Afya Limited (NASDAQ:AFYA) Q3 2023 Earnings Call Transcript

Afya Limited (NASDAQ:AFYA) Q3 2023 Earnings Call Transcript November 14, 2023

Renata Couto: Thank you for joining us for Afya’s Third Quarter 2023 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 could be related to future events, future financial operating performance, known and unknown risks, uncertainties and other factors that may cause 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.

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 date hereof. You should not rely on that 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 measures on this call. These measures are not intended to be considered in insolation 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.

Virgilio Gibbon: Thank you, Renata, and thanks, everyone for joining us today. As we approach to the end of the year, we can see Afya maintaining the strong pace. So moving on to Page number 3. Let’s start with our quarter highlights. Adjusted net revenue grew almost 25% year-over-year, reaching BRL723 million, followed by an adjusted EBITDA growth of nearly 22% year-over-year, reaching BRL278 million with a margin of 39%. We also reported a record cash flow from operating activities generated, ending the nine months period with BRL934 million, 26% higher than last year, with a cash conversion of 109%, and we were able to reduce our net debt to BRL418 million when compared to December 2022, even with UNIT and FITS acquisition in January, as we will see on the Slide 14.

Adjusted net income followed the same positive trend of last quarter and reached BRL128 million, a growth of 7% year-over-year with an adjusted EPS of BRL1.38, 7% higher than last year, even considering a higher net debt level and a higher interest rate. This result reflects Afya’s great capital allocation discipline on buybacks, M&A and an efficient capital structure. In this quarter, we have reached 3,113 operating seats with the acquisition of UNIT and FITS, the beginning of Mais Medicos operations, along with Ji-Parana campus (ph), representing an increase of 15% year-over-year. Our number of undergrad medical students has reached more than 21,000, representing a 20% growth compared to the same period last year. In the Continuing Education segment, we continue to see great results, presenting a net revenue growth of 35% year-over-year.

Once again, after reporting great results on the Digital Health Services revenue, which ended the quarter with an increase of more than 19% year-over-year, reaching more than BRL53 million in the three months period. This result reinforces the great opportunity ahead in the Digital Services and is explained by the strong ramp-up on B2B engagements with new contracts with pharmaceutical industries companies and the continuous ramp-up on B2B contracts. Last but not least, our ecosystem reached 280,005 active users, what represents around 34% of the Brazilian physicians and medical students market. Moving now to Slide number 4. We will talk about our solid business execution within our three business units, starting with the Undergrad segment.

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Q&A Session

We saw important movements throughout the quarter, such as higher tickets in medicine courses with 9% increase in medicine tuition for the nine months period and the maturation of medical seats. We are delighted to present that the most significant growth in terms of revenue came from the Continuing Education segment with 35% growth year-over-year due to a robust intake process, new campuses and course maturation. On our Digital Services segment, we ended the quarter with a revenue increase of 19% compared to last year. This result reinforces the opportunity ahead in Digital Services and is explained by the ramp-up in B2B engagements that boosted net revenues and grew more than 75% with new contracts with the pharma industry and the continuous ramp-up on B2B contracts.

In the next slide, we are reaffirming our guidance for 2023, which considers the successful concluded acceptance of new medical students, ensuring 100% of occupancy in all its medical schools. Considering the above factors, the guidance for 2023 is defined as shown in the charts. Adjusted net revenue is expected to be between BRL2.750 billion and BRL2.850 billion, and the adjusted EBITDA is expected to be between BRL1.1 billion and BRL1.2 billion, excluding any acquisitions that may be concluded after the issuance of this guidance. And also, considering the increase of [indiscernible] contribution rate. In other words, after 2023, net revenues and adjusted EBITDA will be almost 4 times higher than 2019, the year of our IPO. Furthermore, the cash conversion rate will continue to perform above 90%, which shows our capacity to deliver strong growth, expanding our profitability and cash generation.

