Greetings, and welcome to the Align Technology Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I would 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 also 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 expressly assumes no obligation to update any forward-looking statement.

We have posted historical financial statements, including the corresponding reconciliations and our 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?.

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 healthcare and the power of digital treatment planning along with 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, EMEA 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 to VidCon, the top teen culture and community event where Align has a multi-year 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 Americas Orthodontists increased 25.0% and International doctors were up 44.4%. Invisalign First and Invisalign treatment with Mandibular Advancement continue to ramp globally and are helping to increase our share of teenagers and younger patients worldwide.

Overall, we’re very pleased to see that 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 U.S. 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 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 continued to see strong digital engagement with 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 and engagement with the Invisalign brand and are included in our Q2 quarterly slides.

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

This new multi-channel 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 target audiences. In the U.S.

our new campaign will run across all media channels including broadcast and TV networks, connected TV such as Hulu and other streaming services, digital media and all social media channels. In Canada, our new ad 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. Increased services revenues reflect higher subscriptions from installed base growth and multi-year 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 this 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 a digital scanner in the Americas increased to 77.3% from 69.6% in Q2 last year. International scans increased to 60.8% up from 47.8% in 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 doctor’s 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 intraoral scanning needs.

The streamlined workflows to dental laboratories includes an option for on-demand chairside milling and exclusive TimeLapse technology for patient communication and monitoring with the iTero Element Foundation, which provides dentists with capabilities beyond basic STL export 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 chairside tool that enables patients to visualize their future smiles at chairside in less than a minute without any goop – which increases treatment acceptance and drives practice growth.

Before I turn the call over to John, I want to mention the decision to terminate discussions regarding the 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 non-binding letter of intent to assess the possibility of a five-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 deliberations, we announced the 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..

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 benefitted from the teen and adult promotions by approximately 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 Smile Direct Club 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 the promos, 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 our 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 reminder 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 anyway, reflects our full potential.

Our product technology, operational scale and consumer brand awareness are all significant advantages – in a huge market that we are addressing with only 10% share today. The opportunity to bring better smiles to millions is not a zero sum game and we are 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 is ultimately great for the millions of global patients who have yet to reap the benefits of this.

Finally, before I open the call up 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 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 the EMEA region since 2014. Under Simon’s leadership, the EMEA region has consistently grown more than 30% compound 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 the ideal leader for the Americas region. Markus joined Align a year ago and has been responsible for Align’s core Europe commercial organizations focused on the orthodontic channel.

He has also served as 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 and sales, strategic marketing, product development, and change management processes. His deep understanding of the healthcare markets in EMEA, Asia-Pacific, and the U.S.

are an asset to Align. We are 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 will also host an analyst meeting.

Stay tuned for more information. With that, I’ll turn the call over to the operator for questions.

Operator?.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Erin Wright from Credit Suisse. Please proceed with your question..

Thanks. Can you parse out some of the components of this sequentially, slower growth in America is 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 coming from? Is it mostly DTC or is it some of component of the GP offerings as well? And how do you expect that to progress? Thanks..

Hi, Erin. First of all, when you look at the Americas, this is split up – as the America 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 slow down, it's been in the North American marketplace in the U.S. and Canada.

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

It's our fastest growing group and that reflects the technology that we've 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. Our adult segment too has been strong.

It's that 20 to 29 year old that we saw some amount of slow down over time. But when you get into the older classifications, we're still seeing really good strong growth in those areas.

So I feel well about 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. 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, you look at our most – it was great to be in this 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 trot out there from consumer standpoint. We feel so good about the feedback we get about the clinical capabilities of Invisalign, the consistency of it.

It's interaction with iTero, which is it's really a master in the marketplace. And then all of them reaching out to say how they want to compete against that DTC segment, we're the only company that can really join hands with them and help them to compete in that area..

Thanks, Erin. Next question please..

Great. Thanks..

Our next question comes from the line of Jon Block from Stifel. Please proceed with your question..

Great guys. I'm going to try to ask too, an awesome one at a time. So the first long-term guidance is 20% to 30% rev guide, but the guide for next quarter is 17% at the midpoint, it looks like high teens, Joe for the back half of 2019.

I know you had some commentary, but I guess the real question is one or two quarters don't make a trend, but how do we put sort of that high teens 2H 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. Thanks..

