Earnings Call Transcript - AFYA Q1 2023

Operator, Operator

Good night, everyone. Thank you for joining us for Afya’s First Quarter 2023 Conference Call. I'm here today with 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 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 any remaining facts from COVID-19. These risks include those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on the information available to us as of the date hereof. You should not rely on them as predictions of future events, and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, management may reference non-IFRS financial measures on this call. These measures are not intended to be considered in isolation or as a substitute for 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’s CEO, starting with slide number three.

Virgilio Gibbon, CEO

Thank you, Renata. And thanks everyone for joining us today on our first conference call related to 2023 results. We proudly present our first quarter of 2023 showing another great start for the year ahead. Since our IPO, our top line has grown more than two times, improving the resilience and differentials of our business. In this quarter, once again, our net rental has jumped 25% over last year. During this presentation, I will first run through some main strategic topics such as our performance highlights, the successful business execution within our three segments, this year's guidance, some recent awards recognition, and at the end, Luis Blanco will explore our financial and operational overview. So moving now to page number four. Let's start with our performance and highlights. First, adjusted net revenue increased 25%, reaching BRL709.4 million, followed by an adjusted EBITDA growth of almost 22% year-over-year, reaching BRL330.2 million with a margin of 46.5%. We also report a strong cash flow generation again of BRL349.4 million, an increase of 19% year-over-year, boosted by the solid operational results of the company with a cash conversion of 112% and a solid cash position at the end of the quarter. Adjusted net income was BRL166.4 million in line with the same period last year, mainly due to higher financial expenses related to the new debenture issue in December 2022 and higher interest rates in demand. Moving to our operational updates of the quarter, we have reached 3,113 operating seats, an increase of over 25.5% over the first quarter of 2022, with the beginning of four Mais Medicos campuses, along with new seats in Ji-Parana and Itabuna. Additionally, the acquisition of UNIT Alagoas and FITS has contributed to our growth. Our number of undergraduate medical students has reached almost 21,000, representing an 18.8% growth compared to the first quarter of the previous year. We also saw great results in net revenues. For our continuing education business, the segment grew more than 46.6% year-over-year, representing a net revenue of BRL34.9 million in the first quarter. The digital health services reported great results as well, with revenue increase of almost 20% compared to the first quarter of 2022, resulting in a net revenue of BRL56.8 million. This result reinforces the opportunity ahead in digital services, as explained by the ramp-up in B2B engagements with new contracts with pharmaceutical industry companies, and the continuous ramp-up in B2B contracts, which will be discussed further. Lastly, our ecosystem has 295,000 active users, representing great penetration among physicians and medical students in Brazil. In the next slide, we will talk about our solid business execution within our three business units, starting with the undergrad segment. We saw important movements throughout the quarter such as higher tickets in the medicine course, with more than 8% increase in tuition. The maturation of medical seats, the beginning of four new Mais Medicos campuses in 2022, the consolidation of UNIT and FITS acquisitions, and the consolidation of 92 new medical seats; 28 in UniSaoLucas, Ji-Parana located in Rondonia, and 64 additional seats in Faculdade Santo Agostinho in the city of Itabuna. This movement is part of our strategy to add 600 new medical seats on our current operation by 2028. We are delighted to see that the most significant growth of the quarter in terms of revenue came from our continued education segment with a robust intake process, six new campuses, and course maturation. On our Digital Services segment, we ended the quarter with a revenue increase of 20% compared to last year. This result reinforces the opportunity ahead in the digital service, as explained by the ramp-up in the B2B engagements with new contracts with pharmaceutical industries, and the continued ramp-up in B2B contracts. I will now turn the call over to Luis Blanco, Afya's CFO, to give more details on the financial and operational metrics. Thank you.

