Afya Limited (NASDAQ:AFYA) Q4 2022 Earnings Call Transcript

Afya Limited (NASDAQ:AFYA) Q4 2022 Earnings Call Transcript March 22, 2023

Renata Couto: Thank you for joining us for Afya’s Fourth Quarter and Full Year 2022 Conference Call. Today I am here with Afya’s CEO, Virgílio Gibbon; and Luis André 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 any remaining impact from COVID-19.

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 Virgílio Gibbon, Afya’s CEO, starting with slide number three.

Virgílio Gibbon: Thank you, Renata. And thanks everyone for joining us today on our last 2022 conference call. We proudly present another year of outstanding operational and financial performance for Afya. Once again, we have proven the resilience of our business, the successful execution of our strategy, the commitment of our team members and the consistency of our business model. During this presentation, I will first run through some main strategic topics, such as our performance highlights, the successful business execution within our three segments, 2022 and 2023 guidance, some recent awards recognition, and at the end, Luis Blanco will explore our financial and operational overview. So, moving now to page number four.

Let’s start with our performance highlights. First, adjusted net revenue increased 32% reaching R$2,319 million, followed by an adjusted EBITDA growth of more than 27% year-over-year, reaching R$962 million with a margin of 41.5%. We also reported a strong cash flow generation again, ending the year with R$877 million, a 32% increase compared to last year, with a cash conversion of 94%. With an accelerated pace during the whole year, Net income reached R$393 million in 2022, a growth of 62% year-over-year, with an EPS of R$4.14, 73% higher than last year, reflecting our capital allocation discipline in executing our business combination and three buyback programs in a row. Moving to our operational updates of the quarter, we have reached 2,773 operating seats, an increase of over 11% year-over-year, with the beginning of four Mais Médicos campuses, along with new seats in Ji-Paraná and Itabuna.

In addition, our number of undergrad medical students has reached almost 18,000, representing a 12% growth compared to 2021. We also saw great results in net revenue for our continuing education business, the segment grew more than 49% year-over-year, representing a net revenue of R$109 million. Once again, Afya reported great results on the Digital Health Services revenue, which ended the year with an increase of 25% compared to 2021. This result reinforces the opportunity ahead in Digital Services and it is explained by the ramp-up on B2B engagements, with new contracts with the pharmaceutical industry companies and the continuous ramp-up in B2P contracts, as we will discuss further on. Lastly, our ecosystem has 260,000 active users, representing a great penetration among physicians and medical students in Brazil.

In the next slide, we will talk about our solid business execution within our three business units. Starting with our core business, the Undergrad segment, we saw important movements throughout the year. First, the successful opening of four Mais Médicos campuses, Abaetetuba, Bragança, Itacoatiara and Manacapuru, adding more 200 medical seats to our portfolio. Second, the completeness of Unigranrio’s integration process in October, one year after its acquisition, proving our commitment to extracting synergies within the operation. Third, the increase of 92 new medical seats, 28 in the UniSL Ji-Paraná campus, located in Rondônia and 64 in Faculdade Santo Agostinho, in the city of Itabuna, situated in the State of Bahia. And last but not least, the announcement of our largest acquisition so far, UNIT Alagoas and FITS Jaboatão dos Guararapes, adding 340 more medical seats to our base, reaching and impressive number of 3,163 medical operating seats today, strengthening our consolidation as the medical undergrad leader in Brazil.

We are delighted to see that the most significant growth of the year, in terms of revenue, came from our Continuing Education segment. With a robust intake process, six new campuses and course maturation, combined with the return of our practical classes, we can finally see our students, employees and partners extracting the best from our ecosystem again after a challenging scenario during the pandemic. On our Digital Services segment, we are also proud to see our tools being able to assist physicians during their medical journey, as at the same time, we continue to 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, almost 100 contracts with 45 different pharmaceutical industry companies, strengthening our land and expanding strategy. Moving now to slide number six, we can see how the company’s financial results reaffirmed the resiliency and predictability of our business model. Afya´s 2022 net revenues was at least 3 times higher than in 2019, the year of our IPO. Furthermore, we also have marked an expansion in profitability and cash generation. With more than 200 bps in EBITDA margin expansion, the cash conversion rate has continued to perform above 90%, showing our capacity to deliver strong growth, expanding our profitability and cash generation. Lastly, our EPS has increased more than 2 times since 2019, proving our capacity to combine organic and inorganic growth with strong capital allocation discipline, and consequently, great returns to our shareholders.

