Afya Limited

Good morning, ladies and gentlemen, and welcome to AFIA's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Renata Cotto, AFIA's head of IR. You may begin.

Good morning, everyone. Thank you for joining us for ASEAN's third quarter 2020 conference call. With me on the call today is APE's CEO, Virgilio de Bon and Luiz André 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 risk, uncertainties, and other factors that may cause or actual result to differ materially from those contemplated by the 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 impacts from COVID-19. These risks include those more fully described in our filings with securities and exchange commissions. The forward-looking statements in this presentation are based on the information available to us as of today's show. 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 the isolation or as a substitute for results prepared in accordance with IFRS. We have provided a reconciliation of these no IFRS financial measures to the most directly comparable IFRS financial measures in this presentation. Let me now turn the call over to Vigilio Chabon as the CEO and starting with slide four.

Thank you, Hanata, and thanks, everyone, for joining us today. I hope that you and your families are all doing well. Since our last earnings fall, the overall business environment did not material change. Our key priority remains the health and safety of our students, faculty, and employees. Although there has been some disruption from COVID-19, our teams devoted to leverage our online and virtual technology capabilities and adjust often for our students that allow us to generate some results this quarter. We once again saw organic revenue growth, contributions from acquisitions, underlying margin expansion, and cash flow generation. Before we start with our financial and operational highlights, I'm proud to share with you that we have just refreshed our brand. We are the only complete math education platform serving every stage of the doctor's career, providing solutions and methodology for personalized experience. And when company awareness grows, its brand also does. So this is our new logo that reflects our DNA and will support gradually every service and local brand. Please take a few minutes to watch our brand manifesto. Moving to page five, we'll discuss our main highlights. Starting with our top line, third quarter adjustment rate increased 52% year over year. mostly due to maturation of our medical school seats and consolidation of acquired confidence. It's also important to highlight that the discounts granted by the state decree and legal proceedings due to COVID-19 on-site classes restrictions did not impact us materially and represent around 1% of our net revenue in this third quarter. In 2020, profitability continues to run ahead of last year, as we not only grow the business, but we are capturing seniors from acquisitions to leverage that growth. Adjusted BIDA margin increased 340 basis points year over year, and the income was up 47% to 101 million reais. At the end of the quarter, We had approximately $1.1 billion in cash and cash equivalents on our balance sheet, and the cash conversion for nine months 2020 was 86%. Despite any short-term challenges posed by COVID-19, we remain confident in our strong cash flow and have balance sheets to manage through the current crisis and beyond. With respect to M&A, our team continues to successfully execute both on generating and closing new business, as well as capturing synergies. We are particularly pleased with our positions in the digital health service with MedMed, which we quickly followed up with iClinic and MedPhone. At the same time, we continue to grow our medical seats, acquiring two companies during the quarter and another one subsequent to quarter end. With these acquisitions, we are now at 85% of our IPO three-year target of adding 1,000 medical seats. On a separate topic, I'm very pleased to share that we were the winners in the education sector in the EPCA Negotiations 360 Survey. This award, which has been held annually for seven years, is one of the most significant in the communications industry and recognizes companies that are market leaders across six different categories, including financials, corporate governance, and sustainability, vision, and human resources. Besides that, we also have won the Golden Tombstone in the Equity category. This award is evaluated by IBES Sao Paulo and recognizes equity operations in aspects such as complexity of the transactions, innovation, price, and others. And that award was due to our successful IPO in 2019. Moving next to a discussion of our recent vision acquisitions on page number six. Even during these challenging times, we remain committed to delivering innovation to our students, faculty, and other healthcare professionals. COVID did not slow down implementation of our strategic initiatives. In fact, we have accelerated our digital investment. We are expanding our digital office and have begun this digital journey with the acquisition of PadMap. which we discussed on the last quarter call. As a reminder, PetMed provides tools and content for healthcare professionals through the White Book and Nurse Book apps and through the PetMed new portal. It's also the market-leagued and clinical decision software and has an extremely popular app ranking the top 10 Brazilian apps by consumer spend and the NPS of 85. The business model consists of both paid subscription and free content, providing an additional source of revenue for us. We followed this with the acquisition of iClinic, a leading practice management software for physicians in Brazil, which includes electronic medical records, clinical management systems, telemedicine, and a complete marketplace that connects doctors and patients to scheduled consultations. We currently have close to 12,000 monthly subscribers with monthly average per user of 107 hands. With this acquisition, we have strengthened our position into the digital health service segment, complementing our end-to-end offering to the healthcare professions and providing another revenue source. In subsequent to 4N, we announced the acquisition of Medphone, the number two medical app in Brazil