Afya Limited

Thank you for joining us for AFIA's second quarter 2023 conference call. Today I'm here with AFIA's CEO, Vigilio Gibon, and Luís André Blanco, our CFO. During this presentation, our executives 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 AFIA'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 the potential impact from COVID-19. These risks include those fully described in our filing 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. These measures are not intended to be considered in 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. Let me now turn the call over to Virgílio Gibon, FCO.

Thank you, Renata, and thanks, everyone, for joining us today for our second quarter and first half conference call for 2022 results. For us in Accio, this quarter results reinforce that our strategy has been successful, marked by the consistent growth of our operational and financial results. Once again, we are proud to present the strong execution of our unique business model, combining high growth in all three segments, profitability and strong cash generation, proving its resilience. 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, 2023 guidance, recent awards recognition, the new brand strategy, and to finalize, our future expectations. Further on, Luiz Blanco will shed some color over our financial and operational review. So moving now to page number three, let's start with our quarter highlights. Adjusted net revenue increased 24% year-over-year, reaching R$712 million, followed by an adjusted EBITDA growth of more than 22%, reaching R$268 million, with a margin of 38%. We also reported a record cash flow from operating activity of R$ 566 million, an increase of 26% year-over-year, boosted by the solid operational results of the company, with a cash conversion of 99% and a solid cash position of R$ 741 million at the end of the quarter. Adjusted net income was R$132 million, a growth of 11% year-over-year, with an EPS of R$142 representing a growth of 12%, even considering a higher net debt and interest rate period during this quarter over last year. Moving to our operational updates of the quarter, we have reached 3,113 operating seats, an increase of over 25% over second quarter last year, with the beginning of four mais médicos campuses, along with organic seat expansion in Tabuna, and also the acquisition of Uni Chalagoas and Fit Chabuatão. In addition, our number of undergrad medical students has reached almost 21,000, represented an 18% growth compared to the second quarter of previous year. Once again, we saw great results for continued education, presented a strong net revenue growth of 50% year-over-year. Also, we are happy to say that AFER reported great results in the digital health service segment, which ended the quarter growing 28% in revenues year-over-year. These results materialized the great opportunity I had in digital services, and it was explained by the strong ramp-up on B2B engagements, reaching more than 100 contracts with pharmaceutical industry companies, and the continued ramp-up on B2B contracts, business to physician. Our ecosystem reaches almost 282,000 active users, a growth of 6% year-over-year. This represents around 34% of the Brazilian physicians and medical students market. Moving on to slide number four, we'll talk about our solid business execution within our three business units. Starting with the undergrad segment, we saw an important movement throughout the quarter, such as higher ticks and medicine costs, with almost 9% increase in medicine tuition. the maturation of medical seats, the consolidation of unit and physical positions, and 64 additional seats in Faculdade de Santo Agostinho in the city of Itabuni. We are delighted to present that the most significant growth in terms of revenue came from the continuing education segment, with 50% growth year-over-year, due to the robust intake process, new campuses and course maturation. On our digital services segment, we ended the quarter with a revenue increase of 28% compared to last year. This result reinforced the opportunity I had in digital service and is explained by the ramp-up in B2B engagements with new contracts in the pharmaceutical industry and the continuous ramp-up in B2B contracts. And it's with great excitement that we present to you RxInsights, the new data intelligence platform that will allow pharmaceutical industry companies a real-time, best look at physicians' prescriptive behavior. In the next slide, we are reaffirming our guidance for 2023, which considers the successfully concluded acceptance of new medical students, ensuring 100% occupancy in all of its medical schools. Consider the above factors. The guidance for 2023 is defined as shown in the charts. Adjusted net revenue is expected to be between R$2,750,000 and R$2,850,000. An adjusted EBITDA is expected to be between R$1,100,000,000 and R$1,200,000,000, excluding any acquisitions that may be concluded after the issuance of the guidance. And also consider the increase of FGPS contribution rate. Under the new PS program, Higher Education Finance Fund, introduced in 2018, a retention is applied to the amount paid by the program to cover the delinquencies of the finance students. There was a transition rule