Q3 2020 Inogen Inc Earnings Call

Greetings and welcome to the Energen third quarter 2020 financial results Conference call.

This time all participants are in a listen only mode. A question and answer session will follow the presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note that this conference is being recorded.

I'll now turn the conference over to our host Matthew Pigeon head of Investor Relations. Thank you you may begin.

Thank you for participating in todays call joining me from Inogen is CEO, Scott Wilkinson, and CFO and co founder Ali Bauerlein.

Earlier today. In addition, released financial results for the third quarter of 2020. This earnings release in Energens corporate presentation are currently available in the Investor Relations section of the company's website at <unk>.

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 beyond expectations related to our operating expenses for the remainder of 2020 and 2021, our ability to create shareholder value by driving awareness of our product.

Products expectations regarding the international sales in tender activity sales expectations in our domestic sales channels, including expectations related to our rental channel.

Hiring expectations and expectations regarding our sales and marketing roles and related investments product development expectations expectations regarding reimbursement and regulatory changes, including competitive bidding our expectations regarding the market for our products the impact of the COVID-19 public health emergency or PHG.

On our business and demand for our products in both the short term and long term and Rds Gi program.

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 obligations to update these forward looking.

Statements, except as maybe required by law, we have posted historical financial statements and our investor presentations in the Investor Relations section of the company's web site. 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 the 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 Inogens core operating results management uses non-GAAP measures internally to understand manage and evaluate our business and making and make operating decisions right.

Affiliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release for future periods. We are 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 will turn the call over to Energens President.

CEO Scott Wilkinson Scott.

Thanks, Brad.

Good afternoon, and thank you for joining our third quarter 2020 conference call.

As previously discussed covered by 10 pandemic has had a significant impact worldwide and on our company and 2020.

And has continued to have a meaningful effect on our business throughout the third quarter of this year due to a substantial reduction in patient travel than activity outside of the home.

It was reduced consumer confidence.

In addition, we have seen physician offices in the U.S. and assessment centers in Europe, when a patient interactions that traditionally have led to new auction patient referrals.

Furthermore, our EPS your mi customers worldwide and their purchasing focused to stationary oxygen concentrators to treat 10 patients.

While also minimizing patient interaction, which includes replacing existing patient set ups with p. assays.

While these factors made for a challenging third quarter for our business. We saw total revenue and revenue for both domestic and international business to business channels growth sequentially from the second quarter of 2020.

Furthermore, we are pleased that our continued focus on our rental channel has produced strong operating performance worth rental revenue in the third quarter of 2020 growing both sequentially and versus the same period in the prior year.

While it is difficult to predict what impact the <unk> 10, P.H.G. will have for the remainder of 2020 and 2021.

Oxygen therapy is a key treatment for severe C O P D and other respiratory disorders and after the pandemic, we expect the need for long term oxygen therapy to normalize.

Before discussing our financial results in more detail I wanted to briefly give an update on the recently released Medicare traditional fee for service market data for the full year 20 might change.

And competitive bidding round 20 to 21.

Well, the Medicare information, how certain limitations when used to assemble a picture of the oxygen therapy market such as the absence of brand or manufacturer information. We believe that the information can serve to approximate the long term oxygen therapy market in the United States.

Based on the data side, we estimate that the share of portable oxygen concentrators in the traditional fee for service Medicare long term oxygen therapy market grew from 13.9% in 28, 10% to 18% and 2019.

However, this estimate does not include patient cash sales or private insurance transactions.

So we believe that this data from CMS may represent a conservative estimate of actual portable oxygen concentrator market penetration.

You will see is we're still the fastest growing modality and oxygen therapy based on the CMS data. We still believe this category has a significant growth opportunity ahead.

The data also showed a continued trend for a decreasing share of stationary concentrators transforming systems liquid systems and oxygen tanks.

Due to the trend of a higher percentage of patients receiving both stationery and ambulatory oxygen.

We have increased our estimate of target full penetration of total long term oxygen therapy patients using proceeds to be approximately 70%.

This is up from our prior estimate of 68% and it's based on our estimate that 90% of the ambulatory long term oxygen therapy patients for they served by Ptcs overtime.

In regards to competitive bidding round 2021 on October 27.

Yes announced the competitive bidding contracts that were scheduled to go into effect on January 1st 2021 will not be awarded for most product categories, including oxygen.

The payment amounts not achieving the expected savings and the current cold chain public health emergency.

