Afya Limited

Good night, everyone. Thank you for joining us for AFI's first quarter 2023 conference call. I'm here today with AFI's CEO, Vigili de Bon, and Luisa de Blanco, our CFO. During today's presentation, our receptors will make forward-looking statements. Forward-looking statements can be related to future events, future financial or operating performance, known and unknown risks, uncertainties, and other factors that may cause AFI'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, its related benefits, and our expectations regarding the market as well, as any remaining 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 the scope. These measures are not intended to be considered an isolation or 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 Vigili Gibon, FCO, starting with slide number three.

Thank you, Renata, and thanks everyone for joining us today on our first conference call related to 2023 VISO. We proudly present our first quarter of 2023, showing another great start for the year ahead. Since our IPO, AFI's top line has grown more than three times, improving the resilience and differentials of our businesses. In this quarter, once again, our net revenue has jumped 25% over last year. During this presentation, I will first run through some main strategic topics, such as our performance highlights, the successful business execution within our three segments, this year's guidance, some recent awards recognition, and at the end, Luis Blanco will explore our financial and operational overview. So moving now to page number four. Let's start with our performance highlights. First, our just net revenue increased 25% reaching $709.4 million, followed by an adjustably dark growth of almost 22% year over year, reaching $330.2 million, with a marginal of 46.5%. We also reported a strong cash flow generation again of $349.4 million, an increase of 19% year over year, boosted by the solid operational results of the company with a conversion of 112% and a solid cash position of R$723 million at the end of the quarter. Our just net income was $166.4 million, in line with the same period last year, mainly due to the higher financial expense related to the new debenture issue in December 2022 and higher interest rate in the market. Moving to our operational updates of the quarter, we have reached 3,113 operating seats, an increase of over .5% over first quarter of 2022, with the beginning of four more medical campuses, along with new seats in Jipayana and Itabona, and also the acquisition of Unite Alagoas and FIS. In addition, our number of undergrad medical students has reached almost 21,000, representing .8% growth compared to the first quarter of the previous year. We also saw great results in net revenues. For our continuing education business, the segment grew more than .6% year over year, representing a net revenue of $34.9 million in the first quarter. The digital health services reported great results as well, with revenue of almost 20% in the comparison of first quarter 2022 and in the quarter of net revenue of $56.8 million. The results reinforced the opportunity ahead in the digital services and it explained by the ramp up on B2B engagements with new contracts with the pharmaceutical industry companies and the continuous ramp up in B2B contracts, as we will discuss further on. Lastly, our ecosystem has 295,000 active users, representing a great penetration among physicians and medical students in Brazil. In the next slide, we will talk about our solid business execution within our three business units. Starting with the undergrad segment, we saw important movements throughout the quarter, such as higher tickets and medicine course, with more than 8% increase of meds intuition, the maturation of medical seats, the beginning of four new MICE medical campuses in 2022, the consolidation of unit and fit acquisitions, and the consolidation of 92 new medical seats. 28 in Unicão Lucas, G Paraná, located in Rondônia, and 64 additional seats in Faculdade Santo Agostinho in the city of Itabuna. This movement is part of our strategy to add 600 new medical seats on our current operation by 2028. We are delighted to see that the most significant growth of the quarter in terms of revenue came from our continuing education segment, with a robust intake process, six new campuses, and course maturation. On our digital services segment, we ended the quarter with a revenue increase of 20% when compared to last year. This results in reinforcing the opportunity ahead in digital service, and it is explained by the ramp up in the B2B engagements, with new contracts with pharmaceutical industries companies, and the continuous ramp up in B2B contracts. And now I will turn the call over to Luis Blanco, AFI's CFO, to give more call on the National Operation Network. Thank you. Thank

