Good morning, everyone, welcome to CareRx's Second Quarter 2023 Financial Results Conference Call. Please note that this call is being broadcast live over the Internet, the webcast will be available for replay beginning approximately one 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.ca. Today's call is accompanied by a slide presentation. Those listening on their phones can access the slide presentation from the company's website in the Investor section under Events and Presentations by loading the webcast and choosing the non-streaming audio option. Certain matters discussed in today's call or answers that may be given to questions asked, could constitute forward-looking statements that are subject to risks or uncertainties relating to CareRx's 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's continuous disclosure record, which you can access on the SEDAR database under www.sedar.com. CareRx is under no obligation to update any forward-looking statements discussed today. 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, 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 healthcare 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've 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's 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. 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 off-boarded from the previous customer off-boarding. 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 healthcare 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 CAD 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 non-cash 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 30th 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 SmartMeds 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 30th 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 2.1 x at the end of the quarter.
Also, again, to 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. With that, I will 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 onto 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 three-quarters 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 offering, 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?
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a 3-tone prompt acknowledging your request. If you would like to withdraw your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from the line of Gary Ho of Desjardins Capital Markets. Please go ahead.
Thanks. Good morning. Thanks for taking my questions. 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? Should we see kind of this improve as we look out in the back half of this year?
Hey, good morning, Gary. Yeah, you know, I think, I think as we mentioned on, on last call, on the last quarterly call, the 1.7, we feel, is a trough. The labor optimization we're looking at with Lean will start having benefits, but it's, it's, it's gonna be a bit chunky. You know, I think through our recruitment and retention efforts, we will see that, that number go down, but it's, it's gonna be a bit slow.
Okay. Okay. Then, maybe a related question. If I add back that $ 1.7 million to EBITDA, your margins would be well above 9%. And your comments, in your prepared remarks suggest, you know, exiting next year with double-digit margins. Just wanna compare the two. 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%+ margins by the end of next year?
Yeah, you know what? That, that's insightful, Gary. I think from, from our perspective, I, I... we wouldn't expect the 1.7 to be gone by the end of this year. You know, if I, if, if you look at what we're doing with Lean, the way to think about Lean is that it's labor optimization. We, 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. Then leveraging technology such as the BD Rowa will help us offset some, some of the labor requirements in the pharmacy now. You know, again, you know, I think we've put the exit for 2024, in, in getting over the 9.9 and hitting double digit.
I don't think in sort of the near term, we'll be able to give guidance on what that will be quarter-over-quarter, because I do think it'll be a little bit lumpy until we get to the end of next year.
Okay, got it. That makes sense. Just, maybe just last question related to this whole discussion. You talked about the Lean initiatives. Are you expecting any major capital expenditures throughout the, I guess, in the next year and a half as you build that out?
Yeah. Morning, Gary, it's Andrew. You know, 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. With those initiatives, we're not expecting, you know, any significant capital outlays. As Puneet had mentioned in his comments earlier, we are currently evaluating what the potential rollout of further BD Rowa might look like at other locations. So if 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.
Okay, great. Those are my questions. Thanks very much.
Thanks, Gary.
Our next question comes from the line of Kyle McPhee of Cormark Securities. Please go ahead.
Hi, everyone. You're giving lots of color on, you know, some of the moving parts with, with margins, but a big moving part is also OpEx leverage. You know, big benefits come on the back of you guys adding new bed service. 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 morning. Good question. From a bed pipeline perspective, we, we feel the back half of this year will be a bit slower than the first half. It's really because of the labor challenges that our customers are facing. There was a number of larger RFPs that we're expecting to be released that will push into the new year. The same thing with redevelopments and the new beds coming online. Construction has been a bit delayed. We just think it'll just push it. It's not that they're lost opportunities, they're just gonna slide a little bit into early next year.
Got it. Okay, that's helpful color. That's it for me. Thank you.
Thanks.
Ladies and gentlemen, as a reminder, if you wish to ask a question, please press the star followed by the one. 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 you to please disconnect your line.