Earnings Call
Afya Ltd (AFYA)
Earnings Call Transcript - AFYA Q1 2022
Operator, Operator
Good evening, everyone. Thank you for joining us for Afya's First Quarter 2022 Conference Call. With me on the call today is our 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 expectations 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 measures on this call. The non-IFRS financial measures are not intended to be considered in isolation or as a substitute for the 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, starting with Slide three.
Virgilio Gibbon, CEO
Thank you, Renata, and thanks, everyone, for joining us today on our first 2022 conference call. For us in Afya, this quarter shows another great start for the year ahead. We can finally see the pandemic losing its trend, and I'm proud to present once again above the expected results, reaffirming the success and resilience of our business, along with high and predictable growth and another record cash generation. During this call, I will run through four main topics. First, I will remember some key points presented at our last investor and ESG Day, which took place last month. Second, I will reinforce our 2022 disclosed guidance with expectations of another round of growth. Third, we'll talk about an active change of control. And last but not least, I will present our financial highlights of the quarter, demonstrating our solid performance. So moving now to Page number 4. On our last Investor and ESG Day presented to you on April 7, we discussed what makes us unique, where we are heading, how we are building the future, with what sustains our strategy, both on the education and digital services segments and our ESG accomplishments and expectations for the future. Inside these topics, we can highlight our digital services ramp-up with the expansion of our ecosystem and implementation of our B2B and B2C strategies, building our addressable market with digital health. Second, our business resilience which is guided by high net education demands, pricing power, and industry barriers to entry, and third, our ESG evolution, bringing up relevant points successfully performed such as the adoption of clean energy, social impact in vulnerable areas, and embedded governance and ESG culture in the company. In case we have missed the event, please feel free to check it out on our IR website page. In there, you'll find all this information and much more. Also, our 2021 Annual Sustainability Report is now available for all of you to check out. This is our third edition of the report, and we are very proud of our achievements so far. We have consolidated our leadership position in medicine and continue our inroads into the digital medical service segment, which aligns with our proposal to be the physician partner in all stages of their academic training and professional journey. This strategy which guides our business is detailed in the report along with the results achieved from our operations. In it, we have also gathered information on our management structure and ESG practices. In addition to the social and environmental impacts we produce through our operations. We encourage you to join in reading. Moving to Slide number 5. As presented on our last results conference call, the resilience and high predictability of our business model enabled us to introduce our new guidance for the entire year of 2022. Take into account that we successfully concluded the acceptance of new medical students, ensuring once again 100% occupancy for the year of 2022 in all of our medical schools and also the recovery of the continued education segment. Net revenue is expected to be between R$ 2.280 billion and R$ 2.360 billion, and adjusted EBITDA is expected to be between R$ 935 million and R$ 1.050 billion for 2022, excluding any acquisitions that may be concluded after the issuance of this guidance. These figures indicate another strong year ahead and represent incredible operational growth of more than three times when compared to Afya's results in 2019 when we became a public company almost three years ago. In the next slide, we will discuss this important exit operation, even though it happened after the quarter. This month, we announced the closing of the transaction where Bertelsmann, which has been a relevant partner since 2016, acquired 6 million Class B shares of Afya from the Esteves family. As a result of the closing of this transaction, they will beneficially own approximately 57.5% and 33.1% of the voting interest and 31% and 17.9% of the total shares, respectively, in Afya. We are delighted that Bertelsmann, one of the world's leading media companies with a significant footprint in the education sector, has advanced its commitments to Afya's long-term strategy through its evaluation of increasing its stake. Also, we reinforce that we will continue to benefit from the vision and commitment of the Esteves family with their significant shareholding and active participation in our company. Moving to my last two slides in this presentation, I will show our financial highlights for the first quarter, along with the first session takeaways. As I said at the beginning of this call, we have started 2022 with above-expected results. Adjusted net revenue increased 41% year-over-year, reaching R$ 567.7 million, followed by an adjusted EBITDA growth of more than 30% year-over-year, reaching R$ 270.8 million with a margin of 47.7%. One of the highlights of this quarter is the growth in earnings per share, reaching R$ 1.42 per share, more than 22% above last year. Even considering a higher net debt level and market interest rate, this result reaffirms our great operational results, capital allocation discipline on buybacks and M&A, and efficient capital structure. We also reported another great adjusted operating cash flow generation, ending the quarter with R$ 293.6 million, 51% higher than last year. We confirm our tripod of strong growth, profitability, and cash generation. Moving now to the operational update of the quarter. Our undergraduate medical students reached more than 7,500 students, representing a 36% growth compared to the same period last year. Approved seats grew by 29%, also in the same period. These results confirm our growth strategy that combines organic expansion with our capacity to acquire, consolidate, and integrate new seats into our operation. In this quarter, we can gradually see continued education recovery after the pandemic impacts on practical classes, presenting a strong revenue growth of 24% year-over-year. On the digital service highlights, we ended the quarter with R$ 47.5 million, and our ecosystem reached 260,000 active users, a growth of 17% year-over-year. This represents more than 33% of the Brazilian market of physicians. To summarize all I said so far on the next slide, Afya's predictable strong growth, high profitability, and cash generation are related to high and resilient demand, continuous pricing power, margin expansion, and M&A expertise. After the first quarter of 2022, even considering the adverse macro scenario, we already timed the top of our 2022 guidance and expect another round of solid results with continued education taking off and a huge upside on our Blue Ocean Digital Health Services opportunity. I will now turn the call over to Luis Blanco, our CFO, to give more color on the financial and operational metrics.
