Afya Ltd (AFYA) 2022 Q3 法說會逐字稿

 Thank you for joining us for Afya's Third Quarter 2022 Conference Call. Today, I'm here with AFYA's CEO, Virgilio Deloy 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. These risks include Dorma 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 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 these 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 Deloy Gibbon, -- are CEO, starting with Slide #3.

Thank you, Anna, and thanks, everyone, for joining us today. As we approach the end of the year, we can see AFYA deliver strong results again as I will show you throughout this presentation. So moving now to Page #4. Let's start with our quarter highlights. Adjusted net revenue increased 25% year-over-year, reaching BRL 580.2 million, followed by an adjusted EBITDA growth of more than 19% year-over-year, which is BRL 228.7 million, with a margin of 39.4%. This lower EBITDA margin, about 190 bps below last year reflects our efforts to develop our new growth avenues in continued education and digital health services. It's worth mentioning that both segments are accelerating the growth pace quarter-by-quarter and reached 72% and 39% of top-line growth in Q3 over the same period last year. Net income followed the same positive trend of last quarter and reached 321.4 million, a growth of 66.3% year-over-year with an EPS of BRL 3.39 more than 77% higher than last year, even considering a higher net debt level and the market interest rate level. These results reflect Asia's great capital allocation discipline, on buybacks and M&A and an efficient capital structure. We also reported another great cash flow generation ended the 9-month period with BRL 700.3.8 million, 34% higher than last year, with a cash conversion of 104.6%.

Moving to the second row to our operational update of the quarter. We have now reached 2,700[Inaudible] with the beginning of the 4 Mimetics operations along with Shiparana Campus, an increase of almost 15% year-over-year. Our number of undergrad medical students has reached almost 18,000, representing a 13% growth compared to the same period last year. In the Container location segment, we can guardly see another great recovery after the pandemic impact on practicable as the business unit has presented a strong organic revenue growth of more than 72% over last year. Once again, after 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 BRL 45 million in the 3-month period to reinforce the great opportunity ahead in digital service. It is explained by the strong ramp-up on B2B engagements with new contracts with the pharmaceutical industry company 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 Brazil acquisition and medical students market.

Moving now on to Slide #5. The successfully concluded acceptance of new sets students for the second half, ensuring 100% of occupancy in all of its Mexico schools added to the positive trend on the continued education recovery and the growth in digital service enable us to reaffirm our previous issued guidance for the entire year of 2022. In the next slide, we'll talk about how our business execution remains solid, presenting relevant updates within AFYA's Street segments. As previously said, beginning this quarter, we have 4 new life Magic operations. biter, Itaocara, and ManacaPuru, along with Inancaranacampus, all of them combining totaling 228 new Medicos to our portfolio. We have reached an impressive number of 2,700 medical operating teams, strengthening our consolidation as the Med conde red leader in Brazil. Back in the third quarter of 2021, we were hoping to see the fanatical in strength. Now in 2022, we can finally see our students, employees and partners is striking the best of our ecosystem again after the opening of 6 new continued education campuses. We can see for the third time this year, an incredible recovery compared to last year with the strong take processes, new costs being launched in our practical classes boosting again. In our Digital Services segment, we are proud to see our tools being able to assist physicians during their medical journey. And at the same time, we continue to further explore the development of our ecosystem, unlocking new interactions and revenue streams to go beyond the physician, achieving pharma players, hospitals, labs, and drug store 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 our and public recognition. As a reflection of our great result connections that are being shown to the market, we are proud to share that for the third time in a row, we have won the Anasco negates present this sample, award as the best company in the Education segment. And along with that, we are also ranked as the top 50 company engaged with an open innovation in the country. We are very proud of this achievement as the recognition of the work and passion of our more than 9,000 employees around a unique vision to transform health together those who have medicine at a location. We can find more information regarding this award of the KRC at the bottom of the slide. And now I'll turn the call over to Luis Blanco, AFYA's CFO, to give more color on the financial and operational effects. Thank you.

