Welcome to Inogen's 2021 Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today. Please stand by for one moment, as we bring the speakers through. Thank you. Thank you, ladies and gentlemen. And with that, I will now turn the call over to our host, Jason Somer, General Counsel. Please go ahead.

Hi. Sorry, we're having a little bit of technical difficulties here. So we're on a cell phone. Hopefully, everyone can hear us. We're going to try and reconnect at some point. But again for now we're just -- we're going to be on the cell phone. Well, with that thank you for participating on today's call. Joining me are Inogen's CEO, Nabil Shabshab; and our CFO, Mike Sergesketter. Earlier today, Inogen released financial results for the fourth quarter of 2021. This earnings release and Inogen's corporate presentation are currently available in 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 2022 and beyond; expectations related to our financial results for the first quarter and full year of 2022; our expectations with respect to supply challenges and cost inflation related to semiconductor chips, using our batteries and concentrators; our expectations of European regulatory clearances and related impact on our international sales; our ability to create shareholder value by driving awareness of our products; expectations regarding our international and domestic sales channels; expectations related to our rental channel; expectations related to our prescriber sales organization, including the expansion of the sales team and implementation of health care intelligence platforms and tools through our partnership with Ashfield Healthcare, LLC; hiring expectations; expectations regarding reimbursement and regulatory changes; our expectations regarding the market for our products and the impact of COVID-19 pandemic on our business of supply and demand for our products in both the short and long-term. The 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 they may be required by law. We have posted historical financial statements on our investor presentations in the Investor Relations section of the company's website. Please refer to these files for more detailed information. Also, during the call, we will present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. 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 U.S. GAAP and non-GAAP results are presented in tables within our earnings release. With that, I'll turn the call over to Inogen's President and CEO, Nabil Shabshab. Nabil?

Thanks, Jason. Good afternoon and thank you for joining our fourth quarter 2021 conference call. We have made steady progress on the execution of our strategy to expand and effectively increase our sales footprint, while driving the productivity of our commercial operations. We also continue to make progress in mitigating the supply chain challenges in order to meet the market demand and we are investing in R&D and clinical, while strengthening other critical capabilities in support of short-term growth, while setting us up for long-term sustainable and year-over growth in profitability. A few months back, we announced an important new partnership with Ashfield, our contract sales organization to effectively advance our prescriber growth strategy. And we have made significant progress ahead of plan in terms of training and deploying the additional sales representatives and enhancing the operating model. In addition to enhancing our overall commercial excellence, we successfully executed the price increase in September 2021 that primarily offset the cost of inflation associated with the industry-wide limited semiconductor chip availability. Turning to the fourth quarter results, we saw total revenue growth of 3.3% from the fourth quarter of 2020, primarily driven by improved average selling prices, sustained demand and the reduced impact of the COVID-19 pandemic and related Public Health Emergency or PHE versus the comparative period in the prior year which was partially offset by supply chain constraints, that primarily limited sales in our domestic business-to-business channel. This was in line with the midpoint of our preliminary un-audited revenue estimates provided on the January 10th 2022 and the results for each revenue channel reported were in line with those estimates as well. With ongoing supply chain constraints and while attempting to fulfill critical orders for our domestic business-to-business partners we intentionally focus our available capacity on supplying our direct-to-consumer…

Thank you, Nabil. As Nabil noted, total revenue for the fourth quarter of 2021 was $76.4 million, representing an increase of 3.3% over the comparative period in 2020. Turning to gross margin. For the fourth quarter of 2021, total gross margin was 50.5% compared to 46% in the fourth quarter of 2020. Our sales revenue gross margin increased to 49.2% in the fourth quarter of 2021 versus 44.5% in the same period of 2020. The increase was primarily due to higher average selling prices and decreased mix of domestic business-to-business sales, which have a lower gross margin than direct-to-consumer and international sales. The increase was partially offset by higher cost of goods sold per unit in the quarter, primarily due to higher material, labor, and overhead costs. The fourth quarter of 2021 included $2.3 million of higher material costs associated with open market purchases of semiconductor chips used in our batteries and POCs, which represents approximately 360 basis points of gross margin. This cost is lower than our previous expectation of $4.1 million to $6.1 million of higher cost of goods sold in the fourth quarter of 2021 for open market purchases of semiconductor chips due to the timing of usage of chips purchased. Rental revenues gross margin increased to 56.8% in the fourth quarter of 2021 versus 56.5% in the fourth quarter of 2020, primarily due to higher Medicare reimbursement rates, higher billable patients as a percent of total patients on service, and lower service expense for patient on service, partially offset by higher depreciation expense per patient on service. As for operating expense, the total operating expense increased to $45.3 million in the fourth quarter of 2021 versus $39.6 million in the fourth quarter of 2020, primarily due to increased personnel-related expense and consulting expense, partially offset by…

Thank you, sir. [Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan. Please go ahead.

Great. Congrats on the quarter. I wanted to ask there's a lot of moving pieces in 2022 and I do really appreciate the mid single-digit sales growth over 2021. But maybe you could walk us through the different moving pieces and how to think about the components of each of the businesses just given there's -- with Europe and the B2B there's a lot of ups and downs through the year. So I think that would be a great place to start.

