Apria, Inc. (APR) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon, and welcome to Apria's Second Quarter 2021 Earnings Conference Call and Webcast. . Please note that this event is being recorded. Leading today's call are Dan Starck, Chief Executive Officer; and Debby Morris, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be making forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements can be found in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2020, as supplemented by Apria's quarterly report on Form 10-Q for the period ending June 30, 2021, which is expected to be filed later today. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the Investor Section of the company's website at www.apria.com. With that, I'd like to turn the call over to Apria's CEO, Dan Starck. Please go ahead.
Dan Starck: Thank you, operator. Welcome, and thank you all for joining us this afternoon to discuss our second quarter 2021 earnings results. I'm joined today by Debby Morris, our Chief Financial Officer. I'll begin my remarks with some high-level comments on our results from the quarter and context around our activities and Debby will provide a more detailed review of the financials later on the call. We delivered a strong second quarter continuing to build on the momentum from the first quarter and delivering financial results ahead of our expectations on all three of our key metrics. Second quarter revenue grew to $286.3 million, a 6.4% increase over Q2, 2020. Adjusted EBITDA grew to $64.4 million, a 15.5% increase over Q2, 2020. And our adjusted EBITDA less patient equipment CapEx grew to $44.1 million, a 2.2% increase over Q2, 2020. Our performance during the first half of 2021 is reflective of continued recovery in new patient volumes as a more normal patient flow returns to the healthcare system, and our Apria team performing at a high level overcoming the challenges we've all been faced with over the past 15 months. I'm proud of the entire Apria team. We have executed at a high level on the plan we laid out and expect to continue to execute at a high level in the future. I'll spend the bulk of my time today sharing some updates on priorities, operating efficiencies, some recent M&A activity, and of course, some external issues that have been a large focus over the last couple of months. First and foremost, increasing our organic growth rate has been a top priority. We realized the 6.4% year-over-year total revenue growth in the second quarter which is ahead of where we thought we would be in the progression. Now albeit Q2 of 2020 was the first full quarter of the COVID impact. In Q2, 2021 new patient volumes were strong as a more normal patient flow continued to return to the healthcare system. Our new patient starts on oxygen remained elevated above historical run rates and new sleep patient volumes ran above pre-pandemic levels while ventilation and negative pressure wound therapy were at or near pre-pandemic levels. Our sleep resupply business continued at strong performance and we began to see increasing levels in the other equipment category as we progress through Q2. We view the consistent volume growth as a very positive sign. Although we are not without challenges. The challenge that has recently emerged and most are aware of is the Philips Respironics product recall. In June, Philips announced the voluntary recall for continuous and non-continuous ventilators. Certain C-PAP bilevel positive airway pressure and ventilator devices related to polyurethane foam used in those devices. The Food and Drug Administration has since identified this as a class one recall. The most serious category of recall. The recall instructed CPAP and BiPAP patients to discontinue use of their device and consult with their physicians to determine the benefits of continuing therapy and potential risks. For ventilation patients the recall instructed patients do not discontinue their use of the device and to consult with their physician to determine the most appropriate next steps. Thus far, despite the recall, we have not experienced significant amounts of patients stopping the therapy, either CPAP, BiPAP or ventilation, although that could increase over the duration of the recall. Our customer service teams have done an excellent job working with patients and physicians to manage this complex process. The recall did not have a material adverse impact on our consolidated operating results for the six months ended June 30 2021. As you can imagine, the recall has generated significant disruption in the market and will create a situation where demand for devices CPAP, BiPAP and ventilators will likely exceed supply for a period of time due to the substantial market share that Philips possessed. To add more difficulty to the situation manufacturers are facing component shortages as a result of COVID thus negatively impacting device production capacity. We are monitoring the supply chain closely as