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We are also introducing our guidance for 2023, which considers the successfully concluded acceptances of new medical students, ensuring 100% occupancy in all of 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 R$2,750 million and R$2,850 million and adjusted EBITDA is expected to be between R$1,100 million and R$1,200 million, excluding any acquisition that may be concluded after the issuance of the guidance. Once again, we are guiding another strong round ahead and proving AFYA´s resilience and ability to keep delivering solid results with a high predictability. And now, moving to my last slide, as a reflection of our outstanding results and actions that are being shown to the market, we could joyfully celebrate several awards recognitions this year, such as, Anuário Época Negócios 360 degree, 2022 Valor Inovação Brasil, Institutional Investor 2022, Great Place to Work, Bloomberg Gender-Equality Index, TOP 100 Open Corps 2022, among others.

We are very proud of all these achievements, as they reflect the work and passion of our thousands of employees around a unique vision, to transform health together with those who have medicine as a vocation. I will now turn the call over to Luis Blanco, Afya’s CFO, to give more color on the financial and operational metrics. Thank you.

Luis André Blanco: Thank you, Virgílio, and good evening, everyone. Starting with slide number nine to discuss the financial highlights of the fourth quarter. With much satisfaction, I present another strong quarter result for Afya. Adjusted net revenue for the fourth quarter of 2022 was R$595 million, an increase of 18% over the same period of the prior year. In 2022 adjusted net revenue was R$2.3 billion, an increase of 32% over 2021, mainly due to, higher tickets in Medicine courses, maturation of medical seats, the beginning of four Mais Médicos campuses, the Continuing Education segment recovery after practical activities were resumed after COVID-19 pandemic and Digital Services performance. The Digital Services segment increased 25% year-over-year, a combination of; a great start of the B2B engagements, reaching roughly 100 contracts, including pharma solutions and RX PRO contracts,with 45 different pharmaceutical industry companies; and expansion of the active payers in the B2P, mainly in Whitebook, iClinic and Shosp, partially offset by the lower performance of Medcel, due to a higher competition scenario in the Residency Preparatory market.

Fourth quarter adjusted EBITDA increased 24% to R$242 million, with an adjusted EBITDA margin of 41%. For the year, adjusted EBITDA was R$962 million, an increase of 27% with an adjusted EBITDA margin of 41.5%, a decrease of 160 basis points when compared to 2021. The adjusted EBITDA margin reduction in the year is mainly due to the following; Digital segment, primarily due to Medcel’s performance; increase in corporate expenses in the period; and launch of the four Mais Médicos campuses in the third-quarter. Moving to the next slide, adjusted cash flow generation over the year was almost 32% higher year-over-year, totaling R$877 million. Operating cash conversion ratio was 94% for 2022, compared to 101% in 2021. Operating cash conversion ratio in 2021 was positively affected by the end of the grace period of tuition renegotiation that occurred in 2020.

Adjusted net income for the fourth quarter of 2022 was R$129 million, an increase of 31% over 2021. In 2022, adjusted net income was R$535 million, an increase of 22% year-over-year. Our EPS performed a robust expansion, for the quarter EPS grew 53% and for the year EPS reached R$4.14, reflecting an increase of 73% year-over-year. Our EPS performance reflected the growth in our net income and capital allocation discipline executing our business combination and three buyback programs in a row. Moving to slide number 11 for a discussion of key operational metrics by business unit, starting with the Undergrad Programs. Our number of medical students grew 12% year-over-year, reaching 18,000 students, with operating medical seats increasing 14%, due to the encompass of 292 medical seats related to four Mais Médicos and Ji-Paraná and Itabuna seats increase, as previously said.

Therefore, considering our maturation and UNIT acquisition, we have reached 3,163 approved seats and expect to achieve more than 22,000 undergrad medical students at maturity. With our net average ticket increasing 11% year-over-year, we reached R$7,896, compared to R$7,126 in 2021. The last graph shows a 32% growth in combined tuition fees, reaching R$2.6 billion, up from R$2 billion from the prior year, 77% of which are related to medicine. All this effort means one thing, our medical education business remains and will continue to be, the cornerstone of our business in the short and middle terms, delivering highly predicted growth combined with solid profitability and cash generation. On the next page, I will present our Continuing Education metrics.

As said before, we saw another year of great recovery in our Continuing Education segment, with an increase of more than 34% in the number of students, compared to last year, reaching 4,280 students. In addition, for the year, net revenues grew 49% when compared to 2021. This recovery is mainly due to a robust intake process due to the return of our practical classes, six new campuses and courses mix and maturation. 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 the ones that generate revenues in the Business to Physicians. With a continuous growth trend, we reached 203,000 paying users, a 21% growth compared to last year. As you can see in the second graph, our ecosystem grew 5% compared to the previous year achieving 260,000 monthly active users, representing almost 40% of all medical students and physicians in Brazil.

