Earnings Call Transcript - AFYA Q2 2024

Operator, Operator

Thank you for joining us for Afya's Conference Call. I'm here today with Afya's CEO, Virgilio Gibbon, and our CFO, Luis Andre Blanco. 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 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. We 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, the 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%, reaching R$810 million, followed by an adjusted EBITDA growth of 28% year-over-year, reaching R$344 million, with an adjusted EBITDA margin of 42.5%, an impressive 490 basis points over last year. Adjusted net income reached R$210 million, marking a 59% growth compared to the same period in 2023. Meanwhile, our adjusted EPS climbed to R$2.29, reflecting a 62% increase over the previous year. We delivered robust cash flow from operating activities, totaling R$610 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 R$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 R$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 the first half of 2023, concluding the six-month period with a net revenue of R$77 million. Moving now to Slide number four, we can now observe our new business structure taking shape, comprised of three segments: undergrad program, continuing education, and medical practice solution. I would like to reiterate that notable changes have occurred in continuing education. Entities, previously accounted for as content and technology for medical education within the medical practice solution, are now accounted for in the continuing education segment. Simultaneously, the segment formerly known as digital services was renamed to medical practice solution. 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, and 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 solution 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 postponed during the first quarter of 2024 are now being accounted for. Moving now to Slide number five. We are pleased to announce an update to our 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% occupancy. Our updates include a new net revenue range between R$3.225 billion to R$3.325 billion, and an adjusted EBITDA range between R$1.375 billion and R$1.475 billion, and a CapEx range between R$220 million and R$260 million for our capital expenditures. And now I'll be turning the call over to Luis Blanco, Afya's CFO, to provide more insights into the financial and operational metrics. Thank you.

Luis Andre 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 tickets for our medical school grew by 5.4%, reaching R$8,922 in the first half of 2024. Furthermore, undergrad program net revenue saw an increase of more than 13%, reaching over R$1,414 million, 86% of which is related to medicine and 94% from health-related courses. All these efforts highlight one key point: our medical educational 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. For the next page, I will present our continuing educational 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 right at 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 enabled the continuing education metrics revenue to reach R$128 million in the first half of 2024 compared to R$114 million in the first half of 2023, reflecting a growth of over 12%. This growth includes a 15% increase from B2B and a 13% decrease from the B2B offering. Moving to Slide number nine, I will discuss the medical practice solutions operational metrics. On the first graph, you can see our total active payer, those generating revenues in the business to physician segment. With a continuous growth trend, we 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 hit over 57,000 in the first half of last year, mainly due to the discontinuation of the 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 R$77 million. Within this revenue, R$65 million comes from B2B and R$12 million was from B2C, reverting the decrease in net revenue in the first quarter as previously postponed B2B invoices were now accounted for. The next slide presents the 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 services 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 R$810 million, reflecting a 13.7% increase over the same quarter of the prior year. For the six-month period, net revenue was R$1,614 million, an increase of 13.5% over the same period last year. This growth is mainly driven by a 5.4% increase in net average tickets for medical courses, maturation of medical seats, the addition of 40 seats at the Guanambi campus, strong performance in continuing educational intake, and effective execution in medical practice solutions. In the second quarter of 2024, adjusted EBITDA increased over 28% to R$344 million, with an adjusted EBITDA margin 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 R$742 million, an increase of 24% over the same period of the prior year, with an adjusted EBITDA margin 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, ramp-up of the four Mais Médicos campuses that started operations in the third quarter of 2022, operational restructuring efforts in our continuing educational and medical practice solutions segment, and more efficiency in selling, general, and administrative expenses. Moving to the next slide. The year cash flows from operating activities grew 21%, totaling R$683 million, driven by our robust operational performance. The operating cash conversions ratio was 94% in the first half of 2024. Adjusted net income for the second quarter of 2024 amounted to R$210 million, an increase of almost 60% over the same period of 2023. For the six-month period that ended in June 2024, we also saw an increase in adjusted net income, reaching R$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 R$2.29 for the quarter, a remarkable 62% increase compared to the prior year, and R$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 debt, the soft bank transactions, debentures, accounts payable to selling shareholders, and other financial obligations. We are proud to announce that Afya entered into a loan agreement with international finance corporations to finance our expansion program through acquisition. 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 R$500 million, which shall be repaid in seven equal semi-annual 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 CPIs are achieved. Now, moving to my last two slides, I will discuss our cash and net debt position, also giving more insight into our cost of debt. In the second quarter of 2024, our net debt reached R$1,459 million when compared to December 2023, after reducing its net debt by R$356 million. Even considering the earn-out of R$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 the Unidom business combination. As shown, we also reduced our net debt by over R$150 million 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 our area. Our commitment to enhancing the medical journey through a unified educational system and digital solutions remains steadfast. This approach supports the growth, continuous learning, accuracy, and productivity of healthcare professionals. Looking ahead, we are excited about the promising opportunities that await us. I will now open the conference for a Q&A session. Thank you.

