Afya Q2 2024 Earnings Call Transcript

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August 14, 2024

There are 10 speakers on the call.

Operator

Known and unknown risks, uncertainties and other factors that may cause AFE'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 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.

Operator

In addition, management may reference no IFRS financial measures on this call. These measures are not intended to be considered in isolation or as a substitute of 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 Vigile Gibbon, our FCO, who will begin with slide number 3.

Speaker 1

Thank you, Renata, and thanks to everyone for joining us today for our 2nd quarter and first half conference call for 2024 results. Let's start with our performance highlights. 1st, net revenue increased almost 14%, reached R810 $1,000,000 followed by an adjusted EBITDA growth of 28% year over year, reaching R344 $1,000,000 with an adjusted EBITDA margin of 42.5 percent, an impressive 4.90 bps over last year. Adjusted net income reached BRL210 1,000,000 marking a 59% growth compared to the same period in 2023. Meanwhile, our adjusted EPS climbed to R2.29 dollars reflect a 62% increase over the previous year.

Speaker 1

We delivered robust cash flow from operating activities, totaling R682 1,000,000, 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 R723 million dollars at the close of the quarter. Moving to our operational updates for the quarter, medical seats reaches 3,200 approved seats. Additionally, our number of medical students has reached 22,661 representing a 9% volume growth compared to the Q2 of the previous year. It's also important to mention that if our recent acquisition of Unidom and the addition of 80 seats authorized at Unima in the Q3 of 2024, we have now reached a total of 3,583 approved seats as of today.

Speaker 1

We also observed impressive results in net revenue for our continued education business with the segment growing by over 12% year over year, resulting in a net revenue of R127 $1,000,000 in the 1st 6 months period of 2024. Similarly, our medical pet solutions demonstrated significant progress with a revenue increase of 13% compared to first half of twenty twenty three, concluding the 6 month period with a net revenue of BRL77 1,000,000. Moving now to Slide number 4, we can now observe our new business structure taking shape comprised of 3 segments, undergrad programs, continuing education and medical grad solutions. I would like to reiterate that notable change have occurred in continued education. Entities, privileges account for as a content and technology for medical education within Medical PAC solution are now accounted for in the continuing education segment.

Speaker 1

Simultaneously, the segment formerly known as digital services was renamed to Medical Practice Solutions. Beginning with the undergrad segment, we observed significant progress throughout the quarter, including an increase of over 5 point 4% in our net average ticket from medical course, organic growth in all segments and expansion in gross margin and the acquisition of Unidom. Continued 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 Pet Solutions 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.

Speaker 1

We have also seen a recovery in our B2B net revenue for this segment as some of the invoices that were postponed during the Q1 of 2024 are now being accounted for. Moving now to Slide number 5. We are pleased to announce an update to our office guidance following the recent acquisition of Omnidone, the addition of 80 medical seats at Unimalagoras, the first half results that have exceeded our initial expectation and also our robust intake process, which once again ensured 100 percent of occupancy. Our updates include a new net revenue range between R3.225 billion dollars to R3.325 billion dollars and an adjusted EBITDA range between R1.375 billion and R1.475 billion dollars and a CapEx range between R220 $1,000,000 and R260 million dollars for our capital expenditures. And now I'll be turning the call over to Luis Blancou, Afi's CFO to provide more insight into the financial operational matters.

Speaker 1

Thank you.

Speaker 2

Thank you, Virgilio, and good evening, everyone. Starting with slide number 7 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 GWA B, authorized in January 2024. The net average ticket for our medical school grew by 5.4%, reaching BRL8,922 in the first half of twenty twenty four. Furthermore, undergrad program net revenue saw an increase of more than 13%, reaching over BRL1414 million, 86% of which is related to medicine and 94% from health related courses.

Speaker 2

All these efforts highlight one key point. Our medical educational business remains and will continue to be the foundations of our business in the short and medium term, driving consistent growth alongside strong profitability and cash generation. On the next page, I will present our continuing educational metrics. Strategically, we look into our continued educational considering 3 journeys. Starting from the left to the right, with the residency journey, we observed a 33% increase in active payers, reaching 13,058 students at the end of the period.

