Earnings Call Transcript - AFYA Q4 2020

Operator, Operator

Good morning, everyone. Thank you for joining us for Afya's Fourth Quarter and Full Year 2020 Conference Call. With me on the call today is Afya's CEO, Virgilio Gibbon; and Luis Andre Blanco, our CFO. During today's presentation, our executives will make forward-looking statements. Forward-looking statements generally relate to future events or future financial or operating performance and involve known and unknown risks, uncertainties and other factors that may cause our 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 our business and financial performance, expectations and guidance for future periods or expectation regarding our strategic product initiatives, and the 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 results on this call. The non-IFRS financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IFRS. We have provided a reconciliation of these non-IFRS financial measures to the most directly comparable IFRS financial measures in this presentation. Let me now turn the call over to Virgilio Gibbon, Afya's CEO and starting with Slide 4.

Virgilio Gibbon, CEO

Thank you, Renata, and thanks, everyone, for joining us today. I am extremely proud that Afya has over-delivered outstanding results since the IPO. Our performance reflects our superior strategy, great execution, commitment of our team members and the resilience of our business model, especially during a year of a worldwide pandemic. Since 2017, our net revenue has grown almost 6 times and our guidance for the first half of 2021 is higher than 2019’s full year’s net revenue. We are not only growing fast, our adjusted EBITDA has grown almost 8 times and increased 13 percentage points in margin in the same period. And there is more. Afya generated operating cash of R$391 million in 2020, 9 times higher than 2017’s, and reaffirming our tripod of strong growth with high profitability and cash generation, reinforcing, once again, our firepower to continue consolidating medical seats, even after achieving the 1,000 seats guided in the IPO. Besides all this incredible growth and profitability figures, we have been creating the largest medical ecosystem in Brazil with more than 200,000 physicians and medical students using one of our products. We also have more than 430 partnerships with hospitals and clinics in Brazil. Afya's focus continues to be providing lifelong learning experience for physicians and to help doctors to transform Brazil's healthcare. Now let's take a deeper look at 2020 achievements on page number 5. During the year, we successfully executed our strategy to continue to be the market leader of medical school seats in Brazil. As we have completed nine acquisitions since we became public, adding 851 medical seats in less than two years, or approximately 85% of our three-year target shared during our IPO. Importantly, we have a solid track record of integrating acquired companies and delivering cost efficiencies and synergies that can be seen in the margin expansion we are delivering. These acquisitions set us up to deliver continued strong results in the months and years to come. Our medical education business remains, and will continue to be, the cornerstone of our business in the short and mid-term. We have become extremely efficient at operating medical schools and we continue to see opportunities in this area. In the beginning of the year, we had to adapt with the agility needed to stay focused on providing the high-quality educational experience that our students had come to expect from us while at the same time executing on our long-term strategic plan due to the pandemic outbreak. We are fortunate that, as a business, we are able to help using our campuses as vaccination locations and by providing free courses at this time to assist hospitals, medical schools, physicians and nurses to face these difficult times. The COVID-19 pandemic intensified some behavior shifts. It has caused the acceleration of our long-term plan and started to unfold our digital services strategy. As evidenced by the pandemic, the medical community and patients have embraced a digital component to healthcare. We discussed in the past that digital assets were appealing to us so that we can add more services to medical students and professionals, and maximize our product offering. So we furthered our digital strategy with the acquisition of PEBMED, iClinic, MedPhone and Medical Harbour. These acquisitions enable us to deepen our relationship with our students as well as put our brand in front of many new doctors, nurses and other medical personnel and students, enhancing our competitive position and our capabilities. We remain having a peer-leading capital structure, providing the ability to adapt to the dynamic environment we operate in and maintain our focus on generating value. Given our strong free cash flow and liquidity, we remain committed to our long-term capital priorities, with a balanced approach to invest in the business and return strong cash to our shareholders, all while keeping our students, faculty members and employees safe and managing through this volatile environment. Our quality and execution was also rewarded this year. Afya was ranked as the winner in the education sector in the Época Negócios 360 survey and also won the Golden Tombstone in the Equity category. This award is evaluated by IBEF São Paulo and recognizes equity operations aspects such as the complexity of the transaction, innovation, price and others. To close this first part, we will start to report ESG metrics in this earning release. Afya's engagement on this theme is generating incredible impact on society, which makes our team very proud, even more committed to our values and strategy. On the next page, I will present the recent acquisition that we just concluded this week. Medical Harbour develops solution for medical imaging, radiology, teleradiology and medical education for the health community. Their solution is divided into two segments: Medical Imaging and Health Education.

