Thank you for joining us for Afya's third quarter 2023 conference call. Today, I am here with Afya's CEO, Virgílio Gibbon, and Luis André Blanco, our CFO. During this presentation, our executives will make forward-looking statements. Forward-looking statements could 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 these 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. These risks include those more fully described in our filings with 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 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. Let's now turn the call over to Virgílio Gibbon, Afya's CEO.
Thank you, Renata, and thanks everyone for joining us today. As we approach the end of the year, we can see Afya maintaining the strong pace. Moving now to page number three. Let's start with our quarter highlights. Adjusted net revenue grew almost 25% year-over-year, reaching BRL 723 million, followed by an adjusted EBITDA growth nearly 22% year-over-year, reaching BRL 278 million, with a margin of 39%. We also reported a record cash flow from operating activities generation, ending the nine-month period with BRL 934 million, 26% higher than last year, with a cash conversion of 109%. We were able to reduce our net debt in BRL 418 million when compared to December 2022. Even with UNIT and FITS acquisition in January, as we will see on slide 14.
Adjusted net income followed the same positive trend of last quarter and reached BRL 128 million, a growth of 7% year-over-year, with an adjusted EPS of BRL 1.38, 7% higher than last year, even considering a higher net debt level and a higher interest rate. This result reflects Afya's great capital allocation discipline on buybacks, M&A, and an efficient capital structure. In this quarter, we have reached 3,113 operating seats with the acquisition of UNIT and FITS, the beginning of the four Mais Médico s operations, along with Ji-Paraná campus, representing an increase of 15% year-over-year. Our number of undergrad medical student has reached more than 21,000, representing a 20% growth compared to the same period last year. In the continuing education segment, we continue to see great results, presenting a net revenue growth of 35% year-over-year.
Once again, Afya reported great results on the digital health services revenue, which ended the quarter with an increase of more than 19% year-over-year, reaching more than BRL 53 million in the three-months period. This result reinforces the great opportunity ahead in the digital services, and it explained by the strong ramp-up on B2B engagements with new contracts with pharmaceutical industries companies and a continuous ramp-up on B2B contracts. Last but not least, our ecosystem reached 285,000 active users, what represents around 34% of the Brazilian physicians and medical students market. Moving now to slide number four, w e'll 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 higher tickets in medicine courses, with 9% increase in medicine tuition for the nine-month period, and the maturation of medical seats.
We are delighted to present that the most significant growth in terms of revenue came from the continuing education segment with 35% growth year-over-year due to a robust intake process, new campuses, and course maturation. On our digital services segment, we ended the quarter with a revenue increase of 19% compared to last year. This result reinforced the opportunity ahead in digital services, and is explained by the ramp-up in B2B engagements that boosted net revenues and grew more than 75% with new contracts with the pharma industry and the continuous ramp-up on B2P contracts. In the next slide, we are reaffirming our guidance for 2023, which considers the successfully concluded acceptance of new medical students, ensuring 100% of occupancy in all its medical schools. Considering the above factors, the guidance for 2023 is defined as shown in the charts.
Adjusted net revenue is expected to be between BRL 2.750 billion and BRL 2.850 billion. The adjusted EBITDA is expected to be between BRL 1.1 billion and BRL 1.2 billion, excluding any acquisition that may be concluded after the issuance of this guidance, and also consider the increase of FG-FIES contribution rate. In other words, Afya's 2023 net revenues and adjusted EBITDA will be almost 4x higher than 2019, the year of our IPO. Furthermore, the cash conversion rate will continue to perform above 90%, show our capacity to deliver strong growth, expanding our profitability and cash generation. Once again, we are guiding another strong round ahead, aiming the top of the year guidance, improving Afya's resiliences and ability to keep delivering solid results with a high predictability. Moving to slide number six.
On October 4th, the Ministry of Education announced the rules for the Mais Médicos three, which defined the criteria for medical seat expansion throughout Brazil, aiming to achieve OECD average of 3.3 physicians per 1,000 inhabitants in 10 years. The new program will allow the opening of nearly 10,000 new undergrad seats, of which 5,700 seats will be distributed through predefined health regions across 95 cities, considering 60 seats per entity. In addition, approximately 2,000 will be allocated to existing private institutions and another 2,000 allocated to the public system. As stipulated in the notice for Mais Médicos three, each organization is eligible to compete for two health regions. Afya has 18 entities, with 17 of them offering high-quality medical courses. Mais Médicos three presents a significant opportunity to expand Afya's medical courses in Brazil and address the pressing need for more healthcare professional in underserved areas.