behind Whitebook. MedFone has 175,000 registered users and close to 60,000 monthly active users, a 4.9 score in App Store with more than 9.1 thousand reviews. The integration of MedFone's clinical decision software will generate synergies and allow us to offer both products through the same platform. Importantly, the founders of these acquired companies will join ASEAN and will be an integral part of the digital team driving our growth in the health tech services. This has been key acquisition for us as they accelerate our digital health efforts to improve the user experience and efficiency of both healthcare students and other healthcare professionals. There are approximately 500,000 doctors in Brazil, and close to half of them are currently using our digital products and services. Our goal is to improve even more our penetration to support the largest majority of physicians in Brazil with our digital health service platform. Now on page number seven, we'll discuss our overall strategic positioning. As we look to the future, we see the opportunity to maintain a long-term relationship with physicians from the time they enter into our school as undergraduates, to the residence prep, the sanitation studies, and then to their entire careers. We believe in investments in our medical programs and new digital health products. We'll provide growth and revenue for many years, as well as strengthen our relationships with medical students and other healthcare professions. Importantly, our additional investments are already paying off by opening new business revenue opportunities for us. We will also continue to consider acquisition targets. And, as shown on the bar chart on the right, we have been adding medical seats. 851 seats in just 15 months, while also increasing our geographic footprint. This increase in medical fees drives a predictable revenue stream and maximizes cash flow predictability as well. We are also looking to further grow our digital assets through disciplined acquisition of business complementary tools, as well as further growing this business. Importantly, our balance sheet remains healthy with positive cash flow generation that provides us with the resource to continue to grow the business both organically and through energy. Before turning the call over to Luis, our accomplishments through 2020, as we continue to navigate to an unprecedented environment, are proof of the strength and resilience of our business model and exceptional work of our passionate team. We are focused on creating shareholder value by delivering our financial targets investing in growth, driving top-line momentum, and implementing our strategic priorities. I will now turn the call over to Luis for a further discussion of our financial results and second half 2020 guidance. Thank you. Thank you, Virgilio, and good morning, everyone. Moving to page 9. Similar to past calls, my discussion this morning will focus on the main and most significant P&L items. There is additional info in the earnings press release that you can refer to further more information. I'm pleased that we delivered another good quarter across all key metrics. Let me highlight a few. Both medical seats and students saw significant increase during the quarter. With respect to the number of medical seats, we added 294 seats year over year for a total of 1,560 seats. Reflecting the state operation process and the conditions, the total number of students in the third quarter 2020 was 9,567 students, an increase of 50% over the same period of the prior year. Adjusted net revenue for the quarter, which includes the impact of the state decrees and individual and collective legal proceedings related to discounted credit to the COVID-19, off-site practice restrictions. What's up? on the year to 313 million reais, partially benefiting from the recognition of revenue that had been deferred earlier on the year when press conferences were unable to take place. This deferred revenue amounted to 14.4 million in the quarter. Excluding the acquisition of Unitec and Pool, by 16% year-over-year, reaching 239 million reais. The increase was primarily driven by organic revenue growth, mainly due to the maturation of medical school seats and increase in the average ticket. The strong top-line growth, combined with cost-efficiency and synergies from acquisitions, was reflected in adjusted EBITDA, decreasing 63% to R$149 million and margin expanding 340 base points. Adjusted EBITDA also benefits from the inclusion of the deferred revenue I just mentioned. Excluding the consolidation of UNHCR, San Lucas, and FedNet, adjusted EBITDA increased 32% year-over-year to 121 million reais, a margin increase of 626 points to 50.4%. Adjusted net income increased 47% from the third quarter of 2019, reflecting the revenue contribution Earnings per share increased 48% from 54 cents in the third quarter 2019 to 80 cents in the third quarter 2020. Moving on to page 10 for our discussion of key operating metrics by business unit. We delivered solid growth across both business units. In key operating metrics, as shown on this slide, it's been driven by a combination of organic growth and acquisitions. Starting with P1, our average monthly medical tuition is, as the nine months were, 8,053 reais. which was 70% above the same period in 2019. This reflects a combination of new students enrolling with a higher tuition rate, combined with students graduating with a lower tuition. As a reminder, this does not include . As shown in the middle chart, 78% of our combined tuition fees are derived from medical schools, but from 69% in the same period of the prior year. The combination of the 50% increase in the number of students and a 70% increase in the average ticket resulted in medical tuition fees of 41% when compared with the same period of the prior year. With respect to BU2, we have 130,000 active paying users at the quarter end, which included 95,000 from PatNet. Excluding PatNet for Now, turning to page 11 for discussions about the different attractions we are gaining for our digital assets. OPs recently acquired pieces. to elevate our brand as well as deepening our connections with students and physicians. We have focused our efforts over the last year on continuing to enhance