Afya Limited (AFYA) Earnings Call Transcript

Thank you for joining us for Afya's conference call. I'm here today with Afya's CEO, Virgílio Gibbon; and our CFO, Luis Andre Blanco. 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. 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 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 as a substitute of the results prepared in accordance with IFRS. This presentation has reconciled these non-IFRS financial measures to the most directly comparable IFRS financial measures. Now let me turn the call over to Virgílio Gibbon, Afya's CEO.

Thank you, Renata, and welcome to our second quarter and first half conference call for 2026 results. Starting with Slide #3. Once again, we delivered a solid performance in closing the first half of 2026 with revenue growth of 7% year-over-year, reached BRL 1.985 billion. Adjusted EBITDA reached BRL 918 million, growing 3% year-over-year with an adjusted EBITDA margin of 46.2%, a contraction of 190 basis points compared to the same period last year. This margin decrease primarily reflects the lower gross profit contribution from continued education, driven by a higher sales and marketing expenses associated with the investment cycle outlined at the beginning of the year across continued education and medical practice solutions. Net income reached BRL 463 million, a 7% increase year-over-year. Basic EPS climbed to BRL 5.10, represents a 9% increase over the previous year, reflecting our capital allocation strategy. Operating cash conversion remained strong at 87.8%, broadly in line with the prior year. Turning now to free cash flow to equity. We delivered BRL 423 million in the first half of 2026. These results reflect the strength of our cash generation, disciplined execution and our continued commitment to create long-term shareholder value. Moving now to our operational updates. We have 3,768 operating medical seats with an increase of over 6% year-over-year. Furthermore, our number of undergrad medical students grew to more than 26,000 students, represented 3% growth compared to the first half of last year. Additionally, we increased the net average ticket of medical school by almost 4% year-over-year, reached BRL 9,443. In continued education, revenue increased almost 5% over last year, reaching BRL 144 million. And in medical practice solutions, we saw 2% growth in revenue compared to the first half of 2025, reached BRL 85 million. Our ecosystem now accounts for 295,000 users, reflecting continued meaningful penetration among physicians and medical students across the country. Moving to Slide #4. We will discuss the highlights across our 3 business segments. The first half of 2026 was marked by favorable pricing trends in medicine course, where tickets rose by nearly 4% year-over-year. In addition, we continue to deliver strong student base growth momentum in health science course. Compared to the previous years, health science course delivered 13% growth, reflecting the diversification of our health-related undergrad portfolio. The continued education segment was once again marked by strong growth in our total student base, which expanded 23% in the first half of 2026, driven by higher intake in short-term programs, which carry a lower average ticket per student. B2B revenue for the segment grew 8% compared to the same period of prior year. The medical practice solutions segment delivered a 20% increase in clinical management active payers in the first half of this year. In addition, B2B revenue for the first half grew 5% year-over-year. Lastly, shareholder returns remain a key priority. Our disciplined capital allocation framework continues to create sustainable value for shareholders. At the corporate level, supported by strong cash generation, we returned BRL 448 million to our shareholders through dividends and share repurchase in the first half of 2026, representing 106% of our free cash flow to equity. This reflects our disciplined approach to capital allocation. When acquisition opportunities do not meet our return criteria, we return capital to shareholders. The strength of our cash generation gives us the flexibility to pursue acquisitions when attractive and to consistently return capital to shareholders. Now I will return the call over to Luis Blanco, Afya's CFO, to provide further insight into the financial and operational metrics. Thank you all.

