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Good morning, everyone, and welcome to CareRx' Second Quarter 2023 Financial Results Conference Call. Please note that this call is being broadcast live over the internet and the webcast will be available for replay beginning approximately 1 hour following the completion of the call. Details of how to access the webcast replay are available in today's news release announcing the company's financial results as well as on the company's website at www.carerx.canada. [Operator Instructions] Certain matters discussed in today's call or answers that may be given to questions asked could constitute forward-looking statements whether are subject to risks or uncertainties relating to CareRx' future financial and business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in CareRx' continuous disclosure record, which you can access on the SEDAR database at www.sedar.com.
CareRx is under no obligation to update any forward-looking statements discussed today, and investors are cautioned not to place undue reliance on these statements. I would now like to turn the call over to Puneet Khanna, President and CEO of CareRx Corporation. Please go ahead, Mr. Khanna.
Thank you, and good morning, everyone. Welcome to our second quarter 2023 earnings call. With me this morning is our Chief Financial Officer, Andrew Mok. In the second quarter, we delivered results that were in line with our expectations, with revenue of $94.5 million and adjusted EBITDA of $7 million.
While we continue to deal with ongoing challenges in the health care labor market, our financial performance in the quarter is a testament to our team's exceptional work in managing and mitigating these challenges, adding new beds and improving our overall performance. Through organic bed growth in the quarter, we have now substantially offset the bed loss of last year's customer off-boarding. With the impact of this and the labor market issues we previously outlined now reflected in our run rate, our focus will continue to be on technological and operational enhancements, driving cost efficiencies, optimizing our processes and strengthening CareRx' position to drive long-term sustainable profitability and capitalize on the demographic trends that will transform the Canadian seniors industry in the upcoming years.
On a personal note, I'd like to thank our customers, vendor partners and the investment community for your messages of support during my transition to CEO. I would also like to thank the CareRx team, for your unwavering commitment to collaborate, be accountable, to find solutions and be relentless in the pursuit of excellence. This is the same approach we have taken on creating a best-in-class operating model that will aim to leverage our scale and technology.
I would now like to turn the call over to Andrew to discuss our first quarter financial results in more detail. Andrew?
Thank you, Puneet, and good morning, everyone. Before I begin, a reminder that our financial statements and MD&A for the second quarter have been filed with SEDAR and are also available on our website. Revenue for the second quarter of 2023 declined $2.4 million or 2% to $94.5 million from $96.9 million for the second quarter of 2022 and increased 3% from $91.4 million in the first quarter of this year. The year-over-year revenue decline was primarily driven by a change in the mix of branded and generic drugs dispensed during the first half of 2023. This change in drug mix is expected to have a recurring impact on revenue in future quarters. It did not negatively impact the company's profitability in the quarter and is also not expected to have a negative impact going forward. The increase in revenue from the first quarter was primarily due to an increase in the number of beds serviced. As Puneet noted, we have substantially offset the number of beds that were offboarded from the previous customer offboarding and I would note that quarter-over-quarter bed count improved by approximately 1% from 94,436 in the first quarter of this year to 95,247 in the second quarter.
Adjusted EBITDA for the second quarter declined $1.8 million or 20% to $7 million from $8.8 million for the second quarter of last year and increased 3% from $6.8 million in the first quarter of this year. Near-term profitability continues to be affected by challenges in the health care labor market, primarily due to scarcity and an increased competition for pharmacy staff, which has resulted in a higher number of open positions and a longer time to fill these vacancies.
The year-over-year decrease in adjusted EBITDA was driven primarily by incremental costs associated with these continued challenges as CareRx has had to incur incremental costs totaling approximately $1.7 million to ensure the company is able to continue to provide its essential services to its customers without disruption. Compared to the first quarter of this year, the increase in adjusted EBITDA was also due to the increase in the number of beds serviced. We posted net income of $1.9 million in the quarter, an improvement of $27 million or 107% compared to a loss of $25.1 million in Q2 of last year, primarily due to certain noncash adjustments including impairment losses related to goodwill and intangible assets and investments recorded during the second quarter of 2022, which did not recur this year.
