Afya Ltd
NASDAQ:AFYA
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Afya Ltd
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Thank you for joining us for Afya's Conference Call. I'm here today with Afya's CEO, Virgilio Gibbon; and our CFO, Luis Andre Blanco.
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 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 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 of the date hereof. You should not rely on them as predictions of future events as 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 now turn the call over to Virgilio Gibbon, Afya's CEO, starting the next slide.
Thank you, Renata, and thanks to everyone for joining us today for our third quarter and 9-month conference call for 2024 results. Let's start with our quarter highlights. Net revenue grew over 16% year-over-year, reaching BRL 841 million, followed by an adjusted EBITDA growth of 25% year-over-year, reaching BRL 348 million with a margin of 41.4%. Adjusted net income followed the same positive trend of last quarter and reached BRL 165 million, a growth of 29% year-over-year with an adjusted EPS of BRL 1.79. 30% higher than last year, reflecting Afya's great capital allocation discipline on M&A and efficient capital structure.
We also reported a record cash flow from operating activities. Ended the 9-month period with BRL 1.168 billion, 25% higher than last year with a cash conversion of 109.7%. And we are able to maintain our net debt level stable even considering the acquisition of Unidom for BRL 660 million, BRL 7 million in earn-out payments, as will be mentioned further on by Luis Blanco. In this quarter, we have reached 3,593 approved medical seats with the acquisition of Unidom, the approval of 80 seats in UNIMA and the reconsideration of additional 10 medical seats in UNIGRANRIO. Our number of undergrad medical students has reached more than 24,000 students, representing over 12% growth compared to the same period last year. Furthermore, our medical school net average ticket, excluding the Unidom acquisition, increased almost 5% in the 9-month period.
In the Continuing Education segment, we continue to see great results, presenting a net revenue growth of 10.4% year-over-year, reached BRL 188 million. Once again, Afya also reported great results on the Medical Practice Solution, which ended the quarter with an increase in net revenue of 15% year-over-year, reaching more than BRL 170 million in the 9-month period. These results highlight the significant potential in Medical Practice Solution driven by a strong ramp-up in B2B and B2P engagements. With more physicians and data in the ecosystem, Afya's attractiveness to B2B clients continues to grow, engaging 47 unique clients and securing 109 contracts in 2024.
Moving now to Slide #4. We will talk about our solid business execution within our 3 business units. Starting with the Undergrad segment, we saw important movements throughout the quarter, such as higher tickets and medicine costs with 4.8% increase in medicine tuition for the 9-month period. Thanks to the maturation of our medical seats, the completion of UNIMA and Afya Jaboatao integration process in November 2023 and the ramp-up of the 4 Mais Medicos campuses that started its operation in third quarter 2022. We are glad to see a gross margin expansion of 170 bps in comparison to 9 months 2023.
This quarter, we also successfully completed the acquisition of Unidom, which brings 300 additional medical seats and strengthens our footprint in Salvador, one of Brazil's largest metropolitan areas. Our dedicated efforts and the strong brand recognition in Salvador led to a substantial increase in the medical students enrollment at Unidom, boosting our student base by 37% and reinforcing the impact of our ecosystem and alignment with our growth objectives. Continued education was marked by an operational restructuring, which resulted in a growth in B2B students boosted by our residency journey offerings. Additionally, we are pleased to see an expansion of 5 new units in 2024, 4 of them being cross units in undergrad and 1 stand-alone campus.
Lastly, in our Medical Practice Solutions segment, we ended the quarter with over 11% increase in active payers, driven by 11% growth in clinical decision and a 14% growth in clinical management. This result reinforces the opportunity ahead in Medical Practice Solutions and explained by the ramp-up in B2B engagements that boosted net revenues and grew 28% with new contracts with the pharma industry and the continuous ramp-up in B2B contracts.
And now I'll be turning the call over to Luis Blanco, Afya's CFO, to provide more insight into the financial and operational metrics. Thank you.
Thank you, Virgilio, and good evening, everyone. Starting with Slide #6 for discussions of key operational metrics by business unit. Starting with the undergrad programs. Our number of medical students grew 12% year-over-year, reaching more than 24,000 students and approved medical seats increased almost 14% yearly. Our medical school net average ticket, excluding the Unidom acquisitions, increased by 4.8% for the 9 months, reaching BRL 8,887. We have also achieved BRL 2,156 million in net revenues, up from BRL 1,883 million from the prior year, an increase over 14%. Regarding the revenue mix, 86% was delivered from medical school students and 94% from health-related courses.
