Thank you for joining us for Afya's third quarter 2022 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 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 the potential impacts 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 for future events, and we disclaim any obligation to update any forward-looking statement 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 these 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, starting with slide number three.
Thank you, Ana, and thanks everyone for joining us today. As we approach the end of the year, we can see Afya delivering strong results again, as I will show you throughout this presentation. Moving now to page number four, let's start with our quarter highlights. Adjusted net revenue increased 25% year-over-year, reaching BRL 580.2 million, followed by an adjusted EBITDA growth of more than 19% year-over-year, reaching BRL 228.7 million, with a margin of 39.4%. This lower EBITDA margin, about 190 bps below last year, reflects our effort to develop our new growth avenues in continuing education and digital health services. It is worth mentioning that both segments are accelerating the growth pace quarter- by- quarter and reached 72% and 59% of top line growth in Q3 over the same period last year.
Net income followed the same positive trend of last quarter and reached BRL 321.4 million, a growth of 66.3% year-over-year, with an EPS of BRL 3.39, more than 77% higher than last year. Even considering a higher net debt level and the market interest rate level, these results reflect Afya's great capital allocation discipline on buybacks and M&A in an efficient capital structure. We also reported another great cash flow generation, ended the nine-month period with BRL 743.8 million, 34% higher than last year, with a cash conversion of 104.6%. Moving to the second row to our operational updates of the quarter. We have now reached 2,700 medical seats with the beginning of the four Mais Médicos operations, along with Ji-Paraná campus, an increase of almost 15% year-over-year.
Our number of undergrad medical students has reached almost 18,000, representing a 13% growth compared to the same period last year. In the continuing education segment, we can gladly see another great recovery after the pandemic impact on practical classes, as the business unit has presented a strong organic revenue growth of more than 72% over last year. Once again, Afya reported great results on the digital health services revenue, which ended the quarter with an increase of more than 59% year-over-year and more than 30% excluding acquisitions, reaching almost BRL 45 million in the three-month period. The results reinforce the great opportunity ahead in digital services and is explained by the strong ramp-up on B2B engagements with new contracts with the pharmaceutical industry company and the continuous ramp-up on business to physician conference.
Last but not least, our ecosystem reached 286,000 active users, a growth of almost 16% over last year. This represents almost 40% of the Brazilian physician and medical students market. Moving now to slide number five. To successfully conclude the acceptance of new medical students for the second half, ensuring 100% occupancy in all of its medical schools, added to the positive trend on the continuing education recovery and the growth in digital services, enable us to reaffirm our previous issued guidance for the entire year of 2022. In the next slide, we will talk about how our business execution remains solid, presenting relevant updates within Afya's three segments. As previously said, beginning this quarter, we have four new Mais Médicos operations: Abaetetuba, Bragança, Itacoatiara, and Manacapuru, along with UniSão Lucas Ji-Paraná campus. All of them combining totaling 228 new medical seats to our portfolio.
We have reached an impressive number of 2,700 medical operating seats, strengthening our consolidation as the medical undergrad leader in Brazil. Back in the third quarter of 2021, we were hoping to see the pandemic lose its strength. Now, in 2022, we can finally see our students, employees, and partners extracting the best from our ecosystem again. After the opening of six new continuing education campuses, we can see for the third time this year, an incredible recovery compared to last year, with a strong intake processes, new courses being launched, and our practical classes boosting again. In our digital service segment, we are proud to see our tools being able to assist physicians during their medical journey.
At the same time, we continue to further explore the development of our ecosystem, unlocking new interactions and revenue streams to go beyond the physician, a chieving pharma players, hospitals, labs, and drug supply chains. Proof of that is the engagement on the B2B strategy growth, once we have reached so far, 61 contracts with 40 different pharmaceutical industry companies. Now, moving to my last slide on this presentation, I will show how our commitment to everything we do is being well reflected through our awards and public recognition. As a reflection of our great results and actions that are being shown to the market, we are proud to share that for the third time in a row, we have won the Anuário Época Negócios 360º award as the best company in the education segment.
