like that product line on the comprehensive side only because you get the 5-year additional aligners.

So when you move to the noncomp and that increase, our Lite product lines stood out really well.

Our E7 did extremely well.

And also iGo by far was a real winner in that piece.

So just remember, a product like iGo too has one individual additional aligners that's offered with it, too.

So for those kind of simple cases, that also gives the doctors confidence to be able to attack those things with more of a middle-range kind of a product.

That makes sense.

And then from an R&D perspective, I know you sort of over time have had like a steady drip of new products like mandibular advancement or Invisalign First.

Is there anything you could sort of talk about that you guys are working on in terms of further clinical advancements?

We'd have to kill you, Elizabeth, if we told you that.

It's top secret, okay?

It's no mystery that we've been working on what's called a rapid palate expander.

So when we talk about Invisalign First, you think about that's a dental arch expansion product, so you take your teeth that are in your arch and you basically expand those teeth.

A palate expander actually takes -- from a morphological standpoint, it just widens your mouth completely.

That is something we've been working on.

I feel we have a good line of sight on how to get that done.

But it'll be several more quarters before we introduce anything like that.

Our next question comes from the line of John Kreger from William Blair.

Joe, can you just expand a little bit more on what you're seeing in China?

If you're willing, how much is it slowing?

Are you seeing any signs of market maturation?

And are there any competitive pressures that you're seeing there?

Or are you seeing it just in terms of a little bit more reticence on the part of the consumer to spend?

John, I'd start with the end of your question.

It's a little more reticence on consumers to spend.

I mean you're seeing that on other consumer channels when you look at what's going on, particularly with some U.S.-based companies and obviously the issues that we have between the United States and China right now.

As far as the competition goes, John, I'd say Angel Align is a very competent competitor in China from an overall standpoint, but it's not that we feel that there's been any dramatic change in a sense of their competitive positioning or their ability to do certain cases or others.

But I mean we recognize them as a competent competitor.

It's just when you look at the different cities too, Tier 3, Tier 4, there's a huge GP area in the Tier 3 and Tier 4 city.

That's why we put iGo and the GP sales force to go into it.

The Tier 1 cities are more orthodontic.

And so we do segment in that way.

When you talk about maturation or some kind of saturation, we just don't feel that.

Again, we're moving into the teen season in China, and the third quarter is normally their biggest quarter.

Obviously, there's still a lot of spending that goes on in China around the teen side.

And so no, I honestly feel that this is consumer sentiment in general.

It's reflected in other consumer-based businesses.

It's not, to your point, broadly driven by competition or by any kind of, I'd say, saturation of clear aligners in that marketplace.

I think we still have a long way to go before we'd ever reach that point.

Great.

And maybe one quick follow-up for this young adult demographic that you've been talking about.

What other levers do you have to really kind of improving the convenience that they perceive with Invisalign versus other options beyond sort of that classic price trade-off?

Well, with, I'd say, young adults is it's how many doctor visits that they have to make, John, and there are some technologies I don't want to get into right now but they're more remote technologies that would allow a doctor to see these patients less frequently from an office standpoint and be able to monitor their progress remotely.

And I think those kinds of things, they hit the convenience side, but it also hits the cost side because the less time they spend in an office, there's less doctor time associated with it so it's lower cost, too.

So there is a convenience and a price point we think the technology and doctor understanding of specific kind of products and when and where to use them will allow us to be able to get at that segment better.

Our next question comes from the line of Steve Beuchaw from Wolfe Research.

First, just one more clarification on China.

Embedded in the outlook for the back half, am I hearing you right that you assume China actually gets worse?

And then I know John Kreger asked this, but could you put any numbers around China in 2Q and what you're assuming for the balance of the year?

Yes, Steve, this is John.

We assume China kind of stays as we've seen.

So we saw some of that slowdown in the second half of the quarter -- second quarter, and we assume that, that continues not knowing how that consumer sentiment is going to change over the next few months.

Okay.

And then the e-mail that I'm getting most frequently here is how are they thinking now about the LRP, the 20% to 30% growth range beyond the next couple quarters?

And what are the drivers there?

Joe, I appreciate that you called out that the competitive trialing might fade in China we all would imagine gets better.

