Afya Limited (NASDAQ:AFYA) Q4 2021 Earnings Conference Call March 31, 2021 5:00 PM ET
Company Participants
Virgilio Gibbon – Chief Executive Officer
Luis Andre Blanco – Chief Financial Officer
Renata Costa Couto – Director of Investor Relation
Conference Call Participants
Marcelo Santos – JPMorgan
Vinicius Figueiredo – Itaú BBA
Victor Tomito – Goldman Sachs
Mauricio Capeda – Credit Suisse
Renata Costa Couto
Thank you for joining us for AFYA’s fourth-quarter in the full-year 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 content. Forward-looking statements in presentation include but are not limited to the statements related to our business and financial performance, expectations in guidance for future viewers or expectations regarding our strategic product initiatives, and the related benefits in 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 of the date there of. You should not rely on them as predictions of future events 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 considered in insulation or as a substitute of these 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 over to call over to Virgilio Gibbon, AFYA’s CEO is starting with Slide three.
Virgilio Gibbon
Thanks everyone for joining us today on our last 2021 conference call. I’m extremely proud to present a model year of showing strong results on performance since 2021 we’re successful execution of our certainty strategy. The commitment of our team members in the consistency of our business model. Box clean, doing another year of a worldwide pandemic during this call, I will run through three main topics. First, I will show where we heading to on our business strategy for education and Digital Services. Second, the achievements in for solutions on the ESG sign. An extremely relevant that June that year front. And last but not least, our financial highlights in 2022 guidance demonstrated at Afya will continue to deliver a strong performance on wards.
Now, moving to the next page, we can see how Afya has succeeded in its opportunities and yet has a great future ahead with the number of seats getting higher each quarter. The expansion of our offering in the undergrad business continues to grow strong. So far, Afya has reached 2,759 seats for undergrad medical school. With four new medical units and 28 seats [indiscernible] both to start operating in the second semester of 2022. This represents almost 20,000 students [indiscernible]. Our pipeline for acquisition is fertile, and we still have the opportunity to expand more than 1,000 seats among our current campuses. The growth expectation for the digital strategy is not lower. By 2022, we expect to boost our market penetration and consolidate our offerings to B2B clients. That we will allow us to leverage our Physician network, unlock new revenue streams, and create value for the healthcare team. Our plan is to monetize the services by addressing the needs of the pharmaceutical industry, providers such as pharmacies and hospitals, and [indiscernible] the corporate market itself, by providing access and increasing demand and efficiency.
The total addressable market for this strategy is 24.4 billion, segmented between those strip layers. Moving to slide Number 5, as we have promised at the beginning of the year, our ESG metrics were presented on our ongoing basis in each quarter, proving that our evolutions are consistent, and that our ESG agenda is getting more and more robust, as we have embedded [indiscernible] and all we do in [indiscernible]. Throughout the year, we have achieved the number of relevant goals. Number 1, we signed the UN Global pact. Number 2, we assume the voluntary commitment to have at least 50% of women in our management position by 2013, along with the human onboard stretch Exchange. Number 3, we disclosed our second annual ESG report, which the most relevant information about their agenda.
Number 4, we announced that Sustainalytics a leading ESG in corporate governance research firm has rated Afya as a low-risk ESG risks rating company due to our lower explosion in good policies and apply practices. Number 5, as a reflection of our great results and actions that there are being showed to the market. We won over 1000 award as a best Kulkan education segment. And they have kind of Office 360 degrees award in choke attributes, best confident that location segment and sustainability in education segments. In the overall range in all 418 confidences in Brazil, we were in 13 flakes. And number 6, we are on 13 resilient conference to join the gender balance equality index, an Ingeus that aims to track the performance of public companies committed to transparency and gather data reporting. I’m very proud to say this is just a start on this direction.