that kept the retention at certain levels until 2022. From 2023, the limit was lifted. and the retention was updated according to the delinquents per education entity, for those FIES students that enter on the amortization phase. For AFIA, the expected impact on the increase of the FG FIES in 2023 is around 24 million reais, which was already considered when we issued the 2023 guidance. In other words, After 2022 net revenues and adjusted EBITDA will be almost four times higher than in 2019, the year of our IPO. Furthermore, the cash conversion rate will continue to perform above 90%, showing our capacity to deliver strong growth, expanding our profitability and cash generation. Once again, we are guiding another strong round ahead. aimed at the top-of-the-year guidance, improving ATA's resilience and ability to keep delivering solid results with a high predictability. Now, moving to slide number six. I'm really proud to announce that ATA's remarkable performance garnered three significant awards within the second quarter. First one, Valor Economicus Best Education Company in Innovation. Second one, Another prestigious recognition for being the best company in the education sector in the Valor 1000 Award. And third, the Executivo de Valor Award that I was recognized in the education sector in June. We are very proud of all these achievements as they reflect the work and passion of our thousands of employees around a new unique vision to transform health together with those who have medicine as a vocation. On the next slide, I'd like to talk about ATIA brand strategy and its new architecture. We recognize the importance of incorporating the value we create into our brand and the importance of strengthening and integration that reflects our sense of unity and mission. We already are the leaders and pioneers of a solid and profitable business. Now is the time to be perceived as such. We have almost 282,000 physicians and medical students using our digital solution, but only some of them know the brand AFIA. This brings us a huge opportunity to become the reference in solution formats, to hook them up, improve engagement, cross-sell and up-sell along the journey. Therefore, one of our main objectives is to make AFIA a hub known and relevant to students, physicians, healthcare companies and society. becoming the top of mind and most recurring brand by physicians throughout their journey. With this new logo, we review AFIA's brand architecture to no longer let the value of AFIA be fragmented or diluted. To consolidate all this value under a single brand, simplifying the comprehension of our portfolio, avoiding brand conflicts, and working towards strengthening AFIA as the one-stop shop for physicians. So, to finalize, I would like to talk about our future expectations. When we analyze our goals for 2028, six years ahead, and consider our three business segments, we have a very ambitious plan ahead. With undergrad, we have three avenues for growth. First, by maturing the existing seats. Second, through organic growth of half of the requested seats that have been asked to the Ministry of Education. And last, through acquisition. The fact that undergrad is our biggest cash generator allows us to maintain our goal of constant growth with the plan to increase our available seats by 200 per year through acquisition. Considering the increase in inorganic and organic seats, we expect to reach a total capacity of more than 32,000 students and capture 15% of the market share in terms of private seats by 2028. which represents a growth of over two times in top line. It's worth remembering that AFEM manages to extract significant value from every acquisition. In continued education, which is the next natural step for those who study medicine, we have a product that has shown great potential, and despite being significantly impacted by the COVID-19 pandemic, it has experienced an expansion that has exceeded our expectations and still has a lot of room for growth. Through strong top-line growth, hump up of our new units and additional 50 new courses, we expect to reach R$ 440 million of net revenue by 2028, four times higher than the figures seen in 2022. After Digital Services is where we can expand beyond our physical structure and reach a vast number of physicians with tools that offer productivity, assertiveness and up-to-date information. Our strength in this segment lies in serving as a bridge between the pharmaceutical industry, payers and providers, and a vast community of physicians at various stages of their journey. Our goal for 2028 is to increase penetration and engagement in B2B, business to physician sector, and consolidate our B2B offerings, reaching a net revenue of $1.2 billion in digital services by 2028. To summarize, we intend to grow more than two times 2022 net revenue in undergrad by 2028, four times in continuing education, and over six times in the digital sector. This means that AFIA will almost triple its net revenue between 2022 and 2028. Despite the ambitious goals, they are achievable support by strong execution, focus on the medical journey, and a dedicated team. I will now turn the call over to Luis Blanco, AFIA's CFO, to give more color on the financial operational metrics. Thank you.

