Afya Ltd
NASDAQ:AFYA
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Afya Ltd
Earnings Call Analysis
Q2-2024 Analysis
Afya Ltd
In the second quarter of 2024, Afya reported a net revenue of BRL 810 million, a robust growth of 13.7% compared to the same period last year. This growth was primarily driven by a 5.4% increase in net average ticket prices for medical courses and an uptick in student enrollment across its medical programs. Interestingly, the solid performance was reflected in the adjusted EBITDA, which surged by 28% year-over-year, culminating at BRL 344 million. This impressive growth was complemented by an adjusted EBITDA margin of 42.5%, showing an expansion of 490 basis points from the previous year.
Afya also showcased its financial health with a remarkable adjusted net income of BRL 210 million, representing a staggering growth of 59% compared to last year. Strengthening this performance, the adjusted earnings per share (EPS) increased to BRL 2.29, reflecting a 62% rise year-over-year. These metrics highlight the company's effective cost management and operational efficiencies, resulting in greater profitability for shareholders.
The company has continued to expand its operational capacity, reaching a total of 3,203 approved medical seats, reflecting a 9% increase in the number of medical students, now totaling 22,661. The acquisition of Unidom, combined with the addition of 40 new medical seats at its Guanambi campus, indicates Afya's commitment to growth and meeting the rising demand for medical education. As of now, they have successfully secured a total of 3,583 approved medical seats.
Afya's diversified business model is evident in its continued education and medical prep solutions segments, both recording significant financial growth. The continuing education segment grew more than 12% year-over-year, achieving a net revenue of BRL 128 million for the first half of 2024. Meanwhile, medical preparation solutions showed a revenue increase of 13%, amounting to BRL 77 million. This growth reflects enhancements in both operational structure and product offerings.
Afya has revised its financial guidance for the year, projecting net revenue in the range of BRL 3.225 billion to BRL 3.325 billion and adjusted EBITDA between BRL 1.375 billion and BRL 1.750 billion. This positive revision stems from the strong performance in the first half of the year and their successful occupancy rates, all of which bolstered the company’s confidence in achieving these targets.
On the financial front, Afya's effective debt management strategy has resulted in a reduction of its net debt from BRL 1.6 billion to BRL 1.459 billion, lowering the debt-to-EBITDA ratio from 1.6x to 1.5x in the second quarter of 2024. This cautious approach signifies the company's commitment to maintaining financial stability and preparing for future growth opportunities. Additionally, Afya secured a financing agreement with the International Finance Corporation for up to BRL 500 million, reflecting confidence in their expansion program.
Looking ahead, Afya remains optimistic about future growth, not only in current segments but also through potential acquisitions and innovations in the educational sector. The company is focused on enhancing medical education and expanding its reach within Brazil, showing commitment to improving the healthcare system while maximizing shareholder value. The emphasis on a unified educational system underscores the company's strategic goal to continually adapt and thrive in a competitive environment.
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Thank you for joining us for Afya's conference call. I'm here today with Afya's CEO, Virgilio Deloy Gibbon and our CFO, Luis Andre Blanco. During today's presentation, our executive 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 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, the statements related to the business and financial performance, expectations and guidance for future periods or expectations regarding the company's strategic product initiatives and its related benefits. 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 data. 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 this non-IFRS financial measures to the most directly comparable IFRS financial measures. Now let me turn the call over to Virgilio Deloy Gibbon, our CEO, who will begin with Slide #3.
Thank you, Henat, and thanks to everyone for joining us today for our second quarter and first half conference call for 2024 results. Let's turn with our performance highlights. First, net revenue increased almost 14%, which BRL 810 million, followed by an adjusted EBITDA growth of 28% year-over-year, reaching BRL 344 million with an adjusted EBITDA margin of 42.5%, an impressive 490 bps over last year. Adjusted net income reached BRL 210 million, marking a 59% growth compared to the same period in 2023. Meanwhile, our adjusted EPS climbed to BRL 2.29, reflects a 62% increase over the previous year. We delivered robust cash flow from operating activities totaling BRL 602 million, a 21% year-over-year increase driven by the company's solid operational performance. Our operating cash conversion reached 94% with a robust cash position of BRL 723 million at the close of the quarter.
