Afya (NASDAQ:AFYA) Q1 2026 Earnings Call

0:01 Recording in progress. Thank you for joining us for AFYA's conference call. I'm here today with AFYA's CEO, Virginia Gibbon, and our CFO, Vincent Reblo. 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 ATA's actual results to differ materially from those contemplated by these forward looking statements. Forward looking statements in this presentation include, but that 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.

0:49 These risks include those more fully described in our filings with the Securities and Exchange Commission. The forward looking statements in this presentation are based on the information available to us as the date hereof. You should not rely on data as predictions of future events, and we disclaim any obligation to update any forward looking statements except as required by law. In addition, management may reference non IFRS financial measures on this call. These measures are not intended to be considered in isolation or as a substitute of the results prepared in accordance with IFRS. This presentation has reconciled these IFRS financial measures to the most directly comparable IFRS financial measures. Now, let me turn the call over to Mr. Benjamin Gibeault at the queue.

1:39 Thank you, Renata, and welcome to our first conference call of twenty twenty six. It's with much satisfaction that AFYA starts another year of great operational and financial performance. This quarterly result showed the high predictability of our business and successful execution of our strategy that once again combines growth with cash generation, after three pillars business model. In this presentation, I will cover key strategic topics, including our performance highlights, successful business execution across our three segments, and finally, Luis Blanc will provide an in-depth look at our financial and operational performance. Now turning to Page number three, let's begin by highlighting our performance achievements. Initially, our revenues increased by eight percent, reaching BRL1013 million, accompanied by a growth in adjusted EBITDA of 4% year over year, reaching million with a margin of 50.5%.

2:39 We also reported a free cash flow of BRL376 million, reflecting 3% increase compared to the previous year, boosted by the solid operational results of the company, with a cash conversion of 92.5% and a solid cash position of R1.3 billion dollars at the end of the first quarter. With this consistent momentum, our net income reached BRL262 million, marking a 2% growth year over year with an EPS of BRL2.88, a 3% increase compared to the previous year. This growth reflects stronger operational performance, partially offset by an provision related to the OECD Pillar two global minimum tax. Moving to our operational updates.

3:27 We have now 3,768 operating medical school seats, with an increase of over 6% year over year. Additionally, our number of undergrad medical students has reached over 26,000 students, representing over 2% growth compared to the first quarter of twenty twenty five. Furthermore, we increased the net average ticket of medical school by almost 5% year over year, reaching R9,634 dollars In addition, we continue to observe improving performance in the continuing education and medical practice solutions segments. In continuing education, revenue increased 11% year over year, purely organically, reaching million dollars Medical Practice Solutions, we saw a 4% growth in revenue compared to the first quarter of twenty twenty five, reaching over R43 million dollars Lastly, our ecosystem has 304,000 active users, exemplifies substantial penetration among physicians and medical students in the country.

4:29 Moving to slide number four, we will discuss our performance across our three business segments. Starting with the undergrad segment, we observed important movements throughout the quarter, such as higher tickets in medicine course with almost 5% increase year over year, above 2025 inflation. This growth was accompanied by a stable gross margin across the segment of 69. In addition, we expanded our health science student base by 5,000 students compared to the first quarter of twenty twenty five. The continued education segment delivered record on B2B revenue of $74,000,000 in the first quarter of twenty twenty six, supported by a record student base of 57,000 students and reflecting the continued strength of our product offering and engagement across the segment.

5:24 The Medical Practice Solutions segment delivered solid performance in the first quarter of twenty twenty six, supported by an increase of 6,000 clinical management active payers compared with the first quarter of twenty twenty five. And B2B revenue grew by 17%, reflecting the continued progress of our product offering and commercial initiatives across the segment. I will now turn the call over to Luis Blanco, Afya's CFO, to provide further insight into the financial operational metrics. Thank you. Thank you, Brigido, and good evening, everyone. Starting with slide number six for a discussion of key operational metrics by business unit. Starting with the undergraduate programs.

6:11 Our medical student base grew by 2% compared with the first quarter of twenty twenty five, reaching 26,000 students, while operating medical school seats increased by over 6% year over year to 3,768. Our medical school net average tickets increased by 5%, reaching R9,634 dollars the first quarter of twenty twenty six. In addition, revenue for the undergraduate segment saw an 8% increase, achieving $892,000,000 reais, 86% of which is related to medicine and 94% from health related courses.