well as exploring opportunities with other manufacturers for supply of devices. As I said earlier, in Q2 we did not experience any material effect from the recall on our business. And while the situation could be somewhat temporary in nature, the duration of the recall and the supply constraint devices is likely to impact us in Q3 and Q4. Continuing with growth, we have been clear that our intent is to grow organically and supplement our growth with strategic acquisitions. Earlier today, in conjunction with second quarter earnings, we announced the definitive agreement to acquire Airway breathing company, a provider of respiratory care services, sleep equipment and supplies, and DME serving patients in the Hampton Roads region, Charlottesville, and Richmond, Virginia. Airway is a strong competitor in Virginia. And we believe it fits squarely with our goal of acquiring strong local competitors that will enable us to build share in specific markets. As mentioned, Airway breathing company has strong presence in attractive Virginia markets, and strong relationships with the local healthcare systems. We expect the Airway breathing company acquisition to close before the end of the third quarter of this year. More broadly on M&A. We continue to have a robust active pipeline, and our M&A team continues to look for opportunistic deals of varying size. And while we take a diligent measured approach we expect to see more strategic opportunities arise throughout the remainder of the year. Lastly, I'll proactively address our Kaiser Permanente status. I've said before and I'll reiterate, we have a long standing and very strong relationship with Kaiser. In fact, earlier today Apria was recognized as an exemplary partner to Kaiser Permanente in the COVID-19 response. Specific to our contractual relationship our long standing agreement contains an auto renewal feature that was executed in early July. We also continue to work toward the successor agreement which we expect will add multiple years to the Kaiser Permanente Apria relationship. Turning to our operational execution earlier this year, we laid out some growth objectives and as discussed earlier, we've executed well on those objectives. We also continue to execute on operating efficiencies and leveraging our cost structure. As we've experienced the return of higher patient volumes and the subsequent revenue growth, we continue to leverage our cost structure and lower our SD&A as a percent of net revenue. Leveraging technology also continues to be a theme of ours. We continue to invest in technology in order to improve our operating efficiencies whether through telehealth moving to paperless processing, or through automating manual steps of our revenue cycle management processes. Each advancement drives incremental value to the company and allows us to continue to increase our productivity and throughput. Prior to turning the call over to Debby. I'd also like to share a quick update with respect to the current regulatory environment. Since our last call, we've received more clarity around a few aspects of the interim regulatory environment modifications that exists today due to the COVID-19 pandemic. First, the public health emergency has been extended through the end of October. As discussed before, the PHE provides an interim price increase for Medicare patients in the non-bid non-rural areas of the country and keeps intact the 50/50 blended rate in the rural areas of the country. While the PHE extension was largely expected, the extension still need to go through the mandatory process and this is done in 90 day increments. In early July, Medicare issued a revised national coverage determination for oxygen that would expand home oxygen coverage and potentially reduce some of the administrative burden. The NCD still needs to go through the comment period. However, on the surface, it appears it could be positive for Medicare beneficiaries and the DME industry. As a reminder, the suspension of sequestration was extended through year end and CMS permanently removed the budget neutrality rate adjustment for oxygen equipment that has resulted in a reimbursement rate increase for some oxygen systems. Both of these factors are tailwinds for Apria and we had already factored them into our guidance. To sum things up, we reported solid second quarter results and continue to build on momentum from Q1 and last year. We're executing at a high level and driving operational improvements. The regulatory environment is stable and we expect to see some benefits for the remainder of this year. I'd like to thank the entire Apria team for their dedication and hard work helping to drive these results. They are the heartbeat of Apria and they are the individuals that deliver our mission every day improving the quality of life for our patients at home. I'll now turn the call over to Debby to review our financial performance in more detail and provide her outlook for 2021.
