Afya Ltd
NASDAQ:AFYA
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Afya Ltd
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Good night, everyone. Thank you for joining us for Afya's First Quarter 2024 Conference Call. I'm here today with 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 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 those 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 the date hereof. You should not rely on them as predictions of future events, and we disclaim any obligation to update any forward-looking statements, except as required by law.
In addition, management may reference non-IFRS financial measures on this call. These measures are not intended to be considered in isolation or as a substitute of the results prepared in accordance with IFRS. This presentation has reconciled these non-IFRS financial measures to the most directly comparable IFRS financial measures.
Now let me turn the call over to Virgilio Gibbon, our CEO, starting with Slide #3.
Thank you, Renata, and thanks to everyone for joining us today for our inaugural conference call of 2024.
To start off, we'd like to outline our operational restructuring effort in Continuing Education and Medical Practice Solutions segment, to enhance synergies between active content and technology from expert education and its specialization cost for physicians. Afya has restructured its corporate structure so that all process and services related to medical education, excluding the medical undergrad courses, are now managed in the same structure.
Moving to the next page. We can now observe our new business structure taking shape comprised of our 3 segments, Undergrad program, Continuing Education and Medical Practice Solutions.
In the Undergrad segment, we have maintained the existing structure. However, notable changes have occurred in the Continuing Education. And it is previously accounted for as content and technology for med education, Medcel, Além da Medicina, CardioPapers, and Medical Harbour, within Medical Practice Solutions are now accounted for in the Continuing Education segment. Simultaneously, the segment commonly known as Digital Services has been renamed to Medical Practice Solutions. These structural adjustments have already been implemented for the results presented in the first quarter 2024 onwards. Additionally, the comparative base from the previous year has been recalculated to account for these restructuring efforts.
So moving now on to Page #5. Let's start with our performance highlights. Once again, Afya is recording another strong beginning of the year. First, net revenue increased 13%, reaching BRL 804 million, followed by an adjusted EBITDA growth of almost 21% year-over-year, reaching BRL 398 million, with a margin of 49.5%, 300 bps over the same period last year; once again, assets recording another strong quarter, showing a solid organic growth with high profitability boosted by all 3 segments.
The adjusted net income stood at BRL 251 million, representing an increase of 51% when compared to the same period of 2023, and our adjusted EPS scaled to BRL 2.74, a jump of 55% over last year.
We also reported a strong cash flow from operating activities of BRL 429 million, an increase of 23% year-over-year, leveraged by the solid operational results of the company, with an operating cash conversion of 110% and a solid cash position of BRL 611 million at the end of the quarter.
Moving to our operational update of the quarter. We expanded our operation of medical school seats capacity to 3,153 seats. Additionally, our number of medical school students has reached over 22,000, representing an 8.6% growth compared to the first quarter of the previous year.
Lastly, our physician and medical student ecosystem reached 334,000, accounting for around 41% of all medical students and physicians in Brazil.
In the next slide, we will talk about our solid business execution within our 3 business units.
Starting with the Undergrad segment, we saw an important movement throughout the quarter such as the higher tickets in medicine courses with more than 6% increase in tickets of medicine schools, the 40 seats expansion Guanambi campus authorized in January of 2024 and gross margin expansion.
Continuing Education was marked by an operational structure that comes with growth and margin expansion. Considering this new segmentation, we saw an increase in B2B students, while both net revenue from B2P and B2B increased by 11% and 30%, respectively, achieving a net revenue of BRL 65 million in the first quarter.
In our Medical Practice Solutions segment, we ended the quarter with 15% increase in active payers, aligning for our gross margin expansion.
In Slide #7, we are also excited to expand our offer in the Undergrad business with the signing of the acquisition of Unidompedro and Faculdade Dom Luiz. This acquisition will contribute with 300 operating medicals seats to Afya, in Salvador Capital of Bahia, the fifth largest city in Brazil in population size.