Mirela Oliveira, Analyst

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 is 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 Andre Blanco, CFO

Hi, Mirela. It's Luis speaking, talking about the expected cost of debt. I would say that we're going to present our cost of debt below CDI at least until we have the soft bank transactions with us that is due to 2026. So until then, you can expect that our cost of debt will be below the Brazilian 100% CDI, okay?

Virgilio Gibbon, CEO

Mirela, this is Virgilio. Regarding your second question, the guidance on how to reach the top line, so we are aiming for the range. This commitment here is to reach the range that we are releasing right now. But based on our three segments here, the execution was above the initial expectation for all three segments here, so we are performing better. Regarding the medical solution segment, since last year, the second half of last year, when we did all the restructuring process between continuing medical education and also the old digital services segment, we are having a lot of synergies here. And on digital solutions that now it's called a medical practice solution, we are delivering a positive EBITDA. We are growing close to 20s. Our growth rates for 2024 are expected, and also the positive EBITDA margin around 20. Remember that we were close to zero last year. So it's quite a positive improvement on all products that we are offering under the medical practice solution, but also pushed by the undergrad segment and also continuing medical education. Both of them are also better than expectation, and also better than last year, as you can see in our first half results here.

Operator, Operator

Yes, if I may add, Mirela. The main reasons, the main triggers to keep the margins and to achieve what we are delivering the guidance, what we are promising the guidance is mostly the one that we already have. So as we did a study restructuring between the medical practice solutions and continuing education, also the integration of units 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 margins.

Mirela Oliveira, Analyst

Thank you. That's super clear.

Lucca Marquezini, Analyst

Couple of questions from our side. The first one is the release mentions that one of the reasons for the upward revision in 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 Andre Blanco, CFO

Hi Lucca, I'll take the questions. The first one regarding the better performance in the first semester, basically comes from the results that we've 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 all the synergies that we have with these operations. Another one is better performance margins that we are doing on the Mais Médicos 2 operations that we've launched in 2022. We have delivered better SG&A with all the zero-budget projects that we have implemented here on Afya. So all that said, we got a better performance. And that performance with the Unidom acquisitions and with the additional seats that we've 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 on the best accelerations in terms of net revenues in the digital solutions, we have these accelerated mostly with the B2B sides of the solutions. Remember that in the first semester, we mentioned that we have a 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. As these B2B revenues that came in during the second quarter made during the semester, the revenues grew more than 20% and accelerated the revenue for the segment.

Operator, Operator

And regarding the product, Lucca, the main product that we're selling in the B2B is marketing campaigns for the pharmaceutical industry.

Lucca Marquezini, Analyst

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 considered all the rhythm that we saw from the new intake in the second half. And we had another strong intake with a lot of candidates proceeding close to what we had last year. So it's a very healthy cycle. So it gave us the, again, the right confidence and predictability to upward and update our guidance for 2024.

Operator, Operator

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

Leandro Bastos, Analyst

I have two questions more related to regulation. The first one, I mean, we had kind of the approval, the decision actually by the Supreme Court for the injunctions. And so far 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. Then the second also related is whether the recent approvals have been changing your strategy in terms of the regions for Mais Médicos III, the upcoming auction. And if it might continue to change the timeline also that you expect for Mais Médicos III given those kinds of outstanding injunctions. So that'll be my side.

Virgilio Gibbon, CEO

Okay, Leandro. So the first part was the intake cycle of this release. So we didn't perceive any changes. We had a very positive and healthy cycle. I think we are differentiating a lot our operation in all cities that we have our campuses for the undergrad segment. I think the approvals have been the great majority of them very aligned with the expectation after the definition from the Supreme Court. So everything is running as expected. We still have some approvals to come also from the increase in the number of seats from the normal process that we had in the past, still seeing approvals coming from the Ministry of Education not only based on the decision by the Supreme Court. So everything is running as expected. It's very difficult to measure how will be the impact and the speed of them depending on the capacity of the Ministry of Education to approve and also to analyze everything that they have. But based on the idea on the entire Mais Médicos III program is something around 9,000 to 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. So it's too early in the process to give more any other detail more than that.

Operator, Operator

Yes, and regarding the regions that we are choosing, we are not going to compete for the ones that are already in our group. I'm sorry, we are not going to compete in regions that we have injunctions.

