Thank you for joining us for Afya’s Second Quarter 2023 Conference Call. Today I'm here with Afya’s CEO, Virgilio 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 impact from COVID-19.

These risks include those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on the information available to us as of the date hereof.

You should not rely on them as predictions of future events, and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, management may reference non-IFRS financial measures on this call.

These measures are not intended to be considered in isolation or 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. Let me now turn the call over to Virgilio Gibbon, Afya’s CEO..

First by maturing the existing seats; second, through organic growth of half of the requested seats that have been asked to the Ministry of Education; and last, through acquisitions.

The fact that undergrad is our biggest cash generator allows us to maintain our goal of constant growth with the plan to increase our available seats by 200 per year through acquisitions.

Considering the increase in inorganic and organic seats, we expect to reach a total capacity of more than 32,000 students and capture 15% of the market share in terms of private seats by 2028, which represents a growth of over 2x in top line. It's worth remembering that Afya manages to extract significant value from every acquisition.

In Continuing Education, which is the next natural step for those who study medicine, we have a product that has shown great potential. And despite being significantly impacted by COVID-19 pandemic, it has experienced an expansion that has exceeded our expectations and still has a lot of room for growth.

Through strong top line growth, ramp up of new units, and additional 50 new courses, we expect to reach R$440 million of net revenue by 2028, 4x higher than 2022.

Afya Digital Services is where we can expand beyond our physical structure and reach a vast number of physicians with tools that offer productivity, assertiveness and up-to-date information.

Our strength in this segment lies in serving as a bridge between the pharmaceutical industry, payers and providers and a vast community of physicians at various stages of their journey.

Our goal for 2028 is to increase penetration and engagement in B2P business acquisition sector and consolidate our B2B offerings, reaching a net revenue of $1.2 billion in Digital Services by 2028. To summarize, we intend to grow more than 2x 2022 net revenue in Undergrad by 2028, 4x in Continuing Education and over 6x in the Digital segment.

This means that Afya will almost triple its net revenue between 2022 and 2028. Despite being ambitious goals, they are achievable, supported by strong execution, focus on the medical journey and a dedicated team. I will now turn the call over to Luis Blanco, Afya's CFO, to give more color on the financial and operational metrics. Thank you..

Thank you, Virgilio, and good evening, everyone. Moving to slide number 10 to discuss the financial highlights of the second quarter. It is with much satisfaction that I present another strong quarter results for Afya.

Adjusted net revenue for the quarter was up 24% year-over-year to R$712 million, reflecting the maturation of medical seats, higher tickets in Medicine courses, the impressive growth from Continuing Education, consolidation of Digital Services and the integration of new acquisitions.

For the six month period, adjusted net revenue was R$1,422 million, an increase of 24% over the same period of last year. Adjusted EBITDA for this quarter increased 22% to R$268 million, while the adjusted EBITDA margin decreased 50 basis points to 38%.

For the six-month period, adjusted EBITDA was R$598 million, an increase of 22% over the same period of the prior year, with an adjusted EBITDA margin decrease of 80 basis points in the same period.

The adjusted EBITDA margin reduction is due to the mix of net revenues, with higher participations of the Digital and Continuing Education segments, and the consolidation of four new Mais Médicos campuses that operation started on third quarter 2022 and UNIT Alagoas and FITS Jaboatão dos Guararapes, which are performing better than expected but still present lower margins when compared to the integrated companies.

Moving to the next slide. Cash flow from operating activities for the semester was 26% higher year-over-year, totaling R$566 million, resulting in a strong cash conversion ratio of 99%. Adjusted net income for the second quarter of 2023 was R$132 million, an increase of almost 11% over the same period of the prior year.

Even with higher interest rates year-over-year, and an increase in debt with the acquisitions of UNIT Alagoas and FITS Jaboatão dos Guararapes, our adjusted EPS kept increasing due to the operational leverage reaching R$1.42 in the second quarter.

Moving to slide number 12 for a discussion of key operational metrics by business unit, starting with the Undergrad segment. Our number of medical students grew 18% year-over-year, reaching almost 21,000 students, with approved medical seats increasing nearly 15% year-over-year to 3,163 approved seats.