And now moving to my last two slides on this presentation, I will show our financial highlights and our guidance for the entire year of 2020. We ended 2021, achieving our guidance. Adjusted net revenue increased 45% year-over-year, reaching R $ 1 billion, 753 million, followed by an adjusted EBITDA growth of 34% year-over-year, reaching R $ 755 million, with a margin of 43.1%. We also reported our cash position of R$749 million, and the record adjusted operating cash flow generation of R$667 million, 71% higher than last year. Reconfirming our tripod of strong role, profitability, and high cash generation. Moving now to the operational updates of the quarter. Our undergrad medical students, reached more than 16,000 students, represent a 45% growth compared to the same period last year.
Operating seats, were 31% also. On additional service highlights, our net revenue grew 63% year-over-year, and our ecosystem reached 248,000 monthly active users, which represents more than 33% of the Brazilian market of physicians. Consistent growth, success in our digital services, and ESG evolutions, this is how we are evolving and empowering our mission to become the reference in medical education and digital services, encouraging students and physicians to transform their ambitions into rewarding lifelong experience. We’re proud of our business and what we have achieved so far, as well as what we are planning for the future. The resilience in high predictability of our business model enabled us to introduce our new guidance for the entire year of 2022.
Take into account the successfully conclude acceptance of new medical students, ensuring 100% occupancy all medical schools and the recovery of continuing education segment. Net revenue is expected to be between two billion, two hundred and eighty million reais and 2 billion. [indiscernible]. And adjusted EBITDA is expected to be between $935 million highs and one billion, 50 million, excluding an acquisition that may be concluded after Asian of the figure. This figure is showing another strong year ahead and represents an incredible operational growth of more than three times when compared to AFYA’s results in 2019, when it became a public company almost three years ago. Now to this day, all these financial results, I’ll turn the call to Luis Blanco, our CFO.
Luis Andre Blanco
Thank you, Virgilio. And good evening, everyone. Moving to slide 10 to discuss the financial highlights of the fourth-quarter and full-year off 2021. It is with a lot satisfaction that I present another strong and consistent year of results for AFYA. Since 2019, we’ve been seeing, in all quarters, a positive trend in our key metrics. Adjusted net revenues for the quarter was up 45% year-over-year to R$505 million, reflecting the maturation of medical seats, an increase in the average ticket of medical program, and consolidations of acquisitions of medical schools and digital services. For the year, the increase was also 45% totaling R$1.753 billion. It is important to mention that the adjustment up R$7.1 million [indiscernible] in tuition fees in the fourth quarter rented by individual and collected legal and public civil proceedings, related to COVID-19, is mostly seized in December, due to the Supreme Court decision.
Adjusted EBITDA for the quarter was 26% year-over-year to a $195 million range. For the year adjusted EBITDA was $755 million an increase of 34%. For both periods, the adjusted EBITDA margins was below the reported margins off the last year, mainly due to the consolidation iClinic mid [indiscernible], Mitch Kohan, [indiscernible], fleet pharma, [indiscernible] in 9x sprawl, which reduces their digital margins and lower than expected Metso results for the fourth quarter due to higher competition along with lower performance from the continuing education segment. Adjusted net income for the quarter, was R$99 million slightly below the safety periods of the prior year. For the year, net income increase was in line with 2020 totaling R$440 million react.
For most periods, adjusted net income results were affected by an increase in financial expenses that was affected by a higher, higher net debt position related to nine basis combinations execute the duty in 2021 that where partially funded by selling shareholders in the case of when you’re going to new and partially funded by Softback transaction. Adjusted cash flow generation was record in the year, increasing over 70% year-over-year to R$666 million, which resulted in a cash conversions ratio of 101% compared to 76% in the same period of 2020. On the right side of the screen, we can also see bullet points that summarize other financial highlights. For the year. Organic growth in adjusted net revenue for our undergrad, was almost 14%. And as Virgilio previously said, we’ve achieved the announced guidance for 2021, reaching R$752 million, and 43.1% adjusted EBITDA margin.
