Good night, everyone. Thank you for joining us for Afya's first quarter 2023 conference call. I am here today with Afya's 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 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, 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 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 IFRSs. 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 everyone for joining us today on our first conference call related to 2023 results. We proudly present our first quarter of 2023, showing another great start for the year ahead. Since our IPO, Afya's top line has grown more than three times, improving the resilience and differentials of our business. In this quarter, once again, our net revenue has jumped 25% over last year. 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, this year guidance, some recent awards recognition, and at the end, Luis Blanco will explore our financial and operational overview. So moving now to page number four. Let's start with our performance highlights.
First, adjusted net revenue increased 25%, reaching BRL 709.4 million, followed by an adjusted EBITDA growth of almost 22% year over year, reaching BRL 330.2 million with a margin of 46.5%. We also reported a strong cash flow generation again of BRL 349.4 million, an increase of 19% year- over- year, boosted by the solid operational results of the company with a cash conversion of 112% and a solid cash position of BRL 723 million at the end of the quarter. Adjusted net income was BRL 166.4 million, in line with the same period last year, mainly due to the higher financial expense related to the new debenture issued in December 2022 and higher interest rate in the market. Moving to our operational updates of the quarter.
We have reached 3,113 operating seats, an increase of over 25.5% over the first quarter of 2023, with the beginning of four Mais Médicos campuses, along with new seats in Ji-Paraná and Itabuna, and also the acquisition of UNIMA Alagoas and FITS. In addition, our number of undergrad medical students has reached almost 21,000, representing 18.8% growth compared to the first quarter of the previous year. We also saw great results in net revenues. For our continuing education business, the segment grew more than 46.6% year-over-year, representing a net revenue of BRL 34.9 million in the first quarter. The digital health services reported great results as well, with revenue increase of almost 20% in the comparison of the first quarter 2022 and in the quarter's net revenue of BRL 56.8 million.
This result reinforces the opportunity ahead in the digital services and it is explained by the ramp-up on B2B engagements with new contracts with the pharmaceutical industry companies and the continuous ramp-up in B2B contracts, as we will discuss further on. Lastly, our ecosystem has 295,000 active users, representing a great penetration among physicians and medical students 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 higher tickets in medicine course with more than 8% increase of medicine tuition. The maturation of medical seats, the beginning of four new Mais Médicos campuses in 2022, the consolidation of UNIMA and FITS acquisitions, and the consolidation of 92 new medical seats. 28 in UniSão Lucas Ji-Paraná located in Rondônia, and 64 additional seats in Faculdade Santo Agostinho in the city of Itabuna.
This movement is part of our strategy to add 600 new medical seats on our current operation by 2028. We are delighted to see that the most significant growth of the quarter in terms of revenue, came from our continuing education segment with a robust intake process, six new campuses and course maturation. On our digital service segment, we ended the quarter with a revenue increase of 20% when compared to last year. These results reinforce the opportunity ahead in digital service, and it is explained by the ramp-up in the B2B engagements with new contracts with pharmaceutical industries companies, and the continuous ramp-up in B2B contracts. Now I will turn the call over to Luis Blanco, Afya CFO, to give more color on the financial operational metrics. Thank you.
Thank you, Virgílio, and good evening, everyone. Starting with slide number seven to discuss the financial highlights of the first quarter. With much satisfaction, I presented another strong quarter results for Afya. Adjusted net revenue for the first quarter of 2023 was BRL 709 million, an increase of 25% over the same period of the prior year. Mainly due to higher tickets in medicine courses by more than 8.3%, maturation of medical seats, the beginning of four medical campuses, the business combinations with UNIMA Alagoas and FITS Jaboatão, the strong continuing educational segment performance, and the great results of the digital service. First quarter 2023 adjusted EBITDA increased 21.9% to BRL 330 million with an adjusted EBITDA margin of 46.5%, a decrease of 120 basis points when compared to the first quarter 2022.
The adjusted EBITDA margins reduction in this quarter is mainly due to the following: consolidations of four new medical campuses. Operations started on the third quarter 2022. Units and features which are performing better than expected, but still present lower margins when compared to their integrated companies, and digital segments, primarily due to MedCel performance. Moving to the next slide. Adjusted cash flow generations over the year was almost 20% higher quarter-over-quarter, totaling BRL 349 million, boosted by the solid operational results. Operating cash flow ratio was 112% for the first quarter 2023, compared to 113% in the first quarter 2022. Adjusted net income for the first quarter of 2023 was BRL 167 million, in line with the same period from the previous year, mainly due to the higher financial expenses related to UNIMA and FITS acquisitions and higher interest rates.