Leandro Bastos, Analyst

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

Luis Andre Blanco, CFO

Yes, I'll take that, Leandro. As a matter of fact, with these new institutions being approved, our pipeline possible top of the funnel has grown. So we have more targets to talk to. We are pretty confident that we can keep the rhythm of 200 seat acquisitions per year. And remember that we need acquisitions and we are ahead of the guidance that we provided since 2022. So we still see with very good eyes to do the M&A with the right price. Right now, we have more targets on the streets to talk to. Of course, we are going to keep the discipline to choose the regions that make sense for us at the right price.

Operator, Operator

The next question comes from Marcelo Santos from JPMorgan.

Marcelo Santos, Analyst

I have two and one clarification. The first question is, could you please comment on the competitive environment in 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 continuing education are contracting and what are the trends there? And the clarification is something that you just said in one of the answers. Did you mention that the margin for the medical practice business is 20% or I didn't understand if you mentioned it was 20 as well as the growth or your comment just referring to the growth and the margin is positive. Just want to understand better if you really said that. Thank you.

Luis Andre Blanco, CFO

Marcelo, I'm going to take the first one regarding the competitive environment for the prep course. The competitive environment in the second quarter is not relevant at this moment because the second and third quarters of this market are not seasonal because the sales are concentrated on the first and the fourth quarter of the year. So it did not impact us in the second quarter and will not be a topic for the third quarter. This will be back on the table when the sales come back in the fourth quarter when we're going to launch the 2025 collections that we start sales of during the fourth quarter. So until this new cycle, nothing is going to change on that.

Operator, Operator

If I may add on this point, you need to remember that the product is not only MedCell, right? When we talk about the residence journey, we are talking about MedCell and other offerings. So our offering today Marcelo is not only the prep course as we had in the past, right? We have also the mentoring that gives a lot of value to MedCell products.

Virgilio Gibbon, CEO

Yes, that's very important. All sorts of prep courses will be better. That's not only the part that initially was delivered by MedCell. So even considering MedCell traditional products, but as we rebuilt the curriculum and the product, we are seeing a strong enrollment growth coming in the prep course arena here. As you can see in our table tree, some more than 30% of students more than in the same period last year. So it's a good sign in our prep course segment. So not only MedCell 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. This 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 will continue to offer to our clients. It's around 30 to 40 different institutions that continue to use our products in the education sector. About the clarification. So we're expecting to grow around 20% this year on medical prep solutions. And also the contribution margin, not only the gross margin improvement, but we are seeing that the results after the other, the restructuring process that we run to in the second half of last year, it's delivering a positive EBITDA around 10 to 15, and we are aiming to reach close to 20%. But that's the contribution margin that we are not releasing that on our reports by segment, just up to the contribution margin.

Marcelo Santos, Analyst

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

Operator, Operator

The next question comes from Mauricio Cepeda from Morgan Stanley.

Mauricio Cepeda, Analyst

We have two questions. The first one about Unidom, what do you 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. And 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 Andre Blanco, CFO

Hi, Cepeda. I'll take this one. Regarding Unidom, as you remember, we closed the deal on the first day of July, and we're pleased with the institutions because they have a very lean structure. It's been 45 days since the closing, and we're still working on the integration plan. We haven't set specific integration dates yet, but we're satisfied with the institution itself. The synergies will align with all our previous transactions, focusing on the top line. During this period, we will get the full capacity, which will include streams, scholarships, and various discounts offered to families and friends or institutions. We plan to review the costs for service provision to ensure the correct structure for our teachers. We will implement our national curriculum there and centralize all back-office operations under our shared services without any increase. These are the types of synergies we expect to achieve in the coming months. Everything is progressing according to the plan we laid out when we signed the deal last May. When we finalized that, we projected that once the institution matures, we might attain around 4.2 times the EBITDA. This is our outlook and best estimate for Unidom, included in our guidance, which reflects these numbers. As for the restructuring in the digital and educational segments, we began this at the start of the year. A major aspect of the restructuring involves transferring the previous Pillar 1 offerings from digital to continuing education. With this transition, we have shifted from a product-based organization to a more comprehensive structure across segments. Instead of having separate product teams for each pillar, we now have one product team overseeing all our services. Similarly, we have consolidated our tech team for all practical solutions. This streamlined approach has enhanced our operational efficiency, both in costs and expenses. We're pleased with these changes, which are now reflected in our guidance. As we deliver improved results, we update our guidance for the year to incorporate scenarios related to the Unidom acquisitions.

Mauricio Cepeda, Analyst

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

Operator, Operator

So as we do not have any more questions, I would like only to give you guys an invitation to our after date that will happen on October 29. We'll be online and in presentation 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.