Thank you for joining us for Afya's second quarter 2023 conference call. Today, I am here with Afya CEO, Virgílio Gibbon, and Luis André Blanco, our CFO. During this 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 these forward-looking statements.
Forward-looking statements in this presentation include, but are not limited to, the 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 the potential impact from COVID-19. These risks include those fully described in our filing with the Securities and Exchange Commission.
The forward-looking statements in this presentation are based on the information available to us as of 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 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 me now turn the call over to Virgílio Gibbon, Afya's CEO.
Thank you, Renata. Thanks, everyone, for joining us today for our second quarter and first half conference call for 2023 results. For us in Afya, this quarter results reinforce that our strategy has been successful, marked by the consistent growth of our operational and financial results. Once again, we are proud to present the strong execution of our unique business model, combining high growth in all three segments, profitability and strong cash generation, proving its resilience. During this presentation, I will first run through some main strategic topics such as our performance highlights, the successful business execution within our three segments, 2023 guidance, recent awards recognition, the new brand strategy, and to finalize, our future expectations. Further on, Luis Blanco will shed some color over our financial and operational review. So moving now to page number three. Let's start with our quarter highlights.
Adjusted net revenue increased 24% year-over-year, reaching BRL 712 million, followed by an adjusted EBITDA growth of more than 22%, reaching BRL 268 million, with a margin of 38%. We also reported a record cash flow from operating activity of BRL 566 million, an increase of 26% year-over-year, boosted by the solid operational results of the company with a cash conversion of 99% and a solid cash position of BRL 741 million at the end of the quarter. Adjusted net income was BRL 132 million, a growth of 11% year-over-year, with an EPS of BRL 1.42, representing a growth of 12%, even considering a higher net debt and interest rate period during this quarter over last year. Moving to our operational updates of the quarter.
We have reached 3,113 operating seats, an increase of over 25% over second quarter last year, with the beginning of four Mais Médicos campuses, along with organic seat expansion in Itabuna, and also the acquisition of UNIMA Alagoas and FITS Jaboatão. In addition, our number of undergrad medical student has reached almost 21,000, representing an 18% growth compared to the second quarter of previous year. Once again, we saw great results for continuing education present a strong net revenue growth of 50% year-over-year. Also, we are happy to say that Afya reported great results in the digital health service segment, which ended the quarter growing 28% in revenues year-over-year.
These results materialize the great opportunity ahead in digital services, and it is explained by the strong ramp up on B2B engagements, reaching more than 100 contracts with pharmaceutical industry companies, and the continued ramp up on B2P contracts, business to physician. Our ecosystem reached almost 282,000 active users, a growth of 6% year-over-year. This represents around 34% of the Brazilian physicians and medical students market. Moving now to slide number four. We'll talk about our solid business execution within our three business units. Starting with the undergrad segment, we saw an important movement throughout the quarter, such as higher ticks in medicine course, with almost 9% increase in medicine tuition. The maturation of medical seats, the consolidation of UNIMA and FITS acquisition, and 64 additional seats in Faculdade de Saúde Santo Agostinho in the city of Itabuna.
We are delighted to present that the most significant growth in terms of revenue came from the continuing education segment with 50% growth year-over-year due to the robust intake process, new campuses, and course maturation. On our digital services segment, we ended the quarter with a revenue increase of 28% compared to last year. This result reinforced the opportunity ahead in digital service, and is explained by the ramp-up in B2B engagements with new contracts in pharmaceutical industry, and the continuous ramp-up in B2B contract. It's with great excitement that we present to you our RX Insights, the new data intelligence platform that we allowed pharmaceutical industry companies a real time in that look at physician prescriptive behavior. The next line, we are reaffirming our guidance for 2023, which considers the successfully concluded acceptance of new medical students ensuring 100% occupancy in all of its medical schools.
Consider the above factors, the guidance for 2023 is defined as shown in the charts. Adjusted net revenue is expected to be between BRL 2.75 billion and BRL 2.85 billion. 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 the guidance, and also consider the increase of FGTS contribution rate. Under the new FIES program, Higher Education Finance Fund, introduced in 2018, a retention is applied to the amount paid by the program to cover the delinquencies of the finance students. There was a transition rule that capped the retention at certain levels until 2022. From 2023, the limit was lifted, and the retention was updated according to the delinquency per education entity for those FIES students that enter on the amortization phase.
