Earnings Call Transcript - AFYA Q2 2025

Operator, Operator

Thank you for joining us for Afya's conference call. I'm here today with Afya's CEO, Virgilio Gibbon; and our CFO, Luis Andre Blanco. 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 and 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 of the date hereof. You should not rely on them as predictions of future events, and we disclaim any obligation to update any forward-looking statements, except as required by law. In addition, management may reference non-IFRS financial measures on this call. These measures are not intended to be considered in isolation or a substitute of the results prepared in accordance with IFRS. This presentation has reconciled these non-IFRS financial measures to the most directly comparable IFRS financial measures. Now let me turn the call over to Virgilio Gibbon, Afya's CEO.

Virgilio Deloy Capobianco Gibbon, CEO

Thank you, everyone, and welcome to our second quarter and first half conference call for 2025 results. Starting with Slide #3. We are pleased to report that Afya continues to deliver strong operational and financial results. This quarter's performance highlights the high predictability of our business model and the successful execution of our strategy, which consistently combines robust growth, increased profitability and solid cash generation—Afya's three strategic pillars for long-term value creation. This quarter, once again, was marked by significant revenue growth and gross margin expansion in both our Undergrad and Continuing Education segments, reflecting the steady expansion of our business and our ongoing commitment to operational excellence. We are also pleased to reaffirm that Afya remains on track to meet our full year 2025 guidance, supported by disciplined execution and strong business fundamentals. Once again, we delivered strong performance closing the first half of 2025 with a notable growth of 15% in revenues, reaching BRL 1,856 million. Adjusted EBITDA reached BRL 893 million, expanding 20% year-over-year with an impressive margin of 48.1%, an increase of 220 basis points over last year. This margin expansion was primarily driven by the solid results of our Undergrad and Continuing Education segments supported by cost initiatives and our shared service center, helping to boost efficiency and unlock operational synergy across selling, general and administrative expenses. In addition, supported by the increase in adjusted EBITDA, our basic EPS climbed to BRL 4.69, representing a 17% increase over the previous year. Even after accounting for the effects of the new tax legislation aligned with the OECD Pillar Two rules, we continue to deliver higher value to our shareholders. Moving to our operational updates. We have 3,653 approved seats with the closing of FUNIC acquisition, which contributed an additional 60 seats to our portfolio. Furthermore, our number of undergrad medical students has reached almost 26,000 students, representing nearly 14% growth compared to the first half of 2024. In addition, the medical school net average ticket, excluding the UNIDOM acquisition, reached BRL 9,140, over 3% increase year-over-year. In Continuing Education, revenue increased almost 8% over last year, reaching BRL 138 million, and in Medical Practice Solutions, we saw over 9% growth in revenues compared to the first half of last year, reaching BRL 84 million. Lastly, our ecosystem reached 302,000 active users, reflecting strong engagement and deep penetration among physicians and medical students across Brazil. Moving to Slide #4, where we'll discuss the highlights across our three business segments. Starting with the Undergraduate segment, medicine costs continue to show strong performance with a student base increase of 14%. This growth, in addition to the integration of UNIDOM and the ramp-up of 4 Mais Medicos campuses launched in the third quarter of 2022, contributed to a gross margin expansion for the segment. Additionally, as already mentioned, we completed the acquisition of FUNIC, which added 60 new medical seats to our portfolio, with operations started in the second semester of 2025, further strengthening our academic capacity and presence. The Continuing Education segment was marked by an increase in graduate journey students in addition to our gross margin expansion, driven by our ongoing operational restructuring, which continues to contribute to improving costs. The Medical Practice Solutions segment's growth was driven by clinical management payers, an increase of 10% year-over-year. B2P, business to physician, revenues for the first semester also saw a growth of almost 12% compared to the same period of the prior year. On the next slide, I would like to share Afya's new share repurchase program approved by the Board of Directors. We plan to repurchase up to 4 million Class A shares by December 31, 2026, through open market transactions or privately negotiated deals. This initiative reflects our strong commitment to creating shareholder value and ensuring sustainable business performance. It also reaffirms the strength and robustness of our balance sheet while reflecting our disciplined and forward-looking capital allocation strategy aligned with the current economic and political landscape. And now I will turn the call over to Luis Blanco, Afya's CFO, to provide further insight into the financial and operational metrics. Thank you.

