ALGN - NASDAQ

Greetings. Welcome to the Align Fourth Quarter and Full Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy with Align Technology. You may begin.

Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO, and John Morici, CFO. We issued fourth quarter and full year 2024 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately one month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We've posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our fourth quarter and full year 2024 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology's President and CEO, Joe Hogan. Joe?

Thanks, Shirley. Good afternoon, and thanks for joining us today. On our call today, I'll provide an overview of our fourth quarter and full year results and discuss a few highlights from our two operating segments, System Services and Clear Aligners. John will provide more detail on our financial performance and comment on views for 2025. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report that Q4 total revenues, Clear Aligner volumes, Systems and Services revenues were in line with our Q4 outlook, and both GAAP and non-GAAP operating margins were better than our Q4 outlook. Q4 Clear Aligner ASPs were lower than our Q4 outlook due primarily to the impact of unfavorable foreign exchange from the strengthening the US dollar against major currencies from late October through December, as John will explain in his remarks. On a year-over-year basis, fourth quarter revenues of $995 million increased 4%, reflecting 14.9% growth from Systems and Services revenues and 1.6% growth from Clear Aligner revenues. On a year-over-year basis, Clear Aligner volumes grew 6.1%, driven by increased shipments across all regions with strength in EMEA, APAC and LatAm regions and stability in North America. From a channel perspective, Clear Aligner volumes in the ortho and GP channels were up a year-over-year basis with a number of submitters and utilization amongst the highest in the past few years. On a sequential basis, fourth quarter revenue growth of 1.8% reflects continued momentum from sales of iTero Lumina scanners and increased Invisalign Clear Aligner volumes in the EMEA region, especially from teens and growing patients as well as growth from the LatAm regions. Across the orthodontists and GP dentists offset by clear aligner seasonality in in APAC, mostly China, which had a strong teen quarter in Q3. For the Americas, Q4 Clear Aligner volumes reflect a seasonally soft orthodontic channel, offset somewhat by strength in the GP channel in the adult segment. For the full year 2024, total revenues of $4 billion and Clear Aligner volumes of 2.5 million cases were both up 3.5% year-over-year. We delivered fiscal 2024 non-GAAP operating margin of 21.8%, above fiscal 2023 and in line with our 2024 outlook. As of Q4 2024, we achieved several cumulative milestones, including 272,000 active Invisalign trained practitioners, 19.5 million Invisalign patients, including over 5.6 billion teens and kids and over 2 billion clear aligners manufactured worldwide. For clear aligners in Q4, year-over-year volume growth in the Americas reflects strength in Latin America as well as improving trends in North America, especially for GP dentists. In the EMEA region, Q4 year-over-year Clear Aligner volume growth reflects increased volumes from core Europe as well as strong growth from EMEA, Eastern Europe, Middle East and Africa markets. From a channel perspective, EMEA Clear Aligner growth reflects strength in both ortho and GP as well as teens, kids and adult patients. In APAC region, Q4 year-over-year Clear Aligner volume growth was driven by China and Japan, as well as strong growth from our emerging APAC countries led by India, Thailand and Korea. For Q4, APAC growth also reflects increased utilization and submitters in both doctor channels and growth in both patient segments. Q4, we had 85,700 doctors submitters worldwide, a record total in the fourth quarter, primarily reflecting a sequential increase in clear aligner volume for adults and non-comprehensive cases. In the adult clear aligner segment, we're pleased to see both year-over-year and sequential growth across all regions. In the teen and growing kids segments, approximately 216,000 teens and kids started treatment with Invisalign Clear Aligners during the fourth quarter, a decrease of 8.6% sequentially off a record Q3 teen season and an increase of 9.8% year-over-year, reflecting growth across regions, especially from Invisalign First in the APAC and EMEA regions. For Q4, number of doctors submitting cases starts for teens and kids was up 6.2% year-over-year, led by continued strength from doctors treating young kids or growing patients. For fiscal 2024, Total Invisalign Clear Aligner shipments for teens and kids reached a record total of 868,000 Invisalign cases and shipped up to -- a year up to 7.7% compared to the prior year and comprising approximately 35% of the 2.5 million total Clear Aligner case shipments for the year. Teen-specific consumer marketing and sales programs, along with the continued momentum for Invisalign First for kids as young as six and Invisalign Palatal Expander systems help drive