Afya Ltd (AFYA) 2021 Q1 法說會逐字稿

Good morning, everyone. Thank you for joining us for Afya's First Quarter 2021 Conference Call. With me on the call today is Afya's CEO, Virgilio Gibbon and Luis Andre Blanco, our CFO. During today's presentation, our executives will make forward-looking statements. Forward-looking statements generally relate to future events or future financial or operating performance and involve known and unknown risks, uncertainties and other factors that may cause our 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 our business and financial performance, expectations and guidance for future periods or expectations regarding our strategic product initiatives and the related benefits and our expectations regarding the market as well as the potential 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 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. The non-IFRS financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IFRS. We have provided a reconciliation of these non-IFRS financial measures to the most directly comparable IFRS financial measures in this presentation.

Let me now turn the call over to Virgilio Gibbon, Afya's CEO, starting with Slide 4.

Thank you, Rena, and thanks, everyone, for joining us today. I'm very pleased to report a strong first quarter 2021 results, continued the positive trend of 2020 and also reflecting the successful execution of our strategic initiatives. We continue to deliver the combination of our strong and predictable growth with high profitability and health cash generation.

But before we go through our financial highlights in detail of first quarter, I would like to present our last acquisition. We are very excited and honored to announce UNIGRANRIO acquisition and to enter definitely in the Rio de Janeiro state. This acquisition is a milestone for Afya considering the 308 seats from UNIGRANRIO, we will reach 1,159 seats acquired in less than 2 years, overdelivering our guidance released during the IPO after concluding 14 deals since then.

These 308 authorized seats translate in 2,218 students at maturity, represented an embedded growth of 25%, considering the current medical student base of 1,800 today. Including UNIGRANRIO, our total medical students at maturity is expected to reach 1,880 students represent a CAGR of 9% from 2020 to 2026.

Health science-related course are an important share of their business as well, with more than 5,700 students. And to enhance Afya's continued education offering, 806 health-related graduate students will be integrated to our student base.

I would also like to highlight the prestigious brand and the great academic quality of this institution. UNIGRANRIO has the highest quality score among all for-profit universities and university centers in the state of Rio de Janeiro with a solid IGC continues at 3.60.

Moving to the next slide to talk about synergies in this transaction. Today, UNIGRANRIO has 1,800 medical students, what represents an embedded growth of 25% and 2,200 medical students at maturity, and we will assure 100% of occupancy. This large health ecosystem is a fertile opportunity to offer Afya's digital medical services and cross-sell continued medical education programs, leveraging the lifetime value of each student.

Back-office activities will be integrated to our shared services center and our career plan and medical curriculum will also be implemented. Generating synergies already improved in past acquisitions. UNIGRANRIO has also a distance learning expertise with 79 distance learning centers and maximum quality score evaluation. All of these footprints and capabilities will be applied to improve margins of Afya's ex-health undergrad courses, regrading on campus traditional students to a more hybrid learning process.

In terms of net revenues, UNIGRANRIO reported BRL 263 million in 2020, of which 49% comes from medical course and 60% also considered health-related products. At maturity in 2023, net revenue is expected to reach BRL 343 million, with 71% in medical course and 85% in health-related products.

Post synergy and maturation, this transaction is very accretive with an expected EV/EBITDA of 4.1x. The aggregate purchase price is BRL 700 million with payments structured as follows: 60% paid in cash upon closing of the transaction. The remaining 40% is payable in cash in 4 equal installments through 2024 adjusted for CDI rate.

There are 82 additional seats still pending approval. If approved, it will result in a potential earnout structure as follows: BRL 1.1 million per seat if the approval is granted in the first year after acquisition; BRL 1 million per seat if the approval is granted in the second year after acquisition; and BRL 900,000 if approval is granted in the third year after acquisition. To get more information about this acquisition, I invite you all to see the presentation in our Investor Relations website.

Now moving to the next page. We will discuss the highlights for this quarter. First, I would like to reinforce that we will start in this quarter to segregate our results in 3 Business Units. Undergrade, what we used to call BU1, comprise of undergraduate medical course, health science and other products; second, continued education comprised of specialization and graduate courses; third, digital services, which includes all services and products that compose the 6 pillars that our strategy is based on: content and technology for medical education, clinical decision software, proxy management tool and electronic medical records, physician-patient relationship, telemedicine and digital prescriptions.