Is that the whole story?

We feel good about the LRP because of those 2 things?

Yes, we're sticking with 20% to 30% with confidence, Steve.

There is nothing that really changed in that sense.

And John, you'd...

That's how we're allocating resources and investing for that long-term growth model of revenue 20% to 30%.

We're making investments where they're appropriate and looking for return on those investments to work with our long-term growth model.

So does that mean the...

Yes, Steve, I'll just reemphasize, China is not going away, right?

I mean it's a big market.

It's a phenomenon.

The other part that I think we talked about is not -- we just got back.

We were in Asia last week.

It's not necessarily apparent as -- the rest of them -- when you look at APAC, it's so strong.

You have Japan approaching 50% growth rates or more.

You have -- it's an incredibly strong region overall.

We think that we'll get through this China situation.

It's going to continue to be our second-biggest market place.

And I feel really good about our investments over there too because I think it addresses this consumer sentiment piece that we can be more like a Chinese company than be viewed as just an American company.

Our next question comes from the line of Jeff Johnson from Baird.

Guys, can you hear me okay?

Yes.

John, I wanted to go back to Brandon's question just on margins.

Obviously, you reiterated 150 to 200 basis point impact from the legal and the reorg and what have you for the year.

But the rest of the takedown kind of in the second half guidance from a margin perspective ended up around 20% or so is that just the increased spend to try to reinvigorate top line?

Or what other kind of levers get you to that 20% operating margin instead of kind of the mid-20s we were thinking?

Yes, that gets us lower, Brandon -- or Jeff, from the investments that we're making in marketing.

So we're making those media investments in the third quarter.

We expect that to continue into the fourth quarter, and that's a reflection in the overall op margin rate that I gave.

All right.

Fair enough.

And Joe, maybe just a question on ClinCheck and kind of your confidence that those software glitches, issues, whatever the saving issues were, all of that rolled into one, confidence that you're past that, number one.

And then maybe talk about your employee base in Costa Rica.

Obviously, you've had a couple of competitors go down there and open treatment planning facilities in pretty close locations.

Was that impacting in the second quarter at all?

Does that impact over the short term going forward?

Just how to think about that.

Yes Jeff, on the software release we had, I mean it was unfortunate.

But we -- it's contained, and we know exactly what happened, and that's been cleaned up broadly across the world.

On the -- when you think about Costa Rica too, we've had a lot of pressure on that organization.

It's not necessarily because competitors have move down there and we have lost some employees to them.

It's just been our capacity.

We've had -- our growth has been phenomenal.

You still look at these stock rates.

They're huge.

It takes us -- I think I've mentioned before, Jeff, it takes us about 6 months to add capacity, basically, people, technicians to Costa Rica to really get them up to speed where they can deal with customers.

And we are a little bit behind the curve on that, and customers felt it.

The software that we released that you referenced put pressure on them because then we had to go back and redo some cases, and that obviously put pressure on them and put pressure across our whole customer base when we did that.

But it has nothing to do with -- SDC obviously has treatment planning down there, and some of our more traditional competitors have moved people down there, but we haven't had an attrition rate that's significantly different in that area than what we've had before.

So we've added capacity there.

We're going to add more capacity in the second half of this year so that we can take care of some of the increases in volume we see at times because if you -- when you do see these increases in volume, it's not like they go away in 2 weeks.

They ripple through this organization for 30 or 40 days.

And we need to be able to have some little extra capacity to allow us to be able to address that.

Our next question comes from the line of Matthew O'Brien from Piper Jaffray.

Joe, as I think about the quarter and the outlook for the business, I continually hear that Align has better products from clinicians.

That's clear.

It's just it seems like in the marketplace, that message isn't being heard.

So I'm wondering what you can do to turn things around there.

And I know there's some of these investments, but can you be more specific on how you turn things around in North America somewhat quickly with these investments?

And the same goes for China where it's a consumer product, it's not a medically necessary product, versus us encountering kind of a slow bleed as you have more competition in both geographies over the next several years.

Matthew, I'm not sure how to talk about the competition part more than what I have so far, right?

We -- I think we've categorize them well.

We know what their capabilities are.