adoption globally. During the quarter, we continued to commercialize the Invisalign Palatal Expander with steady momentum for doctor's submitters and shipments. In its first full year of availability in North America, Invisalign Palatal Expander adoption was followed by similar trajectory in Invisalign First, which launched 2017. But Invisalign First did not require regional or country-specific regulatory approvals like Invisalign Palatal Expander is required. In Q4, we received the CE mark under the medical device regulation to market the Invisalign Palatal Expander system in most of Europe and also completed registration with the Medicines and Healthcare Products Regulatory Agency for the United Kingdom and overseas territory. Both approvals are for broad patient applicability, including growing children, teens and adults with surgery or other techniques. These approvals mark a significant milestone in our efforts to enhance clinical outcomes and efficiency in orthodontics and enable us to commercialize the Invisalign Palatal Expander across most of the major EMEA region in 2025. We are continuing to make progress in establishing the clinical efficacy and improved patient experience of Invisalign Palatal Expander, which recently made to cover of the Journal of Clinical Orthodontics, or JCO, and an article published by Dr. Jonathan Nicozisis. There have been multiple peer review studies published on the effectiveness of the Invisalign Palatal Expander as well as mandibular advancement. We also are receiving positive parental feedback, as reflected in the article, 7 Reasons Parents Love the Invisalign Palatal Expander System. Overall, the Invisalign Palatal Expander system is gaining traction among orthodontists and patients due to its innovative design and user-friendly feature. As more clinical data becomes available and practitioners gain experience with the device and parents become informed, we believe adoption will continue to grow. Q4 non-case revenues were up year-over-year, primarily due to continued growth in retainers and our Doctor Subscription Program, or DSP, including non-Invisalign patients at getting retainers. Non-case revenues, including our Vivera Retainers, retention aligners ordered to our Doctor Subscription Program, clinical training, education, accessories and e-commerce. DSP also includes Invisalign touch-up cases, which includes up to 14 stages and is currently available in North America and certain countries in Europe and was most recently launched in Brazil. For Q4, total Invisalign DSP touch-up cases were up nearly 37% year-over-year to more than 27,000 cases. For fiscal 2024, total DSP touch-up cases shipped were over 100,000, up 37% compared to 2023. 224 Clear Aligner volume from DSO customers increased sequentially and year-over-year, reflecting growth across all regions. The DSO business continues to outpace our retail doctors globally. And in the U.S., it's driven by our largest DSO partners, Smile Doctors and Heartland Dental, and also had strong growth in iTero scanner sales as DSO invested in their members' practices end-to-end digital workflows. In December, we completed $30 million equity investment in Smile Doctors, the largest orthodontic focused DSO in the U.S. with more than 450 locations in 32 states. Smile Doctors has a rich history of developing and growing affiliated practices by providing tools and technology that allow their orthodontists to focus entirely on patient care, and we are continuously exploring collaboration with DSOs that share our vision of furthering the adoption of digital dentistry. Each DSO has a different strategy and business model. We're focused on working and with encouraging the DSOs aligned with our vision strategy and business model goals. Those DSOs that recognize the benefits of digital workflows enabled by our portfolio of products and services that make up the Align digital platform, including increased practice efficiency and profitability, as well as delivering a better patient experience for shorter cycle times and proximity to their customers. Turning to Systems and Services. Q4 was another strong quarter, with year-over-year revenue growth of 14.9%. On a sequential basis, Q4 Systems and Services revenues were up 5.2%. In Q1 2024, we launched the iTero Lumina with orthodontic workflows as a new stand-alone scanner, or as a wand upgrade from our iTero Element 5D Plus scanner. Overall, we continue to be very pleased with the ongoing adoption of iTero Lumina scanner, and we're looking forward to building on its success with the launch of the iTero Lumina scanner with restorative capabilities. During the fourth quarter, we began a limited market release of our restorative software on the iTero Lumina scanner, and doctor feedback has been outstanding. Our iTero Lumina innovation represents continuous advancement in our mission to deliver unparalleled value to customers and dental professionals worldwide. Doctors can continue to purchase the current version of iTero Lumina scanner today, knowing that it will automatically update to the new version free of charge once it becomes available at the end of March. With that, I'll now turn the call over to John.