Debby Morris: Thank you, Dan. And thank you to everyone who joined the call today. We had a strong second quarter delivering solid year-over-year results and exceeding the high end of our guidance ranges across all three key financial measures. As Dan said earlier, our strong performance was driven by executing against the plan we laid out and through achieving higher volume, higher cash collections and continuing to support the business with lower operating costs. Net revenue of $286.3 million, adjusted EBITDA of $64.4 million and adjusted EBITDA less patient equipment CapEx of $44.1 million each exceeded the high end of our guidance ranges for the second quarter. From a volume perspective, we saw a higher than projected sleep patient census, and we saw increased volume in oxygen therapy continue. We also continue to see very strong cash collections through the second quarter resulting from a combination of improvement and revenue cycle management business process, including investment in tools such as predictive analytics around cash collections as well as modified documentation requirements supporting claims during the public health emergency. The final factor contributing to results coming in above the high end of our guidance was lower operating costs, labor costs, facility costs and insurance costs were favorable to our estimate. They were offset only slightly by higher delivery costs. We continue to maintain a higher operating margin compared to our prior guidance. Transitioning to the second quarter results on a year-over-year basis net revenue of $286.3 million increased 6.4%. The vast majority of which was organic growth in a deminimis amount was from a small deal we completed in the first quarter. Organic growth was largely due to continued growth in oxygen and sleep supply as well as in sleep therapy together with higher cash collections. Adjusted EBITDA in the quarter of $64.4 million increased 15.5% from $55.7 million in the second quarter of last year. The combination of top line growth, daily on oxygen sleep and sleep supplies, improved cash collections, and continual variable cost management while the patient census rebuilds drove the year-over-year second quarter improved results. Adjusted EBITDA less patient equipment CapEx of $44.1 million increased 2.2% from $43.1 million. Patient equipment CapEx was very low in the second quarter of last year given the onset of the pandemic and thereby driving the lower year-over-year growth. Wrapping up Q2 comments, we did not see a material impact in the second quarter in connection with the Philips Respironics recall that was announced in June. Moving on to the balance sheet. As of June 30, we had $206 million in cash and total debt of $391 million. Okay, let's turn to the outlook for 2021. As just covered in my remarks around the second quarter we've been performing ahead of guidance to the first half of the year. During the quarter we experienced further volume recovery for sleep, non invasive ventilation and negative pressure wound therapies. The public health emergency has been extended through October. The suspension of sequestration was extended through year end earlier this year and CMS permanently removed the budget neutrality rate adjustment for oxygen equipment that resulted in a reimbursement rate increase for some oxygen systems. And lastly, we have continued to operate with lower operating costs than projected. On the flip side of these positive tailwinds the Phillips recall is driving time and coordination of recall related activity to support our patient needs. The recall may cause us to incur significant costs, and we're closely monitoring the impact of the recall on our business and the uncertainty surrounding the availability and supply of CPAP and ventilators due to the recall. For the third quarter and full year, we've taken into consideration the following factors. First is our strong first half performance. Second, improving census rebuild particularly in sleep than the continuation of higher volume for oxygen therapy. Third, improved operating margin and lower CapEx as a percentage of revenue. Fourth, extension to the public health emergency. While it's formally extended through October, we are now estimating it will remain in place through the end of the year. These favorable tailwinds are however partially offset by the uncertainty around costs to be incurred to address the Philips recall and the availability of product due to the recall which will likely impact sleep volume. For the third quarter of 2021 we expect net revenues of $282 million to $290 million. Adjusted EBITDA of $57 million to $61 million and adjusted EBITDA less patient equipment apex of $35 million to $38 million. For the full year 2021 we are increasing our guidance to the following. Net revenue of $1.12 billion to $1.15 billion, up from $1.12 to $1.14 billion. Adjusted EBITDA of $221 million to $231 million up from $207 million to $216 million and adjusted EBITDA less patient equipment CapEx of $132 million to $142 million up from $113 million to $120 million. Our updated 2021 outlook combines our strong financial results to-date, as well as improving census and volume trends we've been experiencing coupled with the uncertainty and potential supply issues caused by the Phillips product recall, which is relatively in early stages. We think this is a thoughtful and prudent approach as we tried to factor all of the moving pieces into our guidance. To sum things up, I'm pleased with Apria's performance during the first half of the year. The Apria team historically has performed consistently and especially well in difficult situations and I remain confident that our team will be able to navigate and manage through the latest challenges we face. To close out our prepared remarks today I too want to thank the entire team for their commitment to Apria and to our patients, and for delivering on our mission of improving the quality of life for our patients at home. Operator will now open the call to questions.