I'm pleased that we have concluded another 2 acquisitions to enhance our digital ops. At the end of January, we closed the acquisition of iClinic, a practice management software. This acquisition consolidates our position in the practice management tool, telemedicine and digital prescription pillars.

At the end of the quarter, we also announced the acquisition of MEDICINAE, a health care technology company that specialized in health care payments and financial services.

Moving on the chart, we will highlight our results. Starting with our top line, adjusted net revenue grew 48% year-over-year, reaching BRL 403 million in the first quarter due to the consolidation of acquired companies, maturation of medical school seats and expansion of digital service active paying users. Adjusted EBITDA also increased 48% in the same period, reflecting the synergies extracted from this acquisitions. Adjusted net income was up 22% year-over-year, reaching BRL 160 million. Total growth was partially offset by lower financial results due to the 3 reasons: the increase in lower than financing in BRL 530 million and exchange rate depreciation between Brazilian reals and U.S. dollars of 11% from December 2020 and March 2021 combined with 29% exchange depreciation rates between Brazilian reals and U.S. dollars from December 2019 and March 2020. That increased the financial results at the time due to our position in U.S. dollars.

And lastly, lower income from financial investments due to the increase of Brazilian interest rate, CDI and lower cash position. Cash conversion reached 103% in the first quarter of 2021, with a solid cash position of BRL 966 million, slightly lower than 2020 due to the payments to selling shareholders. It is worth to recognize our collection process that even considering the more flexible renegotiation policy adopted in 2020 because of COVID, our cash conversion ratio was 22 percentage points above last year's same period.

The number of medical students was up 62% due to the consolidation of acquisitions and maturation of medical seats. Without considering acquisitions, the number of medical student was up 22%, reflecting only the maturation of currencies.

Moving to the next page, we will discuss the guidance issued for the first half of 2021. During our last earnings results for the full year 2020, we issued guidance on net revenue and EBITDA margin for the first semester of 2021. Net revenue is expected to be in between BRL 740 million and BRL 780 million, and EBITDA margin is expected to be between 46% and 48%, excluding any acquisition that may be concluded after issuing of this guidance.

For instance, UNIFipMoc is not being considered, we expect to conclude this operation on June 2021. We are on track to achieve our guidance with the first quarter results.

Reported net revenue for the quarter was BRL 403 million, achieving 52% of the middle guidance. In terms of adjusted EBITDA, we achieved 60% of the middle guidance with an adjusted EBITDA margin of 52% for the quarter. These strong results stem from a combination of medical school seats and average fixed maturation, distribution of digital services to our ecosystem and successfully concluded acquisitions.

I will now turn the call over to Luis, who will detail our financial results.

Thank you, Virgilio, and good morning, everyone. Turning to the next slide to discuss the financial highlights of the first quarter 2021.

I'm pleased to present the high growth track record that we were able to achieve in the last 3 years. Since 2019, we saw the strong trend in all key metrics. Adjusted net revenues for the year was up 48% year-over-year to BRL 403 million, reflecting acquisitions and organic growth. Excluding the acquisitions, net revenue grew by 11% year-over-year, reaching BRL 301 million. Such increase was primarily driven by maturation of medical school seats and an increase in the average ticket.

In terms of adjusted EBITDA, we almost tripled our result in just 2 years, reaching BRL 208 million, representing a 48% growth year-over-year. EBITDA margin remained flat comparing to the first quarter of last year, reflecting higher EBITDA margins of integrated companies that were offset by lower margins of recently acquired companies. Adjusted net income was up 22% year-over-year, reaching BRL 160 million, partially offset by the reasons mentioned by Virgilio. Our EPS had an increase of 6%, reaching BRL 1.16 per share. Cash flow generation remained strong in the 3-months period, increasing 81% to BRL 194 million, which resulted in a cash conversion ratio of 103% compared to 81% in the same period of 2020.

Moving on to next page for discussions of key metrics by business unit. Starting with Undergrad. Operating medical seats increased 25% year-over-year to 1,900 operating seats. Medical students were up 62%, reaching a base of almost 13,000 students, reflecting medical seats maturations and acquisitions. Our average monthly medical division fees were up 6% compared to the first quarter 2020, reaching 8,700 excluding acquisitions. This reflects a combination of new students enrolling with higher tuition rates combined with the students graduating with a lower tuition rate.