Along with that, we are also ranked as the top 50 company engaged with an open innovation in the country. We are very proud of this achievement, as they are the recognition of the work and passion of our more than 9,000 employees around a unique vision to transform health together with those who have medicine as a vocation. We can find more information regarding this award on the QR code at the bottom of this slide. Now, I'll 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 nine 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 25% year-over-year to BRL 580 million, reflecting the maturations of medical seats and the beginning of the four Mais Médicos and Ji-Paraná operations, higher tickets in medicine courses and the continuing education recovery, mainly due to the interruption of the effects of the COVID-19 pandemic, the opening of six new campuses in important capitals of the country, and new courses launching. Once again, the digital segments has also contributed to the revenue growth this quarter, with the increasing of the B2B engagements and the active payers expansions in the B2P.
For the nine-month period, adjusted net revenue was BRL 1,724 million, an increase of 38% over the same period of last year. Adjusted EBITDA for this quarter increased almost 20% to BRL 229 million, w hile adjusted EBITDA margins decreased 190 basis points to 39.4%. For the nine-month period, adjusted EBITDA was BRL 720 million, an increase of 29% over the same period of the prior year, with an adjusted EBITDA margin decrease of 320 basis points in the same period. The adjusted EBITDA margin reduction is mainly due to the digital segment, mostly in the performance of Medcel in the residency preparatory markets, the expansion of the continuing education segment, which is still maturing the new campuses, and the increase in expenses in the holding and shared service level.
Important to highlight the growth in gross profit for continuing educations and digital segments in this quarter, reversing the trends observed in the last year. Moving to the next slide. Adjusted cash flow generations for the nine-month period was almost 34% higher year-over-year, totaling BRL 744 million, resulting in a strong cash conversion ratio of 105%. Adjusted net income for the third quarter of 2022 was BRL 120 million, an increase of 3% over the same period of the prior year. The third quarter EPS increased by 47% year-over-year, and was positively affected by the increase in the operation results, the decrease of the non-recurring expenses by almost 63%, and the execution of the previous buyback programs. Moving to slide number 11 for discussions of key operational metrics by business unit. Starting with the undergrad programs.
Our number of medical school students grew 13% year-over-year, reaching 18,000 students with operational medical seats increasing 15% year-over-year due to the encompass of 228 medical seats related to the four Mais Médicos and Ji-Paraná campuses, as previously said. Considering our organic and inorganic seats expectations, we expect to achieve more than 32,000 undergrad medical students at maturity. With our net average tickets increasing more than 9% year-over-year, we have reached BRL 1,978 million of combined tuition fees, up from BRL 1,406 million from the prior year, an increase of 41%. Regarding revenue mix, 77% of these derived from medical school students and 90% from health-related courses. On the next page, I will present our continuing education metrics.
As said before, we saw another quarterly great recovery in our continuing education segments, with an increase of more than 42% in the number of students compared to last year, reaching 4,036 students, getting closer to the 2020 figures again. In the quarter, net revenues for the segment grew 72% when compared to the same period of the prior year. This recovery is mainly due to the interruptions of the effects of the COVID-19 pandemic, the opening of six new campuses in important capitals of the country, and new courses launching, as explained before. Moving to slide number 13, 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 have reached 190,000 paying users, a 23% growth compared to the last year.
As you can see in the second graph, our ecosystem reached 286,000 monthly active users, representing almost 40% of all medical students and physicians in Brazil, as Virgílio said before. Finally, on our last graph, we can see our digital service net revenues for the quarter, which increased more than 59% year-over-year and more than 30% excluding acquisitions. This organic growth is a combination of the start of the B2B engagements, reaching 61 contracts with 40 different pharmaceutical industry companies, and the expansions of the active payers in B2P, mainly in Whitebook and iClinic. In addition, since the beginning of the year, we started to break down our digital service net revenue within B2P and B2B segments.
