Good night, everyone. Thank you for joining us for Afya's first quarter 2024 conference call. I am here today with Afya CEO, Virgílio Gibbon, and Luis André Blanco, our CFO. During today's presentation, our executives will make forward-looking statements. Forward-looking statements can be related to future events, future financial or operating performance, known and unknown risks, uncertainties, and other factors that may cause Afya's actual results to differ materially from those contemplated by those forward-looking statements. Forward-looking statements in this presentation include, but are not limited to, statements related to the business and financial performance, expectations and guidance for future periods or expectations regarding the company's strategic product initiatives, its related benefits, and our expectations regarding the market, as well as any remaining impact from COVID-19. These risks include those more fully described in our filings with the Securities and Exchange Commission.
The forward-looking statements in this presentation are based on the information available to us as the date hereof. You should not rely on them as predictions of future events, and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, management may reference non-IFRS financial measures on this call. These measures are not intended to be considered in isolation or as a substitute of the results prepared in accordance with IFRS. This presentation has reconciled these non-IFRS financial measures to the most directly comparable IFRS financial measures. Now, let me turn the call over to Virgílio Gibbon, Afya's CEO, starting with slide number three.
Thank you, Renata, and thanks to everyone for joining us today for our inaugural conference call of 2024. To start off, we would like to outline our operational restructuring efforts in continuing education and medical practice solutions segments. To enhance synergies between Afya's content and technology for medical education and its specialization course for physicians, A fya has restructured its corporate structure so that all products and services related to medical education, excluding medical undergrad courses, are now managed in the same structure. Moving to the next page. We can now observe our new business structure taking shape, comprised of our three segments: undergrad programs, continuing education, and medical practice solutions. In the undergrad segment, we have maintained the existing structure. However, notable changes have occurred in the continuing education.
Entities previously accounted for as content and technology for medical education, Medcel, Além da Medicina, CardioPapers, and Medical Harbour within medical practice solutions, are now accounted for in the continuing education segment. Simultaneously, the segment formerly known as digital services has been renamed to medical practice solutions. These structural adjustments have already been implemented for the results presented in the first quarter 2024 onwards. Additionally, the comparative base from the previous year has been recalculated to account for these restructuring efforts. Moving now to page number five. Let us start with our performance highlights. Once again, Afya is recording another strong beginning of the year. First, net revenue increased 13%, reaching BRL 804 million, followed by an adjusted EBITDA growth of almost 21% year-over-year, reaching BRL 398 million, with a margin of 49.5%, 300 bps over the same period last year.
Once again, Afya is recording another strong quarter, showing a solid organic growth with high profitability boosted by all three segments. The adjusted net income stood at BRL 251 million, representing an increase of 51% when compared to the same period of 2023, and our adjusted EPS scaled to BRL 2.74, a jump of 55% over last year. We also reported a strong cash flow from operating activities of BRL 429 million, an increase of 23% year-over-year, leveraged by the solid operational results of the company, with an operating cash conversion of 110% and a solid cash position of BRL 611 million at the end of the quarter. Moving to our operational updates of the quarter. We expanded our operational medical school seats capacity to 3,153 seats.
Additionally, our number of medical school students has reached over 22,000, representing an 8.6% growth compared to the first quarter of the previous year. Lastly, our physician and medical student ecosystem reached 334,000, accounting for around 41% of all medical students and physicians in Brazil. In the next slide, we will talk about our solid business execution within our three business units. Starting with the undergrad segment, we saw important movements throughout the quarter, such as the higher tickets in medicine courses with more than 6% increase in tickets of medicine schools. The 40 seats expansion Guanambi campus authorized in January of 2024 and gross margin expansion. Continuing education was marked by an operational restructure that comes with growth and margin expansion.
Considering this new segmentation, we saw an increase in B2B students, while both net revenue from B2P and B2B increased by 11% and 30% respectively, achieving a net revenue of BRL 65 million in the first quarter. In our medical practice solution segment, we ended the quarter with 15% increase in active payers, allowing for our gross margin expansion. In slide number seven, we are also excited to expand our offering in the undergrad business with the signing of the acquisition of Unidompedro and Faculdade Dom Luiz. This acquisition will contribute to 300 operating medical seats to Afya in Salvador capital of Bahia, and the fifth-largest city in Brazil in population size. Unidompedro will be Afya's fourth medical school in Bahia, and will serve as a strategic hub for all other medical campuses in the state.