Luis Andre Blanco, CFO

Thank you, Virgilio, and good morning, everyone. Moving to the next page to discuss the financial highlights of 2020. I'm very proud that we are able to continue to grow with great profitability and cash generation this year. I will now pass through the highlights of our financial results of 2020. Both medical seats and students saw a significant increase this year. Operating medical seats increased 55% year-over-year, to 1,893 operating seats. Medical students was up 67%, reaching the base of 11,030 students, reflecting medical seats maturation and acquisitions. Adjusted net revenue for the year was up 61% year-on-year to R$1.2 billion, reflecting acquisitions, medical school maturation and ticket increase due to the maturation of readjustments. Excluding the acquisition of UniRedentor, São Lucas, PEBMED, Ciências Médicas and FESAR, the net revenue grew by 20% year-over-year, reaching R$956 million. The increase was primarily driven by organic revenue growth mainly due to the maturation of medical school seats and an increase in the average ticket. We also had a great profitability growth coming from the cost efficiency and synergy extracted from acquisitions. Adjusted EBITDA was up almost 70% reaching R$563 million with adjusted EBITDA margin expanding 220 bps. Excluding the acquisitions that I mentioned before, the adjusted EBITDA was up 40% reaching R$467 million. Adjusted net income was up 71% year-over-year, reaching R$388 million. Our EPS had a great increase of 55% reaching R$3.15 per share. Moving on to the next page for discussions of key operating metrics by business unit, starting with BU1. Our average monthly medical tuition fees increased 9% compared to 2019, reaching R$7,975, excluding acquisitions. This reflects a combination of new students enrolling with higher tuition rates combined with the students that are graduating with lower tuition. Talking about the revenue mix, 74% of our combined tuition fees are derived from medical school, up from 69% in the same period of the prior year. In terms of total tuition fees, we reached R$1.2 billion, up from R$794 million, an increase of 53% year-over-year. With respect to BU2, we had almost 125,000 active paying users at the quarter end, which includes 170,000 coming from WhiteBook. Excluding WhiteBook, we saw a 40% increase in active paying students. In the specialization business, we saw an increase of 163% year-over-year mainly due to the consolidation of UniRedentor. Now turning to the next page. I'll discuss our digital student base and student engagement. In the first graph of the page, we can see the evolution of monthly active users in our platforms. We saw a decrease in Medcel monthly active users in the second semester due to the consumption of the COVID-19 free courses in the platform. There are still some students with the course active, but many of them had already finished the course. Monthly active users of WhiteBook reached 163,000, 1.5% lower than the third quarter 2020. On the chart on the right, you can see the trend in our current consumption. Content that users are consuming, including podcasts, learning assessment tools as well instructive medical webinars. We saw a 24% increase from the first quarter 2020. That means that our students are more engaged with the assets that we are providing to them.