We believe that not moving forward with competitive bidding round 2021 will increase beneficiary access and also remove uncertainty for all do you have any suppliers and we plan to continue to focus on driving PRC adoption through consumer and physician awareness and through our partners.

CMS also issued a proposed rule to establish payment amounts going forward for Demi post products and services covered under Medicare we've.

We believe that in Medicare rates will not change for the length of the PNG, except for the 2% Medicare sequestration will go back into effect on January 1st 2021.

And any not changed for inflation and budget neutrality adjustments, but typically occur annually each january but not yet been announced.

CMS is proposing to <unk> Medicare rates after the Phd at the 50 50 blended rates in the non contagious and rural areas as a permanent construct.

Medicare rates and all other areas would be set at the adjusted payment amount.

This would reduce Medicare rates after the P.H. is over and the current areas that are considered non world, but not covered by a former CBVA as those areas are currently receiving a 70 525 blended reimbursement rate.

There was a 60 day comment period on this proposed rule. So we expect this role to be finalized in the first quarter of 2021.

I would also like to note that we have recently published our first report on our environmental social and governance practices, which can be found in the Investor Relations section of the company's website.

We plan to continue to develop our yesterday program in future years.

With that I will now provide details around our third quarter 2020 revenue by channel.

We generated total revenue of $74.3 million, reflecting a decline of 19% compared to $91.8 million in the third quarter of 2019.

However, our third quarter of 2020 revenue was up 3.7% sequentially from the second quarter of 2020.

Domestic business to business sales in the third quarter of 2020 decreased 23.5% to $23.1 million compared to $30.1 million in the third quarter of 2019.

We were pleased to see that domestic business to business sales in the third quarter of 2020 were up 6.9% sequentially compared to the second quarter of 2020.

Especially given the uncertainty of the competitive bidding outcome in the quarter.

The decrease in domestic business to business sales in the third quarter of 2020 versus the comparative period and the prior year was primarily driven by reduced demand from resellers and our age of Mi providers for Pcs.

We believe this decrease demand was primarily due to competitive bidding uncertainty and the continued impact of the COVID-19, pitchy, including lower retail sales reduce patient travel.

Shouldn't offices is continuing to limit patient interactions that traditionally have led to new auction patient referrals h. mi providers minimizing replacement of existing auction patient setups with Pcs, so limit patient interactions.

And providers focusing on supplying stationary oxygen concentrators with higher flow characteristics to Threeq covered my 10 patients.

International business to business sales in the third quarter of 2020 decreased by 21.1% on an as reported basis and 23% on a constant currency basis to $14.6 million compared to $18.5 million in the third quarter of 2019.

The decrease was primarily driven by reduced operating capacity at certain European respiratory assessment centres due to the COVID-19 pandemic continued.

Continued tender delays in certain European markets and decreased sales in other markets, primarily Canada and Australia.

Sequentially International business to business sales in the third quarter of 2020 were up 5.1% compared to the second quarter of 2020.

We're also pleased to say that multiple tenders for the United Kingdom were resolved and service contracts for that were delivered in the third quarter of 2020, which are expected to take effect starting in the fourth quarter of 2020, and the first quarter of 2021.

Finally in the fourth quarter of 2020, we received confirmation that the Inogen one G. Five portable oxygen concentrator was cleared for reimbursement in France. So we expect our French customers to begin to purchase our latest and highest output PSC.

Direct to consumer sales decreased 22.7% to $29.2 million in the third quarter of 2020.

<unk> $37.8 million in the third quarter of 29 10.

We believe the decrease was primarily driven by the impacts of the COVID-19, P.H. young consumer travel and mobility in addition to lower consumer confidence.

Direct to consumer sales in the third quarter of 2020 were down 3.3% sequentially compared to the second quarter of 2020, primarily due to lower average sales representative headcount in the quarter, partially offset by improved sales rep productivity.

We expect minimal direct to consumer hiring in the fourth quarter of 2020 and plan to continue to focus on sales representative efficiencies, including improve sales rep productivity and lead utilization, while we monitor the impact of the COVID-19 pita chip.

Rental revenue in the third quarter of 2020 increased to $7.5 million from $5.4 million in the same period in the prior year, an increase of 40.1% primarily due to increased reimbursement rates and increase in patients on service higher billable patients as a percentage of.

Total patients on service and lower revenue adjustments.

We had approximately 29500 patients on service as of the end of the third quarter of 2020, which was up by 11.7% sequentially compared to the second quarter of 2020, as we made notable progress and using more of our direct to consumer generated leads for rental setups reduce paperwork requirements associated with.