you, Virgilio, and good evening, everyone. Starting with slide number seven to discuss the financial highlights of the first quarter. With much satisfaction, I presented another strong quarter results for AFIA. Adjusted net revenue for the first quarter of 2023 was 709 million reais, an increase of 25% over the same period of the prior year, meaning due to higher tickets in medicine courses by more than 8.3%, maturations of medical seats, the beginning of four most medical campuses, the big business combinations with UNITA Lagoas and FIT Xabotão, the strong continuing educational segment performance, and the great results of the digital service. First quarter 2023 adjusted debit da increased .9% to 330 million reais, with an adjusted debit da margin of 46.5%, a decrease of 120 base points when compared to the first quarter 2022. The adjusted debit da margins reduction in this quarter is mainly due to the following, consolidations of four new management campuses, operations started on the quarter 2022. UNITA and FITX which are performing better than expected, but still present lower margins when compared to the integrated companies, and digital segments, primarily due to mad cell performance. Moving to the next slide, adjusted cash flow generations over the year was almost 20% higher quarter over quarter, totaling 349 million reais, boosted by the solid operation results. Operating cash flow ratio was 112% for the first quarter 2023 compared to 113% in the first quarter 2022. Adjusted net income for the first quarter of 2023 was 167 million reais, in line with the same period from the previous year, made into the higher financial expenses related to UNITA and FITX acquisitions and higher interest rates. Our adjusted EPS for the quarter reached one real and 77 cents, the same when compared to the first quarter 2022. Our EPS performance reflected the decrease in our net income that was compensated by capital allocation discipline executing buyback programs. Moving to slide number nine for discussions of key operational metrics by business unit. Our number of medical students grew 19% over first quarter 2023, reaching 20.8 thousand students, with operating medical seats increasing 25% due to the income pass of 632 medical seats related to 4 mais médicos and G Parana seats increase. UNITA lagoas and FITX have bought down acquisition as privileges set. Therefore, we've reached 3163 approved seats and expect to achieve almost 23,000 undergrad medical students at maturity. Our net average ticket excluding acquisitions increased by .3% over the same period last year, reaching 8,570 reais in the first quarter 2023 compared to 7,861 in first quarter 2022. The last graph shows a 24% growth in combined tuition fees reaching 806 million reais, up from 649 million reais from the first quarter 2022, -8% of which are related to medicine courses. All these efforts means one thing, our medical educational business remains and will continue to be the cornerstone of our business in the short and the middle terms, delivering high predictable growth combined with solid profitability and cash generation. On the next page, I will present our continual educational metrics. As said before, we saw another year of great recovery in our continual educational segments, with an increase of more than 37% in the number of students compared to the same quarter last year, reaching 4,774 students. In addition for the quarter, net revenues grew 47% when compared to the first quarter 2022. This recovery is mainly due to the robust intake process and course maturation. Moving to slide number 11, I will discuss the digital service operational metrics. On the first graph, you can see our total active payers, which are the ones that generate revenues in business to physicians B2P. With a continuous growth trend, we've reached 218,000 paying users, a 24% growth compared to the same period last year. As you can see in the second graph, our ecosystem grew .6% compared to the previous year, achieving 295,000 monthly active users, representing almost 40% of all medical students and physicians in Brazil. Finally, on our last graph, we can see our digital service net revenues, which increased more than 90% when compared to the same quarter of the last year, reaching 56.8 million reais. With the breakdown, our digital service net revenue within B2P and B2B segments, which accounted for more than 46 million reais coming from B2P and more than 10 million reais coming from B2B, since B2B strategy is still humping up, representing a growth of 62% compared to the prior year. And now, moving to my three 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 first quarter were 723 million reais, a decrease of 8% over March 2022 and 34% when compared to the fourth quarter of 2022, meaning to the new debentures issues during the fourth quarter that was used to fund the down payment of units, Alagoas and Fitch-Aboatão acquisitions in January. On the next page, we can look closely to the net debt variation. In the first quarter, 2023, net debt is totally 2.29 billion reais, an increase of 648 million reais when compared to the fourth quarter of 2022, meaning to the 825 million Unita Alagoas and Fitch-Aboatão acquisitions, which was partially offset by 177 million reais of free cash flow generations in the first quarter of 2023. On the next slide, you can see a table with the breakdown of our gross debt and the total cost of our debt, considering our main source of debts, the soft bank transactions, debentures, account payables to selling shareholders and other financial obligations. This ends our prepared remarks. Strong performance, consistent growth and success in all segments. We are committed to provide an ecosystem that integrates educational and digital solutions for the entire medical journey, enhancing the development, updating, assertiveness and productivity of health professionals. We are very proud of our business and what we have achieved so far and excited about what we plan for the future. I will now open the conference for Q&A session. Thank you.

So if you want to ask a question, please raise your hand. The first question comes from Luca Marchesini from Itaú BBA. Luca, you may talk.

Good evening everyone and thank you for taking our question. Regarding mid-sell, we've seen a decrease in the number of active payers for the past quarters, so can you please provide more color on the competitive landscape and comment if you have seen any sign of recovery here, especially considering the initiatives implemented in the end of last year. So that would be helpful, please. Thank you.

Hi Luca, this is Regilio. I can start here and then Blanco can give more details after. So just about the dynamic on mid-sell, we are combining the mid-sell offering on Pillar 1 together with Alenda Medicina and CardioPapers. So we are seeing a very good intake enrollments coming on Alenda Medicina and CardioPapers, also shifting demand between these offerings in the Pillar 1. So mid-sell, as we saw in the last quarter, like this year in the fourth quarter, we still have a lower volume coming this year. So we are ending the seasonality right now in the first quarter. So the mass cycle, the big cycle, starting September. So we still have for this semester a lower number of coming from mid-sell when you compare to last year. So the landscape, the competition landscape, is still have the same. So we still have a lot of competitors on this on this matter. That's the reason why we change not only the product, but also change the offering combining Alenda Medicina and CardioPapers. Offering much more related also for specialization. So it's much more online, continual medical education than only residence prep course, as it used to be mid-sell in the past back in 2019-2018. Just to give more figures, I pass back to Blanco that can color a little bit about the numbers.