Afya is committed to engaging the program with high-quality proposals and enhancing the standards of medicine costs throughout the country. 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.
Thank you, Virgílio, and good evening, everyone. Starting with slide number eight to discuss the financial highlights of the third quarter. It is with much satisfaction that I presented another strong quarter results for Afya. Adjusted net revenue for the quarter was up almost 25% year-over-year to BRL 723 million. For the nine-month period, adjusted net revenue was BRL 2,145 million, an increase of 24% over the same period of the last year, reflecting the maturations of medical seats, higher tickets in medicine courses, and the ramp-up of continuing education boosted by the growth in the number of students. Once again, the digital service segment has also contributed to the revenue growth this quarter with the increase of the B2B engagements and the active payers expansions in B2P.
Adjusted EBITDA for this quarter increased almost 22% to BRL 278 million, while the adjusted EBITDA margin decreased 90 basis points to 38.5%. For the nine-month period, adjusted EBITDA was BRL 877 million, an increase of around 22% over the same period of the prior year with adjusted EBITDA margin decrease of 80 basis points in the same period. The adjusted EBITDA margin reduction is mainly due to mix of net revenues with higher participations of the continuing education segments and the consolidations of four Mais Médicos campuses that started operation on the third quarter 2022, and UNIT Alagoas and FITS Jaboatão, which are performing better than expected but still present lower margins when compared to the integrated companies. Moving to the next slide.
Cash flow from operating activities for the nine-month period was 26% higher year-over-year, totaling BRL 934 million, resulting in a strong cash conversion ratio of over 109%. Adjusted net income for the third quarter of 2023 was BRL 128 million, an increase of 7% over the same period of the prior year, mainly due to the increase in operational results, which was partially offset by higher financial expenses. Adjusted net income for the nine month of 2023 was BRL 427 million, an increase of 5% year-over-year. Even with higher interest rates year-over-year and an increase in debt with the acquisitions of UNIT Alagoas and FITS Jaboatão, our adjusted EPS keep increasing due to operational leverage, reaching BRL 1.38 and BRL 4.58 per share in the third quarter and nine-month period, respectively.
Moving to slide number 10 for discussions of key operational metrics by business unit. Starting with the undergrad programs. Our number of medical students grew 20% year-over-year, reaching more than 21,000 students, with operating medical seats increasing 15% year-over-year. With our net average ticket for the nine months of medical school increasing 9% year-over-year, we've reached BRL 2,446 million in combined tuition fees, up from BRL 1,978 million from the prior year, an increase of 24%. Regarding the revenue mix, 79% was derived from medical school students and 91% from health-related courses. On the next page, I will present our continuing education metrics. As said before, we saw another quarterly with great recovery in our continuing education segment, with an increase of nearly 23% in the number of students compared to the last year, reaching 4,954 students.
In this quarter, net revenues for the segment grew 35% compared to the same period of the prior year. For the nine-month period, we saw an increase of 43%, reaching a net revenue of BRL 108 million. Moving to slide number 12, I will discuss the digital service operational metrics. On the first graph, you can see our total active payers, which are those ones that generate revenues in B2P. With a continuous growth trend in this quarter, we've reached 217,000 paying users, a 12% growth compared to the last year. As you can see in the second graph, our ecosystem reached 285,000 monthly active users, representing around 34% of all medical students and physicians in Brazil, as Virgílio said before. Finally, our last graph shows our digital service net revenues for the quarter, which increased more than 19% year-over-year.
Regarding the nine-month period, increased by almost 22% year-over-year. The organic growth is a combination of the start of the B2B engagements with pharmaceutical companies and the expansion of active payers in the B2P. In addition, since 2022, we started to break down our digital service net revenue within B2P and B2B segments. So from the BRL 164 million of digital service net revenues during the nine-month period, more than BRL 134 million came from the B2P and almost BRL 30 million came from B2B. B2B strategy holds a huge potential and is still ramping up. Now moving to my three last slides, I will discuss our cash and net debt positions, also giving more color on our cost of debt.
Cash and cash equivalents at the end of the quarter were BRL 822 million, an increase of 15% over the third quarter 2022, and an increase of 11% over the second quarter 2023. Net debt, excluding IFRS 16, totaled BRL 1,788,000,000 , compared to the net debt of BRL 1,348,000,000 in the same period of 2022. The increases when compared to the third quarter of 2022 is mainly due to the BRL 825 million of UNIT Alagoas and FITS Jaboatão acquisitions closed on the 2nd of January of 2023, which was partially offset by the free cash flow generation in the first nine- months period of 2023. As we can look closely on the next page, i n this slide, I presented the net debt reconciliation for 2023.
