Afya Limited

Thank you for joining us for ASIA's conference call. I'm here today with ASIA's CEO, Vigilio Gibon, and our CFO, Luiz André Blanca. During today's 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 ASIA's actual results to differ maturely 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 initiative and its related benefits. 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 the data results. 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 no IFRS financial measures on this call. These measures are not intended to be considered in isolation or as 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 Vigilio Ribon, FSEO, who will begin with slide number three.

Thank you, Renata, and thanks to everyone for joining us today for our second quarter and first half conference call for 2024 results. Let's start with our performance highlights. First, net revenue increased almost 14%, reached 810 million reais, followed by an adjusted bidda growth of 28% year-over-year, reaching 344 million reais, with an adjusted bidda margin of 42.5%, an impressive 490 bps over last year. Adjusted net income reached 210 million reais, marking a 59% growth compared to the same period in 2023. Meanwhile, our adjusted EPS climbed to 2.29 reais, reflecting a 62% increase over the previous year. We delivered robust cash flow from operating activities, totaling 682 million reais, a 21% year-over-year increase, driven by the company's solid operational performance. Operating cash conversion reached 94%, with a robust cash position of R$723 million at the close of the quarter. Moving to our operational update for the quarter, medical seats reached 3,200 approved seats. Additionally, our number of medical students has reached 22,661, representing a 9% volume growth compared to the second quarter of the previous year. It's also important to mention that with our recent acquisition of Unidome and the addition of 80 seats authorized at Uniman in the third quarter of 2024, we have now reached a total of 3,583 approved seats as of today. We also observed impressive results in net revenue for our continuing education business, with the segment growing by over 12% year-over-year, resulting in a net revenue of R$127 million in the first six months of the period of 2024. Similarly, our medical practice solutions demonstrated significant progress, with a revenue increase of 13% compared to the first half of 2023. concluding the six-month period with a net revenue of 77 million reais. Moving now to slide number four, we can now observe our new business structure taking shape, comprised of three segments, undergrad programs, continual education, and medical prep solutions. I would like to reiterate that notable changes have occurred in continual education. Entities previously accounted for as a content and technology for medical education within medical practice solutions are now accounted for in the continuing education segment. Simultaneously, the segment formerly known as digital services was renamed to medical practice solutions. Beginning with the undergrad segment, we observed significant progress throughout the quarter, including an increase of over 5.4% in our net average tickets for medical courses, Organic growth in all segments and expansion in gross margin and the acquisition of UNIDO. Continued education was marked by an operational restructuring resulting in growth and an increase in B2B students boosted by both graduate and prep programs. This segment also benefited from a gross margin expansion due to operational restructuring efforts. Lastly, in our medical prep solution segment, we ended the quarter with a 13% increase in active payers, driven by 11% growth in clinical decision and a 19% growth in clinical management. We have also seen a recovery in our B2B net revenue for this segment, as some of the invoices that were postponed during the first quarter of 2024 are now being accounted for. Moving now to slide number five. We are pleased to announce an update to ASEA's guidance following the recent acquisition of Unidom, the addition of 80 medical seats at Uni Malagoas, the first half results that have exceeded our initial expectation, and also our robust intake process, which once again ensured 100% of occupancy. Our updates include a new net revenue range between 3,225,000,000 to 3,325,000,000 and An adjusted bidder range between R$1,375,000,000 and R$1,475,000,000. And a capex range between R$220,000,000 and R$260,000,000 for our capital expenditures. And now, I'll be turning the call over to Luis Blanco, AFIA's CFO, to provide more insight into the financial and operational metrics. Thank you.

