Afya Ltd (AFYA) 2022 Q4 法說會逐字稿

Thank you for joining us for Afya's Fourth Quarter and Full Year 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, 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 refers 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 #3.

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 strategic topics such as our performance and highlights, the successful business execution within our 3 segments, 2022 and 2023 guidance, some recent awards and recognitions. And at the end, Luis Blanco will explore our financial and operational review.

So moving now to Page #4. Let's start with our performance and highlights. First, adjusted net revenue increased 32%, reaching BRL 2.3 billion, followed by an adjusted EBITDA growth of more than 27% year-over-year, reaching BRL 962 million with a margin of 41.5%. We also reported a strong cash flow generation again, ended the year with BRL 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 BRL 393 million in 2022, a growth of 62% year-over-year, with an EPS of BRL 4.14, 73% higher than last year, reflecting our capital allocation discipline and executing our business combination and 3 buyback programs in a row.

Moving to our operational updates of the quarter. We have reached 2,700 operating seats, an increase of over 11% year-over-year, with the beginning of 4 Mais Medicos campuses, along with new seats in Ji-Paraná in Itabuna. In addition, our number of undergrad medical students has reached almost 18,000 students, 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 BRL 109 million. Once again, after reported great results on the digital health services revenue, which ended the year with an increase of 25% compared to 2021. These results reinforce the opportunity we had on digital services and is explained by the ramp-up on B2B engagements with new contracts with pharmaceutical industry companies and the continuous ramp-up in B2B contracts, as we will discuss further on.

Lastly, our ecosystem has 260,000 active users, represented a great penetration among physicians and medical students in Brazil.

In the next slide, we'll talk about our solid business execution within our 3 business units. Starting with our core business. The Undergrad segment, we saw important movements throughout the year. First, the successful opening of 4 Mais Medicos campuses, Abaetetuba, Bragança, Itacoatiara and Manacapuru, adding more 200 medical seats to our portfolio.

Second, the completeness of UNIGRANRIO integration process in October, 1 year after its acquisition, proving our commitment to extract synergies within the operation. Third, the increase of 92 new medical seats, 28 in 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 an 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 come from our Continuing Education segment with a robust intake process, 6 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 drug searching. 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 #6. I we can see how the company's financial results reaffirm the resilience and predictability of our business model. Afya's 2022 net revenue was at least 3x 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 2x since 2019, proving our capacity to combine organic and inorganic growth with strong capital allocation discipline and consequently great returns to our shareholders.

We are also introducing our guidance for 2023, which considers the successful concluded acceptance of new medical students, ensuring 100% of 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 BRL 2,750 million and BRL 2.850 million. And adjusted EBITDA is expected to be BRL 1.1 billion and BRL 1.2 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 resilience and the 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 jointly celebrate several awards and recognition this year such as Anuário Época NEGÓCIOS 360°, 2022 Valor Inovação Brasil, Institutional Investor 2022, Great Place to Work, Bloomberg Gender-Equality Index, TOP 100 Open Corporations 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 measures. Thank you.

Thank you, Virgilio, and good evening, everyone. Starting with Slide #9 to discuss the financial highlights of the fourth quarter. With much satisfaction, I present another strong quarter results for Afya. Adjusted net revenue for the fourth quarter of 2022 was BRL 595 million, an increase of 18% over the same period of the prior year. In 2022, adjusted net revenue was BRL 2.3 billion, an increase of 32% over 2021, mainly due to higher ticket in Medicine courses, maturations of medical seats, the beginning of 4 Mais Medicos campuses, the Continuing Education segment recovered after practical activities was resumed after COVID-19 pandemic and Digital Services performance.

The Digital Services segment increased 25% (sic) [31.6%] 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 expansions of active players in B2P, mainly in Whitebook, iClinic and Shosp, partially offset by the lower performance of net sales due to a higher competition scenario in the Residency Preparatory markets.

Fourth quarter adjusted EBITDA increased 24% to BRL 242 million with an adjusted EBITDA margin of 41%. For the year, adjusted EBITDA was BRL 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 segments, primarily due to the Medcel's performance; increase in corporate expenses in the period; and launch of the 4 Mais Medicos campus in the third quarter.

Moving to the next slide. Adjusted cash flow generation over the year was almost 32% higher year-over-year, totaling BRL 877 million. Operating cash flow conversion ratio was 94% for 2022 compared to 101% in 2021. Operating cash flow ratio in 2021 was positively affected by the end of the grace period of tuition negotiations that occurred in 2020. Adjusted net income for the fourth quarter of 2022 was BRL 129 million, an increase of 31% over 2021. In 2022, adjusted net income was BRL 535 million, an increase of 22% year-over-year.

Our EPS performs a robust expansion. For the quarter, EPS grew 53%. And for the year, EPS reached BRL 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 combinations and 3 buyback programs in a row.