Luis Andre Blanco, CFO

Thank you, Virgilio, and good evening, everyone. Starting with slide number seven to discuss the financial highlights of the first quarter. With much satisfaction, I present another strong quarter's results for Afya. Adjusted net revenue for the first quarter of 2023 was BRL709 million, an increase of 25% over the same period of the prior year, mainly due to higher tickets in medicine courses by more than 8.3%; the maturation of medical seats; the beginning of four Mais Medicos campuses; the big business combinations with UNIT Alagoas and FITS Jaboatao; a strong continuing educational segment performance; and great results from digital service. First quarter 2023 adjusted EBITDA increased 21.9% to BRL330 million, with an adjusted EBITDA margin of 46.5%, a decrease of 120 basis points when compared to the first quarter 2022. The adjusted EBITDA margin reduction in this quarter is mainly due to the following: consolidations of four new Mais Medicos management medical campuses, operations started in the third quarter of 2022; UNIT and FITS, which are performing better than expected but still present lower margins when compared to the integrated companies; and digital segments primarily due to net sale performance. Moving to the next slide. Adjusted cash flow generation over the year was almost 20% higher quarter-over-quarter, totaling BRL349 million, boosted by solid operational results. The operating cash flow ratio was 112% for the first quarter of 2023, compared to 113% in the first quarter of 2022. Adjusted net income for the first quarter of 2023 was BRL167 million, in line with the same period from the previous year, mainly due to higher financial expenses related to UNIT and FITS acquisitions and higher interest rates. Our adjusted EPS for the quarter reached BRL1.77, the same compared to the first quarter of 2022. Our EPS performance reflected the decrease in our net income that was compensated by capital allocation discipline executing buyback programs. Moving to slide number nine for discussions of key operational metrics by business unit. Our number of medical students grew 19% over the first quarter of 2023, reaching 20,800 students, with operating medical seats increasing 25% due to the income base of 632 medical seats related to four Mais Medicos and Ji-Parana, Itabuna seats increase; UNIT Alagoas and FITS Jaboatao acquisition, as previously said. Therefore, we have reached 3,163 approved seats and expect to achieve almost 23,000 undergraduate medical students at maturity. Our net average ticket, excluding acquisitions, increased by 8.3% over the same period last year, reaching BRL8,570 in the first quarter of 2023, compared to BRL7,861 in the first quarter of 2022. The left graph shows a 24% growth in combined tuition fees, reaching BRL806 million, up from BRL649 million, from the first quarter of 2022, 78% of which are related to medicine courses. All these efforts mean one thing: our medical educational business remains and will continue to be the cornerstone of our business in the short and the middle terms, delivering high predictable growth, combined with solid profitability and cash generation. On the next page, I will present our continued educational metrics. As I said before, we saw another year of great recovery in our continued educational segments with an increase of more than 37% in the number of students compared to the same quarter last year, reaching 4,774 students. In addition, for the quarter, net revenues grew 47% compared to the first quarter of 2022. This recovery is mainly due to the robust intake process and course maturation. Moving to slide number 11. 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 business to physicians, B2P. With a continuous growth trend, we reached 218,000 paying users, a 24% growth compared to the same period last year. As you can see in the second graph, our ecosystem grew 13.6% compared to the previous year, achieving 295,000 monthly active users, representing almost 40% of all medical students and physicians in Brazil. Finally, on our last graph, we can see our digital service net revenues, which increased more than 19% when compared to the same quarter of the last year, reaching BRL56.8 million, with a breakdown of our digital service net revenue within B2P and B2B segments which accounted for more than BRL46 million coming from B2P and more than BRL10 million coming from B2B, since the B2B strategy is still ramping up, representing a growth of 62% compared to the prior year. Now moving to my three last slides, I will discuss our cash and net debt positions, also giving more clarity on our cost of debt. Cash and cash equivalents at the end of the first quarter were BRL723 million, a decrease of 8% over March 2022 and 34% when compared to the fourth quarter of 2022, mainly due to the new debentures issues during the fourth quarter that was used to fund the down payment of UNIT Alagoas and FITS Jaboatao acquisitions in January. On the next page, we can look closely at the net debt variation. In the first quarter of 2023, net debt totaled BRL2.29 billion, an increase of BRL648 million when compared to the fourth quarter of 2022, mainly due to the BRL825 million UNIT Alagoas and FITS Jaboatao acquisitions, which was partially offset by BRL177 million of free cash flow generation in the first quarter of 2023. On the next slide, you can see a table with the breakdown of our gross debt and the total cost of our debt, considering our main source of debt, the SoftBank transactions, debentures, account payables to selling shareholders, and other financial obligations. This ends our prepared remarks. Strong performance, consistent growth, and success in all segments. We are committed to providing an ecosystem that integrates educational and digital solutions for the entire medical journey, enhancing development, updating effectiveness, and productivity of health professionals. We are very proud of our business and what we have achieved so far and excited about what we plan for the future. I will now open the conference for a Q&A session. Thank you.

Lucca Marquezini, Analyst

Good evening, everyone and thank you for taking our question. Regarding Medcel, we've seen a decrease in the number of active payers for the past quarters. So can you please provide more color on the competitive landscape and comment if you have seen any signs of recovery here, especially considering the initiatives implemented at the end of last year? So that would be helpful, please. Thank you.

