Afya Limited

a little bit about Bertelsmann's transaction and AFIA's change of control. And last but not least, on our fourth topic, I will present our financial highlights of the quarter, demonstrate our solid performance. So moving now to page number four. On our last Investor and ESG Day, presented to you on April 7, we discussed what makes AFIA unique. where are we heading to, how we are building the future, what sustains our strategy, both on the education and digital services segments, and our ESG accomplishments and expectations for the future. Inside these topics, we can highlight, first, our digital services ramp up with the expansion of our ecosystem and implementation of our B2P and B2B strategies. doubling our addressable market with AFTA Digital Health. Second, our business resilience, which is guarded by high medical education demands, pricing power, and industry barriers to entry. And third, our ESG evolution, bringing up relevant points successfully performed, such as the adoption of clean energy, social impact in vulnerable areas, and embedded governance and ESG culture in the company. In case you have missed the event, please feel free to check it out on our IR website page. In there, you'll find all this information and much more. Also, our 2021 Annual Sustainability Report is now available for all of you to check it out. This is our third edition of the report, and we are very proud of our achievement so far. We have consolidated our leadership position in medicine and continue our inroads into the digital medical service segment, which is consistent with our proposal to be the physician partner in all stages of the academic training and professional journey. This strategy, which guides our business as well as its unfolding, is detailed in the report, along with the results achieved from our operations. In it, we have also gathered information on our management structure and ESG practices, in addition to the social environment impacts we produce through our operation. We encourage you to join in the reading. Moving to slide number five, as presented on our last results conference call, the resilience and high predictability of our business model enable us to introduce our new guidance for the entire year of 2022, taking into account the successfully concluded acceptance of new medical students, insurance, once again, 100% of occupancy for the year of 2022 in all of its medical schools, and also the recovery of continued education sector. Net revenue is expected to be between R$2,280,000,000 and R$2,360,000,000. And adjusted EBITDA is expected to be between R$935,000,000 and R$1,050,000,000 for 2022, excluding any acquisition that may be concluded after the issuance of these guidance. This figure is showing another strong year ahead and represents an incredible operational growth of more than three times when compared to AFIA's results in 2019, when we became a public comment almost three years ago. In the next slide, we will talk about this important equity operation, even though it happened after the quarter. This month, we announced the closing of the transaction where Bertelsmann, which has been a relevant partner since 2016, acquired 6 million Class B shares of AFIA from the state's family. As a result of the closing of this transaction, Bertelsmann and Steves family will beneficially own approximately 57.5% and 33.1% of the voting interest and 31% and 17.9% of the total shares, respectively, in AFIA. As previously said, we are delighted that Bertelsmann, one of the world's leading media companies with a significant footprint in the education sector, has evidenced its commitments to Africa's long-term strategy through its evaluation of increasing its stake. Also, we reinforce that we will continue to benefit from the vision and commitment of Estev's family with their significant shareholding and active participation in our company. And now, moving to my last two slides on this presentation, I will show our financial highlights for the first quarter, along with the first session takeaways. As I said at the beginning of this call, we have started 2022 with above-the-expectation results. Adjusted net revenue increased 41% year-over-year, reaching R$567.7 million, followed by an adjusted EBITDA growth of more than 30% year-over-year, reaching R$270.8 million, with a margin of 47.7%. One of the highlights of this quarter is the growth in earnings per share, reaching R$1.42 per share, more than 22% above last year. Even consider a higher net debt level and market interest rate. This result reaffirms our great operational results, capital allocation discipline on buybacks and M&A, and efficient capital structure. We also reported another great adjust operating cash flow generation, ending the quarter with 293.6 million reais, 51% higher than last year. We confirm our tripod of strong growth, profitability, and cash generation. Moving now to the operational updates of the quarter, our undergrad medical students reached more than 70.5 thousand students, representing a 36% growth compared to the same period last year. Approved seats grew 29%, also in the same period. This result confirms our growth strategy that combines organic expansion to our capacity to acquire, consolidate and integrate new seats to our operation. In this quarter, we can gladly see continued educational recovery after the pandemic impacts on practical classes, present a strong revenue growth of 24% year-over-year. On the digital service highlight, we ended the quarter with 47.5 million reais and our ecosystem reached 260,000 active users, a growth of 17% year over year. This represents more than 33% of the Brazilian market of physicians. To summarize all I said so far on the next slide, after predictable strong growth, high profitability, and cash generation are related to high and resilient demand, continuous pricing power, margin expansion, and M&A expertise. After first quarter 2022, even considering the adverse macro scenario, we are already targeting the top of 2022 guidance and expecting another round of solid results with continued education taking off and a huge upside on our Blue Ocean Digital Health Services opportunity. I will now turn the call over to Luis Blanco, our CFO, to give more call on the financial and operational metrics.

