Afya Limited

Thank you for joining us for AFES conference call. I'm here today with AFES CEO, Virgílio de Bom, and our CFO, Luisa André 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 AFIA'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 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 Virgílio Gibon, AFSCO, 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% year-over-year, reaching 841 million reais, followed by an adjusted EBITDA growth of 25% year-over-year, reaching 348 million reais with a margin of 41.4%. Adjusted net income followed the same positive trend of last quarter and reached 165 million reais, a growth of 29% year over year with an adjusted EPS of 1.79 reais, 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 R$1,168,000,000, 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$660,000,000, R$7,000,000 in earn-out payments, as will be mentioned further on by Luiz Blanco. In this quarter, we have reached 3,593 approved medical seats with the acquisition of Unidom. The approval of 80 seats in Unima and the reconsideration of additional 10 medical seats in Unigran Rio. Our number of undergrad medical students has reached more than 24,000 students, representing over 12% growth compared to the same period last year. Furthermore, our medical school net average ticket, excluding the UNI-DOM acquisition, increased almost 5% in the nine-month period. In the continued education segment, we continue to see great results, presenting a net revenue growth of 10.4% over the year, reaching R$ 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% year-over-year, reaching more than R$170 million in the nine-month period. These results highlight the significant potential in medical practice solutions driven by a strong ramp-up in B2B and B2P engagements. With more physicians and data in the ecosystem, IFAS' attractiveness 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 execution within our three business units. Starting with the undergrad segment, 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 Áfia-Jaboatão integration process in November 2023, and the ramp-up of the four mais médicos 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 UNI-DOM, boosting our student base by 37% and reinforcing the impact of our ecosystem in 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 contracts with the pharma industry and the continuous ramp up in B2B 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, Virgílio, and good evening, everyone. Starting with slide number six for discussions of key operational metrics by business unit. Starting with the undergrad programs. 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 4.8% for the nine months, reaching R$ 8,887. We have also achieved R$ 2,156 million in net revenues, up from R$ 1,883 million from the prior year, an increase over 14%. Regarding the revenue mix, 86% was derived 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 residency 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 percent over the same nine month period of the prior year overall this effort pushed the continual educational net revenues to 188 million reais in the nine month period of 2024 up from R$170 million 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 to 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, an 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 R$117 million. Of this total, R$100 million was generated by the B2P, showing an increase of 13%. while B2B contributed in R$17 million, growing 28% in the nine-month period. In the next slide, we also present AFIA ecosystem. We are pleased to highlight AFIA's substantial contributions to the healthcare community in Brazil. By the end of the third quarter of 2024, our ecosystem encompassed 326,000 physicians and medical students, using our service and products. Moving forward to page number 11, I want to discuss our financial overview for the third quarter of 2024, starting with the next slide. With great satisfaction, I present another strong quarterly performance for AFIA. Net revenue for the third quarter of 2024 reached R$ 841 million. representing a 16% increase compared to the same period last year. Net revenue totally, R$2,455 million 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, unidome acquisitions, and the performance of the continuing education and medical prep solution segments. In third quarter 2024, adjusted EBITDA rose by 25%, reaching R$348 million, with an adjusted EBITDA margin of 41.4%, a gain of 290 base points compared to the third quarter 2023. For the nine-month period, adjusted EBITDA amounted R$1,019 million, an increase of 24% over the prior year, with an adjusted EBITDA margin of 44.4%, representing a 350 base points increase over the same period. The expansion in the adjusted EBITDA margin is largely attributed to Gross margin expansions in the undergrad segments. The completion of the UNIMA and Afro-Jabotão integration process in November 2023. The ramp up of four mais médicos campuses that started operation in the third quarter 2022. Operation restricting efforts in continual 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 R$1,167 million, reflecting strong operational performance. The operational cash flow conversions ratio was 109.7%, in the nine months of 2024. Adjusted net income for the third quarter of 2024 came at R$165 million, marking an increase of 29% from the same period of 2023. For the nine-month period ending September 2024, adjusted net income, totally R$627 million, 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 we achieved R$1.79, a 30% growth compared to the previous year, with R$6.81 per share, in the nine-month period, representing a 49% increase. And now, moving to my two last slides, I will discuss our cash and net debt positions, also giving more color on our cost of debt. This slide presents a table detailing our gross debt compositions and the total cost of debt, covering our primary obligations. the SoftBank transactions, the debentures, the other financial liabilities, the IFC financing, and account payables to selling shareholders. AFIA has entered into a financial agreement with IFC to support our expansion initiatives through acquisitions. These agreements represent the first IFC sustainability-linked loan based on social objectives within the educational sector. Under the loan terms, IFC has disbursed 500 million reais to be repaid in seven equal semiannual installments beginning in April, 2027. The interest rate is set in the Brazilian CDI rate plus 1.2%, with a potential 15 base points reductions if specific sustainability KPIs are met. On the next page, we can look closely at the net debt variation. As of the third quarter of 2024, our net debt stood at R$ 1,894 million. almost the same level compared to the end of 2023. Even accounting for the 157 million earn-out payments regarding the additional seats in Guanabe and Unima, and the 660 million reais regarding the acquisitions of Unidom, we were able to reduce our net debt to adjusted EBITDA, thanks to the strong cash flow 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 the opportunities that lies before us. I will now open the conference for the Q&A section. Thank you.