The cash flow from operating activities was allocated to income tax and lease payments, CapEx activities for the service of the financial debt, and our share buyback program. We were able to generate BRL 418 million as free cash and reduced our net debt in the nine-month period. On the next slide, you can see a table with the breakdown of our gross debt and our total cost of debt, considering our main debts, the SoftBank transaction, other loans and finance, account payables to selling shareholders, plus other financial obligations. Our capital structure remains solid with a conservative leverage position and a low cost of debt. This ends our prepared remarks.
As we approach the end of the year, even considering the challenging economic and political scenario, we can gladly see Afya delivering strong results, w ith a quarter marked by significant increases in net revenues in our three segments, positive EBITDA, cash generations and EPS growth, and the consistent business expansion. I will now open the conference for the Q&A session. Thank you.
If you want to ask a question, please raise your hand. We are going to start our Q&A with Lucas Nagano from Morgan Stanley. Lucas, you can now talk.
Hello. Good evening. Thanks for taking our questions. We have two questions. First one is related to Mais Médicos three. Is it possible to provide us some color on your plans for the program, in terms of how many proposals you plan to submit, how many seats this represents, and which regions you are targeting? The second question is related to tuition readjustments for next year. So how much are you increasing prices for 2024, and if there is between schools? If you could give us some color on the range of tuition readjustment in all of Afya's schools. Thank you.
Hi, Lucas. Virgílio. Thanks for your question. Regarding the Mais Médicos number three, we have 18 institutions that all of them are going to propose for additional two medical schools. We will be allowed to send a proposal for 36 new additional schools. The number of medical seats will be 36 times 60 per each school. This is the number that we are going to participate on this entire process. Regarding the tuition adjustment, I will pass to Blanco here that will give you more color.
Hi, Lucas, it is Blanco speaking. Regarding the second questions about readjustments, we have defined the increase in tuition fees for the next year. Specifically from the medicine courses, we are increasing most part of the courses in 4.95% for freshmen and existing students. Most part of our institutions are going to have this kind of readjustments.
Okay. Thank you. Thank you very much.
Thank you, Lucas. The next question comes from Marcelo Santos from JPMorgan. Marcelo, you may now go on, sir.
Thank you. Thank you very much. Good evening, Virgílio, Luis, Renata. Thanks for the opportunity. I have two questions. The first is, considering we are already in the middle of the fourth quarter, could you please provide an update on the outlook of the prep business? Probably already had a lot of the intake, so it would be interesting to see how do you see this next cycle. The second question is, if you could comment a bit on digital business. We saw a slight sequential decline in revenues. Isn't this a business where we should be hoping for a little bit higher growth? Could you please comment this change from the second to the third quarter? What are the moving parts here, and how do you see this moving forward? Thank you.
Hi, Marcelo. I will get the question about the prep course here. This is basically regarding to Medcel operation. The nine months, we are operating below the trend, when you compare to last year, the same period last year. Remember that the seasonality, we have the new offer for 2024 cohort starting in end of September, October. What we are seeing from October and November that the volume intake that we are seeing, it's ahead last year. It's the first month, when you compare to the last 12 months, that we are seeing a stronger intake from when you compare to the last year same period intakes. We expect to reduce the gap between last year and for 2024, resume growth also on prep courses offerings. Regarding the digital, Blanco will give more color for that.
Hi, Marcelo. Blanco speaking here. Medcel turns to have a pushback on the digital results as a whole. Medcel it's not our most important business in the digital. It's lagging with Whitebook. But as you notice in our release, the number of students of Medcel decreased more than 50% year-over-year. Now, we can have this new intake that started here in the fourth quarter that we can recover and stop this follow from the last year. The digital as a whole, to achieve these BRL 1.2 billion net revenue that we have guided for 2028, has to grow around 35%. And you are right, we delivered a 19% in this quarter. But this drop on the net revenues come mostly from Medcel. If you take the main important part of the practical medical business, we are growing around 30%. Okay?
The numbers of the active base users are growing 16%, and the number of the B2B business is growing 75%. We have this specific pushback because of Medcel. We took all the actions on that, and for the first numbers of the fourth quarter, as Virgílio mentions, we saw a recovery year-over-year.
