Afya Limited

Thank you for joining us for AFI's conference call. I'm here today with AFI's CEO, Virgilio Gibon, and our CFO, Luisa D. Blanco. 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 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 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 of the date hereof. You should not rely on them as predictions of future events, as 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. Now, let me now turn the call over to Vigili Gibon, FCO, starting the next slide.

Thank you, Renata, and thanks to everyone for joining us today for our third quarter and nine-month conference call for 2024 results. Let's start with our quarter highlights. Net revenue grew over 16% over a year, reaching R$841 million, followed by an adjusted BDAR growth of 25% over a year, reaching R$348 million, with a margin of 41.4%. Adjusted net income followed the same positive trend of last quarter, and reached R$165 million, a growth of 29% over a year, with an adjusted EPS of $1.79, 30% higher than last year, reflecting AFIA's great capital allocation discipline on M&A and efficient capital structure. We also reported a record cash flow from operating activities, and the nine-month period with $1,168 million, 25% higher than last year, with a cash conversion of 109.7%. And we are able to maintain our net debt level stable even considering the acquisition of UNIDOM for R$660 million, R$7 million in earn-out payments, as will be mentioned further on by Luis Blanco. In this quarter, we have reached 3,593 approved medical seats with the acquisition of UNIDOM, the approval of 80 seats in UNIMA, and the reconsideration of additional 10 medical seats in Unigran rio. Our number of undergrad medical students has reached more than 24,000 students, representing over 12% growth compared to the same period last year. Furthermore, our medical school net average 60, excluding the UNIDOM acquisition, increased almost 5% in the nine-month period. In the continuing education segment, we continue to see great results, presenting a net revenue growth of .4% every year, reaching R$188 million. Once again, AFIA also reported great results on the medical practice solution, which ended the quarter with an increase in net revenue of 15% every year, reaching more than R$170 million in the nine-month period. These results highlight the significant potential in medical practice solution, driven by a strong ramp up in B2B and B2P engagements. With more physician and data in the ecosystem, AFIA sector tiviness to B2B clients continues to grow, engaging 47 unique clients and securing 109 contracts in 2024. Moving now to slide number four, we will talk about our solid business education within our three business units. Starting with the undergrad segments, we saw important movements throughout the quarter, such as higher tickets and medicine courses, with 4.8 increase in medicine tuition for the nine-month period. Thanks to the maturation of our medical seats, the completion of UNIMA and AFIA-Jabuatão integration process in November, 2023, and the ramp up of the four MICE medical campuses that started its operation in third quarter, 2022. We are glad to see a gross margin expansion of 170 BIPs in comparison to nine months, 2023. This quarter, we also successfully completed the acquisition of Unidom, which brings 300 additional medical seats and strengthens our footprint in Salvador, one of Brazil's largest metropolitan areas. Our dedicated efforts and the strong brand recognition in Salvador led to substantial increase in the medical students enrollment at Unidom, boosting our student base by 37% and reinforcing the impact of our ecosystem and alignment with our growth objectives. Continued education was marked by an operational restructuring, which resulted in a growth in B2B students boosted by our residency journey offerings. Additionally, we are pleased to see an expansion of five new units in 2024, four of them being cross units in undergrad and one standalone campus. Lastly, in our medical practice solution segment, we ended the quarter with over 11% increase in active payers, driven by 11% growth in clinical decision and a 14% growth in clinical management. This result reinforces the opportunity I had in medical practice solution and explained by the ramp up in B2B engagements that boosted net revenues and grew 28% with new contras with the pharma industry and the continuous ramp up in B2B contracts. And now I'll be turning the call over to Luis Blanco, AFIA CFO to provide more insight into the financial and operational metrics. Thank you.