It's somewhat limited.

When you say how to get at that, when some of these cases are offered for free or they're offered for $800 or $750, some orthos are going to try it.

I mean if I was an ortho, I'd try it too given where we've been in the marketplace and where our prices are or whatever.

And so I think that's just part of the competitive environment or whatever.

But what we're being very clear about, we don't see a systemic loss to our traditional competitors in any way.

So I don't want to infer that at all either.

From a China standpoint, look, China, again, I think we talked about that in a few other calls, a few seconds ago, China will continue to be strong.

Consumer sentiment there is consumer sentiment.

We're going to continue to invest there.

We're going to put more salespeople in place.

We'll follow through with our -- continuing our training centers.

Our manufacturing centers all are put in place, and we expect that China will continue to grow and be for the foreseeable future the second-largest area that we sell to.

John, any...

Sorry.

No, go ahead.

Okay.

And then everybody's focusing on the negatives here, and there's -- I get that.

But there was some positives in the quarter I'd love to hear a little bit more about.

You'd started touching on it a bit, but the iTero number, and I know there was some seasonality to it, was just phenomenal again.

Some of that's DSO-related.

I'd love to hear a little bit more about outside the DSOs what was driving that and when we expect to see a lot more of that volume from all the iTero placements.

And same thing goes to doc training.

I think those are some of the best numbers that we've seen in a while.

When some of that training may manifest into higher volumes for the entire organization.

Matt, we appreciate a positive comment like that because there were a lot of good things this quarter.

One thing you missed is, you look at EMEA up 39% and the consistency of the growth across that EMEA region has really been amazing in that sense.

I mentioned the other parts of APAC too is this strong growth that we saw, and again, we verified that last week when we were over to see the team.

And then the North America side, I mean when you look at these tweens, 7 to 10, up 140%, and some of our other age groups, they have been very -- extremely strong.

DSO marketplace has been great for us, and GP is still growing double digits and is not taken for granted in this business because we've had some terrible -- if you go back years ago, of GP growth that were sub-double digits.

We're continuing to do well in that segment.

But you pointed to iTero specifically, and I mean that was really an amazing quarter for iTero.

So you have world-leading technology in iTero.

And with our 5D launch, it wasn't available in the United States.

It's not yet -- we're still working through the FDA.

But in other parts of the world, it has been made available.

We're seeing both orthos and dental -- dentists or general practitioners are really interested in that product line, too.

We have good sales force combined with our iTero sales force that's direct but also with our Invisalign sales force, too.

And more and more as -- it's no secret that dental is going digital.

To start the whole digital piece, the front end of it is the scanner.

Having the kind of technology we have with iTero, you could see in some of the statistics that I mentioned in my opening, 13.7 million scans done.

I think 3.8 million that were done for restorative scans, meaning they had really nothing to do for the most part with Invisalign, and that sense kind of shows you the versatility of that product line, too.

So those areas are very -- they're very strong in the area.

You talked about doc training.

We did have some terrific numbers across all geographies for the quarter.

That's always a strong leading indicator of docs' interest in future Invisalign cases.

It breaks down differently by different regions on how fast they'll go.

But as an overall signal in the sense of what's in front of us in the interest from a doctor standpoint, the doctor training thing is good, and I'm glad you picked up on it.

Our next question comes from line of Steven Valiquette from Barclays.

So not to get too granular in what transpired over the past 3, 4 months, but just coming back to the June quarter case volume for a moment, I guess when you guys provided guidance for 2Q obviously that was in late April.

Then you guys were at a lot of conferences through mid-June with the message that everything seemed okay.

I guess I'm just wondering if most of these negative pressure points hit you maybe late in the quarter and in the month of June in particular.

And when we come back to your comment that in North America, you're seeing improving trends in the first few weeks of Q3, are you just comparing July to June in particular?

Just curious to kind of getting a little more color of how things kind of transpired throughout the quarter as we think about some of these pros and cons in that result.

Steve, like you said, not to be over granular though, I think China by far was one where -- when you got to June and all, it was more difficult than what we had anticipated.

Our China team is terrific too, so you do count on these guys to be able to deliver toward the end of the quarter.