Our adjusted EPS for the quarter reached BRL 1.77, the same when compared to the first quarter 2022. Our EPS performance reflected the decrease in our net income that was compensated by capital allocation discipline executing buyback programs. Moving to slide number nine for discussions of key operational metrics by business unit. Our number of medical students grew 19% over first quarter 2023, reaching 20,800 students, with operating medical seats increasing 25% due to the encompass of 632 medical seats related to four Mais Médicos and Ji-Paraná, Itabuna seats increase, UNIMA Alagoas and FITS Jaboatão acquisition, as previously said. Therefore, we reached 3,163 approved seats and expect to achieve almost 23,000 undergrad medical students at maturity. Our net average ticket, excluding acquisitions, increased by 8.3% over the same period last year, reaching BRL 8,570 in the first quarter 2023, compared to BRL 7,861 in first quarter 2022.
The last graph shows a 24% growth in combined tuition fees, reaching BRL 806 million, up from BRL 649 million from the first quarter 2022, 78% of which are related to medicine courses. All these efforts means one thing, our medical educational business remains and will continue to be the cornerstone of our business in the short and the middle terms, delivering high predictable growth combined with solid profitability and cash generation. On the next page, I will present our continual educational metrics. As said before, we saw another year of great recovery in our continual educational segments, with an increase of more than 37% in the number of students compared to the same quarter last year, reaching 4,774 students. In addition, for the quarter, net revenues grew 47% when compared to the first quarter of 2022. This recovery is mainly due to the robust intake process and course maturation.
Moving to slide number 11, I will discuss the digital service operational metrics. On the first graph, you can see our total active payers, which are the ones that generate revenues in business to physicians, B2P. With a continuous growth trend, we reached 218,000 paying users, a 24% growth compared to the same period last year. As you can see in the second graph, our ecosystem grew 13.6% compared to the previous year, achieving 295,000 monthly active users, representing almost 40% of all medical students and physicians in Brazil. Finally, on our last graph, we can see our digital service net revenues, which increased more than 19% when compared to the same quarter of the last year, reaching BRL 56.8 million.
With the breakdown our digital service net revenue within B2P and B2B segments, which accounted for more than BRL 46 million coming from B2P and more than BRL 10 million coming from B2B, since B2B strategy is still ramping up, representing a growth of 62% compared to the prior year. 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 first quarter were BRL 723 million, a decrease of 8% over March 2022, and 34% when compared to the fourth quarter of 2022. Meaning to the new debentures issued during the fourth quarter that was used to fund the down payment of UNIMA Alagoas and FITS Jaboatão acquisitions in January. On the next page, we can look closely to the net debt variation.
In the first quarter 2023, net debts totaling BRL 2.029 billion, an increase of BRL 648 million when compared to the fourth quarter 2022, meaning to the BRL 825 million UNIMA Alagoas and FITS Jaboatão acquisitions, which was partially offset by BRL 177 million of free cash flow generations in the first quarter of 2023. On the next slide, you can see a table with the breakdown of our gross debts and the total cost of our debt, considering our main source of debts, the Softbank transactions, debentures, accounts payables to selling shareholders, and other financial obligations.
This ends our prepared remarks. Strong performance, consistent growth and success in all segments. We are committed to provide an ecosystem that integrates educational and digital solutions for the entire medical journey, enhancing the development, updating, assertiveness, 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 Q&A session. Thank you.
If you want to ask a question, please raise your hand. The first question comes from Lucca Marquezini from Itaú BBA. Lucca, you may talk.
Good evening, everyone, and thank you for taking our question. Regarding MedCel, we have seen a decrease in the number of active payers for the past quarters. Can you please provide more color on the competitive landscape and comment if you have seen any sign of recovery here, especially considering the initiatives implemented in the end of last year. That would be helpful, please. Thank you.
Hi, Lucca. This is Virgílio. I can start here and then Blanco can give more details after. Just about the dynamic on MedCel. We are combining the MedCel offering on pillar one together with Além da Medicina and Cardiopapers. We are seeing a very good intake enrollments coming on Além da Medicina and Cardiopapers, also shifting demand between these offerings in the pillar one. MedCel, as we saw in the last quarter like
On the fourth quarter, we still have a lower volume coming this year. We are ending the seasonality right now in the first quarter. The next cycle, the big cycle, start in September. We still have, for this semester, a lower number coming from MedCel when you compare to last year. The competition landscape is still have the same. We still have a lot of competitors on this matter. That is the reason why we change not only the product but also change the offering, combining Além da Medicina and Cardiopapers, offering much more related also for specialization. It is much more online continuum medical education than only residence prep course as it used to be MedCel in the past, back in 2019, 2018. Just to give more figures, I pass back to Blanco that can color a little bit about the numbers.