Thank you, Virgílio, and good evening, everyone. Starting with slide number seven for discussions of key operational metrics by business units. Our number of medical students increased by 9% over the first half of 2023 to 22.6 thousand students. We have reached 3,203 approved medical seats due to the 40-seat increase in Guanabí authorized in January 2024. The net average ticket for our medical school grew by 5.4%, reaching R$ 8,922 in the first half of 2024. Furthermore, undergrad program net revenue saw an increase of more than 13%, reaching over R$ 1,414 million, 86% of which is related to medicine and 94% from health-related courses. All these efforts highlight one key point. Our medical educational business remains and will continue to be the foundations of our business in the short and middle term, driving consistent growth alongside strong profitability and cash generation. On the next page, I will present our continuing educational metrics. Strategically, we look into our continuing education considering three journeys, starting from the left to the right. With the residency journey, we observed a 33% increase in active payers, reaching 13,058 students by the end of the period. Moving through the graduate journey, we achieved a 22% growth, totaling 8,100 students. Finally, in our other courses and B2B offerings, we saw an increase of 8.2% over the six-month period of the prior year. In summary, our efforts enable the Continual Education Net Revenue to reach R$128 million in the first half of 2024 compared to R$114 million in the first half of 2023, reflecting a growth of over 12%. This growth includes a 15% increase from B2P and a 13% decrease from the B2B offerings. Moving to slide number nine, I will discuss the Magical Practice Solutions operational metrics. On the first graph, you can see our total active payers, those generating revenues in the business to physician segment. With a continuous growth trend, we reached 196,000 paying users, reflecting a 13% growth compared to last year's quarter. As shown in the second graph, our monthly active users counting, and over 57,000 in the first half of last year, mainly due to the discontinuations of PadMed portal and the launch of the AFIA portal. Finally, our last graph displays the net revenue from our medical practice solutions, which grew by 13% compared to last year, reaching 77 million reais. Within this revenue, 65 million reais come from the B2B and 12 million reais was from B2B, reverting the decrease in net revenue in the first quarter as previously postponed B2B invoices were now accounted for. In the next slide, we also present Asia ecosystem. We are proud to present the significant impact that AFIA has made on the healthcare community in Brazil. At the end of the second quarter of 2024, our ecosystem includes over 320,000 users who are actively engaged with our service and products. Moving forward to page 11, I want to discuss our financial overview for the second quarter of 2024, starting with the next slide. With great satisfaction, I'm pleased to present another robust quarterly result for ASEAN. Net revenue for the second quarter of 2024 reached 810 million reais, reflecting a 13.7% increase over the same quarter of the prior year. And for the six-month period, net revenue was 1,614 million riyals, an increase of 13.5% over the same period of last year. This growth is mainly driven by 5.4% increase in net average tickets for medical courses, maturations of medical seats, the addition of 40 seats at the Guanabe campus, strong performance in continuing educational intake, and effective execution in medical practice solutions. In the second quarter of 2024, adjusted EBITDA increased over 28% to R$344 million, with an adjusted EBITDA margin of 42.5%, marking an increase of 490 base points compared to the second quarter of 2023. For the six-month period, adjusted EBITDA was R$742 million, an increase of 24% over the same period of the prior year, with an adjusted EBITDA margin of 45.9%, an increase of 380 base points in the same period. The adjusted dividend margin expansion is mainly due to gross margin expansions within undergrad and continuing education, completion of UNIMA and FCM, Jaboatão integration process in November, 2023. The ramp-up of the Four Mais Médicos campus that started operations in third quarter of 2022. operation restructuring efforts in our continual educational and medical practice solution segments, and more efficient in selling general and administrative expenses. Moving to the next slide, the year cash flows from operating activities grew 21%, totaling 683 million reais, driving by our robust operational performance. The operating cash conversions ratio was 94% in the first half of 2024. Adjusted net income for the second quarter of 2024 amounted to 210 million reais, an increase of almost 60% over the same period of 2023. For the six-month period that ended June 2024, we also saw an increase in adjusted net income reaching R$ 461 million, presenting an increase of nearly 55% year-over-year, mainly due to the enhancement of operational results, the reduction in financial expenses due to the decrease in net debt and lower interest rates, and lower effective tax rates. and increasing distribution from subsidiaries. Regarding adjusted EPS, we achieved R$ 2.29 for the quarter, a remarkable 62% increase compared to the prior year, and R$ 5.03 per share in the first six-month period, a growth of 57%. On the next slide, we can see a table with the breakdown of our gross debt and our total cost of debt, considering our main debts, the SoftBank transactions, debentures, accounts payable to selling shareholders, and other financial obligations. We are proud to announce that AFIA entered into a loan agreement with international finance corporations to finance our exponential program through acquisitions. The financing is IFC's first sustainability-linked loan based on social targets in the educational sector. According to the financial terms, IFC will loan up to R$ 500 million, which shall be repaid in seven equal semi-annual installments starting in April 2027. The interest rate is the Brazilian CDI rate plus 1.2%, and may be reduced by 15 pips if sustainability KPIs are cheap. And now, moving to my last two slides, I'll discuss our cash and net debt position, also giving more insights into our cost of debt. In second quarter 2024, our net debt reached 1,459 million reais when compared to December 2023, after reducing its net debt by 356 million reais. Even considering the PIP wannabe earn-out of 49 million reais, we were able to reduce our net debt per EBITDA from 1.6 times in 2023 to 1.5 times in the second quarter of 2024, including Unidom-Pedro business combination. As shown, we also reduced our net debt over R$150 million more compared to the same period of the prior year. This concludes our prepared remarks. We are very proud of our achievements and strong performance across our areas. Our commitment to enhancing the medical journey through a unified educational system and digital solutions remains steadfast. This approach supports the growth, continuous learning, accuracy and productivity of healthcare professionals. Looking ahead, we are excited about the promising opportunities that await for us. I will now open the conference for Q&A sessions. Thank you.