And we see that time and time again.

It just didn't materialize, and that consumer sentiment piece became more and more visible to us as we got through the quarter in that way.

And North America, I'd say, in general, we are good with the team volume.

It's up 24%, same as what we had in the previous quarter, up 24%, too.

So there wasn't really a teen issue from a North America standpoint, but we did see some slowdown as we went into the quarter, also.

As you think about July in general when we talk about that increase, we're not just comparing it to June, we're talking about the entire quarter, the first quarter -- the first and second quarters are what we look at when we talk about that increase or else we wouldn't mention it.

Our next question comes from the line of Michael Ryskin from Bank of America Merrill Lynch.

A quick one on the following quarter and then one just to follow up again on something that Steve just touched on with the last one.

For starters, for 3Q, if you just sort of look at your commentary in international, sequentially down with the China pressures, and you look at U.S., North America, even if you account for the 2% impact you had on 3Q last year, it seems like it's a pretty aggressive cut to the North America outlook.

So I was just wondering how much conservative is [built] to that, especially since your point on improving trends in the first part of July?

I guess I'm saying is, was it really kitchen-sink guide?

Or sort of what's your outlook there?

Mike, this is John.

Really, there's no change in how we guide.

We look at a lot of factors and understanding of the market being a few weeks into the quarter so we're -- no change in terms of how we guide.

We're just trying to put the pieces that we see.

And as we mentioned with 2Q, we had some slowdown primarily China, in June.

And we want to be reflective of what we see.

So no change in how we guide.

We give our best estimate at a point in time, and that's what we've done.

All right.

I appreciate that.

And quick follow-up, again, just going through the sort of the bridge in 2Q, if you look at where international came in versus expectations, it may have been a little bit light, but it feels like the majority of the delta was actually in North America and especially on your comments on just June softness in China.

We know roughly how big your China business is for you so it shouldn't have been that meaningful an impact, especially it was only 1-month dynamic.

So is there anything going on outside of China?

I mean is there anything that you can comment on in terms of your local presence there?

You've got the manufacturing site built out.

You got some of your other facilities that you're establishing there.

Any other dynamics in play besides just the June consumer sentiment?

Nothing that we saw out of the ordinary, Mike.

It was -- we looked at the demand that we saw, some of the pressure that we saw in June.

But it was around the consumer sentiment, like Joe said, that China team delivers quarter after quarter.

So we have felt very confident that we've got a great business there in terms of the investments that we've made in treatment planning and now manufacturing and training centers and so on.

So we'll continue to invest and grow.

Just calling a number that we see.

Thanks, Mike.

Our next question comes from the line of Nathan Rich from Goldman Sachs.

John, I actually just had a question on the ASP outlook and how we should be thinking about that sequentially.

And as you look going forward, do you have any change in kind of promotional activity or discounts kind of baked into how you're thinking about where ASPs trend from here?

Yes, Nate.

When we think about ASPs and, really, what we saw at the end of -- and we guided for at the end of last year was essentially flat ASPs.

We have puts and takes, as you know, with our business between international growth and comprehensive versus noncomprehensive.

But what we've seen through this year and our Q3 guide is consistent to the fact that, notwithstanding FX, we expect it to be about flat as we go through.

So we have puts and takes to it, but from an overall ASP, that is flat.

And the promotions that we have like we have every quarter, no difference in terms of how we're thinking.

We're trying to drive increased utilization, trying to drive growth in our business, and promotions continue as usual.

Okay.

I appreciate that.

And then just with the case guidance for 3Q, is it possible to just kind of give us a sense in terms of orders of magnitude in the step-down in the growth rate?

How much was from the slowdown that you saw in China versus maybe a more competitive environment in North America just as we think about the relative impact of those factors?

Yes, Nate, most of what we saw, that slowdown or the guidance that we gave, was related to China.

Like you said, we saw this in June.

And that's a reflection of how we've guided.

So the majority of that was related to China.

Thank you, everyone, for joining us.

This concludes our conference call today.

If you have further questions, please contact myself or Madelyn Homick in Investor Relations.

Thanks, and have a great day.

This concludes today's conference, and you may disconnect your lines at this time.

Thank you for your participation.