Virgilio Gibbon, CEO

Thank you, Luis. Moving now to the last slide on this presentation. Education and health pillars for Afya business are also crucial issues for people’s well-being and socio-economic development. This characteristic, inherent to the company, makes our operations distributed throughout the country revert to positive impacts for local communities. We operate in regions that have a lack of physicians. The healthcare system is in need of investment and the population does not have access to quality health services. With our regional presence, we manage to attract medical and health professionals to remote regions to make investments in the local healthcare system besides providing free consultations for the low-income population. The first step to consolidate Afya as a sustainable company was to sign the UN Global Compact, a program developed by the UN to engage companies in the adoption of social and environmental policies. We are also concerned in our human resource policies with social inclusion, employees’ well-being, gender equality and people development. More than half of our employees are women. 55% of our management positions belong to women. And in our Board of Directors, we have 2 women out of 11 men. More than that, we guarantee at least 3% of disabled employees in Afya. In the environmental scenario, we are running a project to install solar panels in all of our campuses. All the energy used will be generated by our own facilities. We currently have 4 campuses running their own solar panels and an additional 8 are in the middle of the implementation. ESG commitment is part of our strategy and permeates our core values. We have been advancing year after year on the theme, and from now on, ESG metrics will be disclosed in the company's quarterly results. I will now open the conference for the Q&A session. Thank you, all.

Marcelo Santos, Analyst

I wanted to focus a bit on Business Unit 2. The first question is about the initiatives to accelerate the penetration of digital services in BU2 now that you are creating an ecosystem. What are your plans for this year to drive that forward? Secondly, on Slide 8, where you talk about the strategic positioning, there still appears to be a notable gap in the healthcare ecosystem column. You have AgendarConsulta, but that seems to be it. What are your plans to address the healthcare ecosystem? Do you have any developments ready for deployment?

Julio de Angeli, Executive

Sure. Hey, Marcelo, and hi, everyone. Hope everyone is doing fine there with good health. And so to address your questions, Marcelo. Yes, we have several initiatives actually to accelerate what we've been doing with the digital services. But the main one is that we are actually building one single data lake of information that we can use to perform better with the different services. So that said, all of this information that we are collecting with all the digital services, we can, of course, use to adjust all of this business together and accelerate them. So some initiatives on the commercial side, we've been doing already. So we are creating a pack of services with benefits for everyone that is using the digital services. So if you're a doctor and using iClinic, if you're using WhiteBook, if you're using other services that we've been offering or Medcel or even our graduate programs, there are several discounts and offers specifically for all of them. So in general, these are the 2 main pillars. So one is how to use better our database to accelerate the use of these digital services on one side, and we will use that as one single data lake to help every other business and also on the commercial side, also doing several activities to perform better. So to the second question, can you just repeat that, please, Marcelo?

Marcelo Santos, Analyst

Sure. On Slide 8, where you have that slide showing strategic position, competitive advantages. They are like 4 filters, 1, 2, 3, 4 on top. And the 4 is healthcare ecosystem. In there, you have AgendarConsulta, but there is still a big void. So do you plan to do more in that pillar of healthcare ecosystem and patients? And what are your main ideas here?

Julio de Angeli, Executive

Thank you. In terms of our strategy, we are concentrating on empowering doctors through our services. The core idea behind our digital offerings revolves around six main pillars. These include content and technology for medical education, clinical decision support, electronic medical records and clinic management, telemedicine, digital prescriptions, and patient engagement. Each of these services is designed to enhance the performance of doctors. Our strategy is to reach as many doctors as possible and empower them with our services. Currently, nearly 200,000 doctors are utilizing some of our offerings. Specifically, in the area of patient engagement, through AgendarConsulta.com, we connect with patients. This represents a shift in our approach. We firmly believe that by positioning ourselves as an educational company dedicated to supporting doctors and physicians, we will eventually create a marketplace where patients can schedule their consultations and return to the ecosystem. While we are not there yet, our focus remains on the pillars and planning additional services to further empower doctors.

Luis Andre Blanco, CFO

Okay, Marcelo, it's Louis speaking. I would like to add some points regarding what Julio just said. In these six pillars, we have varying levels of service maturity. Three of them—content and technology for medical education, clinical decision software, and practice management and electronic medical records—are more mature. For these three pillars, we have made several bolt-on acquisitions to enhance our services. For instance, Medicinae helps us integrate the financial management skills and receivables of physicians into iClinic. Additionally, we announced Medical Harbour yesterday, which provides imaging solutions for medical classes. Given that these three pillars are more developed, we will see specific service enhancements in these areas. For telemedicine and digital prescriptions, we are somewhat midway through. We see opportunities for further acquisitions to improve our offerings in these pillars. As for the doctor-patient relationship, we are just at the start. Currently, we have AgendarConsulta, and we recognize the need to attract demand for the physician community we want to engage. Therefore, you can expect more strategic movements in this area. We are evaluating healthtech companies that provide these services and aim to strengthen the six pillars with additions, particularly in the last three dimensions, as they are less developed, which means acquisitions will be more significant in these areas.