Luis Blanco, CFO
Thank you, Virgilio, and good evening, everyone. Moving to Slide 10 to discuss the financial highlights of the first quarter. It is with a lot of satisfaction that I present another strong quarter of results for Afya. Adjusted net revenue for the quarter was up 41% year-over-year to R$ 568 million, reflecting the maturation of medical seats, an increase in the average ticket of medical programs, and consolidations of acquisitions of medical schools and digital services. Also important to mention is the continued education recovery, which I will provide more details about further on and the adjustment of R$ 1.4 million in discounts in tuition fees granted by individual, collective legal, and public procedures related to COVID-19, mostly ceased in December due to the Supreme Court decision. Adjusted EBITDA for the quarter was up more than 30% year-over-year to R$ 271 million, while adjusted EBITDA margin decreased 390 basis points to 47.7%, mainly due to the consolidation of acquisitions with lower EBITDA margins and the decrease in net sales, mainly due to high competition in residency preparatory markets. Adjusted cash flow generation has shown quarter-after-quarter growth. In this quarter, the increase was 51% year-over-year to R$ 294 million, resulting in a cash conversion ratio of 113% compared to 103% in the same period of 2021. Adjusted net income for the quarter was R$ 167 million, 4.5% higher than the same period of the prior year. The GAAP improvements between net income and adjusted net income in this quarter were mainly related to decreases of 40% and 79% in non-recurring expenses and in share-based compensation expenses. Moving to Slide 11 for discussions of key operational metrics by business unit. Starting with the undergraduate programs: our number of medical students grew by 36% year-over-year, reaching more than 17,500 students with approved medical seats increased by 29% year-over-year to 2,759. Considering additional organic and inorganic seats expectations, we have the upside to achieve more than 32,000 undergraduate medical students at maturity. The medical school net average ticket for the year, excluding acquisitions, was R$ 7,900, an 8% growth compared to R$ 7,300 from the prior year. In terms of total tuition fees for the quarter, we've reached R$ 649 million, up from R$ 418 million from the prior year, an increase of 55%. Talking about revenue mix, 77% of these derive from medical school students, and 89% from health-related courses represent continued education metrics. In this quarter, we saw a great recovery in our continuing education segment, which reported a strong intake process, increasing the number of students by 9% quarter-over-quarter despite the decrease of 6% year-over-year. Net revenues increased 24% when compared to the same period of the prior year. This recovery was largely due to better performance of repayments, mainly related to the interruption of the effects of the COVID-19 pandemic. Moving to Slide number 13, I will discuss the digital service operation metrics. On the first graph in the slide, you can see the total active payers, which are the ones that generate revenues in B2P. So far, in this quarter, we have reached a number of 176,000 paying users, a 26% growth year-over-year. Our ecosystem reached 260,000 monthly active users this quarter, a 17% increase compared to the same period of the prior year, representing more than 33% of all medical students and physicians in Brazil, as Virgilio said before. Digital service net revenue decreased 11% due to lower performance in net sales this quarter, caused by higher competition in the residency preparatory markets, as I said before. Also, from now on, since we have disclosed our B2P and B2B strategy expectations, we will start to break down our digital service net revenue within these two categories, as you can see on the last graph. So from the R$ 47 million of the digital service net revenue, R$ 41 million came from the B2P and R$ 6 million from the B2B, as the B2B strategy is still in its early stages. Moving to the next slide. Speaking of our digital service strategy, we have exciting news to share with you today. In addition to Alidamitcina and Catopapers, we are proud to announce another business combination, our third of 2022: Glic, a free diabetes care and management app solution for physicians and patients that uses technology to improve diabetes education and daily routine practice by connecting users, devices, and healthcare providers. With these acquisitions, we will add 1,100 active physicians to our ecosystem and monitor more than 90,000 patients. These business combinations represent Afya's entry into the physician-patient relationship pillar and further strengthen our strategy and ecosystem. Our information related to acquisitions is now available on our IR website, accessible through this key. And now moving to my last two slides, I will discuss