Thank you. Thank you, Virgilio, and good evening, everyone. Moving to slide 10 to discuss the financial highlights of the first quarter. It is with a lot of satisfaction that I presented another strong quarter results for AFIA. Adjusted net revenue for the quarter was up 41% year over year to 568 million reais, reflecting the maturation of medical seats Increase in the average ticket of medical programs and consolidations of acquisitions of medical schools and digital service. Also important to mention, the continual education recovery, which I will give more color further on. and the adjustment of 1.4 million reais in discounts in tuition fees granted by individual, collective, legal, and public proceedings related to COVID-19 mostly ceased in December due to the Supreme Court decision. Adjusted EBITDA for the quarter was up more than 30% year over year to 271 million reais. while adjusted EBITDA margin decreased 390 base points to 47.7%, meaning to the consolidations of acquisitions with lower EBITDA margins and the decrease in MedCell, mainly due to high competition in residency preparatory markets. Adjusted cash flow generations has been shown quarter after quarter growth. And in this one, the increase was of 51% year over year to 294 million reais, which resulted in a cash conversions ratio of 113% compared to 103% in the same period of 2021. adjusted net income for the quarter was 167 million reais, 4.5% higher than the same period of the prior year. The gap improvements between net income and adjusted net income in this quarter was mainly related to the decreases of 40 and 79% in non-recurring expenses and in share-based compensation expenses. Moving to slide 11 for discussions of key operational metrics by business unit. Starting with the undergrad programs. Our number of medical students grew 36% year over year, reaching more than 17.5 thousand students. With approved medical seats increased 29% year over year to 2,759 approved seats. Considering additional organic and inorganic seeds expectations, we have an upside to achieve more than 32,000 undergrad medical students at maturity. The medical school net average ticket for the year, excluding acquisitions, was 7.9 thousand reais. and 8% growth compared to R$ 7,300 from the prior year. In terms of total tuition fees for the quarter, we've reached R$ 649 million, up from R$ 418 million from the prior year, an increase of 55%. Talking about revenue mix, 77% of these are derivative from medical school students and 89% from health-related courses. Present continuing education metrics. In this quarter, we saw a great recovery in our continuing education segments, which reported a strong intake process, increasing the number of students by 9% quarter over quarter. despite the decrease of 6% year-over-year. Net revenues increased 24% when compared to the same period of the prior year. This recovery was especially due to better performance of e-payments, mainly related to the interruption of the effects of COVID-19 pandemic. Moving to slide number 13, I will discuss the digital service operation metrics. On the first graph in the slides, you can see the total active payers, which are the ones that generate revenues in B2P. So far in this quarter, we have reached a number of 176,000 paying users, a 26% growth year over year. Our ecosystem reached 260,000 monthly active users this quarter, 17% higher than the same period of the prior year, representing more than 33% of all medical students and physicians in Brazil, as Virgilio said before. Digital service net revenue decreased 11% due to a lower performance of MedCell in this quarter. which was caused by higher competition in the residence prep markets, as I said before. Also, from now on, since we have disclosed our B2P and B2B strategy expectations, we will start to break down our digital service net revenue within these two, as you can see on the last graph. So from the 47 million reais of the digital service net revenue, 41 million reais came from the B2P and 6 million reais came from the B2B, once the B2B strategy is still in the beginning. Moving to the next slide. Speaking of our digital service strategy, we have exciting news to share with you today. In addition to Alenda Medicina and casual papers, we are proud to announce another business combination, our third of 2022. Gleek, a free diabetes care and management app solutions for physicians and patients that use technology to improve diabetes education and daily routine practice, connecting users, devices, and healthcare providers. With these acquisitions, we will add 1.1 thousand active physicians in our ecosystem and monitor more than 90,000 patients. This business combination represents AFIA's entry into physician-patient relationship pillar and further strengthens our strategy and ecosystem. All information related to Gleek's acquisitions is now available in our IR website and can be accessed through this QR code. And now, moving to my two last slides, I will discuss our cash and net debt positions, also giving more color on our cost of debt. Cash and cash equivalents at the end of the quarter were 789 million reais, a decrease of 18% compared to the same periods in the prior year. Net debt totally 1.4 billion reais compared with a net debt of 230 million reais in the first quarter of 2021. This increase was mainly due to nine business combinations and license acquisitions executed during this 12-month period. and payments related to shares repurchase programs, partially offset by free cash flow generation. On the next slide, you can see a table with breakdown of our gross debts and our average cost of debt. Consider our main debts, the soft-bank transactions, lowers in finance, and accounts payable to selling shareholders. This ends our prepared remarks. I will now open the conference for Q&A section. Thank you.

