Afya Limited (NASDAQ:AFYA) Q3 2022 Earnings Call Transcript

Afya Limited (NASDAQ:AFYA) Q3 2022 Earnings Call Transcript November 21, 2022

Afya Limited misses on earnings expectations. Reported EPS is $1.28 EPS, expectations were $1.38.

Ana Raquel Torres: Thank you for joining us for Afya’s Third Quarter 2022 Conference Call. Today, I’m here with Afya’s CEO, Virgilio Gibbon and Luis Andre 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 Afya’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.

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These risks include those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on the information available to us as of the date hereof. You should not rely on them as predictions of future events, and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, management may reference non-IFRS financial measures on 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. Let me now turn the call over to Virgilio Gibbon, Afya’s CEO, starting with Slide number 3.

Virgilio Gibbon: Thank you, Ana, and thanks everyone for joining us today. As we approach the end of the year, we can see Afya delivered strong results again, as well we will show you throughout this presentation. So, moving now to Page number 4. Let’s start with our quarter highlights. Adjusted net revenue increased 25% year-over-year, reaching BRL580.2 million, followed by an adjusted EBITDA growth of more than 19% year-over-year, reaching BRL228.7 million with a margin of 39.4%. This lower EBITDA margin, about 190 bps below last year, reflects our effort to develop our new growth avenues in Continuing Education and Digital Health Services. It is worth mentioning that both segments are accelerating the growth pace quarter-by-quarter and reached 72% and 59% of topline growth in Q3 over the same period last year.

Net income followed the same positive trend of last quarter and reached BRL321.4 million, a growth of 66.3% year-over-year, with an EPS of BRL3.39, more than 77% higher than last year, even considering a higher net debt level and the market interest rate level. This result reflects Afya’s great capital allocation discipline on buybacks and M&A, and an efficient capital structure. We also reported another great cash flow generation, ending the nine months period with BRL743.8 million, 34% higher than last year, with a cash conversion of 104.6%. Moving to the second row to our operational updates of the quarter, we have now reached 2,709 (ph) medical seats with the beginning of the four Mais Medicos operations along with JiParana campus, an increase of almost 15% year-over-year.

Our number of undergrad medical students has reached almost 18,000 (ph) representing a 13% growth compared to the same period last year. In the Continuing Education segment, we can gladly see another great recovery after the pandemic impacts on practical classes, as the business unit has presented a strong organic and revenue growth of more than 72% over last year. Once again, Afya reported great results on the Digital Health Services revenue, which ended the quarter with an increase of more than 59% year-over-year, and more than 30% excluding acquisitions, reaching almost BRL45 million in the three-month period. This result reinforces the great opportunity ahead in Digital Services, and it is explained by the strong ramp-up on B2B engagements, with new contracts with the pharmaceutical industry companies, and the continuous ramp-up on Business to Physician contracts.

Last but not least, our ecosystem reached 286,000 active users, a growth of almost 16% over last year. This represents almost 40% of the Brazilian physicians and medical students’ market. Moving now to Slide number 5, the successful concluded acceptances of new medical students for the second half, ensuring a 100% occupancy in all of its medical schools, added to the positive trend on the Continuing Education recovery, and the growth in Digital Services, enable us to reaffirm our previously issued guidance for the entire year of 2022. In the next slide, we will talk about how our business execution remains solid, presenting relevant updates within Afya’s three segments. As previously said, beginning this quarter, we have four new Mais Medicos operations, Abaetetuba, Bragança, Itacoatiara and Manacapuru, along with UniSL Ji-Parana campus, all of them combined totaling 228 new medical seats to our portfolio.

We’ve reached an impressive number of 2,709 medical operating seats, strengthening our consolidation as the medical undergrad leader in Brazil. Back in the third quarter of 2021, we were hoping to see the pandemic lose its strength. Now, in 2022, we can finally see our students, employees, and partners extracting the best from our ecosystem again. After the opening of six new Continuing Education campuses, we can see, for the third time this year, an incredible recovery compared to last year, with strong intake processes, new courses being launched, and our practical classes boosting again. On our Digital Services segment, we are proud to see our tools being able to assist physicians’ during their medical journey, as, at the same time, we continue to further explore the development of our ecosystem, unlocking new interactions and revenue streams that go beyond the physicians, achieving pharma players, hospitals, labs and drugstores chains.

Proof of that is the engagement on the B2B strategy growth, once we have reached, so far, 61 contracts with 40 different pharmaceutical industry companies. And now, moving to my last slide on this presentation, I will show how our commitment to everything we do is being well reflected throughout awards and public recognition. As a reflection of our great results and actions that are being shown to the market, we are proud to share that, for the third time in a row, we’ve won the Anuario Epoca Negocios 360 award as the best company in the Education segment, and along with that, we were also ranked as a Top 50 company engaged with open innovation in the country. We are very proud of these achievements, as they are the recognition of the work and passion of our more than 9,000 employees around a unique vision to transform health together with those who have medicine as a vocation.