If you want to ask a question, just please raise your hand. The first question comes from Mirela from Bank of America. Mirela, you may now talk.

Good evening Luis and Renata. I have two questions here. The first one in terms of cost of debt What should we think about that considering the recent IFC mission and the debt maturity of some of your debt that it's cheaper? So what are we thinking about the cost of debt in the near future? And second, on the triggers to reach the top of the guidance on margins, Mirela, I imagine that the risk here lays more on the medical practice solution, so could you tell us a bit of how is the margin dynamic in this business, especially for the second semester?

Hi Mirela, we're speaking, talking about the expected cost of death. I would say that we're going to present our cost of death below CDI at least until we have the SoftBank transactions with us, that is due to 2026. So until there, you can expect that our cost of debts will be below the Brazilian 100% CDI, okay?

Miguel, this is Virgilio. We got your second question, the guidance, how to reach the top line. Actually, we are aiming the range. This commitment here is to reach the range that we are releasing right now. But based on our three segments here, so the execution was above the initial expectation for all the three segments here, so we are performing better. I regard the medical solution segment since last year, the second half of last year, when we did all the restructuring process between continual med education and also the digital service, the old digital services segment. We are having a lot of synergies here. And on digital solutions that now it's called a medical practice solution, we are delivering a positive EBITDA. We are growing close to 20s. our growth rates for 2024 expected, and also the positive EBITDA margin around 20. Remember that we were close to zero last year. So it's a quite positive improvement on all products that we are offering under the medical practice solution, but also pushed by undergrad segment and also continuing med education. We kept both of them are also better than expectation, also better than last year, as we can see on our first health results here.

Yes, if I may add, Mirela, the main reasons, the main triggers to keep the margin and to achieve what we are delivering the guidance, what we are promising the guidance, is mostly the one that we already have. So as we just said, the restructuring between the medical practice solutions and continuing education, also the integration of UNIT that comes with a better margin through the whole year, and the four medical units that we opened in the second semester of 2022 that are now delivering better margins.

Thank you. That's super clear.

Thank you. The next question comes from . Can you hear me, guys? Now we can.

Okay, thank you. Thank you for taking our questions. A couple of questions from our side. So the first one is, the release mentions that one of the reasons for the upward revision in guidance was the performance in the first semester. So can you please comment on which of the segments delivered the results that were above the expectations and led to this revision in the guidance? And then the second one is, we saw an acceleration in the revenue growth for the medical practice solution segment. Can you please provide some more color on which of the products latches stronger performers? That's it from our side. Please.

Hi, Luca. I'll take the questions. The first one, regarding the better performance in the first semester, basically comes from better results that we got from the integrations of UNIMA and FITS Jabotão to our structure. And remember that we have their business combinations in the beginning of 2023, but we integrated it in November 2023. So we are now capturing the whole synergies that we have with these operations. Other one is better performance margins that we are doing on the MySmedicus 2 operations that we've launched through 2022. We have delivered better SG&A with all the zero budget projects that we have implemented here on Asia. All that said, we got this performance better, and that performance with the Unidom acquisitions and with the additional seats that we got from Unima made us comfortable to update our guidance for this one that we just released. So we are very confident that we will deliver the guidance as until today we have delivered all the guidance that we've provided. Regarding the second question, regarding the best, the accelerations in terms of net revenues in the solutions, the digital solutions, we have these accelerated. mostly with the B2B side of the solutions. Remember that in the first semester, we mentioned that we have part of the revenue recognitions dropping from the first to the second quarter. We've finalized this service provider for the pharmaceutical industries, and then we could recognize revenue during the second quarter. And these B2B revenues that come during the second quarter, during the semester, the revenues grew more than 20% and accelerating the revenue for the segment.