Speaker 2

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 6 month period of the prior year. In summary, our efforts enable the continued education net revenue to reach BRL 128 1,000,000 in the first half of twenty twenty four compared to BRL114 1,000,000 in the first half of twenty twenty three, reflecting a growth of over 12%. This growth includes a 15% increase from B2P and a 13% decrease from the B2B offerings. Moving to slide number 9, I will discuss the Medical Practice Solutions operational metrics.

Speaker 2

On the first graph, you can see our total active payers, those generating revenues in the business to physician segment. With a continuous growth trend, we've 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 counting stands over 253,000 compared to 257,000 in the first half of last year, mainly due to the discontinuations of PubMed 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 BRL 77,000,000. Within this revenue, BRL 65,000,000 dollars come from the B2B, and R12 $1,000,000 was from B2B, reverting the decrease in net revenue in the Q1 as privilege postponed B2B invoices were now accounted for.

Speaker 2

In the next slide, we also present the Afia ecosystem. We are proud to present the significant impact that AFIA has made on the healthcare community in Brazil. At the end of the Q2 of 2024, our ecosystem includes over 320,000 users who are actively engaged with our service and products. Moving forward to Page 11, I want to discuss our financial overview for the Q2 of 2024. Starting with the next slide.

Speaker 2

With great satisfaction, I'm pleased to present another robust quarterly result for Afya. Net revenue for the Q2 of 2024 reached BRL810 1,000,000, reflecting a 13.7% increase over the same quarter of the prior year. And for the 6 month period, net revenue was BRL1614 million, an increase of 13.5% over the same period of last year. This growth is mainly driven by 5.4% increase in net average tickets for medical courses, maturations of medical seats, the addition of 40 seats at the Guanabik campus, strong performance in continuing educational intake, and effective execution in medical practice solutions. In the Q2 2024, adjusted EBITDA increased over 28% to BRL344 million with an adjusted EBITDA margins of 42.5%, marking an increase of 4.90 basis points compared to the Q2 2023.

Speaker 2

For the 6 month period, adjusted EBITDA was BRL 742 million, an increase of 24% over the same period of the prior year, with an adjusted EBITDA margins 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, Jawaharlal integration process in November 2023, the ramp up of the 4 MICE Medical Campus that started operations into Q3 of 2022 operation restructuring efforts in our continued educational and medical practice solutions segments, and more efficiency in selling, general and administrative expenses. Moving to the next slide. The year's cash flows from operating activities grew 21%, totaling BRL 683 million, driving by our robust operational performance. The operating cash conversions ratio was 94% in the first half of twenty twenty four.

Speaker 2

Adjusted net income for the Q2 of 2024 amounted to BRL 210,000,000, an increase of almost 60% over the same period of 2023. For the 6 month period that ended June 2024, we also saw an increase in adjusted net income, reaching BRL 461 million, representing 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. AFIA increased its tax efficiency by incorporating entities and increasing distribution from subsidiaries. Regarding adjusted EPS, we achieved BRL2.29 for the quarter, a remarkable 62% increase compared to the prior year and BRL5.03 per share in the 1st 6 months 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 debts, the SoftBank transactions, debentures, accounts payables to selling shareholders and other financial obligations.

Speaker 2

We are proud to announce that Afia entered in a loan agreement with International Finance Corporations to finance our expansion program through acquisitions. The financing is IFC 1st sustainability linked loan based on social targets in the educational sector. According to the financial terms, IFC will low end up to BRL500 1,000,000, which shall be repaid in 7 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 pips if sustainability KPIs are achieved. And now moving to my last two slides, I will discuss our cash and net debt positions, also giving more insights into our cost of debt.

Speaker 2

In Q2 2024, our net debt reached BRL1459 million when compared to December 2023, after reduced its net debt by BRL356 million. Even considering the FIP 1,000,000 earnout of BRL 49,000,000, we were able to reduce our net debt per EBITDA from 1.6x in 2023 to 1.5xinthe2ndquarterof24, including Unidom Pedro Business Combination. As shown, we also reduced our net debt over BRL150 1,000,000 more 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 areas.