For Afya, the expected impact on the increase of the FGTS in 2023 is around BRL 24 million, which was already considered when we issued the 2023 guidance. In other words, Afya's 2023 net revenues and adjusted EBITDA will be almost four times higher than in 2019, the year of our IPO. Furthermore, the cash conversion rate will continue to perform above 90%, showing 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 resiliency and ability to keep delivering solid results with a high predictability. Now moving to slide number six. I am really proud to announce that Afya's remarkable performance garnered three significant awards within the second quarter. First one, Valor Econômico's Best Education Company in Innovation.
Second one, another prestigious recognition for being the best company in the education sector, the Valor 1000 award. Third, the Executivo de Valor award that I was recognized in the education sector in June. We are very proud of all these achievements, as they reflect the work and passion of our thousands of employees around a unique vision: to transform health together with those who have medicine as a vocation. On the next slide, I would like to talk about Afya brand strategy and its new architecture. We recognize the importance of incorporating the value we create into our brand, and the importance of strengthening an integration that reflects our sense of unity and mission. We already are the leaders and pioneers of a solid and profitable business. Now is the time to be perceived as such.
We have almost 282,000 physicians and medical students using our digital solution, but only some of them know the brand Afya. This brings us a huge opportunity to become the reference in solution for medicine, to hook them up, improve engagement, cross-sell, and upsell along the journey. Therefore, one of our main objectives to make Afya hub known and relevant to students, physicians, healthcare companies, and society, becoming the top of mind and most recurring brand by physicians throughout their journey. With this new logo, we review Afya's brand architecture to no longer let the value of Afya be fragmented or diluted. To consolidate all this value under a single brand, simplifying the comprehension of our portfolio, avoiding brand conflicts, and working towards strengthening Afya as the one-stop shop for physicians. To finalize, I would like to talk about our future expectations.
When we analyze our goals for 2028, six years ahead, and consider our three business segments, we have a very ambitious plan ahead. With undergrad, we have three avenues for growth. First, by maturing the existing seats. Second, through organic growth of half of the requested seats that have been asked to the Ministry of Education. Last, through acquisition. The fact that undergrad is our biggest cash generator allows us to maintain our goal of constant growth with the plan to increase our available seats by 200 per year through acquisition. Considering the increase in inorganics and organic seats, we expect to reach a total capacity of more than 32,000 students and capture 15% of the market share in terms of private seats by 2028, which represents a growth of over two times in top line. It is worth remembering that Afya manages to extract significant value from every acquisition.
In continuing education, which is the next natural step for those who study medicine, we have a product that has shown great potential, and despite being significantly impacted by COVID-19 pandemic, it has experienced an expansion that has exceeded our expectation and still has a lot of room for growth. Through strong top-line growth, hump back of our new units, an additional 50 new courses, we expect to reach BRL 440 million of net revenue by 2028, four times higher than the figures seen in 2022. Afya Digital Services is where we can expand beyond our physical structure and reach a vast number of physicians with tools that offer productivity, assertiveness, and up-to-date information. Our strength in this segment lies in serving as a bridge between the pharmaceutical industry payers and providers, and a vast community of physicians at various stage of their journey.
Our goal for 2028 is to increase penetration engagement in B2P, business to physician sector, and consolidate our B2B offerings, reaching a net revenue of BRL 1.2 billion in digital services by 2028. To summarize, we intend to grow more than two times 2022 net revenue in undergrad by 2028, four times in continuing education, and over six times in the digital sector. This means that Afya will almost triple its net revenue between 2022 and 2028. Despite being ambitious goals, they are achievable, supported by strong execution, focus on the medical journey and a dedicated team. I will now turn the call over to Luis Blanco, Afya's CFO, to give more color on the financial operational metrics. Thank you.
Thank you, Virgílio, and good evening, everyone. Moving to slide number 10 to discuss the financial highlights of the second quarter. It is with much satisfaction that I presented another strong quarter results for Afya. Adjusted net revenues for the quarter was up 24% year-over-year to BRL 712 million, reflecting the maturation of medical seats, higher tickets in medicine courses, the impressive growth from continuing education, consolidation of digital service, and the integration of new acquisition.
For the six-month period, adjusted net revenue was BRL 1,422 million, an increase of 24% over the same period of the last year. Adjusted EBITDA for the quarter increased 22% to BRL 268 million, while the adjusted EBITDA margin decreased 50 basis points to 38%. For the six-month period, adjusted EBITDA was BRL 598 million, an increase of 22% over the same period of the prior year, with an adjusted EBITDA margin decrease of 80 basis points in the same period.
