Afya Limited (AFYA) Earnings Call Transcript & Summary

Thank you for joining us for Afya's Second quarter 2022 Conference Call. Today, I'm here with Afya's CEO, Virgilio Gibbon; and Luis Andre Blanco, our CFO. During this presentation, Afya executes 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 for 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 the 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, starting with Slide #3.

Thank you, Ana, and thanks, everyone, for joining us today. Before starting, I would like to thank our IR team for the incredible work to prepare our second quarter release and to congratulate Renata Couto, our Head of IR, for the birth of her first daughter [ Maria ] this month. For us in Afya this quarter results reinforced that our strategy has been successful marked by the consistent growth of our operational and financial results. Once again, we are proud to present the strong execution of our unique business model, combining high-growth profitability flowing in all lines and cash generation, proving its resilience. During this call, I will run to 4 main topics. Firstly, I'll present our financial operational highlights of the quarter, demonstrated our strong performance in all business units. Secondly, I will reinforce our 2022 disclosed guidance with expectation of another round of growth results on second half. Thirdly, I will highlight our business expansion, pointing out the opening of important new campuses and acquisitions. And last but not least, on our 4 topics, I will show how our commitment to everything we do is being well reflected to awards and public recognition. So moving now to Page #4. Let's start with our quarter highlights. Adjusted net revenue increased 51% year-over-year, reaching BRL 576.1 million, followed by an adjusted EBITDA growth of more than 37% year-over-year reached to BRL 220.2 million with a margin of 38.2%. One of the major highlights of the quarter is the net income growth, followed by a relevant jump on EPS. Net income reached BRL 106.1 million, a growth of more than 383% year-over-year with an EPS of BRL 1.12, more than 6x higher than last year, even consider a higher net debt level and the market interest rate level nowadays. This result reaffirms Afya's great operational results, capital allocation disciplines on buybacks and M&A and the efficient capital structure. We also reported another great cash flow generation, ending the semester with BRL 450 million, 31% higher than last year. Moving now to the operational update of the quarter. Our undergrad medical students reached more than 17,500 representing a 31% growth compared to the same period last year. Approved seats grew by almost 20%, also during the same period. This result confirms our growth strategy that combines organic expansion with our capacity to acquire, consolidate and integrate new seats into the company's operation. In this quarter, we can clearly see continued education taking off after the pandemic impact on practical classes, presenting a strong revenue growth of more than 47% year-over-year. We will further explore the continued education expansion in the slides ahead. Also, we are happy to say that Afya reported great results on digital health services revenue, which ended the quarter with an increase of almost 50% year-over-year and more than 20% excluding acquisitions, reverting the trend observed in the first quarter. This result is the first glance of the great opportunity ahead in digital service and is explained by the strong ramp-up on B2B engagements reaching more than 37 contracts with more than 20 pharmaceutical industry companies and the continuing ramp-up on B2B contracts. Our ecosystem reaches almost 265,000 active users, a growth of 13.6% year-over-year. This represents around 35% of the Brazilian physicians and medical students market. Moving to Slide #5. The conclusion of a nonmedical students enrollment cycle, ensuring 100% of occupancy for the second half, added to the positive trend on continued education and the recovery of digital service on this quarter, enable us to reaffirm our guidance for the entire year of 2022. This first half result shows that Afya has achieved around 50% of adjusted net revenue and EBITDA median guidance and it's moving fast to deliver another strong year of great operational performance. In the next slide, we will talk about how our business expansion continues to skyrocket with relevant updates also in this quarter. After the opening of several new IPEMED campuses, all of them in relevant capitals in Brazil. We can gather and highlight the successful start of 4 new Mais Médicos campuses, along with Ji-paraná medical school and the opening of our brand-new UNIGRANRIO campus representing the new seats for our highly and predictable growth. Besides the significant accomplishments in undergrad and continued education, it's important to point out another important achievement, the fulfillment of our 6-pillar digital services strategy after our 2 last acquisitions, CardioPapers and Glic, both closed in May. This first half results added to the recent investments reinforce Afya strategy of combining organic and inorganic expansion with a strong capital allocation discipline that will boost our long-term growth combined with profitability and cash generation. And now moving to my last slide on this presentation. I will show how our commitment to everything we do is being well reflected throughout awards and public recognition. As a reflection of our great results and actions that are being shown to the market, we are proud to share that on the most recent Institutional Investor Award, an independent survey of evaluation and market perception of Investor Relations programs regarding the Latin America's executive team, we were very well placed and evaluated in several categories