So if you want to ask a question, please raise your hand and we'll call you. The first question comes from Cepeda from Credit Suisse. Cepeda, you may now go.

Hi, everyone. Thank you. Thank you for the time. I have some questions here. The first is about the continued education. We see that there was a recovery in the tickets, which is very healthy, although there was a small decrease in the student base. So my question would be if the tickets that we are now seeing are something that we expect going forward, or if there is additional potential in these tickets. The second question is about the known health courses that we see that the student base is declining considerably, 11%. And we see currently that the other educational groups who have similar businesses, they are at least now stabilizing the student base. So my question would be, If it's not the case, to double down the effort to sell some of these courses, knowing that the other players are kind of stabilizing the business. Thank you.

It's Blanco speaking. I'll take the first questions. Regarding the continual medical education segment, we have to have in mind that we have our major operations in this segment being IPMET. But it's not the only one. We have some operations. that have postgraduate courses in their offerings. So what happened in this quarter that we continue to decrease these courses in other institutions and increase the the amount of students in the IPMED. So it's a question more of mix between students that we have because we are focused all our efforts on growing the IPMED brands, the IPMED offer as our flagship in the continuing medical education. So it's more questions of mix, decreasing the other offers, others than the IPAMET, than increase just in ticket, okay?

Before Vigilio gets the second question, Sephida, it's important to mention here that IPAMED tickets is higher than in other courses that we have. So sometimes we acquire institutions such as UniHead and Tour that come with grad courses, as Louise already said, and they have different tickets. OK, so if you look for IPAMED ticket, it's close to something around three to four thousand reais per month. And in these other institutions, we have tickets with a lower value, like one, two thousand reais per month. And why is that? Remember that mostly of FIPA med activities are related to in-person activities, right? So it's attending patients. And in these other positions, we have a different kind of courses, mostly of their theoretical.

so in the end of the in the future we should have just one model that we should be permit model okay just add uh about the internet remembering that we launched uh seven new campuses uh just offering this traditional graduates a lot of practice type of content uh for very high value tuition so the trend is that you be much more concentrated on this type of program, high value. So the mixed effect will also help in terms of tickets. And remember that we are resuming growth and we'll see for the following quarters, the student base continue to grow and being even higher. Last year, even consider that we are sharing this offering in other institution different from IPMET. Taking your second question about the other programs, it's worth to mention that we also saw some important growth in other health science programs. So we saw on organic base, we resume growth on our student base for a high value ticket that's much more important on our operation. And also we have some good trend for these problems in terms of on tuition. Different from health science or other undergrad, this type of problem, most of them, we are seeing a negative contribution, mainly on the new acquisition that we had in the last two years. So we will continue our discipline to shut down this type of problem that is not generating value, doesn't make sense. sense to continue on our offer and also it's not sustainable in our operation. Of course that if we had any campus that we can separate and sell in the market, we will do it. But remember that this is in terms of regulation, this is complicated because we have the license operating the different type of programs together on a university center or in a university. so uh but uh it's lower than 10 percent of our undergrad total revenue will continue to dilute all the undergrad programs on our operation oh great very clear thank you so our next question comes from victor tomita victor you may now speak hello good evening

Vitor, you're on mute.

Sorry. Hello, good evening, everyone, and thanks for taking our questions. We have two questions from our side. The first one is on what is your more general strategy for physician-patient relationship software and whether we should expect further acquisitions to complement AFIA's offering portfolio in that new pillar. And the second question would be also on digital. We saw some reduction in monthly active users for telemedicine and digital prescriptions at the same time as we saw an increase in monthly active users for clinical decision software. Is that being driven mostly by people resuming face-to-face consultations and more activity at clinics and hospitals? Or are there any similar factors or other factors that we should take into account? Thank you.

