Afya Limited

Thank you for joining us for AFIA's second quarter 2021 conference call. With me on the call today is AFIA's CEO, Virgílio de Bon 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 and other factors that may cause or actual results to differ materially from those contemplated by these forward-looking statements. Forward-looking statements in this presentation include, but are not limited to, statements related to our business and financial performance, expectations and guidance for future periods, or expectations regarding our strategic product initiatives. and the related benefits and our expectations regarding the market as well as the potential impact from COVID-19. These risks include those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on the information available to us as of the date hereof. You should not rely on them as predictions of future events and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, management may reference non-IFRS financial measures on this call. The non-IFRS financial measures are not intended to be considered in isolation or as a substitute of the results prepared in accordance to IFRS. We have provided A reconciliation of these non-IFRS measures to the most directly comparable IFRS financial measures in this presentation. Let me now turn the call over to Virgílio Gibbon, AFCO, starting with slide 3.

Thank you, Renata, and thanks everyone for joining us today. I am pleased to report another great quarter for AFIA. Today, I will present four main topics during the call. The strong results across financial and operating metrics that allowed us to reach the top of the first semester 2021 guidance. Second, our successful business strategy of acquiring and integrating medical schools and digital platforms, extracting synergies to create a unique ecosystem for physicians in Brazil. Third, our deliveries and exciting opportunities ahead of the digital business. And fourth, Our great accomplishments on the ESG side. Moving to slide number four. Starting with our top line growth, Adjusted Net Revenue increased 39% year over year, reaching 382 million reais. Adjusted EBITDA increased 36% year over year, reaching 161 million reais, with an adjusted EBITDA margin of 42%. We also reported a cash position of 1.4 billion reais, reflecting the 822 million reais transactions from SoftBank and our strong cash generation. Cash conversion reached 104%, 21 percentage points higher than last year due to the reduction in trade receivables that was mainly affected by the end of the grace period that was given to some students During the renewal process in 2020, in the middle of the pandemic. And second, the improvement of our collection process. Moving to the operational highlights, our undergrad medical students reached 13.4 thousand, representing a 47% growth compared to the same period last year. The average medical school ticket also increased more than 5%, leveraging our organic growth. On the digital business, our ecosystem reached 232,000 monthly active users. This represents almost 40% of the Brazilian market of physicians. And our clinical decision soft pillar presented a strong growth since the end of 2020, adding 18,000 users in the period. Now moving on the next stage, let's discuss our business strategy. M&A is a main growth diver in our strategy and on the left side of the page, I'd like to discuss our successful integration. For the acquisitions made in 2018 and 2019, we have a great track record on margin expansion. The five acquisitions made in this period presented an average margin growth of 16 percentage points in just two years, reflecting our senior distractions in the integration process. For the two acquisitions made in 2020, Unirredentor and Unison Lucas, we already saw significant margin expansion Comparing the full year of 2020 with the first semester of 2021. On average, those acquisitions presented an 11 percentage points growth on adjusted EBITDA margin. On the pencil of this presentation, on slide number 18, you can check the margin expansion of each acquisition separately. We are also excited to expand our offering in the undergrad business with the closing of acquisition of UNIFIP Motivis Quarta and Unigran Rio in August 2021. Unigran Rio is our largest acquisition and in more than 300 cities to our operation and represents our interest in Rio de Janeiro City with the best quality private university in the state. This acquisition combined contributed 468 authorized medical cities to AFIA, reaching 2,611 seats. This translates into 19,000 students at maturity. We present a CAGR of 19.3% from 2020 to 2026. And we still have great opportunities ahead. Our pipeline for acquisition is fertile and we plan to acquire at least 200 seats per year starting in 2022. Moving to slide number six, to the digital business. As discussed on ASIA's Investors and ESG Day, we have many growth avenues to pursue in the digital business. The first one is to keep adding new products and services to fulfill the six-pillar strategy of our business. We have already robust and market-leading products in the three of six pillars. Medtel, our residency prep course, completed the content and technology for medical education pillar, supported by PetMed Portal and Medical Harbor Solutions. Whitebook, our market leader clinical decision software, integrated with Medphone, completed our second pillar. iClinic, the largest clinic management solution, integrated with Medsini and Shost, also completed our practicing management tool and electronic medical records pillar. For the last three pillars, telemedicine, digital prescription, doctor-patient relationship, we still don't have an anchor solution, but we can anticipate that we expect to have great yield on the second semester Our strategy here is to develop or acquire a market-leading solution to fulfill these pillars and create a unique digital offering to serve physicians through all their careers among these six pillars. To accomplish this goal, we are already scaling standalone digital products through coordinated commercial efforts. This project consolidated our customer database into a single data lake, launching the first MVPs from the integration of MedCell, PatMed and iClinic Passed MVP solutions with the pharmaceutical industry and initiated AFCA's digital brand awareness strategy. Moving to my last slide on this presentation, I will discuss our main accomplishment in the ESG strategy. Early this year, we released our annual sustainability report incorporating the global reporting initiative GRI methodology. The structural elements, as determined by the International Integrated Report and Counseling, or IIRC, can accomplish transparency to the way in which we allocate capital to generate value over the long term. I invite you all to download our sustainability report in our IIRC website to check more details. Also this semester, we created a new designation for the Compensation Committee, which was renamed Compensation and ESG Committee and now has the responsibility to report and discuss ESG metrics and keep up with all the new projects involving environmental, social and governance issues. Lastly, I'm also very proud to announce that we are one of the first Brazilian companies to publicly commit to gender equality. In 2021, we signed the UN Global Compact and last week we assumed a voluntary commitment to have at least 50% of human in our management positions by 2030. We were also certificated by Women on Board, an initiative that ensures that we have at least two women in our board of directors, positions already magnificently occupied by Vanessa Lox and Shabda Mohan. Now, I will turn the call over to Luis Blanco, our CFO, to discuss the financial metrics. Thank you.