Luis Andre Carpintero Blanco, CFO

Thank you, Virgilio, and good evening, everyone. Starting with Slide #7 for discussions of key operational metrics by business unit, starting with the Undergraduate programs. The number of medical students grew almost 14% year-over-year, reaching nearly 26,000 students, while the number of approved medical seats increased 14%, totaling 3,653 seats, considering the FUNIC acquisition. Our medical school net average tickets, excluding the UNIDOM acquisitions, rose by over 3%, reaching BRL 9,140 by the end of the first semester. As a result, revenue for the Undergraduate segment grew over 16%, totaling BRL 1,642 million. It's worth mentioning that 86% of this revenue comes from the medicine programs and 94% from health-related courses, reinforcing our strategic focus and leadership in the sector. On the next page, I will present our Continuing Education metrics. We approach Continuing Education through three main journeys, starting with the graduate journey, the most relevant within Continuing Education. It presented a 12% growth, reaching 9,055 students, and other courses and B2B offerings also saw a solid growth of 19% compared to the same period of last year. The residency journey, which includes products focused on medical residency preparation, ended the quarter with 9,224 students, a 29% decrease year-over-year. Revenue for Continuing Education rose to BRL 138 million, up from BRL 128 million in the first semester of 2024, representing an 8% growth. This includes a 5% increase in B2P revenue and an impressive 42% increase in B2B. Continuing on the next slide, I'll discuss the Medical Practice Solutions operational metrics. The first graph shows our total active payers that generate revenues in business to physicians. This semester, we maintained a solid 196,000 paying users, in line with the same period of the prior year. The second chart highlights our monthly active users, which account for 230,000, a reduction of 9% in comparison to the same period of the prior year. Finally, the third chart presents the revenue for the segment, which grew over 9% year-over-year, reaching BRL 84 million. Of this, BRL 75 million came from B2P, up 12%, and BRL 9 million from B2B, 8% down compared to the same period of the prior year. On the next slide, we present the Afya ecosystem. We are proud of the meaningful impact Afya continues to make across Brazil's healthcare ecosystem. By the end of the second quarter of 2025, 302,000 users were actually engaging with our services and products, reflecting our solid relevance and reach in medical education and medical solutions. Moving forward to Page 11, I want to discuss our financial overview for the second quarter and the first half of 2025. Starting with the next slide, with great satisfaction, I present another strong quarterly performance for Afya. Revenue for the second quarter of 2025 reached BRL 919 million, reflecting a 14% increase over the same quarter of the prior year. For the 6-month period, revenue was BRL 1,856 million, an increase of 15% over the same period last year. This growth is mainly driven by a 3.2% increase in the net average ticket for medical courses, maturation of medical seats and acquisitions of UNIDOM. In the second quarter of 2025, adjusted EBITDA increased 17% to BRL 401 million, with an adjusted EBITDA margin of 43.6%, marking an increase of 110 basis points compared to the second quarter of 2024. For the 6-month period, adjusted EBITDA was BRL 893 million, an increase of over 20% in comparison to the same period of the prior year, with adjusted EBITDA margins of 48.1%, an increase of 220 basis points in the same period. The adjusted EBITDA margin expansion is mainly due to gross margin expansions within the Undergraduate and Continuing Education segments, completion of the UNIDOM integration, the ramp-up of the 4 Mais Medicos campuses that started operations in the third quarter of 2022, operational restructuring efforts in our Continuing Education and Medical Practice Solutions segments, and more efficiency in selling, general and administrative expenses. On the next page, cash flow from operating activities grew 15%, totaling BRL 783 million, driven by our robust operational performance. The operational cash conversion ratio was 88.8% in the second half of 2025. Net income for the second quarter of 2025 amounted to BRL 177 million, a 9% increase from the same period of 2024. For the 6-month period that ended in June 2025, we saw an increase in net income reaching BRL 434 million, representing an increase of 70% year-over-year. Our net income this quarter reflects not only our strong operational performance but also the impact of the new tax legislations implementing the OECD Pillar Two growth. Our base EPS reached BRL 1.90 for the quarter, an 8% increase compared to the previous year, and BRL 4.69 per share in the first 6-month period, a growth of 17%. Now moving to my two last slides will discuss our cash and net debt positions, also giving more color on our cost of debt. This slide presents a table detailing our gross debt compositions and total cost of debt, covering our primary obligations. The SoftBank transactions, the debentures, other financial liabilities, the IFC financing, and accounts payables to selling shareholders. Afya's capital structure remains solid with a conservative leverage position and a low cost of debt. Afya's net debt, excluding IFRS 16 divided to the midpoint of the 2025 adjusted EBITDA, was only 0.97x. On the next page, we can look closely at our net debt variation. As of the second quarter of 2025, our net debt has reduced to BRL 1,621 million when compared to the end of 2024, a reduction of BRL 194 million, even considering the payment of dividends and acquisition of FUNIC, reflecting our strong operational performance and capital allocation discipline. This concludes our prepared remarks. We are proud of our strong performance we've delivered this quarter. Our focus on improving the medical journey through an integrated educational system and Medical Practice Solutions remains strong, helping students to become doctors, supporting ongoing medical learning and making physicians more accurate and efficient. Looking ahead, we are excited about the opportunities in front of us, and confident in our ability to keep creating value in the entire ecosystem. I will now open the conference for the Q&A session. Thank you.