Considering additional organic and inorganic seats increase, we expect to achieve a capacity of more than 32,000 undergrad medical students in 2028.

With our net average ticket increasing almost 9% year-over-year for medical school, we’ve reached R$1,616 million of combined tuition fees, up from R$1,310 million from the prior year, an increase of 23% for the six-month period. Regarding revenue mix, 78% of these are 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 impressive growth from our Continuing Education segment, which reported a strong intake process, increasing the number of students by 31% year-over-year. In the quarter, net revenues grew almost 50% when compared to the same period of the prior year.

And for the six month period, we saw an increase of 48%, reaching a net revenue of R$71 million. This recovery is due to the better performance of Afya Educação Medica, mainly related to robust intake process, and course maturation. Moving to slide number 14, I will discuss the Digital Services operational metrics.

On the first graph, you can see our total active payers, which are the ones that generate revenues in B2P. With a continuous growth trend, so far, in this quarter, we have reached 207,000 paying users, an increase of 8% to the same period of 2022.

As you can see in the second graph, our ecosystem reached almost 282,000 monthly active users, representing around 34% of all medical students and physicians in Brazil, as Virgilio said before.

And finally, on our last two graphs, we can see our Digital Services net revenue, which for the quarter increased over 28% reaching R$54 million; and regarding the six month period increased by almost 24% year-over-year.

The organic growth is a combination of the start of the B2B segment with pharmaceutical companies, and the expansion of the active payers in the B2P. In addition, since 2022, we started to break down our Digital Service net revenue within B2P and B2B segments.

So, from the R$111 million of Digital Service net revenue in first half of 2023, more than R$91 million came from B2P, and almost R$20 million came from the B2B. B2B strategy holds a huge potential and is still ramping up.

And now, moving to my three last slides, I will discuss our cash and net debt positions, also giving more color on our cost of debts. Cash and cash equivalents at the end of this quarter were R$741 million, an increase of 20% over second quarter 2022 and an increase of 2.6% over the first quarter 2023.

In this quarter, net debt totaled R$2.004 billion, a decrease of 1.3% compared to the first quarter 2023.

The increase of R$623 million when compared with fourth quarter 2022, was mainly due to the R$825 million UNIT Alagoas and FITS Jaboatão acquisition closed in January 2023, which was partially offset by the free cash flow generation in the half of 2023 as we can look closely on the next page.

In this slide, I presented the net debt reconciliations for 2023. The cash flow from operating activities was allocated to income tax and lease payments, CapEx activities and for the service of the financial debt.

Even considering that we had executed part of our share buyback in this quarter, we were able to generate R$202 million as free cash and reduce our net debt in the semester.

On the next slide, you can see a table with the breakdown of our gross debt and our average cost of debt, considering our main debts, the Softbank transactions, other loans and financings, the accounts payable to selling shareholders. Our capital structure remains solid with a conservative leveraging position and a low cost of debt.

This ends our prepared remarks. I will now open the conference for the Q&A session, thank you..

So if you want to ask a question, please just raise your hand. Our first question is from Lucca Marquezini from Itaú. .

So we saw that adjusted EBITDA margin was impacted by revenue mix and the consolidation of new campus and acquisitions.

So if you could please just provide us more color on the integration process of UNIT and also comment on the profitability performance of Medcel specifically, that will be very helpful?.

I'll take this one, Lucca. I think for your questions. Regarding UNIT, we have the expectations to do the migrations to our shared service during the fourth quarter. So the integration is going to happen this year, less than one year after the business combination itself.

And regarding Medcel itself, the second quarter -- the second and the third quarter are the ones that are not relevant for the business itself. The revenues are more concentrated on the first and the fourth quarter. So Medcel itself, during the second quarter, isn’t relevant for the results. .

Yes. To give you more color Lucca, it’s important to say that if you look to our gross margin of Digital Services and Continuing Education, we increased the margins of both segments and now in the second quarter.