Virgilio Gibbon, CEO

Hi, Lucca, this is Virgilio. I can start here, and then Blanco can give more details after. So just about the dynamics on Medcel. We are combining the Medcel offering on Pillar 1 together with Alem da Medicina and CardioPapers. So we are seeing very good intake enrollments coming on Alem da Medicina and CardioPapers, also shifting demand between these offerings in Pillar 1. So Medcel, as we saw in the last quarter, we still have a lower volume coming this year. We are ending the seasonality right now in the first quarter. The next cycle, the big cycle, starts in September. So we still have, for this semester, a lower number coming from Medcel compared to last year. The landscape, the competition remains the same. That's the reason we changed not only the product, but also the offering, combining Alem da Medicina and CardioPapers. We are offering much more related also to specialization, it's much more online continued medical education than just the resident's spread course as it used to be Medcel in the past, back in 2019, 2018. Just to give more figures, I will pass back to Blanco, who can explain a little bit more about the numbers.

Luis Andre Blanco, CFO

Thanks, Virgilio. Lucca, as Virgilio mentioned, we end at the first quarter the intake of the collection of 2023. So all the collection of 2022 is disconnected during this quarter, and now the new intake will take place in the fourth quarter. Medcel, as we mentioned, is not the cornerstone for our business-to-business strategy. We still feel comfortable that with this combined offer, we can stop the following of Medcel. We anticipate some recovery during the next intake cycle for the 2024 collections that we are going to start in September.

Operator, Operator

Virgilio, would you like to complement?

Virgilio Gibbon, CEO

Yes, just to add a point here. Moving forward for the following quarters, we expect that digital and as the next quarter will be consolidated. It will be fully organic when you compare to the previous year. Pillar 1 should be moving around 10% to 15% above last year. The other components of our digital services should be growing above 30%. So the combination of them will be around something 15% to 20% for the rest of the year, at least for the first half, because we still have that intake that will be stronger in the second half, okay?

Lucca Marquezini, Analyst

That’s very clear. Thank you, Virgilio and Luis.

Virgilio Gibbon, CEO

Thank you.

Operator, Operator

Okay. So our next question comes from Mauricio Cepeda from Credit Suisse. Mauricio, you may go.

Mauricio Cepeda, Analyst

Hi, Virgilio, Blanco, Renata. Thank you for this opportunity. Regarding margins, I understand that you are adjusting the business mix. We notice that margins are somewhat lower, but for positive reasons. You're significantly investing in continuous education and opening many medical seats. My first question is, how do you anticipate this trend will continue throughout the year regarding the apparent margin pressures, which are actually a sign of business success? Also, when do you expect to see a stabilization to a new margin level, considering you are integrating new operations alongside these factors? Thank you.

Luis Andre Blanco, CFO

Cepeda, it's Blanco speaking. Regarding the expectations for the year, we are fully committed to what we guided for the market in the first quarter with the disclosure of the results of 2022. The margins embedded in our guidance are between 40% to 42%, from the bottom to the top line of the guidance. We are committed to that. Remember that the first quarter is always our best quarter due to the seasonality of our business. We have a little bit of pressure in these margins caused by Medcel performance, the four new Mais Medicos, and for the beginning of UNIT that is coming with margins that were initially better than expected in the regional business plan but still behind the margins of the integrated companies. If we exclude these acquisitions for 2023, the decreasing margins is just 50 basis points. So we are pretty committed to deliver the margins of this 40% to 42%. As you mentioned, as continuing education grows and the digital segment grows with higher rates than the undergrad segments, we'll experience some shifts in margins. But for this year, the guidance is between 40% to 42%.

Operator, Operator

Yes, but we unfortunately do not give guidance for the longer term. However, there is no reason for margins in all the segments to increase in the following years. Virgilio, would you like to comment?

Virgilio Gibbon, CEO

Yes. I think just as we are growing very fast in continuing education in the med, we launched six new campuses. We are preparing to launch another two or three campuses still this year. As any other on-ground operation for education, we will ramp up the number of students per campus. Therefore, gross margin will increase and the EBITDA margin will increase along the year. We expect to have better contribution margin coming from continued education for the following semester, not only for the legacy operation but also for the new campuses that we launched last year and this year.

Mauricio Cepeda, Analyst

That’s very clear. Thank you.

Operator, Operator

The next question will come from Lucas Nagano from Morgan Stanley. Lucas, you may now talk.

Lucas Nagano, Analyst

Good evening, everyone. Thank you for taking our questions. I have two inquiries. The first pertains to your medical schools. The situation seems stable, with an 8% increase and 100% seat occupancy. However, have you observed any changes in demand, particularly in the Southeast compared to other medical schools regarding candidates' progression or pricing? My second question relates to B2B, which appears to be performing well. Can you share where you currently stand in the product development and commercialization processes? Also, could you provide some insight on whether you are creating solutions for companies outside the pharmaceutical industry?

