Earnings Call Transcript - AFYA Q4 2021

Operator, Operator

Thank you for joining us for AFYA's fourth-quarter and full-year 2021 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 content. Forward-looking statements in this presentation include but are not limited to the statements related to our business and financial performance, expectations in guidance for future viewers, or expectations regarding our strategic product initiatives, and the related benefits in 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 thereof. You should not rely on them as predictions of future events. 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 these 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

Thanks everyone for joining us today on our last 2021 conference call. I'm extremely proud to present a model year of showing strong results on performance since 2021. We successfully executed our strategy of certainty, as evidenced by the commitment of our team members and the consistency of our business model. Despite another year in the worldwide pandemic, during this call, I will run through three main topics. First, I will show where we are heading in our business strategy for education and Digital Services. Second, the achievements in our solutions on the ESG front. And last but not least, our financial highlights and guidance demonstrating that AFYA will continue to deliver strong performance going forward. Now, moving to the next slide, we can see how AFYA has succeeded in its opportunities and yet has a great future ahead with the number of seats getting higher each quarter. The expansion of our offerings in the undergrad business continues to grow strong. So far, AFYA has reached 2,759 seats for undergrad medical school, with four new medical units and 28 seats expected to start operating in the second semester of 2022. This represents almost 20,000 students expected. Our pipeline for acquisition is fertile, and we still have the opportunity to expand more than 1,000 seats among our current campuses. The growth expectation for the digital strategy is also strong. By 2022, we expect to boost our market penetration and consolidate our offerings to B2B clients, which will allow us to leverage our Physician network, unlock new revenue streams, and create value for the healthcare system. Our plan is to monetize these services by addressing the needs of the pharmaceutical industry, providers such as pharmacies and hospitals, and the corporate market itself by providing access and increasing demand and efficiency. The total addressable market for this strategy is $24.4 billion, segmented among these players. Moving to Slide Number 5, as we promised at the beginning of the year, our ESG metrics were presented on an ongoing basis in each quarter, proving our evolutions are consistent, and that our ESG agenda is becoming more robust as we have embedded sustainability into all we do. Throughout the year, we have achieved several relevant goals. Number 1, we signed the UN Global Pact. Number 2, we committed to having at least 50% of women in our management positions by 2023, in conjunction with the Human Rights Exchange. Number 3, we disclosed our second annual ESG report, which includes the most relevant information about our agenda. Number 4, we announced that Sustainalytics, a leading ESG and corporate governance research firm, rated AFYA as a low-risk ESG-rated company due to our strong policies and practices. Number 5, reflecting our great results and market actions, we received over 1,000 awards as the best in education. And we achieved the Office 360 degrees award in multiple categories such as the best education segment and sustainability in education. In the overall ranking of 418 companies in Brazil, we were ranked 13th. And number 6, we are on the 13-resilient conference to join the gender balance equality index, which aims to track the performance of public companies committed to transparency and data reporting. I'm very proud to say this is just the beginning in this direction. Now, moving to my last two slides in this presentation, I will show our financial highlights and our guidance for the entire year of 2022. We ended 2021, achieving our guidance. Adjusted net revenue increased by 45% year-over-year, reaching R$1 billion, 753 million. This was followed by an adjusted EBITDA growth of 34% year-over-year, reaching R$755 million, with a margin of 43.1%. We also reported a cash position of R$749 million and record adjusted operating cash flow generation of R$667 million, which is 71% higher than last year, reaffirming our strong profitability and high cash generation. Moving now to the operational updates of the quarter, our undergrad medical students reached more than 16,000, representing a 45% growth compared to the same period last year. Operating seats grew by 31%. On additional service highlights, our net revenue grew 63% year-over-year, and our ecosystem reached 248,000 monthly active users, which represents more than 33% of the Brazilian market of physicians. Consistent growth and success in our digital services, as well as our ESG evolution, is how we are evolving and empowering our mission to become a reference in medical education and digital services, encouraging students and physicians to transform their ambitions into rewarding lifelong experiences. We're proud of our business and what we've achieved, as well as what we are planning for the future. The resilience and high predictability of our business model enabled us to introduce our new guidance for the entire year of 2022, taking into account the successful acceptance of new medical students, ensuring 100% occupancy across all medical schools, and the recovery of the continuing education segment. Net revenue is expected to be between R$2 billion,280 million and R$2 billion,400 million. And adjusted EBITDA is expected to be between R$935 million and R$1 billion,50 million, excluding acquisitions that may be concluded after posting these figures. These figures show a strong year ahead and represent incredible operational growth of more than three times compared to AFYA's results in 2019 when it became a public company almost three years ago. Now, with this update on our financial results, I'll turn the call over to Luis Blanco, our CFO.