You can find more information regarding these awards on the QR Codes at the bottom of the slide. And now, I will turn the call over to Luis Blanco, Afya’s CFO, to give more color on the financial and operational metrics. Thank you.

Luis Andre Blanco: Thank you, Virgilio, and good evening everyone. Starting with Slide number 9 to discuss the financial highlights of the third quarter. It is with much satisfaction that I presented another strong quarter result for Afya. Adjusted net revenue for the quarter was up 25% year-over-year to BRL580 million, reflecting the maturations of medical seats and the beginning of the four Mais Medicos and Ji Parana operations, higher tickets in Medicine courses, and the Continuing Education recovery, mainly due to the interruption of the effects of the COVID-19 pandemic, the opening of six new campuses in important capitals of the country, and new courses launching. Once again, the Digital Services segment has also contributed to the revenue growth this quarter, with the increasing of the B2B engagements and the active payers’ expansion in the B2P.

For the nine-month period, adjusted net revenue was BRL1,724 million, an increase of 38% over the same period of last year. Adjusted EBITDA for this quarter increased almost 20%, to BRL229 million, while the adjusted EBITDA margins decreased 190 basis points to 39.4%. For the nine-month period, adjusted EBITDA was BRL720 million, an increase of 29% over the same period of the prior year, with an adjusted EBITDA margin decrease of 320 basis points in the same period. The adjusted EBITDA margin reduction is mainly due to the digital segment, mostly in the performance of Medcel in the residency preparatory market, the expansion of the Continuing Education segment, which is still maturing the new campuses, and the increase in expenses in the holding and shared services level.

Important to highlight the growth in gross profit for Continuing Education and Digital segments in the quarter, reverting the trends observed in last year. Moving to the next slide, adjusted cash flow generations for the nine-month period was almost 34% higher year-over-year, totaling BRL744 million, resulting in a strong cash conversion ratio of 105%. Adjusted net income for the third quarter of 2022 was BRL120 million, an increase of 3% over the same period of the prior year. The third quarter EPS increased by 47% year-over-year and was positively affected by the increase in operational results, the decrease of the non-recurring expenses by almost 63%, and the execution of the previous buybacks programs. Moving to Slide number 11 for a discussions of key operational metrics by business unit.

Starting with the Undergrad Programs. Our number of medical students grew 13% year-over-year, reaching 18,000 students, with operational medical seats increasing 15% year-over-year, due to the encompass of 228 medical seats related to the four Mais Medicos and Ji-Parana campuses, as Virgilio said. Considering our organic and inorganic seats expectations, we expect to achieve more than 32,000 undergrad medical students at maturity. With our net average ticket increasing more than 9% year-over-year, we’ve reached BRL1,978 million of Combined Tuition Fees, up from BRL1,406 million from the prior year, an increase of 41%. Regarding revenue mix, 77% of these derived from medical school students and 90% from health-related courses. On the next page, I will present our Continuing Education metrics.

As said before, we saw another quarterly great recovery in our Continuing Education segment, with an increase of more than 42% in the number of students, compared to last year, reaching 4,036 students, getting closer to the 2020 figures again. In the quarter, net revenues for the segment grew 72%, when compared to the same period of the prior year. This recovery is mainly due to the interruption of the effects of the COVID-19 pandemic, the opening of six new campuses in important capitals of the country, and new courses launching, as explained before. Moving to Slide number 13, I will discuss the Digital Services operational metrics. On the first graph, you can see our total active payers, which are those ones that generate revenues in B2P.

With a continuous growth trend in this quarter, we have reached 190,000 (ph) paying users, a 23% growth compared to last year. As you can see in the second graph, our ecosystem reached 286,000 monthly active users, representing almost 40% of all medical students and physicians in Brazil, as Virgilio said before. Finally, on our last graph, we can see our Digital Services net revenue for the quarter, which increased more than 59% year-over-year, and more than 30% excluding acquisitions. This organic growth is a combination of the start of the B2B engagements, reaching 61 contracts with 40 different pharmaceutical industry companies, and the expansion of the active payers in the B2P, mainly in Whitebook and iClinic. In addition, since the beginning of the year, we started to break down our Digital Service’s net revenue within B2P and B2B segments.

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So, of almost BRL45 million of the Digital Service’s net revenue in the third quarter, more than BRL38 million come from B2P, and more than BRL6 million come from the B2B, since the B2B strategy is still ramping up. And now, moving to my two last slides, I will discuss our cash and net debt position, also giving more color on our cost of debts. Cash and cash equivalents at the end of the quarter were BRL716 million. Net debt, excluding IFRS-16, totaling BRL1,348 million compared to net debt of BRL1,109 million in the same period of 2021. The increase year-over-year was mainly due to six business combinations and license acquisitions executed during the last 12 months period, payments related to the shares repurchase program, investment activities, and net financial results from the last 12 months, all partially offset by our cash flow generation.