The cobot my team <unk>, and increasing rentals across our position Salesforce.

We remain excited about our focus to drive new oxygen patient rentals, as we see meaningful patient interest in our products.

We continue to believe that the rental channel as an opportunity that should provide future revenue growth and stability as well as margin expansion through our overall business and we plan to continue to increase rental setups.

As I mentioned in our second quarter earnings release, I have decided to retire from the company by the end of 20 to 21 and as a result, the board of directors has initiated a process for finding a new chief Executive officer for antigen.

The board is continuing the search process and I remain committed to supporting antigen in this transition period as we continue to execute our initiatives to deliver innovative respiratory solutions to patients and homecare providers.

We believe we are a leader in plc technology with our product offerings that the market for our technology remains under penetrated.

We still see the PEO sees as the future for oxygen therapy worldwide as they provide increased freedom and independence for patients, while also decreasing service and delivery cost to providers.

In addition, PRC is provide a lower touch model compared to regular tank deliveries, which we believe is critical during the period of the COVID-19 pandemic and beyond.

Furthermore, while we worked relentlessly to optimize our operations with a focus on improving margins. We also plan to make investments in our business to drive long term revenue growth for our respiratory technologies and provide patients with best in class products and solutions for their respiratory needs.

Lastly, given where engine stands today and in spite of the challenges we are in the global economy have been facing we believe our strong cash cash equivalents and marketable securities of $220.5 million with no debt outstanding provides us with a certain level of stability and liquidity operate and b.

Adaptable during this unprecedented time.

With that I will now turn the call over to our CFO Ali Bauerlein Alley.

Thanks, Scott and good afternoon, everyone. During my prepared remarks, I will review, our third quarter 2020 financial performance.

As Scott noted total revenue for the third quarter of 2020, with 74.3 million, representing a decline of 19% from the third quarter 2019.

Turning to gross margin for the third quarter of 2020 total gross margin was 44.4% compared to 47.2% in the third quarter 2019.

Our sales revenue gross margin was 43.5% not third quarter at 2020 versus 48.2% in the same period of 2019.

The decrease in sales revenue gross margin in the comparative period was primarily due to lower average selling prices, particularly in our direct to consumer channel, where consumers bought product configurations with lower margin bundle and increased material and overhead costs per unit, partially offset by lower warranty expenses per unit.

Rental revenue gross margin increased to 52% in the third quarter of 2020 versus 31.5% in the third quarter of 2018.

Mainly due to higher Medicare reimbursement rate higher billable patients as a percent of total patients on service lower revenue adjustments and lower servicing and depreciation expense per patient on survey.

We believe a portion of the lower servicing expenses, maybe related to lower travel of our patient population due to the COVID-19, Phs, which may not recur in teaching parity.

As for operating expenses.

Total operating expenses decreased to 35 million in the third quarter of 2020 versus $35.2 million in the third quarter of 2019.

Primarily due to a reduction in advertising expenses, partially offset by an increase in intangible amortization.

Research and development expenses increased to 3.5 million in the third quarter of 2020 compared to $2.6 million in the third quarter of 2019.

Currently associated with $1 million of increased intangible amortization expense.

Sales and marketing expenses decreased to $22.9 million in the third quarter of 2020 versus 24 million in the comparative period of 2018.

Primarily due to decreased advertising expenditures of $7.7 million in the third quarter of 2020.

Compared to 9 million in the third quarter of 2018.

General and administrative expenses increased 8.6 million in the third quarter of 2020 versus 8.5 million in the third quarter and 2018, primarily due to higher personnel related expenses.

Really upset by lower legal and consulting expenses.

In addition, we adjusted point $3 million from the carriers that provide a relief fund payment received in the second quarter of 2020 to offset COVID-19, P.H.D. related costs incurred in the third quarter at 2020.

And if I had to general and administrative expenses and a reduction to lost revenues classified in other income.

And the third quarter of 2020, we generated an operating loss of $2 million adjusted EBITDA of 4.6 million and net loss of 1.7 million and loss per diluted common share of eight cents.

Now turning to guidance because of the unprecedented market uncertainties. We are still unable to provide guidance for the full year 2020 or 2021.

And the uncertain scope and duration of the Tobin 19, P.H.D., we are unable to estimate the impact on our financial results, including our revenue revenue mix net income or loss and adjusted EBITDA estimates for such period.

Well, we continue to look for ways to be cost efficient and also drive rental set ups to improve lead utilization. We do expect it to cope with 19 pandemic, we'll continue to have an adverse impact on our business in the fourth quarter of 2020 and that revenue in the fourth quarter at 2020 will be down compared to the third quarter of 2020.