Operator, Operator

Now we have Thiago Bortoluci from Goldman Sachs.

Thiago Bortoluci, Analyst

Thanks, Renata. Thanks for taking our questions. We have 2. You mentioned the ongoing commercial efforts within the space. I would just like to better understand in the short-term within which apps you think are the clearest opportunities in terms of bundling and cross-sell. And in this sense, how are you planning to approach the marketing of Medical Harbour? This is the first question. And also moving to the traditional campus operations, could you please give us an update on the status of the Mais Médicos 2 campuses that are yet to be launched? And also, if there is anything else mapped on your M&A pipeline? That's the question.

Julio de Angeli, Executive

Thank you for the questions, Thiago. Regarding our commercial efforts and service bundling, we are not merging apps together. Instead, services like WhiteBook and iClinic currently operate separately. What we're doing is creating bundles of offers, which has proven effective for cross-selling. We have nearly 110,000 subscribers for WhiteBook, and iClinic is also experiencing growth. While there are differences in audience, there is an opportunity to leverage these databases and combine services. For example, Medicinae is a recent acquisition that was intended for iClinic, and we will add this service to the iClinic offering. It's a new addition, but we will integrate it for physicians using the iClinic product. In response to your last question about Medical Harbour, we plan to incorporate it into our undergraduate curriculum, which is a crucial solution we've been seeking. On the B2C side, we also intend to include more digital imaging services in products like Medcel. Additionally, we're committed to embedding more educational content in both iClinic and WhiteBook, which we have already started. iClinic provides educational content, and we are now increasing educational resources in WhiteBook, especially during physician diagnoses, using Medical Harbour. On the B2B side, with over 50 clients for Medical Harbour, our goal is to continue growing and expanding this service, particularly in educational institutions.

Virgilio Gibbon, CEO

Hey, Thiago. This is Virgilio. I'll take your second question about Mais Médicos campuses. We started the 2 first Mais Médicos last year. We have 100% of occupancy on this first cohort seats maturation. We are ready with 2 additional campuses waiting for the final go ahead from the Minister of Education. So we're waiting for the last visiting. We're expecting to have the final authorization by the end of the first half. And the last 3 of the total 7 that we have, we expect for the second half of this year. About M&A, we have mapped on our M&A pipeline 4,000 seats that we are analyzing. And 500 of them, we’re having a very close conversation and can be something released to the market during this first and second half of this year.

Operator, Operator

So next question is from Caio Moscardini from Morgan Stanley.

Caio Moscardini, Analyst

So I have 2 questions. The first 1 related to the guidance. If you are considering any negative impact from potential mandatory discounts on the guidance? And if so, what level of mandatory discounts are you expecting? And the second question is related to the EBITDA margin. That deteriorated during the fourth quarter. You mentioned one of the reasons being a change in the methodology of allowance for doubtful accounts in the fourth quarter of 2019. And I would like to better understand that if you can please explain what has changed? And if we should expect any delinquency methodology change once the pandemic situation normalizes? Those would be the questions.