On the next page, I will present our continuing educational metrics. We approached the continuing educational metrics through 3 main journeys. Starting with the residency journey, we saw a 52% increase, reaching 15,678 students by the end of the period. In the graduate journey, student numbers grew by 3%, reaching 7,300 students, primarily driven by student graduations. Lastly, our other courses and B2B offerings increased by 22% over the same 9-month period of the prior year. Overall, this effort pushed the continued educational net revenues to BRL 188 million in the 9-month period of 2024, up from BRL 170 million in the 9 months of 2023, reflecting a growth over 10%. This includes a 14% increase in B2B revenue and a 22% decrease in B2P.
Moving to Slide #8, I will discuss the Medical Practice Solutions operational metrics. The first graph shows our total active payers, representing revenue generated in the Business to Physicians segment. Following a steady growth trend, the number of paying users rose to over 200,000, an 11% increase over the same quarter last year. The second graph highlights our monthly active users, which accounts for 249,000, slightly lower than the 259,000 record last year. This change is primarily due to the transition from the PEBMED Portal to the Afya portal.
Lastly, the third graph shows the net revenues from our Medical Practice Solutions, which grew 15% year-over-year, reaching BRL 117 million. Of this total, BRL 100 million was generated by the B2P, showing an increase of 13%, while B2B contributed BRL 17 million, growing 28% in the 9-month period. In the next slide, we also present Afya ecosystem. We are pleased to highlight Afya substantial contributions to the health care community in Brazil. By the end of the third quarter of 2024, our ecosystem encompassed 326,000 physicians and medical students using our service and products.
Moving forward to Page #11, I want to discuss our financial overview for the third quarter of 2024. Starting with the next slide. With great satisfaction, I present another strong quarterly performance for Afya. Net revenue for the third quarter of 2024 reached BRL 841 million, representing a 16% increase compared to the same period last year. Net revenue totaled BRL 2,455 million for the 9-month period, up 14% year-over-year. This growth was primarily supported by medical tickets increasing above inflation, the maturations of medical seats, Unidom acquisitions and the performance of the Continuing Education and Medical Practice Solutions segments.
In third quarter 2024, adjusted EBITDA rose by 25%, reaching BRL 348 million with an adjusted EBITDA margin of 41.4%, a gain of 290 basis points compared to the third quarter 2023. For the 9-month period, adjusted EBITDA amounted BRL 1,090 million, an increase of 24% over the prior year with an adjusted EBITDA margin of 44.4%, representing 350 basis points increase over the same period. The expansion in the adjusted EBITDA margin is largely attributed to gross margin expansions in the Undergrad segment, the completions of the UNIMA and Afya Jaboatao integration process in November 2023, the ramp-up of 4 Mais Medicos campuses that started operation in the third quarter 2022, operational restructuring efforts in Continuing Educational and Medical Practice Solutions segments and more efficiency in selling, general and administrative expenses.
Moving to the next slide. The year's cash flow from operating activities rose by 25%, reaching BRL 1,167 million, reflecting strong operational performance. The operational cash flow conversion ratio was 109.7% in the 9 months of 2024. Adjusted net income for the third quarter of 2024 came at BRL 165 million, marking an increase of 29% from the same period of 2023. For the 9-month period ending September 2024, adjusted net income totaled BRL 627 million, up 47% year-over-year. This performance was mainly due to the enhancement in our operational results, lower effective tax rate than the last year and lower interest rates. In terms of adjusted EPS, the quarter, we achieved BRL 1.79, a 30% growth compared to the previous year with BRL 6.81 per share in the 9-month period, representing a 49% increase.
