Afya - Q2 2024

Transcript

Renata Couto (Head of Investor Relations)

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, expectation 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.

Leandro Bastos (Equity Research Director)

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 Virgilio Gibbon, Afya CEO, who will begin with slide number three.

Virgilio Gibbon (CEO)

Thank you, Renata, and thanks to everyone for joining us today for our second quarter and first half conference call for 2024 results. Let's start with our performance highlights. First, net revenue increased almost 14%, reached BRL 810 million, followed by an adjusted EBITDA growth of 28% year-over-year, reaching BRL 344 million, with an adjusted EBITDA margin of 42.5%, an impressive 490 bps over last year. Adjusted net income reached BRL 210 million, marking a 59% growth compared to the same period in 2023. Meanwhile, our adjusted EPS climbed to BRL 2.29, reflect a 62% increase over the previous year.

Leandro Bastos (Equity Research Director)

We delivered robust cash flow from operating activities, totaling BRL 682 million, a 21% year-over-year increase, driven by the company's solid operational performance. Operating cash conversion reached 94%, with a robust cash position of BRL 723 million at the close of the quarter. Moving to our operational updates for the quarter, medical seats reached 3,200 approved seats. Additionally, our number of medical students has reached 22,661, representing a 9% volume growth compared to the second quarter of the previous year. It's also important to mention that with our recent acquisition of Unidom and the addition of 80 seats authorized at UNIMA in the third quarter of 2024, we have now reached a total of 3,583 approved seats as of today.

We also observed impressive results in net revenue for our continuing education business, with the segment growing by over 12% year-over-year, resulting in a net revenue of BRL 127 million in the first six-month period of 2024. Similarly, our medical practice solutions demonstrated significant progress, with a revenue increase of 13% compared to first half of 2023, concluding the six-month period with a net revenue of BRL 77 million. Moving now to slide number four, we can now observe our new business structure taking shape, comprised of three segments: undergrad programs, continuing education, and medical practice solutions. I would like to reiterate that notable changes have occurred in continuing education. Entities previously accounted for as a content and technology for medical education within medical practice solutions are now accounted for in the continuing education segment.

Simultaneously, the segment formerly known as digital services was renamed to medical practice solutions. Beginning with the undergrad segment, we observed significant progress throughout the quarter, including an increase of over 5.4% in our net average ticket for medical courses, organic growth in all segments, an expansion in gross margin, and the acquisition of Unidom. Continuing education was marked by an operational restructuring, resulting in growth and an increase in B2B students, boosted by both graduate and prep programs. This segment also benefited from a gross margin expansion due to operational restructuring efforts. Lastly, in our medical practice solutions segment, we ended the quarter with a 13% increase in active payers, driven by 11% growth in Clinical Decision and a 19% growth in Clinical Management.

We have also seen a recovery in our B2B net revenue for this segment, as some of the invoices that were postponed during the first quarter of 2024 are now being accounted for. Moving now to slide five. We are pleased to announce an update to Afya's guidance, following the recent acquisition of Unidom, the addition of 80 medical seats at UNIMA Alagoas, the first half results that have exceeded our initial expectation, and also our robust intake process, which once again ensured 100% of occupancy. Our updates include a new net revenue range between BRL 3.225 billion-BRL 3.325 billion. And an Adjusted EBITDA range between BRL 1.375 billion-BRL 1.475 billion.

Our CapEx ranges between BRL 200 million and BRL 260 million for our capital expenditures. Now I'll be turning the call over to Luis Blanco, Afya's CFO, to provide more insight into the financial and operational metrics. Thank you.

Luis Blanco (CFO)

Thank you, Virgilio, and good evening, everyone. Starting with slide number seven, for discussions of key operational metrics by business unit. Our number of medical students increased by 9% over the first half of 2023 to 22,600 students. We have reached 3,203 approved medical seats, due to the 40-seat increase in Guanambi, authorized in January 2024. The net average ticket for our medical school grew by 5.4%, reaching BRL 8,922 in the first half of 2024. Furthermore, undergrad program net revenue saw an increase of more than 13%, reaching over BRL 1,414 million, 86% of which is related to medicine and 94% from health-related courses.