The elimination of the net loss was also attributed to an increase in income tax recovery, partially offset by the previously discussed incremental costs incurred as a result of the current labor market. Compared to the previous quarter, net income improved by $4 million from a loss of $2 million due to the previously mentioned increase in income tax recovery.
Cash at June 30 was $36 million, down $4.4 million from $40.4 million at the end of the second quarter of 2023. The decrease in cash in the quarter was driven by an earn-out payment related to the previous SmartMed acquisition as a result of the business achieving certain agreed-upon operational targets. Cash flows generated from operations remained consistent quarter-over-quarter. Net debt at June 30 was $58.6 million, an increase of $4.4 million compared to the prior quarter. This was driven primarily by the decrease in our cash balance.
Net debt to annualized run rate adjusted EBITDA was essentially flat at 2.1x at the end of the quarter. I would also again reiterate that our debt is and has always been fixed rate so we've had no increase in our cost of debt as interest rates have risen. And with that, I'll turn the call back over to Puneet.
Thank you, Andrew. CareRx provides essential medication and clinical pharmacy services to seniors homes and other congregate care settings across Canada. The work we do is highly specialized and our customers need a pharmacy partner that can provide incredible responsiveness while maintaining the highest quality services.
CareRx's strategic priorities reflect our commitment to quality and service while also positioning us to create value for all our stakeholders by increasing efficiencies, improving margins and cash generation and further leveraging our industry leadership position to drive profitable growth in the expanding seniors living sector.
One area of delivering efficiency is through the use of innovative technology. In the first quarter of this year, we commenced the packaging of medications dispensed from our BD Rowa Robotics at our Oakville fulfillment center. This technology enables the optimization of medication dispensing at speeds that exceed conventional packaging solutions currently used in Canada with superior quality and less wastage.
At the end of the second quarter, we had transitioned over 6,000 beds on to BD Rowa and by the end of the third quarter, we expect to have transitioned over 11,000 beds. As we continue to roll out the use of this technology, we expect to drive enhanced operating margins through higher prescription volumes without additional labor costs while also improving safety reducing medication packaging errors and waste.
The transition to BD Rowa has validated our initial thesis for acquiring the machines. And once, BD Rowa is fully operational at our Oakville fulfillment center and all the planned beds have transitioned, we expect to achieve a run rate savings of approximately $500,000 per year. While we continue to evaluate the business case for the deployment of BD Rowa at our other fulfillment centers.
In the near term, we continue to focus on optimizing our business operations as we believe there are opportunities to generate efficiencies and cost savings within the business, expand margins and create a more sustainable long-term operating platform while continuing to provide the highest level of services to our customers. These initiatives are designed to capitalize on our size and scale and to complete the remaining integration of our acquisitions, including certain procurement initiatives and standardization of our operating model nationally.
We expect that these initiatives will result in operating efficiencies and an improved customer experience as we simplify and optimize how we deliver our service.
Finally, we are also excited to introduce lean principles within our operations. Lean methodology is a form of management and operation processes rooted in reducing waste and continuously improving efficiencies. We believe these principles are highly applicable to our high-volume production business, and we intend to leverage lean methodology in order to further strengthen our high-performance culture and to assist us in making data-driven decisions which will advance our efforts to drive sustained profitable growth.
Our efforts to optimize our business operations are designed to drive long-term operational performance in order to maintain our leadership position in the seniors pharmacy sector and position the company to continue to capitalize on our exciting growth pipeline. We have seen tremendous growth over the last few years. But with more than 3/4 of the Canadian market still serviced by other pharmacy service providers, our growth potential remains very significant.
We are seeing an accelerated expansion in the number of long-term care beds across the country. We are benefiting from this expansion and acquisition activity of our current customers. In addition, we continue to also deliver on growth through the increased breadth and scope of the products and services we are offering our customers.