Finally, on our last graph, we can see our Digital Services’ net revenue, which increased more than 25% year-over-year, reaching R$190 million. Since the beginning of the year, we also started to break down our Digital Services net revenue within B2P and B2B segments, which accounted for more than R$166 million came from B2P and more than R$23 million came from B2B, since the B2B strategy is still ramping up, representing a growth of 154% compared to the prior year. 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 fourth quarter were R$1,093 million, an increase of 46% over the same period in 2021, mainly due to due to a R$500 million debenture issued in December of 2022.

In 2022, net debt totaled R$1,381 million, achieving the same level of 2021, supported by the strong cash generation in 2022 of R$844 million, which was offset by investments activities in properties, equipment and intangibles totaling R$297 million; R$99 million of acquisition of subsidiaries; and R$152 million of share repurchase programs. Our capital structure remains solid with a conservative leveraging position and a low cost of debt. Even considering UNIT acquisition and the mid-guidance for 2023, Afya’s net debt-to-adjusted EBITDA for 2023 would be 1.9 times. On the next slide, you can see a table with the breakdown of our gross debt and total cost of debt, considering our main debts, the Softbank transaction, debentures, accounts payable to selling shareholders and other financial obligations.

This ends our prepared remarks. Strong performance, consistent growth, success in all segments and public recognition, this is how we are evolving and empowering our mission to provide an ecosystem that integrates educational and Digital Solutions for the entire medical journey, enhancing the development, updating, assertiveness and productivity of health professionals. We are very proud of our business and what we have achieved so far and excited about what we plan for the future. I will now open the conference for the Q&A session. Thank you.

A – Renata Couto: So if you want to ask the please just raise your hand and we will call you. The first question comes from Marcelo Santos from JPMorgan. Marcelo,, you may go.

Marcelo Santos: Good evening, Virgílio and Luis. Renata, thank you for taking the question. I wanted to ask a bit about the prep course and the environment that you commented in the release. I mean looking at the financial statements, it looks like that the prep course revenue fell more than 50% year-over-year. So just wanted to understand if I am reading this correctly. What is happening and how do you see the outlook for this business? That’s the first question. And the second question is if you could share your expectations for a potential new Mais Médicos program. When, how this should shape up, how are the discussions going with the government? Thank you.

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Q&A Session

Luis André Blanco: Marcelo, it’s Luis speaking. Yes. We faced — continue to face a competitive environment regarding the prep course in Medcel, and it’s important to remember that this year, we suffered with 2022 collections that mostly come in the first quarter of the year and we continue to see the pressure in the completeness of the process for the 2023 collections that started within the fourth quarter of 2022, okay. These are very competitive landscape for us. We have rebuilt the product. We have implemented new marketing strategy. We implemented a new team in developing that. The recovery is still slow and we think that we could see a more consistent result for the next cycle that will start on the fourth quarter of 2023.

Virgílio Gibbon: Marcelo, just to add a point here, it’s important that under the Pillar 1, where Medcel located, we are also combining the offerings coming from Alidamitcina and also Catopapers. So this Medcel is just one type of the course that we are offering under the Pillar 1. So combining all the programs that we are offering under the Pillar 1, Medcel is just one of them, the prep course environment is quite competitive. And we are expecting to have like resume growth under the Pillar 1, it’s one part of our B2B business and the Digital Services on the second half of 2023 as we are going to launch the new collection for 2023, 2024, okay? For the — your second question about the Mais Médicos program. We just saw the release of the new two Normatise establishing the group that will discuss about health, education, how will be all the process of medical and also health products related programs.

So it’s very soon in the process. But what we can see is that, it’s — they are following at least the trend that we are expecting, having a lot of effort trying to incentivate more physicians in north, northeast region and the areas that they will define that prioritization under the new government. So it’s still soon in the process. How it would be the size of the next wave of the new Mais Médicos. But I think they are trying to support the dynamic that we are having. So I think we still have some weeks to see what this group is going to define and release what will be the new wave for the new Mais management.

Renata Couto: Yeah. As Virgílio said, Marcelo, the trend is aligned on what we believe, that we do need more physicians, but in the right locations, right? So when we see all this effort to have physicians in the countryside of Brazil, we have this feeling that is going to follow what we saw with Mais Médicos has run into.

Marcelo Santos: Perfect. Thank you very much.

Renata Couto: Of course. Thank you. So the second question comes from Fred Mendes from Merrill Lynch.

Fred Mendes: Thank you. Thank you, Renata. Good evening, everyone. I have two questions here as well. The first one is related to, once I look at the guidance, it looks like there’s a margin should be under pressure for 2023, pretty much flat. So just wondering that’s because of Continuing Education should came more relevant. So anyways you are expecting a little improvement here? And then the second one, once I look at the change in net debt, there was a cash burning of R$20 million quarter-over-quarter and your cash conversion is very high like 90%. So I was just wondering why not this high cash conversion is not helping to actually generate cash and if we should expect an improvement in 2023 and this quarter as well? Thank you very much.