Thank you, Virgilio, and good evening, everyone. Starting with Slide #9 to discuss the financial highlights of the third quarter. It is remote satisfaction that I presented another strong quarter results for Afya. Adjusted net revenue for the quarter was up 25% year-over-year to BRL 580 million, reflecting the maturation of medical seats and the beginning of the 4 Mist and Japan on operations, higher tickets in mentioned courses and the continued education recovery, main to the interruption of the FX of the COVID-19 pandemic the opening of 6 new purposes in important capitals of the country and new courses launching. Once again, the digital segment has also contributed to the revenue growth this quarter with the increasing of the B2B engagements and the active payer's expansions in the B2P -- for the 9-month period, adjusted net revenue was BRL 1,724 million, an increase of 38% over the same period of last year. Adjusted EBITDA for this quarter increased almost 20% to BRL 229 million, while adjusted EBITDA margin decreased 190 basis points to 39.4%. For the 9-month period, adjusted EBITDA was BRL 720 million, an increase of 29% over the same period of the prior year, with an adjusted EBITDA margin decreased by 320 basis points in the same period. The adjusted EBITDA margin reduction is mainly due to the digital segment, mostly in the performance of net sale in the resident preparatory markets, the expansion of the Continuing Education segment, which is still maturing the new campuses, and the increase in expenses in the holding and shared service level. Important to highlight the growth in gross profit for continued education and digital segments in this quarter, reversing the trend observed in the last year.

Moving to the next slide. Adjusted cash flow generations for the 9-month period was almost 34% higher year-over-year, totaling BRL 744 million, resulting in a strong cash conversion ratio of 105%. Adjusted net income for the third quarter of 2022 was BRL 120 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 the operational results, the decrease of the nonrecurring expenses by almost 63%, and the execution of the previous buyback programs.

Moving to Slide #11 for discussions of key operational metrics by business unit, starting with the other grad programs, our number of net good students grew 13% year-over-year, reaching 18,000 students with operational medical seats increased 15% year-over-year due to the income tax of 228 Medco seats related to the forming NG Panama campuses, experiences. Considering our organic and inorganic set 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 have reached BRL 1,978 million of combined tuition fees, up from BRL 1,406 million from the prior year, an increase of 41%. Regarding revenue mix, 77% of these derivative from medical school students and 19% from health-related courses. On the next page, I will present our continued education metrics. As said before, we saw another quarterly great recovery in our continued education segments 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 6 new campuses in important capital of the country, and new courses launching, as I explained before.

Moving to Slide #13, I will discuss the digital service operational metrics. -- the first graph, you can see our total asset payers, which are those ones that generate revenues in B2P. With a continuous growth trends in this quarter, we have reached 19,000 paying users, a 23% growth compared to the 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 service net revenues for the quarter, which increased more than 59% year-over-year and more than 30% excluding acquisitions. This organic growth is the combination of the start of the B2B engagements, reaching 61 contracts with 40 different pharmaceutical industry companies, and the expansions of the active players in B2P, mainly in white book and iclinic. In addition, since the beginning of the year, we started to break down our digital service net revenue within B2P and B2B segments. So of almost $25 million of the digital service net revenue in the third quarter, more than $38 million come from the B2P and more than 6 million come from the B2B since the B2B strategy is still coming up. And now moving to my 2 last slides. I will discuss our cash and net debt position, also giving more color on our cost of debt. Cash and cash equivalents at the end of the quarter were BRL 716 million. Net debt, excluding IFRS 16, totaling BRL 1,328 million compared to the net debt of BRL 1,109 million in the same period of 2021. The increase year-over-year was mainly due to 6 business combinations and like acquisitions executed during the last 12 months period, payments related to the share repurchase program, investment activities and net financial results for 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 grass apps and our total cost of debt, considering our main debt, stock-based transaction other laws, and finance and accounts payables to selling shareholders plus other financial obligations. Our capital structure remains solid with a conservative leverage position and the low cost of test. This ends our prepared remarks. As we approach the end of the year, even considering the challenging economic and political scenario, we can readily see after delivering strong results with acquired market by significant increase in net revenues in our 3 segments. -- positive EBIDTA cash generation and EPS growth and a consistent business expansion. I will now open the conference for the Q&A session. Thank you.

So our first question comes from Luca [Inaudible] from Itau. Luca, you may now start, please...

 Good evening everyone, thank you for taking our questions we got 2 questions from our side. So first, on Medcel. -- we've seen 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 his contribution to that revenue?