Besides all the synergies that we can extract from all continuing education campus in Salvador. We are affirming our strategy. Unidompedro is focused on medicine. Its projected net revenue for 2024 is BRL 110.5 million, with 88% coming from medicine course. By 2027, when the medical school reaches full maturity, the projected net revenue is BRL 267 million, with over 95% coming from medicine. Highlighting their excellence, Unidompedro received a score of four out of five in both institution concept and course concept metrics, affirming the high quality of their medical course at the campus in question. The aggregate purchase price amounts to BRL 660 million. We also anticipate achieving an EV/EBITDA of 4.2x at maturity, post synergies. We expect the closing of transaction to be on July 1st, 2024.
Now, I will turn the call over to Luis Blanco, Afya's CFO, to give more color on the financial and operational metrics. Thank you all.
Thank you, Virgílio, and good evening everyone. Starting with slide number nine for discussions of key operational metrics by business unit. Our number of medical students grew 9% over first quarter 2023, reaching 22,600 students due to the maturations of our medical seats and the seat increase in Guanambi authorized in January 2024. Therefore, we reached 3,203 seats and expect to achieve over 23,000 undergrad medical students at maturity. Our medical school net average tickets increasing by 6.4%, reaching more than BRL 90,000 in the first quarter of 2024. In addition, net revenues for the undergrad program saw over 13% increase, achieving BRL 705 million, 87% related to medicine. All this effort means one thing: our medical educational business remains and will continue to be the cornerstone of our business in the short and middle terms, delivering high predictable growth combined with solid profitability and cash generation.
On the next page, I will present our continuing education metrics. As Virgílio mentioned, we proudly present the new structure for the continuing education and medical practice solutions. Strategically, we look into our continuing education in three different journeys. Starting from left to right with the residency journey, which encompass the products of Além da Medicina, focused towards mentoring and Medcel B2P. We saw an increase of 62% in active payers, obtaining around 15,000 students at the end of the period, f ollowing the graduate journey, which includes the students from Afya Educação Médica and Afya Papers. It grew 12%, reaching more than 30,000 students. In other courses and B2P offerings, Afya reached 21,000 students, which represented an increase of 44%.
Summarizing, our efforts made possible for continuing education net revenue to reach BRL 65 million in the first quarter of 2024, compared to BRL 58 million in the first quarter of 2023, a growth of over 12%. Moving to slide number 11, I will discuss the medical practice solutions operational metrics. On the first graph, you can see our total active payers, which are the ones that generate revenues in B2P. With a continuous growth trend, we reached 191,000 paying users, a 12% growth compared to the last year. As you can see in the second graph, in line with the previous years, we achieved 263,000 monthly active users. Lastly, our final graph represents the net revenue of our medical practice solution, which has expanded 9% compared to the same quarter of last year, reaching BRL 37 million.
Breaking down the revenue within the B2P and B2B segments, we observed that BRL 32 million originated from B2P, while BRL 5 million come from B2B. It is important to mention that during the first quarter of 2024, some B2B invoices were postponed and are expected to occur in the next quarters. In the next slide, we are proud to present the impact of Afya on the medical community in Brazil. We ended in the first quarter of 2024 with more than 334,000 medical students and physicians in our ecosystem e xperience our service and products, representing a 41% of market penetration. Moving forward, I would like to discuss our financial overview for the first quarter of 2024. Starting with the next slide, with great satisfaction, I am pleased to present another robust quarterly results for Afya.
Net revenue for the first quarter of 2024 reached BRL 804 million, marking a significant 13% increase over the same period of the prior year. This growth can primarily attribute it to higher tickets in medicine courses at 6.4%, the maturations of the medical seats, the 40 seats expansions in the Guanambi campus, the continuing education in taking performance as the medical practice solutions execution. In first quarter 2024, adjusted EBITDA increased more than 20% to BRL 398 million, with an adjusted EBITDA margins of 49.5%, marking an increase of 300 basis points compared to the first quarter 2023.