Leandro Bastos (Equity Research Director)

All these efforts highlight one key point: our medical education business remains, and will continue to be, the foundation of our business in the short and medium term, driving consistent growth alongside strong profitability and cash generation. On the next page, I will present our continuing education metrics. Strategically, we look into our continuing education considering three journeys. Starting from the left to the right, with the residency journey, we observe a 33% increase in active payers, reaching 13,058 students by the end of the period. Moving to the graduate journey, we achieved a 22% growth, totaling 8,100 students. Finally, in our other courses and B2B offerings, we saw an increase of 8.2% over the six-month period of the prior year.

In summary, our efforts enable the continuing education net revenue to reach BRL 128 million in the first half of 2024, compared to BRL 114 million in the first half of 2023, reflecting a growth of over 12%. This growth includes a 15% increase from B2P and a 13% decrease from the B2B offerings. Moving to slide number nine, I will discuss the medical practice solutions operational metrics. On the first graph, you can see our total active payers, those generating revenues in the business to physician segment. With a continuous growth trend, we've reached 196,000 paying users, reflecting a 13% growth compared to last year's quarter.

As shown in the second graph, our monthly active users counting stands over 253,000, compared to 257,000 in the first half of last year, mainly due to the discontinuations of PEBMED portal and the launch of the Afya portal. Finally, our last graph displays the net revenue from our medical practice solutions, which grew by 13% compared to last year, reaching BRL 77 million. Within this revenue, BRL 65 million come from the B2P and BRL 12 million was from B2B, reverting the decrease in net revenue in the first quarter, as previously postponed B2B invoices were now accounted for. In the next slide, we also present Afya ecosystem. We are proud to present the significant impact that Afya has made on the healthcare community in Brazil.

As of the end of the second quarter of 2024, our ecosystem includes over 320,000 users who are actively engaged with our service and products. Moving forward to page 11, I want to discuss our financial overview for the second quarter of 2024. Starting with the next slide, with great satisfaction, I'm pleased to present another robust quarterly result for Afya. Net revenue for the second quarter of 2024 reached BRL 810 million, reflecting a 13.7% increase over the same quarter of the prior year. And for the six-month period, net revenue was BRL 1,614 million, an increase of 13.5% over the same period of last year.

This growth is mainly driven by 5.4% increase in net average ticket for medical courses, maturations of medical seats, the addition of 40 seats at the Guanambi campus, a strong performance in continuing education intake, and effective execution in medical practice solution. In the second quarter of 2024, adjusted EBITDA increased over 28% to BRL 344 million, with an adjusted EBITDA margins of 42.5%, marking an increase of 490 basis points compared to the second quarter of 2023. For the six-month period, adjusted EBITDA was BRL 742 million, an increase of 24% over the same period of the prior year, with an adjusted EBITDA margins of 45.9%, an increase of 380 basis points in the same period.

The adjusted EBITDA margin expansion is mainly due to gross margin expansions within undergrad and continuing education, completions of UNIMA and FCM Jaboatão integration process in November 2023. The ramp-up of the four Mais Médicos campus that started operations into third quarter of 2022. Operational restructuring efforts in our continuing education and medical practice solution segments, and more efficiency in selling general and administrative expenses. Moving to the next slide, the year's cash flows from operating activities grew 21%, totaling BRL 683 million, driven by our robust operational performance. The operating cash conversion ratio was 94% in the first half of 2024.

Adjusted net income for the second quarter of 2024 amounted to BRL 210 million, an increase of almost 60% over the same period of 2023. For the six-month period that ended June 2024, we also saw an increase in adjusted net income, reaching BRL 461 million, presenting an increase of nearly 55% year-over-year, mainly due to the enhancement of operational results, the reduction in financial expenses due to the decrease in net debt and lower interest rates and lower effective tax rates. Afya increased its tax efficiency by incorporating entities and increasing distribution from subsidiaries.