Luca, this is Virgilio. So about Medcel. We launched our new products at the beginning of November. So the reason that we are seeing for new enrollments in the bottom of intake of this new season is much better than we saw in the rest of the year. So we launched the presale on the end of September, beginning of October, but the new product we was in beginning of November. So all the premium version generating more leads and the intake that we are seeing after November, it's much better than the rest of the year. So the expectation moving forward is that the reduction on medcel will be lower than we saw in the previous quarters. Besides that, we are combining medcel with Pillar 1. So we have a note of mid sales just on product under the Pillar 1. So the other product is moving fast, and we are also offering continued and the best content for physicians to help not only for residents past, but also for title prep and other type of problems that we support their needs. So we are seeing a better trend on Pillar 1 year-over-year and net sell turnaround start fourth quarter.

Luca, it's Louis 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 pharmacare history. This is a strategy that we deployed clear on 2022, and it's been very well received by the Pharmacy industry regarding the access from this format beds to our vision users. We've been able to sign contracts more than 60 contracts to now this year, and we are providing the access for these continues to the physician base. This is a trend that we see. We are very happy with this role, and we see that we have a very a great role to achieve regarding this kind of service. Just to add, look, this is Bajio. We just passed what we follow the Phase I on the B2B conference. The first quarter, we launched this offer was a kind of lending expanding type of contract. So it was more like a service that we have to deliver in a short period of time. So our efforts right now is not only increasing the number of clients, the pharma comes that we are serving, but also a type of recurring revenue that we can serve from a longer time or for a longer period, this type of services. So we are moving on the direction, growing a lot, not only in the number of contracts but the book value that we have for sale opportunity on our pipeline. So this is -- remains our -- the biggest debt for the following year. And you see good numbers coming from the B2B from the following quarters.

 That's very clear. Thank you. Virgilio and Luis...

Our next question comes from Fred from of Fred, please go ahead.

I have 2 questions here as well. The first one, I just want to understand the difference between the net income growth and the EPS. We have here 94 million shares 21, 9 million shares here. Maybe we don't have the right information or maybe you're considering doubters on 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 gista you are, right? Please do understand it's almost like a startup. So you build a portfolio, eventually, you start to scale, then eventually this scale leads to dilution of costs and higher margins. So if you look on a 3-, 5-year window at which level of Afya gista we are right now.

Fred -- we were speaking regarding the ADS, you are right. We have considered the treasuries -- the shares that we have in our treasury that total amount of 3.7 million shares that we have regarding the 3 buybacks that we've done to now as the metrics that we use for this report is the in the last 12 months. So as we do as these shares are more than 12 months than the FX regarding the dilutions, the increase of the EPS numbers regarding the increase of the shares that we have on our treasury test comes up. So right now, we have approximately 3.7 million shares in our treasury.

Regarding the second question, I will begin with that, and then you can add regarding the ambitions that we have on the digital segment, we see that the digital segment can achieve the BRL 1.2 billion of net revenues in 2028. This is our goal right now for 2028, we see that the B2B is where we can get most part of this growth, providing access for -- mainly for the partnership industry for providing demand for the providers and provide efficiency to payers. This is our plan, the first phase of is the launching of service access for the pharma uses what we are capturing the revenues right now, but we see these digital segment as this opportunity of BRL 1.2 million in 2028.

 Fred, just to add a point here. So during 2022, I think the main focus was to complete our ecosystem, our 6 pillar and we review that with the last acquisition of Click enforcing our sixth pillar. Having said that, we also saw during 2022, the beginning of the monetization on the B2B contract -- we are going faster than expected on that. We can check also on our figures on top line and also gross margin ramping up and not up very fast. So these are good opportunity in terms of leveraging moving forward. So as Blanco said, we are aiming to have 5% of this adverse market by 2028. And we are in a good trend to reach that. So moving to 2023. We didn't release any figures to 2023. But for sure, the results coming from both segments will be stronger when we deep dive on continued education and digital service when you compare year-over-year will be a much better figure in terms of top line and also in contribution margin for the entire business and a Perfect

Very clear Virgilio and Luis. If I may just do a follow-up, and I do apologize. But on the same topic, when I think about capital allocation, right? I understand that the distill take some margin for the consolidated business. So how do you think about -- I mean, what kind of metrics do you use now is the time to accelerate on Aegis and pressure a little bit more margin or I don't want to go to a margin below a certain point, and then we need to be careful here. How do you think about this trade between higher growth eventually and after digital and pressuring margins on the consolidated business?