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

Hi, good evening, Virgílio, Luiz, Renata. 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 were 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.

Marcelo, thank you for your question. I will take the first one and Vigilio is going to take the second one. 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 Unidump. So we keep talking to all the... 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 deal will have lower multiple per seat if you compare to the latest transactions.

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. Then 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 health 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 program 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, Virgílio. Thank you, Luis. Very clear.

So our next question comes from Andrés Salles 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 beta 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.

André, thank you for your questions. This is Blanco speaking here. I'll take the two questions. Regarding the margin expansions that we got from the the restructuring from continued educational and the digital segments. It's regarding the operational efficiency that we got with this restructuring. We had our organizational structures divided by products, by pillars at that time. So I'll give you an example. On the... the digital sides. We had a product manager for the content pillar. We have the product manager for the support decisions and we have the product manager for the practice management tools. When we did the restructuring, we did not only pass the content structure from the digital sites to the continuing educational sites. We did more than that. We unified all the structures that deliver the product. So we just have one product manager for all the offers that we have under the medical practice solutions. And in the continued 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 BU's. 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 BUs, but when we talk about mix, we need to be careful because the undergrad grows a bit lower than continuing education and digital services. So that can impact the margin overall.

Yes, thank you, Renato. 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 of course, in the last three acquisitions, we've been talking with players that are more based in large cities. And remember that the latest business combination was in the city of Salvador. And the previous one, it was in Jabotão and Maceió. 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, Blanco and Renato for the comments.

Of course. Next question comes from Mirella 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 has 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 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 normalizing and 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 PebMed 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, you 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. That's because we changed the procedure how to get the data when some new user is signing to have access to our portal. Okay.

Yeah. It's Blanco speaking. I will take the second one regarding, uh, when you don't, uh, we are very glad, uh, with, uh, the business combination itself. It's been performance, uh, better than, uh, initially expected for us. Uh, And remember that when you don't 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 finalized the second semester intake, the with more than 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 uh uh with that we we have all the integration gains that we're gonna uh integrated their their legacy systems they are their their systems to our uh shared service uh uh uh items that we're gonna occur during 2025 so this uh uh uh process unifications uh plus the fulfillment of the the existing capacity uh uh in unidom uh will even expand more the margins that we we got from from this deal that's super clear thank you next 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 would 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 dividend payout ratio in 2025, please.

Yeah. 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 used to be called the pillar one. that is on 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 launched five new campuses. These new campuses is ramping up this semester right now. So we have good figures, but it's still 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 on 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 like 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 adjust the EBITDA from 1.6 times that we got at the end of 2023. And reduced to 1.3 right now, if you consider the net ends 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 UNIDO acquisitions and the earnouts that we paid for the additional seats from UNIMA and FIPI Guanabiru. 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, very concentrated in medicine and give us the minimal 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 extract 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 marginal acquisitions that we made have less impact in our financial figures. So with that, we are discussing internally if with this 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 these are 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 Mais 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 Mais Medicals units that we will win. So just a reminder, if you want to ask a question, just raise your hand. Next question comes from Lucas Nagano.

Hi, good evening, Virgilio, Luis, Renata. Thanks for taking our questions. We have two. The first is regarding the tuition increase in candidates per seat. We like to get a sense of the variance of those metrics between your institutions, basically to understand whether we consider portfolios a segment segmented into different buckets, like if there was 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 and keep up the M&A or to pay down the debt? 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 of Brazil. And we are pricing differently. So the average for 2025 is around 5.1%, the average that we are passing through 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 priced 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 Africa and Brazil. That also includes Unidon. 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, okay?

And again, Blanco speaking here, talking about SoftBank deal. As you mentioned before, from May 2026, SoftBank has the optionality to do the early redemption of the deal, of the convertible deal. We didn't get any kind of anticipations of these discussions. It's an optionality that SoftBank has. It's not clear for us if they are going to do the early redemptions on that. Having said that, to repay this R$820 million amount, we could easily get another source of finance. or even repay with our operating cash flow. 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, Virgílio, 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.