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

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

At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question will come from the line of Michael Cherny from Leerink Partners. Your line is open.

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

Yeah. Michael, this is John. When we talk about the -- kind of give picture for the total year, we're looking at volume for Clear Aligners at up mid-single digits, and that's how we look at that. It varies like it does across different regions and different times of the year and so on. But we've looked at it that way, and that's the perspective that we have for year. We were pleased with how we exited in 2024 with the volumes that we had, and that's the overall guidance that we have for the year.

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

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

Thank you. One moment for next question. Our next question will come from the line of Elizabeth Anderson from Evercore ISI. Your line is open.

Hi, guys. Congrats on the quarter, and thanks so much for the question. I was wondering, if you could talk about two things. Maybe as regards to the Lumina and the scanner business more broadly, it looked like you were -- you obviously have the launch coming up in the first quarter. So if you could talk a little bit on your expectations for that, maybe given what you've learned on the ortho side for Lumina? And then two, you talked about sort of the impact, obviously, of more leases and things like that versus perhaps capital equipment sales. Can you talk about, sort of, help us understand maybe on a unit basis, how you're thinking about the growth in that business? I think that would be one thing that would be helpful. And then maybe if you could also help us understand a little bit better that maybe some of the growth dynamics, particularly in North America, DSO versus non-DSO customers? Thank you.

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

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

Thanks, Elizabeth. Next question,

Thank you. One moment for our next question. Next question will come from the line of Glen Santangelo from Jefferies. Your line is open.

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

Yes, Glen, it's a good question. I think we've been talking about stability for a while now, too. And again, I think we stand on that platform also. Each one of these regions are different from what we've seen. We felt good about Europe in the fourth quarter. We saw some momentum there, felt reasonable about APAC in a sense, I mentioned China and Japan. And increases in Thailand and different in China and different -- I mean, in different parts of the APAC region. When you come to the United States, the orthodontic marketplace, Glen, has really been flat for the last three years. Now, I think we made progress, good progress with the new products that we've had. But we've been challenged in that segment. And I wouldn't call it so much competition as I would -- it's been a wires and brackets kind of regression in that marketplace because of when doctors are seeing less patient throughput, they're looking to save margin, and it's difficult to really appeal to them with clear aligners when they're not at capacity in that sense. But on the counter of that, Glen, we've seen really good progress in GPs and good growth in GPs, not just in the US but all over the world, and that's really helped us. And so remember, we changed our channel strategy years ago to make sure that we went to the GP channel with the GP sales force and ortho, with ortho sales force, too. And I think that's really helped us to give us insight into the industry and position our products properly for both those areas. So I hope that helps to answer your question. I think our new technology, too, gives us a lot of confidence. Specifically in the orthodontic channel since offering differentiation, those early patients that we talked about. We feel we have the three products I mentioned in my script, we feel we have something that's special in the orthodontic community in a sense of that younger patient piece, and you'll see us push that really hard as we move into 2025.

That's awesome. And John, maybe if I could just follow up with you on this ASP issue, right? I mean, obviously, everyone is focused on the fact that ASPs will be down. And you highlighted FX and you highlighted mix shift. I was wondering if you could just unpack that a little bit to tell us -- and I'm sorry if I missed this, exactly how much FX is playing a role here on that ASP number in 2025?

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

Okay. Thank you very much.

One moment for our next question. Our next question will come from the line of Jon Block from Stifel. Your line is open.

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

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

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

Yes. No, beat on balance, got it ahead on balance for 1Q, I get that. And then just second question is, I think, Joe, this one is for you. But for a couple of quarters now, at least two, maybe more, we've heard you detail, call it, the faster growth from the DSOs. And so a couple of questions here. Joe, what is are the DSOs, call it, as a part of your North American business, if you could just give us a rough number? But more importantly, the plays that you run with the DSOs -- and we've heard of some those, the marketing support -- pardon -- this is my language, not your -- they might be more sophisticated with your help. Are those transferable to the fragmented GP market? And if so, how long does that take to go ahead and manifest on your part? Because clearly, if you could extrapolate that faster growth to the individual practices, that would be -- certainly, I'm positive and something to get excited about. So, maybe your comments on, again, the percent of their weighting of your bids? And more importantly, can you see yourself running the same plays with the individual practices?