Regarding capital rationale, I will start saying that we see a completeness of what kind of see we want to serve right now. So the major points we go in capital allocations right now is not that we're are going to impact in new solutions, the new road service that we put within the product. So we see in terms of capital allocations itself, it's more business deployment of new servicing products inside the existing products. So we're going to expand with organic CapEx, I would say, on that. Regarding the impact that we have on our operations results regarding the digital itself, we see that 2022 is a year that we got negative sorry, guys, on start, we start to refer right now besides the office, sorry about that. But regarding the results during 2022, we faced the negative margins that comes from the digital segment. And regarding the 23% ahead, we're going to talk it a little bit more next year. But definitely, 2022 was the lower point with the lower margin, the negative margins, and then we start coming for the positive side as the growth count and that we gain scale, and we do not make more business combinations, we start to do the business development inside of existing products.

 Fred if i add here, to rule of some between 2020 and 2022, we had a lot of needs in terms of campuses to improve our CapEx responded by the life of acquisition and also launching the mimetics and 7 new graduate campuses that we are working and operating under the Ethernet brand. So moving to the end of 2022, we have our CapEx close to 11% of our net revenues. So moving to 2023, all these real estate requirements that we had in the previous years, I think it's much lower. So we expecting to have actually a lower maintenance CapEx -- recurring CapEx on 2023, that would be something to run to 2 percentage points below 2022, call in terms of cash flow. And the great majority be allocated as Blanco said, in product development to use the road map of our 6 pilots on the digital half.

Super clear. Thankyou Virgilio Thankyou Luis.

So our next question now comes from Marcelo Peev from JPMorgan. Marcelo...

 I also have 2. I think the first question ties a bit to the previous one. You said that you should have the lowest point of margin in the B2B in 2022. Could you broaden a bit of discussion on margins could you please discuss a bit what the beauty blocks of margins in 2023, where the contractors and the support of margin that we should see in the year? That's the first question. The second question is if you could comment a bit on tuitions for the -- the first half of 2023 intake cycle, given that you probably already set our prices. So what could we expect in terms of tuition...

 [Inaudible] speaking, regarding the margins for 2023, we didn't reduce the guidance for 2023. Right now, we're going to release in the beginning of the year within the 2022 good results. So we can comment more on 3 guidance margins over there. Regarding the tuition fees, as we usually do, we put the new prices for new students and for existing students during September and October. Regarding the -- our core business regarding the medicine students, most of the units have applied readjustments of 7.5% exist for existing and for new students. So we can expect an increase of 7.5%. Some units, we had a little bit behind that. Some units, we have a little bit more than that. more of the students. So 7.5%, it's a number to consider for 2023 price increase.

 Marcelo, just adding on the first question about the margins. We analyze our 3 different segments under the Undergrad segment. We will still mature in our operations. Liani, our last and biggest -- we are excluding units that still pending the closing expected to be beginning of January. But considering Deco, we will see some gross margin opportunity and leveraging our operation as we still have some opportunities in terms of margin. We just implemented push all the transaction activity or services rolling out season. So we have some efficiency that we can have from Igniandthe maturation for other companies. But the other grade operation is very mature. So the opportunity in terms of overall margin, it's lower. Moving to the other segment, we can see that graduate problem, the container metalation will go very fast year-over-year. So the composition, we will see much more revenues from the graduate program than we had in 2022, but we still at lower margins than be on the ground. So the mix will be better on the graduate cog that will grow faster, but with lower margins. So in terms of average, can have a negative impact coming from that. The same dynamic we are seeing on the digital because digital when you take a look just for the segment, we will be much better in terms of margin and gross margin. But by the bottom line, we still have a lower margin when compared to the core on the graduate business. So having said that, when we put everything, we'll still have the margin close where we are operated, but we didn't release any guidance where will be our range during 2022. Okay?

So just a reminder, if you want to ask the question, please[Operator Instructions) Next question comes from Vitor Tomita from Goldman Sach. Vitor, go ahead, please.

 Two questions from our side. The first one is that there seems to have been a slight decline in nonmedical health care students in addition to the reduction in nonhealth care students. Could you give us some more color on that and on whether the decline is related to macroeconomics or competitive headwinds? And the second question on our side would be about the B2B access features that you're launching, do you have any initial sense on how physicians are receiving their changes from their end in their daily usage of digital solutions in their usage experience now that there are B2B access features interacting with them?