Of almost BRL 45 million of the digital service net revenue in the third quarter, more than BRL 38 million come from the B2P and more than BRL 6 million come from the B2B, since the B2B strategy is still ramping up. Now moving to my two last slides, I will discuss our cash and net debt position, also giving more color on our cost of debt. Cash and cash equivalents at the end of the quarter were BRL 716 million. Net debt, excluding IFRS 16, totaling BRL 1,348 million compared to the net debt of BRL 1,109 million in the same period of 2021.
The increase year-over-year was mainly due to six business combinations and light acquisitions executed during the last 12 months period, p ayments related to the share repurchase program, investment activities, and net financial results for the last 12 months, all partially offset by our cash flow generation.
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, stock-based transaction, other loans and finance, and accounts 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 with a quarter marked by significant increase in net revenues in our three segments, positive EBITDA cash generations and EPS growth, and a consistent business expansion. I will now open the conference for the Q&A session. Thank you.
Our first question comes from Lucca Marquezini from Itaú. Lucca, you may now talk, please.
Hey, good evening, everyone, and thanks for taking our questions. We got two questions from our side. First, on Medcel, we've seen another quarter of decrease in the number of active payers. Can you please provide an update on the competitive landscape in the market? Secondly, the company mentioned that one of the drivers for revenue growth was the start of the B2B engagements. Can you please provide more color on these contracts and its contribution to net revenue? Thank you.
Hi, Lucca. This is Virgílio. About Medcel, w e launched our new products in beginning of November, so the rhythm that we are seeing for new enrollment, the volume of intake of this new season is much better than we saw in the rest of the year. We launched the pre-sale on end of September, beginning of October, but the new product release was in beginning of November. All the free version and generating more leads and the intake that we are seeing after November, it's much better than the rest of the year. The expectation moving forward is that the reduction on Medcel will be lower than we saw in the previous quarters. Besides that, we are combining Medcel with pillar one . We have another product. Medcel is just one product under the pillar one .
The other product is moving fast, and we are also offering continual and fast content for physicians to help not only for residents who have bought, but also for title drafts and other type of programs that will support their needs. We are seeing a better trend on pillar one year-over-year, and Medcel turnaround is starting on fourth quarter.
Hi, Lucca, it is Luis speaking. I will take your second question regarding the B2B contracts on the digital segments. The main driver on the B2B revenue growth that you see from the third quarter regarding the second quarter are the contracts that are coming from the pharmaceutical industry. This is a strategy that we have deployed here on 2022, and it has been very well received by the pharmaceutical industry regarding the access from this pharmaceutical industry to our physician users. We have been able to sign more than 60 contracts till now this year. We are providing the access for these pharmaceutical industries to the physician base. This is a trend that we see. We are very happy with this growth, and we see that we have a great room to achieve regarding this kind of service.
Just to add, Lucca, this is Virgílio. We have just passed what you call the phase one on the B2B contracts. The first quarter we launched this offer was a kind of landing and expanding type of contract. It was more like a service that we have available for a short period of time. Our effort right now is not only increasing the number of clients, the pharma companies that we are serving, but also a type of recurring revenue that we can serve from a longer time or for a longer period, this type of services. We are moving on the direction, growing a lot, not only the number of contracts, but the book value that we have for each sale opportunity on our pipeline. This remains the biggest bet for the following year. You will see good numbers coming from the B2B from the following quarters.
That is very clear. Thank you, Virgílio and Luis.
Our next question comes from Fred from BofA. Fred, please go ahead.
Hello, good evening, everyone. I have two questions here as well. The first one, I just want to understand the difference between the net income growth and EPS. We have here 94 million shares Q2 2021, 90 million shares here. Maybe we do not have the right information, or maybe you are considering delta as a repurchase program. That's why you have the difference in EPS. I just want to make sure we get that. This will be the first one. The second one, if you guys could just provide us at which level of Afya digital you are. At least we understand it is almost like a startup, so you build a portfolio, eventually you start to scale, then eventually the scale leads to dilution of cost and higher margin.