Thank you, Virgílio, and good evening, everyone. Starting with Slide #6 for discussions of key operational metrics by business unit. Starting with the undergraduated programs. Our medical student base grew by 3% compared with the first half of 2025, reaching over 26,000 students, while operating medical school seats increased by over 6% year-over-year to 3,768. Our medical school net average ticket increased by 4%, reaching BRL 9,443 in the first half of 2026. As a result, revenue for the undergraduated segment grew over 7%, totaling BRL 1,762 million. It's worth mentioning that 85% of this revenue comes from medical programs and 93% from health-related courses, reinforcing our strategic focus and leadership in the sector. On the next page, I will present our continued educational metrics. We approach continuing educational through three main journeys, starting with the residency journey, which encompass products focused on the residency preparations, the student base remained stable year-over-year, reaching 9,244 students at the end of the period. In the graduate journey, which focused on the specialization test preparations and graduated medical education, the total number of students increased by 13%, reaching 10,213 students supported by the continued demand for advanced medical training programs. Lastly, other B2P and B2B offerings continue to grow strongly with total students increasing 35% year-over-year to 36,780 students, demonstrating the continued expansion of our broader continuing education portfolio. Continuing educational revenue increased to BRL 144 million in the 6-month period of the 2026 compared to BRL 138 million in the same period of 2025, representing growth of 5%. This performance was primarily driven by B2P revenue, which increased 8% year-over-year to BRL 135 million, representing 94% of the continuing education revenue. Meanwhile, the B2B revenue totaled BRL 9 million, declining 25% year-over-year. Moving to the next slide, I will discuss the medical practice solutions operational metrics. The total active payers remaining broadly stable year-over-year at approximately 201,000 with clinical management active payers growing 20% to more than 50,000, reflecting the continued penetration on Afya iClinic. Monthly active users reached 212,000 during the period, an 8% year-over-year decrease. Despite the stability in total active payers, medical practice solutions revenue increased 2% year-over-year to BRL 85 million in the first half of 2026. On the next slide, we present Afya ecosystem. We are proud of the meaningful impact of Afya continues to make across Brazil health care ecosystem. By the end of the second quarter of 2026, 295,000 users were actively engaging with our service and products, reflecting our solid relevance and reach in medical educational and medical solutions. Moving forward to Page 10, I want to discuss our financial overview for the second quarter and the first half of 2026. I'm pleased to present another solid set of results for Afya, reflecting the resilience of our business model and our continued focus on sustainability growth and operational efficiency. Revenue for the second quarter of 2026 reached BRL 972 million, representing a 6% increase compared to the same period of the prior year. For the first half of 2026, revenue totaled BRL 1,985 million, 7% year-over-year increase. Adjusted EBITDA reached BRL 470 million in the second quarter of 2026, an increase of 1% compared to the prior year. For the first half of the year, adjusted EBITDA totaled BRL 918 million, growing 3% year-over-year. Adjusted EBITDA margin reached 41.8% in the quarter and 46.2% in the 6-month period. While margins were below those reported in the comparable periods last year, reflecting a combination of continuing investments to support growth initiatives and the investment cycle across continued educational and medical practice solutions, profitability remained healthy. On the next page, cash flow from operating activities reached BRL 806 million in the first half of 2026 compared to BRL 783 million in the same period of the prior year, representing a growth of 3%. Cash conversions remained strong at 87.8%, broadly stable compared to the prior year. Net income for the second quarter of 2026 totaled BRL 201 million, an increase of 14% compared to the same period of the prior year. For the first half of the 2026, net income reached BRL 463 million, growing 7% year-over-year. Earnings per share increased to BRL 2.22 in the second quarter of 2026, up 17% from BRL 1.90 in the prior year, higher than the net income increase, reflecting the execution of our buyback program. For the 6-month period, earnings per share reached BRL 5.10, up 9% from the BRL 4.69 in the first half of 2025. Overall, these results reflect Afya's ability to continue to generate solid cash flow while delivering consistent growth in profitability and shareholder returns. And now moving to my last 3 slides, I will cover our gross debt compositions and cost of debt, our net debt reconciliation and close with our shareholder return. This slide details the compositions of our gross debt positions as of June 2026, covering its maturity profile and average cost of debt. Afya continued to maintain a solid capital structure and a conservative leverage profile. As of 30th of June, gross debt totaled BRL 2.4 billion compared to the BRL 2.7 billion as of 30th of June of 2025. At the same time, the average debt duration increased from 1.9 years to 3.7 years, extending our maturity profile in the period. The average cost of debt stood at 15.1% per year, representing approximately 106% of the CDI for the period. On the next page, we can look closely at the net debt variation. As of June 2026, our net debt totaled BRL 1,394 million remaining virtually unchanged from the end of 2025 despite returning BRL 448 million to shareholders through dividends and treasury share repurchase during the first half of the year, reflecting our strong cash generation and disciplined capital allocation. Our net debt positions continue to benefit from the solid cash flow from operating activities, which totaled BRL 806 million during the period, largely offsetting investments, leases, interest expenses and shareholders' distributions. Our Afya net debt, excluding IFRS 16 divided by the midpoint of 2026 adjusted EBITDA guidance was 0.8x. In my last slide, we paid BRL 307 million in dividend during the second quarter of 2026, representing 40% of our 2025 net income, while continuing to execute the share purchase program. Our consistent growth in net income and cash generation has enabled us to enhance shareholder returns while remaining disciplined in our capital allocation decisions and focus on the long-term value creation. In first half of 2026, we returned BRL 448 million to shareholders, surpassing our free cash flow to equity of BRL 423 million for the period, resulting in a 106% ratio. Our last 12 months free cash flow to equity yield stood at 11% calculated on market capitalizations as of 30th of June 2026, and basic EPS growth reached 13% for a total equity return of 24% at constant valuation multiple. This concludes our prepared remarks. The first half of 2026 reinforces what we have consistently demonstrated over time, a resilient business, a focused team and the strategic that is working. We remain deeply committed to advancing the physician journey through our integrated ecosystem and confident in our ability to deliver sustainable long-term value for our shareholders, students and health care professionals across Brazil. I will now open the conference for the Q&A session. Thankyou.

[Operator Instructions] The first question comes from Marcelo Santos from JPMorgan.