Moving to our operational update for the quarter. Medical seats reached 3,200 approved seats. Additionally, our number of medical students has reached 22,661, representing a 9% volume growth compared to the second quarter of the previous year. It's also important to mention that with our recent acquisition of Unidom and the addition of 80 seats authorized at UNIMA in the third quarter of 2024, we have now reached a total of 3,583 approved seats as of today. We also observed impressive results in net rate for our continuing education business, with the segment growing by over 12% year-over-year, result in a net revenue of BRL 127 million in the first 6 months period of 2024. Similarly, our medical prep solutions demonstrated significant progress with a revenue increase of 13% compared to first half of 2023, concluding the 6-month period with a net revenue of BRL 77 million.
Moving now to Slide #4. We can now observe our new business structure taking shape comprised of 3 segments: on the grad program, continued education and medical prep solutions. I would like to reiterate that notable changes have occurred in continued education. Entities previously accounted for as a content and technology for medical education within medical prep solution are now accounted for in the continued education segment. Simultaneously, the segment formerly known as digital services was renamed to medical practical solutions.
Beginning with the undergrad segment, we observed significant progress throughout the quarter, including an increase of over 5.4% in our net average ticket from medical course, organic growth in all segments and expansion in gross margin and the acquisition of Unidom. Continued education was marked by an operational restructuring, resulting in growth and an increase in B2B students boosted by both credit and prep program. This segment also benefited from a gross margin expansion due to operational restructuring efforts. Lastly, in our medical prep solutions segment, we ended the quarter with a 13% increase in exit payers, driven by 11% growth in clinical decision and a 19% growth in clinical management. We have also seen a recovery in our B2B net revenue for this set as some of the invoices that were postponed during the first quarter of 2024 are now being accounted for.
Moving now to Slide #5. We are pleased to announce an update to asset guidance. following the recent acquisition of Unidompedro, the addition of 80 medical seats at UNIMA, the first half results that have exceeded our initial expectations and also our robust intake process, which once again ensure 100% of occupancy. Our updates include a new net revenue range between BRL 3.225 billion to BRL 3.325 billion and an adjusted EBITDA range between BRL 1.375 billion and BRL 1.75 billion and a CapEx range between BRL 220 million and BRL 260 million for our capital expenditures. And now I will be turning the call over to Luis Blanco, Afya's CFO, to provide more insights into the financial and operational metrics. Thank you.
Thank you, Virgilio, and good evening, everyone. Starting with Slide #7 for discussions of key operational metrics by business unit. Our number of medical students increased by 9% over the first half of 2023 to 22,600 students. We have reached 3,203 approved medical seats due to the 40-seat increase in Guanambi authorized in January 2024. The net average tickets for our medical school grew by 5.4%, reaching BRL 8,922 in the first half of 2024. Furthermore, undergrad program net revenue saw an increase of more than 13%, reaching over BRL 1,414 million, 86% of which is related to medicine and 94% from health-related courses. All these efforts highlight one key point.
Our medical educational business remains and will continue to be the foundations of our business in the short and medium-term, driving consistent growth alongside strong profitability and cash generation. On the next page, I will present our continuing educational metrics. Strategically, we look into our continued education considering 3 journeys. Starting from the left to the right, with the residency journey, we observed a 33% increase in active payers, reaching 13,058 students at the end of the period. Moving to the graduate journey. We achieved a 22% growth, totaling 8,100 students. Finally, in our other courses and B2B offerings, we saw an increase of 8.2% over the 6-month period of the period prior year.
