Afya Limited (AFYA) Earnings Call Transcript & Summary

We appreciate your participation in this conference call. Joining me today are Virgilio Gibbon, our CEO, and Luis Blanco, our CFO. Throughout today's presentation, our executives will deliver forward-looking statements. Such statements may pertain to upcoming events, future financial or operational results, both known and unknown risks, uncertainties, and additional factors that could lead Afya's actual outcomes to diverge materially from what these forward-looking statements anticipate. Forward-looking statements within this presentation encompass, without limitation, remarks concerning business and financial performance, expectations and guidance for upcoming periods, or expectations about the company's strategic product initiatives and their associated benefits. These risks comprise those more thoroughly outlined in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation rest on information available to us as of this date. You should not treat them as forecasts of future events, and we renounce any duty to revise any forward-looking statements, unless the law requires it. Furthermore, management might mention non-IFRS financial measures during this call. These measures should not be viewed alone or as a replacement for results prepared under IFRS. This presentation has reconciled these non-IFRS financial measures with the most directly comparable IFRS financial measures; at this point, I'll hand the call over to Afya's CEO, Virgilio Gibbon.

Thanks, Renata. I want to welcome all of you to this call, where we'll go over what we achieved in the second quarter and the opening six months of 2026. Starting on slide three, we delivered another strong set of results, closing out the first half of 2026 with top-line growth of 7% compared to a year earlier. Revenue reached BRL 1,985 million. Adjusted EBITDA totaled BRL 918 million, a 3% increase versus the prior-year period, and our adjusted EBITDA margin stood at 46.2%, down 190 basis points from the same period last year. The main reason for the margin drop is that continuing education contributed less gross profit, which happened because sales and marketing costs went up due to the investment cycle we described at the beginning of the year for continuing education and medical practice solutions. Net income reached BRL 463 million, up 7% from a year earlier. Basic EPS climbed to BRL 5.10, a 9% gain versus the prior year, which shows how we're allocating capital. Operating cash conversion is still solid at 87.8%, roughly matching last year's level. Now let's discuss Free Cash Flow to Equity. For the first half of 2026, that came in at BRL 423 million. This shows how strong our cash generation is, how disciplined we've been in execution, and how we remain committed to building long-term shareholder value. Moving on to operational updates: we currently have 3,768 operating medical seats, which is up over 6% from a year ago. On top of that, undergraduate medical student numbers rose above 26,000, a 3% gain versus the first half of last year. We also increased net average fees for medical school by nearly 4% year-over-year, bringing them to BRL 9,443. In continued education, we posted an increase of almost 5% compared to last year, reaching BRL 144 million. Looking at Medical Practice Solution, revenue increased 2% versus the first half of 2025, coming in at BRL 85 million. The number of users in our ecosystem has reached 295,000, which shows we keep making meaningful inroads with physicians and medical students nationwide. On slide number four, we'll go over what stood out in each of our three business segments. Favorable pricing trends shaped the first half of 2026 in medicine course, with tickets up almost 4% compared with a year earlier. Beyond that, we're still seeing robust momentum from student-based growth in health science course. Versus prior years, health science course posted 13% growth, which speaks to how our health-related undergrad portfolio has become more diversified. Once again, our continuing education division posted robust expansion. Its overall student count climbed 23% during the opening six months of 2026, fueled by greater enrollment in shorter-duration offerings, which come with a smaller average revenue per learner. Within that division, B2P revenue rose 8% against the equivalent stretch a year earlier. Turning to the Medical Practice Solution division, active payers in clinical management jumped 20% across the first half of this year. On top of that, B2B revenue for those six months was up 5% versus a year ago. Finally, giving back to shareholders stays a top priority. Through our disciplined approach to allocating capital, we keep generating lasting value for those who hold our stock. On a company-wide basis, with solid cash flow backing us, we gave back BRL 448 million to shareholders during the first half of 2026 via dividends and buybacks, which works out to 106% of our Free Cash Flow to Equity. That shows how carefully we manage where capital goes. If deals we look at fail to clear our return hurdles, the money goes back to shareholders instead. Because our cash generation is so robust, we have room to make acquisitions when they look appealing while also returning capital on a steady basis. Now I'll hand things to Afya's CFO, Luis Blanco, who will walk you through more on the financial and operational metrics. Thanks, everyone.