I have 2. The first, if you could talk a bit about the competitive intake in the second half and how you're seeing the pressure for tickets, the capacity to increase prices? That's the first question. And the second question is regarding medical practice solutions. It was a bit down this quarter. So just wanted to get a bit more detail and when we should see the increased investments start showing results in the revenue side.

Related to our intake on the second half, we are once again aiming to have 100% of all of our occupancy fulfilled. While still not all the [ ProUni ] cycle is a little bit late. So we are waiting for these enrollments to be completed by September. So once again, we have a solid and healthy intake. So the price, I think we are not changing price for the second half because we are doing the beginning of the year. So we are not also giving any discount for medicine programs. On the health sector, on the health programs, we are seeing a very strong intake. At this moment, we're still ending the process in the beginning. We will also end on the beginning of September. We are more than 20% above from last year at the same period. So we are growing organically more than 18% in volume in health we're expecting to be above that for the second half. So that's on NPS, Blanco will help me here.

Thank you for your question. Regarding the NPS, the general environment, what's happening that we are having been -- have some pushbacks in terms of clinical decisions on major on Whitebook. These pushbacks in terms of active payers are due to the competitions by the AI tools that are pressuring the number of payers. What we decided that we would to reduce a little bit the ticket on that and increase functionalities under embedded on the Whitebook. But the other side, on the clinical management system that our major encompass iClinic, we have a very positive cycle. We are growing faster, but this growth is not sufficient to surpass a lot by this decline on Whitebook. The both together on the business to physician side, we are growing semester by semester, just 1.1%. Having said that, just remember that our investment cycle that we've announced in the beginning of the year encompass investment cycle. This investment cycle is both regarding CapEx that we are increasing the intangibles in the year if we compare to last year to increase functionalities both in iClinic and Whitebook and investments in teams under the teams increasing the number of the team members on this -- under this segment. So we are under our plan to put more functionalities on the segment, increase audience first and then in the future, have this recover in terms of revenues.

Second question comes from Flavio Yoshida from Bank of America.

I have 2 questions here from our side. The first one is on EBITDA, okay? So if we get the first half EBITDA and annualize it, it gets us to roughly BRL 1.8 billion for the year, which is pretty much the top of your guidance range, right? So since you guys didn't make any changes on the guidance, should we expect the second half EBITDA to come a bit below the first half? Or you guys just prefer to be a little bit more conservative here on the guidance? So this is my first question. And my second question is on capital allocation strategy going forward, right? So if you guys could share with us some details on how do you guys plan to balance an eventual higher dividend distribution or a more active approach on M&A, right? And also, if you could share with us how is the recent M&A environment for medical courses?

Thank you, Flavio. It's Blanco speaking. I will start with that. Regarding the first one under the EBITDA, we are focused on delivering the EBITDA that we provided to the market that's between BRL 1.7 billion and BRL 1.8 billion. So we guided the market and we delivered as we always do regarding the guidance. Regarding the capital allocation itself, what I can assure you that Afya will always be very, very conscious in terms of capital allocations. Since the IPO, we've made 22 business combinations, and we take capital allocations very, very, very, very serious. If we don't have opportunities that attends the thresholds in terms of concentrations in medicine and mostly the IRR that these business combinations do not have a return on the capital employed in these business combinations that is above our thresholds, that's 20% minimal -- nominal unleverage, we simply do not do the business combination. So we are very careful on that. As we did not have this business combinations with this return of the capital in the hands, we prefer to return this capital to our shareholders, both in terms of share buybacks and dividends. We are very comfortable with this 0.8 net debt to EBITDA that we presented right now, and we decided to give it back the shareholders all the free cash flow to equity for the first semester. And it's very important to going forward to have in mind that we have opening buyback in place that we've announced in August of last year, if I'm not wrong, and right now, from this 4 million shares in buyback that we've announced, we've performed 2.6 million shares. So we had a firepower of 1.4 million to perform until the end of this year.

Yes, Flavio, just if I may add here and summarizing what Blanco wants to mention. So we keep aware about M&A opportunities considering this threshold. So we have a good pipeline in our hand here. As you saw in the first semester, we distribute almost 100% of actually more than 100% of the cash that we generated to our shareholders through buyback and dividends and also keeping a very low leveraging on our net debt. In parallel, we are also investing a lot in terms of product. So you can see the intangible. So we are doing a lot of enhancement on our features, plugging more AI features, improving the engagement of our physician into our solution. So we are levering prescription into our clinical decision solution. We are reaching more than 50,000 users on our clinical solution on our iClinic here, it's our main solution and also embedding clinical decision support features that for one side is reducing the solo users on that, but they are also using this type of feature embedded on our clinical management solution. So that's -- we are funding not only our current internal investment, reducing our leverage, buying back shares, distributing through dividends and keep aware with a lot of firepower to do some M&As, but we have to reach the -- at least the threshold that we are aiming, okay?

Next question comes from Lucca Marquezini from Itaú.