Regarding adjusted EPS, we achieved BRL 2.29 for the quarter, a remarkable 62% increase compared to the prior year, and BRL 5.03 per share in the first six-month period, a growth of 57%. On the next slide, we can see a table with the breakdown of our gross debt and our total cost of debt, considering our main debts, the SoftBank, bank transactions, debentures, accounts payables to selling shareholders, and other financial obligations. We are proud to announce that Afya entered in a loan agreement with International Finance Corporation to finance our expansion program through acquisitions. The financing is IFC's first sustainability-linked loan based on social targets in the educational sector. According to the financial terms, IFC will loan up to BRL 500 million, which shall be repaid in seven equal semiannual installments, starting in April 2027.

The interest rate is the Brazilian CDI rate plus 1.2% and may be reduced by 15 basis points if sustainability KPIs are achieved. Now, moving to my last two slides, I will discuss our cash and net debt positions, also giving more insights into our cost of debt. In second quarter 2024, our net debt reached BRL 1,459 million when compared to December 2023, after reduced its net debt by BRL 356 million. Even considering the FIP Guanambi earn-out of BRL 49 million, we were able to reduce our net debt per EBITDA from 1.6x in 2023 to 1.5x in the second quarter of 2024, including Unidompedro business combination.

As shown, we also reduced our net debt over BRL 150 million more compared to the same period of the prior year. This concludes our prepared remarks. We are very proud of our achievements and strong performance across all areas. Our commitment to enhancing the medical journey through a unified educational system and digital solutions remain steadfast. This approach supports the growth, continuous learning, accuracy, and productivity of healthcare professional. Looking ahead, we are excited about the promising opportunities that await for us. I will now open the conference for Q&A sessions. Thank you.

Renata Couto (Head of Investor Relations)

If you want to ask a question, just please raise your hand. The first question comes from Mirela, from Bank of America. Mirela, you may now talk.

Mirela Oliveira (Associate Equity Research Analyst)

Good evening, Virgilio, Luis, and Renata. I have two questions here. The first one, in terms of cost of debt, what should we think about that, considering the recent IFC mission and the debt maturity of some of your debt that it's cheaper? So what are we thinking about the cost of debt in the near future? And second, on the triggers to reach the top of the guidance on margins. I imagine that the risk here lays more on the medical practice solution, so could you tell us a bit of how is the margin dynamic in this business, especially for the second semester?

Luis Blanco (CFO)

Hi, Mirela, it's Luis speaking. Talking about the expected cost of debts, I would say that we're gonna present our cost of debt below CDI, at least until we have the SoftBank transactions with us. That is due to 2026. So until then, you can expect that our cost of debts will be below the Brazilian 100% CDI. Okay?

Virgilio Gibbon (CEO)

Mirela, this is Virgilio. Regarding your second question, the guidance, how to reach the top line, actually, we are aiming the range. The commitment here is to reach the range that we are releasing right now. But based on our three segments here, so the execution was above the initial expectation for all the three segments here, so we are performing better. Regarding the medical solutions segment, since last year, the second half of last year when we did all the restructuring process between continuing medical education and also the digital services, the old digital services segment, we are having a lot of synergies here. And on digital solutions, that now it's called medical practice solutions, we are delivering a positive EBITDA. We are growing close to 20%.

Leandro Bastos (Equity Research Director)

Our growth rates for 2024 expected, and also the positive, positive EBITDA margin around 20s. Remember that we were close to zero last year. So, it's a quite positive improvement on all our products that we are offering under the medical practice solution, but also pushed by undergrad segment and also continuing medical education. Both of them are also better than expectation, and also better than last year, as we can see on our first half results here.

Renata Couto (Head of Investor Relations)

Yes, if I may add, Mirela, the main reason, the main triggers, to keep the margin, and to achieve what we are delivering the guidance, what we are promising the guidance, is mostly the ones that we already have. So, as Virgilio said, the restructuring between, the medical practice solutions and continuing education, also, the integration of unit that comes with a better margin through the whole year, and the four Mais Médicos units that we opened in the second semester of 2022, that are now delivering better, better margins.

Mirela Oliveira (Associate Equity Research Analyst)

Thank you. That's super clear.