Yes, hey Jon. General from a teen standpoint, you know what our product portfolio is and how well it competes in that sense. When we talk about the slow down right now – the 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 – and 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 or there might have been some trialing and then they said, hey, we don't have a comparable product or maybe we could just split what those comments were specific to?.

Well, they're specific – they're specific in 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 – 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 they've had to-date or whatever. And then we see an inflection point from a growth standpoint as we move into July being not significant.

Secondly is when we look at Asia in the July orders also including China, we've seen an uptick in China also. So just in general, I’m talking about, and 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..

Okay. Thank you..

Yes..

Our next question comes from the line of Glen Santangelo from Guggenheim Securities. Please proceed with your question..

No worries. Joe, I just want to talk to you about – and clearly the competitive landscape seems like its 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 aside for a second.

But when you think about the traditional players that are also now selling into the GP in the ortho market, are you seeing any sort of price sensitivity from your customer base at all?.

Hey, Glen, I start to say, our markets 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, 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 increasing or 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 on the software side. There's no scale on the supply side. There's a ways to go.

There's no challenge in the teen segment results, , 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 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 half a million to 600,000 aligners a day. It's not easy to do those things. So overall as 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 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 six, lower crowding, things that are orthodontically simple. These products have been aligned for that too.

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

And also they give them a chance to be able to work with the 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..

Okay. I appreciate those comments.

Anything regarding ASP, slight downtick sequentially, was it mix, was it discounting or any anything you can add on that front?.

For primarily it was exchange, right. And that's what we're leaning into. John, you can….

Yes, I mean, it’s – like you said, Glen, its down about $15, $10 of that was exchanged and then the rest of it was mix so nothing material from the previous quarter..

Thank you very much..

You’re welcome..

Our next question comes from the line of Brandon Couillard from Jefferies. Please proceed with your question..

Thanks. Good afternoon. Joe, just starting in the Americas region, why do you think the DT channel – the DTC channel was having a negative impact now, you kind of talked about that perhaps having a positive halo effect.

And then could 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, hey, Brandon. First of all, on the DTC piece is, I think it's – there's light and dark in that, right. I do feel that Smile Direct Club and Candid, they've raised the category for 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 that gives them an opportunity to engage at a level that I feel is just our advertising alone, it would have never gotten to that level.

So that's a positive side. The negative side is it's – there's some price competition, that segment offers $2,000 or less kind of a case for simple case and it's pushed some of the doctor office models and it's pushed our portfolio too.

What we're saying is we've always know there's a 10% overlap and educating our customers, having customers be able to, which is our doctors, having this customers be able to use an iTero scanner to help to communicate and visualize exactly what the treatment plan would be.

Giving patients some off ramp 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. It was second part of your question, Brandon. We put roughly 100 in North America last year. We watched these statistics. I do, really closely and it's amazing to watch the productivity, what happens. It's like clockwork. It takes nine 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 they're almost, we call it, breadth and reach.

And the number of accounts 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 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. Thanks 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? Is there any reason that extends perhaps into 2020?.

No, Brandon. Its the one and a half to two 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..

Okay..

Thanks Brandon.

Next question?.

Thanks Brandon..

Our next question comes from the line of Ravi Misra from Berenberg Capital. Please proceed with your question..

Hi. Good morning. Thanks for taking the questions. Just two quick ones, 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? Thanks..

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..

Hey, Ravi, it's Joe. Your second question is dynamics of that, it's a really good question. When we look at that on the GP side, I mean, its hit-and-miss both on the orthos and the GP side. Our orthodontic data for the second quarter indicated there was really a reduction in number of adults that were going through orthodontist.

And we know we recognize that. On a GP side, it hits the GP side also but what we see with our DSO specifically is they're up significantly in growth. I mean, there've been focused on Invisalign to hit it harder.

So within that segment of GP, I think the individual practices its hit a little bit harder, the DSOs have really grabbed products like iGo, they’ve institute that in the organization and done much better with it..

Our next question comes from Elizabeth Anderson [Evercore ISI]. Please proceed with your question..

Hi, good afternoon, guys..

Hey, Elizabeth, we can barely hear you..

Hi, Elizabeth..

Sorry about that.

Can you hear me better now?.

That's better..

We got it now, yes..

Okay, perfect. Sorry about that.