Larry speaking here. It's good to hear from you to meet them. Maybe I will start with the with the first question. So on the physician-patient relationship in which we just acquired GLIC as announced, our main goal here is to improve the relationship on treatments, mainly on chronic treatments like the case of GLIC, which supports the diabetes treatment, generate more demand for physicians and make it easier for patients to improve the treatment and to adhere the treatment. The idea here is to increase our penetration in senior physician cohort. as in most of the case, those are the physicians in charge of chronic diseases treatment. We are also enabling the B2B offerings that we are planning to have demand generation. We buy chronic disease we can improve and increase the demand generated for medications, for tests, and for any operations in a hospital, for example. And also to allow more intelligent access from the pharmaceuticals to those patients and physicians. This is the first question. On the monthly activity users, so telemedicine and prescription are both part of our practice management suite. So this is yet an increase year over year, so we are seeing more clinics using our practice management tool. Although you're right, so telemedicine is kind of maybe steady, not growing so fast anymore, but we are not disclosing the access to those functionalities. So the overall number of physicians using our solutions are increasing. And this is an important enabler for our B2B strategy.

And Tomita, it's Blanco speaking. Just give you more color why we have this reduction on MAL on the clinical management tools. Is that why we exclude from the first quarter uh uh uh 2022 numbers all the uh uh assistance uh uh from the physicians that are our users in the systems uh but uh they were not not a a a a physician a physician itself so every time a physician's higher eye clinic for instance they put their assistance as a user as well for free, okay? So we are counting the number of users. From the first quarter of 2022, we exclude these assistance from the MAU, and we put the notes on the MAU table. Explaining that, so we are not showing this number. If we put this access that are iClinic users on the square, these almost 20,000 monthly active users, we're going to jump to 41,000 users. So the group in the number of the users would be something about 50%. That is in line with the number of the iClinic payers. Okay, so that's just a question to better show the monthly active users on this metric. We decided to exclude this number from the first quarter 2022 ahead.

Very clear. Thank you very much.

Sorry.

No problem. Just to remember you all that we have been doing a great work with our data. We made a data lake that we also said about that during AFIA Day. And that's what we want. We want to have the better quality of data to understand who is the persona that is using our products. And we understood that was fair. to the investors to see and to understand how many physicians were using not only assistance. And we didn't have the same view of this data when we acquired the company and what we have right now, you know. So it's just a way to be more clear for you guys.

Very clear. Thank you all very much.

Of course. And next question comes from Luca from Itaú Web App. Luca, you may now go.

Hi, good evening, everyone, and thank you for taking our question. So can you please give us a further detail on the competitive landscape for MedCell, and what could we expect for the top-line dynamics for the rest of the year? And then secondly, if you could please comment on the integration process of Winnegan Hill and the recent developments on this end, it would be very helpful. Thank you.

I can start here with MedCell Competition Landscape. So in 2019, we used to have four to six players in the market. And the benchmark was, and it still is somehow, a med group with a more physical course, right? During the pandemic time and all the advance of internet and digital influencers, a lot of new competitors arise. So we have nowadays 24 to 25, 24 to 30 new competitors in the market, most of them with simpler offerings. So the offerings are more, I would say, the options are more sophisticated in the market. There are a lot of competitors offering a specific content for a specific residence program or a specific part of the content, like, for example, question simulations or much more competitiveness in the market share in the market right now. And we are all working on our content. That is a very good content, high quality to repackage it, to be more competitive in this new scenario of the residency program market. We are also seeing some delay in the residence testing, so it seems that most of the students or some of the students are preferring to have higher salaries in the mock as there are a lot of open positions for physicians and delay a little bit the decision to take residence program or they may be also more in debt. along all these years with the pandemic, the families struggle a little bit, so we are seeing more competition on the company side and maybe a more steady demand on the demand side.

Yeah, taking a second. I've got a second question here. Look, I don't know if you have any additional questions or comments about the explanation.

That was very clear, sir. If you just could please comment on the integration process. Okay.

So, we are very anticipated in the process. All the academic integration, the new curriculum in place that helped us to move our tuition and we will enroll in the second half of 2022. I mean, guarantee 100% of occupancy was already implemented. Also, we have a successful record intake for X medicine programs, health programs, and also different than other undergraduate programs. So helping us to ramp up our results on Winding Green Hill. Remember that when we close the operation, the contribution margin on Unigran Hill was close to 25%, and we are close to 40% as a contribution margin coming from the Unigran Hill units. What we have in front of us for the next quarters, we're expecting to have the full integration process, our shared services rollout by October of this year, second half. So you'll have another round of synergy that you can extract and also maturing and scaling the medical program. will help us to even go further in terms of margin contribution so uh just a summary here so we are better than expect in terms of integration and our uh calendar here uh and we expect to be fully integrated by october of this this 2022. that's very clear thank you all for your answers

Okay, just a reminder, if you want to ask a question, just raise your hand and we'll call you. Next question comes from Jessica from JP Morgan. You may now go, Jessica.