This takes into account, the successfully concluded acceptance of new medical students for the second half of 2021, and consolidations of additional companies and medical school acquisitions, excluding RX Pro. Into Slide 11, for discussions on key metrics by business units. Starting with the undergrad programs. Our number of medical students grew 25.2%, reaching more than 60,000 students, with operating medical seats increasing 31% year-over-year, to 2,481 operating seats. In terms of total tuition fees for the year, we’ve reached R$1,990 billion, up from R$1,237 billion, from the prior year, an increase of 61%. Talking about revenue mix, 76% of these are derived from medical school students, and 88% from health-related courses. Net [indiscernible] average tickets for the year, was R$8,600, a 7% growth compared to R$8,100 tickets from the prior year.
On the next page, I would present continued education metrics. We saw a 32% decrease in continued education net revenue, from R$107 million to R$73 million, with a decrease of 24% in the number of students. The decrease was driven mainly by reductions in the student base, which has two main reasons. Blanco programs that are not being offered since the first semester of 2021 due to pandemic and physicians’ decisions to postpone admission to specialization courses due to COVID-19 pandemic. Nevertheless, with the combinations off their opening of six new campuses in 2021 and expansion of the specialization portfolio along with the rebound of the [indiscernible] admission process.
The decrease in continued education segments reduce it in the fourth quarter, and FX specs better results during 2022. Moving to slide 13, I will discuss the digital service operation metrics. On the first graphic in the slides, you can see our active paying users per pillar. Those are the active players that generate revenues. Combining all active paying users in the year, we’ve reached a number off a 165 thousand paying users. Content in technology for medical education grew 66% year-over-year with a lower ticket and a different mix of products. Clinical management tools reported almost 18,000 payers and clinical decision software, has more than 125,000 payers, these results reflected an increase of 63% additional service net revenue since last year, meaning to the consolidation soft acquired digital companies and organic growth from WhiteBook, which was partially offset by net sale lower performance.
The last graph on the page shows the monthly active users, also per pillar. Once again, combining all users, we reached a number of almost 250,000 students and physicians all over Brazil. This number represents more than 33% of all medical students and physicians in Brazil, as Virgilio said before. And now, moving to my last slide, I will discuss our cash and net debt position. Cash and cash equivalents at the end of the quarter, were RS749 million, a decrease of 28% compared with the same period in the prior year. At year end, net debt totaling R$1.4 billion compared with net debt of a R$167 million at the end of 2020. This increase was mainly due to the closing of nine M&A transactions partially offset by free cash flow generation. This ends our prepared remarks. With this opportunity, we would also like to invite all of you to our virtual Afya investors in ESG Day, which will take place on April 27 at 09:00 AM In decent time. l will now open the conference for Q&A session.
Question-and-Answer Session
Renata Costa Couto
Good evening, everyone. Marcelo, you may talk.
Marcelo Santos
Hi, good evening. Thank you very much for the questions. I have two. The first, I wonder if you could comment a bit more on the higher competitiveness in the medical prep business. What kind of player is creating this higher competition? What are your plans to do about it? How should we think going forward? And the second question is, what kind of ticket assumption is embedded in the guidance for 2022 for medical courses? These are the two questions. Thank you.
Virgilio Gibbon
Hi Marcelo. This is Virgilio. On the resident’s square course arena, we saw at least 10 additional competitors coming to the market in 2021. And also, the market was kind of impacted by all the resident’s exam schedule. Because of the pandemic, we have some exams that was postponed and all the decisions of take the program costs [indiscernible] was impacted by this problem was the schedule planning. So, we had a higher competitive landscape impacting the margins and also price, and also the demand was postponed because of these disruptions, probably back on-schedule planning for the resident [indiscernible] exams — resident’s exams. On the second about the guidance, Luis will dictate.
Luis Andre Blanco
Hi, Marcelo, good evening. Talking about the tickets on the undergrad side of the business. We’ve put a readjustment of 7.5% in new students and existing students, for 2022. So, we have this increase in our tickets, and above that, we have the effect of the maturation of tickets that would have on existing base, as we are graduating students with lower tickets than the ones that are coming to intake. These two affects together, must have an increasing ticket in something about 10%, or a little bit more than that.
Marcelo Santos
Thank you.