the student experience. We're globally monitoring their behavior and targets, personalized approach to keep them engaged. The digital investments that we have made enable us our students as well as the broader healthcare industry with what is so important to them, quickly and timely access to important medical information. This is more critical now than ever and is also a key leverage for both member acquisition and retention. As shown on the charts on this page, we are digital engagement. In the third quarter, combining mostly active users across our MedCell and PetMed platform, we are close to 180,000 users. On the chart on the right, you can see the trend in the current consumption. Content that users are consuming included podcasts, learning assessment skills, as well as structured medical webinars. We are also seeing a positive traction here with a 90% increase when compared to the first quarter of 2020 when we began our push into digital assets. The higher performance in the second quarter is partially reflected of our opening up of our digital assets for free at the start of the pandemic to our students and healthcare professionals, temporarily inflating the numbers of users. In sum, we keep looking for ways to modify and enhance have strong foundations of products offering to support our long-term growth objectives to empower the position. Moving on to a deeper analysis of revenue and levita on slide 12. As shown on this page, we have provided the net revenue and adjusted EBITDA regions from our historical third quarter 2019 revenues to the reported third quarter 2020. For the nine-month period, the adjusted net revenue increased 62.3% to 860 million reais. Excluding Uniden and Toro. from September through 750 million reais, with a contribution of 93 million from acquisitions and 90 million reais from organic growth, which is comprised of the maturation of medical school seats and increase in the average ticket. Yuri Kadyatov contributed revenue of 64 million reais in the nine-month period while Sao Lucas' contribution was 73 million reais, and that net was close to 7 million reais. Lastly, there was also a 4 million benefit from the non-recurrence discount granted to COVID-19. On the right side of the page, we show nine months 2020 adjusted EBITDA. During the period, adjusted EBITDA increased 77% year-over-year to 480 million reais, with 396 due in part to a R$50 million contribution for Univeridad de San Lucas and Petrimed, and R$4 million contribution of non-recurrent discounts granted to COVID-19. Excluding the contribution of these acquisitions, I just added that advanced from 54% to another R$56 million, with R$48 million contributed from acquisitions and R$75 million excluding these three companies, expanded 1,028 points. Moving next to a discussion of cash flows on slide 13. Cash and cash equivalents of 1.1 billion reais at the quarter end were 3% higher than the period end in the second quarter, reflecting the strong cash generation that we had in the quarter. The majority of this funding is invested in low-risk Brazilian reais denominated Israelites. Total debt was 599 liter reais at the quarter end 2020, up from 535 liter reais at the end of second quarter 2020, and 361 liter reais at year end 2019. Cash generation remained strong in the nine-month period, increasing 39% to R$325 million, which resulted in a cash conversion of 86%, compared to the 109% in the same period of 2019. The decrease in the cash conversion rate year over year is mainly due to the consolidation of master business, Our students were in negotiations of overdue monthly installments due to COVID-19, and we saw a decrease in advances from our students. During next two discussions about Performa Cash and Debt on slide 14. On this slide, we have agreed our cash positions at the end of the third quarter to arrive at the Performa level. This bridge takes into account the cash outflows for the five announcement acquisitions since the second quarter end, coupled with an increase in the bank tax to support our growth initiatives. All of these auctions have resulted in a performer cash position of 656 billion reais, compared with 1.1 billion reais at the end of September. By contrast, our pro forma gross debt has increased to R$1.3 billion from R$599 million at the end of September. The increase reflected the increase of the bank debt that I just mentioned coupled with the debt we have summed up with the acquisition of Cintas Medicus. Turn next for discussions about guidance on slide 15. We are reaffirming our second half 2020 guidance based on the solid performance in the third quarter. Our guidance takes into account the successfully concluded medical student intake for the second half of 2021. As a reminder, The world is still in the middle of a pandemic. Economics are slowing opening up, and our guidance takes into account the best information available at this point of time. Two key metrics for the second half 2020 guidance are as follows. The second half met revenues between 600 and 640 million reais. Second half 2020 adjusted income margins ranged between 45.5% and 47%. Our guidance includes the impact of the adoption of IFRS 16 starting from February 2020, SABUCAS from May 2020, and PEDMAP from the later July, and exclude other acquisitions that may be concluded after the issuance of the guidance. Additionally, Included in the revenue outlook is the revenue recognition for some record classes that could not be held during the first half and were pushed out the second half of 2020 upon the reduction of classes. These amount to 14 million reais. Before opening the call to questions, let me finish by saying that we are pleased with our performance in the third quarter with the context of this challenging environment. I would like to thank you, every one of our employees and faculty, for their continued hard work and resilience during these unusual times. We remain confident that our strategic investments are establishing a solid foundation, creating further differentiations and positioning us from continued strong financial results that will drive long-term shareholder value creations. This ends our prepared remarks. We are now ready to take our questions. Operator, please open the lines for questions.