Yes. Thank you, Robbie. Thanks for the question. So as I maybe let me take a step back and say that the good thing is the underlying demand that we see is very sustainable in Europe which is a good thing. As you can tell from the prepared comments that there is a supply situation that still is lingering over our performance. With that said, we feel confident that with the channel mix that we have planned for and will execute around, that will get to that mid-single-digit growth. As expected, of course, we're going to be focused on prioritizing where we get the highest revenue and margin, not too dissimilar from 2021, but we hope with the improved supply situation we’ll be able to also serve the needs of the B2B domestic channel a little bit better than what we've done in 2021.

Got it. And how do you think the current HME -- the health of the HMEs are in the U.S.? Do you think once you get supply back online that there'll be a willingness to go out and buy Inogen POCs or do you foresee more of DTC and rental as the biggest drivers going forward? Thanks.

Yes. Maybe, let me make a comment first on the HME. I think there is an understanding that, what we're trying to do as a company in terms of the prioritization of the channel is only expected, everybody would behave the same way if they were running their own business. So despite the fact that there is some, maybe, uncertainty around us supplying the HME business, there is some understanding to the fact of why we're doing it. Now with that said, we continue to see orders that are in the system. They're not being canceled. We get also additional orders as an indication that, also that supply is constrained all around, Robbie. So it's not only us. And we believe that most of that will remain in place as supplies come back online. But we -- that's a normal part of the uncertainty that we're all leaning through, but we believe that most of it will stay in place.

Great. If I could just slip one more question in. With the first quarter guide below consensus, how do you get confidence in mid-single-digit growth for the full year, if there's still going to be some supply issues at different points during the year? And that's it for me. Thanks.

Yes. No, thank you, Robbie. So I think, despite the fact that the first quarter was a little bit lower, we believe that, from the visibility we have in terms of supply chain, as well as our ability to ramp up production the second half, of course, of the year is going to be stronger than the first half of the year, giving us that confidence that, for us to, at least at a high level, indicate where we believe the growth rates are going to land.

Great. Thanks a lot.

Okay, Robbie.

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

Hey, Matt.

Hey, guys. This is actually Brett on today for Matt.

Hey, Brett.

Just a couple of questions. Hey, Thanks, Nabil. How are you? Just a couple of questions from us today. I just wanted to start with gross margin. The 50% number seems pretty positive in 4Q and with the understanding some of the supply chain cost seems to be increasing and other moving pieces. Just how would you be thinking about gross margins directionally in 1Q versus 4Q? And then also, just touching on the cadence for the rest of 2022 as we sit here today?

Yes. This is Mike. As you think about gross margin, because we talked about what we expect in Q1 in terms of top line and we also put a number out there in terms of what we expect the supply chain premiums that we're going to be absorbing in Q1. And so if you think in terms of -- we've had pretty good gross margins in Q4. Obviously, they were propped up a little bit by the price increase and a little lower material cost effect than we had planned in the quarter, so we came in higher, higher than we thought we would. And so I think as you look at Q1 you have to kind of factor in the fact that we're going to have about double the amount of PPV that's going to be flowing through our financials similar revenue. And I think that can get you pretty close probably to a number in terms of what to expect for Q1. Now, if you think about the full year, obviously, we're going to be ramping up, we think in the back half of the year. And we expect things to improve in the back half of the year around supply chain, as we see some more normalcy coming back to supply chain. So we would hope that, as we move through the year, we'll continue to see improvement in our gross margins from that low point in Q1.

All right. And then, just a little bit of a bigger picture question here. And I appreciate this could be a little bit tough to answer, but do you guys have a sense of what underlying demand might look like if not for the supply chain constraints? And what upside to the initial mid-single-digit growth guidance could be in more of a normalized environment?

Yes. So Brett, I'm going to take that. So if I look at underlying demand, I have to characterize it in two senses. One is, are we continuing to see the demand in the cash channel and the cash sales as well as in the orders that we received from B2B. And the answer is, we're seeing steady demand from both those channels, be it B2B in Europe or B2B in the US as well as our own DTC. So there's not a significant concern that might flag so far that the underlying demand is weakening. The other side or the other list that I look at is also, we don't believe, to our knowledge that there is any major reduction in prescription as a result of diagnosis and prescription rates. Nothing that we have been able to see or determined so far. So that's the other angle that says that the underlying demand seems to be steady and healthy. I'm not going to make a comment on saying it's increasing, but it's actually steady as we go through the earlier part of 2022.

All right. Totally fair. And then last question for me today. Just thinking about capital allocation for 2022, what would you consider your biggest priority is at this stage? And how would you characterize the current pipeline for potential acquisitions maybe relative to a year ago? Thank you very much for taking the questions.