In summary, our efforts enable the continued education metric to reach BRL 128 million in the first half of 2024 compared to BRL 114 million in the first half of 2023, reflecting a growth of over 12%. This growth includes a 15% increase from B2P and a 13% decrease from the B2B offering. Moving to Slide #9. I will discuss the Medical Practice Solutions operational metrics. On the first graph, you can see our total asset payers, those generating revenues in the business to physician segment. With a continuous growth trend, we reached 196,000 paying users, reflecting a 13% growth compared to last year's quarter. As shown in the second graph, our monthly active users counting -- over 57,000 in the first half of last year, mainly due to the discontinuation of Pet Med portal and the launch of the Afya portal.
Finally, our last graph displays the net revenue from our medical practice solutions, which grew by 13% compared to last year, reaching BRL 77 million. Within this revenue, BRL 65 million come from the B2P and BRL 12 million was from B2B, reversing the decrease in net revenue in the first quarter as privilege postponed B2B invoices were now accounted for. In the next slide, we also present Afya Ecosystem. We are proud to present the significant impact that Afya has made on the health care community in Brazil. At the end of the second quarter of 2024, our ecosystem includes over 320,000 users who are actively engaged with our service and products. Moving forward to Page 11, I want to discuss our financial overview for the second quarter of 2024.
Starting with the next slide, with great satisfaction, I'm pleased to present another robust quarterly result for Afya. Net revenue for the second quarter of 2024 reached BRL 810 million, reflecting a 13.7% increase over the same quarter of the prior year. And for the 6-month period, net revenue was BRL 1,614 million, an increase of 13.5% over the same period of last year. This growth is mainly driven by 5.4% increase in net average tickets for medical courses. Maturations of medical seats, the addition of 40 seats at the Guanambi Campus, strong performance in continuing educational intake and effective execution in medical practice solutions.
In the second quarter of 2024, adjusted EBITDA increased over 28% to BRL 344 million, with an adjusted EBITDA margins of 42.5%, marking an increase of 490 basis points compared to the second quarter of 2023. For the 6-month period, adjusted EBITDA was BRL 742 million, an increase of 24% over the same period of the prior year, with an adjusted EBITDA margin of 45.9%, an increase of 380 basis points in the same period. The adjusted EBITDA margin expansion is mainly due to gross margin expansions within undergrad and continued education, completions of UNIMA and FCM, Jaboatão integration process in November 2023. The ramp-up of the formic medical campos that started operating operations in third quarter of 2022, operation restructuring efforts in our continued education and medical practice solutions segments and more efficient in selling general and administrative expenses.
Moving to the next slide. The year cash flows from operating activities grew 21%, totaling BRL 683 million, driving by our robust operational performance. The operating cash conversion ratio was 94% in the first half of 2024. Adjusted net income for the second quarter of 2024 amounted to BRL 210 million, an increase of almost 60% over the same period of 2023. For the 6-month period that ended June 2024, we also saw an increase in adjusted net income, reaching BRL 461 million. Presenting an increase of nearly 55% year-over-year, mainly due to the enhancement of operational results, the reduction in financial expenses due to the decrease in net debt and lower interest rates, and lower effective tax rate. Afya increased its tax efficiency by incorporating entities and increasing distribution from subsidiaries.
Regarding adjusted EPS, we achieved BRL 2.29 for the quarter, a remarkable 62% increase compared to the prior year, and BRL 5.3 per share in the first 6 months period, a growth of 57%. On the next slide, we can see a table with the breakdown of our gross debt and our total cost of debt, considering our main debts, the soft bank transactions, debentries, accounts payable to selling shareholders and other financial obligations. We are proud to announce that Afya entered in a loan agreement with International Finance Corporation to finance our expansion program through acquisitions. The financing is IFC first sustainability linked loan based on social targets in the educational sector.
According to the financial terms, IFC will loan up to BRL 500 million, which shall be repaid in 7 equal seminal installments starting in April 2027. The interest rate is the Brazilian CDI rate plus 1.2% and may be reduced by 15 bps if sustainability DPIs are achieved. And now moving to my last 2 slides, I will discuss our cash and net debt position, also giving more insights into our cost of debt. In second quarter 2024, our net debt reached BRL 1,459 million when compared to December 2023, after reduced its net debt by BRL 356 million. Even considering the peak earnout of BRL 49 million. We were able to reduce our net debt per EBITDA from 1.6x in 2023 to 1.5x in the second quarter of '24, including Unidom business combination.