Luis Andre Blanco, CFO

Thank you, Virgilio, and good evening, everyone. Moving to slide 10 to discuss the financial highlights of the fourth quarter and full year of 2021. It is with great satisfaction that I present another strong and consistent year of results for AFYA. Since 2019, we've seen a positive trend in our key metrics in all quarters. Adjusted net revenues for the quarter were up 45% year-over-year to R$505 million, reflecting the maturation of medical seats, an increase in the average ticket of the medical program, and the consolidation of acquisitions of medical schools and digital services. For the year, the increase was also 45%, totaling R$1.753 billion. It's important to note that the adjustment of R$7.1 million in tuition fees in the fourth quarter was due primarily to individual legal and public civil proceedings related to COVID-19, which peaked in December due to the Supreme Court decision. Adjusted EBITDA for the quarter was up 26% year-over-year to the R$195 million range. For the year, adjusted EBITDA was R$755 million, an increase of 34%. For both periods, the adjusted EBITDA margins were below the reported margins of last year, mainly due to the consolidation of iClinic, along with lower performance from the continuing education segment. Adjusted net income for the quarter was R$99 million, slightly below the same period of the prior year. For the year, net income increase was in line with 2020, totaling R$440 million. For both periods, adjusted net income results were affected by increased financial expenses that were related to a higher net debt position connected to nine acquisitions executed in 2021 that were partially funded by selling shareholders in some cases and partially funded through a transaction with SoftBank. Adjusted cash flow generation was record-breaking this year, increasing over 70% year-over-year to R$666 million, resulting in a cash conversion ratio of 101% compared to 76% in the same period of 2020. On the right side of the screen, we can see bullet points summarizing other financial highlights. For the year, organic growth in adjusted net revenue for our undergrad program was almost 14%. As Virgilio previously mentioned, we've achieved our guidance for 2021, reaching R$752 million and 43.1% adjusted EBITDA margin. This takes into account the successful acceptance of new medical students for the second half of 2021 and the consolidations of additional companies and medical school acquisitions, excluding RX Pro. Moving to Slide 11 for discussions on key metrics by business units. Starting with the undergrad programs, our number of medical students grew by 25.2%, reaching more than 60,000 students, with operating medical seats increasing 31% year-over-year to 2,481 operating seats. In terms of total tuition fees for the year, we reached R$1.990 billion, up from R$1.237 billion from the prior year, marking a 61% increase. Talking about revenue mix, 76% of this is derived from medical school students and 88% from health-related courses. The average ticket for the year was R$8,600, a 7% growth compared to R$8,100 tickets from the prior year. Continuing education metrics saw a 32% decrease in net revenue, from R$107 million to R$73 million, with a decrease of 24% in the number of students. This decrease was driven mainly by reductions in the student base, which had two reasons: programs not being offered since the first semester of 2021 due to the pandemic and physicians’ decisions to postpone admission to specialization courses due to the COVID-19 pandemic. Nevertheless, with the opening of six new campuses in 2021 and expansion of the specialization portfolio, along with the rebound of the admission process, the decrease in the continuing education segment has reduced in the fourth quarter, and we expect better results during 2022. Moving to Slide 13, I will discuss the digital service operation metrics. In the first graphic on the slide, you can see our active paying users per pillar. These are the active users that generate revenues. Combining all active paying users for the year, we’ve reached approximately 165,000 paying users. Content and technology for medical education grew by 66% year-over-year, with a lower ticket and a different mix of products. Clinical management tools reported almost 18,000 payers, and clinical decision software has more than 125,000 users. These results reflect a 63% increase in additional service net revenue since last year, driven by the consolidation of acquired digital companies and organic growth from WhiteBook, partially offset by lower performance. The last graph on the page shows the monthly active users, also per pillar. Once again, combining all users, we reached almost 250,000 students and physicians across Brazil. This represents more than 33% of all medical students and physicians in Brazil, as Virgilio mentioned before. Now, moving to my last slide, I will discuss our cash and net debt position. Cash and cash equivalents at the end of the quarter were R$749 million, a decrease of 28% compared with the same period last year. At year-end, net debt totaled R$1.4 billion compared to net debt of R$167 million at the end of 2020. This increase was mainly due to the closing of nine M&A transactions, partially offset by free cash flow generation. This ends our prepared remarks. With this opportunity, we would also like to invite all of you to our virtual AFYA investors' ESG Day, which will take place on April 27 at 09:00 AM in decent time. I will now open the conference for the Q&A session.