Thank you, Virgilio. Luca, as Virgilio mentioned, we end at the first quarter the the intake of the collection of 2023. So all the collection of 2022 is disconnected during this quarter. And now the new intake will take place in the fourth quarter. Mid-sell, as we mentioned, is not a concern for our business to business strategy. And we still feel comfortable that with this combined offer that we are doing with the prep test of mid-sell within CardioPapers and Alenda Medicina content, we're gonna stop this following of mid-sell and then we can have some kind of recovery during the next cycle for the 2024 collections that we're gonna start on September.

Virgilio, you want to comment?

Yeah, just to add a point here. So moving forward for the following quarters on the digital. And as the next quarter will be consolidated, it's no more, it'll be fully organic when you compare to the previous year. So pillar one should be moving around 10 to 15 above last year and the other components of our digital services should be growing above 30%. So the combination of them will be around something 15 to 20% for the rest of the year, at least for the rest of the first half because we still have the intake that will be stronger on the second half.

Okay. That's very clear. Thank you, Virgilio and Luis.

Thank

you.

Okay, so our next question comes from Mauricio Cepeda from Credit Suisse. Mauricio, may go.

Hi, Virgilio, Blanco, Renata. Thank you for the space here. So a little bit on margins. I think we're reconfiguring the mix of business there. So we see that the margins are being a little bit lower, but for a very positive reason, right? You're ramping up a lot, continuous education, you're opening lots of medical seats. So my first question would be, how do you expect this to go on for this year in terms of these apparent margin pressures, which are in fact the success of the businesses? And thinking a little bit more further, if you see, when you see basically a convergence to, let's say a new margin level, given that you're going, you're integrating new operations on top of the mentioned effects. Thank you.

Well, Cepeda, it's Blanco speaking. Regarding the expectations in the year, we are fully committed for what we have guided for the market in the first, with the disclosure of the results of 2022. The margins embedded in our guidance is between 40 to 42% from the bottom to the top line of the guidance. We are committed with that. Remember that the first quarter is the best quarter that we always have due to the seasonality of our business. We have this a little bit pressure in these margins caused by a metal performance, the four new mice met with them for the beginning of units that is coming with margins that were initially better than expected in the original business plan, but still behind the margins of the integrated companies. If we exclude these acquisitions for 2023, the decreasing margins is just 50 bips. So we are pretty committed to deliver the margins of these 40 to 42%. And as you mentioned, as a continue educational, we'll grow and the digital growth with higher rates than the undergrad segments, we're going to have some kind of shifts for margins. But for this year, the guidance is between 40 to 42%.

Yes, Cepeda, we unfortunately do not give guidance for a longer term, but there is no reason for margins in all the segments to increase in the following years. Isilio, do you want to comment?

Yeah, I think just as we are growing very fast in continuing education, we launch six new campuses. We are preparing to launch another two or three campuses still this year. So as any other on ground operation for education, we will ramp up the number of students per campuses. So gross margin will increase and the margin will increase along the year. So we expect to have better contribution margin coming from continuing education for the following semester. Not only for the legacy operation, but also mainly for the new campuses that we launched last year and also this year.

That's very clear. Thank you.

That's a reminder. If you want to ask a question, just raise your hand. The next question will come from Lucas Nagano from Morgan Stanley. Lucas, you may now talk.

Hey, good evening, all. Thanks for taking our questions. I have two. The first one is related to your med schools. The situation seems still very comfortable. You increased prices 8 percent, filled 100 percent of seats. But have you noticed any underlying change in the demand, for example, how it evolved in the Southeast versus the mathematical schools in terms of candidates per seat or pricing, for example? And the second question is related to B. It seems to be performing well. Can you tell us a little which part of the product development process and the commercialization process you are in? And also if you could comment a little if you're developing solutions for companies that are not in the pharma industry.

Yes, Lucas, I can take the first one here. Blanco helped me on the second one. So about the tuition adjustment, that was the average across the board. About the intake level this year, this year was when you compare to the last four years was the candidate ratio, candidate per seat that we had for the last four years. We are reaching around eight candidates per seat. Of course, this is a national average, but as we have a very integrated process, we can manage to have 100 percent of occupancy in all of our units. And of course, that we have a different ratio between our campuses. When you analyze our campuses in large cities like Unigran, Rio, in Rio de Janeiro, we have more than 20, 25 candidates per seat. And for some institutions have around four and five candidates per seat, but it's pretty feasible and easy to enroll in 100 percent of the seats every semester. So even considering that we are passing tuition a little bit above inflation this semester, I think we are strengthening our commercial process, our enrolling process, and our capacity to convert students to our campuses.