Operator: Thank you. Our first question comes from Ralph Giacobbe with Citi. Your line is open.
Unidentified Analyst: Great. Good afternoon. This is Jason for Ralph today. Thanks for the question. I guess, just to go back to the 21 guidance, it looks like you increase the high end of the revenue range. But EBITDA and your margins are up a bit more. Can you just help unpack what's driving the better EBITDA and margin expectation on a relatively similar revenue base from before?
Debby Morris: Yes, sure. What we've seen is operating efficiencies, and we've been able to continue to operate at a higher margin to the first half of the year. So as we said last quarter, we would be looking as we exited Q2, looking at coming out of moving to the next stage of COVID, where we were landing and reevaluate our guidance. So that's what you see reflected in the numbers, Further improvement that we expected EBITDA , and also in CapEx. CapEx benefits from a few things. One is, the rate changes that go through obviously have no CapEx associated. We also have product mix favorability where growth and sleep supplies also has no CapEx associated with it. So those also provide some incremental contribution towards that improvement that you're seeing in adjusted EBITDA and adjusted EBITDA less CapEx.
Unidentified Analyst: Got it. Thanks. So I guess it just along those lines on the operating efficiencies, just looking forward, given the macro backdrop, are you seeing any inflationary pressures on your business? I mean, either from like the labor side or the Philips with the supply costs, but anything that you're seeing inflationary pressures and then maybe if you have discuss those strategies that you have in place to help mitigate anything along those lines, that'd be helpful.
Debby Morris: Yes, so we're seeing, we're clearly seeing costs increase in the delivery side of the business, so fuel costs are up. So they're in to mitigate some of the fuel costs. We're continuing to optimize routes and evaluate how much inventory we store to reduce trips. That's also a mitigating factor for labor. thus far we have had favorability on labor some offset in overtime, some upset in couriers. But here again, it because of some of the efficiencies we've gained, we've been able to manage through that pretty effectively. And on the kind of the product cost side, we've seen some increase in some of the bent metal, as we call it, the side wheelchair. Other than that, from the top side is the ventilation site hasn't really been an increase and we're not actually contemplating significant increase there given what's going on with the Philips recall.
Unidentified Analyst: Got it. Thanks. So I guess the last one for me, just going back to the deal you highlighted in the quarter, and then I stuck in there, can you maybe break out more of the details around that deal? And then separately, can you delve more into your M&A strategy and how you're seeing the pipeline develop? Maybe if you can comment on what you're seeing in terms of multiples in the space would be helpful. Thanks.
Dan Starck: Yes Jason this is Dan. Just though, I mean, we have the deals not close. We signed the agreement late last week. So we'll talk just briefly about it. It's revenues a little bit north of $20 million a year. So it's a nice sized deal. And a very strong presence in that area. So we feel very good about being able to support that team that's coming aboard and continue to grow both the Apria brand as well as the ABC brands. So a very strong competitor and happy to have them join the Apria family. Just from a broader M&A strategy, I think what that deal is reflective of in that company is the types of deals that we want to do. We've, again, want to grow organically and supplement with acquisition and we feel like that deal specifically because of their density, and their strong name in that area that's really the type of opportunity we're looking for where we can really gain in a specific market. From a multiple standpoint, and I'll have Deb chime in a little bit on this as well the multiples are there's high expectation from sellers, which we would expect. And our job is to figure out whether or not we believe that the combination of Apria and that company really brings, at the end the day the justification of the multiple and certainly on this one that we did we are pleased with it, and are looking forward to getting that one to close.
Unidentified Analyst: Got it. Great. Thanks. Thanks, guys.
Dan Starck: You're welcome. Thank you.
Operator: Our next question comes from Jamie Perse with Goldman Sachs. Your line is open.