Renata Couto (Head of Investor Relations)

Thank you. The next question comes from Lucca Marquezini from Itaú.

Lucca Marquezini (Equity Research Associate)

Can you, can you hear me, guys?

Renata Couto (Head of Investor Relations)

Now we can.

Lucca Marquezini (Equity Research Associate)

Okay. Thank you. Thank you for taking our questions. A couple of questions from our side. So the first one is, the release mentions that one of the reasons for the upward revision and guidance was the performance in the first semester. So can you please comment on which of the segments delivered the results that were above the expectations and led to this revision in the guidance? And then the second one is, we saw an acceleration in the revenue growth for the medical practice solution segment. Can you please provide some more color on, which of the products led to this stronger performance? That's it from our side. Please.

Luis Blanco (CFO)

Hi, Lucca. I'll take the questions. The first one, regarding the better performance in the first semester, it's basically come from better results that we got from the integrations of UNIMA and FCM Jaboatão to our structure. And remember that we have their business combinations in the beginning of 2023, but we integrated it in November 2023. So, we are now capturing the whole synergies that we have with these operations. Other one is better performance margins that we are doing on the Mais Médicos two operations that we've launched during 2022.

Leandro Bastos (Equity Research Director)

We have delivered better SG&A with all the zero budgets project that we have implemented here on Afya. So all that said, we got this performance better, and that performance with the Unidom acquisitions and with the additional seats that we got from UNIMA made us comfortable to update our guidance for this one that we just released. So we are very confident that we will deliver the guidance as until today we have delivered all the guidance that we've provided. Regarding the second question, regarding the accelerations in terms of net revenues in the solutions, the digital solutions, we have these accelerated mostly with the B2B side of the solutions.

Remember that in the first semesters with acquisitions that we have part of the revenue recognitions dropping from the first to the second quarter, we've finalized these service providers for the pharmaceutical industries, and then we could recognize revenue during the second quarter. And these B2B revenues that come during the second quarter made during the semester the revenues grow more than 20% and accelerating the revenue for the segment.

Renata Couto (Head of Investor Relations)

Regarding the product, look, the main product that we're selling in the B2B is marketing campaigns for the pharmaceutical industry.

Lucca Marquezini (Equity Research Associate)

That's very clear, guys. Thank you very much.

Virgilio Gibbon (CEO)

Lucca, I think just one point. I think it's important to mention also, the new guidance consider the all the rhythm that we saw from the new intake from the second half, and we had another strong intake with a lot of candidates proceed close to what we had last year. So it's a very healthy cycle, so gave us the again the right confidence and predictability to upward and update our guidance for 2024.

Lucca Marquezini (Equity Research Associate)

Perfect, Virgilio. Thank you.

Renata Couto (Head of Investor Relations)

Thank you, Luca. The next question comes from Leandro Bastos, from Citi. Leandro, you may now go on.

Leandro Bastos (Equity Research Director)

Hey, guys, thank you. I have kind of two questions more related to regulation. First one, I mean, we had kind of the approval, the decision actually by the Supreme Court for the injunctions, and so far we have been seeing, we haven't seen some approvals. So just wanted to have your perspective on whether you're seeing any changes in competition, given those approvals, and how many injunctions you think might be approved, given the market knowledge that you have. That will be the first part.

And then the second, also related, is whether the recent approvals have been changing your strategy in terms of the regions for Mais Médicos 3, the upcoming auction, and if it might continue to change the timeline also that you expect for Mais Médicos 3, given those kind of outstanding injunctions? So that'll be it on my side.

Virgilio Gibbon (CEO)

Hey, Leandro. So the first part was the intake cycle after all this release, so we didn't receive any changes. We had a very positive and healthy cycle. I think we are differentiate a lot our operation in all cities that we have our campuses for the undergrad segment. I think the approval, it's been the great majority of them, very aligned with the expectation after the definition from the Supreme Court. So it's everything running as expected. We still have some approvals to come.