Yeah. Just summarizing that, Marcelo, the way that I like to see that is that separating on digital, the pillar one that is basically medical education, medical education, most of the part come from Medcel operations. Even combining Medcel operation, there is a business-to-physician type of business with other products that we have on pillar two and also pillar three. We are growing on B2B more than 14%, even considering the downturn coming from Medcel. If you see the B2B business that we started ramping up last year, we are moving above 75%. That's our, at least where I put our efforts here, to leverage our digital operations. This is basically medical practice. On digital, medical practice is growing faster than expected. But when we have the pillar one that's more regarded to medical education impacted by Medcel operation, it's just expanding 14% year-over-year.
If I may complement, Marcelo, other thing that's important to remember is that when we look for the future of the company, especially in the digital, most of the money comes from the B2B part of the digital service, right? To accomplish that, we don't need the pillar one. I don't want to make you guys that don't think that's not important, not that, but to complement the strategy here, we need to have the contact with the physicians, right? The products that most matter here is the products for the pillars two, three, four, five, and six. Medcel, it's really important to the thesis. We want to keep with the physician, but what we are seeing with Medcel, it doesn't make us believe that we cannot achieve the BRL 1.2 billion or anything like that, okay? Our B2B segment is doing great.
Perfect. No, thank you very much for all the explanation.
Thank you. The next question comes from Fred Mendes from Merrill Lynch.
Thank you. Thank you, Renata. Good evening, everyone. I have two questions as well. If I can just go back to Mais Médicos program, just trying to get your understanding. Do you think that eventually, as it looks like the restrictions of the request per institution, they are more restricted than previous programs, do you think that eventually this could bring an opportunity for you in terms of M&A? As, I do not know, maybe smaller companies gaining some of these seats, and eventually they do not have the CapEx to do the investment, then you could eventually buy, and end the Mais Médicos through if more seats than you can request. That would be my first question.
The second one, more like a perspective, if you have any idea or any view when the Supreme Court would eventually restart or resume the case of injunctions of Mais Médicos as well. Thank you.
Hi, Fred. This is Virgílio. About the first question. This restriction about two proposals for each institution, they are also limited in allowing small players to bid differently and also in two different cities. Thinking about the M&A opportunity here, for sure we may have some small players that they can come to the table with new opportunities for M&A. Being very sincere, this is not something that we are thinking right now. We still have a hot pipeline for more traditional schools, and seeing the size of our pipeline coming from the Mais Médicos three, more than 30 new possible institutions, I think this is much more important than thinking about acquiring additional institutions that will be implemented using Mais Médicos three. This is what we are thinking right now. Secondly, about the Supreme Court.
We are seeing that the other judge, the other federal judge is moving and having a lot of questions coming to the sector. I think they are preparing to release additional votes. Maybe we will have some additional votes that are still pending by the end of this year. Maybe November, we can have one or two additional judges voting. But being very sincere, we do not know if they will complete this session by the end of this year or start in 2024. It is still a lot of speculation about that. We do not have anything that would be more tangible for you guys right now, okay?
And Fred, Blanco speaking, just to give more color on the first topic regarding M&A in Mais Médicos. You need to remember that we always keep our capital discipline allocation, okay? So the first restrictions regarding these possible new targets with Mais Médicos. First, we needed to buy the entity as a whole. As you know, we have this threshold of having 60% of the revenues coming from medicine business. So if an institution that doesn't have medicine just want this Mais Médicos stream license, we need to see how important these licenses will be under the future operations of this company. Why I'm saying that, because it's important to remember that under Mais Médicos program, you cannot carve out the license from the [Non-English content] if you don't have the course recognized.
So it's not possible to carve out just the medicine course and buy this medicine course coming from Mais Médicos if the course is not recognized by the Ministry of Education. So I think this will take some time to get through the table. But for sure, with or without these kind of targets will keep having our capital discipline allocation, okay?
Perfect. Super clear. Thank you, Virgílio. Thank you, Blanco.
Okay. The next question comes from Lucca from Itaú.
Good evening, everyone, and thank you for taking our question. It's regarding the digital services segment. The release mentions that the company had a strong increase in B2B engagements. Can you please provide some color on this performance and also comment on what should be the next steps within this vertical if you have new initiatives and you expect still strong growth in upcoming quarters? That would be very helpful. Thank you.