Thanks, Virgilio, and good evening to all of you. Let's begin on slide 6, where we go over the key operational metrics for each business unit. We'll start with the undergraduate programs. Our medical student base expanded 3% versus the first half of 2025, surpassing 26,000 students, and operating medical school seats rose more than 6% year over year, hitting 3,768. The net average ticket for our medical school went up 4%, arriving at BRL 9,443 in the first half of 2026. Consequently, undergraduate segment revenue climbed more than 7%, coming to BRL 1,762 million. It's worth noting that medical programs account for 85% of that revenue, while health-related courses make up 93%, which underscores our strategic focus and leadership in the sector. Turning to the next page, I'll walk through our continuing education metrics. We structure continuing education around three main journeys. First, the residency journey, which covers products aimed at residency preparations — the student base stayed stable year over year, at 9,244 students at the close of the period. In the graduate journey, focused on specialization test preparations and graduated medical education, the total number of students rose 13%, reaching 10,213 students, buoyed by sustained demand for advanced medical training programs. Finally, other B2P and B2B offerings kept growing strongly, with total students up 35% year over year to 36,780 students, which shows the ongoing expansion of our broader continuing education portfolio. Continuing education revenue rose to BRL 144 million in the six-month period of 2026, versus BRL 138 million in the same period of 2025, a growth rate of 5%. This performance was mainly driven by B2P revenue, which grew 8% year over year to BRL 135 million, accounting for 94% of continuing education revenue. Meanwhile, B2B revenue came to BRL 9 million, falling 25% year over year. Moving to the next slide, I'll cover the operational metrics for medical practice solutions. Total active payers stayed broadly stable year over year at roughly 201,000, while clinical management active payers grew 20% to more than 50,000, reflecting continued penetration on Afya iClinic. Monthly active users hit 212,000 during the period, an 8% year-over-year decrease. Despite that stability in total active payers, medical practice solutions revenue rose 2% year over year to BRL 85 million in the first half of 2026. On the next slide, we present the Afya Ecosystem; we take pride in the meaningful impact Afya continues to have across Brazil's healthcare ecosystem. By the end of the second quarter of 2026, 295,000 users were actively engaging with our services and products, reflecting our solid relevance and reach in medical, educational, and medical solutions. Moving on 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. In Q2 2026, revenue came in at BRL 972 million, which was up 6% from the equivalent quarter a year earlier. Across the first six months of 2026, revenue was BRL 1,985 million, marking a 7% rise versus the same stretch last year. Adjusted EBITDA for Q2 2026 hit BRL 470 million, a 1% gain over the year-ago period. During the first half, adjusted EBITDA summed to BRL 918 million, up 3% from a year earlier. The adjusted EBITDA margin was 41.8% for the quarter and 46.2% for the six-month span. Although those margins came in lower than what we posted in the matching periods a year ago — a result of combining ongoing spending on growth initiatives with the investment cycle across continuing educational and medical practice solutions — profitability stayed healthy. Turning to the next page, cash flow from operating activities was BRL 806 million during the first half of 2026, versus BRL 783 million a year earlier, which works out to 3% growth. Cash conversion stayed robust at 87.8%, essentially flat against the prior year. Net income in Q2 2026 came to BRL 201 million, up 14% from the equivalent quarter last year. During the first six months of 2026, net income was BRL 463 million, a 7% increase year-over-year. Earnings per share climbed to BRL 2.22 in Q2 2026, 17% above the BRL 1.90 recorded a year earlier and ahead of the net income growth rate, which shows the effect of executing our buyback program. Over the six-month periods, earnings per share came to BRL 5.10, 9% higher than the BRL 4.69 posted in the first half of 2025. Taken together, these figures demonstrate that we keep generating solid cash flow while also producing steady improvement in profitability and returns for shareholders. I'll now turn to my final three slides, where I'll cover our gross debt positions along with the cost of debt, walk through our net debt reconciliation, and finish with our shareholder return. This slide lays out how our gross debt positions were composed as of June 2026, including the maturity profile and the average cost of debt. Afya went on maintaining a solid capital structure and a conservative leverage profile. As of June 30th, gross debt stood at BRL 2.4 billion, down from BRL 2.7 billion on June 30th, 2025. Meanwhile, average debt duration lengthened from 1.9 years to 3.7 years, pushing out our maturity profile during the period. The average cost of debt came to 15.1% per year, roughly 106% of the CDI for that period; flipping to the next page, we can examine the net debt variation in more detail. As of June 2026, net debt came to BRL 1,394 million, essentially unchanged from the close of 2025, even after we returned BRL 448 million to shareholders via dividends and treasury share repurchase during the first half, which speaks to our strong cash generation and disciplined capital allocation. Operating cash flow stayed strong and kept our net debt position favorable, coming to BRL 806 million for the period, which went a long way toward covering investments, leases, interest expenses, and distributions to shareholders. When we take Afya net debt without IFRS 16 and divide it by the midpoint of our 2026 adjusted EBITDA guidance, the result was 0.8x. On my final slide, you can see that BRL 307 million in dividends were paid in the second quarter of 2026, equal to 40% of our 2025 net income, even as we kept carrying out the share purchase program. Because net income and cash generation have grown consistently, we have been able to improve returns for shareholders while staying disciplined about capital allocation and keeping our sights on creating value over the long term. During the first half of 2026, BRL 448 million went back to shareholders, which exceeded our Free Cash Flow to Equity of BRL 423 million for that period, giving us a 106% ratio. Over the trailing 12 months, our Free Cash Flow to Equity yield was 11%, based on market capitalizations as of 30th of June 2026, while basic EPS growth came in at 13%, producing a total equity return of 24% at a constant valuation multiple. That brings our prepared remarks to a close. The first half of 2026 confirms what we have shown consistently over time: a resilient business, a focused team, and a strategy that is working. We stay deeply committed to advancing the physician journey through our integrated ecosystem and are confident in our capacity to deliver sustainable long-term value for our shareholders, students, and healthcare professionals throughout Brazil. I will now open the conference for the Q&A session. Thank you.