our cash and net debt positions, also providing more details on our cost of debt. Cash and cash equivalents at the end of the quarter were R$ 789 million, a decrease of 18% compared to the same period in the prior year. Net debt totaled R$ 1.4 billion compared with a net debt of R$ 230 million in the first quarter of 2021. This increase was mainly due to nine business combinations and license acquisitions executed during this 12-month period and payments related to share repurchase programs, partially offset by free cash flow generation. On the next slide, you can see a table breaking down our gross debt and our average cost of debt considering our main debts, including the SoftBank transactions, loans in finance, and accounts payable to selling shareholders. This ends our prepared remarks. I will now open the conference for the Q&A section. Thank you.
Mauricio Cepeda, Analyst
Thank you for the time. I have some questions here. The first is about the continued education. We see that there was a recovery in the tickets, which is very healthy. Although there was a small decrease in the student base. So my question would be if the tickets that we are now seeing are something that we expect going forward? Or if there is additional potential in these tickets? The second question is about the non-health courses. We see that the student base is declining considerably by 11%. And we see currently that the other educational groups who have similar businesses are at least now stabilizing the student base. So my question would be if it's not the case to double down the effort to sell some of these courses, knowing that the other players are kind of stabilizing the business? Thank you.
Luis Blanco, CFO
Thank you, Cepeda. It's Blanco speaking. I'll take the first question. Regarding the continued medical education segment, we must keep in mind that we have our major operations in the segment, but it's not the only one. What happened in this quarter is that we continue to decrease these courses in other institutions and increase the number of students in the e-payment segment. So it's more a matter of mix between the students we have, as we are focused on growing the IPEMED brands and the IPEMED offering as our flagship in the continuing medical education. So it's more about mix, decreasing the other offers, other than IPEMED that then increase just in ticket.
Operator, Operator
Before Virgilio gets the second question, Cepeda, it's important to mention here that the net ticket is higher than in other courses we offer. Sometimes we acquire institutions such as UniRedentor that come with lower courses, as Luis already said, and they have different tickets. If you look at the IPEMED ticket, it's close to something around R$ 3,000 to R$ 4,000 per month. And in these other institutions, we have tickets with lower value, such as R$ 1,000 or R$ 2,000 per month. And why is that, remember that most of IPEMED activities are related to in-person activities, right? So it's attending physicians. In these other positions, we have different kinds of courses, mostly of their income. At the end of the day, in the future, we should have just one model that should be the IPEMED model.
Virgilio Gibbon, CEO
Just to add about the mix effect and remember that we launched seven new campuses, offering this transitional graduate, a lot of seats type of content with very high-value tuition. So the trend is that we'll be much more concentrated on this type of program, high value. The mix effect will also help in terms of ticket. And remember that we are resuming and will see for the following quarters, the student base continues to grow and be even higher than last year, even considering that we are showing this offer other institution that is different from IPEMED. Taking your second question about the other programs, it's worth mentioning that we also saw some significant growth in other health science programs. So we saw an organic base resuming growth on our student base for high-value tickets that are much more important in our operation. Additionally, we have some good trends for these programs in terms of demand. Different from health science, many of the other graduation programs we are seeing a negative contribution, mainly on the new acquisitions that we had in the last two years. So we will continue our discipline to shut down these types of products that do not generate value. It doesn't make sense to continue offering these programs, nor is it sustainable in our operation. Of course, if we have any campus that we can separate and sell in the market, we will do it. But remember that this is complicated from a regulatory standpoint, because we have the licenses to operate different types of programs together under a university center or university. However, this represents less than 10% of our undergraduate total revenue, and we will continue to dilute all the undergraduate programs in our operation.