Moving to Slide #11 to a discussion of our key operating metrics by business units, starting with the undergrad products. Our number of medical students grew 12% year-over-year, reaching 18,000 students, with operating medical seats increasing 14% due to the (inaudible) of 292 medical seats related to the 4 Mais Medicos and Ji-Paraná and Itabuna seats increased, as previously said. Therefore, considering our maturation and UNIT acquisitions, we have reached 3,163 approved seats and expected to achieve more than 2,002 undergrad medical students at maturity.

With our net average ticket increasing 11% year-over-year, we reached BRL 7,896 compared to BRL 7,126 in 2021.

The last graph shows a 32% growth in combined tuition fees, reaching BRL 2.6 billion, up from BRL 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 the middle term, delivering high predictable 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 the 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, 6 new campuses and courses mix and maturation.

Moving to Slide #13. I will discuss the digital service 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 [active] paying users, a 21% growth compared to the 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, represent 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 BRL 190 million. Since the beginning of the year, we also started to break down our digital service net revenue within B2P and B2B segments, which accounted for more than BRL 166 million comes from B2P and more than BRL 23 million coming 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 last 2 slides. I will discuss our cash and net debt positions, also giving more color on our cost of debt. Cash and cash equivalents at the end of the fourth quarter were BRL 1.093 billion increase of 46% over the same period in 2021, mainly due to the BRL 500 million debenture issued in December of 2022. In 2022, net debt totaled BRL 1.381 billion achieving the same level of 2021, supported by strong cash flow generations in 2022 of BRL 844 million, which was offset by investment activities in properties, equipment and intangible, totaling BRL 297 million, BRL 99 million of acquisitions of subsidiaries and BRL 152 million of share repurchase product.

Our capital structure remains solid with a conservative leverage positions and low cost of debt. Even considering UNIT acquisitions and the mid guidance of 2023, Afya net debt to adjusted EBITDA for 2023 would be at 1.9x.

On the next slide, you can see a table with the breakdown of our gross debt and total cost of debt, considering our main tax, SoftBank transactions, 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 asset (inaudible) 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.

(Operator Instructions) The first question comes from Marcelo Santos from JPMorgan.

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'm 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 Medicos program. When, how this should shape up? How are the discussions going with the government?

Marcelo, it's Luis speaking. Yes, we face -- continue to face 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 [competitiveness] 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.

Marcelo, just to add a point here, it's important that under the Pillar 1, where Medcel is located, we are also combining the offerings coming from Além da Medicina and also CardioPapers. So this Medcel, it's just one type of the cost 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're expecting to have like resume growth under the Pillar 1, it's one part of our [B2P] business in 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 is about the Mais Medicos program. We just saw the release of the new 2 normatives 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 -- still 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 Medicos.

Yes. As Virgilio 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 Medicos run into.

So the second question comes from Freddie Mendes from Merrill Lynch.

I have 2 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 gain more relevance. So anyways, you're 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 BRL 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 in this front as well.

Fred, it's Luis speaking. I'll take the 2 questions. The first was regarding guidance. We are pretty much in terms of midpoint, aligned with the guidance. And remember that the guidance included UNIT and included the expansion of the mix with the growth of digital and the Continuing Education that has lower margins than the undergrads focused on (inaudible).

So it includes UNIT. UNIT is the first year. We had the [transitional] year that the service will still be provided by the former sellers until the end of the year when we do the integrations of units to our [trendsetters]. So it's pretty much the same in terms of margin, the guidance within our 2022 results, but we have to have in mind these units and the mix effect, okay?

Regarding net debt, it's always important to remember that we have seasonality on our operations. The most part of our cash in a quarterly basis generated during the first quarter and the third quarter because we have the intakes, we have the renegotiations of all the students for the near term. So you're going to see -- you're going to always see a better cash conversion in these 2 quarters if we compare to the second and the fourth quarter, okay?

Just to add a point, and also on the second half -- the fourth quarter, Fred, we also have the vacations and (inaudible) payments only in December. So there's a lot of cash payments in December that reduced the cash position for all higher education sector -- actually for all education sector in Brazil, okay?

So the next question comes from Lucas Nagano from Morgan Stanley.

We have 2 questions. The first one is a follow-up on regulation. The question is, should another Mais Medicos program happen anytime soon after the end of the suspension? Or do you need to wait for Supreme Court's definition?

And the second question is related to Continuing Education. How much growth can you achieve at -- for maturation? And what are the perspectives for future expansion of campuses?

Okay. Lucas, I'll take the first one here and what will happen on the Continuing Education here. So under the regulation, it's likely to happen this semester, another process that will release more capacity to the entire sector. So the Minister of Education doesn't have to wait any Supreme Court decision to release the Mais Medicos [III] or any program that is similar. So the expectation is that once we have the freezing process finished in April, they will be ready to announce the new product.

The issues that they just put this group together that we analyze would be the new frame, the new characteristics for this new Mais Medicos and still have to wait to come up a solution and to release to the entire market.