Unidompedro will be Afya's fourth medical school in Bahia and will serve as a strategic hub for all other medical campuses in the state, besides all the synergies that we can extract from all Continuing Education campus in Salvador.
We're affirming our strategy, Unidompedro is focused on medicine. Its projected net revenue for 2024 is BRL 110.5 million, with 88% coming from medicine course. By 2027, when the medical school reach full maturity, the projected net revenue is BRL 267 million, with over 95% coming from medicine.
Highlighting the actions, Unidompedro received a score of 4 out of 5 in both institution concept and course concept metrics, affirming the high quality of their medical course at the campus in question.
The aggregate purchase price amounts to BRL 660 million. We also anticipate achieving an EV/EBITDA of 4.2x at maturity and post synergies. We expect the closing of transaction to be on July 1, 2024.
Now I will turn the call over to Luis Blanco, acting CFO, to give more color on the financial and operational metrics. Thank you all.
Thank you, Virgilio, and good evening, everyone.
Starting with Slide #9 for discussions of key operational metrics by business unit. Our number of medical students grew 9% over first quarter 2023, reaching 22,600 students due to the maturation of our medical seats and the seat increase in Guanambi authorized in January 2024. Therefore, we've reached 3,203 sets and expect to achieve over 23,000 undergrad medical students at maturity.
Our medical school net average ticket increased by 6.4%, reaching more than BRL 90,000 in the first quarter of 2024. In addition, net revenue for the Undergrad program saw over 13% increase, achieving BRL 705 million, BRL 87 million related to medicine.
All this effort means one thing, our medical education business remains and will continue to be the cornerstone of our business in the short and middle term, delivering high predictable growth combined with solid profitability and cash generation.
On the next page, I will present our Continuing Education metrics. As Virgilio mentioned, we proudly present the new structure for the Continuing Education and Medical Practice Solutions.
Strategically, we'll look into our Continuing Education in 3 different journeys, starting from left to right with the residency journey, which encompass the products of Além da Medicina, focused towards mentoring, and Medcel B2P, we saw an increase of 62% in active payers, obtaining around 15,000 students at the end of the period; following the graduate journey, which includes the students from Afya Educação Médica and Afya Papers, it grew 12%, reaching more than 30,000 students; in other courses and B2P offerings, Afya reached 21,000 students, which represented an increase of 44%.
Summarizing, our efforts made possible for Continuing Education of net revenue to reach BRL 65 million in the first quarter of 2024 compared to BRL 58 million in the first quarter of 2023, a growth of over 12%.
Moving to Slide #11, I will discuss the Medical Practice Solutions operational metrics. On the first graph, you can see our total active players, which are the ones that generate revenues in B2P. With a continuous growth trend, we've reached 191,000 paying users, a 12% growth compared to the last year. As you can see in the second graph in line with the previous years, we achieved 263,000 monthly active users. Lastly, in our final graph, we present the net revenue of our Medical Practice Solutions, which has expanded 9% compared to the same quarter of last year, reaching BRL 37 million.
Breaking down the revenue within the B2P and B2B segments, we observed that BRL 32 million originated from B2P, while BRL 5 million come from B2B. It's important to mention that during the first quarter of 2024, some B2B invoices were postponed and are expected to occur in the next quarters.
In the next slide, we are proud to present the impact of Afya on the medical community in Brazil. We ended in the first quarter of 2024 with more than 334,000 medical students and physicians in our ecosystem experiencing our service and products, representing 41% of market penetration.
Moving forward, I would like to discuss our financial overview for the first quarter of 2024. Starting with the next slide, with great satisfaction, I'm pleased to present another robust quarterly results for Afya.
Net revenue for the first quarter of 2024 reached BRL 804 million, marking a significant 13% increase over the same period of the prior year. This growth is primarily attributed to higher tickets in medicine courses at 6.4%, the maturation of the medical seats, the 40 seats expansions in the Guanambi campus, the Continuing Education intake performance and the Medical Practice Solutions execution.
