Afya Limited (NASDAQ:AFYA) Q4 2023 Earnings Call Transcript

Afya Limited (NASDAQ:AFYA) Q4 2023 Earnings Call Transcript March 14, 2024

Afya Limited beats earnings expectations. Reported EPS is $0.36, expectations were $0.34. AFYA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good night [sic] everyone and thank you for joining us for Afya’s Fourth Quarter and Full Year 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 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.

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 welcome to our final conference call of 2022 [ph]. We are excited to present another year of exceptional operational and financial performance for Afya. Once again, we have demonstrated the resilience of our business, the successful implementation of our strategy, and the reliability of our business model. In this presentation, I will cover key strategic topics, including our performance highlights, the successful business execution across our three segments, guidance for 2023, and the new goals for 2024. And finally, Luis Blanco will provide an in-depth look at our financial and operational performance. Now turning to page number three, let’s begin by highlighting our performance achievements.

Initially, our adjusted net revenue increased by 24%, reaching R$2,874 million, accompanied by a growth of adjusted EBITDA of over 21% year-over-year, reaching R$1,166 million, with a margin of 40.6%. Furthermore, we are pleased to report a record on cash flow generation from operating activities, concluding the year with R$1,088.8 million, reflecting a 24% increase compared to the previous year, with a cash conversion rate of 97%, which is 270 bps better than the previous year. With consistent momentum throughout the year, our adjusted net income reached R$591 million, in 2023, marking over 10% growth year-over-year, with an EPS of R$6.37, a remarkable 12% increase compared to the previous year. This underscores our disciplined capital allocation on buyback programs, M&A, and an efficient capital structure.

Transition to our operational updates for the year, we have expanded to 3,113 operating seats, witnessing an year-over-year increase of over 12%, facilitated by the acquisition of UNIMA and Faculdade de Ciências Médicas de Aboatão in January of 2022 [ph]. In addition, our number of undergrad medical students has reached more than 21,000, representing a 19% growth compared to 2022. Additionally, we are delighted to report significant growth in net revenue for our continuing education segment, which expanded by more than 35% year-on-year, organically reaching a net revenue of R$147 million. Our digital health services revenue marked another great result with a 21% increase compared to 2022, pure organically, reaching a net revenue of R$229 million.

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Q&A Session

This outcome underscores the vast opportunity in digital services, driven by the ramp-up in B2B engagements, securing new contracts with pharmaceutical industry companies, and the continuous expansion in B2B contracts. Lastly, our ecosystem has 268,000 active users, exemplifying substantial penetration among physicians and medical students in Brazil. In the next slide, we will discuss our robust business performance across our three business segments. Beginning with our core business, the undergrad segment, we observed significant growth in the net average tickets of medicine, representing a growth of 8.2% over last year. The completeness of UNIMA and Faculdade de Ciências Médicas de Aboatão integration process in November, less than one year after its acquisition, proving our commitment to extract synergies within the operation.

We are pleased to note that the most substantial revenue growth of the year came from our continuing education segment. With a robust intake process, three new campuses, and cross moderation, we can see once more our students, employees, and partners benefit from our constantly developing ecosystem. On our digital services segment, we take pride in our two assistant physicians throughout their medical journey. Concurrently, we are expanding our ecosystem to facilitate new interactions and revenue streams beyond physicians, including engagements with pharmaceutical players, hospitals, labs, and drugstore chains. Evidence of this expansion is seen in the growth of our B2B strategy, fortifying our market presence and extending our reach. Consequently, we achieved a 64% year-over-year growth in our B2B revenues.

Transition to slide number five, we will explore how the company’s financial results reaffirm the resilience and predictability of our business model. Afya’s 2023 adjusted net revenue was almost four times higher than in 2019, the year of our IPO, reaching R$2,874 million, surpassing our mid-guidance for 2023. Furthermore, 2023 adjusted EBITDA was R$1,166 million followed by an adjusted EBITDA margin of 40.6%, also surpassing our mid-guidance of R$1,150 million for EBITDA. Moreover, our EPS has more than doubled since 2019, underscoring our capacity to combine organic and inorganic growth with strengthened capital allocation discipline, thereby delivering significant returns to our shareholders. We are pleased to introduce our new guidance for 2024, which considers the successful acceptance of new medical students, ensuring 100% of occupancy in all of our medical schools.