Speaker 2

Our commitment to enhancing the medical journey through a unified educational system and digital solutions remain steadfast. This approach supports the growth, continuous learning, accuracy and productivity of health care professionals. Looking ahead, we are excited about the promising opportunities that await for us. I will now open the conference for Q and A sessions. Thank you.

Operator

The first question comes from Mirela from Bank of America. Mirela, you may now turn.

Speaker 3

Good evening, Yoshio, Luis and Renata. 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 it's 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.

Speaker 3

So could you tell us a bit of how is the margin dynamic in this business, especially for the for the 2nd semester?

Speaker 4

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 SoftBank transactions with us that is due to 2026. So until there, you can expect that our cost of debt will be below the Brazilian 100 percent CDI. Okay.

Speaker 5

Mariela, this is Brigiglio. Regarding your second question, the guidance, how to reach the top line, actually, we are aiming the range. That's commitment here is to reach the range that we are releasing right now. But based on our 3 segments here, so the execution was above the initial expectation for all the 3 segments here. So we are performing better.

Speaker 5

Regard the medical solution segment, since last year, the second half of last year, when we did all the restructuring process between Continuum at Education and also the digital service, 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 expected and also the positive EBITDA margin around 20s. Remember that we were close to 0 last year.

Speaker 5

So it's a quite positive improvement on all products that we are offering under the medical practice solution, but also pushed by undergrad segment and also continued med education. Both of them are also better than expectation and also better than last year as you can see on our first half results here.

Operator

Yes. If I may add, Mirela, the main reason, the main triggers to keep the margin and to achieve what we are delivering the guidance, what we are promising the guidance is mostly the ones that we already have. So as Vijita said, the restructuring between the medical practice solutions and continuing education. Also, the integration of unit that comes with a better margin through the whole year and the 4 MICE Medical units that we opened in the 2nd semester of 2022 that are now delivering better margins.

Speaker 3

Thank you. That's super clear.

Operator

Thank you. And the next question comes from Mukeshini from Itau.

Speaker 6

Can you hear me, guys?

Operator

Now we can.

Speaker 6

Okay. Thank you. Thank you for taking our questions. A couple of questions from our side. The first one is the release mentions that one of the reasons for the upward revision and guidance was the performance in the 1st semester.

Speaker 6

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 second one is, we saw an acceleration in the revenue growth for the Medical Practice Solutions segment. Can you please provide some more color on which of the products led to the stronger performance? That's it from our side. Please.

Speaker 4

Hi, Luca. I'll take the questions. The first one regarding the better performance in the first semester, it's basically come from better results that we've got from the integrations of Unima and Fitschabotau 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 the whole synergies that we have with these operations.

Speaker 4

Other one is better performance margins that we are doing on the Maison Medical School operations that we've launched during 2022. We have delivered better SG and A with all the zero budget project that we have implemented here on Afia. So all that said, we got this performance better. And we that performance with the Unidom acquisitions and with the additional seats that we 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.

Speaker 4

Regarding the second question, regarding the best the accelerations in terms of net revenues in the solutions, the digital solutions. We have these accelerated mostly with the B2B side of the solutions. Remember that in the 1st semesters with nations that we have part of the revenue recognitions dropping from the 1st to the 2nd quarter. We've finalized these service providers for the pharmaceutical industries and then we could recognize revenue during the Q2. And these B2B revenues that come during the Q2 made during the semester.

Speaker 4

The revenues grew more than 20% and accelerating the revenue for the segments.

Operator

And regarding the product, Luca, the main product that we are selling in the B2B is marketing campaigns for the pharmaceutical industry.

Speaker 6

That's very clear guys. Thank you very much.

Speaker 5

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

Speaker 6

Perfect. Thank

Operator

you. Thank you, Luca. The next question comes from Leandro Bastos from CIT. Leandro, you may now go.

Speaker 7

Hey, guys. Thank you. I have kind of 2 questions more related to regulation. First one, I mean, we had kind of the approval, the decision actually by the Supreme Court for the injunctions. And so far, we have we haven't seen some approvals.