Mainly due to the seasonality in our business and the impact of the COVID-19 P.H.D.

Well, we expect to COVID-19 pandemic and any potential for further prolonged lockdown would have a negative impact on our sales in those periods. We also believe it is prudent to make investments to broaden our product portfolio with the use of the recently acquired new era technology and also build the necessary infrastructure to support our increased focus.

On rental.

Given these investment initiatives, we expect increased operating expenses and the remainder of 2020 and 2021 that we believe will support future revenue growth.

In addition, while we expect to incur minimal expenses related to bonus and performance based stock compensation in 2020, we expect such costs to increase in 2021.

I also want to reiterate Scotts comments on our liquidity position, we believe our strong cash cash equivalents and marketable securities of $220.5 million with no debt outstanding as of September Thirtyth 2020 provides us the stability and liquidity necessary to operate during this time of uncertainty.

While providing the capital necessary to make investments and initiatives that will drive future growth.

With that we will be happy to take your questions.

Thank you.

At this time, we'll be conducting a question and answer session.

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Our first question comes from Robbie Marcus with JP Morgan. Please state your question.

Hi, this is actually low.

Hi, Thanks for taking the question I was wondering if you could give a little bit more detail on a trend that you've been seeing on a monthly basis.

Good thing continue to improve throughout the quarter or was that kind of disrupted by rising cases in the U.S. and elsewhere.

And if you could provide any detail in my you've been seeing in October and November as well that would be really helpful.

Yeah. Thanks, I'll I'll take that one and we tried to reflect a little bit of the answer in our prepared remarks, but let me let me go into a little more detail.

When we really got into the heart of the second quarter, our country and really most of the world whats going on to produce strong locked down you had shelter and place orders.

You know physicians were not seeing patients you know most restaurants closed nobody is certainly going on across the cruise ship and you know the decrease in travel you know in the world is pretty well chronicled and that that hit our business you know pretty hard we have a freedom and mobility product and a lot of the homecare providers turned there.

Focus to treat those acutely ill cobot patients tried to not touch the current patients and do the swap outs of PEO sees that they had been engaged in.

And as you know we've talked about on our retail side, while we still had strong leads and we were able to execute a considerable amount of retail sales.

You know people were very careful about spending money for a product that they're not able to use all the benefits, obviously <unk> not only reduced travel, but also you know just being stuck in their home and I think you have to realize there I'll remind you that that's particularly to oxygen patients because you've got a respiratory.

Pandemic and oxygen patients are particularly vulnerable vulnerable to a a disastrous outcome. If they were to contract covered my team.

So we saw that hit our business pretty hard in the second quarter.

Now in the third quarter, we did see a little bit the stabilization you know the variability within the quarter that you know.

You don't see on the outside we report by the whole quarter, but within the quarter. It was a lot more stable than the second quarter, which was which was a pretty difficult for our ops team to deal with the swings in demand.

And in addition, we started to see some growth sequentially that Rick you know that I think is a direct result of some of the easing of restrictions you know the shelter and place orders were relaxed restaurants started to open on a limited basis people that have just been stuck in our homes you know we're dying to go.

Outside of just go for a walk and get some fresh air and so certainly you know we saw improvements in our business in the <unk> in the third quarter versus the second quarter I think that's a reflection of the demand for our product and the place that it pays plays and I'm, particularly pleased with that I'll say on the domestic front because you still have the uncertainty throughout the.

Entire quarter of of competitive bidding and how that was going to be resolved.

Now as we look ahead in the fourth quarter, we've already got some signals that things could tighten up you know if you are watching the news you have seen that the UK you know, they're gonna tightened down for the next month.

France is doing the same thing and so you know that we expect will have a negative impact on our international business. You're also seeing the prevalence of cases go up in the United States here as we get into the fourth quarter and there was talk of you know what do we need to do to control bad and curb that and so you know these are.

Things that we think will be headwinds in the fourth quarter and while we would love to continue the trend of sequential growth. You know we have to acknowledge that those things are out there and there was those signals and that's you know that really leads to alleys comments. So we don't expect that our revenue in the fourth quarter would be higher than the third quarter.

And so that's the big driver you've also got to.

I'll say put him a pop that the fourth quarter is usually you know in normal times, just seasonally a slower time you know so that's part of it as well. So I think you'll see you know some impact I've said many times in the past. This does have a big negative impact on our business, but not nearly like the travel industry glad I'm not.