Under the Continuing Education, so it's a lot of opportunities here in terms of growth. We are growing year-over-year almost 50% in terms of revenues in 2022. Just remembering that we almost stopped our operation during the pandemic. So this is a very beginning -- this is a market that is a very high growth in terms of addressable market. We have 15% to 20% physicians growth that will enter in this market, looking for new Continuing Education. And we are outperforming the market growth here.

So remember that we just launched 7 new units offering 100% of graduate programs, and most of them related to capitals -- located in capitals. And we have more than 60 programs offering right now on our portfolio. So today, it's more than 4,000 students. We are aiming at least to reach 10,000 students by 2026. That's what we are aiming as an opportunity here in 3 to 4 years.

Yes. If I can complement, Lucas, as Virgilio said, we expand the number of units that we had during the pandemic. And 2022 was the first year to ramp up these units. And 2023 comes with the same trend to mature these units, and we can expect to outgrow this market that Virgilio mentioned, that's around 20%.

And just coming back to Fred's question, that, as we said, it's one of the reasons that we see stability in margins as we have a different mix of Continuing Education and Digital Services growing more in top line than the Undergrad services.

Yes. This is also important. Remember that as we launched 7 new campuses, they are maturing. So the density of students per campus is still low. We have a lot of opportunity. So as -- semester over semester we're going to have more students, we have more fixed costs that will be diluted. And as you can see on our financial statement, we have gross margin improvements on Continuing Education and also in digital services 2022 over 2021. And we expect to have the same dynamic for this next year.

The questions on margin is that the mix effect will be different because we have a high-growth business in on digital and also on Continuing Education.

Our next question comes from Lucca Marquezini from Itau.

Just a quick follow-up on the Mais Medicos topic. So assuming a new program that should bring additional medical seats to the industry, how do you believe this should impact the company's ability to readjust tickets in the medical school business going forward, not only for 2023, but especially in the long run?

This is a difficult question here. But based on what happened on Mais Medicos I, Mais Medicos II and also what they are at least aiming to do with these new announcements, they try to incentivate more physicians in North and Northeast area, in an area that they want to prioritize as critical of physician [for] inhabitants. I think that we'll release maybe 1 or 2x bigger than the last portion that was in 2018, maybe 8,000, 10,000 seats. But I don't think this will change the balance between supply and demand. I think it could be more small adjustments in some areas. And I think at least on our expectations here, we have fully commitment and good expectation that we will keep continuing to have 100% of occupancy, and [pass] at least inflation to our tuition for the following years.

In using the space here, just remember that we are increasing prices -- the average price for 2023, 7.5%, and with the maturation effect that could increase 1 other percentage point.

(Operator Instructions) Our next question comes from Pedro Caravina from Credit Suisse.

First of all, congratulation on the results. So most of the questions we had were already answered. Just a follow-up. On the reshaping of Medcel, how is the intake going for the first quarter? And what level of ticket adjustments should we expect for the new Medcel after the reshape?

And also, we saw an increase in margin for the quarter year-over-year. I was wondering what was the reason. It was like 230 bps for the fourth quarter '22 versus fourth quarter '21.

Regarding Medcel, we established for the 2023 collection that started in the fourth quarter and will continue in the first quarter of 2023. We have a very important price increase. We are talking about roughly 50% of the pricing increase in terms of tickets. So we put it that -- these in place for the Medcel cycle that started in the fourth quarter and will continue in the first quarter. So this was a part of this product restructurations that we've done. We changed the team. We changed the product. We changed how we deliver the content for the students. We focus a lot on helping the physicians to pass the test to have a more focused product. So we are confident that we made the right moves on that. And we are confident that we will revert these situations for the next cycle.

It's -- what's important is to change the way we're -- we were expanding the gap between the next year. We are not seeing more than that. We're closing the gap. But I think more results we'll be seeing on the next cycle of 2024.

Regarding the expansion -- the margin expansion for the fourth quarter, you are right, we have this margin expansions. And remember that, as Virgilio mentioned before, during 2021, we faced a lot of pressure coming from the Continuing Education sites. And the COVID crisis started to be released -- to be relieved at the fourth quarter. So the fourth quarter, it was the first quarter that we started to see the intakes and started to rebound the revenues of the repayment of the Continuing Education. So it was the beginning of it. And now as we mentioned before, (inaudible) is -- with a huge growth right now and is one of the main reasons to the margins if you compare fourth quarter 2022 regarding 2021.

And Pedro, besides that in Continuing Education, so the undergrad are kind of flat margins quarter-over-quarter. But also, we have Digital Services because of -- although we have the (inaudible) on Medcel, have strong results coming on B2B. So the contribution margin -- the gross margin come on Digital Services is much higher when you compare the fourth quarter 2022 to fourth quarter 2021. So overall, we have this bps of margin increase on our fourth quarter.

So as we don't have any more questions, I would like to thank you all for participating today with us. If you have any more questions, please do not hesitate to contact me or our IR team. It was a pleasure. See you next quarter.