Hey Jon, it's a great question. Really, first of all, I look at -- I talk about it internally, too. I look at DSOs as a force multiplier. They can actually take our technology, what we learned in a sense of a sense of efficiency, what we learned from brand, from a demographic zone brand you can apply to. And they just have an ability to be able to disseminate that within their teams. Much better than doing that individually door-to-door like we do with our normal sales force, which is kind of obvious. But that doesn't preclude us from what we're taking to the DSOs in the sense of what we know and what they incorporate. Our salespeople are -- many of them have been with us many years, they understand that also. They just have to find the right orthodontists and the right general dentists to really want to implement those procedures in their marketplace. That's why I -- talking about the sales kickoff the other day down in Dallas. And it said that we have the longest or the hardest last mile of any company I've ever worked with because you are calling on these individual family-driven practices. And not that they're stupid or anything, they are very smart. But they're very -- not necessarily business minded always. They're clinically minded, and it takes a while to gain their confidence and move it forward. DSOs help to accelerate that, Jon, is the best way I can explain that. Jon, you've got--

Thanks for the color guys.

Jon, thank you.

Our next question comes from the line of David Saxon from Needham. Your line is open.

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

Hey David, I'll take the first part of your question, which, yes, our forecast for next year does imply a slower U.S. than the rest of the world. And that's -- to me, that's -- we're just projecting what we saw in 2024 into 2025. But we don't have any data right now that would make us change that in some way from a consumer confidence. And to see or any kind of change in the last several quarters, I would say that it would be different going. As far as ASPs go...

Look, ASPs, they're heavily impacted with our business, over 50% of it outside the U.S. They're impacted by a stronger dollar. And I just tried to make it very clear in terms of our guidance based on what those spot rates are as of now and saying this is how it's going to play out in the future. Obviously, it changes. And -- but at least give you a reference point to jump off of. So when you look at Q1, you'd see that ASPs will be down. It's a reflection of the foreign exchange, and that's the primary driver of that. It will change as it goes through each of the quarters. I mean, by the end of the year, it kind of catches up, and that strength of the dollar that we saw in November and December won't have as much a year-over-year impact. But in Q1, it has that impact.

Okay. All right. That's helpful. And then maybe sticking with you, John. So operating margin down year-on-year in the first quarter, but guiding to expansion for the full year. So I'd love to just hear kind of the puts and takes that drive that ramp? And maybe it would be great if you could talk about quarterly cadence. Thanks so much.

Yes. When you think of the op margin that we'll have, we did actions last year to be able to get our op margin in a place from a cost standpoint to be able to provide that margin accretion. The first quarter is one where, as you start to ramp up, usually first quarter op margin is and at a rate standpoint, the lowest or one of the lowest for the quarters as you -- it builds as you go through year. It's based on volume. As we have more volume coming through our facilities, we generate additional productivity, and that shows up. We have new products, as Joe described, with the Lumina Restorative, different products where we're expanding out and so on that help us drive additional margin as we go through. So we've got the levers that we can pull and adjust as we go through the year to be able to generate that margin accretion on a year-over-year basis. And that is margin accretion that we talked about at 22.5%, that's despite unfavorable FX on a year-over-year basis. So you can tell some of that margin accretion that that we're talking about. But it's -- it's all about driving productivity through volume you have and being smart about the other investments that you're making.

Great. Thanks so much.

Thanks, David.

One moment for next question. Our next question will come from the line of Jeff Johnson from Baird. Your line is open.

Hi, Jeff.

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

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

Ballpark, am I close on that 3, 3.5?

Yes. You're close on that.

Okay. And then just my other question is really kind of the same kind of FX question, but on the gross margin side -- sorry, on the company margin side, on the operating margin side. You're guiding to 70 basis points of year-over-year improvement at the op margin line on a non-GAAP basis. How much is currency weighing on, I don't care if it's gross margin or operating margin, however you want to provide the answer. But how much is currency weighing there? And then how much of the incremental direct fab investments potentially weighing this year on gross or overall margin? It seems like this could have been a year if currency neutral and you didn't have the direct fab incremental investments that we really would have started to see a recapture back towards those pre-COVID numbers. So just trying to understand all those moving pieces? Thank you.

