Greetings and welcome to the Inogen First Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host today, Matt Bacso. Please proceed, sir.

Thank you for participating in today's call. Joining me from Inogen is CEO, Scott Wilkinson; and CFO and Co-Founder, Ali Bauerlein. Earlier today, Inogen released financial results for the first quarter of 2020. This earnings release and Inogen's corporate presentation are currently available on the Investor Relations section of the Company's website. As a reminder, the information presented today will include forward-looking statements, including without limitation statements about our growth prospects and strategy for 2020 and expectations regarding international sales and tender activity, the impact of COVID-19 public health emergency or PHE on our business and demand for our products and expectations regarding related reimbursement and regulatory changes. Forward-looking statements in this call are based on information currently available to us as of today's date. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary, and we disclaim any obligation to update these forward-looking statements except as maybe required by law. We have posted historical financial statements in our investor presentation in the Investor Relations section of the Company's website. Please refer to these files for more detailed information. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with US GAAP financial measures provide useful information for both management and investors by excluding certain non-cash items and other expenses that are not indicative of Inogen's core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Reconciliations between US GAAP and non-GAAP results are presented in tables within our earnings release. For future periods, we are not -- unable to provide a reconciliation of our non-GAAP guidance to the most directly comparable GAAP measures without unreasonable effort as discussed in more detail in our earnings release. With that, I'll turn the call over to Inogen's President and CEO, Scott Wilkinson. Scott?

Thanks, Matt. Good afternoon and thank you for joining our first quarter 2020 conference call. Before moving into a review of our quarter results, I'd like to take a moment to update everyone on how the COVID-19 public health emergency or PHE has impacted our company and how we have responded to what is truly been a terrible crisis for our country and everyone around the world. Additionally, I will provide an update on Medicare's response to the COVID-19 PHE and our expectations of its potential impact on our company. As everyone is aware, the COVID-19 virus was first identified in China in late 2019 and quickly spread across the globe. The resulting pandemic led governments to order residents to shelter in place and practice social distancing to reduce further transmission. Symptoms of COVID-19 have ranged from very mild including some with no reported symptoms to severe including illness resulting in death with higher mortality rates among older adults and those with certain chronic medical conditions. Given the impact to the respiratory system, oxygen therapy is prescribed by healthcare professionals for treatment for certain patients with COVID-19. We also believe stationary and portable oxygen concentrators could be prescribed by healthcare professionals in an effort to provide relief to global hospital systems by allowing appropriate patients to be treated in the home, such as patients early in the disease progression or those in recovery post hospital discharge, thus making room for more severe patients who need treatment in the hospital. As the pandemic started to impact Europe and the United States in the first quarter of 2020, there was heightened interest and demand for our oxygen concentrators late in the quarter, particularly within the domestic business-to-business sales channel. The sales increase in our business-to-business sales channels was partially offset by lower…

Thanks, Scott, and good afternoon everyone. During my prepared remarks, I will review our first quarter of 2020 financial performance and discuss the details surrounding our decision to withdraw 2020 guidance. As Scott noted, total revenue for the first quarter of 2020 was $88.5 million, representing a decline of 1.9% from the first quarter of 2019. Turning to gross margin, for the first quarter of 2020 total gross margin was 43.4% compared to 49.2% in the first quarter of 2019. Our sales gross margin was 43.3% in the first quarter of 2020 versus 50.4% in the first quarter of 2019. The decrease in sales gross margin was primarily due to higher cost per unit associated with certain manufacturing inefficiencies in the period that contributed to higher labor and overhead expenses. In addition, we experienced an increase in product sales mix toward the Inogen One G5, which remained at a higher cost than the Inogen One G3 during the period. Finally, average selling prices were down in the first quarter of 2020 versus the same period in the prior year across all sales channel. And the increased mix to business-to-business sales which has a lower gross margin also reduced total sales gross margin in the first quarter of 2020 versus the comparative period in the prior year. Rental gross margin increased to 43.8% in the first quarter of 2020 versus 30.8% in the first quarter of 2019, primarily due to higher Medicare reimbursement rates and lower servicing and depreciation expense. As for operating expense, total operating expense increased to $40.5 million in the first quarter of 2020 versus $39.6 million in the first quarter of 2019, primarily due to New Aera intangible amortization expense of $1.9 million, partially offset by a $1 million benefit from the change in fair value of…

Thank you. [Operator Instructions] Our first question comes from Margaret Kaczor with William Blair. Please proceed with your question.