Talking about revenue mix. 80% of our combined tuition fees are delivered from medical school, up from 77% in the same period of the prior year. In terms of total tuition fees, we reached BRL 414 million, up from BRL 252 million, an increase of 64% year-over-year.

On the next page, I will present continued education metrics. We saw a 30% decrease in net revenue due to a reduction in paying students primarily driven by: practical programs that are not being offered since August 2020 and represents an impact of BRL 7.9 million in net revenues and the physician decision to postpone the intake in specialization courses due to the COVID-19 pandemic.

Although with the combination of opening of 6 new campuses in 2021 and expanding the specialization portfolio, we have a strong intake process that started in the second quarter. IPEMED reached 1,800 students in April 2021.

Going to the next slide, I will discuss digital service metrics. On the first graphic, you can see our achieved paying users per bidder. Those are the active subscribers that generate revenues. Medcel active paying students grew 50% year-over-year. Clinical management tools reported a subscriber base of more than 13,000 users and clinical decisions software of more than 110,000 active users. We have a great opportunity here to distribute our products in this ecosystem. These results reflected in a 48% increase in digital service net revenue.

The last graph on the page shows that the monthly active users that reached 221,000 students and physicians all over Brazil. This accounts for approximately 30% of the market of medical students and doctors in Brazil.

Moving to the next page, I will discuss in more details the net revenue and EBITDA growth. We saw a 48% increase in net revenue year-over-year, of which 78% are coming from the consolidations of acquired companies. On the right side of the page, we show the bridge of adjusted EBITDA for the first quarter 2021. During this period, adjusted EBITDA also increased 48% year-over-year to BRL 208 million with high margin as we presented in the past years. 75% of the increase is coming from acquisitions and the other 25% is coming from the synergies expected from acquired companies as we have integrated into our shared service centers and increased occupation of medical seats to 100% and implementations of our career plan and integrated curriculum.

Moving next to discuss cash and net debt position. Cash and cash equivalents of BRL 966 million at the quarter end were 8% lower than 2020, reflecting the payment of acquired companies. This cash position does not consider the closing of Softbank operation, which was closed in this quarter. The total net debt was BRL 230 million in first quarter 2021, up from BRL 167 million in 2020. Considering digital acquisitions that were closed subsequent to the quarter end and 2050 mark and only grant the acquisitions that were already signed but not closed, our pro forma net debt would reach BRL 1.3 billion. I will now open the conference for the Q&A section. Thank you.

So our first question is from Gabriel Menezes from JPMorgan.

Do you hear me, well? Hello. Can you hear me?

Yes, we can.

Yes.

Okay. We have 2 questions here regarding UNIGRANRIO. So the first one is regarding their distance learning operation, which is very robust, as you pointed out. And we would like to see what's your plan on this business in terms of how can you extract the synergies and perhaps increase the amount of distance learning on your nonhealth operations based on their expertise. This would be the first question. And the second question is regarding the potential for ticket increase at UNIGRANRIO. How do you see that? And which level of tickets are in all days? And also, if you're thinking creating new campus units on the UNIGRANRIO level, which are related only to medicine. So these are our questions.

Gabriel, this is Virgilio. Thanks for your question. About your first one regarding distance learning. We are going to apply all the expertise coming from UNIGRANRIO as our Afya's distance learning platform and used to leverage all on-campus or migrate on-campus ex-health programs to this platform. So this is a huge opportunity for us to keep a health operation for these programs and also leverage margins for the recent acquisitions and for the following acquisitions that can come and also migrate, helping us in integrations strategies even faster after a new medical school acquisition that comes with additional programs.

On the ticket, the average tuition for UNIGRANRIO today is around 8,000 -- BRL 8,500 on medical programs. They still have maturation on enrollments and also on tuition. The first year students, the tuition is around BRL 10,000. So we have this opportunity to maturate the cohort of these higher tuitions through the next 3 to 5 years. So we still have opportunity for ticket improvement considering the cohort maturation. About the campuses location. We have 2 main campuses -- 3 main campuses, one in Duque de Caxias is the largest one. The second one is in Nova Iguaçu and the third in Barra da Tijuca, where we have 100% health operation, with the new medical school that is still maturation -- still maturing.