Thank you, Virgílio.
Lucca, as Virgílio mentions, we end at the first quarter the intake of the collections of 2023. All the collection of 2022 is disconnected during this quarter. Now the new intake will take place in the fourth quarter. MedCel, as we mentioned, is not a cornerstone for our B2B-
Strategy-
Strategy. We still feel comfortable that with this combined offer that we are doing with the prep test of MedCel within Cardiopapers and Além da Medicina content, we are going to stop this following of MedCel. Then we can have some kind of recover during the next intake cycle for the 2024 collections that we are going to start on September.
Yeah. Virgílio, you want to complement?
Yeah, just to add a point here. Moving forward for the following quarters on the digital, as the next quarter will be consolidated, it will be fully organic when you compare to the previous year. Pillar one should be moving around 10%-15% above last year, and the other components of our digital services should be growing above 30%. The combination of them will be around something 15%-20% for the rest of the year, at least for the rest of the first half, because we still have the intake that will be stronger on the second half. Okay?
That's very clear. Thank you, Virgílio and Luis.
Thank you.
Okay, our next question comes from Mauricio Cepeda from Credit Suisse. Mauricio, you may go.
Hi, Virgílio, Blanco, Renata. Thank you. Thank you for the space here. A little bit on margins. I understand that you are, in fact reconfiguring the mix of business there. We see that the margins are being a little bit lower, but for a very positive reason, right? You're ramping up a lot continuous education. You're opening lots of medical seats. My first question would be, how to expect this to go on for this year in terms of these apparent margin pressures, which are in fact the success of the businesses? Thinking a little bit more further, when you see basically a convergence to, let's say, a new margin level, given that you're integrating new operations on top of the mentioned effects. Thank you.
Cepeda, it's Blanco speaking. Regarding the expectations in the year, we are fully committed for what we have guided for the market with the disclose of the results of 2022. The margins embedded in our guidance is between 40%-42%, from the bottom to the top line of the guidance. We are committed with that. Remember that the first quarter is the best quarter that we always have due to the seasonality of our business. We have these a little bit pressure in these margins caused by MedCel performance, the four new MedZ, and for the beginning of UNIMA that is coming with margins that were initially better than expected in the original business plan, but still behind the margins of the integrated companies. If we exclude these acquisitions for 2023, the decrease in margins is just 50 basis points. 50 basis points.
We are pretty committed to deliver the margins of this 40%-42%. As you mentioned, as continuing education will grow and the digital segment will grow with higher rates than the undergrad segments, we're going to have some kind of shifts for margins. But for this year, the guidance is between 40%-42%.
Yes, Cepeda, we unfortunately do not give guidance for longer term, but there is no reason for margins in all the segments to increase in the following years. Virgílio, do you want to complement?
Yeah, I think just as we are growing very fast in continuum medical education in MedEd, we launched six new campuses. We are preparing to launch another two or three campuses still this year. As any other on-ground operation for education, we will ramp up the number of students per campuses, so gross margin will increase, and also EBITDA margin will increase along the year. So we expect to have better contribution margin coming from continuum medical education for the following semester, not only for the legacy operation, but also mainly for the new campuses that we launched last year and also this year. Okay?
That is very clear. Thank you.
Just a reminder, if you want to ask a question, just raise your hand. The next question will come from Lucas Nagano from Morgan Stanley. Lucas, you may now talk.
Hey, good evening, y'all. Thanks for taking our questions. I have two. The first one is related to your MedEd schools. The situation seems still very comfortable. You increased price 8%, filled 100% of seats. But have you noticed any underlying change in the demand? For example, how it evolved in the Southeast versus the Mais Médicos schools in terms of candidates per seat or pricing, for example. The second question is related to B2B. It seems to be performing well. Can you tell us a little which part of the product development process and the commercialization process you are in? Also, if you could comment a little if you are developing solutions for companies that are not in the pharma industry.
Yes, Lucas, I can take the first one here. Blanco helped me on the second one. About the tuition adjustment, that was the average across the board. About the intake level, this year was, when you compare to the last four years, was the candidate per seat ratio higher, the highest ratio candidate per seat that we had for the last four years. We are reaching around eight candidates per seat. Of course, this is on a national average, but as we have a very integrated process, we can manage to have 100% of occupancy in all of our units. Of course, that we have different ratio between our campuses. When you analyze our campuses in large cities like Unigranrio in Rio de Janeiro, we have more than 20, 25 candidates per seat. For some institutions have around four and five candidates per seat.