Thank you, Virgilio and good evening, everyone. Starting with slide number six for discussions of key operational metrics by business unit. Starting with the undergrad problems. Our number of medical students grew 12% year over year, reaching more than 24,000 students and approved medical seats increased almost 14% yearly. Our medical school net average ticket, excluding the unidom acquisitions, increased by .8% for the nine months, reaching 8,887 reais. We have also achieved 2,156 million reais in net revenues, up from 1,883 million reais from the prior year. An increase over 14%. Regarding the revenue mix, 86% was the rivet from medical school students and 94 from health related courses. On the next page, I will present our continuing educational metrics. We approach the continuing educational metrics through three main journeys. Starting with the presidency journey, we saw a 52% increase, reaching 15,678 students by the end of the period. In the graduate journey, students numbers grew by 3%, reaching 7,300 students, primarily driven by student graduations. Lastly, our other courses and B2B offerings increased by 22% over the same nine month period of the prior year. Overall, this effort pushed the continuing educational net revenues to 188 million reais in the nine month period of 2024, up from 170 million reais in the nine months of 2023, reflecting a growth over 10%. These include a 14% increase in B2B revenue and a 22% decrease in B2B. Moving into slide number eight, I will discuss the medical practice solutions operational metrics. The first graph shows our total active payers representing revenue generated in the business to physicians segment. Following a steady growth trend, the number of paying users rose to over 200,000 and 11% increase over the same quarter last year. The second graph highlights our monthly active users, which accounts for 249,000, slightly lower than the 259,000 record last year. This change is primarily due to the transitions from the PEPMAP portal to the AFIA portal. Lastly, the third graph shows the net revenues from our medical practice solutions, which grew 15% year over year, reaching 117 million reais. Of this total, 100 million was generated by the B2P, showing an increase of 13%, while B2B contributed in 17 million reais, growing 28% in the nine month period. In the next slide, we also present AFIA ecosystem. We're pleased to highlight AFIA substantial contributions to the healthcare community in Brazil. By the end of the third quarter of 2024, our ecosystem encompassed 326,000 physicians and medical students using our service and products. Moving forward to page number 11, I want to discuss our financial overview for the third quarter of 2024. Starting with the next slide. With great satisfaction, I present another strong quarterly performance for AFIA. Net revenue for the third quarter of 2024 reached 841 million reais, representing a 16% increase compared to the same period last year. Net revenue, totally 2,455 million reais for the nine month period, up 14% year over year. This growth was primarily supported by medical tickets increasing above inflation, the maturations of medical seats, unidom acquisitions, and the performance of the continuing educations and medical prep solution segments. In third quarter 2024, adjusted EBITDA rose by 25%, reaching 348 million reais, with an adjusted EBITDA margins of 41.4%, a gain of 290 base points compared to the third quarter 2023. For the nine month period, adjusted EBITDA amounted 1,090 million reais, an increase of 24% over the prior year, with an adjusted EBITDA margins of 44.4%, representing a 350 base points increase over the same period. The expansions in the adjusted EBITDA margin is largely attributed to gross margin expansions in the undergrad segments. The completions of the UNIMA and Afro-Jabotão integrations process in November 2023, the hump up of four MyS medical campuses that started operation in the third quarter 2022, operation restructuring efforts in continuing educational and medical practice solution segments, and more efficiency in selling general and administrative expenses. Moving to the next slide. The year's cash flow from operating activities rose by 25%, reaching 1,167 million reais, reflecting strong operational performance. The operation cash flow conversions ratio was .7% in the nine months of 2024. Adjusted net income for the third quarter of 2024 came at 165 million reais, marking an increase of 29% from the same period of 2023. For the nine month period ending September 2024, adjusted net income totally 627 million reais, up 47% year over year. This performance was mainly due to the enhancement in our operational results, lower effective tax rates than the last year, and lower interest rates. In terms of adjusted EPS, the quarter will achieve one reais and 79 cents, a 30% growth compared to the previous year, with six reais and 81 cents per share in the nine month periods, representing a 49% increase. And now moving to my two last slides, I will discuss our cash and net debt positions, also give you more color on our cost of debt. This slide presents a table detailing our gross debt compositions and the total cost of debt covering our primary obligations, the soft bank transactions, the debentures, the other financial liabilities, the IFC financing, and account payables to selling shareholders. AFIA has entered to a financial agreement with IFC to support our expansions initiatives through acquisitions. This agreement represents the first IFC sustainability linkage loan based on social objectives within the educational sector. Under the loan terms, IFC has disbursed 500 million reais to be repaid in seven -semi-annual installments beginning in April, 2007. The interest rates is set in the Brazilian CDI rate plus 1.2%, with a potential 15 base points reductions if specific sustainability KPIs are met. On the next page, we can look closely at the net debt variation. As of the third quarter of 2024, our net debt is stood at 1,894 million reais, almost the same level compared to the end of 2023. Even accounting for the 157 million earn out payments regarding the additional seats in wannabe and Unima, and the 660 million reais regarding the acquisitions of Unidom, we were able to reduce our net debt to adjust the debida thanks to the strong cashflow from operating activities in the nine month period. This concludes our prepared remarks. We are very proud of our accomplished and robust performance across all areas. Our commit to advance to the medical journey to an integrated educational system and medical practice solutions remain strong, supporting healthcare professionals growth, continuous learning, accuracy and productivity. As we look ahead, we are enthusiastic about opportunities that lies before us. I will now open the conference for the Q&A section. Thank you.

