Good afternoon, Welcome to Apria's second quarter 2021 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. After today's presentation, there'll be an opportunity to ask questions. To ask a question, press star one. 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 during this call will be 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. We believe these expectations are reasonable; we undertake no obligation to revise any statement to reflect changes that occur after this call.
Descriptions of some of the factors that could cause actual results to differ materially from those 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 31st, 2020, as supplemented by Apria's quarterly report on Form 10-Q for the period ending June 30th, 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 investors 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.
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 the context around our activities. 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. 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 is 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 a 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-19 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 its strong performance, and we began to see increasing levels in the other equipment category as we progressed 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 a voluntary recall for continuous and non-continuous ventilators, certain CPAP, 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 I 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 not to determine the most appropriate next steps. Thus far, despite the recall, we have not experienced significant amounts of patients stopping their 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 30th, 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.
While the situation could be somewhat temporary in nature, the duration of the recall and the supply constraint of 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. 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 longstanding 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 longstanding 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 SG&A as a % 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 exist 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 needs 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 our outlook for 2021.
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 and oxygen therapy continue.
We also continued to see very strong cash collections through the second quarter, resulting from a combination of improvement in 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 estimates. 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, and a de minimis 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, namely in 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, 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 through 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. Lastly, we have continued to operate with lower operating costs than projected. On the flip side of these positive tailwinds, the Philips recall is driving time and coordination of recall-related activity to support our patient needs.
The recall may cause us to incur significant costs. 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, and the continuation of higher volume for oxygen therapy. Third, improved operating margin and lower CapEx as a percent of revenue. Fourth, extension of 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-$290 million. Adjusted EBITDA of $57 million-$61 million, and Adjusted EBITDA less patient equipment CapEx of $35 million-$38 million. For the full year 2021, we are increasing our guidance to the following: net revenue of $1.12 billion-$1.15 billion, up from $1.12 billion-$1.14 billion. Adjusted EBITDA of $221 million-$231 million, up from $207 million-$216 million. Adjusted EBITDA less patient equipment CapEx of $132 million-$142 million, up from $113 million-$120 million. Our updated 2021 outlook combines our strong financial results to date, as well as the improving census and volume trends we've been experiencing, coupled with the uncertainty and potential supply issues caused by the Philips product recall, which is relatively in early stages.
We think this is a thoughtful and prudent approach as we try 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, we'll now open the call to questions.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Our first question comes from Ralph Giacobbe with Citi. Your line is open.
Great. Good afternoon. This is Jason Cassorla in for Ralph today. Thanks for the question. I guess, just to go back to the 2021 guidance. It looks like you increased 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?
Sure. What we've seen is operating efficiencies, and we've been able to continue to operate at a higher margin through the first half of the year. As we said last quarter, we would be looking as we exited Q2, looking at coming out of or moving to the next stage of COVID, where we were landing and reevaluating our guidance. That's what you see reflected in the numbers. Some further improvements that we expect in 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 in sleep supplies also has no CapEx associated with it. Those also provide some incremental contribution towards that improvement that you're seeing in Adjusted EBITDA and Adjusted EBITDA less CapEx.
Got it. Thanks. I guess just along those lines on the operating efficiencies, just thinking, looking forward, given the macro backdrop, are you seeing any inflationary pressures on your business? Either from the labor side or Philips with the supply costs, anything that you're seeing on inflationary pressures? Maybe if you have, just those strategies that you have in place to help mitigate anything along those lines, that'd be helpful.
We're clearly seeing cost increases in the delivery side of the business, fuel costs are up. 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 and some offset in couriers. Here, again, because of some of the efficiencies we've gained, we've been able to manage through that pretty effectively. On the product cost side, we've seen some increase in some of the bent metal, as we call it, on the HME side wheelchair. Other than that, from the top side and the ventilation side, hasn't really been an increase, and we're not actually contemplating significant increase there given what's going on with the Philips recall.
Got it. Thanks. I guess the last one from me, just going back to the deal you highlighted in the quarter, the nice tuck-in there. Can you maybe break out more of the details around that deal? 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, might be helpful. Thanks.
Yeah, Jason, this is Dan. The deal's not closed. We signed the agreement late last week. We'll talk just briefly about it. Its revenue is a little bit north of $20 million a year, so it's a nice size deal. They have 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 brand. 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 and that company is the types of deals that we want to do. We, again, want to grow organically and supplement with acquisition.