The CEO of one of the travel companies, but it does definitely have an impact negative way.

That's great. Thank you for all that detail I'm.

Just one quick follow up I think you previously mentioned that you relaunched the new era product a few months ago. So if you could share any updates on how that's been progressing and how significant of a revenue contribution that is right now.

Thank you.

Yeah, we actually started a limited launch at the very end of 29, <unk> and then you know at the beginning of this year and things progressed nicely and the limited launch.

But then covert at night 10 kind of smacked.

That just like it did our PSC business. So you know it's had a similar negative impact on that is it is it did on T. O sees.

We are continuing to market and sell the product that learn you know.

How it fits in the market in its current state, but it's not a material contribution right now at all I'd say, we're still in a learning phase with positioning of the right patient, but I would also like to remind everyone that the real exciting part of new era isn't the product in its current configuration than its current configuration. It.

Really hooked up to attack or stationary Concentrators and of course, you know our vision and our mission is to obsolete tax over the long term. So we're more excited about is actually integrating that into our PRC and other products in our product pipeline, that's more of a medium to longer term play.

That's that's where I think well, we'll deliver the real value from that technology is.

As in the innovation that lets us deliver in new products and integration into our PSC.

Great. Thank you.

Thank you. Our next question comes from Danielle Antalffy with SBB Leerink. Please state your question.

Hi, good afternoon, everyone. Thanks, so much for taking the question.

Just a quick question for you and it's about the long term kind of think about the long term mix of rental versus direct.

No you're seeing actually pretty decent growth I understand off a small base, but it seems like mark gross margins are a little bit better lately in the rental business. So does it make sense to more aggressively push to shift your rental longer term or how should we be thinking about that and then I just have one follow up.

Yeah, we're very pleased with the progress we've made in bench wells you know our gross margins a couple of years ago, We're really hit by the last round of competitive bidding.

And you know we had to focus on some up delivering some operational efficiencies to really make it attractive financially for US now you know alley reflected that our gross margins are now in the Fiftys I think our teams done a lot of great work, we do see that as a bigger part of our future you know it falls right in line with our goal.

As of driving efficiency and and margin expansion in the company. It gives us a better lead utilization a when we can use more of the leads for rentals and while I don't want to predict what mix it might be in the future. A I'll say, we are going to continue to pursue rentals the tough part.

At about rentals, though in the short term as far as its impact on the piano is you've got to <unk>. You know recognize that the rental revenue recognition is overtime and not upfront like a cash sale whether that be you know b to b or retail sale. So you had a a retail sale today you know it's at least a couple of thousand.

Dollars you out of rental today, and you know, it's a $100 plus this month, but then it's $100 next month in the next month in the next month. So as we continue to expand that rental base and build that annuity. It should have a meaningful contribution in future it'll be more meaningful as we go and it's certainly expands our market access by a lot.

Moving patients to use either Medicare or their insurance benefit to help pay for the product.

Well I don't want to make predictions about where we'll get you know where that number is land.

Because it's hard to predict mix over time.

I will say that you know when we did execute our IPO.

Back in 2014, and rental revenue was about 40% of our total revenue that so we've already been in a spot where it was a significant part of our revenue and of course that got knocked out with competitive bidding reimbursement cuts, but we've weathered that storm and you know we're ready to go go climbed that mountain <unk>.

Okay got it. Thanks, so much for that and then just specifically as it relates to the UK and I'm sorry. If you gave this in the prepared remarks and I missed it but what is that going to contribute in Q4, I imagine its relatively small, but you guys called it out in the press release. So just curious about what to expect and how to think about that contributing and.

Q4, and is that something that carries into 2021. Thanks so much.

Yeah, I I'd love to give you a number but I'll tell you upfront I'm I cat, it's just too big a wildcard, especially with it with the locked down in the UK here over the next month you know.

Were excited that at least these disputed tender some of them got resolved in you know a difficult time, you know as everything was kind of shut down in Europe, we kind of fear that nothing would move on that you know, it's probably not top of everyone's list to dust off or finish off resolve those tenders, but there was progress made.

Were you know contracts were awarded and people are ready to go execute.

Normally you know with that resolution in the third quarter you'd start to see those get fulfilled in the fourth quarter.

I think it'll probably get pushed out and I'm just kinda play of the odds here because of because of the shutdown in the UK, but I think that's probably going to push out more into the first quarter and it might even flow into the second quarter, just depending on how things go. Obviously you know these wild cards are a good reason why it's very difficult.