The adjusted EBITDA margin reduction is due to the mix of net revenues with higher participations of the digital and continuing education segments, and the consolidations of four new Mais Médicos campuses that operations started on the third quarter of 2022, and UNIMA Alagoas and FITS Jaboatão dos Guararapes, 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 semester was 26% higher year-over-year, totaling BRL 566 million, resulting in a strong cash conversion ratio of 99%. Adjusted net income for the second quarter of 2023 was BRL 132 million, an increase of almost 11% over the same period of the prior year.
Even with the higher interest rate year-over-year and an increase in debt with the acquisitions of UNIMA Alagoas and FITS Jaboatão dos Guararapes, our adjusted EPS kept increasing due to operational leverage, reaching BRL 1.42 in the second quarter. Moving to slide number 12 for discussions of key operational metrics by business unit. Starting with the undergrad segment. Our number of medical students grew 18% year-over-year, reaching almost 21,000 students, with approved medical seats increasing nearly 15% year-over-year to 3,163 approved seats. Considering additional organic and inorganic seats increase, we expect to achieve a capacity of more than 32,000 undergrad medical students in 2028. With our net average ticket increasing almost 9% year-over-year for medical school, we have reached BRL 1,660 million of combined tuition fees, up from BRL 1,310 million from the prior year, an increase of 23% for the six-month period.
Regarding revenue mix, 78% of these are derived from medical school students and 90% from health related courses. On the next page, I will present our continual educational metrics. As said before, we saw another impressive growth from our continual educational segment, which reported a strong intake process, increasing the number of students by 31% year-over-year. In the quarter, net revenues grew almost 50% when compared to the same period of the prior year. For the six-month period, we saw an increase of 48%, reaching a net revenue of BRL 71 million. This recovery is due to the better performance of Afya Educação Médica, mainly related to the robust intake process and course maturation. Moving to slide number 14, I will discuss the digital service operational metrics.
On the first graph, you can see our total active players, which are the ones that generate revenues in B2B with a continuous growth trend. So far in this quarter, we have reached 270,000 paying users, an increase of 8% to the same period of 2022. As you can see in the second graph, our ecosystem reaches almost 282,000 monthly active users, representing around 34% of all medical students and physicians in Brazil, as Virgílio said before. Finally, our two last graphs. We can see our digital service net revenues, which for the quarter increased over 28%, reaching BRL 54 million. Regarding the six-month period, increased by almost 24% year-over-year. The organic growth is the combinations of the start of B2B segments with pharmaceutical companies and the expansion of the active players in B2P.
In addition, since 2022, we have started to break down our digital service net revenue within B2P and B2B segments. So from the BRL 111 million of digital service net revenue in the first half of 2023, more than BRL 91 million came from B2P and almost BRL 20 million came from the 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 debts. Cash and cash equivalents at the end of this quarter were BRL 741 million, an increase of 20% over second quarter 2022, and an increase of 2.6% over the first quarter of 2023. In this quarter, net debt totaled BRL 2 billion and BRL 4 million, a decrease of 1.3% compared to the first quarter of 2023.
The increase of BRL 623 million when compared with the fourth quarter of 2022, was mainly due to the BRL 825 million UNIMA Alagoas and FITS Jaboatão acquisition closed in January 2023, which was partially offset by the free cash flow generations in the first half of 2023, as we can look closely on the next page. In this slide, I presented the net debt reconciliations for 2023. The cash flow from operation activities was allocated to income tax and lease payments, CapEx activities, and for the service of the financial debt.
Even considering that we had executed part of our share buyback in this quarter, we were able to generate BRL 202 million as free cash and reduce our net debt in the semester. On the next slide, you can see a table with the breakdown of our gross debt and our average cost of debt. Considering our main debts, the SoftBank transactions, other loans and financings, the account payables to selling shareholders. Our capital structure remains solid with a conservative leverage positions and a low cost of debt. This ends our prepared remarks. I will now open the conference for the Q&A section. Thank you.
If you want to ask a question, please just raise your hand. Our first question is from Lucca Marquezini from Itaú. Lucca, you may go.
Good evening, everyone, and thank you for taking our question. We saw that adjusted EBITDA margin was impacted by revenue mix and the consolidation of new campuses and acquisitions. If you could please just provide us more color on the integration process of FUNIC and also comment on the profitability performance of Medcel specifically, that would be very helpful. Thank you.