7:02 On the next page, I'll present our continuing education metrics. We approach continuing education through three main journeys, starting with the residency journey, which encompass products focused on the residency preparation. We saw a 20% decrease, reaching seventeen forty four students by the end of the period. In the graduate journey focused on specialization, test preparations and graduate courses in Mercy, students grew by 15%, reaching nine thousand eight and fifty five students. Lastly, our other costs in P2P offerings increased an impressive 41% over the same three month period of the prior year.

7:52 Continued educational revenue rose to BRL79 million in the three month period of 2026, up from BRL71 million in the three month period of 2025, reflecting a growth of 11%. This includes a 13% increase in B2B revenue and 14% decline in B2B. Moving to slide number eight, I'll discuss the medical practice solutions operational metrics. The first graph shows our total active payers, which are the ones that generate revenues in the business supervision. The number of active payers declined to 201,000, a 1% decline over the same quarter last year.

8:44 The second graph highlights our most active users, which account for 221,000, a reduction of 10% compared to the same period of the prior year. Lastly, in our final graph represents revenue of our Medical Practice Solutions segments, which has expanded by over 4% compared to the same quarter of the last year, reaching BRL43 million. Of this total, BRL38 million was generated by B2B, showing an increase of 3%, while B2B contributed to BRL5 million, 17% increase over the same quarter last year.

9:31 In the next slide, we presented our Afya ecosystem. We are pleased to highlight Afya's substantial contributions to the Brazilian healthcare community. By the end of the first quarter of twenty twenty six, our ecosystem encompassed 304,000 physicians and medical students using our service and products. Moving forward to page 10, I want to discuss our financial overview for the first quarter of twenty twenty six, starting with the next slide. With great satisfaction, I present another strong quarterly performance for Afya. Revenue for the first quarter of twenty twenty six reached R1,013 million dollars an 8% increase compared to the same quarter of last year.

10:26 The quarter revenue increase was mainly due to higher tickets in medicine courses, the increase in non medical undergraduate students, the acquisition of UNIQ, and advancement of the continuing educational segment. In the first quarter of twenty twenty six, adjusted EBITDA rose by 4%, reaching 11,000,000 reais, with an adjusted EBITDA margin of 50.5%, a reduction of 200 basis points compared to the first quarter of twenty twenty five. The reduction in adjusted EBITDA margin was primarily driven by higher costs and expenses in continuing educational and medical prep solutions segments, mainly reflecting a lower gross margin compared with the first quarter of twenty twenty five and higher payroll, sales and marketing expenses associated with the ongoing investment cycle in both segments.

11:30 Moving to the next slide. The first quarter cash flow from operating activities rose by 0.6%, reaching R473 million dollars operating cash flow conversion ratio was 92.5%. Net income for the first quarter of twenty twenty six totaled million dollars a 2% increase over the same period of 2025. This growth reflects stronger operation performance, partially offset by an additional taxation provisions related to OCD pillar two global minimum taxation. Despite a lower adjusted EBITDA margin, driven by higher expenses in continued education and medical practice solutions, Net income growth was sustained, supported by the disciplined execution and the consistency of our business model.

12:28 Regarding EPS, we achieved 2.88 per share in the three month period, representing a 3% increase year over year. And 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. This slide presents a table detailing our gross debt compositions at the end of the first quarter of twenty twenty six, and the total cost of debt covering our primary obligations. Afya capital structure remains solid, with a conservative leverage position and a low cost of debt. Afya net debt, excluding IFRS 16 divided by the midpoints of the 2026 adjusted EBITDA guidance, was 0.7 times.

13:24 Our financial discipline was also independently recognized. On May 5, BOOTs reaffirmed Afya credit rating at AAA with a stable outlook reflecting our consistent revenue growth above industry average margins, solid cash generation and robust liquidity, while also recognizing our strong competitive position and disciplined approach to liability management and capital allocation. On the next page, we can look closely at the net debt variation. As of the end of the first quarter of twenty twenty six, our net debt has reduced to R151 million dollars when compared to the end of twenty twenty five, a reduction of R218 million dollars even considering the repurchase of R17 million dollars in treasury in the first quarter, reflecting our strong operational performance and capital allocation discipline.

14:35 This concludes our prepared remarks. We are pleased with the progress achieved during the quarter and with the consistency of our executions across the business segments. Our commitment to advance to the medical journey through an integrated ecosystem of educational and medical practice solutions remains unchanged, supporting students through their path to becoming physicians, promoting continual medical learning and enhancing physician decision making and productivity. Looking ahead, we remain focused on our executing our strategy with discipline and capturing the opportunities ahead. I will now open the conference for the Q and A session. Thank you.