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. Our job is to figure out whether or not we believe that the combination of Apria and that company really brings, at the end of the day, the justification of the multiple. Certainly, on this one that we did, we're very pleased with it and are looking forward to getting that one to close.
Got it. Great. Thanks, guys.
You're welcome. Thank you.
Our next question comes from Jamie Perse with Goldman Sachs. Your line is open.
Hi, Dan and Debby. Thanks for taking the question. I wanted to just start with the Philips 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 strengths. Just any comments or quantification around that?
Yeah, Jamie, good afternoon. I think you just summed it up in that sentence pretty well. We have contemplated some uncertainty around Philips, and it varies across the range, obviously, because there's a range of possibilities we believe could happen, up to call it $30 million in revenue. 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.
Okay. That's helpful. 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 had it in this quarter in context for us as we think about the rest of the year, and how sustainable this might be?
Yeah. We continue to perform strong. If we look at the quarter and look 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 it's 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 on the rev cycle process, the investment we've made there, we've continued to see really strong, solid performance. It's a combination of three things. It is investments we've made in rev cycle, and we have for It's continual workflow improvement. It was Project Simplify, as we've talked about at length on other calls and its contribution towards accountability and business that we take. Then investment in predictive analytics that I mentioned.
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 favorability that could occur. The combination of the rev cycle and cash, coupled with, on the flip side, the labor and operating improvement. We've had some increase, as I mentioned, in delivery costs offset by some favorability in labor, driven by some of the labor shortages. I don't want to say shortages too high because we managed effectively through it. We've obviously also had the incremental go public costs that are all built into our numbers as well now.
I think we continue to see, as you can look at the guidance where we're guiding to, it's a higher margin. We originally had estimated that that would be a little lower this year coming out of COVID and such, but we're continuing to see the operating efficiencies that we established stick. We're continuing to see that trend. We do expect them to be, I'd say in the low 20s.
Okay, great. Last one from 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. If you could just remind us how that benefited the respiratory business, if we should expect something similar to the extent this wave kind of sticks with us for a little while.
Yeah, Jamie, this is Dan. We are absolutely seeing the effects of it. We're a little bit downstream, maybe a week or two removed, or behind it, if you will. 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 variant's 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. We saw the 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 a long-term COPD patient. However, we have some level of capacity at each location, and so on the margin, it's very good business for us to have high volume and to continue to utilize our equipment that we have purchased. It's been positive. Unfortunately, for the country, it's been positive for our industry.
Okay. Appreciate the color. Thank you.
Yep.
Our next question comes from Kevin Fischbeck with Bank of America. Your line is open.
Good afternoon. Actually, this is Joanna Gajuk filling in for Kevin. Just a couple of follow-ups. You mentioned that in your guide, you assume a range, obviously, of potential costs related to the recall, and you said that could be up to $30 million, I guess, you said to revenues. I just want to clarify because first you were talking about costs and then you said revenues, because I was thinking about there's two different things.
One is, yeah, the cost, I guess, with dealing with it. I guess, if you can talk about whether this includes this other dynamic around the shortage of supply to meet the new demand. Can you kind of break it, or how much, I guess, of each, or if it's including in both of these? Also, in terms of how you're thinking about it, because clearly you said Q2 not impacted, should we expect kind of Q3 and then Q4 being a higher impact because you start to see the impact of the shortage of supply?
Yeah, Joanna. Yes. Starting with the revenue, at roughly the range of $30 million on revenue, when we look at Adjusted EBITDA, obviously, there's a portion of that we don't disclose in 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. On a relative basis, what we have assumed some level of cost in our guidance for that. 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. That's somewhat of an offset when you get down to the Adjusted EBITDA as CapEx.
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, potential shortage. For your Q3, Q4 question, we would expect the impact in Q4 to be greater than Q3 if it should continue. You now have our full year and Q3 guidance both, so you essentially have Q3, Q4, and full year. As we report on Q3, we'll certainly be updating on where things are at and where we see Q4. Should the product shortage through the recall or the product availability due to chip shortage continue, it actually gets greater, it could get greater. The other piece of this is, besides the equipment, is patient behavior.
The sleep resupply business, we've assumed there'll 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. That could also, as more patients learn of it , potentially accelerate or increase, and therefore the combination of the rental period extending through Q3 and longer in Q4, missing those, and then the supply, Q4 could be potentially worse if it lasts that long. We work to do different scenario modeling to contemplate everything that we could in that regard.