To give guidance right now because things change so quickly.

So I I it would be it would be wrong for me to just just speculate when we don't know for sure how it's going to go.

Thank you.

Just a reminder to ask a question press star one on your telephone keypad.

Our next question comes from Matthew Mishan with Keybanc. Please state your question.

Oh, good afternoon, guys. He's got this might be a little hard to estimate, but you got any sense of kind of where new patient volumes. There are new oxygen prescriptions are from the Doctor's office are as like a percentage of where they were pre coded.

And then how how far down is that and did that improve do you think that it improved threed hubris is to give.

Yeah, I'll I'll I'll give you some kind of wild numbers of what we've heard in the market and let me say that it varies by geography, you know obviously, there's some places that are hit harder in the U.S. and they have spikes and things tend to ebb and flow, but we've heard that things are in the 40% to 60% range.

As far as a capacity versus previous full capacity. So we're running about half throttle. That's what we've heard we've heard similar things in Europe.

You know in that 40 to 60 range are we.

We certainly heard that that got better in the third quarter as things tended to loosen up a little bit you know if I went back to the second quarter I would say you know that's probably less than 20%. So things didn't get a little better in the third quarter or fourth quarters, you know kind of a wildcard here seeing how things go I think given the.

The shutdowns in the UK and France that I mentioned in my prepared remarks.

I would say pretty solid bet that it's you know it's going to go south as far as the percentage of assessment centers that are open in the fourth quarter versus the third quarter, because they've said, we're tightening up in the U.S. don't know that we'll have to wait and see but like I said, we've heard 40% to 60% is where things are running that's kinda.

We have an average across across the country.

Okay. Thank you. Thank you for the color there and then it doesn't I'm just trying to understand the rental customer versus versus the DTC sale, how incremental is that or if there's some level of cannibalization that that's good that's going on between the two.

Yeah, I'll take that one so certainly when a patient call them, they're just responding to our advertisement for appeals see they're not necessarily thinking about using that Medicare benefits versus paying for cash. So when somebody calls then based on our criteria of the number of mine.

Its remaining and what insurance coverage they have that determines whether they're eligible for it to come onto our rental service for a PSC or whether they're only opportunity is to buy for cash. So say for example, somebody has already been on oxygen 30 month, they only have six months remaining.

Oh, they are benefit Ah, we wouldn't bring them onto our service roles to only get six additional months of reimbursement. So we do have a cut off its applied to all patients and then of course, we don't have a significant amount of private insurance contracts. So the depending.

On whether they have out of network benefit that would be reviewed to determine you know if they qualify for rental or sale.

So that's a critical part of the decision making is the number of modest and then what product. They are interested in that GE for energy five products.

Our latest two products are only available for a cash sale and the G. Three product is available under rentals, so depending on how important the characteristics on patient preference that also drives the patient decision to buy versus versus rent the product using there.

Insurance benefit.

So certainly as we've seen with the the Tobin 19, P.H.D. the willingness to pay has been reduced from consumers for a cash option and so.

And that's been impacted both just by their frequency of travel and meeting their home as well as just consumer confidence. So that certainly has had an impact and produce the close right now as you can imagine on.

If somebody spending over $2000 to add people see that close rate is lower than somebody who can use their insurance benefits and actually get it under under Medicare and for their care and it only being responsible for a 20% coinsurance. So we.

With our shift to rental if somebody qualifies for rental services. They are more likely to choose a rental as a lower cost option than purchasing for cash but of course, those that want the latest and greatest products I still have that ability to upgrade and pay out of pocket.

So there is some level cannibalization as we shift that criteria, but the close rate on rental is significantly higher than a cash sale close rate. So you make it up from a close rate perspective in a significantly.

But again its stock are you mentioned you don't see that immediately translate to rentals, but you can certainly see it in our rental patient roles and see we added over 3000 rental patients on to our rental roll. This quarter. So you know we significantly increased that plan.

Continued to do that in the short term at least and we think it's a great way to provide access to the product in these challenging times, we know patients have a high preference for Pcs and want them if they qualify for them and so we're happy to do that.

Uh huh.

You know increased adoption of our technology.

Okay excellent. Thank you.

Thank you.

And our next question comes from Mike Matson with Needham and company. Please state your question.

Yeah, Thanks for taking my questions.

I apologize if you've already gone through this I joined the call little late but I did see the commentary about the cells a representative head count.

Being down in the quarter I just wanted to ask what was that driven by.

Involuntary moves voluntary moves or something else.