Operator, Operator

Our first question comes from Lucca from Itau BBA.

Lucca Generali Marquezini, Analyst

Our question regards the main leverages here for profitability expansion in the quarter. So you mentioned that one of the levers was improved efficiency in SG&A expenses. If you could provide just more color on each of the segments these efficiencies are focused on? And then going forward, if you expect any further dilution in SG&A expenses? That would be very helpful.

Luis Andre Carpintero Blanco, CFO

Thank you, Lucca. Blanco speaking. I will take your first questions. We always chase the higher efficiency performance by our shared service. So during this period, we had some additional centralizations regarding some services that were still in the Undergraduate units. We centralized it in our shared service. On top of that, remember that last year, on the Continuing Education segment and the Medical Solutions segments, we made huge transformations beginning in the first quarter, centralizing all the teams from different products from different units into a single team. So all of that helped us achieve the expansion that we presented in our margins during 2024. These initiatives continue to provide results this year. So it's a little bit what we are doing and we are still capturing all the synergies that we can within the three segments.

Virgilio Deloy Capobianco Gibbon, CEO

It's Virgilio, just to add a few points. Just remembering that we launched 4 Mais Medicos campuses 2.5 years ago and they are still maturing. So it's leveraging operational leverage as we have a very efficient G&A corporate structure. As the top line goes up, you'll have all the synergies being captured to the bottom line. Also, UNIDOM is still maturing. It's a huge operation in Salvador. So it's improving the gross margin from the campus side and also helping to leverage and push our bottom line EBITDA margin. The simple fact is that this first half is an all-time high first half EBITDA margin since we became publicly traded in 2019. So we are discussing efficiency. That's the beauty of the model we designed in the past, and now we have the full maturation of most of our campuses, of our operation, and also as Blanco mentioned, capturing value and leverage from Continuing Education and Digital Services.

Operator, Operator

The next question will come from Flavio from Bank of America.

Flavio Yoshida, Analyst

Thank you for the opportunity to ask questions. I have two on my side. The first one is on the guidance, more specifically on the EBITDA guidance and taking into consideration what you just mentioned about some more efficiency and more leverage. So if we annualize the first half EBITDA, we reached roughly BRL 1.8 billion for the year, which is slightly above the top of the guidance range. So given that there wasn't any guidance revision here, should we expect the EBITDA for the second half to be slightly below the first half? Or do you guys just prefer to be a little bit more conservative here? And then my second question is on the tax rate. If we consider not only the second quarter but also the first half figures, we see an effective tax rate close to 9%, which is below the 15% tax rate proposed under the global minimum tax of the OECD. It would be great if you guys could share some more color on what we should expect for the second half of this year related to the tax rate here.