As shown, we also reduced our net debt over BRL 150 million more compared to the same period of the prior year. This concludes our prepared remarks. We are very proud of our achievements and strong performance across our areas. Our commitment to enhancing the medical journey through a unified educational system and digital solutions remain steadfast. This approach supports the growth, continuous learning, accuracy and productivity of health care professionals. Looking ahead, we are excited about the promising opportunities that await for us. I will now open the conference for Q&A sessions.
Thank you. [Operator Instructions]. The first question comes from Mirela from Bank of America.
I have 2 questions here. The first one, in terms of cost of debt, what should we think about that considering the recent IFC mission and the date maturity of some of your debt that it's cheaper. So, what are we thinking about the cost of debt in the near future? And second, on the triggers to reach the top of the guidance on margins, I imagine that the risk here lays more on the medical practice solutions. So, could you tell us a bit of how is the margin dynamic in this business, especially for the second semester?
Mirela, it's speaking -- talking about the expected cost of debt. I would say that we're going to presents our cost of debt below CDI, at least until we have the SoftBank transaction with us, that is due to 2026. So, until there you can expect that our cost of debt will be below the Brazilian 100% CDI, okay?
Regard your second question, the guidance, how to reach the top line, actually, we are aiming the range. The commitment here is to reach the range that we are releasing right now. But based on our 3 segments here, so the execution was above the initial expectation for all the 3 segments here, so we are performing better. Regarding the Medical Solutions segment, since last year, the second half of last year when we did all the restructuring process between continued education and also the digital service, the old digital services segment, we are having a lot of synergies here. And on digital solutions that now it's called medical prep solution, we are delivering a positive EBITDA. We are growing close to 20%. Our growth rates for 2024 expected and also positive EBITDA margin around 20%. Remember that we were close to 0 last year. So, it's a quite positive improvement on all products that we are offering under the medical prep solution, but also pushed by undergrad segment and also continue at education, both of them are also better than expectation and also better than last year, as you can see on our first half results here.
Yes. If I may add, Mirela. The main reasons, the main trigger to keep the margins and to achieve what we are delivering the guidance, what we are promising the guidance is mostly the ones that we already have. So as Virgilio said, the restructuring between the medical practice solutions and continued education, also the integration of units that comes with a better margin through the whole year and the 4 mg medical units that we opened in the second semester of 2022 that are now delivering better margins.
Thank you, that's super clear.
The next question comes from Marquezini from Itaú.
Okay. A couple of questions on my side. So, the first one is the release mentioned that one of the reasons for the revision in guidance was the performance in the first semester. So, can you please comment on which of the segments delivered the results that were above expectations and last this revision in the guidance? And then the second one is, we saw an acceleration in the revenue growth for the Medical Practice Solutions segment. Can you please provide some more color on which of the products led this stronger performance? That's it from our side. Please?
Lucca, I'll take the questions. The first one, regarding the better performance in the first semester, it's basically come from better results that we got from the integrations of UNIMA and FITS Jaboatão to our structure. And remember that we have their business combinations in the beginning of 2023, but we integrated it in November 2023. So, we are now capturing the whole synergies that we have with these operations. Other one is better performance margins that we are doing on the much medical operations that we've launched 2022. We have delivered better SG&A with all the 0 budget projects that we have implemented here on Afya.
So, all that said, we got this performance better, and that performance with the Unidom acquisition and with the additional seats that we got from UNIMA made us comfortable to update our guidance for this one that we just released. So, we are very confident that we will deliver the guidance as until today, we have delivered all the guidance that we've provided. Regarding the second question, regarding the deceleration in terms of net revenues in the digital solutions. We have this accelerated mostly with the B2B sides of the solutions. Remember that in the first semester, we mentioned that we have a part of the revenue recognitions dropping from the first to the second quarter.