In first quarter 2024, adjusted EBITDA increased more than 20% to BRL 398 million, with an adjusted EBITDA margin of 49.5%, marking an increase of 300 basis points compared to the first quarter 2023. The adjusted EBITDA margin expansion is mainly due to gross margin expansion within the 3 segments, the end of UNIMA and Afya Jaboatão integration process in November 2023, the ramp-up of the 4 Mais Médicos campuses that started operations in third quarter 2022 and operational restructuring efforts in Continuing Education and Medical Practices Solutions segments.
Moving to the next slide. The cash flow from operational activities for the year increased 23%, reaching a total of BRL 429 million, driven by our strong operational performance. The operational cash flow conversion ratio stood at 110% for the first quarter 2024, slightly decreasing from 112% in the first quarter 2023.
Adjusted net income for the first quarter of 2024 amounted to BRL 251 million, an increase of 51% over the same period of 2023, mainly due to the enhancement of operational results, the reductions in the financial expenses due to the decrease in net debt and lower interest rates, and lower effective tax rates.
In terms of adjusted EPS, we achieved BRL 2.74 for the quarter, a remarkable 54% increase compared to the previous year. Our EPS was mainly positively influenced by the increase in our net income with an impact from the previous year's share repurchase.
And now moving to my 2 last slides, I will discuss our cash and net debt position. I also give you more color on our cost of debt.
On the next slide, you see a table with the breakdown of our gross debt and the total cost of debt, considering our main debt, the SoftBank transactions, debentures, account payables to selling shareholders and other financial obligations.
On the next page, we can look closely to the net debt variation. In the first quarter of 2024, our net debt reached BRL 1.577 billion when compared to December 2023, after reducing its net debt by BRL 237 million. Even considering the FIPGuanambi earn-out over BRL 49 million, we reduced our net debt per adjusted EBITDA from 1.6x in 2023 to 1.2x in the first quarter of 2024, considering the midpoint of the guidance for 2024. Considering the additional debt regarding Unidompedro acquisition, we expect an updated net debt per adjusted EBITDA of 1.6x.
This ends our prepared remarks. Strong performance, consistent growth and success in all segments. We are committed to provide an ecosystem that integrates education and medical practice solutions for the entire medical journey, enhancing the development, updating, assertiveness, and productivity of health professionals. We are very proud of our business and what we have achieved so far and excited about what we plan for the future.
I will now open the conference for the Q&A session. Thank you.
[Operator Instructions] The first question comes from Lucca Marquezini from Itaú.
Two questions from our side. The first one, the release mentioned that there was a gross margin expansion in all 3 segments. Can you please give more color on which of the segment most contributed to this expansion and the drivers behind this enhancement?
And then the second question would be, after the acquisition, you already surpassed the guidance of acquiring 200 seats per year. Should we expect another acquisition in undergrad med courses this year or M&A should now be focused in other verticals?
Lucca, it's Luis speaking. I'll start with your second question. Regarding M&A, we have this guidance from 200 seats per year that we gave in 2022. So from these, at this moment, we've made 2 business combinations, one that was UniSL, and this is the second one. So in 3 years, we made 640 seats. And right now, after the approval of the [ kinds ], we'll have achieved this guidance for 2024. Of course, we are always open to discuss the asset that has our profile with the right price. So we know that we have various laser point, specific targets and we'll try to keep this rhythm, but it's always hard to match the size of the transactions with the targets that we have, okay?
Yes. Regarding the gross margin, Lucca, we are going to disclose it to you guys, our consolidated spreadsheet, as soon as we finish the call. But all the segments, as we already said, had margin expansion. The Undergrad was around 1.5 points; Continuing Education, a little less than 4 points; and the Digital Services a little bit higher than 5 points.