Hi, if you wanna ask a question, just please raise your hand. The first call comes from Marcelo Santos from JP Morgan.

Hi, good evening, I'm Virgilio Luis Renato. Thanks for the opportunity for asking questions. I have two, one is regarding, if you could make some comments about the M&A environment, given that there are a large number of seats issued, how are you seeing, what kind of negotiations, generally speaking, are you having? How do you think M&A will unfold from now on? And the second question is more about the competitive environment. I know you're able to increase the tuition for new students, I think by 5.1%, at least projected for next year, which is a very good number, but what kind of changes, if any, have you noticed versus the previous intake cycles that could be attributed to more competition and how are you dealing with that? Thank you.

Hi Marcelo, thank you for your question. I'll take the first one and Virgilio gonna take the second one, okay? Regarding the M&A environments, with the outcome from all these injunctions that come after the Supreme Court process, all these approvals, they amplify, they increase the number of targets that we have in our pipeline because these new authorizations come to the market and some of them are starting to talk to us. The better thing about this is that these more sellers markets, I would say, makes us to get a possible, the next year will be a lower multiple if you compare to our latest business combinations that was when you don't. So we keep talking to all the entities that have our profile and remember that we just go after institutions that are highly concentrated in medicine and we think that the next year will have lower multiple per seat if you compare to the latest transactions.

Hi Marcelo, I'll get the competitive environment question here. We are keeping the same strategy as we did for the last four or five years. We keep passing at least inflation to our price, to our average tuition price for the next cycle. As you may notice, we already started our 2025 first semester intake. It's still in the very beginning. What we are seeing is the number of candidates compared to the same period last year, it's much higher, much better than we saw, much more candidates and leads coming. And we are close to 10 percentage points above last year in number of enrollments at the same month. So we are already 50% already enrolled, still have a room. We were at the same time last year, around 40% of all seats already enrolled. So keeping a good half trend to us and that is not only for medicine. We are also seeing a very good trend on other health programs. As you may see, we are growing organically very fast on our health programs because we have all the synergy on our campuses, on our labs and also in our brand because we are covering health programs. So the intakes coming on health programs, it's also around two digits, high two digits when you compare to the same period last year.

Okay, thank you, Virgilio. Thank you, Luis, very clear.

So our next question comes from Andres Salis from UBS.

Hi, good evening, everyone. Virgilio, Blanco, Renata, thanks for the presentation and for the questions here. I have two on my end. You mentioned that restructuring efforts in continuing education and medical practice solutions help the company to deliver better with the margins year over year. I would like to know how far down the road are we in these restructuring efforts if we could see further margin expansion going forward. And the second one is maybe a follow-up on the M&A strategy, which regions or states the company might prioritize in 2025 if you could comment on that, thank you.

Hey, Andres, thank you for your questions. It's Blanco speaking here. I'll take the two questions. Regarding the margin expansions that we got from the restructuring from continuing educational and the digital segments, it's regarding the operational efficiency that we got with this restructuring. We had our organization instructors divided by products, by pillars at that time. So I'll give you an example. On the digital sides, we had a product manager for the contents pillar. We have the product manager for the support decision and we have the product manager for the practice management tools. When we did the restructure, we did not only pass the content structure from the digital sides to the continuing educational sides. We did more than that. We unified all the structures that delivered the product. So we just have one product manager for all the offers that we have on the medical practice solutions. And in the continuing education, we have the same. We have just one product manager for the in-person and the digital offer. So the gains that we got through 2024 are regarding the better management for this structure. We are reducing costs and expenses for providing the service. From 2025 ahead, the margin expansions will come from the operational leverage that we are getting in each one of these bills. So they are growing and we have all the structures in place. So with this structure, we are able to increase our results per each one of the segments. So this is for the first question.