Okay. That's helpful. $30 million is the revenue hit, and that includes the dynamic around just the shortage of equipment. That's why I was saying we should think about Q4 being a higher number than Q3 because things start to kind of compound, so to speak, right? Because you have the supply, and then you don't have the resupply if you didn't have the new patients in Q3, right? I guess if this persists, then I guess into 2022, then the number becomes 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.
Yeah, that could be the case.
I think the impact really is really about duration, right?
Right.
You've got the Philips recall, that issue, the other manufacturers have chip shortages as well. There basically is and 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. There's 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.
I guess talking about other manufacturers, is this something you're trying to explore in terms of purchasing different equipment or that's It sounds like it wouldn't be even enough, I guess, is this something you're trying to pursue to kind of try to minimize that headwind?
We are. Yeah, we are. We are in active discussions with other manufacturers.
What is the realistic scenario here? As you mentioned, it's all about impact, like how long it's going to last. Is there something you're kind of looking out to kind of say, "Hey, now, X, Y, Z happened, and now we know, okay, this is going to be over in whatever period of time." Is there something that we should also be looking out for in terms of how this situation could be resolved?
Yes. I think the first thing, Joanna, is approval from the FDA for Respironics remediation of the recall. They're in the process of having that reviewed, and once that is approved through the FDA, that's going to at least take the overhang of uncertainty off of production and/or repair. As well as the other manufacturer's ability to get back to even historic capacity, let alone build on top of that. We are actively monitoring the situation with Philips and all of our manufacturers on a daily basis. The best news that anybody could have is that the FDA has approved the fix and that the remediation process can start.
Okay, because you're saying that in your $30 million worst-case scenario, excuse me, you're assuming there's no resolution this year, right?
Yes. We have assumed, in our worst case, I would say W-O-R-S-T case, it is through the end of the year. Yes, that's correct.
To your point, it could be that it's sooner, right? The easy fix, so to speak, right, is that you just do the replacement of the foam or some other fix to that, right? That would be kind of the best-case scenario in this situation.
Yes. A lot depends on sleep resupply as well. If patients continue to use the equipment, then the impact could be less because of the continued resupply, right? There's two sides of it. One is new patients and the growth that we contemplate and having units to support that growth, and the other is the existing patient base, which is very large, and as patients continue to use, which is what we've seen to date, and again, we don't know if there'll be some slowdown, but if patients continue to use and continue to resupply, right, the impact is less. There's a wide range of impacts and, as Dan Starck said, duration. I like to say dose and duration. Those are both going to dictate where this goes.
No, I appreciate the call. If I may, please, last clarification on the deal that you announced, 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?
Correct. We've signed a definitive agreement. We'll include it in the guidance once we actually close the deal, which we expect in Q3.
Okay, great. Thanks.
Thank you. As a reminder, if you like to ask the question, press star and one key touch tone telephone. We have this question from Jeff Garro with Piper Sandler. Your line is open.
Yeah, good afternoon, thanks for taking my question. I'll follow up a little bit there on the Airway Breathing acquisition. You've given some nice detail about its level of revenue that you expect on an annual basis, could you give a little bit more detail on the expected growth and profitability profile of that business?
Sure, Jeff. 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. They have grown nicely over the last couple of years from a top-line perspective. They're a profitable, well-run business. We expect that it will be helpful to our bottom line as we move forward.
Excellent. That helps. One more from me asking about the guidance and the impact of COVID-19 and the Delta variant. You mentioned the positive impact so far into Q3 on revenue. Just curious whether your guidance assumes any type of acceleration of that increased Delta variant prevalence into Q4.
Jeff, we haven't assumed a spike like we had in the beginning of the year. We have assumed that oxygen continues or 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 and what Dan Starck was talking about a little. We'll see a shift around in the products. We'll see oxygen surge more.
We could potentially see sleep slow if it surges, which may be okay right now with the product shortage. Those could time. We may see a mix in product, but the benefit we have at Apria is that we have a large rental base. We're 75% rental. That rental stream on the census continues with a low level of cost to support. I see it more as a movement in product and continual leverage of variable costs, just like we saw last year in 2020.
Excellent. That helps. Thanks again.
Thanks, Jeff.
Thank you. I'm showing no other questions in the queue. I'd like to turn it back to Dan Starck for any closing remarks.
Thanks, operator. Thank you, everybody. We 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. We certainly appreciate you spending the last 45 minutes with us. 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.
This concludes today's conference call. Thank you for participating. You may now disconnect.