Speaker 7

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 Masomedica Street, the upcoming auction. And if it might continue to change the timeline also that you expect from Masimo Medical 3 given those kind of outstanding junctions?

Speaker 7

So that will be on my side.

Speaker 5

Okay. The other also the first part was the intake cycle of August release. So we didn't receive any changing. We had a very positive and healthy cycle. I think we are differentiating a lot our operation in all cities that we have.

Speaker 5

Our campuses for the undergrad segment. I think the approval, it's been the great majority of them very aligned with the expectation after the definition from the Supreme Court. So it's everything running as expected. We still have some approvals to come also from the increase of number of seed from the normal process that we had in the past, still seeing some approvals coming from the Ministry of Education, not only based on the decision by the Supreme Court. So it's everything running.

Speaker 5

As expected, it's very difficult to measure how, will be the impact, and the speed of them because depend 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 maize magical street program, it's suffering around 9,000 to 10000 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, still early in the process to give more any other detail, more than that. Okay?

Operator

Yeah. And regarding the regions that we are choosing, we are not going to compete for the ones that are already in my. I'm sorry. We are not going to compete on regions that we have injections.

Speaker 7

Mhmm. Great. And just kind of, if I may, another one. In terms of the M and A pipeline, this has been changing with the injunction. I don't know any companies that won and eventually might become targets.

Speaker 7

Did your pipeline change with that? Are you seeing more opportunities or not really?

Speaker 4

I'll take that, Alejandro. As a matter of fact, with these new institutions being approval, So our pipeline, possible top of the funnel has grown. Okay? So we are we have more targets to talk. We are pretty confident that we can keep the rhythm of 200 seats acquisitions per year.

Speaker 4

And remember that with unit acquisitions and we are ahead of the guidance that we provided since 2022. So we still see with a very good eyes to do the M and A with the right pricing. Right now, we have more targets on the streets to talk to. And of course, we are going to keep the discipline to choose the ratios that make sense for us at the right price.

Speaker 7

Great. Thank you.

Operator

And just a reminder, if you want to ask a question, just please raise your hand. The next question comes from Marcelo Santos from JPMorgan.

Speaker 8

I have 2 and one clarification. The first question is, could you please comment on the competitive environment on 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 continued education is contracting and what are the trends there?

Speaker 8

And the clarification is something that Brasilio said in one of the answers. Brasilio, did you mention that the margin for the medical practice business is 20% or I understand I didn't understand if you mentioned it was 20% as well as the growth or you're just comment referring to the growth and the margin is positive. Just want to understand better, if you really said that. Thank you.

Speaker 4

So 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 the third quarters of this market It's not seasonal because the sales are concentrated on the first and the Q4 of the year. So did not impact us in the second quarter and will not be a topic for the Q4 for the Q3, sorry. This will be back on the table when the sales come back is the Q4 when we're going to launch the 2025 collections. We start sales of it during the Q4.

Speaker 4

So until that until this new cycle, nothing we're going to change on that.

Operator

If I may add on this point, you need to remember that the product is not only MedCel. Right? When we talk about the residents' journey, we are talking about MedCel and AlindaMedCena. So our offering today, Marcel, is not only the prep course as we had in the past. Right?

Operator

We have also dementia that gives a lot of value to Medcel product.

Speaker 5

Yeah. That's very important. It's all the sort of prep courses embedded that not only the product that initially was being delivered by Medcel. So even considering Medcel traditional product, but as we rebuild the curriculum, the product, we are seeing a strong enrollment growth coming on the prep course arena here. As you can see on our table tree, it's on the 30 more than 30% of students more than the same period last year.

Speaker 5

So it's a good sign on our prep and prep course segments. So not only mid sell here. Okay, Marcel. Take your second question here about the b to b revenues on continuing medical education. This is not core.

Speaker 5

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 continued medication. But it's something that we are not shutting down the offer but we continue to offer to our clients. It's around 30 to 40 different institutions that continue to use our products in the education sector.