Hi, Lucca. Just to remember, we start offering the B2B offerings to the market beginning on first quarter 2022. Today, we almost have around 200 contracts signed, most of them with pharma companies, to give them all kind of access to our physician ecosystem. They are spreading content, new protocols, education and learning objects to the physicians and also typical ads using our social network here. This type of offering is getting even more used for the pharma companies. They are kind of exchanging the traditional way that they have the sales representative reaching physicians to do the marketing, to sell their medicine, their drugs.
They are using even more the digital channel and with a strong, n ot only reputation, but we are I think the right partner to them to have the right way to reach physician and the best time using their time in the best way. What we are thinking is that, well, our strategy here to reach the pharma industry as on the B2B contracts, it's more based on landing and expanding strategy. Today we have, like for the five big companies, we have more than 10 contracts with them. It's being more recurring relationship with them and ramping out B2B contracts. That's the type of offer that we are offering to B2B and to pharma companies and also start using this type of product also to providers in the same way that we are doing to pharma companies.
By the end of the day, providers, they also want to reach physician to generate more demand and also to drive more volume for their operations for their hospital. This is the type of solutions and opportunities that we are offering using our ecosystem.
If I may add, Lucca, one point here is that until the first semester of this year, most of our contracts were campaign-based, okay? So the pharmaceutical companies hire us for a specific campaign, for specific drugs, for a specific type of physicians. From the third quarter, we started new products. We launched, as a matter of fact, our first product that is generate recurring kind of revenues and recurring type of relationship. That is what it is, RX Insights that provides insights for prescribed drugs under our ecosystem. We are moving from campaigns to this kind of recurring revenues that is very important for us in the ramp-up of the business.
That is very clear. Thank you, guys.
Just a reminder, if you want to ask a question, you can raise your hand. While we wait for next question, I am going to read a question that we received from the Q&A. It is regarding the Mais Médicos seats bid, how does the CapEx in terms of cost per seat compare to usual M&A per seat costs of roughly BRL 2 million per seat? You want to take this?
Yes, I am going to take this. We are seeing that these Mais Médicos three will be around BRL 25 million to invest and deploy the sites. Just making a round calculation, if we consider BRL 30 million, just rounding, with 60 seats, we would say about BRL 500,000 per seat. That is much, much less than these BRL 2 million per seat. That is its kind of number of multiple that you see in the market. Getting the license and deploying these green fields is accretive for us.
Yeah. BRL 25 million-BRL 30 million is our expectation as of today. The next question comes from Lucas Nagano from Morgan Stanley.
I have a follow-up question on the regulation related to the injunctions. Now that the Ministry of Education revoked that measure that basically invalidated the injunctions that didn't comply with Mais Médicos cities, the current valid decision is from Gilmar, which orders MEC to evaluate some of those requests. Do you think that more medical schools could be opened outside of Mais Médicos in the meantime, while the STF trial doesn't resume? How do you perceive this risk?
Hi, Lucas. That's a very good question. That's also our opinion here. In my opinion, I think the Ministry of Education, they will expect the final decision from the Supreme Court in order to evaluate and give the final word if that process that we analyzed through the injunctions will follow or not. If you read this new ordinance, they expect that they will follow the process, they will visit these institutions, but by the end of the process, they still have a final word from Ministry of Education in order to approve or not that new medical institution. I think that with that measure, Ministry of Education is waiting for the final word coming from the Supreme Court in order to analyze what they are going to do with all this process coming from injunction. I think that's the main point.
I think we are not going to see any approval before the decision coming from the Supreme Court.
If I may add, Nagano, this normative that Virgílio is saying, it is after what we are seeing since Gilmar Mendes give his decision on beginning of August. Since then, while this normative was not released yet, we were not seeing a flood of seats being released because of that, b ecause they were not in the municipalities as they mentioned. We do not see a big risk here, as Virgílio said.
Yeah. By the end of the day, they still have to follow the Mais Médicos requirements, that they have to have the hospital beds, they have to follow the social demand and how critical is for that region, for that city to open new medical school, and also to follow all the academic, and also the necessities that they have to pay to the municipality and to the health secretary in order to approve the new medical. So when we analyze that and apply for all the regions that they are trying to open these new Mais Médicos, these new injunctions, I think, the impact on overall demand will be much lower than the overall process that we are seeing being analyzed by the Ministry of Education.
That is very clear. Thank you, Virgílio and Renata.
Thank you, Lucas.
Of course. Since we do not see any other questions here, I appreciate you all participating and we from investor relations, we are available if you still want any follow-up question. Thank you and have a nice night.