And also, if you look for the ex-acquisition results that we present in the first table of the earnings release, you also can see that you need to have a margin that's below what we can see now of our other results. So in the end of the day, as we said, everything is going as predicted and we are still seeing operational leverage in all segments. .

Very helpful. Thank you, guys. .

Okay, of course. So the next question will come from Lucas Nagano from Morgan Stanley. .

We have two questions. The first one is related to the regulation on medical seats. Now that we have some visibility on the Supreme Court's decision, do you have any expectations for the 170 approximately requests that were made outside of Mais Médicos that will still be analyzed by MEC.

And in parallel, do you have any guess on the format of the new Mais Médicos' III program like in terms of size, regions? That was my first question. The second question is related to FG-FIES. You mentioned that the expected impact for the year is R$24 million.

And I wanted to ask you how much of these were reflected in the first half? Can we assume it R$12 million? And was this effect concentrated in the second quarter or spread between the first quarter and the second quarter?.

Okay, Lucas, it's Virgilio, I'll take the first question here of the FG-FIES, Blanco will help me out. About the asking for new seats out of the Mais Médicos process, I think it’s too soon. We are in the middle of the judgment. We have the second judge just releasing his full this afternoon.

Now he was completely opposed against the continuity of the process that was already within the MEC and the Ministry of Education step but it's still soon in the process to check how would be the impact of all these issues -- the issue process that is out of the current Mais Médicos process.

About the Mais Médicos III, about the seat, I think you still have to wait for one or two weeks to have the bid -- the public bid in the market and to analyze, which will be the seat that will be the acquisition for the Mais Médicos III. .

Hi, Lucas, it's Luis. In talking about FG-FIES, when we saw the increases in the retention piece of FG-FIES that was in the beginning of March, we foresee that and we did this expectations of R$24 million and we put it under our guidance. So since the inception of the guidance of 2023, it's reflected under our guidance of 2023.

So it's -- we don't expect any kind of changes in our guidance and our expectations of this impact in terms of net revenues for the year would be R$24 million. .

Yes. And we don't see a lot of seasonality between the quarters for us to see a lot of concentration in one quarter or other, okay Lucas. .

Yes, but the FIES contract is based by semester. So you can consider that most of them, 50% of them will be in the first and the second half. But consider that we have maturation, we still have more students enrolling in the second half. So it is little bit higher in the second half when you compare it to the first half because of the maturation. .

Very clear. Thank you, guys. .

Of course. So just a reminder, if you want to ask a question, just raise your head. The next question is coming from Jessica from JPMorgan. .

It's a follow-up question on FG-FIES.

So if you could give a little bit more color on the outlook for this contribution on 2024? And do you think it should remain stable as a percentage of medical revenues, assuming no changes in regulations?.

Thank you, Jessica. I'll take this one. And let's recap about the FG-FIES regulations. As Virgilio talking in his part of the presentation, the retentions started when it was ended the fifth year in the beginning of the six years. So this kind of retention is coupled by the governance per educational entity, per each one of the entities.

What happened here in this first year that the entity that has no medical educations were affected because the government calculated delinquency rates regarding the program, but put it on the revenues that are -- the FG-FIES revenues that are related to that financial entity.

So the entities that has more known medical institutions were more affected in terms of percentage. The medical entities were not affected because we didn't have any kind of graduations of the medicals during the beginning of the six years. The medical program, the graduations will occur at the end of the six years.

So we are in this year in a transition period, okay? So regarding the impact in 2024, it's hard to foresee an impact on that.

But what's definitely I could share with you the views that the entities that has Medicine and other courses, the kind of retention that we have will decrease because right now, we just have the delinquency of the non-medical part affecting all the revenues of these entities.

So I would say that we can expect the reduction on that because will start to reflect the delinquency of the medical programs. And regarding the medical -- the pure play, Medicine, it's right now that we have something about 13% of the retentions.

It could go up or down because the delinquency rates on this kind of entity is very, very low for non-FIES. So it's kind of hard to say right now what will be the behavior of these retentions when these calculations is updated in 2024. But having these two different groups sphere, I could say that even -- we could even get a reduction on that.