We are still analyzing making a go-to-market of all sites, all campuses. We now have another campuses in our north of the state that maybe it's an opportunity to close this campuses because there's a very small operation and migrate the on campus programs to distance learning platform. So it's too early to analyze what we are doing. But yes, it's an opportunity to manage the location of those campuses.

So our next question is from Caio from Morgan Stanley.

Can you guys hear me?

Yes. Perfect.

Yes. So great. So my question is regarding the expected margin at maturity which would be around 50%. Is it really feasible to arrive at those margins, especially in a very competitive market like Rio de Janeiro that has very big players? So I was wondering what are the drivers that should lead to this very strong margin expansion?

Caio, it's Luis speaking. When we make these projections for Rio de Janeiro, we've reached on the maturations portions of medicine revenues to the total coming around 70%. 15% of that coming from other health programs. If we compare this kind of profile with institutions that we have on our portfolio that have the same profile. We are confident that we can achieve this kind of margins. And even though that's a very competitive market, most of the revenues come from the medicine business on the maturations. And we see that we can have the ticket like which you just settled -- us from BRL 10,000 approximately as the ticket for new students. So we are pretty confident that implementing all the playbook of synergies that we have in place that, on 2023, we can reach this kind of margins.

Yes. If I may add here, Caio. We have our more mature schools operating at very much higher margin than the 60%. Contribution margins for these medical schools operating above 55% and some of them, above 60% of contribution margin. So when you compare and make an internal benchmark of the portfolio with 80% in maturation coming from health education more than 60% coming from medical programs, we have a very good view where we can reach in terms of miles. So 50% in a city like Rio de Janeiro with one of the highest tuition that we have in Afya's considering that the new students are enrolling almost BRL 10,000 as the first tuition. We are very confident to reach this contribution margin in UNIGRANRIO in 3 years.

Okay. Next question comes from Vitor Tomita from Goldman Sachs.

Our first question would be what do you believe could be the main challenges in integrating such a large asset in UNIGRANRIO and if you anticipate any potential friction in rolling out access curriculum into UNIGRANRIO? And our second question also related to UNIGRANRIO is whether this acquisition could change the focus of our overall M&A strategy? namely, if you are now more likely at least in the near term to focus more on smaller targets or on digital solution.

Vitor, thanks for your question. In terms of M&A, for sure, it will be the most complex acquisition in terms of integration to have the full integration between 12 to 18 months from now after closing the deal, we expect for the last 3 -- next 3 months. And first of all, that our curriculum will be sale to all UNIGRANRIO community. I think there is a lot of enhancement that we can implement there in terms of technology, in terms of all digital services that we have plugged into our curriculum to help during the learning process for the first and the sixth year. So there's a lot of plug-ins that's a win-win in terms of curriculum for the medical programs. So I don't think there will be some kind of resistance on that.

On the other health problems, I think there's something that we also can join with our curriculum. And they have a lot of expertise and health programs. Dentistry program is very traditional in Rio de Janeiro, also some strict sense of -- master and doctor program in health areas that we'll leverage our -- for faster portfolio in terms of doctors and masters in our operations. So it will be a very carefully integration very long term. On the first wave, we'll be, for sure, integrating our medical curriculum and also all the enhancements that we can plug in for the entire student base.

In terms of focus on the digital opportunities, we organized it on our M&A area, almost in 2 avenues. One is completely dedicated to analyze all the digital services opportunities, And the other one, leveraging medical school opportunity. So we are carrying this in parallel. So it's not hurting our strategy here in terms of opportunity costs or reducing our speed to keep attracting new tech companies to our operation here. Do you want to add there?

Yes. Yes. Thank you, Virgilio. Thank you, Vitor, for your questions and adding to what -- to give you more colors to what Virgilio just said. First of all, of all of that, we are very glad that we've achieved -- surpassed the goals that we provide to the market as the use of proceeds in IPO. So we are now with 1,159 seats within our portfolio. Having said that, about the undergrad opportunities that we have, we're going to keep growing the market. We see that it's accretive -- very accretive for us to keep going on acquiring institution that has a portfolio for medicine that is over 6% on the maturation. So we see a very much value on that. We have a very fertile pipeline on this undergrad. And with guidance the market that from 2022, we're going to keep adding more than 200 seats per year.