 Thanks, Tomita. Luis speaking here. Regarding the drop that we have on non-medical health, it's regarding the closing of one business learning force that we have implemented in one unit that we closed this course during the second financials, of course, that had a small revenue and a very small margin contribution. So we decided that you close to finish it on the -- here on the end of the first semester. And so roughly, something about 3,000 students that we have on these business learning force in health. Regarding the second question regards the B2B features. We see that we can provide the connection between the physician and the pharmaceptindustry. This is being very well received by our physicians, and we can -- and because of that, that's been very, very well accepted. We can use with the expansion in the number of contracts and the number of pharmaceutical companies that we have under our portfolio. As Virgilio mentioned, we have this land and expense strategy when we provide our service for a specific line of products within a pharmaceutical company. And then we expand we been different line of products in times of the same format performance. We've been doing that and providing this kind of service and the physicians are good with these kinds of connections that we are providing.

 Our next question comes from Mauricio Cepeda from Credit Suisse. Mauricio go ahead.

Hello, Virgilio, Blanco. I have 2 questions from our side. The first one is about the recent acquisition of Uniti. I understand that the closing is, as you said, is forecasted for next year. But anyhow, how do you plan to make the capital structure to absorb such acquisitions? So are you planning on more debt? What is the capital that you're planning to cope with this acquisition? And the second question is about the prep courses medcel. If you are some way trying to remodel it or even trying to rethink about the tickets, any kind of product redesign that you're thinking now that we are approaching the intake for the rest of the year?

I will start with that, and Digirolamade some additional points. Regarding units, we are planning to increase trends. We are right now negotiating in the final negotiation of this increase in debt to finance the down payments that we have for the unique yield. As you mentioned, we expect to close that in next year, but we didn't close the financial data of the is right now. We are very, very advanced way, but we haven't closed it, as you know, and expect to reach final agreement in the beginning of December. Regarding Selestat, with that, we've made a completely transformation, the completely range regarding Medcel. We changed the product itself. We change the price, which changes the way we adverse this product and the way we package this products. Starting with the product itself instead of having a very complete product to feed all kind of students we kind of process for each one of the institutions that the students want to pass. We exclude the fiscal book from the value propositions. We -- right now, we offer the physical book as an add-on. So the basic package is book of is. Instead of providing all the content for the students in the first time, we made an assessment of these students, and we impact these students with the content that the most needed to get the minimum grade that is needed for the institution that we want to pass for this specific subject. -- if the asset, the first assessment is performing well. It will be impacted by a very short content and then go both to the simulations, the test simulations. And if it's not a very well positioned with this grade, so he's going to be back of the content that is needed to in to get improved. So we make this kind of changes in products.

In terms of pricing, we have increased prices. The pricing for the 2022 collections. It was around 4.5000 per year per 1 year, have increased this pricing for about BRL 7,000. So we increased the pricing for the product. Regarding the way that we sell the product, we give more protagonism for our teachers will be more on the social networks instead of the bone adding, but with trenches with a premium content inside of our social networks. And last but not least, we are[Inaudinle] products to offer what we say that the Pillar 1 offer instead of just offering Medcel itself. Now we are offering medcel coming with mentoring and probably with some features that come from cadavers. So we are holding that and offering to our students, and this kind of offers are being very well received by the students. But it's a turnaround of all these offers that we put in place now. Virgilio?

Mauricio, just to add. Just remember that we acquired CantoPesas in Alinda Vicino in those acquisitions, we have many expert physicians that went entering on our Pillar 1, helping us to review our products and our offer to the market. So they are influencers, they expect from each area. So we -- as Blanco said, we are giving much more putting our proffesors teachers in front of the student in tailoring the content for each type of residents for each type of problem that they are going to apply. So we have much more experts tailoring the content that helped us to change our price and also to revamp our products. So this is the very beginning. So we have the Black Friday that's a very strong process during November. And since we launched, we are seeing very good figures in terms of , but it's still in the beginning where we are going through March, April next year to have our final results from this new season.

Great. So an additional complementary to my question. So by remodeling the product by reengineering the product, do you expect this to change the way you sell and recognize revenues of it? Should it be more continuous now? How do you think about that?

Didn't change that. The remodeling didn't affect how we see how we capture the revenues of the product ever. So we're going to keep seeing the sails from the fourth quarter and the first quarter for Medcel. very clear.

So with no further questions, I would like to thank everyone once again for joining us, and we hope to see you again in our next conference call. Good night.Â