Hey, good afternoon, guys. Thanks for taking the questions. Yes, maybe the first one from me [indiscernible] can you give us a sense of April trend for the DTC and B2B businesses as demand decreasing or stabilizing or the same. And should we plug DTC down in line with travel which is down pretty severely or is it a more sticky business in that?

Yes, sure, Margaret. I'll take that question. As Scott shared in his prepared remarks, we did give a little bit of visibility on what we saw on the direct-to-consumer order volumes in April. Those volumes were down approximately 25% compared to the first quarter of 2020. And as you know, typically, we would expect to see order volume increase going into the second quarter, which is seasonally stronger for us. If you look at the historical increase we've seen going from Q1 to Q2 that sequential increase, from 2012 to 2018 that average about 25%. So, it was a large decline that we saw in April in the direct-to-consumer side in terms of close rates. Now, what we also saw though in April is we still are generating significant patient interest. So the lead volume has actually been very strong. It's the close rate that is really down compared to what we've seen historically. So, in that area, that's why we talked about increasing lead utilization toward the rental business because it's really difficult to predict how long this crisis will last. And how long it will take for consumer confidence to return as well as a return to traveling, particularly for the elderly population. On the business-to-business side, Internet reseller demand, which is of course a subset of that domestic business-to-business demand saw similar drop-offs in April. So, we expect that to follow pretty closely with what we've seen on the direct-to-consumer side of the business. But, of course, the majority of that domestic business-to-business bucket is for additional HME providers. And as you saw in our results, the business-to-business provider orders were up in the first quarter versus expectation. We do expect that to continue to be lumpy over time, obviously there's a lot of moving parts right now and with oxygen therapy being a potential treatment for certain patients with COVID-19. But we also are seeing referrals down for traditional COPD patients because there just is limited physician interaction. So, COPD patients that may eventually need oxygen and seeing their doctor those conventional appointments are just not happening right now. So, that will really depend on how quickly the shelter-in-place orders are removed and how quickly we return to normalcy there. We also have seen some on the domestic business-to-business side really trying to limit interactions in the patient's home due to obviously wanting to reduce the potential spread of COVID-19. So, I do think that for that period, it could also limit the restructuring activities of our B2B partners from tanks to POCs. Now, the good thing though is that we continue to see the benefit of patients being interested in POCs and wanting a better solution and I'll maybe turn it to Scott to talk about the long-term outlook there.

Yes, I guess, if we looked at the long-term, I mean, first of all, COVID-19 is a respiratory ailment and oxygen therapy is used, it's one of the treatments for it. So, in the short term, we saw an uptick. In the long term, if you look at our business, kind of where do we go and what's the impact on our business. After the kind of the smoke clears from the pandemic, it's uncertain what kind of impact this might have on needs by people that had COVID-19 and if there is long-term damage to the respiratory system, there is always a chance that over the long-term they may turn into oxygen therapy patients, but that's kind of up in the air. Certainly, it's not going to harm the demand or put -- decrease the demand for our product. But there could be an increase, time will tell on that, that's more a long-term play. I think also, as Ali said, we've had -- the dialogue with patients has been a lot different on these -- all the patients that have called and are still answering our marketing campaign. Most of them aren't looking for product to go on a trip or go on a visit, everybody's kind of hunkered down in their homes. But they do have concerns about their supply, they do have concerns about having a stranger come to their home to deliver tanks. If you look at the other side of the equation home care companies are kind of in the same boat. They have concerns about going into a patient's home or to a patient's home either exposing them or being exposed themselves. So, this really shines a light and I think puts another piece of pressure on the non-delivery model in the future if you look ahead. We've already had pressure from reimbursement cuts that really make it difficult to continue to deliver or sustain the delivery model with all the expenses associated with it. Here is another thing that down the road when the smoke clears again, people are going to say, how do we better prepare for this next time around. While there is a few trends, people have talked a lot about tele-medicine being maybe more emerging in the future from this. I think there'll be more pressure put on the non-delivery model to convert to that. So that we avoid these exposures and risks in the future and the patients are more in control. So, long term, I think there could be some, I'll say, positive pressure for our business. Short term, as Ali outlined, there is a lot more variability introduced that we have to cope with and obviously we're not alone. The whole world is going through coping with a lot of variability right now.

Got it. No, that's helpful. And so if we dive a little bit deeper into that HME demand, where did those products as far as you know get distributed, it sounds like maybe they are in the patient's house but was kind of unclear. And are they being used on COVID patients as far as you know post discharge?