Yes, I'll take that one so.

First of all on a year over year basis, our headcount our average headcount was still up about 8% in the third quarter of 2020 versus the third quarter of 2019, so that.

That was actually a tailwind in that period, but as we said on the call I. It was down sequentially from the second quarter as as I know you know there is Ah you know attrition in our business, we have sounds right sleeve.

Because we didnt minimal hiring in the quarter that was the reason for the sequential decline in <unk> in total headcount as we're continuing to be cautious in the you know Kobe time, expanding sales capacity too much.

In terms of the split between voluntary and involuntary more were associated with you know.

Choosing that the person you know wasn't performing I would say that our level of turnover in the quarter was not out of line with previous quarters on that.

In terms of the size of the number of termination. So I wouldn't say that it was outside but certainly just because of the natural attrition in the sales force it was down a bit from the second quarter.

Okay. Thanks, and then with the international tenders resolved what does that.

What sort of impact do you think that could have on your international growth. I mean is it possible we could see see that business returned to growth as far as like that or is it not that meaningful.

Well, we certainly are pretty cautious there obviously, we didn't give specific guidance on the international side or the business, especially given the recent locked down so we've seen in parts of Europe, but certainly this is something that is an enhancement if they can execute those tender.

<unk> in the quarter and with the Lockdowns were not frankly sure if they will be able to and whether that will transition.

2021, so that's not something that we think it should be factored into models for the fourth quarter.

Okay. Thanks, and then just.

Yeah good.

Claire.

Okay, and you're still sitting on quite a bit of cash. So would you be open to doing and doing an acquisition in this environment, especially but Scott.

Definitely stepping down at some point or is that something that maybe sort of on hold until things stabilize and you get a new CEO.

It's a it's a good question, Mike and I'll say and we've said this in the past as well.

If it's the right match.

You know then we wouldn't necessarily shy away because you know its a pandemic or were you know I'm going to retire it's all about being in the right match and you know there's a lot of people that are involved in assessing if that's the right match right. It's our it's our whole management team as well as our board of directors. So its all up.

Got the match I think we are as I said, we're in a great position to from a cash standpoint that if the right. One did come along you know we would investigated it wouldn't be de facto just thrown out because of the environment that we're in but but it's going to go under the usual scrutiny of it's got to we've got to believe collectively as a board and management.

That it's it's the right thing and it's a great match.

Okay, great. Thank you.

Thank you and next question comes from Margaret Kasler with William Blair. Please your question.

Margaret because all your line is open.

Can you guys hear me.

Yes, yes, perfect sorry about that.

[laughter]. Good afternoon, guys I, just wanted to follow up a little bit about competitive bidding and I know you provided some commentary, but it wasn't clear to me whether you saw that it would go past the P.H.D. you know towards the three year time horizon, a and then get rebuilt after that are potentially you know would it be a short term change and.

Ultimately the question becomes you know what does this do trade you need to bad on the short term and then kind of over.

Not necessarily 21, but you know what I mean, the next few quarters.

Yeah, Yeah, it's a great question and I there still is some level of uncertainty on exactly what they're going to do going forward with the competitive bidding program as.

As you saw in our you know kind of prepared remarks.

You know they decided not to move forward with competitive bidding both because of the COVID-19, P.H.D. as well as the fact that they didn't see the expected savings in the product categories for 13 of the 15 product category. So that is very telling and that you know the bidding program.

Ram is an expensive administrative burden for the government to go through and if they're not going to see the expected savings will they go forward the future round when will they decide that it's appropriate time to to build it out again, and we frankly don't know, but I would expect.

That we'll.

We'll have these rates in place for at least a couple of years just in the sense that it takes some time to go through a bidding process again, if you remember we bid last last September so it's been over a year before they announced what they were going to do with the program.

And of course, there was a notice period before the bidding window, even opened so these bidding processes do take a significant amount of time before they can implement than we do think that this is a good sign though that the rate has likely bottomed.

And that there isn't a significant risk of additional reductions going forward and this also allows all providers to play in the sandbox. So we shouldn't have access issues, but we know happens when there are reduced suppliers.

Across a with competitive bidding I also think it's a good thing that they maintain the higher rural rate, but there is a little bit of uncertainty with the new proposed rule of exactly how they'll roll it roll it in for the other areas and of course the areas that are currently.

Oh.

70, 525 blended rate would see a reduction down to the 100% of the adjusted payment amount. What we're really focused on though is you know driving patient and physician awareness of PEO sees and if rentals is the right access point doing that ourselves.