The rationale behind that, Lucca, I think the contribution from the Undergrad comes from, first, the maturation of our Mais Médicos school campuses. Remember that we started this operation around second half of 2022, 2023, so now we are in the third year of maturation, so the margin is going up and contributing to improve our margin. Also the integration of UNIT, that was faster than expected originally on our business plan, so it helped a lot to improve our margins. And all the contribution coming from the other business units not only in terms of growth but also improving margins on the Graduate segment operating close to what we are operating now on the Undergrad. And also the Digital Service now flowing not only growth on the top line but flowing positive results on the top and the bottom line. So that was the duration of all of this margin improvement that comes from the 3 segments.
Yes, if I could add a point, not only in terms of cost but also in terms of our expenses. The reorganization that we did between the segments on the content technology for medical education going to the Continuing Education, we could save a lot money. So it was something that we made that made sense in terms of operations and also improved our results, and we are expecting to boost our growth.
Yes. Just for a little bit additional color on that, Lucca, for Digital Services, as an example, we were operating with different companies. So we have 2 commercial areas, 2 rural areas, 2 IT teams for development. So we have now fully integrated closely related to the physician journey for the mission that they have. So now it's only one team focused for the entire mission that we are prioritizing for that squad and for that screen. So it's a lot of synergies after the restructuring. The same applied for the Pillar 1 combined with Continuing Education that we had last year. So we have all the marketing and commercial team working together and also the content creator, the curriculum development, working together. So there was a lot of synergies implemented in the fourth quarter in 2023.
The next question will come from Mirela from Bank of America.
I have a follow-up question on the gross margin one. Could you comment a bit also on what to expect from both the Continuing Education and the medical specialization margins going forward?
And a second question, on the guidance on last year's Investor Day, the company mentioned the long-term guidance for the Continuing Education revenues of around BRL 1.2 billion in 2028. And I was just wondering how should we think of this guidance and the one for Digital Services also, considering the new structure?
Mirela, Blanco speaking here. We don't have this opening of gross margins in terms of the guidance. We gave the EBITDA guidance for the year, and we don't have changes in our view for the year of 2024 regarding the guidance that we provided when we released the results of 2023. So what we can expect for the year, it's adjusted EBITDA between BRL 1.3 billion and BRL 1.4 billion for the year. We reaffirmed the guidance with these results.
And Mirela, regarding the guidance of our digital services, because of the restructuring, the one important part of that guidance is Pillar 1, that now is combined and have a lot of synergies with Continuing Education. So the BRL 1.2 billion now is split between 2 segments, we will have to reorganize this guidance for the long term, and we will come to the market at the right time to check how much of each segment will compound this [ BRL 1.2 billion ] that would come from the Digital Service. But as soon as we get that, we will come to the market with more detail, okay?
Our next question comes from Marcelo Santos from JPMorgan.
I have two as well. The first is regarding the growth on the Undergrad revenue. I think last call, if I remember correctly, you indicated that within your guidance, this component, the Undergrad, should grow around 10% in the year. You delivered 13.5% in this quarter. So I just wanted to understand, is there some seasonal factor that you expect growth to be more in the first half? Or is this really coming ahead of your expectations? Just wanted to get a feel here in terms of timing or how are you going according to your expectations.
And the second question is the B2B revenues that you mentioned. I think Luis mentioned that there was a postponement of recognition of some invoices, I think, from the first quarter to the second quarter. If you had recognized everything at the right quarter, what would be a better idea of how this revenue growth is taking place? Like, what would be a more organic measure for this?
Marcelo, regarding your first question about the idea of the revenues coming around 10%. 10% was mentioned, it was regarding more volume than top line. So when you take a look on our Table #2 on our release, you can see that medical school undergrad has moved around 15.5%, and around 9% is volume and 6% coming from tuition. And the good news is that in terms of net revenue, we are also seeing organic growth coming from the health science and also for other programs that used to have always a decreasing revenue on this side, so it's not more hurting the top line growth as we had in the past because of the restructuring we are doing in our programs. Now we are more organic, so it's expected.