Thank you, Virgílio, and good evening, everyone. Moving to slide number 10 to discuss the financial highlights of the second quarter. It is with much satisfaction that I presented another strong quarter results for AFIA. Adjusted net revenues for the quarter was up 24% year over year to R$712 million, reflecting the maturation of medical seats, higher tickets in medicine courses, the impressive growth from continuing education, consolidation of digital service, and the integration of new acquisitions. For the six-month period, adjusted net revenue was R$ 1,422 million, an increase of 24% over the same period of the last year. Adjusted EBITDA for the quarter increased 22% to R$ 268 million, while the adjusted EBITDA margin decreased 15 base points to 38%. For the six-month period, adjusted EBITDA was R$ 598 million, an increase of 22% over the same period of the prior year. with an adjusted EBITDA margin decrease of 80 base points in the same period. The adjusted EBITDA margin reduction is due to the mix of net revenues with higher participations of the digital and continuing education segments, and the consolidations of four new Miles Medical campuses that operations started on the third quarter of 2022, and Unite Alagoas and Fitzgerald Guararapes, which are performing better than expected, but still present lower margins when compared to the integrated companies. Moving to the next slide. Cash flow from operating activities for the semester was 26% higher year over year, totaling 566 million reais, resulting in a strong cash conversions ratio of 99%. Adjusted net income for the second quarter of 2023 was 132 million reais, an increase of almost 11% over the same period of the prior year. Even with the higher interest rate year over year, and an increase in debt with the acquisitions of Unita Alagoas and Fitra Baratão dos Guararapes, our adjusted APS kept increasing due to operational leverage reaching R$1,42 in the second quarter. Moving to slide number 12 for discussions of key operational metrics by business units. Starting with the undergrad segment. Our number of medical students grew 18% year-over-year, reaching almost 21,000 students, with approved medical seats increasing nearly 15% year-over-year to 3,163 approved seats. Considering additional organic and inorganic seats increase, We expect to achieve a capacity of more than 32,000 undergrad medical students in 2028. With our net average ticket increasing almost 9% year-over-year for medical school, we've reached 1,616 million reais of combined tuition fees, up from 1,310 million reais from the prior year. an increase of 23% for the six-month period. Regarding revenue mix, 78% of these are derived from medical school students and 90% from health-related courses. On the next page, I will present our continual educational metrics. As said before, we saw another impressive growth from our continual educational segment. which reported a strong intake process, increasing the number of students by 31% year-over-year. In the quarter, net revenues grew almost 50% when compared to the same period of the prior year. And for the six-month period, we saw an increase of 48%, reaching a net revenue of R$ 71 million. This recovery is due to the better performance of AFIA Educação Médica, making it related to the robust intake process and course moderation. Moving to slide number 14, 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 B2P. With a continuous growth trend so far in this quarter, we have reached 270,000 paying users, an increase of 8% to the same period of 2022. As you can see in the second graph, our ecosystem reached almost 282,000 monthly active users. representing around 34% of all medical students and physicians in Brazil, as Virgílio said before. And finally, our two last graphs. We can see our digital service net revenues, which, for the quarter, increased over 28%, reaching R$ 54 million. And regarding the six-month period, increased by almost 24% year-over-year. The organic growth is a combination of the start of B2B segments with pharmaceutical companies and the expansion of the active payers in B2P. In addition, since 2022, we've started to break down our digital service net revenue within B2P and B2B segments. So, from the R$111 million of digital service net revenue in the first half of 2023, more than R$91 million came from B2P, and almost R$20 million came from the B2B. B2B strategy holds a huge potential and is still ramping up. And now, moving to my three left slides, I will discuss our cash and net debt positions, also giving more color on our cost of debts. Cash and cash equivalents at the end of this quarter were 741 million reais. an increase of 20% over second quarter 2022, and an increase of 2.6% over the first quarter 2023. In this quarter, net debt, totally, 2 billion and 4 million reais, a decrease of 1.3% compared to the first quarter 2023. The increase of R$ 623 million when compared with the fourth quarter 2022, was mainly due to the R$ 825 million Unita Lagoas in Ficha Boatão acquisition closed in January 2023, which was partially offset by the free cash flow generations in the first half of 2023, as we can look closely on the next page. In this slide, I presented the net debt reconciliations for 2023. The cash flow from operation activities was allocated to income tax and lease payments, CAPEX activities, and for the service of the financial debt. Even considering that we had executed part of our share buyback in this quarter, we were able to generate 202 million reais as free cash and reduce our net debt in the semester. On the next slide, you can see a table with the breakdown of our gross debt and our average cost of debt. Considering our main debts, the soft bank transactions, other loans and financing, the account payables to selling shareholders. Our capital structure remains solid with conservative leverage positions and the low cost of tax. This ends our prepared remarks. I will now open the conference for the Q&A section. Thank you.