And now moving to my 2 last slides. I will discuss our cash and net debt positions, also give you more color on our cost of debt. This slide presents a table detailing our gross debt compositions and the total cost of debt covering our primary obligations, the SoftBank transactions, the debentures, the other financial liabilities, the IFC financing and account payables to selling shareholders. Afya has entered to a financial agreement with IFC to support our expansion initiatives through acquisitions. This agreement represents the first IFC sustainability-linked loan based on social objectives within the educational sector. Under the loan terms, IFC has disbursed BRL 500 million to be repaid in 7 equal semi-annual installments beginning in April 2027. The interest rate is set in the Brazilian CDI rate plus 1.2%, with a potential 15 basis points reductions if specific sustainability KPIs are met.
On the next page, we can look closely at the net debt variation. As of the third quarter of 2024, our net debt stood at BRL 1,894 million, almost the same level compared to the end of 2023. Even accounting for the BRL 157 million earn-out payments regarding the additional seats in Guanambi and UNIMA and the BRL 660 million regarding the acquisitions of Unidom, we were able to reduce our net debt to adjusted EBITDA, thanks to the strong cash flow from operating activities in the 9-month period.
This concludes our prepared remarks. We are very proud of our accomplished and robust performance across all areas. Our commit to advance to the medical journey to an integrated educational system and medical practice solutions remains strong, supporting health care professionals growth, continuous learning, accuracy and productivity. As we look ahead, we are enthusiastic about the opportunities that lies before us.
I will now open the conference for the Q&A section. Thank you.
The first call comes from Marcelo Santos from JPMorgan.
I have 2. One is regarding if you could make some comments about the M&A environment, given that there are a large number of seats issued, how are you seeing -- what kind of negotiations generally speaking, are you having? How do you think M&A will unfold from now on? And the second question is more about the competitive environment. I know you were able to increase the tuition for new students, I think, by 5.1% at least projected for next year, which is a very good number. But what kind of changes, if any, have you noticed versus the previous intake cycles that could be attributed to more competition? And how are you dealing with that?
Marcelo, thank you for your question. I will take the first one and Virgilio is going to take the second one, okay? Regarding the M&A environment, we've -- the outcome from all these injunctions that come after the Supreme Court process, all these approvals, they amplify, they increase the number of targets that we have in our pipeline because these new authorizations come to the market and some of them starting to talk to us. The better thing about this is that these more sellers' markets, I would say, makes us to get a possible -- the next deal will be a lower multiple if you compare to our latest business combinations that was Unidom. So, we keep talking to all the entities that have our profile. And remember that we just go after institutions that are highly concentrated in medicine. And we think that the next deal will have lower multiple per seat if you compare to the latest transactions.
Marcelo, I will get the competitive environment question here. We are keeping the same strategy as we did for the last 4, 5 years. We keep passing at least inflation to our price to our average tuition price for the next cycle. As you may notice, we already started our 2025 first semester intake. It's still in the very beginning. What we are seeing is the number of candidates compared to the same period last year, it's much higher, much better than we saw much more candidates and leads coming. And we are close to 10 percentage points above last year in number of enrollments at the same month. So, we are already 50% already enrolled, still have a room. We were at the same time last year, around 40% of all seats already enrolled. So, keeping a good health trend to us.
And that is not only for medicine. We are also seeing a very good trend on other health programs. As you may see, we are growing organically very fast on our health programs because we have all the synergy on our campuses, on our labs and also in our brand because we are covering health programs. So, the intake coming on health programs, it's also around 2 digits, high 2 digits when you compare to the same period last year.
So, our next question comes from Andre Salles from UBS.
I have 2 on my end. You mentioned that restructuring efforts in Continuing Education and Medical Practice Solutions helped the company to deliver better EBITDA margins year-over-year. I would like to know how far down the road are we in these restructuring efforts, if we could see further margin expansion going forward? And the second one is maybe a follow-up on the M&A strategy, which regions or states the company might prioritize in 2025, if you could comment on that.
Andre, thank you for your questions. This is Blanco speaking here. I'll take the 2 questions. Regarding the margin expansions that we got from the restructuring from Continuing Education and the Digital segments. It's regarding the operational efficiency that we got with this restructuring. We had our organization structure divided by products, by pillars at that time. So, I'll give you an example. On the digital side, we had a product manager for the content pillar. We have the product manager for the support decision and we have the product manager for the practice management tools. When we did the restructure, we did not only pass the content structure to -- from the digital sites to the continued educational sites. We did more than that.