Yes. So, we have seen some indication of it being used for some COVID-19 patients. Of course, the mass majority of oxygen usage right now is really for COPD patients. So -- but there is some acute need for oxygen to treat a portion of the COVID-19 patients and either early in the disease state or later after they're in the hospital and they're discharged, but may still need some level of oxygen support for some period of time. So, yes, we are seeing that as a potential use, but remember those uses of oxygen are not long-term uses, those are short term uses where a patient may need it for a few weeks or month, not for a long-term use.

Okay. That's helpful. And then just last one from me, I heard the sales rep headcount go down 15% year-over-year. Can you give us a sense of how that's trended sequentially as it improved and declined and you kind of alluded to maybe changing a strategic plan around DTC, but what do you do for the next three, four, five quarters while all this is ongoing and people travel a lot. Thanks.

Yes. I'll take that question. So, we did hire to our expectations in the first quarter. So, sequentially, headcount was up and so we were glad that we are able to get the reps in the door. And kind of looking forward from here, we did continue to do some level of hiring, even as the stay at home orders went into place. So, we did some remote learning, obviously, that's more difficult than in-person learning, but so far that has been successful. So, we do plan to hire some level of employees, but it will be lower than what we have initially planned going into 2020 until we can really see the return of the close rates of that group and/or do more rentals as a group.

Our next question comes from Robbie Marcus with J.P. Morgan. Please proceed with your question.

Thanks for taking the question. Ali, I was wondering if you could walk us through some of the impacts to the P&L as DTC which is the most profitable on a dollar basis is down, I think, to 20% in April. How should we think about the deleverage and the impact down the P&L. How much can you cut on expense? How much is fixed versus variable on manufacturing? Any help would be appreciated.

Yes, sure. So, we said 25% was the amount -- sales were down in April compared to the first quarter of 2020. And, again, usually April would be an uptick from Q1 just given our traditional seasonality patterns. In terms of deleveraging, as we mentioned, we are going to reduce advertising. Advertising in Q1 was $10 million. So, that's a significant portion of our -- a little over $40 million that we had in operating expenses. In terms of the gross margin profile, most of those costs are material costs versus labor and overhead costs and fixed costs. So, that can overall be, of course, leveraged at a better rate but as B2B becomes a bigger portion of the sales mix that also can impact our gross margin percent. So, I do want to highlight that as something that will depend on the overall mix in our business. As we did see the decline there, we said we are reducing hiring and that's really across the entire company that we're making sure that we're being careful with our spending and our investments across the group. But we still are hiring and making the investments that we think are prudent for the long term. So, there is some level of deleveraging, but of course, it certainly will be more challenging in these times where D2C you still have the overall sales cost, the sales rep cost, but you have a lower close rate. So that certainly is expected to have an impact on the bottom line in our business for the duration of this lower close rate associated with lower consumer confidence and travel. Now, we are planning on, as we said, doing more rental investments that will be a small use of cash in the scheme of our overall cash balances. But that also should produce a more stable revenue stream over time and a return on those investments. So, that is something that we plan to do.

Great. And maybe just as a follow-up, I'm jumping between calls, so if you said this I apologize. But could you call out how much the business-to-business sales was due to what you think COVID impact was in the quarter and how should we be thinking about that based on what you've seen in April so far? Thanks.

Yes, we didn't call out a specific number there. And frankly, it would be really difficult for us to do that because the mass majority of the entities buying from us are customers or the same customers buying units for us or from us or their core COPD patients and they're using them interchangeably, they may use it for a COVID-19 patient for a month and then start using it for a COPD patient. So, we didn't call out specifically what that amount was, but we did hear qualitatively from our provider partners that units were being used for that purpose. We did see some level of smaller buys from charitable organizations and hospitals that we don't typically see in our normal ordering pattern, but none of those were material in the quarter.

Our next question comes from Matt Mishan with KeyBanc. Please proceed with your question.

Great. Thanks for taking the questions. And thank you for doing everything you can to support the healthcare system at this time. I'm just curious where your call centers open throughout this -- throughout the crisis or were you able to adjust to a work-at-home environment. And if so, how do you get everyone back to the office safely?