The adjusted EBITDA margin expansions is mainly due to gross margin expansions within the three segments, the end of UNIMA and Afya Jaboatão integration process in November 2023, t he ramp up of the four Mais Médicos campuses that started operations in third quarter 2022, and operation restructuring efforts in continuing educations and medical practice solution segments.
Moving to the next slide, t he cash flow from operation activities for the year increased 23%, reaching a total of BRL 429 million, driven by our strong operational performance. The operational cash flow conversion ratio stood at 110% for the first quarter of 2024, slightly decreasing from the 112% in the first quarter of 2023. Adjusted net income for the first quarter of 2024 amounted to BRL 251 million, an increase of 51% over the same period of 2023, mainly due to the enhancement of operational results, the reductions in the financial expenses due to the decrease in net debts and lower interest rates, and lower effective tax rates.
In terms of adjusted EPS, we achieved BRL 2.74 for the quarter, a remarkable 54% increase compared to the previous year. Our EPS was mainly positive influenced by the increase in our net income with an impact from the previous year's share repurchase. Now moving to my two last slides, I will discuss our cash and net debt position. I also give you more color on our cost of debts. On the next slides, you see a table with the breakdown of our gross debts and the total cost of debts, considering our main debts, the SoftBank transactions, debentures, accounts payables to selling shareholders and other financial obligations. On the next page, we can look closely to the net debt variation. In the first quarter 2024, our net debts reached BRL 1,577 million. When compared to December 2023, Afya reduced its net debts by BRL 237 million.
Even considering the [FIP Guanambi earn-out] over BRL 49 million, we reduced our net debts per adjusted EBITDA from 1.6x in 2023 to 1.2x in the first quarter of 2024. Considering the midpoint of the guidance for 2024. Considering the additional debts regarding only the Unidompedro acquisition, we expect an update net debts per adjusted EBITDA of 1.6x . This ends our prepared remarks, s trong performance, consistent growth, and success in all segments. We are committed to provide an ecosystem that integrates educational and medical practice solutions for the entire medical journey, enhancing the development, updating, effectiveness, and productivity of health professionals. We are very proud of our business and what we have achieved so far, and excited about what we plan for the future. I will now open the conference for the Q&A session. Thank you.
Hi, everyone. If you want to ask a question, please raise your hand. The first question comes from Lucca Marquezini, from Itaú. Lucca, you may now go.
Hey, good evening, everyone. Thank you for taking our questions. We have two questions from our side. The first one, the release mentions that there was a gross margin expansion in all three segments. Can you please give more color on which of the segments most contributed to this expansion and the drivers behind this enhancement? The second question would be, after the acquisition, you already surpassed the guidance of acquiring 200 seats per year. Should we expect another acquisition in the grad med courses this year, or M&A should now be focused on other verticals? Thank you.
Hi, Lucca. It's Luis speaking. I'll start with your second question. Regarding M&A, we have this guidance from 200 seats per year that we give in 2022. From this moment, we've made two business combinations, o ne that was UniSL, and this is the second one. So in three years, we made 640 seats. Right now, after the approval of the [grants], we all have achieved these guidance for 2024. Of course, we are always open to discuss the asset that has our profile with the right price. We know that we are very laser-point specific targets and we try to keep this rhythm, but it's always hard to match the size of the transactions with the target sets that we have. Okay?
Yeah. Regarding the growth margins, Lucca, we are going to disclose it to you guys, our consolidated spreadsheet, as soon as we finish the call. But all the segments, as we already said, had margin expansion. The undergrad was around 1.5 points, continuing education, a little less than four points, and the digital service a little bit higher than five points.