Renata Costa Couto
Our next question comes from Vinicius Figueiredo. Thank you, Marcelo. Our next question comes from Vinicius Figueiredo, from Itau BBA. Vinicius you may go.
Vinicius Figueiredo
Good evening won, Thanks for taking my question on my question regarding their data is for which does thing to try to connectors Zales for top line and EBITDA we can see even with the ongoing duration of seats in 2003, healthy price dynamics, margin should not expand substantially the right. What is the main reason behind it? Because we should expect digital services increasing their participation in the revenue mix. And if I may a second question would be on digital services from organic perspective, we saw a marginal year-over-year crazy top-line. If you could explore this performance, it will be great. Thanks
Virgilio Gibbon
Hi, Vinicius. In terms of organic growth for 2022, we expect the top line to move above 30% considering the median of the guidance on our top line. And more than 50% of this growth will be leveraged by the organic growth maturation and also price and tuition for 2022. On the digital services, yes, we’re expecting an even higher growth coming from the digital services segment with lower margin. That was the reason that we may have some small decrease on our overall margin considering education and also the digital service. Specific on the education side on the undergrad business, we’ll have 12 months of UNIGRANRIO and UNIFIPMoc. These two institutions, they are very representative on our total revenue coming from 2021 to 2022. And we are still extracting synergies from UNIGRANRIO and leveraging their contribution margin. So having said that, we will have on [indiscernible] on the undergrad business, still have very high margin, a flat margin, considering this effect. But as we have higher a contribution coming from digital services, that’s the reason we are expecting a little bit, 1 to 1.5 digital percentage points of margins year-over-year for the overall guidance for 2022.
Renata Costa Couto
And if I may add Vinicius. One important point, that 2022, is the year that we are going to expand our B2B strategy. As you guys know, we need to structure all that. We need to hire more people, structure the process, build the products. We already have more than 20 contracts with the industry, considerably, education and services [indiscernible] industry. That’s the first year of our strategy. We expect to spend money to build all that. That’s what is one of the biggest reasons for marketing decrease. Plus, as Virgilio said, we have a flat margin coming from [indiscernible 00:26:30]
Luis Andre Blanco
Paving uses and Luis speaking right now to take your second questions regarding the growth, organic growth, the digital segments, either fourth-quarter We need to remember that we’ve made 6 business combinations in the digital segments during 2021. So, the comparison on the organic growth between the fourth-quarter 2021 and the fourth-quarter of 2020 is comparing just MEDCEL and PEBMED business. We have this pushback, the [indiscernible] that was due to the MEDCEL business. We see the PEBMED digital support system growing over 30%, and the pushback that we have on the fourth-quarter was related fully on the Metso business.
Vinicius Figueiredo
Okay. Perfect. Very clear. Thanks for [indiscernible]
Renata Costa Couto
Of course. So, our next question comes from Vitor Tomita from Goldman Sachs. Vitor you may go.
Vitor Tomita
Hello. Good evening, all. Two questions from our side. Thanks for taking our questions. And the first one, it’s a follow-up to Vinicius ‘ question. Given all that, in your guidance, how much approximately organic growth are you assuming for the digital units now that you have all the acquisitions together influencing the results? And a second point here, is how do you see continuing education intakes performing at this point? And how much growth are you assuming for these units in guidance? Thank you.
Luis Andre Blanco
Okay. Hi, Vitor. Thank you for question. It’s Luis speaking. Regarding the embedded [indiscernible] global organic growth inside of the digital segment, we’re expecting growth approximately, of 50%, 50% during 2022. Remember that we have these 6 business combinations that we have done during 2021. We’ve compared this organic growth, we’re going to expect this 50% growth year-over-year, in terms of organic during the year.
Vitor Tomita
This is on the top-line?
Luis Andre Blanco
Yeah. Net revenues. And on the continuing education, the graduates [indiscernible] from the demands. At the moment, we have something good, 40% above the same period last year, so the intake process is running very strong, and we already have enrolled most of the classes. So, we have very good news on the front of continuing education, as we are allowed to start delivering the classes on a regular basis. It will be positive flow during 2022.