I'll take this one, Lucca. Thank you for your questions. Regarding FUNIC, we have the expectations to do the migrations to our shared service during the fourth quarter. The integration is going to happen this year, less than one year after the business combination itself. Regarding Medcel itself, the second quarter, the second and the third quarter are the ones that are not relevant for the business itself. The revenues are more concentrated on the first and the fourth quarter. Medcel itself during the second quarter is not relevant for-
The results.
For the results
Yeah. To give a little more color, Lucca, it's important to say that if you look to our gross margin of digital services and continued education, we increased the margins of both segments in the second quarter. Also, if you look for the ex acquisition results that represent in the first table of the earnings release, you also can see that FUNIC has a margin that's below what we can see in all of our other results. In the end of the day, as we said, everything's going as predicted, and we are still seeing operational leverage in all segments.
Very helpful. Thank you, guys.
Okay. Of course. The next question will come from Lucas Nagano from Morgan Stanley. Lucas, you may talk.
Hi. Good evening, everyone. Thanks for taking our questions. We have two questions. The first one is related to the regulation on medical seats. Now that we have some more visibility on the Supreme Court's decision, do you have any expectations for the approximately 170 requests that were made outside of Mais Médicos that will still be analyzed by MEC? In parallel, do you have any guess on the format of the new Mais Médicos III program, like in terms of size, regions? That was my first question.
The second question is related to FGTS. You mentioned that the expected impact for the year is BRL 24 million. I wanted to ask you how much of this was already reflected in this first half. Can we assume it's BRL 12 million? Was this effect concentrated in the second quarter or spread between the first quarter and the second quarter? Thank you.
Okay, Lucas. This is Virgílio. I will take the first question here about the FGTS. Blanco will help me out. About the asking for new seats out of the Mais Médicos process, I think it's too soon. We are in the middle of the judgment. We have the second judge just releasing his vote this afternoon. Right now, he was completely opposed against the continuity of the process that was already within the MEC and the Ministry of Education step.
It's still soon in the process to check how will be the impact of all these issues, the issue process that is out of the current Mais Médicos process. About the Mais Médicos III , about the city, I think we still have to wait for one or two weeks to have the public bid in the market and to analyze which will be the city that will be the prioritization for the Mais Médicos III.
Hi, Lucas. Blanco speaking. Talking about the FGTS, when we saw the increase in the rotation fees of FGTS, that was in the beginning of March. We foresee that, and we did these expectations of BRL 24 million, and we put it under our guidance. Since the inception of the guidance of 2023, it's-
Already reflected.
Reflected under our guidance of 2023. We do not expect any kind of changes in our guidance, and our expectations of this impact in terms of net revenues for the year would be BRL 24 million.
Yeah. We do not see a lot of seasonality between the quarters for us to see a lot of concentration in one quarter or another. Okay, Lucas?
Yeah. The PS counter, they are based by semester. You can consider that most of them, 50% of them will be in the first and the second half. But consider that we have maturation. We still have more students enrolling in the second half, so it is a little bit higher in the second half when compared to the first half because of the maturation.
Very clear. Thank you, guys.
Of course. Just a reminder, if you want to ask a question, just raise your hand. The next question is coming from Jessica from JPMorgan. Jessica, you may now go.
Hi, good evening. Thank you for taking my question. It is a follow-up question on FGTS. If you could give a little bit more color on the outlook for this contribution on 2024, and do you think it should remain stable as a percentage of medical revenues, assuming no changes in regulations? Thank you.
Okay. Thank you, Jessica. I will take this one. Let us recap about these FGTS regulations. As Virgílio talked in his part of presentations, the retentions started when it was ended the fifth year and the beginning of the sixth years. This kind of retention is calculated by the government per educational entity, per each one of the entities. What happened here in these first years, that the entity that has no medical educations were affected because the government calculated delinquency rates regarding the program. But put it on the revenues that are the FIES revenues that are related to that financial entity. The entities that has more non-medical institutions were more affected in terms of percentage. The medical entities were not affected because we did not have any kind of graduations of the medicals during the beginning of the six years.
The medical program, the graduations will occur at the end of the sixth year. We are in this year in a transition period. Okay? Regarding the impact in 2024, it's hard to foresee an impact on that. But what definitely I could share with you the views that the entities that has medicine and other courses, the kind of retention that we have will decrease. Because right now we just have the delinquencies of the non-medical parts affecting all the revenues of these entities. I would say that we can expect the reduction on that because we'll start to reflect the delinquency of the medical programs.