As an example, our Revicare medical supplies business is on pace to grow 20% this year, and we expect it to continue to grow at double-digit pace and provide an increasingly meaningful contribution to both top and bottom line. We remain committed to the execution of our growth strategy, continuing to strengthen our capabilities and service offerings and becoming truly a world-class institutional pharmacy partner for our customers and their residents.
As a management team, we have begun to instill a performance culture and set a high bar for growth with an internal goal of exiting 2024 with double-digit margins through top line growth and the continued optimization of our business operations. With that, I would now like to open the call to questions. Operator?
[Operator Instructions] Your first question comes from the line of Gary Ho of Desjardins Capital Markets.
Maybe just the first one, just on the additional labor costs, $1.7 million, that was stable sequentially. Are you seeing progress on dealing with the labor challenges on your end? And should we see kind of this improve as we look out in the back half of this year?
Yes, I think as we mentioned on last call -- on the last quarterly call, the $1.7 million we feel is a trough. And so the labor optimization, we're looking at with lean will start having benefits, but it's going to be a bit chunky. And I think through our recruitment and retention efforts, we will see that number go down, but it's going to be a bit slow.
And then maybe a related question. So if I add back that $1.7 million to EBITDA, your margins would be well above 9%. And your comments, prepared in your prepared remarks suggest exiting next year with double-digit margins. So I just want to compared the two. So are you expecting that $1.7 million to go away by the end of the year? And what gives you confidence in hitting like 10% plus margins by the end of next year?
Yes. That's insightful. Gary. I think from our perspective, we wouldn't expect the $1.7 million to be gone by the end of this year. If you look at what we're doing with lean, the way to think about lean is that it's labor optimization. So we've broken down each step in our process, the function, and we're ensuring that labor is best utilized at the right time of that demand and then leveraging technology such as the BD role will help us offset some of the labor requirements in the pharmacy now. So again, I think we've put the exit for 2024 and getting over the 9.9% and hitting double digit I don't think in sort of the near term, we will be able to give guidance on what that will be quarter-over-quarter because I do think it will be a little bit lumpy until we get to the end of next year.
Okay. Got it. That makes sense. And then just maybe just last question related to this whole discussion. Any -- you talked about the lean initiatives. Are you expecting any major capital expenditures throughout, I guess, in the next 1.5 years as you build that out?
Gary, it's Andrew. Specifically as it relates to the lean methodology, no, we don't anticipate any major capital outlays related to that. The only thing that we may look to incur a little bit in certain locations is to the extent that there are leasehold improvements required just to facilitate a more streamlined and efficient workflow. But with those initiatives, we're not expecting any significant capital outlays.
As Puneet mentioned in his comments earlier, we are currently evaluating what the potential rollout of further BDRs might look like at other locations. And so we end up down that path. That may require some capital investment, but definitely with the lean initiatives, we're not expecting that to be significant.
Our next question comes from the line of Kyle McPhee of Cormark Securities.
You're giving a lot of color on some of the moving parts with margins. But a big moving part is also OpEx leverage, big benefits come on the back of you guys adding new bed service. So can you provide an outlook on what that new bed add pipeline looks like? Is there an opportunity to boost the pace of bed addition throughout the rest of this year versus what we've seen in recent quarters? Any color there would be appreciated.
Good question. From a bed pipeline perspective, we feel the back half of this year will be a bit slower than the first half. And it's really because of the labor challenges that our customers are facing. So there was a number of larger RFPs that we are expecting to be released that will push into the new year. And then the same thing with redevelopment and the new beds coming online. Construction has been a bit delayed. And so we just think it will just push it. It's not that they're lost opportunities, they are just going to slide a little bit into early next year.
[Operator Instructions] There are no further questions at this time. Please proceed.
Thank you, everyone, for participating in today's call and for your continued interest in CareRx. We look forward to reporting on our continued progress next quarter. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.