We unified all the structures that deliver the product. So, we just have one product manager for all the offers that we have under the Medical Practice Solutions. And in Continuing Education, we have the same. We have just one product manager for the in-person and the digital offer. So the gains that we got through 2024 are regarding the better management for this structure. We are reducing costs and expenses for providing the service. From 2025 ahead, the margin expansions will come from the operational leverage that we come -- that we are getting in each one of these BUs. So, they are growing, and we have all the structures in place. So with this structure, we are able to increase our results for each one of the segments. So, this is for the first question.
If I may add just a point here, Andre. One thing that you guys need to be careful in order to model our results is about mix. So yes, we foresee margin increase in all BUs. But when we talk about mix, we need to be careful because the Undergrad grows a bit lower than Continuing Education and Digital services. So that can impact the margin overall.
Yes. Thank you, Renata. And regarding M&A targets in each regions that are possible within Brazil, we are not focused on any specific regions. We are more focused on each one of the institutions. The institutions has to be highly concentrated in medicine to become a target to us. And of course, we've been -- in the last 3 acquisitions, we've been talking with players that are more based in large cities. And remember that we closed the latest business combination was in city of Salvador and the previous one, it was in Jaboatao and Maceio. So, we don't seek any specific regions. We seek specific targets that are highly concentrated in medicine. And and trying to get a good IRR on each one of these deals.
Next question comes from Mirela from Bank of America.
I have 2 questions on my side. The first one regarding the monthly active users on the digital services solutions. This have declined 4% this quarter, accelerating from the second quarter. So, could you give us some more color on the decrease? And when do you expect this to normalize now that the PEBMED platform has already been transferred? And the second question would be on the ramp-up of Unidom margins since the acquisition. Could you guys comment a little bit on what are the main lines supporting the margin gains there? And what are the main challenges? What do you expect in terms of normalized margins there?
So, regarding your first question, we have one effect that affects our monthly active users. That is the launch of Portal Afya. I don't know if you guys recall, but we had in the past, the Portal PEBMED and we have changed to Portal Afya. And with that, we had a decrease in the number of monthly active users. It's totally normal since we have changed. But we launched it in March, April. And since then, we are seeing really great results from this new portal. It's part of our new brand strategy.
Yes. Just adding a point here. On the other side here, Mirela, we were asking for more data from each user. So that helped us to increase the number of payers. So, we have much more user that is paying the monthly fee than the monthly active users just because we changed the procedure how to get the data when some new user is signing to have access to our portal. Okay?
Mirela, it's Blanco speaking. I will take the second one regarding Unidom. We are very glad with the business combination itself. It's been performing better than initially expected for us. And remember that Unidom deal, we got them with around 850 medical students over there. We put that information under the 6-K that we announced the deal. And we've finalized the second semester intake with more than 1,150 medical students over there. We got institutions around 60% of the occupations over there. And in only 2 months and remember that we had the closing in 1st of July, we have been able to increase occupations to around 80% in just 2 months. So, this is what brings these margins in this semester.
Going ahead, what we can expect, we can expect more regarding Unidom because we had a room to go to 100% of occupancy over there. And with that, we have all the integration gains that we're going to integrate their legacy systems, their systems to our shared service items that we're going to occur during 2025. So, these process unifications plus the fulfillment of the existing capacity in Unidom will even expand more the margins that we got from this deal.
Next question comes from Lucca Marquezini from Itau.
A couple of questions from our side. The first one will be regarding the Continuing Education segment for which we saw a deceleration in net revenue growth this quarter. Can you please provide more color on the reason behind this deceleration? And also, how should we expect growth for the segment throughout 2025? And then the second one would be regarding financial leverage. So, we saw another quarter of decrease in financial leverage. So, in this sense, can you please comment on what should be the target or a comfortable level for financial leverage going forward? And also if we should expect a higher dividend payout ratio in 2025, please?
Luca, about the first question on the growth rate on Continuing Education. As expected, we have like a seasonality on the intake that what used to be called the Pillar 1 that is on the second and the third quarter, it's a low quarter. We are in the middle of the stronger intake also on graduate programs. We have a high cohort, a very large cohort graduating this last semester. So that was the main reason why we are kind of flat this quarter right now. But we are seeing good trends on intake. You can check that we launched 5 new campuses. These new campuses is ramping up this semester right now. So, we have good figures that will -- but it's still early in the process. The seasonality of this new intake starting October, November, December goes into January and February. So, we may expect some flat on Continuing Education, something in the same path on the fourth quarter and getting better in 2025.