Luis Andre Blanco, CFO

Hi, Caio, it's Louis speaking. Thank you for your 2 questions. The first one, regarding the postponement of the revenue recognitions, as everyone knows, in Brazil, we have a critical situation in the COVID. So some of our campuses with this increase of the COVID case were shut down for practical classes again at the beginning of this year. But how we can see that, that we are very comfortable that if any impacts that should occur in our revenues in the semester, if we need to postpone this revenue recognition, this revenue recognition postponement is inside of our guidance. So we are very confident to deliver this guidance that we provided for the first half of 2021. Regarding the change on provisions, on bad debt provisions, we've made the change in our methodology on the fourth quarter of 2019. We've made this change to improve the methodology and this change on the methodologies, made that in the fourth quarter of 2019, the PDA was exactly low. So as it was just a control movement. That's why when we compare this loss that we have on the fourth quarter of 2020, in the fourth quarter '19 we have this increase, not because of the increase in 2020, but in 2019 was exactly low this figure, this change of the methodology. So we don't expect this gap should change in ‘21. Because all of 2020, we keep provisioning our receivables in the same way, okay?

Virgilio Gibbon, CEO

If I may add something regarding the guidance and expectations for net revenues, Luis mentioned some risks related to postponements, and you inquired about discounts. Recently, the Supreme Court decided that any laws related to discounts must be determined at the federal level, not the state level, which reduces the risk significantly. Currently, the higher education sector is experiencing situations where students make individual decisions in court, and while some may gain temporary victories that establish discounts, these instances are marginal. We have accounted for this in our top-line projections for the first half of the year. Regarding the EBITDA margin, I’d like to highlight that the impact on the margin stems not only from the PDA levels but also from different methodologies established in 2019. Additionally, we are merging several acquisitions with varying levels of maturity, and some of these assets are currently operating at margins below our average for more established campuses, indicating that we still have synergies to leverage. Furthermore, we annualized our corporate expenses post-IPO, which saw a significant increase in 2019. We embraced 12 months of new hires following the IPO, which raised our general and administrative expenses throughout 2020. However, we do not anticipate an increase in these expenses going into 2021 and beyond.

Operator, Operator

Next question is from Vinicius Ribeiro from UBS.

Vinicius Ribeiro, Analyst

I have two questions. The first is about M&As, specifically regarding medical education. Can you provide some insights into the current landscape? We've noticed a slowdown in M&A announcements in the market. Could this be due to longer due diligence processes, more complex negotiations, or perhaps pressure regarding valuations? What can we expect moving forward? I know Virgilio touched on a similar point earlier. My second question pertains to your guidance. You have completed several M&As in the healthtech business unit. From what I understand, while these applications will continue to operate as independent APIs, some level of integration will be necessary, which likely requires investment in developers and technology. Without this expense, how much do you think your margins would have increased for the first half of 2021? Are you allocating part of these investments to CapEx?

Luis Andre Blanco, CFO

Hi, Vinicius, I'll address the first question regarding the mergers and acquisitions in medical education. We are not experiencing a slowdown in our acquisitions. In fact, we are currently awaiting approval for UNIFIPMoc, which was our latest announcement. This is part of an antitrust process. We have operations in Montes Claros City, and while we still have a few weeks ahead, we anticipate closing by May. Our pipeline is simply a matter of maturation and final negotiations for some opportunities. However, we are not seeing any indications that we are being sold. The pace of new announcements is slower compared to what we experienced in 2020.

Virgilio Gibbon, CEO

Okay. Yes. Adding to that, Vinicius, the graduation aspect of the business is crucial for us. We aim to continue with acquisitions. So far, we have reached 851 of the 1,000 seat target we promised to the market, and we are confident that we will exceed this goal this year. After that, we will keep evaluating opportunities and pursuing mergers and acquisitions in this area. The graduation business remains a significant part of our overall operations. Regarding guidance, we haven’t provided details on the different segments. However, I can share that the operations we are integrating into Afya digital are at various stages of maturity. For example, the PEBMED business has grown considerably, with almost 110 paying users monthly. In contrast, iClinic has around 13,000 paying users but is still at the beginning of its journey and is currently consuming cash.

Operator, Operator

The last question is from Luca from Bradesco.