Thank you, Virgílio, and good evening, everyone. Moving to slide 9 to discuss the financial highlights of the second quarter 2021. I'm pleased to present strong results once more. Since 2019, we saw a strong trend in all key metrics. Adjusted net revenue for the quarter was up 39% year-over-year to R$ 382 million. Reflecting acquisitions and organic growth. Excluding the acquisitions, adjusted net revenue grew 9% year-over-year, reaching 299 million reais. Such increase was primarily driven by the maturations of medical school seats and an increase in the average ticket. Adjusted debita for the quarter was up 36% year-over-year to 161 million reais. Adjusted EBITDA margin was slightly below the reported margin of last year, mainly due to 1. The consolidations of PebMed, iClinic, MedFone, Medicinai, Medical Harbor, Click Pharma, Shoshpe, Unifipi Mock, and Fipi Gona B that present lower margins than the integrated companies. 2. Lower performance from the continuing education segment of which I will give more color in the next slides. Three, partially offset by recently acquisitions that were consolidated with higher EBITDA margin, XMPB and FESA. A net income for the quarter was 65 million reais, a decrease of 27% over the same period of the prior year, mainly in effect by A. 1.5 billion reais increase in year-over-year gross debt, excluding the impact of IFRS 16 due to new debt contracts, acquisitions, and the soft bank transaction. B. The depreciations of Brazilian reais against U.S. dollar in the period that affect our cash positions in U.S. dollars. And C. The FX rates difference between the signing of SoftBank transactions and the internalization of the proceeds that with the point B resulted in 29 million reais foreign exchange loss. Cash pool generations remained strong in the six month period increasing 70% to 343 million reais which resulted in a cash conversion ratio of 104% compared to 83% in the same period of 2020. Moving to slide 10 for discussions of key metrics by business unit. Starting with the undergrad programs. Operating medical seats increased 35% year-over-year to 2,053 operating seats. Medical students were up 47%, reaching the base of 13,390 students, reflecting medical students' maturations and acquisitions. Our average monthly medical tuition fees were up 5% compared to the second quarter of 2020, reaching R$8,598 excluding acquisitions. This reflects a combination of new students enrolling with higher tuition rates Combined with students graduating with a lower tuition rate. Talking about revenue mix, 80% of our combined tuition fees are derived from medical school, up from 73% in the same period of the prior year. In terms of tuition fees for the first semesters, we've reached 831 million reais, up from 556 million reais, an increase of 50% year-over-year. On the next page, I will present the continuing education metrics. We saw a 33% decrease in continuing education net revenues. This decrease was driven by 27% lower student base in the first semester of 2021. Practical programs that are not being offered since the first semester of August 2020 due to the pandemic. And two, physicians' decisions to postpone admissions to specialization courses due to the COVID-19 pandemic. We expect to pick up demands on the next intake periods that will happen on October. Moving to slide number 12, I will discuss the digital service operation metrics. On the first graph in the slides, you can see our active paying students per pillar. Those are the active payers that generate revenues. Active paying users reaches 148,000. Excluding acquisitions, MedCell active paying students alone grew 64% year-over-year, reaching 19,000 students, meaning due to our successful marketing campaign in the end of 2020. Clinical management tools reported 14,000 payers and clinical decision software base has more than 115,000 payers. These results reflected a strong increase of 89% in digital service net revenues The last graph on the page shows the monthly active users that reach 233,000 students and physicians all over Brazil 32% higher than 2020 This number represents more than 30% of all medical students and physicians in Brazil Moving to the next page, I will discuss in more details the net revenue and EBITDA growth. We saw a 44% increase in adjusted net revenues year over year, of which 77% are coming from the consolidations of acquired companies. On the right side of the page, we saw adjusted EBITDA growth for the first semester of 2021. During this period, adjusted EBITDA increased 42% year-over-year to R$ 368 million, with a margin of 47%. Of this increase, 81% is coming from acquisitions and the other 19% is organic. Moving next to discuss cash and net debt position. Cash and cash equivalents in the end of the second quarter were R$ 1.4 billion, representing 36% when compared to December 2020 position, mainly due to the closing of the SoftBank transaction, totaling R$ 822 million. And quarter-end net debt, totaling R$ 583 million, compared with a net debt of R$ 167 million in the end of 2020. This increase was mainly due to M&A transaction. Considering only the acquisition of Unigran Rio that was closed in August this year, our performance net debt would reach almost 1.3 billion reais. Moving to my last slide, I will discuss our guidance for 2021. For the first half of 2021, we surpassed the middle point of the adjusted net revenue guidance by 2%, with an adjusted EBITDA margin of 47% right in the middle range of the guidance. I'm also glad to issue a new guidance for the second semester of 2021. This guidance will not include any acquisition that may be concluded after the issuance of this guidance. 2021 adjusted net revenue between R$ 1,720,000,000 and R$ 1,760,000,000 representing a 44% growth year-over-year if considered the mid-range of the guidance. Adjusted EBITDA margin of 42% and 44%. This percentage includes the synergy that will be extracted from acquisitions and the negative impact caused by the consolidations of UNIFIPI Market, PIPI Guanambi, Unigran Rio and the digital companies that will be not integrated this year and come with a lower EBITDA margin. This ends our prepared remarks. I will now open the conference for Q&A session. Thank you.