We've finalized this service providers for conducers and then we could recognize revenue during the second quarter. And this B2B revenues that come during the second quarter, made during the semester, the revenues grew more than 20% and accelerating the revenue for the segment.
And regarding the product, Lucca, the main products that we're selling in the B2B is marketing campaigns for the pharmaceutical industry.
Lucca, I think just one point, I think it's important to mention also the new guidance considered all the reason that we saw from the new intakes in the second half, and we had another strong intake with a lot of candidates proceed close to what we had last year. So, it's a very healthy cycle, so gave us, again, the right confidence and predictability to upward and update our guidance for 2024.
The next question comes from Leandro Bastos from Citi.
I have kind of 2 questions more related to regulation. First one, I mean, we had kind of the approval -- the decision actually by the Supreme Court for the injunction. And so far, we haven't seen some approval. So, just wanted to have your perspective on whether you're seeing any changes in competition given those approvals? And how many injunctions you think may be approved, given the market knowledge that you have. That will be the first part. And then the second also related is whether the recent approvals have been changing your strategy in terms of the regions for mathematical streets, the tan auction. And if it might continue to change the time line also that you expect for Mathematical Street, given those kinds of outstanding injunctions.
Leandro, so the first part was the intake cycle on this release. So, we didn't receive any changing. We had a very positive and healthy cycle. I think we are differentiated a lot of our operations in all cities that we have, our campuses for the undergrad segment. I think the approval is been the great majority of them, very aligned with the expectation after the definition from the Supreme Court. So, everything running as expected. We still have some approvals to come also on the increase of numbers from the normal process that we had in the past. Still seeing some approvals coming from the Ministry of Education, not only based on the decision by the Supreme Court.
So, is there anything in as expected, it's very difficult to measure how will be the impact and the speed of that because depends on the capacity of the Ministry of Education to approve and also to analyze everything that they have. But based on the idea on the entire medical seat program, it's something around 9,000 to 10,000 additional seats, including all the expansion for this new capacity wave, at least what is based on the idea coming from the ministration. So still early in the process to give more any other detail more than that, okay?
Yes. And regarding the regions that we are choosing, we are not going to compete for the ones that are already -- I'm sorry, we are not going to compete on regions that we have injunction.
Great. And just kind of if I may, another one. In terms of the M&A pipeline, this has been changing with the injunction. I don't know any companies that one and eventually might become targets. Did your pipeline change with that? Are you seeing more opportunities or not really?
I'll take that, Leandro. As a matter of fact, we have these new institutions being approval. So, our pipeline possible top of the funnel has grown, okay? So, we have more targets to talk. We are pretty confident that we can keep the written of 200 seats acquisitions per year. And remember that with units' acquisitions. We are ahead of the guidance that we provided since 2022. So, we still see with very good eyes to do the M&A with the right pricing. Right now, we have more targets on the streets to talk to. And of course, we are going to keep the discipline to choose the rations that make sense for us at the right price.
[Operator Instructions]. The next question comes from Marcelo Santos from JPMorgan.
I have 2, and one clarification. The first question is, could you please comment on the competitive environment on the prep course business? I think that was something that in the past you were having some difficulties. Just wanted to know how it evolved. The second question is I wanted to understand a bit why the B2B revenues in continued education is contracting and what are the trends there? And the clarification is something that Virgilio said in one of the answers. Virgilio, did you mention that the margin for the medical practice business is 20%? Or I didn't understand if you mentioned it was 20 as well as the growth? Or you just comment referring to the growth and the margin is positive. Just want to understand better if you really said that.
I'm going to take the first one regarding the competitive environment for the prep course. The competitive environment in the second quarter, it's not relevant at this moment because the second and the third quarters of this market, it's not seasonal because the sales are concentrated on the first and the fourth quarter of the year. Did not impact us in the second quarter and will not be a topic for the fourth quarter -- for the third quarter, sorry. This will be back on the table when the sales come, that is the fourth quarter when we're going to launch the 2025 collections. We start sales of it during the fourth quarter. So, until that -- this new cycle, nothing we're going to change on that.