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

Elizabeth, when you look at that our comprehensive held and they're really well, you remember – it's really important to remember the comprehensive, our larger size docs like diamond, diamond plus, platinum rely almost exclusively on those product lines because the discount that we give them really it makes it easier for them to be able to move up and down the portfolio.

They liked that product line, the comprehensive side only because you get the five year additional aligners. So when you move to the non-comp in that increase, our Lite product line stood out really well. Our E7 did extremely well and also iGo by far was a real winner in that piece.

So you remember a product like iGo too has one individual additional aligner that's offered with it too. So for those kinds 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..

And from an R&D perspective, I know you sort of over time have had like a steady drip of new products, Mandibular Advancement 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 chill you, Elizabeth, if we told you that. It's top secret. Okay. It's no a mystery that we've been working on what's called a rapid palatal expander. So when we talk about Invisalign First, you think about that 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. There'll be several – it will be more quarters before we introduce anything like that..

Okay. That's helpful. Thank you..

Our next question comes from the line of John Kreger from William Blair. Please proceed with your question..

Thanks very much.

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

John, I’ll start with the end of your question. It's a little more reticence on consumers to spend. I mean, you've seen that in 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 confident competitor in China from a overall standpoint, but it's not that we feel that there's been any dramatic change in the sense of their competitive positioning or their ability to do certain cases or others.

But maybe we recognize them as a confident 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 in the third quarters, normally the 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, thanks. 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 improve the convenience that they perceive with Invisalign versus other options beyond sort of that classic price trade off?.

Well, I’d say young adult is, 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 there are more remote technologies that would allow doctor to the CDs patients, less frequently from an office standpoint to be able to monitor their progress remotely.

And I think those kind of things that 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 of technology, and doctor understanding of specific kind of products and where – when and where to use them will allow us to be able to get us that segment better..

Great, thank you..

All right, John, thanks..

Our next question comes from the line of Steve Beuchaw from Wolfe Research. Please proceed with your question..

Hi, good afternoon..

Hi, Steve..

First, just one more clarification on China. It embedded in the outlook for the back half.

Am I hearing you right that you assumed China actually gets worse? And then John Kreger asked this, but could you put any numbers around China and 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 slowed down 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 email 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 appreciated that you’ve called out that the competitive trialing might be in China. We all would imagine gets better.

Is that the whole story we feel good about the LRP because of those two things?.

Yes, we’re sticking to the 20%, 30% with competence, Steve, is nothing that really changed in that sense. And John, you….

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..

Yes. Steve, I just reemphasize China’s not going away, right. I mean that’s a big market. It’s a phenomena. The other part that I think we talked about it, but it’s not we just got back we were in Asia last week. It’s not necessarily apparent as the rest of them – the rest of when you look at APAC is so strong.

You have Japan approaching 50% growth rates or more. You have just incredibly strong region overall. We think we’ll get through this China’s situation. It’s going to continue to be our second biggest marketplace.

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 a just an American company..

Okay, that’s clear. Thanks so munch..

All right..

Our next question comes from the line of Jeff Johnson from Baird. Please proceed with your question..

Thank you. Good afternoon, guys.

Can you hear me okay?.

Yes. Hi Jeff..

Hey Jeff..

Hey, all. John, I wanted to go back to Brandon’s question just on margins, obviously you reiterated the 150 basis points to 200 basis point impact from the legal and the reorg, and what have you for the year? But the rest of the take down kind of in the second half guidance from a margin perspective ending up around 20% or so.

Is that just the increased spend to try to reinvigorate top line or what other kind of levers that 20% operating margin instead of kind of the mid-20s we were thinking?.

Yes. That gets us low branded are Jeff from the investments that we’re making in marketing. So we’re making those media investments in the third quarter, we’re expected to continue to the fourth quarter. And that’s a reflection in the overall op margin rate that I gave..

Fair enough. And Joe, maybe just a question on [indiscernible] in kind of your confidence that those software glitches issues, whatever the saving issues where all of that rolled into one competence 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 moved 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 the stack rates, they’re huge.

It takes us – I think I’ve mentioned before, Jeff, it takes us about six 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.

This software that we released that you referenced put – did put pressure on them, because they – we had to go back and redo some cases in that, obviously put pressure on them, 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 two weeks, they ripple through this organization for 30 days or 40 days and we need to be able to have some little extra capacity to allow us to be able to address that..

Thank you..

Our next question comes from the line of Matthew O’Brien from Piper Jaffray. Please proceed with your question..