And the rationale behind that, Lucca, I think the contribution from the undergrad comes from, first the maturation of our Mais Médicos two campuses. Remember that we started this operation around second half of 2022, 2023. So now, we are in the third year of maturation, s o the margin's going up and contributing to improve our margin. Also, the integration of UNIT, that was faster than expected originally on our business plan, so helped a lot to improve our margins, a nd all the contribution coming from the other business units that not only in terms of growth but also improving margin, the graduate segment operating close to what we are operating now on the undergrad. And also the digital service now flowing not only growth on the top line, but flowing positive results from the top to bottom line.
So that was the duration on all of this margin improvement comes from the three segments.
Yeah, if I could add a point. Not only in terms of cost, but also in terms of expenses. The reorganization that we did between the segments of the content technology for medical education going to the continuing education, we could save a lot of money. So it was something that we made that made sense in terms of operation and also improved our results, and we are expecting to boost our growth.
Yeah, just for a little bit additional color on that, Lucca. For digital service, an example, we were operating with different companies. We have two commercial areas, two growth areas, two IT teams for development. We have now fully integrated, close related to the physician journey, for the mission that they have. Now it is only one team focus for the entire mission that we are prioritizing for that quarter, for that sprint. It is a lot of synergies after the restructuring. The same applied for the pillar one combined with continuing medical education that we had last year. We have all the marketing commercial team working together and also the content creator, the critical development working together. There was a lot of senior implementation in the fourth quarter in 2023.
That is very clear, guys. Thank you.
Of course. The next question will come from Mirela from Bank of America. Mirela, you may now go.
Good evening, everyone. I have a follow-up question on the gross margin ones. Could you comment a bit also on what to expect from both the continuing education and the medical specialization margins going forward? A second question on the guidance. On last year's Investor Day, the company mentioned a long-term guidance for the continuing education revenues of around BRL 1.2 billion in 2028. I was just wondering how should we think this guidance and the one for digital services also considering the new structure.
Hi, Mirela. Blanco speaking here. We do not have this opening of gross margins in terms of the guidance. We give the EBITDA guidance for the year, and we don't have changes in our view for the year of 2024 regarding the guidance that we provided when we released the results of 2023. So what we can expect for the year, it is adjusted EBITDA between BRL 1.3 billion and BRL 1.4 billion for the year. We reaffirm this guidance with these results.
And Mirela, regarding the guidance of our digital service because of the restructure, one important part of that guidance pillar one that now is combined and have a lot of synergy with continuing education. So the BRL 1.2 billion now is split between two segments. We will have to reorganize this guidance for the long term, and we will come to the market in the right time to check how much of each segment will compound this BRL 1.2 billion that would come from the digital service. But as soon as we get it that, we will come to the market with more detail. Okay?
Okay. Thank you.
Of course. Our next question comes from Marcelo Santos from JP Morgan. Marcelo, you may now go.
Thank you. Good evening, Virgílio, Luis, Renata. Thank you for taking my questions. I have two as well. The first is regarding the growth on the undergrad revenue. I think Virgílio, last call, if I remember correctly, you indicated that within your guidance, this component, the undergrad, should grow around 10% in the year. You delivered 13.5% in this quarter. I just wanted to understand, is there some seasonal factor that you expect growth to be more on the first half or is this really coming ahead of your expectations? I just wanted to get a feeling here in terms of timing or how you are going according to expectations. The second question is the B2B revenues that you mentioned. I think Luis mentioned that there was a postponement of recognition of some, forgot the name, of some invoices I think from the first quarter to the second quarter.
If you had recognized everything at the right quarter, what would be a better idea of how this revenue growth is taking place? What would be a more organic measure for this? Thank you.
Hi, Marcelo. Grabbing your first question about the idea of the revenues coming around 10%. 10% that was mentioned, it was regarding more volume than top line. When you take a look on our table number two on our release, you can see that medical school undergrad is moving around 15.5%, and around 9% is volume, and 6% coming from tuition. The good news is that in terms of net revenue, we are also seeing organic growth coming from the health science and also for other programs that used to have always a decreasing revenues on this side. It is not more hurting the top-line growth as it had in the past because all the restructuring, we are shutting down programs.