Yeah. Jeff, when you talk about the FX impact on op margins, its over one point, you're right, it's two points at revenue on a year-over-year basis, falls to just over one point on an op margin basis. So a large part of that falls through. So, you're right, calling 70 basis point improvement year-over-year. That's despite having one point of op margin pressure from an FX standpoint. And then, of course, all the other things that we're doing to invest in. So and there's some offsets to that in terms of scaling up our growth platforms and so on. But that's all in the number that we have at the 22.5%. So if FX was going the other way, you would see even more margin accretion, and we'll see how that foreign exchange plays out as we go through the rest of the year.

Understood. Thank you guys.

Thanks Jeff.

One moment for next question. Our next question will come from the line of Brandon Vazquez from William Blair. Your line is open.

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

Yeah. Brad, first of all, I mean, the adoption curve has been good, as I mentioned in my script, it follows Invisalign First. Invisalign First is what we call a dental expansion product. It's kind of moving your teeth, but it's not moving bone in that sense. In this case with IP, we're moving bone. And so that's why the regulatory things and all that I mentioned that we have to go through each region in order to move that through. I feel really good about it. It's such a breakthrough product and a different product. It takes doctors a while in a number of cases to become comfortable with it. We have a wonderful feedback from patients in the sense of the comfort of the product line. And many of the patients or parents have gone through the Hi-Res [ph] device and the wrench and those kind of things. And that makes parents a little more susceptible to wanting Invisalign Palatal Expander too. So I feel good about it. We've had some things too on the release. We didn't have full visualization from a scanning standpoint when we first started. There were some attachment pieces that we had to improve in the sense of how you attach. And then there's also some just wearability aspects about how long you wear this. But we've come over those and we're making good progress in it. So I'm very optimistic about it. And it's great to see it really go from a regional standpoint to a global standpoint now. But we have a great one, two punch in that marketplace with Invisalign First. And that's also worth mentioning, too, we're seeing many doctors, as they do the upper palate expansion, they use Invisalign First on the bottom in order to expand the teeth to be -- to make sure that they're in line with the sense of the bite as they're setting in their upper arch, too. So it's good to see a synergistic effect on those two products. I hope I answered your question, but that's the momentum that we're talking about.

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

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

Thanks, Brandon. Operator, we want to try and get through the covering analysts that are still on the line. So -- and if I can ask folks to limit to one question so we can get through everyone's questions, please.

Thank you. One moment for our next question. Our next question will come from the line of Jason Bednar from Piper Sandler. Your line is open.

Hey, good afternoon. Thanks for taking the question. I'll try be an quick here. I really want to ask on just maybe thematically reducing frictions -- I'm sorry, trailing to pack kind of a combo in here, but this is -- is there a way to reduce frictions within the teen channel and really address what has been maybe a bit of a challenge or sluggish ortho environment? Anything that you can do from a marketing initiative to really create better demand pull effect? And then also on the friction side, maybe help with the business rationale, removing that $10 to $15 process, and you see you all neutralizing it with price increases. Is that -- have you had pushback on the processing fees? Has this caused friction with doctors that you're trying to remove? Thank you.

Yeah, Jason, that's a good question. First of all, the friction in teen channel is -- a lot of it has to do with the economics in the orthodontists office today. We talked about the orthodontic offices in the United States haven't really -- in North America haven't seen really any substantial growth in the last three years. And so again, there are individual practices, and I think they're trying to maximize their bottom line as much as they can. And so I think they've been very cautious from a business standpoint. The friction you talked about with our processing fees and all, those are real. We have a pushback, not as much in Asia. We had a lot of pushback in Europe and in the US on that. And we decided to roll that back with that aggregate price increase. And we have a good response from our doctors in order to do that. And that is a friction piece. And it was -- to me, it was an annoyance to the sales team to have to kind of fight through that when they had to talk to doctors in either joining what we were doing or having been with us for a while and explaining those things. So I think that's very helpful. John, I'm sure you have some ideas to it.

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

Yes. Thanks.

Thank you.

One moment for our next question. Our next question will come from the line of Steven Valiquette from Mizuho. Your line is open.