Leandro Bastos (Equity Research Director)

Also, from the increase of number received from the normal process that we had in the past, still seeing some approvals coming from the Minister of Education, not only based on the decision by the Supreme Court. So it's everything running as expected. It's very difficult to measure how will be the impact and the speed of them, because depend on the capacity of the Minister of Education to approve and also to analyze everything that they have. But based on the idea on the entire Mais Médicos 3 program, it's somewhere around 9-10,000 additional seats, including all the expansion for this new capacity wave, at least what is based on the idea coming from the Ministry of Education.

Still, we're in the process to give more, any other detail more than that, okay?

Renata Couto (Head of Investor Relations)

Yeah, regarding the regions that we are choosing, we are not going to compete for the ones that are already Mais Médicos. I'm sorry, we are not going to compete on regions that we have injunctions.

Leandro Bastos (Equity Research Director)

Mm-hmm. Great. And just kind of like for me, another one, in terms of, the M&A pipeline, this has been changing with the, the injunction. I don't know any companies that, that won and eventually might become targets. Does, did your pipeline change with that? Are you seeing more opportunities or not really?

Luis Blanco (CFO)

I'll take that, Leandro. As a matter of fact, with these new institutions being approved, so our pipeline possible top of the funnel has grown. Okay, so we have more targets to talk. We are pretty confident that we can keep the rhythm of 200 seats acquisitions per year. And remember that, with UNIT acquisitions and Unidom, we are ahead of the guidance that we provided since 2022. So we still see with a very good eyes to do the M&A with the right pricing.

Leandro Bastos (Equity Research Director)

Right now we have more targets on the streets to talk to, and of course, we're gonna keep the discipline to choose the regions that make sense for us at the right price.

Great. Thank you.

Renata Couto (Head of Investor Relations)

Just a reminder, if you want to ask a question, just please raise your hand. The next question comes from Marcelo Santos from JPMorgan.

Marcelo Santos (Senior Sell-side Equity Analyst)

Hi, good evening, Virgilio, Blanco, Renata. Thanks for taking my questions. I have two and one clarification. The first question is, could you please comment on the competitive environment on the prep course business? I think that was something that in the past, you were having some difficulties, just wanted to know how it evolved. The second question is, wanted to understand a bit, why the B2B revenues in continued education is contracting, and, and what are the trends there? And the clarification is something that Virgilio said in one of the answers. Virgilio, did you mention that the margin for the medical practice business is 20%? Or, or I understand, I didn't understand if you mentioned it was 20 as well, as well as the growth, or you're just comment- referring to the growth and the margin is positive.

Leandro Bastos (Equity Research Director)

Just want to understand better, if you really said that. Thank you.

Virgilio Gibbon (CEO)

Marcelo, I'm gonna take the first one regarding the competitive environment for the prep course. The competitive environment in the second quarter it's not relevant at this moment because the second and the third quarters of this market it's not seasonal because the sales are concentrated on the first and the fourth quarter of the year. So did not impact us in the second quarter, and will not be a topic for the fourth quarter for the third quarter, sorry. This will be back on the table when the sales come back, is the fourth quarter, when we're gonna launch the 2025 collections.

Leandro Bastos (Equity Research Director)

We start sales of it during the fourth quarter. So until that, until this new cycle, nothing. We're gonna change on that.

Renata Couto (Head of Investor Relations)

If I may add on this point, you need to remember that the product's not only Medcel, right? When we talk about the residency journey, we are talking about Medcel and Além da Medicina. So our, our offering today, Marcelo, is not only the, the prep course as we had in the past, right? We have also the mentoring. That gives a lot of value to Medcel product.

Virgilio Gibbon (CEO)

Yeah, that's very important. It's all the sort of prep courses is embedded, that not only the product initially was being delivered by Medcel. So even considering Medcel traditional product, but as we rebuild the curriculum, the product, we are seeing a strong enrollment growth coming on the prep course arena here. As you can see on our Table 3, it's almost 30%-more than 30% of students more than the same period last year. So it's a good sign on our prep and prep course segment. So not only Medcel here. Okay, Marcelo, I think your second question here about the B2B revenues on continuing medical education, this is not core. This was something that was leveraged during the pandemic that we were licensing our products here to help other institutions.