Now we are more organic, so it is expecting to be, i t is not seasonal, as we have a very strong intake, not only for medical, filling all the 100% of our seats. We have a strong intake for health programs and ex-health during the first quarter. Respect to keeping a very good trend the first half of 2024, around 13%, 15% coming from the undergrad segment. Okay? Luis will take the second question.
Just to add, Marcelo, to the first ones. Despite what we have had this performance of the first quarter, our expectations regarding the net revenues for 2024 remains the same that we provided in the guidance. That can go for BRL 3.150 billion at the bottom to BRL 3.250 billion at the top part of the guidance regarding the net revenues.
When we give this call about how we would perform per each segment, we just give a col or how, in the big numbers, how we would perform between our three segments. Our guidance is regarding always in the consolidated figures that comes from BRL 3.150 billion- BRL 3.250 billion for 2024. Having said that, coming to your second questions regarding B2B, yes, we have some postponements on recognitions on the medical practice tools. If we put that on this way, we would be around 20%-30% growth regarding the same period of the prior year, okay?
Just to add here, Marcelo. In terms of guidance, seeing the overall results from top and bottom line in the first quarter, of course, there is a positive bias when you compare to the one-year guidance that we released last quarter. It is still soon in the process. We have the second quarter intakes, everything. There is still uncertainty. So it is still soon to admit that we are going to change or not our guidance for 2024. Okay?
Perfect. Very clear. So 20%-30%, the -6% would become 20%-30%. That is it, Luis?
Yeah.
Perfect. Very clear. Thank you very much.
Thank you, Marcelo. Just a reminder, if you want to ask a question, please raise your hand. The next question comes from Lucas Nagano from Morgan Stanley. Lucas, you may now go.
Thank you, and good evening for the space here. We have some questions related to the Unidompedro acquisition. Three to be precise. The first is how you are planning to fund the acquisition. Second is, what is the expected impact on margin once you consolidate Unidompedro? I think also you mentioned that you expect this to close on July, right? The third is, in practical terms, what is the likelihood that those incremental 175 seats are canceled? If you could comment a bit on the stage of this judicial process. Thank you.
Hi, Lucas. Thank you for your three questions. I will take the three questions. Regarding the fund, we ended the first quarter with more than BRL 600 million in cash s o we have the funds to pay the down payments related to the acquisitions p lus we have the cash stands, we have the cash generations of the second part. If we find an opportunity that we find attractive, we would hire additional funding for that. Regarding margins, we can expect a little bit of dilutions on that. They don't operate margins that we can operate our undergrads segments. So we can have these dilutions that will come in this year, but we can expect increasing margins from 2025 ahead. We are going to work to have a very quick integrations on Unidompedro to have them integrated as fast as possible to our ecosystem.
Regarding the 175 seats, they are operating since the beginning, since 2021, since the first intake, s o we have a very positive view regarding the continuation of these seats to be approved. We put the payment schedule to be 10 years to protect us in a remote possibility to have these seats not being operating. So our view in the base case is these seats we are going to keep operating.
Just to add here, Lucas. First on the second question about the margin impact and how we want to leverage operationally the new campus. Remember that it's our largest medical program campus. It's 300 seats concentrated in one large city with very high levels of tuition. The capacity that we'll have to fulfill all the seats available, the vacancy that we are seeing there in a very fast track as soon as we get the operation closed and improve margins. I think taking what we had as an experience in Unigranrio and also UNIMA that we could leverage 30 percentage points in almost one year. I think we will do something very close to that and reach the same level what we are operating now in the undergrad business in 2025.
175 seats, I think it's important to mention here that we are not operating the seats since the beginning. We have the approval, not only in the Justice but also for the Ministry of Education that recognize it. All the trend that we are seeing from the Supreme Court is that, everything that was approved, considering the current regulation, the Ministry of Education is not canceling, not only for this case here, but all the precedents that we are seeing the market, it's quite positive on this direction. It's very rare, it's completely remote, the chance that to be canceled. Even in a worst case scenario that happens, we have all the framework that we are paying the sums to protect ourselves in 10 years. Also, we will cancel all the payments at the right moment. That's the way that we construct the deal. Okay?