Jamie Perse: Hi, Dan and Debby thanks for taking the question. I wanted to just start with the Phillips recall and see if that's impacting your guidance at all. If you're contemplating any potential headwind in guidance in the second half of the year, and that's just being masked by some of the underlying strength. Just any comments or quantification around that?
Debby Morris: Yes. Jamie, good afternoon. I think you just summed it up in that sentence pretty well. Yes, we have contemplated some uncertainty around Phillips. And it varies across the range, obviously, because there's a range of possibilities we believe could happen up to you call it $30 million in revenue. So we have contemplated that and as you noted between the first half performance where we were performing expecting and still continue to expect to perform in the second half coupled with a little bit extra there from the PHE. That's why, as you suggested it's all incorporated into the guidance.
Jamie Perse: Okay that's helpful. And then just on margins, they're really strong this quarter, kind of 22.5% or so. Was there anything unique about this quarter? Can you just put that kind of performance that you have in this quarter and context for us as we think about the rest of the year? And how sustainable this might be?
Debby Morris: Yes. We continue to perform strong. If we look at the quarter and particularly year-over-year where we were, we obviously have some rate favorability. Some of that is budget neutrality that will stay with us. Some of its temporary, but it's relatively minor in the grand scheme of things or maybe 20 basis points related to rate that is expected to go away. Really the combination of the improvement and the rep cycle process investment we've made there. We've continued to see really strong solid performance and it's a combination of three things. It is investments we've made in ref cycle and we have for continual workflow improvement. It was simplifying as we've talked about at length on other calls and its contribution towards accountability and business that we take. And then investment in predictive analytics that I mentioned. And so we believe that those are sustainable. I guess the other one I would say would be there is some benefit, obviously, from documentation. It's unclear if some of that will stay. We haven't factored that assuming that will factor into our guidance at this point. But there's some variability that could occur. So the combination of the rep cycle and cash coupled with on the flip side, the labor and operating improvement. So we've had some increases, I mentioned and delivery costs, offset by some favorability labor, driven by some of the labor shortages, I don't want to say shortage is too high, because we've managed effectively through it. And then we've obviously also had the incremental go public costs that are all built into our numbers, as well now. So I think we continue to see and as you can look at the guidance where we're guiding to it's a higher margin. And we originally estimated that that would be a little lower this year coming out of COVID and such that we're continuing to see the operating efficiencies that we establish stick. We're continuing to see that trend. So we do expect them to be I'd say in the in the low 20s.
Jamie Perse: Okay, great. And last one for me, just wanted to get your thoughts on how you're thinking about the Delta variant, if you're seeing any impact in some of the regions that are more impacted right now and if you could just remind us how that benefited the respiratory business, if we should expect something similar to the extend this wave got to stick with us for a little while.
Dan Starck: Yes, Jamie, this is Dan. We are absolutely seeing the effects of it. We are a little bit downstream, maybe a week or two removed, or behind it, if you will. But when we think about kind of the areas that are most heard of Florida, kind of Missouri, Texas, some of the Southern California and southwest states, where the variants really picking up we certainly see our new patients on oxygen have started to increase. Really they increased in July over June, which is not normal in this time of year, and we saw the COVID patients, number of COVID patients on service tick up a little bit, from how it impacts it is really, it's generally a shorter term patient than long term COPD patient. However, we have some level of capacity at each location and so the marginal, on the margin, it's a very good business for us to have high volume and to continue to utilize our equipment that we have purchased. So it's been positive for unfortunately for the country. It's been positive for our industry.
Jamie Perse: Okay, appreciate the color. Thank you.
Dan Starck: Yes.
Operator: Our next question comes from Kevin Fischbeck with Bank of America, your line is open.