All right, thanks, afternoon. Thanks for taking the question. 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 is being heard. So I’m wondering what you can do to turn things around there.

I know there are 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 categorized 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 more of those are going to try it.

If I was an ortho, I tried 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 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’s standpoint, look China, again, I think we talk about that in a few other calls, a few seconds ago, China continued to be strong. Consumer sentiment, there is consumers sentiment. We’re going to continue to invest there. We’re going to put more salespeople in place.

We’ll follow through with continuing our training centers or manufacturing centers all we put in place. And we expect to China continue to grow and be – for the foreseeable future, the second largest area that we sell to. John, you can….

Sorry..

Okay. And then everybody is 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 started touching on it a bit, but the iTero number, 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 with 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..

I appreciate a positive comment like because there were a lot of good things in this quarter. One thing you missed is you look EMEA up 39% in the consistency of the growth across that EMEA region. It’s really been amazing in that sense. I mentioned the other parts of APAC too strong growth that we saw.

And again, we verified that last week when we were over to see the team. And in North America side, I mean when you look at these tweens, 7 to 10, up 140% and some of our other age groups, they’ve 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, you’d go back years ago of GP growth that we saw double-digits. We’re continued to do well in that segment. But you pointed to iTero specifically in, I mean, it was a 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 hasn’t 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. It’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 starts the whole digital piece, the front end of it as a scanner, having to kind of technology we have with iTero.

You can 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 in that sense, kind of shows you the versatility of that product line too. So those areas are very strong in the area.

Talked about doc training, we did have some terrific numbers across all geographies for the quarter. That’s always a strong leading indicator of doc’s interest in future Invisalign cases. It breaks down differently by different regions to how fast they’ll go.

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

Thank you..

You’re welcome..

Our next question comes from the line of Steven Valiquette from Barclays. Please proceed with your question..

Thanks. Good afternoon, everybody..

Hey, Steve..

Hey, guys. So nothing get too granular on what transpired over the past three, four 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 we had a lot of conferences through mid-June, with the message and everything seemed, okay.

I guess, I’m just wondering if most of these negative pressure points hits 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 and you just comparing July to June in particular.

Just curious to kind of get little more color of how things kind of transpired throughout the quarter as we think about some of these pros and cons in the results. Thanks..

Hey, Steve. Like you said, not to be over granular though. I think China by far was one where – when you’ve got the 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 end of the quarter.

And we see that, time and time again, it just didn’t materialize and that consumer sound, that piece became more and more visible to us, as we got through the quarter in that way. In North America, I’d say in general, we were good with the team volume was up 24%, same as what we had in the previous quarter up 24% too.

So there wasn’t really a team 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 and we talk about that increase, we’re not just comparing it to June, we’re talking about the entire quarter, the first and second quarters and what we at, when we talk about that increased us, we wouldn’t mention it..

Okay. I appreciate the after color. Thanks..

Our next question comes from the line of Michael Ryskin from Bank of America Merrill Lynch. Please proceed with your question..

Hey, guys. Thanks for squeezing me in. Quick one on the follow-up quarter and then one just to follow-up again on something that, Steve just touched on with the last one. First, start with the 3Q, if you just sort of look at your commentary on international, sequentially down with the China pressures and you’ll get U.S. North America.

Even if you’ll count for the 2% impact you had at Q2 last year. It seems like it’s a pretty aggressive cut the North America outlook. So I’m just wondering how much conservative is little 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 slow down, 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 into the sort of the bridge in 2Q, if you look at where international came in versus expectations may have been a little bit life, 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 businesses for you. So it shouldn’t have been that meaningful of an impact, especially if it was only a one 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 as they built out.

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

Any other dynamics and 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 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’re continuing to invest in grow, just calling a number that we see..

Thanks, Mike. Operator, we’ll take one more question, please..

Our next comes from the line of Nathan Rich from Goldman Sachs. Please proceed with your question..

Thanks for squeezing me in. John, 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 discount? It’s kind of big into how you’re thinking about, where ASP is trend from here..

Yes, Nate. When we think about ASP is and really what we saw at the end of – 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 non-comprehensive.

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 different, in terms of how we’re thinking, we’re trying to drive, increase utilization, trying to drive growth in our business and promotions continuous 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..

Okay. Thanks a lot..

All right, Nate. See you..

Thanks, Nate. And 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..