Virgilio Deloy Capobianco Gibbon, CEO

Okay, Flavio, thank you for your question. I will take the first one, and Blanco can help me with the tax rate. So regarding the guidance, we prefer to keep to the conservative side here mostly because we have some seasonality in Continuing Education. So the roadmap of the new cohort of the new season starts after September, and we are just at the very beginning here. So we still have some uncertainty ahead, even considering that we have a successful intake in the Undergrad segment, which is the most important business. From our side here, we are confident with our guidance, and we prefer to keep the same range as we released in the first semester.

Luis Andre Carpintero Blanco, CFO

And Flavio, regarding the tax rate, you are completely right. The minimum tax rate is 15%, but in the first quarter and here in the second quarter, we could recognize two tax deferred assets in our balance sheet. With these recognitions, we could reduce the effective tax rate in this semester. But coming ahead, we don't expect the impact of the Pillar Two to convert to 15%. There is an adoption effect that is growing, but at the end of the day, we are keeping the effective tax rates at that level.

Operator, Operator

Our next question will come from Marcelo Santos from JPMorgan.

Marcelo Peev dos Santos, Analyst

Thanks for the opportunity. My two questions are about the medical business. The first is, could you please comment a bit on the competitive outlook for the second half intake? How did that go? How did you see competition? Whatever you could add there. The second question would be about medical tickets. So could you discuss a bit? I mean, it grew 3.3%, if I'm not mistaken. And it's a bit below inflation. What are the effects that drive this? Maybe mix, maybe ramp up? So I just want to hear from you guys. Thank you.

Virgilio Deloy Capobianco Gibbon, CEO

I'm sorry. So we were on mute here. So just repeating what was mentioned, Marcelo. So regarding the medical competition, as everybody knows here, we had a lot of new approvals on medical seats and also institutions during the first half. We didn't have a new cohort of new or fresh students coming from high school, so the competition in the second half to fill the seats was higher. We reduced the candidates' ratio from 7% last year to around 5% this year, but we have a good trend on the enrollments. We already started our classes, so it's something that we keep our 100% occupancy. We just launched our first half 2026 intake for next year. It's very beginning. We are very confident on that because now we don't have many new seats coming as expected, but we do have a new and fresh cohort of students graduating from high school soon. So the candidate ratio was reduced from 7% to 5%. It was a bit more competition in some of the cities where we operate. About medical tickets, although we passed our gross tuition a little bit above inflation, we are having more discounts coming from FIES, the net effect was a little bit below inflation, but we continue to pass around inflation with our strategy moving ahead. The main effect here was the 27% discount coming from FIES, with depending on the campuses, we have around 10% to 15% of our student base enrolled in medical programs at that campus level.

Marcelo Peev dos Santos, Analyst

Perfect. Just following up on this. I mean, regarding this is a bit more competitive second half, did this entail discounts, or were you able to pursue your normal pricing policy despite this slightly more intense competition?

Virgilio Deloy Capobianco Gibbon, CEO

No discounts. The same policy.

Operator, Operator

The next question will come from Samuel from BTG.

Samuel Campos Alves, Analyst

Just one question on our end about this new taxation that you guys were commenting before. I imagine the company is seeking to challenge the tax charge here through legal or administrative means. My question is, if you could elaborate on that opportunity, do you see a more likely scenario through administrative efforts or through legal processes?