Unidentified Analyst: Good afternoon. Actually, this is Joanna filling in for Kevin. Just a couple follow up. So you mentioned that in your guide you have arranged a receipt of potential costs related to the vehicle and you said could be up to 30 million I guess revenues. So just want to clarify, because you would have more costs and then you said revenues. Because I was thinking about like there's two different things. One is yet a cost. I guess we're dealing with it. But then I guess if you can talk about whether this includes, this other dynamic around the shortage of supply to meet the new demand. So can you kind of break it or how much I guess, of each or if it's if it's including in both of these, and then also, in terms of how you're thinking about it as you said Q2 not impacted, but then should we expect kind of Q3 and Q4 being a higher impact because you start to see the impact of the shortage of supply.
Debby Morris: Yes. Joanna. Yes. So starting with the revenue at roughly the range of $30 million in revenue. When we look at adjusted EBITDA obviously, there's a portion of that we don't disclose detail in the margins, but a portion of that flows through to adjusted EBITDA. There are some incremental costs while they could be significant, they are not significant at this point. So on a relative basis what we have assumed some level of cost in our guidance, for that. And then on the CapEx side, obviously, there's a wide range of scenarios on the worst case scenario if you want to call it that at $30 million. Obviously, there's CapEx savings that are greater than other scenarios, because the equipment is not available to purchase. So that's somewhat of an offset when you get down to the adjusted EBITDA less CapEx. So we factored in the revenue. We factored in, obviously the margin on that, factored in incremental costs that we expect to have to incur and incremental CapEx savings associated with a shortage of product, essential shortage. And for your Q3, Q4 question we would expect the impact in Q4 to be greater than Q3 if this continues. And so you now have our full year in Q3 guidance folks. So you essentially have Q3, Q4 and a full year. And as we report in Q3, we'll certainly be updating on where things are at and where we see Q4. But should the product shortage through the recall or the product availability due to ship shortage continue it actually gets greater, it could get greater. The other piece of this is, besides the equipment is patient behavior. So the sleep resupply business, we've assumed there will be some level of patients that choose not to continue to be on their devices, even though we're not seeing much of that now we're expecting there could be some level of that, and therefore they would no longer resupply. So that could also as more patients learn of it, it could potentially accelerate or increase, and therefore the combination of the rental period extending through Q3 and longer in Q4 missing those, and then the supplies, Q4 could be potentially worth if it lasts that long. And again, we within our ranges, work to do different scenario modeling to contemplate everything that we could in that regard.
Unidentified Analyst: Okay, that's how a $30 million is the revenue head. And then that includes the dynamic around just the shortage of equipment. So that's what I was saying we should think about it being, Q4 being a higher number than Q3 because things start to kind of compound so to speak, right? Because you have the supplier and maybe you don't have the resupply if you didn't have the new patients in Q3, right? So then I guess, if this persists, then I guess, into 2022, then the number become even bigger because of this dynamic of just compounding that you didn't get the patients and then you don't get the resupply too.
Dan Starck: I think the impact really, is really about duration. So you've got the Philips recall that issue, but then the other manufacturers have chip shortages as well. So there is a basically is an going to be somewhat of a shortage of equipment. The other manufacturers combined even if they had full chips couldn't, make up the Philips capacity. So there is some metering effect here and the faster the chip shortage gets resolved at least for that small sector of manufacturing will really impact whether it's big, small. Again, we think it's probably larger than zero from an impact. But we don't think it's bigger than what Debby described.
Unidentified Analyst: Okay, and I guess talking about other manufacturers, so is this something you're trying to explore in terms of purchasing different equipment or debts? I mean, you said it sounds like it, would it be even enough, but I guess if there is this something you're trying to pursue to kind of try to minimize the headwinds?
Dan Starck: Yes. We are in active discussions with other manufacturers.
Unidentified Analyst: Okay, but kind of what is the realistic scenario here? Because like you mentioned it's all about impact, like how long it's going to last. So if there is something you kind of looking out to kind of say, hey, now, XYZ happened. And now we know, okay, this is going to be over in whatever period of time if there's something that we should be also looking out for in terms of how this situation could be resolved?