in the sector in which we operate, including Best Analyst Day of our Afya Best IR program, Best ESG program, among others. Another proud for announcement is Afya's great results on 2022 Valor Inovação Brasil on the education segment. We jumped from fifth place to second place this year and considering all companies in the country, we are now listed in the 78th position. This result reflects Afya efforts to make innovation the central engine of a robust ecosystem that integrates the entire physician share. You can find more information regard these awards on the QR codes at the bottom of the slides. Now I will 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 #9 to discuss the financial highlights of the second quarter. It is with good spectrum that presented another strong quarter results for Afya. Adjusted net revenue for the quarter was up 51% year-over-year to BRL 576 million, reflecting the maturation of medical seats, higher tickets in medicine courses, the continued education recovery, the digital service rebounds and the consolidations of acquisitions. It is important to mention that this quarter, the company recovered BRL 22.1 million of the mandatory discounts on tuition fees previously granted by legal proceedings related to COVID-19. As in 2020 and 2021, excluded these mandatory discounts from adjusted net revenues. The recovery of these amounts is not counted for adjusted net revenues in 2022. For the 6 months period, adjusted net revenue was BRL 1,144 million, an increase of 46% over the same period last year. Adjusted EBITDA for this quarter increased 37% to BRL 220 million, while the adjusted EBITDA margin decreased 390 basis points to 38.2%. For the 6-month period, adjusted EBITDA was BRL 491 million, an increase of 33.3% over the same period of the prior year, with an adjusted EBITDA margin decrease of 410 basis points in the same period. The adjusted EBITDA margin reduction is due to the digital segment, mostly in the performance of Medcel in the residency preparatory market. The expansion of the continuing education segment, which is still maturing the new campuses, and the increase in expenses in the holding and shared service level. Adjusted cash flow generation for the semester was more than 31% higher year-over-year totaling BRL 450 million, resulting in a strong cash conversion ratio of 91%. Adjusted net income for the second quarter of 2022 was BRL 119 million, an increase of 83% over the same period of the prior year. Net income results were positively affected by the increase in operation results and the reduction of financial expenses, mainly due to the FX rate difference regarding the SoftBank transactions that affected us in the second quarter 2021. Moving to Slide #11 for discussions of key operational metrics by business unit. Starting with the undergrad programs. Our number of medical students grew 31% year-over-year, reaching more than 17,500 students with proven medical seats increased almost 20% year-over-year to 2,759 approved seats. Considering additional organic and inorganic seat expectations, we expect to achieve more than 32,000 undergrad medical students at maturity. With our net average ticket increasing almost 9% year-over-year, we've reached BRL 1,310 million of combined tuition fees up from BRL 843 million from the prior year, an increase of 55%. Regarding revenue mix, 77% 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 quarterly great recovery in our continuing educational segment, which reported a strong intake process, increasing the number of students by 8% year-over-year. In the quarter, net revenues grew almost 50% when compared to the same period of the prior year. This recovery is due to the better performance of IPEMED mainly related to the ramp-up of the new campuses and the eruption of the FX after the COVID-19 pandemic. Moving to Slide #13. I will discuss the digital service 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 trends so far in this quarter, we have reached 191,000 paying users. As you can see in the second graph, our ecosystem reached almost 265,000 monthly active users representing around 35% of all medical students and physicians in Brazil as Virgilio previously said. And finally, on our last graph we can see our digital service net revenues, which increased more than 50% year-over-year and more than 20% excluding acquisitions. This organic growth is the combination of the start of the B2B engagements and the expansions of the active payers in the B2P mainly in WhiteBook and iClinic. In addition, since last quarter, we started to break down our digital service net revenues within B2P and B2B segments. So from the BRL 42 million of digital service net revenues in the second quarter, almost BRL 38 million came from B2P and more than BRL 4 million came from B2B since the B2B strategy is still in the beginning. And now moving to my last 2 slides, I will discuss our cash and net debt positions also giving more color on our cost of debt. Cash and cash equivalents at the end of the quarter were BRL 616 million. Net debt totally BRL 1,483 million compared to a net debt of BRL 583 million in the same period in 2021. The increase year-over-year was mainly due to 7 business combinations and acquisitions executed during the last 12-month period. Payments related to the shares repurchase programs and investment activities, partially offset by our strong cash flow generation. On the next slide, you can see a table with a breakdown of our gross debt and our average cost of debt, considering our main sources of debt. SoftBank transactions, other loans and financings and account payables to selling shareholders. Our capital structure remains solid with a conservative leverage positions and low cost of tax. This ends our prepared remarks. I will now open the conference for Q&A session. Thank you.