But it's kind of expectations right now, Jessica.

Thank you..

Of course. So the next question comes from Mauricio Cepeda from Credit Suisse. .

I also have some questions around FG-FIES. It's kind of a controversial topic. It was kind of the hot topic in the results from the other companies as well. So it seemed that the size of the contribution was kind of took the companies offguard. The magnitude of it was kind of unexpected.

So my question would be, what you as a company or as a sector, how are you working to mitigate these effects for the future? What are you proposing that could mitigate the effect from the delinquency? And a clarification as well following what Blanco was answering.

You said the delinquency of the medical entities are higher or lower than the non-medical ones. This is just a clarification. And my second question would be on prep courses.

I know that this is not exactly the cycle for revenues, but you have mentioned in other opportunities that you have been repositioning, right, repositioning the courses in a different tactic, commercial tactic.

So if you could update us on how this reposition is going, it would be great?.

Mauricio, I will get from the first -- your second question about the delinquency on medical, it's much lower than other programs. Our PDA levels is around 1%, 1.5% for a pure player, a pure campus that's just running a medicine program here.

And about the size of this retention, of course, that -- we do not think that this is fair, considering that all this retention is over the delinquency calculated over the students that is getting into the amortization phase.

These students, they are non-medical students, because if the program, that the new FG-FIES started back in 2018, we are just considering students ex medicine or other products than medicine, that they graduated entering the amortization phase and their delinquency is much higher than any other medical problems that we have in Afya.

So considering that when they are using this as a proxy to calculate which would be the retention rate over the entire institution, over the entire entity, they are applying this for overall revenues.

That's why the entire sector do not agree and is trying to convince everyone that this is not fair, and we're trying -- we are seeing like -- and did propose an amendment that’s being discussed under the Congress to limit this retention rate in the future.

Otherwise, yes, we would lose the traction and FG-FIES is an important flag for the current government. We should see some changes in the future semesters. So this is about the FG-FIES. And your third question about the Pillar 1. The second and third quarters have very low seasonality on our revenues here.

Otherwise, we are combining not only the residence prep course coming from Medcel but all other continued medical education programs that prepare physician for titles and so forth. So the operation coming from Além da Medicina, also CardioPapers, they are getting -- increasing a lot the number of students.

So we expect for the second half, starting the revenues on the fourth quarter, better so the turnover when we compare to the last year.

So we are now combining all the products into a big portfolio, not only Medcel residence prep course, but all in terms of title prep and also soft skill programs combining into the Pillar 1, that's our digital continued education offerings, okay?.

Yes. Just for me to add some color on the FG-FIES. So today, we have a retention rate of something around 27% that which should be 13% and what the sector's filing is to limit to 25%. So that could be a change that we can see in the pharma in the next months.

And other point that's important to mention here is that we haven't seen any change on a pure player of medicine in the retention rate.

So if it was 13.5%, it is still 13.5%, okay?.

Yes, just to put a color on that. What's happened that these calculations is done by entity, okay? So if the at entity just have medicine courses as none of the medical students has graduated during the six years because they were going to graduate in the seventh year, the retention rates didn't change.

What hasn’t changed is the entity that has medicine and other causes that as Virgilio mentioned, the delinquency was calculated just for non-medical and was applied to the whole program. That's why we have some entities that had a higher retentions because they calculated the delinquency of non-medical and apply for the whole entity itself.

And with this cap of 25% that's being discussed on Congress that would reduce the impact of this increase in retentions for us. .

Just to finalize, Mauricio, the most reasonable thing is to consider that the retention rate instead of applying for the entire entity should be applied program-by-program. So it would consider the delinquency over each program, not for overall institution based off some sample of this unit that does not represent the total revenue of that entity.

So that is the -- I think the pledge of the entire sector with the new segmentation. .

So I think that we do not have any more questions. If you have any other doubts that you couldn't ask here, I will be available in our e-mail of the IR department. It was a pleasure to have you all today. Thank you for the participation. Have a nice evening..