Regarding the medical, the pure bloods, the pure player medicine, right now that we have something about 13% of the retentions, it could go up or down because the delinquency rates on this kind of entity, it's very low for non-FIES. It's kind of hard to say right now what will be the behavior of these retentions when these calculations is updated in 2024. But having these two different groups sphere, I could say that we could even get a reduction on that. But it's kind of expectations right now, Jessica.
Jessica, is it okay?
Yeah. Sorry, I was on mute. Thank you. Very clear.
No problem. Of course. The next question comes from Maurício Cepeda from Credit Suisse. Maurício, you may now talk.
Hi, Virgílio, Blanco, Renata. Thank you for the opportunity. I also have some questions around FIES, and it is a kind of a controversial topic. It was kind of the hot topic in the results from the other companies as well. It seemed that the size of the contribution kind of took the companies off guard. The magnitude of it was kind of unexpected. My question would be, what you as a company or as a sector, how are you working to mitigate these effects for the future? What are you proposing that could mitigate the effects from the delinquency?
And a clarification as well, following what Blanco was answering. You said the delinquency of the medical entities are higher or lower than the non-medical ones? This is just a clarification. My second question would be on prep courses. I know that this is not exactly the cycle for revenues, but you have mentioned in other opportunities that you have been repositioning, right? Repositioning the courses in a different commercial tactic. If you could update us on how this repositioning is going, it would be great. Thank you.
Hey, Maurício. I will get from the first, your second question about the delinquency on medical. It is much lower than other programs. Our PDD levels is around 1%, 1.5% for a pure player, pure campus that is just running a medicine program here. About the size of this retention, of course, that we do not think that this is fair, considering that all this retention is over, the delinquency calculated over the students that is getting into the amortization phase.
These students, they are non-medical students because it is the program that has the new FIES started back in 2018. We are just considering students ex-medicine or other program than medicine, that they graduated and enter the amortization phase, and their delinquency is much higher than any other medical program that we have in Afya. Considering that, when they are using this as a proxy to calculate which will be the retention rate over the entire institution, over the entire entity, they are applying this for overall revenues. That is why I think the entire sector do not agree and is trying to convince everyone that this is not fair. We are seeing a Medida Provisória, an amendment, being discussed under the Congress to limit this retention rate in the future. Otherwise, FIES would lose the attraction.
As FIES is an important flag for the current government, we should see some changes in the future semesters. This is about the FIES. Your third question about the Pillar One. The second, third quarter is a very low seasonality on our revenues here. Otherwise, we are combining not only the residence prep course coming from Medcel, but all other continuum medical education programs that prepare physician for titles and so forth. The operation coming from [inaudible] and also CardioPapers, they are increasing a lot the number of students.
We expect, for the second half, starting the revenues on the fourth quarter better, so the turnover when you compare to the last year. We are now combining all the products into a big portfolio, not only Medcel residence prep course, but all in terms of title prep and also soft skill programs combining into the Pillar One. That is our digital continuing medical education offerings. Okay?
Yeah. Just for me to add some color, Maurício, under the FIES. Today we have a retention rate of something around 27%. That used to be 13%. What the sector is fighting is to limit to 25%. That could be a change that we can see in the next months. Other point that is important to mention here is that we have not seen any change on a pure player of medicine in the retention rate. If it was 13.5%, it is still 13.5%. Okay?
Yeah. Just to put a color on that. What happened, these calculations are done by entity. Okay? So if the entity just has medicine courses, as none of the medical students has graduated during the sixth year because they were going to graduate in the seventh year, the retention rates did not change. What has changed is the entity that has medicine and other courses that, as Virgílio mentions, the delinquency was calculated just for non-medical and was applied to the whole program. That is why we have some entities that had higher retentions, because they calculated the delinquency of non-medical and applied for the whole entity itself. And with this cap of 25% that is being discussed on Congress, that would reduce the impact of these increasing invitations for us.
Just to finalize, Maurício, the most reasonable thing is to consider that the retention rate, instead of applying for the entire entity, should be applied program by program. So it would consider the delinquency over each program, not an overall institution based off some sample of the student that does not represent the total revenue of that entity. So that is, I think, the pledge of the entire sector with the Ministry of Education.
Mm-hmm. So very clear. Thank you.
Thank you.
Our next question. I think that we do not have any more questions. If you have any other doubts that you couldn't ask here, I will be available in our email of the IR department, and it was a pleasure to have you all today. Thank you for the participation. Have a nice evening.