If I may add just a point here, André, one thing that you guys need to be careful in order to model our results is about mix. So yes, we foresee margin increase in all bills, but when we talk about mix, we need to be careful because the undergrad grows a bit lower than continuing education digital services. So that can impact the margin overall.

Yes, thank you, Renata. And regarding M&A, targets in each regions that are possible within Brazil, we are not focused on any specific regions. We are more focused on each one of the institutions. The institutions has to be highly concentrated in medicine to become a target to us. And so of course, we've been in the last three acquisitions, we've been talking with players that are more based in large cities and remember that we close the latest business combination was in city of Salvador and the previous one, it was in Jaboatão and Maceio. So we don't seek any specific regions, we seek specific targets that are highly concentrated in medicine and trying to get a good IRR on each one of these deals.

Got it, thank you. Thank you, Bloco and Renata for the comments.

Of course, next question comes from Mirela from Bank of America.

Good evening, everyone. I have two questions on my side. The first one regarding the monthly active users on the digital services solutions. This have declined 4% this quarter, accelerating from the second quarter. So could you give us some more color on the decrease and when do you expect this to normalize now that the PEMAD platform has already been transferred? And the second question would be on the ramp up of when you don't margins since the acquisition. Could you guys comment a little bit on what are the main lines supporting the margin gains there and what are the main challenges? What do you expect in terms of normalized margins there?

Hi, Mirela. So regarding your first question, we have one effect that affects our monthly active users that is the launch of Portal Afia. I don't know if you guys recall, but we had in the past the Portal PEMAD and we have changed to Portal Afia. And with that, we had a decrease in the number of monthly active users. It's totally normal since we have changed, but we launched it in March, April. And since then, we are seeing really great results from this new portal. It's part of our new brand strategy.

Yeah, just adding a point here. On the other side here, Mirela, we were asking for more data from each user. So that helped us to increase the number of payers. So we have much more user that is paying the monthly fee than the monthly active users just because we changed the procedure, how to get the data when some new user is signing to have access to our portal. Okay.

Mirela, it's Blanco speaking. I will take the second one regarding Unidom. We are very glad with the business combination itself. It's been performance better than initially expected for us. And remember that Unidom deal, we got them with around 850 medical students over there. We put that information under the 6K that we announced the deal. And we've finalized the second semester intake with more than the 1,150 medical students over there. We got institutions around 60% of the occupations over there. And in only two months, and remember that we had the closing in 1st of July, we have been able to increase occupations to around 80% in just two months. So this is what brings these margins in this semester. Going ahead, what we can expect, we can expect more regarding Unidom because we had a room to go to 100% of occupancy over there. And with that, we have all the integration gains that we're gonna integrate their legacy systems, their systems to our shared service items that we're gonna occur during 2025. So these process unifications, plus the fulfillment of the existing capacity in Unidom will even expand more the margins that we got from this deal.

That's super clear, thank

you. Next question comes from Luca Marchesini from Italy.

Hey guys, good evening. And thank you for taking my questions. A couple of questions from our side. The first one will be regarding the continuing education segment for which we saw a deceleration in net revenue growth this quarter. Can you please provide more color on the reason behind this deceleration? And also how should we expect growth for the segment throughout 2025? And then the second one will be regarding financial leverage. So we saw another quarter of decrease in financial leverage. So in this sense, can you please comment on what should be the target or a comfortable level for financial leverage going forward? And also if we should expect a higher given payout ratio in 2025, please.

Hi Luca, about the first question on the growth rate on continuing education. As I expect we have like a seasonality on the intake that what used to be called the pillar one that is on the second, the third quarter, it's a low quarter. We are in the middle of the stronger intake also on graduate programs who have a high cohort, a very large cohort graduating this last semester. So that was the main reason why we are kind of flat this quarter right now. But we are seeing good trends on intake. You can check that we launch five new campuses. These new campuses is ramping up this semester right now. So we have good figures that will, but it's too early in the process. The seasonality of this new intake starts in October, November, December goes until January and February. So we may expect some flats on continued education, something in the same path on the fourth quarter and getting better in 2025.