Once again, we are guiding another strong round ahead (ph) in the top of the year guidance, improving Afya’s resiliencies and abilities to keep delivering solid results with a high predictability. And now moving to Slide number 6. On October 4, The Ministry of Education announced the rules for the Mais Medicos 3, which defined the criteria for medical seats expansion throughout Brazil, aiming to achieve OECD average of 3.3 physicians per 1,000 inhabitants in 10 years. The new program will allow the opening of nearly 10,000 new undergrad seats, of which 5,700 seats will be distributed through 25 health regions across 95 cities, considering 66 per entity. In addition, approximately 2,000 will be allocated to existing private institutions and another 2,000 allocated to the public system.

As separating the notice from Mais Medicos 3, each organization is eligible to compete for two health regions. Afya has 18 entities with 17 of them offering high quality medical courses. Mais Medicos 3 presents a significant opportunity to expand Afya’s medical courses in Brazil and address the pressing need for more health care professionals in underserved areas. Afya is committed to engage in the program with high-quality proposals and enhancing the standards of medicine courses throughout the country. Now I’ll turn the call over to Luis Blanco, Afya’s CFO, to give more color on the financial and operational metrics. Thank you.

Luis Blanco: Thank you, Virgilio, and good evening, everyone. Starting with Slide number 8 to discuss the financial highlights of the third quarter. It is with much satisfaction that I present another strong quarter results for Afya. Adjusted net revenue for the quarter was up almost 25% year-over-year to BRL723 million. For the nine-month period, adjusted net revenue was BRL2,145 million, an increase of 24% over the same period of the last year, reflecting the maturation of medical seats, higher tickets in medicine courses and the ramp-up of Continuing Education, boosted by the growth in the number of students. Once again, the Digital Services segment has also contributed to the revenue growth this quarter with the increase of the B2B engagements and the active payers expansions in B2B (ph).

Adjusted EBITDA for this quarter increased almost 22% to BRL278 million, while the adjusted EBITDA margin decreased 90 basis points to 38.5%. For the nine-month period, adjusted EBITDA was BRL877 million, an increase of around 22% over the same period of the prior year, with adjusted EBITDA margin decrease of 80 basis points in the same period. The adjusted EBITDA margin reduction is mainly due to mix of net revenues with higher participations of the Continuing Education segments and the consolidation of four Mais Medicos campuses that started operation on the third quarter 2022 and UNIT Alagoas and FITS Jaboatao, which are performing better than expected, but still present lower margins when compared to the integrated companies. Moving to the next slide.

Cash flow from operating activities for the nine-month period was 26% higher year-over-year, totaling BRL934 million, resulting in a strong cash conversion ratio of over 109%. Adjusted net income for the third quarter of 2023 was BRL128 million, an increase of 7% over the same period of the prior year, mainly due to the increase in operational results, which was partially offset by higher financial expenses. Adjusted net income for the nine months of 2023 was BRL427 million, an increase of 5% year-over-year. Even with higher interest rates year-over-year and an increase in debt with acquisitions of UNIT Alagoas and FITS Jaboatao, our adjusted EPS keep increasing due to operational leverage reaching BRL1.38 and BRL4.58 per share in the third quarter and nine-month periods, respectively.

Moving to Slide number 10 for a discussion of key operational metrics by business unit. Starting with the Undergrad progress. Our number of medical students grew 20% year-over-year, reaching more than 21,000 students with operating medical seats increasing 15% year-over-year. With our net average tickets for the nine months of medical school increasing 9% year-over-year, we’ve reached BRL2,446 million in combined tuition fees, up from BRL1,978 million from the prior year, an increase of 24%. Regarding the revenue mix, 79% was derivative from medical school students and 91% from health related courses. On the next page, I will present our Continuing Education metrics. As said before, we saw another quarter with great recovery in our Continuing Education segment, with an increase of nearly 23% in the number of students compared to the last year, reaching 4,954 students.