But it is pretty feasible and easy to keep enrolling 100% of the seats every semester. So even considering that we are passing tuition a little bit above inflation this semester, I think we are strengthening our commercial process, our enrollment process, and our capacity to convert students to all of our campuses.
If I may add a point here, I just want to mention that we do have different prices in different regions, and that is mainly because of the region. But that does not mean that we have different margins in different regions, because all the costs and expenses related to different regions are also different. So what I am trying to say here at the end of the day, that ticket from Medical School compared to, I do not know, Unigranrio is different. But in the end of the day, we can see similar margins. What changed the margin level is mostly how much concentrated the school is from medicine. That is what changed the game. And Blanco, may you take the second question?
Yeah. Hi Lucas, thank you for our questions. Just give you more color on the B2B. I will just give a step back to give more color in our strategy. So our digital strategy is focused on penetrating within the physicians with the best solutions to increase their productivity, to increase their assertiveness, and to increase their updating from topics. And we have been these channels to connect these physicians to the healthcare players. So we divided the digital in these two parts. Okay? So regarding the companies that we provide this service for the physicians, we are increasing a lot the users, the monthly active users, and we are increasing the payers as well.
Regarding the B2B, what we had in place until right now is the connections that we have made in a minor part with other educational companies to provide solutions such as our prep course, MedCel, and our medicine image solutions, that is Medical Harbour. And most part of these digital revenues are coming from the pharmaceutical industry. We have
More than 100 contracts established till now, with more than 40 pharmaceutical industry players right now, multinationals and national players on that. All the B2B revenues are coming for these two parts. What we have launched right now, we started the connections for the second pillar of the industry that is relevant for our B2B strategy. That is the providers. We just are getting up a team to do these connections and starting to offer our connections with the physicians to the providers.
In the pharmaceutical industry, what we are providing right now, it's what the industry calls e-detailing. That is marketing and commercial efforts to connect the physicians with the industry players to get their latest drugs, the latest t reatments for the physicians and for providers, we are going to offer a recruitment service and offering the best leads that can come from our ecosystem, leads for them to get their treatments. Buying some medicine, doing their treatments or doing the accents. That's the strategy, Lucas.
Very clear, Virgílio, Blanco and Renata. Thank you very much.
Of course. Just a reminder, if you want to ask a question, please just raise your hand. The next question comes from Jessica from JPMorgan. Jessica, you may now go.
Hi. Thank you for taking my questions. I have two. First, how are medicine tickets expected to behave going forward? Do you expect to increase prices above inflation? This is the second question, do you have any updates regarding the new Mais Médicos program? Thank you.
Hi, Jessica. It's Blanco speaking. I will take the first one and Virgílio will take the second one. Regarding the first one, what we have already discussed in the last call is the pricing for this first semester. We have disclosed that we made readjustments for the medicine students that were 7.5% for these years. Within the ticket maturations, we are going to get something around 1% above that. What we delivered for the first quarter, this 8.3% increase in terms of net tickets, excluding acquisitions. Just remember about our ticket dynamic. We established our price increase annually. We usually do that in the month of September, in the beginning of October, and we establish the price for the inflations that we expect for the year. When we take the year from when we did that in 2021 for 2022, we did the same 7.5%.
We were behind of the inflations of 2021 because inflation sped up at the end of the year. This year of 2022, the opposite has happened. We established the same 7.5%, but the inflation started to decrease at the end of the year. That's how we do that. Next September, we are going to see this inflation perspective for the year. We established a new pricing for 2024. Above these price readjustments, we have these tickets maturation effect that will come these around of this 1%.
Yeah. Just to add a point of view on this question about tickets. When you take a look on our table two, we also have very high incremental on tuition when you consider also other health programs. Even excluding acquisition, the tuition fees is jumping more than 15%. That's an effect not only about price adjustment, but an effect of mix, much more concentrated in high value programs than we had in the past. So it's a good dynamic also for the year on other programs besides the medical programs for 2023.
About the Mais Médicos, we are just following after the normative rule that they said that we should have to take a long 120 days to release what will be the new rules for the Mais Médicos III or the new wave of capacity. It's just 60 days after they release that information. We are expecting to have something by the end of July, beginning of August. They are working. They have their commission getting together, asking the sector, many professionals, many areas participating, how should be in addressing the new conditions for the new wave capacity. But it's still early in the process to have any information. Okay?
Thank you. Very clear.
We do not have other questions. Thank you so much for participating with us today. If you have any follow-up questions or if you want to schedule a call with us, just contact me and I will be pleased to help you guys. Have a good night and a great end of week. Thank you.
Thank you all. Bye-bye.