Yes, it's a good question, Matt. We've moved a large portion of our office staff to work from home environment that does include a lot of our inside sales reps. We haven't really forced people to go home. We've left that optional and said if you feel comfortable working from home, it's probably a prudent thing to do. I'll say we probably encouraged it but not mandated it. Just throwing a number out 80%, 85% of our office staff are now migrated to working from home. And if you don't mind, let me just give a shout out to our IT team for making that happen in a really short period of time. That's worked really well. And I'll tell you, we started that right at the beginning back in early March and obviously we've never had this many people work from home before. So, we had some questions on how that was going to go. And I tip my hat to our employees, everybody has dug in and kind of rallied around the cry of -- we are part of the solution to this problem. And let's do everything that we can to take care of every patient that we can. And so I'm incredibly proud of our staff and they've done a great job. Now, somewhere down the line, we'll have those people come back, we're not really in any rush to bring them back, because like I said, everybody is doing a great job. So, there is no sense of urgency to do that. But I want to maintain a level of engagement in our company. So, long term, the plan is to bring them back. Now, of course, our manufacturing people they got to come to work today, nobody is building our products from home. So, and I tip my hat to them for coming to work every day to build the products and get them out the door and help the patients. But really everybody has done a terrific job. And I think we've handled those changes very well.

That's great. And then any update you have on some of the European tenders you are expecting in the first half of 2020, I think, there was one, specifically in the UK that you are confident that was going to go through. Has it gone through or that's still in flux?

Yes, we actually started to see some progress in the first quarter and then everything was put on hold in March. So, we have been informed on some of the winners and some of the losers. But there has been no transition take place because even though some of that has been sorted out from a decision standpoint, it's a lot of work from an execution standpoint to make those changes. And so in the UK, everything was put on a hard stop. So that all of the home care companies and the entire healthcare system could focus on taking care of patients instead of switching product around from one provider to another. So, we do expect when -- again, when this is all over that that will sort itself out and we'll see that transition take place, but nothing is going to move until the public health emergency is lifted.

Our next question comes from Mike Matson with Needham & Company. Please proceed with your question.

Yes, thanks. So, I was -- I wanted to ask about the New Aera tidal assist product, can you remind me, I don't know if you formally launch that yet. And is that something, I know there has been this clamoring for ventilators and have you benefited from that? Is there any potential to benefit from that?

Yes, sure. I'll take that one. So, we launched the TAV product in a limited launch in December. So, it's really been just a few months that it's been available both through our domestic direct-to-consumer and domestic business-to-business channels, it is not a traditional invasive ventilator, it's really meant as an assist core with oxygen and that launch really was going well and we were rolling it across the sales force across the D2C side. We have not trained all the sales reps yet on that product, but really that also was impacted similar to our core oxygen business on the direct-to-consumer side with the stay-at-home mandates and the lower consumer confidence. So, we've seen a similar pullback in the direct-to-consumer interest in that product. Now, really, while we've done some great learning right now, we didn't expect that to be a significant contributor to 2020 anyway. The goal is really to integrate that TAV product into the POC and into our stationary concentrator. That's really where we think we'll see a larger uptick and overall interest in the product and that's still an ongoing R&D effort that we're focused on right now. Obviously, I know ventilators have received a lot of press for the benefit for treatment in COVID-19 patients. But we really have not seen that for this product and we're still exploring if there is a small role to play there. But that's not really the purpose of that product effort.

Okay. Understand. And then just a question on your DTC rep count. So, you were down 15% year-over-year this quarter. What's the -- you said you're going to slow you're hiring, but are you still planning to increase the count between now and end of the year, and -- or at least to, I guess, where you were at the beginning of the year. And then the -- when would you -- when does your rep count actually stop declining on a year-over-year basis, when do you expect that?

Yes. So, if you recall last year, the large reduction in the sales force occurred in the first half. So, we expect to lap that large reduction at the end of the second quarter. So, we're close to it. Now, you've seen it sequentially decrease as a headwind since we started reporting this mid last year as a headwind to that D2C business. In terms of the exact hiring, we obviously haven't put out a number of how many reps we expect to hire. And also remember there is some level of attrition of reps built into our models as well. So, kind of -- that will depend on where exactly we end the year, we're not going to give specific guidance on where we expect headcount to be at the end of 2020. But we do plan to hire in the remainder of the year just at lower rates. And where we shake out will depend on how many we actually can execute in this remote model and then also how many reps we lose to normal attrition.

But on a -- I understand you're not willing to give a number, but on a net basis your plan right now is to end the year higher than you started?

Yes.

Or you're not sure? Okay.

Yes, I mean, yes, so our plan is to add to our rep base, now where we actually come out will depend on factors that we still have to execute on, including hiring and how many reps leave in that period as well.

Yes. And then finally just, I know you make a stationary concentrator, I've heard that the stationary concentrators have become really scarce these days just given all the COVID-related demand. So, one, have you been able to take advantage of that with your own product? And two, if not, have POCs being used as a substitute for stationary concentrators at all?