Mauricio Cepeda, Analyst
Okay, very clear. Thank you.
Victor Tomita, Analyst
Hello, good evening, everyone, and thanks for taking our questions. I have two questions from our side. The first one is on what is your more general strategy for physician-patient relationship software? And whether we should expect further acquisitions to complement Afya's offering portfolio in that new pillar? The second question would be also on digital. We saw some reduction in monthly active users for telemedicine and digital prescriptions. At the same time, as we saw an increase in monthly active users for clinical decision software. Is that being driven mostly by people resuming face-to-face consultations and more activity at clinics and hospitals? Or are there any seasonal factors or other factors that we should take into account?
Virgilio Gibbon, CEO
It's good to hear from you, Victor. I'll start with the first question. Regarding the physician-patient relationship, following our recent acquisition of a software solution, our primary objective is to enhance treatment relationships, particularly for chronic conditions such as diabetes. We aim to generate more demand for physicians and facilitate better patient adherence to treatments. Our focus is on increasing our presence among senior physicians, who predominantly manage chronic disease cases. Additionally, we are developing our planned B2B offerings to drive demand generation. By supporting chronic disease management, we can boost the demand for medications, tests, and hospital operations, while also facilitating smarter access for pharmaceutical companies to patients and physicians. This addresses your first question. Concerning monthly active users, both telemedicine and prescriptions are integral parts of our practice management suite, which has experienced year-over-year growth. More clinics are adopting our practice management tools. While telemedicine usage may have stabilized and is not growing as rapidly, we are not disclosing specific access numbers. Nonetheless, the overall increase in physicians utilizing our solutions is a key enabler for our B2B strategy.
Luis Blanco, CFO
And Tomita, it's Blanco speaking. Just to give you more detail on the reduction on the clinical management tools, we excluded from the first quarter 2022 numbers all the assistance from the physicians that are users in the systems but were not physicians themselves. So every time a physician hires iClinic, for instance, they put their systems as a user as well for free. So we were counting the number of users. From the first quarter of 2022, we excluded assistance from the MoU. We noted on the MoU table explaining this. So we are not showing this number. If we were to include those users from iClinic, there would be almost 20,000 non-active users. If we counted them, it would jump to 41,000 users. The growth in the number of users would thus be around 50%, which aligns with the number of iClinic payers. So that's just to clarify the monthly activity users on this metric. We decided to exclude this number from the first quarter of 2022 onwards.
Operator, Operator
No problem. Just to remember, we have been doing great work with our data. We made investments in a data lake, as we talked about during the after day. And that is what we want to have, the better quality of data to understand who is the one using our products. We realized this was important for investors to see and understand how many physicians were using not only assistance. We didn't have the same view of this data when we acquired the company as we do right now. So it's just a way to be more transparent for you guys.
Victor Tomita, Analyst
Very clear. Thank you.
Unidentified Analyst, Analyst
Hi, everyone. Thank you for taking our question. Can you please give us further detail on the competitive landscape for Medcel? And what could we expect for the top-line dynamics for the rest of the year? Additionally, if you could please comment on the integration process of the recent developments in this area, that would be very helpful. Thank you.
Virgilio Gibbon, CEO
I can start with the competition landscape for Medcel. In 2019, there were about four to six players in the market, with Med Group as a benchmark due to its more extensive physical course offerings. However, during the pandemic, the rise of the Internet and digital influencers led to a significant increase in new competitors. Currently, there are approximately 24 to 30 new entrants, most of which have simpler offerings. These offerings are more appealing in the market, with many competitors providing specific content for individual residency programs or question simulations, resulting in heightened competition for market share. We are focused on improving our high-quality content to make it more competitive in this evolving residency program market. Additionally, we are facing delays in residency testing as many students prefer to pursue higher-paying job opportunities due to the abundance of jobs for physicians, which is causing them to postpone entering residency programs. This trend may also be influenced by increased student debt accumulated during the pandemic. As a result, we are seeing more competition on our end while demand remains relatively stable.
Luis Blanco, CFO
I'll get the second question here. Luca, I don't know if you have any additional questions or comments about the later explanation.
Unidentified Analyst, Analyst
That was very clear. If you could please comment on the integration process, that’d be great.