Vitor Tomita
Thank you very much.
Renata Costa Couto
So just show remember if you want to ask the question, raise your hand. The next question comes from Mauricio Cepeda from suites Maui you may tell
Mauricio Cepeda
Everyone Hi, Virgilio, Andre Thanks for the time. So, I have a question about competition as well. But instead of asking about the prep courses, let me go to the continuing education and we know that we — you had kind of, let’s say, circumstantial problem with the pandemics. But do you see an increase in the competition in continuing education as well given that seems to be a kind of an attractive niche in the sector. And secondly, when we see the secret suggests we’re a little bit below inflation. What are the reasons behind that was that intentionally to maximize volumes? Do you see any market difficulties that could prevent better price adjustments? Thank you.
Virgilio Gibbon
Hi, Cepeda. Thanks for both questions. On the continued education competition, we are not seeing a tough market. Actually, it’s on the other side. We changed our prices. We launched many other programs. We also opened new campuses to operate these specialization programs. So, we are seeing a very strong demand, remembering that our program, it’s very practical two or three-year program, a very high value tuition. So, it’s a huge opportunity here for us and we are having a record student base coming from this continued education operation. So, these are your first question. And about the ticket, the inflation, I think it’s important to understand how we set our prices for the following year. When we start making all the intake, the enrollment process for the following year, for 2022 as an example, we start in September, so we had to define the tuition back in September 2021.
It was in the middle of the prices. We did not have this huge leverage from the inflation, from the price at that moment. So farther that moment the students that we already have your role in our student base, 7.5% would it be something reasonable considering that we’re best of the entire student means what do we are doing is that for the new students, we pushed a price a little bit over than 7.5. We have some campuses — some programs that was almost 15% for the fresh students that we’re repositioning our product on that region. So, the combination on all of these, remember that we are graduating students with lower tickets, we have a new wave coming.
A new cohort coming with 7.5% above, and the fresh students enrolling even above the 7.5, that’s our strategy off-price. So, we have to define prices in September so we started enrolling students in February like now. Want we are seeing for the following semester is that, the inflation is reducing. We are expecting a lower inflation of one digital for the next 12 months. And we can keep passing between 5 and 8% price for the student’s base in order to be more as a smooth transition for this higher inflation period for the regular one that we are most used with one single-digit. So that’s not out of here. I think it’s not how borrower we can best inflation 10%, but it’s in order to be moist moves. For a longer period that we can have 7.5 for the entire set up basis at least. And for the following year, we also can adjust for some of the same same level, even considering that the inflation will be lower than that.
Renata Costa Couto
Cepeda, I will use your question to go back to the resident’s prep competition point. And one thing that I think that is important for all you guys to understand, is that we considered the market stable in terms of resident’s seat in the market, and the number of competitors in this market almost doubled. And the kind of competitors that we are seeing, our competitors that are focused in one kind of specialization, they have digital offerings that sometimes are less complex and needs less investments than what we have and we follow those lower tickets. So that’s the scenario of competition that we are facing.
But what we are doing, we are understanding our portfolio, understanding how we can make this purch volume more approachable for all of the students. And I don’t know if you guys saw it, but we acquired a company that’s called Alem da Medicina. And this company have digital influencers behind it and have a high penetration among students in Brazil, so we are trying to make a better position in this digital marketing. Again, understanding how the offer should be, understanding who we need to be the face of the company for the students to have a more appealing marketing for them. So, we probably will have some news in the short period. Thank you for a question.
Mauricio Cepeda
Thank you. Thank you for the clarity.
Renata Costa Couto
I see that Cepeda was the last question. If you still want to ask a question, please raise your hand. Before that, I would also like to highlight our [indiscernible] day next week. I hope that we can see you you all. I just ask you all to register for the event. We have the link in our website. I see that we don’t have any more questions. We are available if you want to do any follow-up. If anybody decides want to talk to us, just send us an email in our Investor Relations email or contact. Thank you so much. Have a good night.
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