It's not seasonal as we have a very strong intake not only for medical filling 100% of our seats. And we have a strong intake for health programs and ex health during the first quarter. We expect to keeping a very good trend in the first half of 2024 of around 13%, 15% coming from the Undergrad segment, okay?
Luis will take the second question.
Yes. And just to add, Marcelo, to the first one, despite of what we'll have in the performance of the first quarter, our expectations regarding the net revenues for 2024 remains the same that we provided in the guidance. That can go from BRL 3.150 billion at the bottom to BRL 3.250 billion at the top part of the guidance regarding the net revenue. So when we did this color about how we would perform per each segment, we just give a color of how, in the big numbers, we would perform between our 3 segments. But our guidance is regarding always the consolidated figures that come from BRL 3.150 billion to BRL 3.250 billion for 2024.
Having said that, coming to your second question regarding B2B, yes, we have some postponement on recognitions on the medical practice tools. And if we put that on this way, we would be around 20% to 30% growth regarding the same period of the prior year, okay?
Just to add here, Marcelo, so in terms of guidance, seeing the overall results from top and bottom line in the first quarter, of course, there is a positive bias when you compare to the 1 year guidance that we released last quarter but still show in the process. We have the second quarter intake. There is still uncertainty. So it's too soon to admit that we are going to change or not our guidance for 2024.
Perfect. Very clear. And so 20% to 30%, the minus 6% would become 20% to 30%. That's it, Luis?
Yes.
Yes.
[Operator Instructions] The next question comes from Lucas Nagano from Morgan Stanley.
We have some questions related to the Unidom acquisition, three to be precise. The first is, how are you planning to fund the acquisition? Second is, what is the expected impact on margin once you consolidate Unidom? I think also you mentioned that you expect this to close on July, right? And the third is, in practical terms, what is the likelihood that those incremental 175 seats are canceled, if you could comment a bit on the stage of this judicial process?
Lucca, thank you for your three questions. I will take the three questions. Regarding the fund, we ended the first quarter with more than BRL 600 million in cash, so we have the funds to pay the downpayments related to the acquisition because we have the cash and we have the cash generation of the second quarter. If we find an opportunity that we find attractive, we would hire additional funding for that.
Regarding margins, we can expect a little bit of dilution on that. They don't operate margins that we can operate our Undergrad segment, so we can have these dilutions that will come in this year, but we can expect increasing margins from 2025 ahead. We're going to work to have a very quick integration on Unidompedro to have them integrated as fast as possible to our ecosystem.
And regarding to the 175 seats, they are operating since the beginning of 2021, since the first intake, so we have a very positive deal regarding the continuation of the seats to be approved. And we put the payment schedule to be 10 years to protect us in the remote possibility of having these seats not operating, so our view in the base case is these seats are going to keep operating.
Just to add here, Lucca, first, on the second question about the margin impact and how we want to leverage operationally the new campus. Remember that it's our largest medical program campus, 300 seats concentrated in one large city with a very high level of tuition. So the capacity that we'll have to fulfill all the seats available, the vacancy that we are seeing there, very fast track, as soon as we get the operation closed. And improved margins, I think, taking what we had as an experience in UNIGRANRIO and also UNIMA, we could leverage 30 percentage points in almost 1 year. I think we will do something very close to that and reach the same level of what we are operating now in the Undergrad business in 2025.
And the 175 seats, I think it's important to mention here that we are operating these seats since the beginning, we have the approval not only in the Justice but also for the Ministry of Education that recognize it. And all the trend that we are seeing from the Supreme Court is that everything that was approved, considering the current regulation, the Ministry of Education, it's not canceling. Not only for this case here, but all the precedents that we are seeing in the market, is quite positive on the direction. So it's very rare, it's completely remote, the chance that it'll be canceled. Even in a worst-case scenario, if that happens, we have all the framework, that we are paying the sums, protecting ourselves in 10 years. And also, we will cancel all the payments at the right moment. So that's the way that we constructed the deal, okay?