Operator, Operator

Good evening, everyone. Marcelo, you may talk.

Marcelo Santos, Analyst

Hi, good evening. Thank you very much for the questions. I have two. The first, I wonder if you could comment a bit more on the higher competitiveness in the medical prep business. What kind of player is creating this higher competition? What are your plans to do about it? How should we think going forward? And the second question is, what kind of ticket assumption is embedded in the guidance for 2022 for medical courses? These are the two questions. Thank you.

Virgilio Gibbon, CEO

Hi Marcelo. This is Virgilio. In the residents' square course arena, we saw at least 10 additional competitors entering the market in 2021. Additionally, the market was impacted by all the resident exam schedules due to the pandemic. We had some exams that were postponed, and all the decisions regarding the program costs were impacted by scheduling issues with the resident exams. So, we experienced a higher competitive landscape impacting our margins, prices, and also postponed demand due to these disruptions, which delayed the scheduling for the resident exams. Regarding the second question about the guidance, Luis will elaborate.

Luis Andre Blanco, CFO

Hi, Marcelo, good evening. Regarding the ticket adjustments on the undergrad side of the business, we will implement a readjustment of 7.5% for new students and existing students in 2022. So, we anticipate this increase in our tickets, and additionally, we expect the maturation of tickets to impact our existing base, as we will graduate students with lower tickets than the new intake. Together, these two effects should lead to an increase in ticket prices of around 10%, or a little bit more.

Operator, Operator

Our next question comes from Vinicius Figueiredo. Thank you, Marcelo. Vinicius, you may go.

Vinicius Figueiredo, Analyst

Good evening, thanks for taking my question. My question is regarding your data-driven expectations for top line and EBITDA. We can see even with the ongoing duration of seats in 2023, healthy price dynamics, margins should not expand substantially, right? What is the main reason behind that? Should we not expect digital services to increase their participation in the revenue mix? If I may, a second question would be on digital services; from an organic perspective, we saw marginal year-over-year growth. If you could explore this performance, it would be great. Thanks.

Virgilio Gibbon, CEO

Hi, Vinicius. In terms of organic growth for 2022, we expect the top line to move above 30%, considering the median of the guidance on our top line. More than 50% of this growth will be driven by organic growth maturation and also by price adjustments in tuition for 2022. Regarding digital services, yes, we're expecting even higher growth coming from the digital services segment, albeit with lower margins. That’s why we may see a slight decrease in our overall margins when considering education and also digital services. Specifically in education, for our undergrad business, we will have 12 months of metrics from UNIGRANRIO and UNIFIPMoc, both of which are very significant contributions to our total revenue from 2021 to 2022. We continue to extract synergies from UNIGRANRIO, enhancing their contribution margin. Thus, while we expect stable margins in the undergrad business, the contribution from digital services will lead to a slight decline of about 1 to 1.5 percentage points in margins year-over-year in our overall guidance for 2022.

Operator, Operator

And if I may add, Vinicius, an important point is that 2022 will be the year where we expand our B2B strategy. As you know, we need to structure everything; we need to hire more people, structure processes, and build products. We already have more than 20 contracts in the industry, significantly with the education and services sector. This is the first year of our strategy, and we expect to invest money to develop this sector. This is one of the biggest reasons for the marketing decrease, plus as Virgilio said, we have stable margins going forward.