And regarding the product, Luca, the main product that we're selling in the B2B is marketing campaigns for the pharmaceutical industry.

That's very clear, guys. Thank you very much. Luca, I think just one point I think it's important to mention. Also, the new guidance considered all the rhythm that we saw from the new intake from the second half, and we had another strong intake with a lot of candidates proceed close to what we had last year, so it's a very healthy cycle, so gave us the again, the right confidence and predictability to upward and update our guidance for 2024. Perfect, Vigilio. Thank you.

Thank you, Luca. The next question comes from Leandro Bastos from CIC. Leandro, you may now go.

Hey, guys. Thank you. I have two questions more related to regulation. First one, I mean, we had kind of the approval, the decision actually by the Supreme Court for the injunctions. And so far we have seen some approval. So just wanted to have your perspective on whether you're seeing any changes in competition given those approvals and how many injunctions you think might be approved given the market knowledge that you have. That will be the first part. Then the second also related is whether the recent approvals have been changing your strategy in terms of the regions for mesomericus trees, the upcoming auction. And if it might continue to change the timeline also that you expect for mesomericus tree, given those kind of outstanding junctions. So that'll be it on my side.

Okay, Leandro, so the first part was the intake cycle of this release. So we didn't perceive any changing. We had a very positive and healthy cycle. I think we are differentiating a lot our operation in all cities that we have our campuses for the undergrad segment. I think the approval, I think the great majority of them very aligned the expectation after the definition from the Supreme Court. So it's everything running as expected. We still have some approvals to come. Also, the increase of number of seats from the normal process that we had in the past, still seeing some approvals coming from the Ministry of Education, not only based on the decision by the Supreme Court. So is everything running as expected? It's very difficult to measure how will be the impact and the speed of them, because it depends on the capacity of the Ministry of Education to approve and also to analyze everything that they have. But based on the idea on the entire My Magical Street program, it's something around 9,000 to 10,000 additional seats, including all the expansion for this new capacity wave, at least what is based on the idea coming from the Ministry of Education. So we're still in the process to give more, any other detail, more than that, okay?

Yeah, and regarding the regions that we are choosing, we are not going to compete for the ones that are already in my book. I'm sorry, we are not going to compete on regions that we have injunctions.

Great. And just kind of from me, another one, in terms of the M&A pipeline, does it have been changing with the injunction? I don't know any companies that won and eventually might become targets. Did your pipeline change with that? Are you seeing more opportunities or not really?

I would take that, Leandro. As a matter of fact, with these new institutions being approved. So our pipeline, possible top of the funnel, has grown. So we have more targets to talk. We are pretty confident that we can keep the rating of 200 seats acquisitions per year. And remember that with unique acquisitions and when you don't, we are ahead of the guidance that we provided since 2022. So we still see with a very good eyes to do the M&A with the right pricing. Right now we have more. more targets on the streets to talk to. And of course, we are going to keep the discipline to choose the regions that make sense for us at the right price.

Great. Thank you.

And as a reminder, if you want to ask a question, just please raise your hand. The next question comes from Marcelo Santos from Jacob & Borden.

Hi, good evening, Virgilio, Blanco, Renata. Thanks for taking my questions. I have two and one clarification. The first question is, could you please comment on the competitive environment on the prep course business? I think that was something that in the past you were having some difficulties, just wanted to know how it evolved. The second question is, wanted to understand a bit why the B2B revenues in continued education is contracting and what are the trends there? And the clarification is something that Virgilio said in one of the answers. Virgilio, did you mention that the margin for the medical practice business is 20%? Or I didn't understand if you mentioned it was 20% as well, as well as the growth, or you're just referring to the growth and the margin is positive. Just want to understand better if you really said that. Thank you.

I'm going to take the first one regarding the competitive environment for the prep course. The competitive environment in the second quarter, it's not relevant at this moment because the second and the third quarters of this market, it's not seasonal because the sales are concentrated on the first and the fourth quarter of the year. So did not impact us in the second quarter and will not be a topic for the fourth quarter, for the third quarter, sorry. This will be back on the table when the sales come back is the fourth quarter when we're going to launch The 2025 collections, we start sales of it during the fourth quarter. So until that, until this new cycle, nothing, we're going to change on that.