On the next slide, you can see a table with the breakdown of our gross debt and our total cost of debt, considering our main debts, the Softbank transaction, other loans and financings, and accounts payable to selling shareholders plus other financial obligations. Our capital structure remains solid with a conservative leveraging position and a low cost of debt. This ends our prepared remarks. As we approach the end of the year, even considering the challenging economic and political scenario, we can gladly see Afya delivering strong results, with a quarter marked by significantly increases in net revenue in our three segments, positive EBITDA, cash generations and EPS growth, and a consistent business expansion. I will now open the conference for the Q&A session.

Thank you.

A – Ana Raquel Torres: So our first question comes from Luca Marcussini from Itau. Luca, you may now talk, please.

Luca Marcussini: Hey. Good evening, everyone and thanks for taking our questions. We got two questions from our side. So first on Medcel. We’ve seen an another quarter of decrease in the number of active payers. So can you please provide an update on the competitive landscape in the market? And then secondly, the company mentioned that one of the drivers for revenue growth was the start of the B2B engagements. Can you please provide more color on these contracts and its contribution to net revenue? Thank you.

Q&A Session

Virgilio Gibbon: Hi, Luca. This is Virgilio. So about Medcel, we launched it — our new product in beginning of November, so the rhythm that we are seeing for new enrollments nearing the bottom of intake of this new season, it’s much better than you saw in the rest of the year. So we launched the pre-sale on end of September, beginning of October. But the new product release wasn’t beginning of November. So all the free new (ph) version now generating more leads and the intake that we’re seeing after November is much better than the rest of the year. So the expectation moving forward is that, the reduction on Medcel would be lower than we saw in the previous quarters. Besides that, we are combining mid-sale with pillar one. So we have another problem (ph) Medcel is just one product under the pillar one, so the other product its moving fast and we are also offering continue and that content for physicians to help not only for residents’ ramp out (ph), but also for title prep and other type of problems that will support their needs.

So we are seeing a better trend on pillar one year-over-year in Medcel turnaround starting of fourth quarter.

Luis Andre Blanco: Hi, Luca. It’s Luis speaking, I’ll take your second question regarding the B2B contracts on the Digital segments. The main driver on the B2B revenue growth that you see from the third quarter regarding the second quarter are the contracts that are coming from the pharmaceutical industry. This is the strategy that we deploy here on 2022 and is being very well received by the pharmaceutical industry, regarding the access from based on Mais Medicos (ph) through our physicians users. We’ve been able to sign contracts of more than 60 contracts to now this year and we are providing the access for these pharmaceutical industries to the physician base. This is a trend that we see. We are very happy with this growth and we see that we have a very — a great room to achieve regarding this kind of service.

Virgilio Gibbon: Just to add, Luca. This is Virgilio. We just passed, what you call it the Phase 1 on the B2B contracts. The first quarter, we launched the software was a kind of lending, expanding type of contract. So it was more like a service that we have to deliver for a short period of time. So our effort right now is not only increasing the number of clients, the pharma accounts that we’re serving, but also a type of recurring revenues that we can serve from our longer time — for a longer period, these type of services. So we are moving on that direction, growing a lot. Not only the number of contracts, but the book value that we have for each sale opportunity on our pipeline. So this is — remains our the biggest batch for the following year and you will see good numbers coming from the B2B from the following quarters.

Luca Marcussini: That’s very clear, Thank you Virgilio and Luis.

Ana Raquel Torres: Our next question comes from Fred from BofA, Fred please go ahead.

Frederico Mendes: Hello. Good evening, everyone. I have two questions here as well. The first one, I just want to understand the difference between the net income growth and EPS. We have here 94 million shares to 2021, 90 million shares here, maybe we don’t have the right information, maybe you’re considering doubters minus as a repurchase program, that’s why you have the difference in EPS. So I just want to make sure we get that. This will be the first one. And then the second one, if you guys could just provide us at which level of Afya you are, right? At least do you understand, it’s almost like a startup, so you build the portfolio eventually you start to scale that eventually this scale is to dilution of costs and higher margins. So if you look on a three, five year window at which level of Afya we are right now. Thank you very much.

Luis Andre Blanco: Hi, Fred. Its Luis speaking. Yes, you’re right, we have considered the treasuries, the shares that we have in our treasury that totals amount of 3.7 million shares that we have regarding the three buybacks that we’ve done till now. As the metrics that we use for these three parties, the mean in the last 12 months. So as we — as these shares are more than 12 months, then the effects regarding the dilutions, the increase of the EPS numbers, regarding the increase of the digital shares that we have on our treasury, these amounts comes up. So right now, we have approximately 3.7 million shares in our treasury. Regarding the second question, I’ll begin with that and then Virgilio can add regarding the ambitions that we have on the digital segments.