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

Hi, Steven, it is, just to confirm, US is still our biggest market in the world in that sense. Remember, I just talked about the orthodontic market not really growing for the last three years, too. So we have had competition. Obviously, we know that your comments really refer to Angel Aligner or maybe some other Chinese suppliers coming in. I think overall, you first win with customer service and you win with technology, you win with relationships, and that's what our sales force is really talking about. We felt that the Chinese have come in on unsustainable prices. When you look at -- we kind of know the prices you have to charge in order to have a decent return. And we think that always takes care of itself one way or another, and we've seen that with other competitors in the marketplace also. So I don't – I can't really speak for 10,000 orthos or GPs that are around the United States and how they feel about international politics or anything they do. But our job is to make sure that we keep our heads down. We deliver the best technology, best productivity, the best brand, all those things to make sure we win in the marketplace, and we'll let that other piece decide for itself.

Okay. Got it. Thanks.

First of all, I'd say our IPE device is 3D printed, but it's not the Cubicure process and it's not the resin that we'll used in the Cubicure process. So as I mentioned in my script, we will begin to -- just with limited release, an Invisalign First retainer. Invisalign First retainer is a very complicated. It has to have a high modulus. It has to have a huge amount of variability in the sense of how you structure that depending on where that person's arch is at that point in time. And it's the perfect fit for us as we try to ramp up and we ramp up our new our new Cubicure process with resin too. So again, like I mentioned, you'll see just the beginning of that in the first half of this year. And in the second half of this year, we should begin to get ourselves more ready for general release in third and fourth quarters of that product line. That's the beginning. After that, we'll move into what we call mandibular advancement. But any kind of aligners that have auxiliary types of things that you would have to have printed on those or difficult cases where wall thicknesses need to be different in some ways. So, we're really excited about the efficiency of that particular technology, but also the design and incredible design capability and design freedom orthodontists will have in order to do that. So, that's about as well as I can do for you now.

Thanks. Next question please.

Our next question from the line of Michael Ryskin from Bank of America. Your line is open.

Hey, thanks for squeezing me in guys. Just one quick one for me, hopefully. John, I appreciate the commentary you had on tariffs to Mexico and realize there's still a lot of moving pieces, but I just want to make sure I understood that. Just a comment on transfer prices. I mean, I hear you on overhead and freight cost, treatment planning not being included. How should we think of it as a percent of your COGS? I think if you just go through the P&L with something like $375 COGS per case roughly? Is the transfer -- like how much would be impacted? Is it 50% to 75% of that? And just walk us through the transfer price math, just so we can--?

No, it's a good question, Mike. And you're right. I tried to give a perspective of, look, you start with COGS and then there's some hard COGS that have nothing to do with what we're doing in Mexico freight and treatment planning and other things, specifically the value add and the work that's being done there than that transfer price. I guess to put it in perspective in terms of -- there's been a lot of people thinking about what this could be, just based on your question and so on. But like on an average month, that tariff, if it's that 25%, might impact us $4 million to $5 million of cost or that might be the cost perspective of this. So, that gives you an idea of like how this kind of fits into this. This is something, as I said in my prepared remarks -- look, if at that amount of tariffs, 25%, if that ever was implemented, it's not a big enough cost on tariff for us to switch some of the manufacturing and move from perhaps manufacturing in Mexico to Poland. But we'll evaluate that as we go forward. But I just want to kind of size that for you. We'll evaluate as we go forward, we'll understand more as these days come about. We hope there's not anything, but we have a perspective in terms of what it means from a cost standpoint, and we will make decisions based on that. And that will impact us what we do in the short and long-term.

Thank you. Thanks.

Operator, we'll take one last question.

And our last question will come from the line of Erin Wright from Morgan Stanley. Your line is open.

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

That's great, Erin. I'll take the first one on tariffs. So we're not in our forecast and what we've given for guidance at that margin of 22.5%. There's no additional new tariffs that we've contemplated in that number. So, we'll see how things come about. But in the framework, if there is a tariff, and it should be 25% from Mexico to the U.S., it's $4 million to $5 million depending on volume per month from an expense standpoint. And then on China, I don't know if you want to give -- Joe, any other perspective on the kind of the market there?

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

Okay. Thank you.

Thank you.

You’re welcome.

And I will now turn the call over back to Shirley Stacy for any closing remarks.

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