Should anyone wish to pose a question, kindly lift your hand, and we will give you the floor. Up first with a question is Marcelo Santos of JP Morgan.

Hello. Good evening, and thank you for allowing me to ask. There are a couple of things I'd like to cover. First off, could you share some perspective on how competitive the intake was during the second half, and what you're observing regarding pressure on take, in the event that added capacity pushes prices up? That wraps up my first one. My second one concerns medical practice solutions. It came in somewhat lower this quarter. I was hoping for a little more color on when the additional investment should begin translating into results on the revenue line. Thanks so much.

Hello, Marcelo. This is Virgilio speaking. Regarding the intake we saw in the second half, once again our target is to fill 100% of everything we have available in occupancy. The PROUNI cycle for the year isn't entirely finished yet — it's running somewhat behind — so we're awaiting completion of those enrollments by September. So, again, our intake has been strong and healthy. On pricing, my sense is that we won't be adjusting price for the second half, since that happens at the start of the year, and likewise we aren't offering any discounts on our medicine programs. Turning to the health sector, specifically the health programs, the intake we're seeing is very strong. Right now, we're at the start of wrapping up that process. That will also conclude at the beginning of September. Compared with the same period a year ago, we're more than 20% higher; in health, our volume is growing organically by more than 18%. For the second half, our expectation is to land above that figure. That covers MPS — Blanco will assist me on this part.

Hello Marcelo, this is Blanco here. I appreciate the question. When it comes to MPS, the broader situation, the thing that's going on is that we've been encountering certain pushbacks when it comes to clinical decisions, largely on Whitebook. Those pushbacks regarding active payers stem from competition coming from AI tools, which are putting pressure on payer counts. Our decision was to trim the tickets somewhat on that front and boost the functionalities we've been investing in for Whitebook. On the flip side, with the clinical management system that our main offering, iClinic, covers, we're in a really favorable cycle. Our growth is quicker, yet that expansion isn't enough to offset a great deal of decline at Whitebook. Taken together, across the business-to-physician side, we're expanding semester over semester by only 1.1%. With that said, keep in mind that the investment cycle we announced at the start of the year covers an investment cycle. That investment cycle concerns both CapEx — we're raising intangibles this year relative to the prior year, to add functionalities at both iClinic and Whitebook — and spending on teams, as we add team members within this segment. We're following our plan to add more functionalities in the segment, grow the audience first, and afterward, down the road, see that recovery when it comes to revenues.