So if you look on a three, five-year window, at which level of Afya digital we are right now? Thank you very much.
Hi Fred, this is Luis speaking. Regarding the EPS, you are right. We have considered the treasuries, the shares that we have in our treasury, that totals amount of 3.7 million shares that we have, regarding the three buybacks that we have done till now. As the metrics that we use for this report is the mean in the last 12 months. As these shares are more than 12 months, then the effect regarding the dilutions, the increase of the EPS numbers regarding the increase of the shares that we have on our treasury, these amounts comes up. So right now, we have approximately 3.7 million shares in our treasury.
Regarding the second question, I will begin with that and then Virgílio can connect regarding the ambitions that we have on the digital segment. We see that the digital segment can achieve BRL 1.2 billion as net revenues in 2028. This is our goal right now for 2028. We see that the B2B is where we can get most part of this growth, providing access mainly for the pharmaceutical industry, for providing demand for the providers, and provide efficiency to payers. This is our plan. The first phase of it is the launching of service of access for the pharmaceutical industry. We are capturing the revenues right now, but we see these digital service segments as this opportunity of BRL 1.2 billion in 2028.
Hi, Fred. Just to add a point here. So during 2022, I think the main focus was to complete our ecosystem, our six pillar. And we did that with the last acquisition of iClinic, reinforcing our six pillar. Having said that, we also saw during 2022, the beginning of the monetization on the B2B contract. We are growing faster than expected on that. We can check also on our figures on top line and also gross margin ramping up and ramping up very fast. So this is a good opportunity in terms of leverage moving forward. As Blanco said, we are aiming to have 5% of this addressable market by 2028, and we are in a good trend to reach that. Moving to 2023, we didn't release any figures for 2023.
But for sure, the results coming from both segments will be stronger when we deep dive on continuing education and digital service. When you compare year-over-year, will be a much better figure in terms of top line and also in contribution margin for the entire business and product.
Perfect. Very clear, Virgílio and Luis. If I may just do a follow-up, and I do apologize. But on the same topic, when I think about capital allocation, right, I understand that the Afya digital still takes some margin from the consolidated business. So how do you think about, what kind of metrics do you use? Now is the time to accelerate on Afya digital and pressure a little bit more on margin? Or I don't want to go to a margin below a certain point, and then we need to be careful here. How do you think about this trade between higher growth eventually on Afya digital and pressuring margins on the consolidated business? Thank you.
Regarding capital allocation itself, I would start saying that we see a completeness on what kind of service we want to serve right now. The major point regarding capital allocations right now is the amount that we are going to invest in new solutions, in new service that we put within the product. We see it in terms of capital allocations itself, it is more business deployment of new service, new products inside the existing products. We are going to spend with organic CapEx, I would say, on that. Regarding the impact that we have on our operational results regarding the digital itself, we see that 2022, it is a year that we got negative. Sorry, guys. Start to re purchase right now besides the office. Sorry about that. But regarding the results, during 2022, we faced negative margins that comes from the digital segment.
Regarding the 2023 ahead, we are going to talk a little bit more next year. But definitely, 2022 was the lower point with the lower margin, the negative margin, and then we start coming from the positive side as the growth comes and as we gain scale and we do not make more business foundations. We start to do the business development inside of existing products.
Fred, if I may add here, that is a rule of thumb. Between 2020, 2022, we had a lot of needs in terms of campuses to improve our campuses from the largest acquisition, and also launching the Mais Médicos and seven new graduate campuses that we are working and operating under the IPEMED brand. Moving to the end of 2022, we have our CapEx close to 11% of our net revenue.
Moving to 2023, all these real estate requirements that we had under the previous years, I think it is much lower. We expecting to have actually a lower maintenance CapEx, return on CapEx on 2023 that would be something to 1 percentage points-2 percentage points below 2022. It is quite positive in terms of cash flow, and the great majority will be allocated, as Blanco said, in product development to fulfill the roadmap of our six pillars on the digital health.