[Operator Instructions] First question comes from Vinicius Figueiredo from Itaú BBA.

You guys mentioned during the earnings release that the EBITDA margin was affected by the performance of Medcel, but also the expansion of continuing education in the -- especially in the contribution of continuing education in the sales mix, the increase in holding expenses. Would it be possible for us to try to quantify how much each of those factors contributed to the reduction in margins? And also, if you could give us an update on the measures that the company has taken in Medcel to normalize the growth, it will be great.

Vinicius, this is Virgilio. I can take your question here and Blanco can add something after. So I think that the impact on margin was a split by 50% of each business in continuing education and digital services related to Medcel impact. On continuing education, remember that we launched 7 new campuses. So they are just starting the maturation. So we have a few students for each campuses. So the gross margins are lower than we expect in the future. But moving forward, we expect to leveraging this operation and start getting important points of efficiency on the P&L from the continued education for the next semesters. On the digital services, we still have the impact from Medcel, but combining all the offers, all the pillars that we have, we are seeing the second half a better gross profit, gross margin coming from digital services. And moving forward, we expect Medcel to start launching the new products and also improving their results when we compare to last year, after September, that's when we launched the new release, the new version of Medcel prep products for the following year. So we still have an impact on the fourth -- the second half coming on the digital service in terms of margin because of Medcel. But I think we reached the bottom line and now we start leveraging operation and all the other pillars will become even more relevant on the following quarters. So diluting this effect and also have the new collection effect that will be launched in September, improving margins moving forward.

Yes. And Vinicius, if I may add something in what Virgilio said. That's -- it's aligned with our expectations that we give on the guidance. So when we've issued the guidance, during the first quarter results, we have these fields on that. So we are pretty much aligned with the guidance that we give for 2022.

Our next question comes from Mauricio Cepeda from Credit Suisse.

I have my first question about -- a little bit about profitability. We were talking in the previous quarters about the impact from the integration of the new operations. So I would ask you if the new operations are still impacting profitability somehow, I would say the ones that were made, let's say, 1 to 2 years ago, there is still impacting margins? And if the new digital business are also playing a certain role in the profitability? And my second question is a little bit more related to the regulatory environment. We have seen there is a lot of debates around the authorization of medical courses. Some are -- some trying to discuss that legally, others trying to go to the court to get mandates, et cetera. So how do you position yourselves in this kind of situation? How are you prepared to face distinct scenarios for now on, both the one that keeps the current regulatory framework from as medical or eventually another pathway that may change the authorization to something more, let's say, market triggered?

Cepeda. So I will take both questions here and Blanco can help me. So first, related to profitability. For the acquisitions that we concluded 2 years, 3 years ago, I think all the integration process and the synergy are very aligned to what we expected. Have in mind the 2 big acquisitions last year that was UNIGRANRIO and UNIFIPMoc in Montes Claros City, all the integration process is better than expected. You can see that when we combine this acquisition on our total results, it's also helping to improve margins because the margin coming from these 2 assets is higher than digital services and continuing education. So we are extracting a lot of value for these last acquisitions on BU1 that is our undergrad unit. On digital, that was -- I think is the more relevant impact in terms of margins and related to acquisition. Because we concluded 11 acquisitions in the last 2 years on the digital side. So there's a lot of initiatives taking place right now in terms of reorganization, how we can extract value of cross-selling and also optimizing the team, the commercial team, the tech team, all the stacked people related. So this is under discussion right now. And we expect also on the digital to start improving revenues at the same speed and even faster than we are seeing right now and helping us to dilute the G&A costs that are coming from these new acquired tech companies. So this is the side on profitability related to your first question. On regulation to med courses, we are following the Mais Médicos here. We have a lot of investments under 7 new campuses that we already launched 6 of them, and we truly support all the regulation behind opening new medical school where as a country, we need to place these new physicians. So on our side here, of course, that I would like to have an opportunity to open a school in Belo Horizonte, São Paulo that we don't have an undergrad programs. But the truth behind that is that we really don't need such a professional physician under the cities and the Mais Médicos program that we support and also all the association that is going to discuss this under court. We are supporting the Mais Médicos rule moving forward.

[Operator Instructions] Next question comes from Marcelo Santos from JPMorgan.

The first one would be regarding tickets. What's the outlook for the -- especially for the tickets of the students that are coming in, in the second half of the year? Are you being able to pass inflation? And the second question is about the ramp-up of IPEMED campus. Is that going according to plan? And when do you think this operation will achieve maturity?