Luca, it's Blanco speaking here talking about the financial leverage. I really like the net debt reconciliation slide that I had presented. And it was really amazing performance when in just 9 months, we've reduced our net debt to adjusted EBITDA from 1.6x that we got at the end of 2023 and reduced to 1.3 right now if you consider the net debt compared to the midpoint of the guidance that we got for this year. Even we've done 2 inorganic movements, important inorganic movements that was the Unidom acquisitions and the earn-outs that we paid for the additional seats from UNIMA and FIES and PROUNI.
Moving ahead, what's our view on that? Our view is that we leverage the company doing business combinations, business combinations, and I want to address this point again that are very concentrated in medicine and give us the minimal return on investments and we're talking about IRR that returns our capital. So, we are very strict on that on capital allocations on that. So, we leverage the company to do business combination. And then we started to extract synergies from these business combinations, keep generating cash, keep the discipline of having a high cash conversion ratios to decrease the leverage until we are prepared to do the next business combination. As we are becoming bigger with this strategy, all the marginal acquisitions that we made are -- have less impact in our financial figures. So with that, we are discussing internally if with this M&A scenario that we keep growing with this 200 seats per year target, if we have a possibility to start to distribute dividends. But this is -- it's ongoing discussions. We did not have any kind of changes on our policy. So that's my view regarding the net debt to the leverage ratio.
Just a reminder, Luca, that next year, we have also Mais Medicos. So, we have the acquisitions that we are going to keep our pace of 200 seats per year and also to start the investments of the Mais Medicos units that we will win.
[Operator Instructions] Next question comes from Lucas Nagano.
We have 2. The first is regarding the tuition increase in candidates per seat. We'd like to get a sense of the variance of those metrics between your institutions basically to understand whether we can see your portfolio segmented into different buckets, like if there is a particular type of school that saw higher tuition increase in candidates versus another that saw lower or not, you're still seeing very homogenous trends. So, this is the first question. And the second question is a follow-up on capital allocation and M&A. But taking into account the SoftBank debt, we still have plenty of time until the debt can be redeemed. But how is your base case about this, assuming -- if we assume the debt is redeemed, how does it change your capital allocation priorities? Would you be more inclined to refinance it and keep up the M&A or to pay down the debt? Sorry for the long question.
Lucas, I'll get the first one here about the tuition and the candidates ratio. So, we have more than 30 campuses offering medical programs from North, South, East, West of Brazil, and we are pricing differently. So, the average for 2025 is around 5.1%, the average that we are passing to all institutions. Of course, that we have some institutions that we have a very good cohort, quality students applying for that. We are moving forward, moving ahead of 5.1%. And the other institutions independently on the tuition level, we are priced a little bit lower. Of course, that we have synergy as we operate integrated, we can move candidates from one campus to another campus, but our commitment here is to keep passing at least inflation in terms of average for all campuses that we have.
The candidates ratio, as I mentioned, the first question here, we are seeing a much higher demand at the same -- when you compare the same point that we are on the intake process. So, we are still in the very beginning that goes until January, most of them. And also in terms of enrollment. So today, we have almost 50% of all seats already fulfilled for all campuses in Afya in Brazil. That also includes Unidom, that's our last acquisition here. So, the candidates ratio is still in the very beginning. But what we can say here that we are better, actually much better than the same period last year when you compare the intakes. Okay?
Nagano, Blanco speaking here. Talking about SoftBank deal, as you mentioned before, from May 2026, SoftBank has the optionality to do the early redemption of the deal -- of the convertible. It's -- we didn't get any kind of anticipation of these discussions. It's optionality that SoftBank has. It's not clear for us that if they were going to do the early redemptions on that. Having said that, to repay this BRL 820 million amount, we could easily to get another source of finance or even repay with our operating cash flow. And just for these 9 months, we generated almost BRL 1.2 billion. So, I think it's very early to have these discussions, but we could easily managed to get -- to substitute this finance for another instrument.
Since we do not have any more questions, we keep the Investor Relations team open to a follow-up if you guys need. See you next quarter.