Leandro Bastos (Equity Research Director)

This is, will be more than flat. We are not guiding any growth on this type of product or on this type of segment here on the continuing medical education. But, it's something that we are not shutting down the offer, but we continue to offer to our clients. It's around 30-40 different institutions that continue to use our products in the education sector. About the clarification, so we expecting to grow around 20s this year on medical prep solution.

And also, the contribution margin, not only the gross margin improvement, but we are seeing that the results after the all the restructuring process that we run to in the second half of last year, it's delivering a positive EBITDA around 10%-15%, and we are aiming to reach close to 20%. But that's a contribution margin that we are not detailing, at least disclaiming, releasing that on our reports by segment, just up to contribution margin.

Marcelo Santos (Senior Sell-side Equity Analyst)

Perfect. Thank you very much. Contribution will be gross, gross margin. Okay, thank you very much.

Renata Couto (Head of Investor Relations)

The next question comes from Cepeda, from Morgan Stanley.

Mauricio Cepeda (Analyst)

Hi, Virgilio, Blanco, Renata, thank you for the opportunity. We have two questions. The first one about Unidom. What to expect in terms of consolidated margins after the integration? Which are the sources of synergy there? Which is the timeframe of the integration? So, a little bit on the impact of Unidom. A second one about the medical practice solutions. We understood from the release that there was a simplification there, which helped the margins. So our question would be, if you are narrowing down the services you offer there, if you chose to concentrate in some few digital services, so basically if there is a different strategy or a different positioning there. Thank you.

Luis Blanco (CFO)

Hi, hi, Cepeda. I'll take this one. Regarding Unidom, and remember, all that we closed the deal in the first day of July. We see a very good institutions that was with a very lean structure. So we're very happy with the transactions. We have 45 days since the closing, so we're still working on the integration plan. We don't have the integration dates yet defined, but we're very happy with the institution itself.

Leandro Bastos (Equity Research Director)

The synergy will come in line with all the transactions that we've made as of today. So they are concentrated in top line. We're gonna have the fullness of the capacity during this period. We're gonna have the streamlining of the scholarships and some kinds of discounts that were given to family and friends or in the institutions. We're gonna revisit the costs to provide the service regarding the correct structure for the teachers. We're gonna implement our national curriculum over there, and we're gonna centralize all the back office operations under our shared service without increasing it.

So these are kind of synergies that we're gonna achieve in the next couple of months. So everything is occurring according to the plan that we've announced it when we signed the deal in last May. So when we did that, we put that after we got the maturations, we were gonna reach an EV/EBITDA when the institution is mature with 4.2x EV/EBITDA. So this is our view, and our best view for Unidom for the semester is incorporated in our guidance. So the number it's over there.

Regarding the restructuring of the digital segment and the educational segments, we've made these in the very beginning of the year. So we started these restructuring. We started this year with this restructuring in place. One of the major part of the restructures is, was, to move the old pillar one offerings from the digital to the continuing education. And with these movements, each one of the segments, we started to not be structured per product or per family of product, but we started to be organizing this segment as a whole.

So instead of having a product team, for instance, pair each one of the pillars, we started to have one product team for all the service that we have. We started to have one tech team for all the service practical solutions, for all the solutions that we have. So we lean up our structure for the year, and with that, we gain a lot of efficiency, both in terms of costs and expenses. So we're very happy with that. And we've put these movements within the guidance, and as we are delivering better results, we incorporate all these scenarios within the Unidom acquisitions to update our guidance for the year.

Mauricio Cepeda (Analyst)

Okay, Blanco, thank you. So, so the point is that there was no redesign in the offerings? It's, it's much more about, internal structure for delivery.

Luis Blanco (CFO)

Yes, exactly that.

Mauricio Cepeda (Analyst)

Thank you.

Renata Couto (Head of Investor Relations)

Of course. So as we do not have any more questions, I would like only to give to you guys an invitation about our Afya Day that will happen on October 29th. It will be online and in presential mode, and we're going to send more details shortly. Thank you all for being with us today, and we hope to see you next time. Have a good night.