Luis Andre Carpintero Blanco, CFO

It's Blanco speaking. I'll take this question. It's very good to have this question to clarify how we see that. We have two fronts that we are working on right now regarding the new structure of taxation. One is to define it at the judicial level; we are asking for protections regarding this new taxation, questioning some points about how it was defined and implemented. We don't have any concrete outcomes from this questioning for this challenge yet, but we are questioning at the judicial level. In parallel, we are presenting to the executive and lower house representatives that these taxations at the end of the day take away all the benefits from the PROUNI program. At the end of the day, as PROUNI is not qualified as a qualified credit under this pillar, all the effect of PROUNI is withdrawn from the Pillar Two calculations. We have more than 10,000 students in medicine, other health and other courses being supported by PROUNI, and we want to keep our policy regarding PROUNI. We don’t want to jeopardize it as it is a very important program for the population itself. We have these two fronts. It's very hard right now to define a probability regarding which one will succeed, but we are working on these two fronts.

Operator, Operator

Our next question will come from Mauricio Cepeda from Morgan Stanley.

Mauricio I Cepeda, Analyst

We have two questions. The first one about the M&A environment. Are we seeing that because we have seen some transactions being performed in Brazil by your competitors that seem to be cheaper than what we saw in the past? Are you seeing the sellers being pressured somehow? Can you take advantage of this new environment? And how did this wave of new seats change the environment during the diligence process? The second question is about this buyback program. We understand that 4 million shares is a significant portion of your free flow, and then several times your daily traded volume. So how are you considering this trade-off between the return to shareholders versus stock liquidity?

Luis Andre Carpintero Blanco, CFO

Thank you, Mauricio. I'll take the questions, and Vig, please, jump in if you want. Regarding the M&A environment, we are always looking for the right opportunity, the right profile at the right price. Good brand, good reputation, and good location are becoming even more relevant for defining the price from the transactions. With these new entities coming to the market and all these judicial challenges in the markets, of course, we have new offers, and we are working closely with good location brands and reputations that we can target at the right pricing. Regarding the buyback itself, as you mentioned, that's relevant. It's about 4% of our number of shares, and it has an impact in terms of liquidity. But we see that as an opportunity in capital allocation in all shareholder remuneration. We discussed this in the last months. We decided that the combination of dividends and buybacks would make sense to return to shareholders and increase shareholder remuneration. So with the buyback, we can take an opportunistic price action strategy on that. Over the long term, we believe it will provide increased value for our shareholders by increasing EPS.

Operator, Operator

Our next question will come from Renan Prata from Citibank.

Renan Prata, Analyst

Just a very quick question here. I think the colleagues covered my point. But it caught my attention that the residents' journey dropped significantly year-over-year. And I just want to know if there is a meaningful trend in the market or if this is just a centrality in this quarter. Lastly, you guys commented on the release about the ENAMED exams. So I just wanted to hear your thoughts regarding these new exams. I mean— is there any additional CapEx that you envisage for Afya to benefit from these new standards? Or I don't know, just want to hear your thoughts on this new exam.

Virgilio Deloy Capobianco Gibbon, CEO

Okay, Renan, Virgilio here. So regarding the residents' journey, we had a very low cycle in 2024 or end of 2024 that reduced the intake significantly over 2023. As the highest seasonality is in the third and fourth quarters, we are just at the beginning. We changed a lot in our approach and our product at the end of the first half. In July and August, we have seen a very good trend, but it's a very small intake compared to the entire year. We will see an increase in volume in September. So it's too soon. I think the main point here is that we are observing a very high competitive landscape in residency. In 2024, we didn't have a successful intake, leading to reduced overall revenues. However, on the other side, the ENAMED, as you mentioned, I think it's a very important opportunity in Continuing Education besides the graduate business that is continuing to grow and boosting our revenues. The CapEx required for ENAMED is marginal because we already have all the assets in place, and we can also leverage what we are using on residency preparation and all the learning objectives that we already have in our curriculum here in Afya. So the CapEx is marginal; it's just a valuable opportunity, not only on B2C but also on B2B, leveraging the relationships that we have with various institutions.

Operator, Operator

As there are no further questions at this time, I would like to thank everyone for joining us today. On behalf of the Investor Relations team, we remain available for any follow-up questions. We look forward to talking with you again during our next conference call. Thank you.