And about the digital service, we have the 6 pillars strategy in place. We want to fulfill all of them with our own service to provide the power for the physicians in his career. So we are keeping talking with these health tech providers to see what the best and to represent the best service to aggregate in our portfolio. So the acquisitions of UNIGRANRIO do not change at all in any point of our strategy. We keep being aligned what we are being said in kind of size in kind of profile of companies and in the digital side keeping -- adding service for the physicians.

So our next question comes from Cepeda from CS.

Can you hear me?

Yes.

Okay. Just one question. We see that the acquisition of UNIGRANRIO was, of course, a very large acquisition, a distinctive milestone in your history. And thank you for showing the pro forma net debt. My question is about do you intend to go for more capital in the short term, so you can accelerate the acquisitions, specifically of medicine schools? Or do you -- or are you willing to consolidate a little bit more the undergrad business before going for more acquisitions and concentrate in the tech business?

Cepeda, it's Luis here. Thank you for your questions. About the capital strategy what we have. First of all, it's important to remember that we generate a lot of cash. Even in these difficult times, the adjusted cash flow generation was over 100% due to our successful, I would say, that policy of learning that we have implemented on the COVID that was proven very, very strong and provide us this cash flow -- strong cash flow generation in this first quarter.

The second point is to remember that this number do not reflect in a net debt position, the operations that we've achieved with SoftBank. As a net debt we're going to receive that and cash. We've closed these operations more than BRL 800 million in May. So we have -- in a pro forma base because of these operations, we have a very strong cash flow -- strong cash positions. And important to highlight that, we've negotiated a seller's finance with this new offer. When you're going to hear that we just paid 60% -- 68% at the moment of the close. The 40% remaining percentage, we're going to pay in the next years through a seller's finance. So we are -- keep coming the targets in all of the 3 segments, okay?

Very clear.

(Operator Instructions) The last question comes from [Luca Brindine] from Bradesco.

Okay. Can you hear me?

Yes.

Okay. So my question is regarding the continuing education. We saw in the first quarter that it was impacted by physician's decision to postpone enrollments. So my question is should we see a positive effect from pent-up demand going forward in the segment? And if so, what's the magnitude of this impact? And when should we start to see this?

Thank you, Luca. That's an important point. On 2020, we have an impact delivering the practical problems for graduate students. So the second half intake was very, very, very low, and we have an impact on the rhythm of net revenues recognition on this first quarter. That impacts us from -- notice around BRL 8 million when you compare to the same period last year. But on the other hand, these practical classes resume this year. And also the intake that we closed at the end of April was very strong as we announced during the Afya Day. We enroll more than twice the volume of students that we had last year in the same period. So the student base now, we pass the inflection point, and we'll start seeing this result in the second half. You'll still see some reduction on the second quarter. But on the second half, we'll see growth on this line, and we're expecting to be very aggressive growth for the following semesters.

We just launched more -- 8 units. Last year, we have only 5. Now we are operating with 11. And the second half, we will have 13 centers distributing our graduate programs. Also in terms of programs, we had last year 16 programs, and now we have more than 60 being offered through all these centers. So it's a huge opportunity to lever this operation and have a very good growth rates. I think it's worth to mention that in this quarter, we have seen digital services growing very fast when you -- not only because of the acquisition, but on organic, we are just showing Medcel results that is jumping 15% pure organic year-over-year.

But for the second half that when we start joining Medcel -- I'm sorry, IPEMED and PEBMED and the other health tech companies, we are expecting a 20% MRR above the second half last year because of the number of doctors enrolling in our platform. So this is very important for the future forecast on the digital services.

Okay. So we see here a question in our chat. And it is do you have an EBITDA guidance for the year of 2021. Could you provide an EBITDA breakdown between the business units?

So we have a guidance actually that's for the semester. We released guidance each second quarter and fourth quarter for the following semester. For this -- the first semester, It is BRL 740 million to BRL 780 million of net revenue and EBITDA margin from 46% to 48%.

Regarding the EBITDA margin for business segment, we do not disclose it, but we can give you a better understanding of that, if you want. Please just follow up with us and send me an e-mail on investorrelations.afya.com.br.

I think that we do not have any more questions. I want to thank you all for participating today. And please feel free to contact us if you still have any doubts. Have a nice day.