Yeah, just two reminders. The first one is that the request for those seats was before Mais Médicos law, so it was before 2013. The second reminder that in this worst case scenario that Virgílio told us to stop paying, we still have the positive effect of these students that are already enrolled for the next six years. So we also have the economic benefit without having to pay and increasing our IRR.
Yeah. An important point regarding the performance for Unidompedro, we have these expectations of the closing to occur on the first day of July. When we have this kind of confirmations in the next release, we are going to update our guidance, including these six months in our guidance for the year. We are going to release our numbers, consolidated figures and ex acquisitions as we did before, to segregate the performance of these first 12 months of Unidompedro.
Thank you. Also a quick follow-up on the Supreme Court debate, w hen do you expect them to resume the voting process?
It is expected to happen now in May. Actually, the due date is tomorrow, but we do not know if they will release or not the voting by tomorrow.
Yeah, just a clarification. The due date for tomorrow is Alexandre de Moraes' time frame to return with his vote.
Perfect. Thank you.
Okay.
The next question comes from Leandro Bastos from Citi. Leandro, you may now go.
Yeah, thank you, guys. Two questions on our side. First one about kind of the rationalization of cost, the restructuring that you mentioned. I'm just wondering if you could comment how far advanced you think the company is in the process of rationalization. If you see additional levers for reducing duplications and unlocking efficiencies, or if we could expect basically what we saw during Q1 and basically the carry impact from these initiatives through the years. If you could, I don't know, provide some color on how should we think about this margin dynamic forward, I think would be helpful. That will be the first one. The other, if you could also talk about how you saw competition during this recent intake season in terms of candidates per seat. How was the strategy for pricing? We saw, of course, good volumes and kind of a pricing ahead of inflation.
If you just kind of can comment a little bit on how you saw the competitive environment, I think it would be interesting to hear. That'll be it. Thank you so much.
Thank you for your question, Leandro. I will start with the first one, and Virgílio will jump to the second. Regarding the expectations margins, gross margins going ahead, we do not give guidance for gross margins for the year. What we can expect is to achieve the guidance of adjusted EBITDA that we gave for the year. That is our point. We are very constructive with that. We have been not only giving annual guidance but achieving annual guidance before in the last years, and we are confident that during 2024 we are going to do the same. So I prefer to focus on what the guidance that we provide the market, rather than give a guidance in specific gross margins going ahead.
Just adding a color on that, Leandro. We did a big restructuring process in the last quarter of 2023. We dismissed around 200 people. Because of this restructuring, we integrated all the companies acquired, mainly in the digital area. In terms of costs, I think we already completed the work, so now it is much more related to growth and top-line expansion than more cost efficiency than in the past. Another lever here was our corporate expenses t hat is, now we are getting some, not synergy, but we are growing top-line, and our structure is already mature after the IPO, five years of IPOs. We are also getting synergies on G&A expenses on the overall, and that is considered on our expectation on the release guidance that we gave to the market on last quarter.
About the competition, this intake it is close what we saw for the last two years in terms of candidates per seat. I think we do not know why we kept so stable, the competition here. My two cents here is that because all the effort in terms of brand, the change that we did last semester, I think it starts taking off and helping us to attract more leads. Remember that we now have more than 300,000 physician and medical students talking about Afya, using our solution. It is a huge army knowing what our company here is doing for their journey, for their career. I think this is helping us to attract more leads and to fulfill all the seats that we are doing the macro with every semester, every year, in a better way, attracting good students and a good level to complete our ecosystem here.
The competition for us, it is quite the same that we saw actually since 2020, 2021. The candidates per seat was around 6.4 candidates per seat. We have something between five and eight during the last four years. When we analyze also the smaller campuses in more remote areas, we also have a very good intake, and we could attract and enroll very good cohort of students to our schools. So there is no news on the competition side on our side. Remember that we also have a very good condition to pass inflation, a little bit above inflation for our prices year-over-year since 2019.
Okay, that is clear. Thank you.
Yeah.
Of course. Since we do not have any other questions, we are going to end the call. If you have any other questions, we are in investor relations area. We are going to be happy to help you. Have a good night.