If I may add on this point, you need to remember that the product is not only MedCell, right? When we talk about the residence journey, we are talking about MedCell and only the MedCell. So our offering today, Marcelo, is not only the prep course as we had in the past, right? We have all the mentoring that gives a lot of value to MedCell products.

Yeah, that's very important. It's all the sort of prep courses embedded. That's not only the product that initially was being delivered by MedCell. So even considering MedCell traditional products, but as we rebuild the curriculum, the product, We are seeing a strong enrollment growth coming on the prep course arena here. As you can see on our table tree, it's more than 30% of students more than the same period last year. So it's a good sign on our prep and prep course segments. So not only mid-cell here, okay, Marcelo? Thank you. Our second question here about the B2B relevance on continual medical education. This is not core. This was something that was leveraged during the pandemic, that we were licensing our products here to help other institutions. This will be more than flat. We are not guiding any growth on this type of product or on this type of segment here on the continual medical education. But it's something that we are not... shutting down the offer, but we continue to offer to our clients. It's around 30 to 40 different institutions that continue to use our products in the education sector. About the clarification, so we're expecting to grow around 20 this year on medical practice solutions and also The contribution margin, not only the gross margin improvement, but we are seeing that the results after the restructuring process that we ran in the second half of last year, it's delivering a positive EBITDA around 10 to 15%. And we are aiming to reach close to 20%. But that's the contribution margin. We are not releasing that on our reports by segment, just up to contribution margin. Perfect. Thank you very much. Contribution would be gross margin. Okay. Thank you very much.

The next question comes from Cepeda from Morgan Stanley.

Hi, Virgílio, Blanco, Renata. Thank you for the opportunity. We have two questions. The first one about Unidon. What do you expect in terms of consolidated margins after the integration? Which are the sources of synergy there? Which is the timeframe of the integration? So a little bit on the impact of Unidon. And a second one about the medical practice solutions. We understood from the release that there was a simplification there, which helped the margins. So our question would be, if you are narrowing down the services you offer there, if you chose to concentrate in some few digital services. So basically, if there is a different strategy or a different position in there. Thank you.

Hi, Cepeda. I'll take this one. Regarding Munidon, and remember all that we closed the deal in the first day of July, we see a very good institutions that was with a very lean structure, so we're very happy with the transactions. We have 45 days since the closing, so we're still working on the integration plan. We don't have the integration dates yet defined, But we're very happy with the institution itself. The synergy will come in the same line with all the transactions that we've made as of today. So they are concentrated in top line. We're going to have the fullness of the capacity during these periods We're going to have the stream, the scholarships, and some kinds of discounts that were given to family and friends or institutions. We're going to revisit the cost to provide the service regarding the correct structure for the teachers. We're going to implement our national curriculum over there and we're going to centralize all the back office operations under our shared service without increasing it. So these are kind of synergies that we're going to achieve in the next couple of months. So everything is occurring according to the plan that we've announced when we signed the deal in May, in last May. So when we did that, we put a date. after we've got the maturations, we're going to reach an EVA to EBITDA when the institution is mature with 4.2 times EVA EBITDA. So this is our view and our best view for Unidom for the semester is incorporated in our guidance. So the number is over there. Regarding the restructuring of the digital segment and the educational segment, we've made this in the very, very beginning of the year. So we started this year with this restructuring in place. one of the major parts of the infrastructure is what? To move the old Pillar 1 offerings from the digital to the continual educational. And with these movements, each one of the segments we started to not be structured pair of product or per family of product, but we started to be organized this segment as a whole. So instead of having a product team, for instance, pair each one of the pillars, we started to have one product team for all the service that we have. We started to have one tech team for all the service practical solutions for all the solutions that we have. So we lean up our structure for the year. And with that, we gain a lot of efficiency, both in terms of cost and expenses. So we're very happy with that. And we put these movements within the guidance, and as we are delivering better results, we incorporate all these scenarios within the UNIDO acquisitions to update our guidance for the year.

Okay, Bernardo, thank you. So the point is that there was no redesign in the offering. It's much more about internal structure for delivery.

Yes, exactly that.

Thank you.

Of course. So as we do not have any more questions, I would like only to give to you guys an invitation about our after day that will happen on October 29th. We'll be online and in presentation mode, and we're going to send more details shortly. Thank you all for being with us today, and we hope to see you next time. Have a good night.