Perfect. Super clear. Thank you, Virgílio. Thank you, Luis.
Our next question now comes from Marcelo Santos from JP Morgan. Marcelo, you may now talk.
Hi. Good evening. Thanks for taking my questions. I also have two. I think the first question ties a bit to the previous one. You said that you should have the lowest point of margin in the B2B in 2022. Could you broaden a bit the discussion on margins? Could you please discuss a bit what are the building blocks of margins in 2023? What are the tractors and the supports of margin that we should see in the year? That's the first question. The second question is if you could comment a bit on tuitions for the first half of 2023 intake cycle, given that you probably already set your prices. So what could we expect in terms of tuitions? Thank you.
Hi, Marcelo. Luis speaking. Regarding the margins for 2023, we didn't release the guidance for 2023. Right now, we're going to release in the beginning of the year within the 2022 results, so we can comment more on 2023 guidance margins over there. Regarding the tuition fee, as we usually do, we put the new prices for new students and for existing students during September and October. Regarding our core business, regarding the medical students, most of the units had applied readjustments of 7.5% for existing and for new students. So we can expect an increase of 7.5%. Some units we have a little bit behind that, some units we have a little bit more than that, more on the new students. But 7.5%, it's a number to consider for 2023 price increases.
Marcelo, just adding on the first question about the margins. It's analyzed our three different segments. Under the undergrad segment, we will still maturing our operation. Unigranrio is our last and big acquisition. We are excluding units that are still pending the closing, expected to be beginning of January. But considering that scope, we will see some gross margins opportunity and leveraging our operation as Unigranrio still have some opportunities in terms of margin. We just implemented, pushed all the transactional activity to our shared services, rolling out system, so we have some efficiency that we can have from Unigranrio and the maturation for other campuses. But the undergrad operation is very mature, so the opportunity in terms of overall margin, it's lower. Moving to the other segment, we can see that graduate programs, the continuing education, will grow very fast year-over-year.
The composition, we will see much more revenues coming from the graduate programs than we have in 2022 b ut still with lower margins than the undergrad. The mix will be better on the graduate program that will grow faster, but with lower margin. In terms of average, can have a negative impact coming from that. The same dynamic we are seeing on the digital, because digital, when you take a look just for the segment, will be much better in terms of margin and gross margin. But by the bottom line, we still have a lower margin when you compare to the core undergraduate business. Having said that, when we put everything, we will still have the margin close where we operate, but we didn't release any guidance where will be our range during 2022. Okay.
Perfect. Thank you very much. Very clear.
Just a reminder, if you want to ask a question, please raise your hand. Next question comes from Vitor Tomita from Goldman Sachs. Vitor, go ahead, please.
Hello, good evening, all, and thanks for taking our questions. Two questions from our side. The first one is that there seems to have been a slight decline in non-medical healthcare students, in addition to the reduction in non-healthcare students. Could you give us some more color on that, and on whether the decline is related to macroeconomics or competitive headwinds? The second question on our side would be about the B2B access features that you'r e launching. Do you have any initial sense on how physicians are receiving their changes from their end in their daily usage of digital solutions, in their usage experience now that there are B2B access features interacting with them? Thank you.
Thanks, Tomita. Luis speaking here. Regarding the drop that we have on non-medical health, it's regarding the closing of one distance learning course that we have implemented in one unit, that we closed this course during the second semester. It's a course that had a small revenue and a very small margin contribution. So we decided to close, to finish it on the end of the first semester. And roughly it is something about 3,000 students that we have on this distance learning course in health. Regarding the second questions, regarding the B2B features, we see that we can provide the connection between the physician and the pharmaceutical industry. This is being very well received by our physicians. And because of that, that's been very well accepted. We can move with the expansions in the number of contracts and the number of pharmaceutical companies that we have under our portfolio.