Or through our partners to get bought adoption rate up and so we think that this allows us the flexibility to continue to do that with with both our own rentals as well as as well as our partners and you know kind of create that rental.

Rental annuity overtime.

Okay Yeah.

No I appreciate that.

The commentary as [laughter] I'm, sorry to bring it back to it to me budgets, but.

This is one thing to think about and how have H. me budgets responded to the pandemic and potentially does that change that demand you know as we go forward because maybe they don't have kind of the cash or the capital they need to be able to invest in peak season is that a risk for you guys or just kind of business as usual.

Yes, I think over the long term Margaret things don't change, we've certainly absolutely, saying in the short term that budgets have been shifted to try and acquire as many stationary concentrators as possible because you know higher flow continuous flow as a primary treatment for COVID-19 patients so no.

Question, the short term budgets have shifted a in the long term you know we don't see our opportunity changing if you look out into the future. It's not clear when the pandemics kind of passed but eventually it will pass and you know a PEO sees but just have so many advantages over.

Sure you know tanks and the delivery model to to me and you know our team. There's no question, they're going to dominate in the future might this slow down adoption a little bit you know through the pandemic yeah, absolutely I mean, we've seen that reflected in our sales as the market leader that and you know that people have shifted their focus in the short term but.

Long term opportunity.

Is unchanged for us.

Okay, and I know you guys aren't trying to to go to 2021, but that's the question anyway, Yeah. Yeah wasn't let's say that we do get a vaccine in the spring time or the summer time, Oh, yeah, what's the outlook for the various business segments at that point to things. You know you think immediately open up front of patient assessment side or will it be more.

Well that you know if you guys can provide any commentary in terms of where the street estimates are relative to your own expectations, if they're aggressive or not to be even better. Thanks.

Thanks, guys.

Sure I'll keep it pretty high levels since we aren't giving guidance today on 2021, just given that we do see a lot of variability in the scenarios and how this could play out both in the U.S. and in Europe, which are our two primary markets.

And and certainly you know, how we get to a vaccine and what the consumer confidence is at that time, how the economy's doing those all have impacts on our business and and frankly patients' willingness to get back to traveling that they feel safe enough to be able to.

Return to travel as Scott mentioned these patients are already having underlying health conditions with C. O P D and so they they are more risk adverse than the average spot average person and so I think all of that plays into it. So it's not just you know on the magic.

They did a vaccine is available all of a sudden the markets open I think it is Ah that's a starting point for a gradual return now I wouldn't say that you know clearly these patients need oxygen and the fact that they are all getting the treatments that they need at this point because of the pandemic.

Theres only so long that you can hold off on that but people can choose to say all right I'm going to stay home. So for now tanks are okay, and that's why we really are focused on increasing rentals, because we know that there still is strong patient preference for PEO sees but.

There may not be a willingness or ability to pay oh.

Crop that the patient population.

So that's really our lever that we can pull short term. So you know I would expect you know looking across the four segments that rental revenue is where we have I think the most control and the most ability to execute there in these challenging times. So I would expect that to continue to.

To be outperforming versus the other segments.

And you know looking at the domestic B to B channel obviously, they still have the continued challenges they've had for years restructuring their business and as you know from.

Moving locations and trucks and drivers.

So while they now have don't have the competitive bidding overhang or are they still have challenges now we do think that there will be providers, who will see the benefits appears sees see this as an opportunity for them to continue to grow their businesses and grow their rental roles in these uncertain times and he said.

So that those people will will grow their businesses and want to use our plc to do it. So we see those as opportunities, but you know the exact timing of that and how that will roll out a you know we're not going to put a prediction on that today you know in Europe most of the.

Focus is with the large cap companies and and large accounts over there that's where the majority of the business is and you know there it will really be down to the assessment centers the flow of new patients and you know their their focus on p.

Sees an ambulatory solution versus servicing corporate banking page.

Okay. Thanks, very much guys.

Thank you there are no further questions at this time I'll turn it back to management for closing remarks.

Okay. Thank you.

The COVID-19, P.H. is place all of us in unprecedented times and we continue to respond by making sure. We are part of the solution that helps patients with respiratory disorders, while also keeping our employees healthy and say well.

Well the COVID-19, PHG has created a challenging impact on our financial performance given our strong balance sheet. We believe we have the ability to continue to execute on our plan to deliver attractive revenue growth with improvements in operating leverage long term.

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 all of you for your time today.

Thank you. This concludes today's conference all parties may disconnect have a good day.