Speaker 5

About the clarification, so we expecting to grow around 20s this year on medical pet solution. And also, our contribution margin, not only the gross margin improvement, but we are seeing that the results after 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 a contribution margin that we are not releasing that on our reports by segment, just up to contribution margin.

Speaker 8

Perfect. Thank you very much. Contribution will be gross margin. Okay. Thank you very much.

Operator

The next question comes from Sepega from Morgan Stanley.

Speaker 9

Hi, Virgil, Blanco, Renata. Thank you for the opportunity. 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 time frame of the integration. So a little bit on the impact of Unidom.

Speaker 9

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 choose to concentrate in some few digital services? So basically, if there is a different strategy or a different position in there? Thank you.

Speaker 4

Hi, Sepeida. I'll take this one. Regarding Unidom, and remember all that we closed the deal in the 1st day of July, we

Speaker 2

see

Speaker 4

very good institutions that was with a very lean structure. So we're very happy with the transactions. We have 45 days since the closing. So we're still working on the integration plan. We don't have the integration dates yet defined, but we are very happy with the institution itself.

Speaker 4

The synergy will come with in the same line with all the transactions that we've made as of today. So they are concentrated in top line. We're going to have the full fullness of the capacity during this period. We're going to have the stream, the scholarships and some kinds of discounts that were given to family and friends or in institutions. We're going to revisit the costs of to provide the service regarding the correct structure for the teachers.

Speaker 4

We're going to implement our national curriculum over there, and we're going to centralize all the back office operations in under our shared service without increasing it. So these are kind of synergies that we're to achieve in the next couple of months. So, everything is occurring according to the plan that we've announced when we signed the deal in May in last May. So when we did that, we put that after we got the maturations, we're going to reach an EBITDA to EBITDA when the situation is mature with 4.2 times a v EBITDA. So this is our view and our best view for Unidom for the semester is incorporated in our guidance.

Speaker 4

So the number is over there. Regarding the restructuring of the digital segment and the educational segments, We've made these in the very, very beginning of the year. So we started this restructuring we started this year with this restructuring in place. One of the major part of the restructures is was to move the old pillar 1 offerings from the digital to the continued educationals. And with these movements, each one of the segments, we started to not be we started to not be a structured pair of product or pair family of product, but we started to be organized in this segment as a whole.

Speaker 4

So instead of having a product team, for instance, pair each one of the pillars, we started to have one product team for all the service that we have. We started to have 1 tech team for all

Speaker 2

the service practical solutions for all the solutions that we have. So we lean up our structure for the year. And with that, we gain a lot of efficiency both in terms of costs and expenses. So we're very happy with that and we've put these movements within the guidance and as we are delivering

Speaker 4

better results, we incorporate all these scenarios within the Unidom acquisitions to update our guidance for the year.

Speaker 9

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

Speaker 5

Yes, exactly that.

Speaker 9

Thank you.

Operator

Of course. So as we do not have any more questions, I would like only to give to have to give you guys an invitation about our IFRS Day that will happen on October 29th will be online and in presentation mode, and we're going to send more details shortly. Thank you, Warf, all for being with us today, and we hope to see you next time. Have a good night.

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Key Takeaways

  • Net revenue rose 13.7% to BRL 810 million in Q2, while adjusted EBITDA jumped 28% to BRL 344 million, lifting the margin to 42.5% and driving adjusted EPS up 62%.
  • Medical student enrollment climbed 9% to 22,661 students and approved medical seats increased to 3,583 after the Unidom acquisition and 80 new seats at Unima.
  • Management upgraded full‐year guidance to BRL 3.225–3.325 billion in net revenue and BRL 1.375–1.475 billion in adjusted EBITDA, reflecting stronger-than-expected H1 performance.
  • Operating cash flow grew 21% to BRL 683 million with a cash conversion of 94%, while net debt fell by BRL 356 million to BRL 1.459 billion, lowering net debt/EBITDA to 1.5x.
  • Recent segment restructuring and integrations drove margin expansions across undergrad programs, continuing education, and medical practice solutions, with active payers up 13% in the latter segment.
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Earnings Conference Call
Afya Q2 2024
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