As Virgílio mentioned, we have these land and expand strategies when we provide our service for a specific line of products within a pharmaceutical company, and then we expand within different line of products inside of the same pharmaceutical company. We've been doing that and providing these kind of services. The physicians are good with these kind of connections that we are providing.
Very clear. Thank you.
Our next question comes from Maurício Cepeda from Credit Suisse. Maurício, go ahead please.
Hello, Virgílio, Blanco . Thanks for the time. I have two questions from our side. The first one is about the recent acquisition of UNIT. I understand that the closing is, as you said, it's forecasted for next year. But anyhow, how do you plan to make the capital structure to absorb such acquisitions? Are you planning on more debt? What is the capital that you're planning to cope with this acquisition? The second question is about the prep course, the Medcel. If you are some way trying to remodel it or even trying to rethink about the tickets, any kind of product redesign that you are thinking now that we are approaching the intake for the rest of the year. Thank you.
Cepeda, I will start with that, and Virgílio will make some additional points. Regarding UNIT, we are planning to increase that. We are right now negotiating, in the final negotiation of this increase in that to finance the down payment that we have for the UNIT deal. As you mentioned, we expect to close that next year, but we didn't close the financial date of it right now. We are very much advanced, but we haven't closed it until now, and we expect to reach final agreements in the beginning of December. Regarding Medcel, we start with that. We've made a complete transformation, a complete reengineering regarding Medcel. We changed the product itself, we changed the price, we changed the way we advertise this product, and the way we package this product.
Starting with the product itself, instead of having a very complete product to fit all kind of students, we kind of focused it for each one of the distributions that the students want to pass. We excluded the physical book from the value propositions. Right now, we offer the physical book as an add-on so that the basic package is an e-book. Instead of providing all the content for the students in the first time, we made an assessment of these students, and we impact these students with the content that he most needed to get the minimum grade that is needed for the distribution that he wants to pass for this specific subject. If in the first assessment, he is performing well, he will be impacted by a very short content and then go to the simulations, the test simulations.
If he's not very well-positioned with his grades, he's going to be impacted by the content that is needed to him to get improvements. So we made these kinds of changes in products. In terms of pricing, we have increased pricing. The pricing for the 2022 collections, it was around BRL 4,500 for one year, and we increased this pricing for about BRL 7,000. So we increased the pricing for the product. Regarding the way that we sell the product, we give more protagonism for our teachers. We've been more on the social networks instead of Google Ads, but with social ads, with free view content inside of our social networks. Last but not least, we are combining the products to offer what we say that the pillar one offer.
Instead of just offering Medcel itself, now we are offering Medcel combining with mentoring and combining with some features that come from CardioPapers . So we are combining that and offering to our students, and this kind of offers are being very well received by the students. But it's a turnaround of all these offers that we put in place right now. Virgílio?
Maurício, just to add, just remember that we acquired CardioPapers and Além da Medicina. In those acquisitions, we had many expert physicians that went into entering on our pillar one, helping us to review our product and our offer to the market. So they are influencers, they are experts from each area. As Blanco said, we are putting our professor, our teachers in front of the student in tailoring the content for each type of residence, for each type of problem that they are going to apply. So we have much more experts tailoring the content that help us to change our price and also to revamp our product. This is in the very beginning, so we have the Black Friday. That's a very strong process during November.
Since we launched, we are seeing very good figures in terms of month, but it's still in the beginning, where we are going to March, April next year to have our final results from this new season.
Oh, great. So an additional complement to my question. By remodeling the product, by reengineering the product, do you expect this to change the way you sell and recognize revenues of it? Should it be more continuous now? How do you think about that?
Didn't change that. The remodeling didn't affect how we capture the revenues of the product, Cepeda. We're going to keep seeing the seasonality from the fourth quarter and the first quarter from itself.
That's very clear. Thank you, Virgílio. Thank you, Blanco.
Thank you, Maurício.
With no further questions, I would like to thank everyone once again for joining us, and we hope to see you again in our next conference call. Good night.