If I may add on this point, you need to remember that the products not only Medcel. When we talk about the residents' journey, we are talking about Medcel. So, our offering today, Marcelo, is not only the prep course as we had in the past, right? That gives a lot of value to Medcel products.
Yes, that's very important. It's all the sort of prep course embedded. That's not only the product initially was being delivered by Medcel. So, even considering Medcel traditional products, but as we rebuild the product, we are seeing a strong enrollment growth coming on the prep quarter in a year. As you can see on our table 3, more than 30% of students, more than the same period last year. So, it's a good sign on our and prep and prep course segment. So, not only Medcel here, okay Marcelo.
I think your second question here about the B2B revenue on continued Medcel education. This is not core. This was something that was leveraged during the pandemic that we were licensing our products here to help other institutions. This is will be more than flat. We are not guiding any role on this type of product or on this type of segment here on the continued education. But it's something that we are not shutting down the offer, but we'll continue to offer to our clients. It's around 30 to 40 different institutions that continue to use our products in the education sector. About the clarification. So, we are expecting to grow around 20 this year on medical prep solution. And also, the contribution margin, not only the gross margin improvement, but we are seeing that the result after the order -- the restructuring process that we run to in the second half of last year, it's delivered a positive EBITDA around 10% to 15%, and we are aiming to reach close to 20%. But that's a contribution margin. We are not at least disclaimed -- releasing that on our reports by segment, just up to contribution margin.
The next question comes from Cepeda from Morgan Stanley.
We have 2 questions. The first one about Unidom, what do we expect in terms of consolidated margins after the integration, which are the sources of synergy there, which is the time frame of the integration? So, a little bit on the impact of Unidom. And a second one about the Medical Practice Solutions. We understood from the release that there was a simplification there, which help in margins. So, our question would be, if you're narrowing down the services you offer there, if you chose concentrating some few digital services. So basically, if there is a different strategy or a different position in there?
Cepeda, I'll take this one. Regarding Unidom, and remember, all that we closed during the first day of July, we received a very good institutions that was with a very lean structure. So, we're very happy with the transactions. We have 45 days since the closing. So, we're still working on the integration plan. We don't have the integration dates yet defined. But we are very happy with the institution itself. The synergy will come in the same line with all the transactions that we've made as of today. So, they are concentrated in top line. We're going to have the fulfillment of the capacity during this period. We're going to have the stream, the scholarships and some kind of discounts that were given to family in France or in the institutions.
We're going to revisit the cost to provide the service regarding the correct structure for the teachers. We're going to implement our national curriculum over there, and we're going to centralize all the profits operations in under our stress without increasing it. So, these are kind of synergies that we're going to achieve in the next couple of months. So, everything is occurring according to the plan that we've announced when we signed the deal in last May. So, when we did that, we put that after regards the maturation, we're going to reach an EBITDA when the situation is mature with 4.2x at the EBITDA. So, this is our view. And our best view for Unidom for the semester is incorporated in our guidance. So, the number is over there.
Regarding the restructuring of the digital segment and the educational segment, we've made this in the very, very beginning of the year. So, we started this restructuring. We started this year with this restructuring in place. One of the major parts of the infrastructures was to move the old Pillar 1 offerings from the digital to the continued educational. And with these movements, each one of the segments. We started to not be -- we started to not be restructured per product or per family of products, but we started to be organizing this segment as a whole. So, instead of having a product team, for instance, per each one of the pillars, we started to have one product team for all the service that we have. We started to have one tech team for all the prep solutions, for all the solutions that we have. So, we lean up our structure for the year. And with that, we gained a lot of efficiency both in terms of costs and expenses. So, we're very happy with that. And we put these movements within the guidance. And as we are delivering the results, we incorporate all these scenarios we have been the unitizations to update our guidance for the year.
Okay, Blanco. Thank you. So, the point is that there was no redesign in the offering. It's much more about internal structure for delivery.
Yes, exactly that.
So, as we do not have any more questions, I would like only to give -- to give to you guys an invitation about our Afya date that will happen on October 29, will be online.