Luis Andre Blanco, CFO

This is Luis speaking, regarding your second question about organic growth in the digital segments. We must remember that we made six business combinations in the digital segments during 2021. Thus, the comparison for organic growth between the fourth quarter of 2021 and 2020 only includes the MEDCEL and PEBMED businesses. The results were affected due to performance issues arising from the MEDCEL business. However, we see that PEBMED's digital support system is growing over 30%, and the performance issues we experienced in the fourth quarter were solely related to the METSO business.

Operator, Operator

Of course. Our next question comes from Vitor Tomita from Goldman Sachs. Vitor, you may go.

Vitor Tomita, Analyst

Hello. Good evening, all. Two questions from our side. Thanks for taking our questions. The first one is a follow-up to Vinicius' question. Given all that in your guidance, how much roughly organic growth are you assuming for the digital units now that you have all the acquisitions influencing the results? The second point here is how do you see continuing education intakes performing at this point? And how much growth are you assuming for these units in guidance? Thank you.

Luis Andre Blanco, CFO

Okay, hi, Vitor. Thank you for your question. It's Luis speaking. Regarding the embedded organic growth assumption in the digital segment, we expect approximately 50% growth during 2022. Keep in mind that we have these six business combinations that we executed during 2021. In this context, we anticipate this 50% organic growth year-over-year in terms of net revenues. Regarding the continuing education side, we are seeing a very good performance, with intakes running about 40% above the same period last year. So the intake process is going very strong, and we have already enrolled most of the classes. We expect very positive developments in continuing education during 2022.

Operator, Operator

So just a reminder, if you want to ask a question, please raise your hand. The next question comes from Mauricio Cepeda from Suites Maui. You may proceed.

Mauricio Cepeda, Analyst

Hi everyone. Hi, Virgilio, Andre, thanks for the time. I have a question about competition as well. But instead of asking about the prep courses, let me go to the continuing education. We know that you faced some circumstantial challenges due to the pandemic. But do you see an increase in competition in continuing education as well? Given that this seems to be an attractive niche in the sector? And secondly, regarding ticket prices, which are a little bit below inflation, what are the reasons behind that? Was that intentional to maximize volumes? Or do you see any market difficulties that could prevent better price adjustments? Thank you.

Virgilio Gibbon, CEO

Hi, Cepeda. Thanks for both questions. Regarding the competition in continuing education, we are not observing a tough market. In fact, it's quite the opposite. We changed our prices, introduced several new programs, and opened new campuses to operate specialization programs. We're seeing very strong demand. Remember that our programs typically span two to three years, with very high tuition values. This presents a huge opportunity, and we are experiencing a record student intake for our continuing education operations. Regarding ticket prices, in understanding how we set our prices for the following year, we begin the enrollment process for the coming year in September, which means we had to set prices back in September 2021. At that time, inflation rates were still moderate. Although the 7.5% tuition increase we set for our existing student base was reasonable then, we also raised prices for new students a bit more aggressively, with some programs seeing increases of nearly 15% for incoming students. In balancing these changes, we’re graduating students with lower tickets while welcoming a new cohort with a 7.5% increase and fresh students at even higher rates. This pricing strategy aims to ensure a smooth transition amidst fluctuating inflation rates.

Operator, Operator

Cepeda, I’ll use your question to revisit the competition in the resident prep market. One important thing for all of you to understand is that we consider the market stable in terms of resident seats, and the number of competitors in this market has nearly doubled. The competitors we are seeing are these smaller players focused on specific specializations. They tend to have digital offerings that can be less complex and require less investment than ours, which has led to lower price competition. We are critically assessing our portfolio and figuring out how to make this purchasing volume more accessible to students. We also acquired a company called Alem da Medicina, which is well-known among students in Brazil and employs digital influencers to improve engagement. We are working to refine our positioning in this area, and you can expect updates soon. Thank you for your questions. I see that Cepeda was the last question. If you still want to ask a question, please raise your hand. Before that, I would like to highlight our upcoming ESG day next week. I hope to see you all there. Please remember to register for the event; the link is available on our website. I see that we don't have any more questions. We are available if anyone would like to follow up. If anyone wants to reach out, please send us an email to our Investor Relations contact. Thank you so much, and have a good night.