Unidentified Analyst, Analyst

My first question is about Business Unit 1, specifically regarding the non-medicine related courses. How has the intake cycle been, especially considering the delays and the challenges faced by the company's peers? Additionally, regarding Business Unit 2, could you provide some insights on the advancement of monetizing digital services? For instance, PEBMED has shown a growing active subscriber base, yet there has been a decline in monthly active users this quarter. Can you discuss that as well?

Luis Andre Blanco, CFO

Hi, Luca, about your question of BU1 of other programs, we just closed the first half intake. These other programs are different from health programs. It's around 5% of our undergrad net revenues. And we beat our goals for this half. In terms of intake and renewal, what we can say is that our student base will be flat year-over-year considering other health and other programs ex medicine. So it was a strong challenge here. The intake was 1% to 3% below last year, but the renewal rates was a little bit better, so we could keep our ex medicine student base flat year-over-year. That was a very good result considering the external scenario. The second question. Julio, would you like to take from there?

Julio de Angeli, Executive

Yes. Let me first address your initial question before discussing monetization, Luca. We have a substantial number of free subscribers, and our focus is primarily on converting them into paying customers rather than simply adding new users. This approach is one of the reasons for our strategy. Regarding the monetization of digital services, our current plan involves increasing the number of doctors on our platforms. We've observed significant engagement on the B2B side, particularly with the pharmaceutical industry, where we can create tailored content. For instance, we have the PEBMED portal and various services, and we possess a considerable number of physicians within our ecosystem. This is crucial. We're considering a range of activities to produce content and allow these industries to engage with our ecosystem, enhancing the quality and relevance of the information for physicians, which will ultimately help improve their practice. We intend to further develop our B2B efforts in the future; for now, our monetization primarily focuses on our physicians. However, we’ve initiated activities on the B2B front and are starting to see traction, which we plan to build on soon. We're also working on developing a portfolio of products to enhance collaboration with industries in this sector, and that’s currently in our pipeline.

Virgilio Gibbon, CEO

And Luca, I would like to add a point to emphasize that our short-term goal is to increase the penetration of our Afya digital solutions among the 200,000 students and physicians in our base. We aim to enhance this penetration of the solutions we currently offer and those that will be developed through the execution of our six-pillar strategy. Once we achieve this increased penetration in the short term, we will then begin to explore opportunities with other players in the healthcare sector. Therefore, what you can expect in the short term, specifically for 2021, is an increase in the penetration of these products.

Operator, Operator

Marcelo, you're next.

Marcelo Santos, Analyst

I just wanted to ask a bit about the question that Vinicius made about the margin on the guidance. So the margin on the guidance is 46% to 48%. And last year, you had 47.4%. So at the midpoint, it assumes a small decline on the margin. Could you just please explain what are the main factors helping and hurting margins that would result in a small decline, please?

Luis Andre Blanco, CFO

Yes. As we grow 50% year-over-year, we have a different mix of institutions and healthtechs. Institutions like São Lucas and UniRedentor, which we acquired in 2020, have lower margins than our overall portfolio. In the healthtech sector, we have iClinic, which is operating at a negative EBITDA. So as we continue to grow, we are analyzing the varied mix of institutions, even with just one year separating these two time periods.

Virgilio Gibbon, CEO

Marcelo, it's a matter of combining assets at various stages of development. UniRedentor and São Lucas are significant assets that include a range of health programs beyond just the medical undergraduate curriculum. There is still considerable opportunity to generate synergies and improve efficiency to enhance the contribution margin of our more established campuses. That's the reasoning behind it.

Operator, Operator

Before I finish, I would like to invite you all to our Afya Day event that we're hosting on May 6 at 9 a.m. Eastern Time. We will discuss our strategy, including our digital strategy and the core business strategies, especially focused on the undergraduate business. Additionally, we will have a segment on ESG to showcase our efforts in that area. I see that there are no further questions, so I want to thank you all for participating. If you have any other questions, please feel free to reach out to me. I am available. Have a nice day.

Luis Andre Blanco, CFO

Thank you all.

Virgilio Gibbon, CEO

Bye-bye, guys.

Julio de Angeli, Executive

Thank you, everyone. Bye.