15:25 So, if you would like to ask a question, we want you to confirm if your name is in your Zoom account correct. If not, please exit the call and enter again with the link that I sent on the chat. So the first question comes from Luca Macchizini from Itau. Luca, you may now go. Good evening, everyone. Thank you for taking our questions. Two questions from our side. So the first one would be, the release mentions that the intake cycle was successful and that the company implemented a 4.6 price increase. So can you please comment on the competitive environment for this intake cycle and whether it got any worse when compared to the other intake cycles in previous years?

16:12 So that is the first question. And the second one, the release also mentions that one of the drivers for net revenue growth was the performance of nonmedical undergraduate students. Can you please comment on the strategy on this side and on what whether this has changed compared to the last years as well, please? Thank you. Hi, Luca. This is Virgilio. So the first half intake was a very strong intake when we compare to last year. We saw the same level of candidates proceed. On our side here, we are seeing that the recognition of our brand and also the internal process that now we are having an intake and enrollment process fully centralized that we are calling the national intake process.

17:05 So that is also helping us to keep us 100% of the Cuban. So it was a very healthy intake cycle. And besides that, we also start already started our second half intake very beginning and the number of leads, it's also better than the same period last year. In terms of the share of our undergrad revenues, we are seeing a very good trend on other health programs because of Afya's brand is very well connected to the health sector. The last two years, we're also opening some health programs, completing the portfolio for all of our campuses. So we are seeing a very strong intake when we compare year over year and almost a 20% growth, organically growth coming from other undergrad programs on the health sector. So this is a strategy for Afya. We are not only offering medicine on our program, but also increasing the health undergrad programs as a portfolio and strategic portfolio for our ecosystem.

18:15 Why is that? When we have a campus in a small city, just the physician, just the undergrad, just the program for medicine does not solve the issue on the region. And being also offering other health problem attached to Afya's brand connected to our medicine infrastructure on that campus makes a lot of sense. It's a very low additional CapEx, strong brand recognition and very strong intake that we are seeing in good momentum. Okay? Thank you. Thank you. Of course.

19:02 The second question comes from Eduardo Rezeng from UBS. Good evening, everyone. So, thanks for taking my question and two on my side as well. So, could provide an update on the, you know, Meditox. So, if you could provide an update on the impacts that are expected and the initiatives you are executing to foster student performance in the upcoming exam would be very helpful. And the second question is regarding the M and A environment and had the first goal.

19:50 So, if you could please provide some color on the marketing environment for new deals in medical school. I mean, what in your view has been the main constraint for new deals? Is it still on valuation or maybe some asymmetries involving AnaMed as well? So anything you can share with us in this front would be very helpful. Thank you. Hi, Eduardo. I'll take the AnaMed here question and Blanco will help them with the M and A side. So regarding our action plan, the work in AMED, we are doing a very strong initiative here. First of all, it's how to increase engagement of all students that will be applying for AnaMed now in September in the second half this year.

20:41 We are also conducting almost 30 mock up tests of all students that will be applying for AnaMed and doing action plan for every two weeks we have measuring the results based on the new model, because the AnaMed is completely new model when we compare for the previous one based on the old energy. So having said that, we are seeing that our student is much more engaged, committed to have a much better result. And also we are adapting our curriculum also to fulfill the type of question, the type of evaluation that is being considering in the NAMAD. So our expectation that it will be a much better result for our students now in September.

21:30 So regards the M and A, I'll pass here to Blanco. Just to add a point on the AnaMed question, if I may, a reminder that all the results, the exciting results on the second semester is already considered in the guidance that we provided in the beginning of the year. And it's minimal and it's not material. So, Blanco. Hi, it's Blanco speaking. Regarding the M and A environment, first, it's very important to highlight that we keep our capital allocation of discipline, just focus on M and A that are concentrated in medicine, and that generates a good return on capital. Just as a reminder, we have as a target institution that has more than 60% of the revenue coming for the medicine programs.

22:32 And we look for targets for deals that generates an IRR above 20% on leverage nominal kind of internal rate of returns. Having said that, we still keeping our 200 seats per year growth. And we look deals that have these profile that I just mentioned. Sometimes we don't get the right profile. Sometimes we didn't reach a price that make the return on the capital that we seek.

23:18 And then we do not purse a deal just for the growth itself. So we purse deals that have the exact profile and the exact type of return as we keep a very disciplined on this. Eduardo, is it clear? I think that you're on mute. Okay. So moving to the next question. From Bank of America Merrill Lynch.