Hi. Thank you for taking my question. How has the candidate seat ratio been behaving within AFIA units, and how are medicine tickets expected to behave going forward? Thank you.

J. Eduardo Campos- Jessica so we close this first half intake. J. Eduardo Campos- An average around 5.1 candidates per seat all seats in Brazil, of course, that we have some region that we. have higher ratio candidates per seat, but the national average was 5.1. So it's a kind of flat E over E in terms of this ratio. In terms of tuition moving forward, we We are changing our price a little bit over 8% in this first quarter. The largest, the highest changing on price was for the new acquisition that was Unifipimoki and also Unigran Rio. That was not counted on when you consider the average because we exclude the acquisition. uh to count the average tuition year over year uh so we keep uh uh considering everything together uh we would move around eight and ten percent uh by the end of this year in terms of medical programs okay thank you very clear

Yeah, and complementing this question, Jessica, remember that we are aggregating more value to our students' curriculum, right, Virgílio? So we now have white book integrated to all of our students. MedSAL is something that we already did. We have now Internato 4.0. that's a new initiative so all of this we are doing so they shouldn't can perceive and have more value when they are enough so in the end of the day uh we want to have reasons that we can increase prices in the future uh and the student can perceive why they are receiving a premium offer you know

Having said that, and that is important to highlight as well, that we put that added to our offering to our students, Medical Harbor as well. And mostly that we've launched for Unigran Rio students, the MedCell Station offer, that's the digital way, digital value propositions for the students for the first to the fourth year. So it's being tested through all the students in Univ. Rio, This offer is very, very interesting and getting the feedback, we're going to provide these solutions for every AFI student and after it to offer this to other institutions as well.

Thank you, very clear.

Thank you, Jessica. So our next question comes from Vinicius Ribeiro from UBS.

Yeah, hi, guys. Good afternoon, everyone. Hope everyone is listening to me. Two questions on our end. And the first, not necessarily tied to results. We saw last week a change in sort of rules that regulate the Mize Magical seed granting process. I just wanted you guys to clarify if that changes at all something about your operations and your prospects of gaining new seats going forward. And our second question is also a little bit on the side. We are seeing, in addition to the pressure on the public equity markets, the venture capital work is also being hit with higher interest rates and all that. which might have some repercussions going forward. Just wanted to get your sense on how does that change your strategy on capital deployment going forward, if you guys already seen some, you know, better opportunities, if that's some, if valuations should change to a certain extent. So just if you guys could provide some, so far there will be in this case.

If it needs to get to your question here, then, Blanc will help me with the catalogation question. So under the Minds Magicals, the normative rule that was released last week was a kind of, they were regulamenting and creating the procedure how institution can ask for additional seats under the Mais Magicos programs. So that was the main idea behind this normative rule last week. And for today, in the morning, we have this normative rule canceled. So they returned what was before the normative rule release last week. That was you can only ask for once to increase the seats for any Mais Magico campuses from Mais Magico Zoom and Mais Magico. So no changes. And the idea was to try to give more clarification for this new process, but to keep the same rule that was expected before the rule was released.

In Virgilio Blanco speaking about your second questions, when you mentioned the VCs pressures, I understand that you want to talk about the digital completeness of our ecosystem. Within these Qlik acquisitions that was just announced today, We completed all the pillars in our view. So we have the most completed ecosystem offering for physicians in the country with these 260,000 patients. active physicians and medical students using our physicians and then what we want with these solutions to increase usage to increase penetrations within that so in terms of offer we are we are now satisfied with the completeness of it and we're gonna move forward in We can move forward in acquisition if these acquisitions add volumes on these offers. But for now on, as we complete the patient-physician relationship, we completed the ecosystem as a whole. giving more color if we talk about this. So let's talk about undergraduate as well. what you can expect that we keep our disciplines on business combinations. We still see that we can grow 200 seats per year as we guided the market so we are working on that and of course we know that the the increase in capital, the cost of capital that we had with this increase of interest rate and increase of risk. And we keep our discipline in allocating the capital. And allocating the capital, we have to mention the buyback as well. We just concluded in May our third buyback program. So we are 100% completed. And we keep evaluating opportunities, keeping evaluating the possibility to to put in place another buyback. But as of today, we disclose to the market that we have completed our third buyback program, 100% in the beginning of May.

Got it. Thanks, Virgínia and Bronco.

So, as we don't have any more questions, I would like to thank you all for participating today. uh i make myself available if you need anything else from the investor relations and just a reminder that we just disclosure today our sustainability report okay guys thank you so much and have a good night