Virgilio Gibbon, CEO

Yes. Lucas, I can take the first one here; Blanco can help me on the second one. Regarding the tuition adjustment, the average across the board, this year compared to the last four years had the highest candidate per seat ratio we have seen, reaching around eight candidates per seat. Of course, this is a national average. However, with a very integrated process, we have managed to maintain 100% occupancy in all of our units. Different ratios exist between our campuses; for large cities like Rio de Janeiro, we have more than 20 to 25 candidates per seat, while some institutions have around four or five candidates per seat. It is feasible and easy to keep enrolling 100% of the seats every semester. Consider that we are passing tuition a little bit above inflation each semester, and we are strengthening our commercial and enrollment processes as well as our capacity to convert students to our campuses.

Operator, Operator

If I may point here, I just want to mention that we do have different prices in different regions, and that's mainly because of the region. But that does not mean that we have different margins in different regions. All the costs and expenses related to different regions are also different. So what I'm trying to say here at the end of the day, that ticket from a medical school comparing to unit is different. But at the end of the day, we can see similar margins. What changed the margin level is mostly how concentrated the school was from medicine. That's what changed the game. Blanco, may you take the second question?

Luis Andre Blanco, CFO

Yes. Lucas, thank you for your question. Just to give you more color on the B2B. I’ll give a step back to explain our strategy. Our digital strategy focuses on penetrating within the physicians, providing the best solutions to increase their productivity, assertiveness, and updating on various topics. We've been connecting these physicians to healthcare players. We divided digital into two parts. Regarding the companies we provide service for the physicians, we are significantly increasing the number of users, the monthly active users, and payers as well. Regarding B2B, what we had in place until now includes connections we made in parts with other educational companies to provide solutions such as our prep course, Medcel, and our imaging solutions, Medical Harbour. Most of the digital revenues have come from the pharmaceutical industry, with more than 100 contracts established with over 40 pharmaceutical industry players, both multinationals and national. Currently, we are initiating connections to providers which is relevant for our B2B strategy. We are onboarding a team to begin offering connections with physicians to the providers. In the pharmaceutical industry, we are providing what the industry calls e-detailing, marketing and commercial efforts to connect physicians with industry players to ensure they get the latest drugs and treatments. For providers, we will be offering recruitment services and leads from our ecosystem for them to fulfill treatment needs, purchase medications, and provide access.

Lucas Nagano, Analyst

Very clear, Virgilio, Renata. Thank you very much.

Operator, Operator

Of course. The next question comes from Jessica from JPMorgan. Jessica, you may now go.

Jessica Mehler, Analyst

Thank you for taking my questions. I have two. So first, how are medicine ticket expected to behave going forward? Do you expect to increase prices above inflation? And do you have any updates regarding the new Mais Medicos program? Thank you.

Luis Andre Blanco, CFO

Jessica, it's Blanco speaking. I will take the first one, and Virgilio is going to take the second one. Regarding the first question, we discussed pricing for the first semester last call. We disclosed that we've made readjustments for medicine students that were 7.5% for this year. Within ticket maturations, we're looking at something around 1% above that. What we delivered for the first quarter is an 8.3% increase in terms of net tickets, excluding acquisitions. Our pricing strategy is to establish annual price adjustments, typically in September to October, based on expected inflation for the year. Last year, we used a 7.5% increase, which was below inflation at year-end. This year, we tried for a 7.5% increase again but inflation decreased at the year's end. So, come September, we'll evaluate inflation and establish new pricing for 2024. In addition to price adjustments, we expect some ticket maturation effects.

Virgilio Gibbon, CEO

Yes. Just to add a point of view regarding the ticket. If you take a look at our data, we have also seen a significant increase in tuition fees overall, excluding acquisitions, which have jumped more than 15%. This reflects not just price adjustments but a shift towards higher-value programs than we had in the past. For the Mais Medicos, we're following the guidelines from the normative rule that indicates a 120-day period to release the new rules for the program. It's just 60 days after they shared that information. We're expecting some announcements by the end of July or beginning of August. They are currently assembling their commission, and integrating many professionals from various sectors to address the new conditions for the program's capacity. However, it's still early to provide any detailed information.

Jessica Mehler, Analyst

Thank you, very clear.

Operator, Operator

We do not have any other questions. Thank you so much for participating with us today. If you have any follow-up questions or if you want to schedule a call with us, just contact me, and I will be pleased to help you guys. Have a good night and a great end of week. Thank you.

Virgilio Gibbon, CEO

Thank you all. Bye-bye.