24:13 Good evening, I have a question on the medical practice solutions in the investments on this front. So you mentioned in the previous quarter that you plan to invest more heavily on this line. And we see that this quarter, the number of total payers continue to decline, especially on the white book front. I understand here that there's a timing component to see the results of these investments. So I was just wondering if you guys could give us more color on the expected timing to see some recovery on these lines. And also, if you could provide more color on the initiatives that you see as a solution, especially on the white book front. Angela, your voice buzzed a bit. Can you please repeat your question?

25:07 Hi, can you hear me well now? Now we can. Okay. So my question is on the medical practice solutions and the investments on this line of business. You mentioned in the previous quarter that you plan to invest more heavily on the medical practice solutions. And we see that in this quarter, the number of payers continue to decline. I understand here that there is a timing component to see some recovery there, especially on the white book. So I just wanted more color on the timing that you expect to see recovery on these lines, especially on the white book. And also if you could give us more color on the initiatives that are being done on the white book to face the competition from AI and the more competitive market on the segment.

26:10 Hi, Medela. Now it was very clear, your question. So regard the investments, we are already investing more on the NPS here for our products, not only individually product by product, but also integrating them and creating like a network effect, having our physician not only more engaged, but also generating more insights and information inside within our platform. So we still see a reduction on payers on white book. On the other hand, we are growing and growing faster on eye clinic. There is more engaged physician to our base and also generating much more data on a daily routine on our basis. We are also tracking the physicians that are leaving our base. They are more young physicians that are not using the platform on a daily routine. We are seeing much more using on the daily routine for more mature and senior physicians that are adopting our clinic, also leveraging the number of prescription that is being made into our platform.

27:31 We just reached more than 2,000,000 prescription level per month in Afya that's also very important. Most of them coming through iClinic. That's why it's so important to leverage the number of clinics and physician adopting eye clinics. In terms of investment, what we are doing, first of all, AI, it's one of the issues and also an opportunity here. We are launching a lot of features, new features, AI based. So the solution is becoming AI for us in terms of white book and also considering the social network effect because we are embedding prescription within white book. We are also integrating white book with our updates and continue medical education solutions and also within iClinic.

28:26 So all of these in a very middle term is to have what we are calling here Afya One platform where a physician doesn't make sense if they are signing for one solution and another. He is like a membership of the entire platform. So this is what we are building here. So in terms of cost and investments that we are doing in this first semester, one is CapEx related to all of this innovation, integration and creating this beautiful platform. And second is improving our sales team, most of B2B that we are now already seeing an important growth year over year and that's what we believe that's the greatest opportunity in the middle and long term for the MPS segment.

29:18 Miguel, I'm Blanco speaking, just adding two more things in what we just mentioned regarding the investment itself. If you notice our CapEx, it's most concentrated on this quarter in tangible assets rather than property and equipment. You can see this change of mix if you compare year over year. And another point regarding specifically about White Book, what we are pursuing year regarding all these investments is to increase the audience within White Book. White Book, when you compare with the public LLMs, most of them are provided for free.

30:04 So we are focused these year on the white book on what we call the audience sites. So the impacts on active payers and then on the revenues, you won't see a big impact on white book this year, but from 2027 ahead. So this year, these investments were focused on audience on the white book. Perfect. That's super clear. Thank you. Thank you. So just a reminder, if you wanna ask a question, please raise your hand and just confirm that your name is correct in the Zoom tool. We can see that we have two questions here. One, we can see the correct name and the other one, it doesn't have the correct name. So please, if it's yours, just leave and click in the link that we sent on the chat.

31:00 So the next question comes from Victoria from JPMorgan. Victoria, you may now go. Good evening, thank you for taking my question. I have one on my side. Just on the sales and marketing expenses in this quarter, so we saw year over year increase. And I just want to touch base to see why we saw this increase. And if you could please give more color on this line going forward? Thank you. Hi, Victoria. So it's two main reasons here. First of all, we anticipate the volume of intakes for the first half because of the NAMAD.

31:50 So we spend a little bit more on undergrad and also on health programs. We saw the results. We also have a very strong intake as we also have a bigger offer portfolio in the first half when you compare to last year. And second, for the SPM, where we are improving our process sales team here, we are also putting more market effort on SPM and also Azcom to strengthen our position on that. This is not a recurring base, but one time based on this first semester, most of them from the undergrad and also for this launching of this new approach of many solutions that is being more integrated and how we are offering this new dynamic and products to our physician ecosystem.

32:52 We thought it's very important that this increase in sales and marketing expenses are under this program and this embedded on our guidance for the year. Okay. Perfect. Thank you so much. So, if you don't have any more questions, we are going to end the call. If you still have a question, please contact the Investor Relations team. We'll be happy to help you. Have a good evening.