So, if you want to ask a question, please just raise your hand. Our first question is from Luca Marchesini from Itaú. Luca, you may go.

Good evening, everyone, and thank you for taking our question. So we saw that adjusted bidder margin was impacted by revenue mix and the consolidation of new campuses and acquisitions. So if you could please just provide us more color on the integration process of Unique and also comment on the profitability performance of Mid-South specifically, that would be very helpful. Thank you.

I'll take this one, Luca. Thank you for your questions. Regarding units, we have the expectations to do the migrations to our shared service during the fourth quarter. So the integration is going to happen this year, less than one year after the business combination itself. And regarding MetSell itself, the second quarter, the second and the third quarter are the ones that are not relevant for the business itself. The revenues are more concentrated on the first and the fourth quarter. So MetSell itself during the second quarter is not relevant for MetSell. for the results.

Yeah, to give a more color look, important to say that if you look to our gross margin of digital services and continued education, we increased the margins of both segments in the second quarter. And also, if you look for the ex-acquisition results that represent in the first table of the earnings release, you also can see that UNIT has a margin that's below what we can see in all of our other results. So in the end of the day, as we said, everything is going as predicted, and we are still seeing operational leverage in all segments.

Very helpful. Thank you, guys.

Okay, of course. So the next question will come from Lucas Nagano from Morgan Stanley. Lucas, you may talk.

Hi, good evening everyone. Thanks for taking our questions. We have two questions. The first one is related to the regulation on medical seats. Now that we have some more visibility on the Supreme Court's decision, do you have any expectations for the 270, approximately, requests that were made outside of Mais Magicos that will still be analyzed by MAC? And in parallel, do you have any guess on the format of the new MICE Magicus 3 program, like in terms of size regions? That was my first question. The second question is related to FGPS. You mentioned that the expected impact for the year is 24 million reais. And I wanted to ask you how much of this was already reflected in this first half. Can we assume it's 12 million? And was this effect concentrated in the second quarter or spread between the first quarter and the second quarter? Thank you.

Okay, Lucas. I'll take the first question here. Blanc will help me out. About the asking for new seats out of the Mais Magicos process, I think it's too soon. We are in the middle. of the judgment we have the second judge just releasing his fault he said you know uh now uh he was completely opposed against uh the continuity of the process that was uh already uh within the mac uh and the minister of education uh uh step But it's still soon in the process to check how would be the impact of all these issues, the issue process that is out of the current Mais Magicos process. About the Mais Magicos 3, about the city, I think we still have to wait for one or two weeks to have the public bid in the market and to analyze which will be the city that will be the theorization for the mathematical stream.

Lucas Blanco is talking about the FGFS. When we saw the increases in the in the rotations piece of IPFS that was in the beginning of March. We foresee that and we did these expectations of 24 million reais and we put it under our guidance. So, since the inception of the guidance of 2023, It's reflected under our guidance of 2023, so we don't expect any kind of changes in our guidance and our expectations of this impact in terms of net revenues for the year would be 24 million reais.

Yeah, and we don't see a lot of seasonality between the quarters for us to see a lot of concentration in one quarter or another. Okay, Luca?

Yeah, but the PS contra they are based by semester. So you can consider that most of them, 50% of them will be in the first and the second half. But considering that we have maturation, we still have more students enrolling in the second half. So it is a little bit higher in the second half when compared to the first half because of the maturation.

Very clear. Thank you, guys.

Of course. So just a reminder, if you want to ask a question, just raise your hand. The next question is coming from Jessica from JP Morgan. Jessica, you may now go.

Hi, good evening. Thank you for taking my question. It's a follow-up question on FGFS. So if you could give a little bit more color on the outlook for this contribution on 2024, And do you think it should remain stable as a percentage of medical revenues, assuming no changes in regulations? Thank you.

Thank you, Jessica. I'll take this one. And let's recap about these FGFIS regulations. As Vigilio talked in his part of the presentations, The retentions started when it was ended the fifth year in the beginning of the six years. So, this kind of retention is calculated by the government per educational entity, per each one of the entities. What's happened here in these first years is that the entity that has no medical education was affected. because the government calculated the delinquency rates regarding the program, but put it on the revenues that are the PS revenues that are related to that financial entity. So the entities that has more known medical institutions were more affected in terms of percentage. The medical entities were not affected because we didn't have any kind of graduations of the medicals during the beginning of the six years, the medical program, the graduations. will occur at the end of the six years. So, we are in this year in a transition period, okay? So, regarding the impact in 2024, it's hard to foresee an impact on that, but what definitely I could share with you, the views that The entities that have medicine and other courses, the kind of retention that we have will decrease, because right now we just have the delinquency of the non-medical parts. affecting all the revenues of these entities. So, I would say that we can expect the reduction on that because we'll start to reflect the delinquency of the medical programs. And regarding the pure blood, the pure player medicine, it's right now that we have something about 13% of the retentions. It could go up or down because the delimpacy rates on this kind of entity, it's very, very low for non-PS. So it's kind of hard to say right now what will be the behavior of these rentations when these calculations is updated in 2024 but uh having these two different groups uh uh spare i could say that even we could even get a reduction on that but it's standoff expectations right now jessica jessica is it okay yeah yeah sorry i wasn't mute thank you very much of course

So the next question comes from Mauricio Cepeda from Credit Suisse. Mauricio, you may now talk.