Yes. Just a reminder, the first one that they required for those seats was before Mais Médicos law, so it was before 2013. And the second reminder is that, in this worst-case scenario that Virgilio told us, to stop paying, we still have the positive effect of the students that are already enrolled for the next 6 years. So we also have economic benefit without having to pay and increasing our IRR.
Yes. And an important point regarding the performance for Unidom, we have these expectations of the closing to occur in the 1st of July. And when we have this kind of confirmation, in the next release, we're going to update our guidance, including these 6 months in our guidance for the year and we're going to release our numbers, consolidated figures and ex acquisitions, as we did before, to segregate the performance of this first 12 months of Unidom.
And also a quick follow-up on the Supreme Court debate, when do you expect them to resume the voting process?
It's expected to happen now in May. Actually, the due date is tomorrow, but we don't know if they will release or not the voting by tomorrow.
Yes, just a clarification, the due date for tomorrow is Alexandre de Moraes' time frame to return with results.
So the next question comes from Leandro Bastos from Citi.
Two questions on our side. First one about kind of the rationalization of costs, the restructuring that you mentioned. I'm just wondering if you could comment how far advanced you think the company is in the process of rationalization, if you see additional levers for reducing duplications and unlocking efficiencies or if we could expect basically what we saw during Q1 and basically the carry impact from these initiatives through the year. If you could, I don't know, provide some color on how should we think about this margin dynamic forward, I think it would be helpful. That will be the first one.
The other, if you could also talk about how you saw competition during this recent intake season in terms of candidates per seat, how was the strategy for pricing with, of course, good volumes and kind of pricing ahead of inflation. So if you can kind of comment a little bit on sort of the competitive environment, I think would be interesting to hear. That will be it.
Thank you for your question, Leandro. I will start with the first one, and Virgilio will jump to the second. Regarding the expectations on gross margins during to half, we don't give a guidance for gross margins for the year. What we can expect is to achieve the guidance of adjusted EBITDA that we gave for the year. So that's our point. We are very constructive with that. We have been not only giving annual guidance but achieving an annual guidance before, in the last years, and we are confident that during 2024, we're going to do the same. So I prefer to focus on the guidance that we provide the market rather than give a guidance in specifically gross margins going ahead.
Just adding a color there, Leandro. So we did a big restructuring process in the last quarter of 2023. We dismissed around 200 people because of the restructuring. We integrated all the companies acquired, mainly in the digital area. So in terms of COGS, I think we already completed the work, so now it's much more related to growth and top line expansion than more cost efficiencies than in the past.
Another lever here was our corporate expenses that now we are getting some not synergy, but we are growing top line, and our structure is already mature after 5 years of IPO, so we are also getting synergies on G&A expenses overall. And that is considered on our expectation, on the release guidance that we gave to the market last quarter.
About the competition, this intake, it's close to what we saw the last 2 years in terms of candidates per seat. I think we don't know why we kept so stable with the competition in the year. My two cents here is that it's because of all the efforts in terms of brand, the change that we did last semester, I think it started taking off and helping us to attract more leads. And remember that we now have more than 300,000 physicians and medical students talking about Afya, using our solutions. So it's a huge army, knowing what our company here is doing for their journey, for their career. I think this is helping us to attract more leads and to fulfill all the seats that we are going in the market with every semester, every year, in a better way, attracting good students at a good level to complete our ecosystem here.
So the competition for us, it's quite the same that we saw actually since 2020, 2021. The candidates per seat was around 6.4 candidates per seat, and we have something between 5 and 8 during the last 4 years. And when we analyze also the smaller campuses in more remote areas, we also have a very good intake and we could attract and enroll very good cohort of students to our school. So there is no news on the competition side on our side. Remember that we also have a very good condition to pass inflation, a little bit above inflation, for our price year-over-year since 2019.
Since we do not have any other questions, we are going to end the call. If you have any other questions, we in Investor Relations are here. We are going to be happy to help you. Have a good night.