Right. Thank you very much.

Thank you.

Second question comes from Flavio Yoshida from Bank of America.

Hello, and good evening to Virgilio, Blanco, and Renata. From our end, I've got a couple of questions. The first concerns EBITDA. When we take the first-half EBITDA and run the analysis, it points to about BRL 1.8 billion for the full year, which lands essentially at the ceiling of your guidance range, correct? Given that no revisions were made to the guidance, ought we to anticipate that second-half EBITDA will land somewhat lower than the first half? Or is it simply that you'd rather stay on the more cautious side with the guidance? That's my first question. My second question relates to the capital allocation strategy ahead. Could you possibly give us some specifics about the way you intend to strike a balance between a potentially larger dividend payout and a more aggressive stance on M&A? And if you could also tell us how the M&A landscape for medical courses looks at present, that would be helpful. Thank you.

Thanks, Flavio. This is Blanco here. Let me begin with that. On the first point, regarding EBITDA, our focus is on delivering the EBITDA we committed to the market, which sits between BRL 1.7 billion and BRL 1.8 billion. We gave the market that guidance, and we delivered, just as we always do when it comes to guidance. As for capital allocation, I can assure you that Afya will always approach capital allocations with a great deal of discipline. Since our IPO, 22 business combinations have been completed, and we treat capital allocation extremely seriously. Should we lack opportunities that meet the thresholds in terms of concentration demands and, above all, the IRR — meaning those business combinations fail to generate a return on the capital employed that exceeds our thresholds, which is 20% minimal nominal unleveraged — then we simply walk away from the business combination. We are extremely cautious about that. Because we did not have such business combinations available with that return on capital, we would rather hand that capital back to our shareholders, through both share buybacks and dividends. We feel quite at ease with the 0.8x net debt to EBITDA that we are showing at this moment, and we chose to return all the Free Cash Flow to Equity for the first semester to the shareholders; it matters a great deal, looking ahead, to keep in mind that we have an open buyback in place that we announced back in August of last year, if I recall correctly. At present, out of the 4 million shares in that buyback we announced, 2.6 million shares have been executed; we still hold firepower of 1.4 million to carry out through the end of this year.

Sure, Flavio, let me jump in here and sum up what Blanco is trying to say. We remain mindful of the numerous opportunities tied to this threshold. We've got a solid pipeline in front of us. As you noticed in the first half, we paid out nearly 100% — in fact, above 100% — of the cash we produced to our shareholders via buybacks and dividends, while also maintaining quite low leverage on our net debt. At the same time, we're putting substantial money into product, which shows up in the intangibles; we're making many enhancements to our features, adding more AI capabilities, boosting how engaged our physicians are with our solution; we're using prescriptions within our clinical decision tool; we're now past 50,000 users on our clinical solution, on our iClinic here, which is our flagship offering. We're also embedding clinical decision support features, which on one hand lowers the count of solo users there, but those users are likewise engaging with this kind of feature built into our clinical management solution. That's it. We're financing not just our ongoing internal investment, bringing down our leverage, repurchasing shares, paying out dividends, and staying on course with plenty of firepower for some M&As, though we first need to hit the threshold where we stand. Alright?

Got it. That's completely clear. Thanks.

Our following question is from Lucca Marquezini, who is with Itaú.

Hello, everyone, and thanks for allowing us to ask. Our inquiry concerns the continuing education segment and actually follows up on the earlier question. We noticed that revenue went down. Could you share your thoughts on the competitive landscape and the reasons behind that decrease, plus what you anticipate for the back half of this year — should we expect the decline to persist throughout the year, or when do you think growth will pick back up?