Yes. So, we have seen heightened interest in stationary concentrators, I think, that's been well reported that there has been some shortages there. Our product is not typically a product that would be used by our business-to-business partners for our stationary concentrators, because it is higher cost product that is more of a premium product with lower weight and less noise and lower power consumption, things that patients care about not necessarily things that providers are willing to put into the rental fleet. So, historically, that product has been a direct-to-consumer focused product, but of course with the shortages of stationary concentrators, we have seen more interest there in that product. But we also are limited by how quickly we can ramp up that supply chain. So, we have tried to ramp up the supply chain a bit to accommodate the needs, but we also are balancing that just given the fact that we know the other stationary concentrators are also being ramped up for volume and when it comes to -- when there is adequate supply in the market, the providers will choose the lower cost product in most scenarios. So, we certainly are looking at that, but we don't think that's a major driver for us as a business, mass majority of our sales are still POCs. In the shortage of stationary concentrators, though, we have seen providers using POCs as another treatment source to get the patient oxygen therapy to treat COVID-19 and other patients.

[Operator Instructions] Our next question comes from Danielle Antalffy with SVB Leerink. Please proceed with your question.

Hey, guys. Good afternoon. Thank you so much for taking the question and giving the color that you have. My first question is around how to think about, first of all, on the business-to-business domestic, it looks like on a comp-adjusted basis, you did see some improvement/less bad declines, I guess, on a comp adjusted basis over the fourth quarter. So, it doesn't sound like you're talking about much of a COVID beneifit in the quarter, so it feels like that's more organic in nature. Is that the right way to think about that and anything you call out there that might have driven that growth? Are you seeing -- I don't think there is any seasonality in Q1, help us maybe understand what's driving that?

Yes. So, we did see some level of increased buying from the business-to-business partners because of the COVID-19 crisis. So, that certainly was part of the Q1 numbers there. Of course, in the first part of the quarter we were dealing with the component part shortages of the G5, which is why we were expecting muted B2B interest in the period, because they would wait for the G5 product instead of buying other products and putting it into their fleet. So, we didn't expect those orders to push until later in the quarter. But as the health emergency started evolving, we certainly saw providers wanting to increase their inventory levels and make sure that they have the supply in order to deal with COVID-19 and any potential increases in demand. And as I said earlier, we did see some level of buying from charitable organizations and hospitals. Those weren't material amount and it's really hard for us to break out a specific COVID-19 impact because really the buying was mostly through our existing provider partners, it was not through many new accounts.

Got it. Okay. Okay. And then my next question is on margins longer term, you saw a little bit -- this quarter with the business mix shift toward B2B business, I mean, how do we think about the long-term margin potential here, does it look any different as you think about the ramp in the shift to B2B versus D2C? I mean, help us sort of think about long-term margin potential. Thanks so much.

Yes, sure. So, as we've said, historically, our gross margins will fluctuate based on our mix of B2B versus direct-to-consumer. Direct-to-consumer is obviously a higher gross margin profile, also has a lot higher percentage of the sales and marketing costs associated with that business. And as you have more B2B, it has a lower gross margin profile, but also much lower operating expenses associated with it. So, we do expect those gross margins to fluctuate over time as our mix fluctuates. If D2C does become a lower portion of the total revenue profile, then certainly we would expect that to also impact our gross margins. Now, obviously, in the quarter, we were also impacted by the manufacturing inefficiencies with the component part shortages as well as G5 still being at a higher costs than the G3. We are making progress on the G5 costs, we still feel like by mid-year that we'll be at cost parity there and reducing COGS is really a top priority for us. So, we are focused on reducing our cost of goods sold, so we can continue to offset at least a portion of those gross margin headwinds. But it will be heavily mix dependent to drive what our actual gross margin comes out at.

Thank you so much.

Now, of course, I do want to mention on the rental side of the business, you continue to see improvement in gross margin there and that's something we're really proud of particularly as we're looking to add more rentals into the fleet and we do expect that to incrementally improve with the tailwinds associated with the lower rates -- the higher rates, excuse me, for the length of the COVID-19 PHE.

Thank you. At this time, I would like to turn the call back over to Mr. Scott Wilkinson for closing comments.

Thank you. While the COVID-19 PHE has placed all of us in unprecedented times, we are proud to be part of a solution that helps patients with respiratory disorders. Despite these immediate challenges, we continue to believe our future is bright and that portable oxygen concentrators will be the standard of care for oxygen therapy patients worldwide. Given our strong balance sheet, we believe we have the ability to weather the storm. And once the storm passes, we believe we can execute on our plan to deliver attractive revenue growth with improvements in operating leverage. With that, I would like to thank our employees for the extraordinary effort they make every day to take care of patients who require oxygen therapy. Thank you and have a good day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.