Given these factors, the guidance for 2024 is as follows. Net revenue is expected to range between R$3,150 million and R$3,250 million while adjusted EBITDA is anticipated to be between R$1.3 billion and R$1.4 billion, excluding any acquisition that may be concluded after the issuance of this guidance. Once again, we are guiding another strong round ahead, improving Afya’s resiliency and ability to keep delivering solid results with a high predictability. Now let’s move to slide number six. Furthermore, in addition to the guidance we provided earlier, we are excited to share our first CapEx guidance. Shown in the chart, our CapEx for 2024 expects to be between R$220 million and R$260 million. It’s important to note that the 2024 CapEx guidance does not encompass the earn-out payments in the amount of R$49.6 million related to the 40 seats increase at Faculdades Integradas Padrão PIP Guanambi, and the CapEx presented disregards any additional license and goodwill.

In slide number seven, we will check our ESD initiatives. Our company’s dedication to sustainability and environmental care is exemplified by our remarkable achievements. Annually, our photovoltaic plants contribute to 6,341 megawatts-hour units of power generation capacity, showcasing our significant investment in renewable energy. Additionally, 16 education institutions now have installed photovoltaic plants, reflecting our commitment beyond corporate boundaries. Notably, this integration of sustainable energy source has enabled 100% of our education operations to operate completely free from greenhouse gas emissions associated with electricity consumption. These accomplishments highlight our commitment to creating a greener, more sustainable future that impacts our stakeholders and investors.

With 9,680 employees, our workforce represents diversity and inclusion at its core, highlighting our commitment to promote equality and opportunities for minority communities. Additionally, 58% of our workforce consists of female employees, reflecting our dedication to gender, diversity, and empowerment in the workplace. Also, 45% of leadership roles in our company are held by women, reflecting a growth of over four percentage points over last year. This is reinforced by our public commitment to have, by 2030, 50% of our leadership team occupied by women. In our governance structure, we prioritize transparency, accountability, and equality in the decision-making process. Afya has 36% of our board of directors composed by women. More than 36% of our board members are independent, ensuring diverse viewpoints and fair oversight.

Our dedication to health reaches far beyond our organization, extending to the communities we serve. Since 2019, we have offered 2 million free clinical consultations, striving to enhance healthcare accessibility for everyone. By 2023, our program will have graduated over 20,000 physicians, enriching healthcare services within our communities. Furthermore, our platform provides over 32 million medical access points to help in decision-making for medical management. In conclusion, these achievements resonate profoundly with our stakeholders and investors, reflecting our comprehensive approach to responsible business practices. Now I will turn the call over to Luiz Blanco, Afya’s CFO, to give more color to our financial operational metrics.

Thank you.

Luis Blanco: Thank you, Virgilio, and good evening, everyone. Slide number nine will now guide us through the discussions of the financial highlights of the fourth quarter. With great pleasure, I present another strong quarterly result for Afya. Adjusted net revenue for the fourth quarter of 2023 reached R$730 million, marking a 23% increase compared to the same period of the prior year. Furthermore, in 2023, adjusted net revenue reached R$2,874 million, reflecting a 24% surge over 2022. This growth trajectory can be attributed primarily to higher tickets in medicine course, maturations of medical seats, the acquisitions of UNIMA and FCM Jabotão, the continual educational segment growth, and digital service performance. Adjusted EBITDA for the fourth quarter of 2023 saw a 19% increase, reaching R$289 million, with an adjusted EBITDA margin of 39.6%.

For the full year, adjusted EBITDA amounted to R$1,166 million, reflecting a 21% increase with an adjusted EBITDA margin of 40.6%, representing a marginal decrease of 90 basis points compared to 2022. These reductions can be attributed to factors such mix of net revenue with higher participations of continual educational segment and launch of four medical campus in the third quarter of 2022 that are still in early stage of maturation. However, in each semester until full maturation, revenues will increase, offsetting the impacts of the fixed costs of the operation. Transitioning to the next slide, adjusted cash flow generation witnessed a 24% year-over-year increase, totaling R$1,089 million for 2023. The operational cash conversion ratio stood at 97% for 2023, 270 bps above 2022.