Luis Blanco, CFO
Okay. We are very advanced in the process of academic integration; the new provider is in place and helping us move our tuition price for fresh students that we launched at the beginning of this year, and we will enroll in the second half of 2022. That is already in place. So all the top lines will guarantee 100% of occupancy, which has already been implemented. Also, we have a successfully recorded intake for health programs, and also different from other undergraduate programs, so helping us ramp up our internal results. Remember that when we closed the operation, the contribution margin was close to 25%, and we are now close to 40% as a contribution margin coming from the units. What we have in front of us for the next quarters is the expectation of full integration, our shared services, and other rollouts by October of this year, second half. So we'll have another round of synergy that we can extract, and maturing and scaling the medical program will help us to go even further in terms of margin contribution. So just to summarize, we are ahead of schedule in terms of integration, and we expect to be fully integrated by October of 2022.
Operator, Operator
Next question comes from Jessica from JPMorgan. You may go ahead, Jessica.
Unidentified Analyst, Analyst
Thank you for taking my question. How have the candidate set rates been behaving within Afya units? And how are medicine tickets expected to behave?
Virgilio Gibbon, CEO
Jessica, we closed this first half intake on average around 5.1 candidates per seat, all seats in Brazil. Of course, we have some regions that have a higher ratio of candidates per seat, but the national average was 5.1%. So it's kind of flat year-over-year in terms of this ratio. In terms of tuition moving forward, we have adjusted our prices slightly over 8% in this first quarter. The largest increase in price was for the new acquisition that was not counted in the average as we excluded the acquisition when calculating the average tuition year-over-year. Overall, we expect the average tuition to move around 8% to 10% by the end of this year for medical programs.
Operator, Operator
Yes. And supplementing this question, Jessica, remember that we are adding more value to our students' perceptions. We now have Whitebook integrated into our students' offerings. Medcel is something that we have already integrated. We have now launched 4.0, which is a new initiative. All of this enables us to justify price increases in the future, ensuring that students perceive why they are receiving a premium offer.
Virgilio Gibbon, CEO
That being said, it's important to highlight as well that we added other offerings to our students, including Medical Harbor, and particularly the Medcel station offer; that's the digital value proposition for students from the first to the fourth year. We are testing it with all the involved students, and the feedback is very encouraging. We plan to provide these solutions to every office student before offering them to other institutions as well.
Vinicius Ribeiro, Analyst
I hope everyone is listening to me. I have two questions. The first is about the recent change in the rules regarding the medical seat granting process. Can you clarify if that change impacts your operations and your ability to secure new seats in the future? My second question is related to the pressures we are seeing in both the public equity markets and the venture capital world due to higher interest rates. How do you anticipate this will affect your strategy for capital deployment moving forward? Do you see potential opportunities arising from this, or do you expect valuations to shift significantly, creating new possibilities?
Virgilio Gibbon, CEO
Vinicius, I'll address your first question here, then Blanco will help me with the capital allocation question. The management change was because the rule that was released last week was focused on how institutions can ask for additional seats under the Mais Medicos programs. That was the main idea behind this normative rule released last week. However, this morning, we have seen the cancellation of the normative role, meaning they reverted to the previous regulations. The rule previously allowed for one request to increase the seats for any Mais Medicos campuses from Mais Medicos. Hence, no changes are expected, as the idea was to provide clarification for this new process, which maintains the same rules as expected before the recent rule was released.
Luis Blanco, CFO
Vinicius, Blanco speaking, regarding your second question on VC pressures. I believe that you are referring to the digital completeness of our ecosystem. Within the acquisitions we announced today, we have completed all the pillars in our view. So we now have the most comprehensive ecosystem offering for physicians in the country, with 260,000 active physicians and medical students utilizing our services. What we want with these solutions is to increase usage and penetration within this group. In terms of offer, we are satisfied with the completeness of it, and we will move forward. We could pursue further acquisitions if they add value to our offerings. For now, as we completed the physician-patient relationship, we have fully established our ecosystem. Giving more detail: concerning the undergraduate segment, we still plan to grow our seats by 200 per year, just as we have guided the market. We are also aware of the impact from increased capital costs due to interest rate hikes, which is why we will maintain our discipline in capital allocation. We have announced the completion of our third buyback program in early May this year.
Operator, Operator
As we do not have any more questions, I would like to thank you all for participating today. I make myself available if you need anything else from the Investor Relations team. And just a reminder that we disclosed our sustainability report today. Thank you very much, and have a good night.