Hi, Virgílio, Blanco, Renata. Thank you for the opportunity. I also have some questions around FGFS. It's kind of a controversial topic. It was kind of the hot topic in the results from the other companies as well. So it seemed that the size of the contribution kind of took the companies off guard. The magnitude of it was kind of unexpected. So my question would be, what you as a company or as a sector, how are you working to mitigate these effects for the future? What are you proposing that could mitigate the effects from the delinquency? And a clarification as well, following what Blanc was answering, You said that the delinquency of the medical entities are higher or lower than the no medical ones. This is just a clarification. And my second question would be on prep courses. I know that this is not exactly the cycle for revenues, but you have mentioned in other opportunities that you have been repositioning, right, repositioning the courses in a – in a different tactic, commercial tactic. So if you could update us on how this reposition is going, it would be great. Thank you.

Mauricio, I would get from the first, your second question about the delinquency on medical, it's much lower than other programs. Our PDA levels is around one, one and a half percent for a pure player, pure campus that's just running a medicine program here. And about the size of this retention, of course, we do not think that this is fair, considering that all this retention is over the delinquency calculated over the students that is getting into the amortization phase. These students, they are non-medical students because if the program that has the new FHFA started back in 2018, we are just considering students ex-medicine or other programs than medicine that they graduated entering the amortization phase and their deletion is much higher than any other medical program that we have in APIA. so considering that when they are using this as a proxy to calculate uh which will be the retention rate over the entire institution over the entire entity they are applying this for overall revenues that's why uh the entire sector uh do not agree uh and is uh trying to uh to convince everyone that this is not fair and we're trying And we are seeing, like, a medida provisória, an amendment being discussed under the Congress to limit this retention rate in the future. Otherwise, FIES would lose the attraction. And as FIES is an important flag for the current government, we should see some changes in the future semesters. So this is about the FGFS. And your third question about the Pillar 1. The second, third quarter is a very low seasonality on our revenues here. Otherwise, we are combining not only the residence prep course coming from MedStar, but all other continuing medical education programs that prepare physicians for titles and so forth. The operation coming from Alenda Medicine and also CardioPapers, they are increasing a lot the number of students. So we expect for the second half, starting the revenues on the fourth quarter, better, so the turnover when compared to the last year. So we are now combining all the products into a big portfolio, not only Med-Cell Residence Prep course, but all in terms of Title Prep and also soft skill programs combined into the Pillar 1, that's our digital continuum education offerings, okay?

Yeah, just for me to add some color of knowledge to under the FCFS. So today we have a retention rate of something around 27%. That used to be 13%. And what the sector is fighting is to limit to 25%. So that could be a change that we can see in the next months. And other point that's important to mention here is that we haven't seen any change on a pure player of medicine in the retention rate. So if it was 13.5%, it is still 13.5%, okay?

Just to put a color on that, what's happened that these calculations is done by entity, okay? So if the entity just have medicine courses, as none of the medical students has graduated during the sixth year because they were going to graduate in the seventh year, the rotation rates didn't change. What haven't changed is the entity that has medicine and other courses. That, as Vigilio mentions, the delinquency was calculated just for non-medical and was applied to the whole program. That's why we have some entities that had higher retentions. because they calculated the delinquency of non-medical and apply for the whole entity itself. And with this cap of 25% that's being discussed on Congress, that would reduce the impact of these increased limitations for us.

Just to finalize, Maurício, the most reasonable thing is to consider that the retention rate, instead of applying for the entire entity, should be applied program by program. So it would consider the delinquency over each program, not an overall institution based on some sample of this unit that does not represent the total revenue of that entity. So that is the, I think, the pledge of the entire sector with the Ministry of Education.

Very clear. Very clear. Thank you. Thank you.

So, our next question. So I think that we do not have any more questions. If you have any other doubts that you couldn't ask here, I'll be available in our email of the IR department. And it was a pleasure to have you all today. Thank you for the participation. Have a nice evening.