Yes. So Brett, I'm going to say the priority is we have a growth strategy. We're going to make sure that we fund that growth strategy. We believe that's one of the best returns we can give back to our shareholders. But with that said, as you know and as you can see from our balance sheet that we have the ability to continue to look for an acceleration of our growth rates if we happen to find the right inorganic play through M&A, so that would be part of it. And of course, as you can see, now we're funding some of the increases in our cost bases from the cash that we have. We believe the balance between the three things, meaning we're doing some investments like we said in multiple areas, we are actually overcoming some of the challenges from the cost increases as well as we are constantly engaged in dialogue around potentially finding the M&A acceleration that we would hope to get to in the future. So, three ways but we're in a good place in terms of the cash on hand to be able to do all of them at the same time.

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

Hey, guys. This is Maggie on for Margaret today. I wanted to ask a question on the physician sales force. So you guys have added several new reps to the physician sales force in the first quarter alone. So how long does it take these reps to ramp? And then when do you expect these reps to be fully productive? And do you think we can see material impacts to the top line this year from these reps?

Hey Maggie, it's Nabil. How are you doing? So, great question. So first I think with the new -- not only the additional salespeople but the insights behind them in terms of the sales tools as well as the data-driven insights we're providing as well as the operating model in terms of giving people the productive time back. So they're not doing administrative work. They're focused on selling. We definitely believe that we'll see a faster ramp to productivity. The ramp before used to be 12 to 16 months more trending towards the end. Well, I'm not going to make a comment on how do we expect that ramp to be, but we expect it to be shorter than we've seen before with higher productivity also based on the back end of it.

Okay, great. Thank you. You guys talked about the level of investments you've made in 2021 and plan to make in 2022 beginning to see impacts in 2023. So I know it's still early but assuming that you'll have an improving supply backdrop, is it reasonable to assume that you guys could begin to see high single digits to double-digit growth? Thank you.

By when? Is it -- you're asking by 2023?

Yes, by 2023.

Yes. We believe that within the coming couple of years, we will be back to that level of double-digit growth as well as returning to profitability, Maggie.

Okay. Great. Thank you.

You’re welcome. Thank you.

Our next question comes from Mathew Blackman with Stifel. Please go ahead.

Good afternoon, everybody. Thanks for taking my question. Just a couple. Maybe to start on guidance if you're willing to share that single-digit revenue growth you're expecting for 2022 is there any way to parse that between price and volume? And then a couple of follow-ups.

It's Nabil. At this point, in time we're not going to parse them out. I think the good news is we've got the ability to successfully execute on a price increase. And because of the fact that supply is the issue here we'd rather not answer that question now because the supply strengthens and the ratio would change significantly between where we're sourcing that revenue growth from.

Fair enough. And then another one on the guidance, I just want to clarify the way it read in the press release and I apologize if you expanded on it in the prepared remarks but it sounds like for the full year you're expecting positive adjusted EBITDA. Am I reading that correctly? While in the first quarter for the full year it's supposed to be positive?

Yeah, that's what we were signaling in the press release. Absolutely. Yes.

Okay. I appreciate that. And then my final question Nabil and I apologize again. There's a lot of moving parts. Particularly in Europe you're obviously doing a lot of things there. But is the sort of takeaway message is you're not expecting to see material disruption in the business? Is that sort of the take? Obviously there's a lot of different initiatives you've got in place. But is that sort of the bottom line takeaway? I would assume so because you wouldn't be able to grow mid-single digits if you were going to lose substantial revenues in Europe. But I just want to clarify that that should be the take?

Yeah it's a great question Mat. So let me maybe answer it in a two-part answer. One is we believe that the existing orders that were in the system because there is backlog a little bit in Europe also like here we can meet the existing orders with our ability to assert the NDD registration ship product before May 18. So that component, I would say affirmatively like you read it. Of course, we have also applied for the MDR certificate. And to our knowledge as you heard in the prepared remarks we feel that it will be cleared in time for longer-term operations. But I can sit here and say they don't have a huge backlog or there will be some questions that might come back. But we feel if you ask me today I think that we'll get that back on track in terms of the MDR certificate issued on time for us not to have major disruption, but I'm not going to take it off the table altogether.

Okay. But does that mid-single digit – Go ahead sorry. I was going to ask if – go ahead Nabil. I apologize.

No, no, no. Not material enough. Go ahead.

I was just going to ask, if that mid-single digit which I assume is like 4% to 6% is there some cushion in there to give you a little bit of flex in case things take a little bit longer? I'm just trying to get a sense of what's baked into that mid-single-digit guide.

We're not going to answer that right?

Doesn't mean I can't ask but no I...

We realize that now but of course. We'll see you later today.

Fair enough. Thank you. Appreciate it.

Okay. Thank you.

Thank you. And there are no further questions at this time. So I'll turn the floor back to Mr. Shabshab for closing remarks. Thank you.

Okay. So while the short-term outlook is impacted by certain supply constraints we are proud of the actions, we have taken to make structural improvements in our business, including a stronger commercial organization a more robust innovation pipeline and to support our market development efforts. I remain confident in our ability to advance Inogen to a global market leader with innovative evidence-based chronic respiratory care solutions with long-term sustainable revenue growth and profitability. Thank you for the time today, and we look forward to engaging in conversations with all of you. Thank you.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.