Hi Luca, it's Blanco speaking here talking about the financial leverage. I really liked the net debt reconciliation slide that I had presented. And it was a really amazing performance when in just nine months, we've reduced our net debt to adjusted EBITDA from 1.6 time that we got at the end of 2023 and reduced to 1.3. Right now we feel considered the net debt compared to the midpoint of the guidance that we got for this year. Even we've done two inorganic movements, important inorganic movements that was the unidirectional acquisitions and the earnouts that we paid for the additional seats from Unima and FIPI-Buanabi. Moving ahead, what's our view on that? Our view is that we leverage the company doing business combinations. Business combinations, and I want to address this point again, that are very concentrated in medicine and give us the minimal business combinations return on investments. And we're talking about IRR that returns our capital. So we're very strict on that, on capital locations on that. So we leverage the company to do business combinations. And then we started to expect synergies from these business combinations, keep generating cash, keep the discipline of having a high cash conversion ratios to decrease the leverage until we are prepared to do the next business combination. As we are becoming bigger with this strategy, all the marginals acquisitions that we made have less impact in our financial figures. So with that, we are discussing internally if with these M&A scenario that we keep growing with these 200 seats per year targets, if we have a possibility to start to distribute dividends. But this is ongoing discussions. We did not have any kind of changes on our policy. So that's my view regarding the net debt to the leverage ratio.

Just a reminder, Luca, that next year we have also MICE Medicals. So we have the acquisitions that we're going to keep our pace of 200 seats per year. And also to start the investments of the MICE Medicals units that we will win. So just a reminder, if you wanna ask a question, just raise your hand. Next question comes from Lucas Nagano.

Hi, good evening, Virgilio, Luis, and Nata. Thanks for taking our questions. We have two. The first is regarding the tuition increase and candidates' proceeds. We like to get a sense of the variance of those metrics between your institutions, basically to understand whether we can see your portfolios a segment into different buckets. If there is a particular type of school that saw higher tuition increase in candidates versus another that saw lower, or not, you're still seeing very homogenous trends. So this is the first question. And the second question is a follow-up on capital allocation and M&A, but taking into account the soft bank debt. We still have plenty of time until the debt can be redeemed. But how's your base case about this, assuming, if we assume that that is redeemed, how does it change your capital allocation priorities? Would you be more inclined to refinance it or then keep up the M&A or to pay down to that? Thanks, and sorry for the long question.

Hi, Lucas. I'll get the first one here about the tuition and the candidates' ratio. So we have more than 30 campuses offering medical programs from North, South, East, West or Brazil, and we are pricing differently. So the average for 2025 is around 5.1%, the average that we are passing to all institutions. Of course, that we have some of institutions that we have a very good cohort, quality students applying for that. We are moving forward, moving ahead of 5.1. And the other institutions, independently on the tuition level, we are pricing a little bit lower. Of course, that we have synergy as we operate integrated, we can move candidates from one campus to another campus, but our commitment here is to keep passing at least inflation in terms of average for all campus that we have. The candidates' ratio, as I mentioned, the first question here, we are seeing a much higher demand when you compare the same point that we are on the intake process. So we are still in the very beginning that goes until January, most of them, and also in terms of enrollment. So today we have almost 50% of all seats already fulfilled for all campuses in AFIA in Brazil. That also includes UNIDOM, that's our last acquisition here. So the candidates' ratio is still in the very beginning, but what we can say here that we are better, actually much better than the same period last year when you compare the intakes.

And I'm going to, Blanco speaking here, talking about soft bank deal. As you mentioned before, from May, 2026, soft bank has the optionality to do the early redemption of the deal, of the convertible. We didn't get any kind of dissipation of these discussions. It's an optionality that soft bank has. It's not clear for us that if they were gonna do the early redemption on that. Having said that, to repay these 120 million, 820 million reais amount, we could easily to get another source of finance or even repay with our operating cashflow. And just for these nine months, we generated almost 1.2 billion reais. So I think it's very early to have these discussions, but we could easily manage to get, to substitute this finance for another instrument.

Super helpful, Virgilio, Luis, thanks.

Since we do not have any more questions, we keep the Investor Relations team open to a follow-up if you guys need. See you next quarter.