Dan Starck: Yes, I think the first thing Joanna is the approval from the FDA for respironics remediation of the recall. So they're in the process of having that reviewed and once that is approved to the FDA, that's going to at least take the overhang of uncertainties off of production and/or repair and then as well as the other manufacturers ability to get back to historic even historic capacity, let alone build on top of that. So we are actively monitoring the situation with Philips and all of our manufacturers on a daily basis. And the best news that anybody could have is that the FDA has approved the fix and that the remediation process can start.
Unidentified Analyst: Okay, because you're saying that in your $30 million worst case scenario, excuse me, you assume you like there's no resolution this year, right?
Debby Morris: Yes. So we have assumed in our worst case I would say case it is through the end of the year. Yes. Correct.
Unidentified Analyst: Okay, because then to your point, it could be that it's sooner, right? Or, because they're the easy fix, so to speak, right, is that they just, you just did the replacement of the firm or some other fix to that, right. So that we're going to, kind of the best case scenarios in this.
Debby Morris: Yes. And a lot depends on fleet resupply as well. So patients continue to use equipment then the impact could be less because of the continue to resupply. So there's two sides of it. One is new patients and the growth that we contemplate worth that growth. And the others is the existing patient base which is very large, and patients continue to use which is what we've seen today. Again we don't know if there will be some slow down, but if patients continue to use and continue to resupply the impact is left. So there's a wide range of impacts and Dan said duration. So I like to say dose and duration, those are both going to dictate where this goes.
Unidentified Analyst: No, I appreciate the color. And if I may squeeze last clarification on the deal that you announced that you said it's about $20 million or actually north of $20 million annual revenue. I just want to confirm it's not included in the guidance, correct?
Debby Morris: Correct. Yes because we've signed a definitive agreement. We'll include it in the guidance once we actually close the deal, which we expect in Q3.
Unidentified Analyst: Okay, great. Thanks.
Operator: Thank you. We have next question from Jeff Garro with Piper Sandler. Your line is open.
Jeff Garro: Yes, good afternoon and thanks for taking my question. I will walk a little bit there on the Airway breathing acquisition. You've given some a nice detail about its level of revenue that you expect on an annual basis. But could you give a little bit more detail on the expected growth and profitability profile of that business?
Dan Starck: Sure, Jeff. I think I mean, it's not something that we would disclose from that aspect. But I think we're going to be able to, from our perspective, help from a few things, mostly synergies around cost of goods sold. And as well as some of the potential opportunities from a headquarters perspective but what we, they have grown nicely over the last couple of years, from a top line perspective. They're a profitable, well run business. And we expect that it will be helpful to our bottom line as we move forward.
Jeff Garro: Excellent that helps. One more from me asking about the guidance and the impact of COVID and the Delta variant. You mentioned, the positive impacts so far into Q3 on revenue. Just curious whether that your guidance assumes any type of acceleration of that increased Delta variant prevalence into Q4?
Debby Morris: It just we haven't assumed a spike like we had the beginning of the year. We have assumed that oxygen continues and respiratory continues to be above plan. What will happen if there's a spike is I suspect very similar to what we've seen thus far in what Dan was talking about a little, we'll see a shift around the products and we will see oxygen surge more we could potentially see sleep slow if it surges which may be okay right now with the product shortage, there could time and so we may see a mix in product. But the benefit, we have an average of a large rental base we're 75% rental. So that rental stream on the census continues with a low level of cost to support. So I see it more as a movement in product and continual leverage of variable cost just like we saw last year in 2020.
Jeff Garro: All right. That helps. Thanks again.
Dan Starck: Thanks Jeff.
Operator: Thank you and I am showing no other questions in the queue. I would like to turn it back to Dan Starck for any closing remarks.
Dan Starck: Thanks operator and thank you everybody. We would just want to thank you again for joining today. We appreciate your interest in Apria and we understand that everybody's time is very valuable. So we certainly appreciate you spend the last 45 minutes with us and we look forward to keeping you up to speed and look forward to talking to you all in the near future. Take care. Thank you.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