If I may add a point here, I just want to mention that we do have different prices in different regions, and that's mainly because of the region, but that does not mean that we have different margins in different regions because all the costs and expenses related to different regions are also different. So what I'm trying to say here in the end of the day, that the ticket from medical school comparing to, I don't know, Unigran, Rio is different, but in the end of the day, we can see similar margins. What changed the margin level is mostly how much concentrated is cool is from medicine. That's what changed the game. And Blanco, may you take the second question?

Yeah, Lucas, thank you. Thank you for our questions. Just give you more color on the B2B. I'll just give a step back to give more color in our strategy. So our digital strategy is focused on penetrating within the physicians with the best solutions to increase their productivity, to increase their assertiveness, and to increase their updating from topics. And we've been these channels to connect these physicians to the healthcare players. So we divided the digital in these two parts. So regarding the companies that we provide this service for the physicians, we are increasing a lot the users, the monthly active users, and we're increasing the payers as well. Regarding the B2B, what we had in place until right now is the connections that we've made in minor parts with other educational companies to provide solutions such as our prep course, and our medicine image solutions that is medical. And most part of these digital revenues are coming from the pharmaceutical industry. We have more than 100 contracts established to now with more than 40 pharmaceutical industry players right now, multinationals and nationals players on that. All the B2B revenues are coming for these two parts. What we have launched right now, we started the connections for the second pillar of the industry that is relevant for our B2B strategy. That is the providers. So we just are getting up a team to do these connections and to offer our connections with the physicians to the providers. In the pharmaceutical industry, what we are providing right now, it's what the industry call it, it detailing that it's marketing and commercial efforts to connect the physicians with the industry players to get their latest drugs, the latest treatments for the physicians. And for providers, we are going to offer recruitment service and offering the best leads that can come from our ecosystem leads for them to get their treatments, buying some medicine and doing their treatments or doing the exams. So that's the strategy, Lucas.

Very clear, Virgilio, Blanquin, Hanata. Thank you very much.

Of course. So just a reminder, if you want to ask a question, please just raise your hand. The next question comes from Jessica from J.B. Morgan. Jessica, you may now go.

Hi, thank you for taking my questions. I have two. So first, how are medicine tickets expected to behave going forward? I mean, do you expect to increase prices above inflation? And do you have any updates? This is the second question. Do you have any updates regarding the New Mice Magicals program? Thank you.

Hi, Jessica. It's Blanquin speaking. I'll take the first question. One and Vigilio, we're going to take the second one. The first, regarding the first one, what we have already discussed in the last call is the pricing for this first semester. We have a disclosure that we've made readjustments for the medicine students that were .5% for these years. And within the ticket maturations, we're going to get something around 1% above that. So what we delivered for the first quarter, this .3% increase in terms of net tickets, excluding acquisitions. And just remember about our ticket dynamic. We established our price increase annually. We usually do that in the month of September, in the beginning of October, and we established the price for the inflations that we expect for the year. When we did that on 2021 for 2022, we did the same 7.5%. We were behind off the inflation of 2021 because inflation speed up at the end of the year. And this year of 2022, the opposite has happened. We established the same 7.5%, but the inflation started to decrease at the end of the year. So that's how we do that. So next September, we're going to see this inflation perspective for the year. We established a new pricing for 2024. And above these price readjustments, we have these tickets maturation effects that will come around off these 1%.

Yeah. So just to add a point here on this question about tickets, and you'll take a look on our table too. We also have a very high increment on tuition when you consider also other health programs, even excluding acquisition, the tuition fees is jumping more than 15%. So that's an effect not only about price adjustment, but an effect of mix, much more concentrated and high value programs than we had in the past. So it's a good dynamic also for the year on all the programs besides the medical programs for 2023. So about the MICE Magicals, so we are just following after the normative rule that they said that we should have to take 120 days to release what will be the new rules for the MICE Magicals tree or the new wave of capacity. So it's just 60 days after they release that information. So we're expecting to have something by the end of July, beginning of August. They are working, they have their commission getting together, asking the sector, many professionals, many areas participating, how should be addressing the new conditions for the new wave capacity, but it's still early in the process to have any information.

Okay. Thank you. Thank you.

So we do not have other questions. Thank you so much for participating with us today. If you have any follow-up questions or if you want to schedule a call with us, just contact me and I will be pleased to help you guys. Have a good night and have a great end of week. Thank you.

Thank you all. Bye bye.

Recording stopped.