Afya Ltd. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Performance highlights: Net revenue increased almost 14% to R$810 million; adjusted EBITDA grew 28% year-over-year to R$344 million with a margin of 42.5%; adjusted net income reached R$210 million, up 59%; adjusted EPS climbed to R$2.29, up 62%; operating cash flow from activities totaled R$610 million, up 21%; operating cash conversion 94%; cash position R$723 million.
• Operational updates: Medical seats reached 3,200 approved seats; number of medical students reached 22,661, a 9% volume growth; acquisition of Unidom and addition of 80 seats at UNIMA in Q3 2024 led to total approved seats of 3,583; continuing education segment saw net revenue growth over 12%; medical practice solutions had 13% revenue increase.
• Business structure: New structure with three segments - undergrad program, continuing education, and medical practice solution. Continuing education entities previously in medical practice solution moved to continuing education segment; digital services renamed to medical practice solution.

Segment Performance

• Undergrad segment: Net revenue saw growth, with a net average ticket for medical courses increasing by over 5.4%. There was organic growth across all segments, gross margin expansion, and the acquisition of Unidom. Net revenue for the undergrad program increased by more than 13%, reaching over R$1414 million, with 86% related to medicine and 94% from health-related courses.
• Continuing education: Net revenue grew by over 12% year-over-year, reaching R$127 million in the first six-month period of 2024. It was marked by operational restructuring, resulting in growth and an increase in B2B students, boosted by both graduate and prep programs. The segment also benefited from gross margin expansion due to operational restructuring efforts. Revenue for the first half of 2024 reached R$128 million, up from R$114 million in the first half of 2023.
• Medical practice solution: Ended the quarter with a 13% increase in active payers, driven by 11% growth in clinical decision and a 19% growth in clinical management. Net revenue grew by 13% compared to last year, reaching R$77 million. B2B net revenue recovered as postponed invoices were accounted for.

Guidance

• Updated net revenue range: R$3.225 billion to R$3.325 billion.
• Adjusted EBITDA range: R$1.375 billion to R$1.475 billion.
• CapEx range: R$220 million to R$260 million. Based on recent acquisition, exceeded initial expectations, and robust intake process.

Risks

• Regulatory risks related to approvals of medical seats and institutions, which could impact expansion and M&A plans. For example, uncertainties in the approval timeline of injunctions and their impact on market competition and M&A pipeline.

Question and Answer

Q: In terms of cost of debt, what should we think about that considering the recent IFC mission and the debt maturity of some of your debt that it's cheaper? And on the triggers to reach the top of the guidance on margins, especially for the medical practice solution.

A: Luis Andre Blanco said cost of debt will be below CDI at least until soft bank transactions due in 2026. Virgilio Gibbon said execution was above initial expectation for all segments, and medical practice solution has seen positive EBITDA improvement post-restructuring.

Q: The release mentions that one of the reasons for the upward revision in guidance was the performance in the first semester. Which of the segments delivered the results that were above the expectations and led to this revision? And on the acceleration in revenue growth for the medical practice solution segment, which products led to this?

A: Luis Andre Blanco said better performance came from integrations of UNIMA and FCM Jaboatão, Mais Médicos 2 operations, and SG&A improvements. Lucca Marquezini was told revenue acceleration in medical practice solution was mostly from B2B sites, especially pharmaceutical industry service provider revenues recognized in the second quarter.

Q: Regarding regulation, perspective on changes in competition given Supreme Court injunctions approvals and number of injunctions expected; impact on M&A pipeline.

A: Virgilio Gibbon said no perceived change in competition, approvals running as expected, and M&A pipeline grew with more targets. Luis Andre Blanco said pipeline of possible targets grew, confident in 200 seats acquisitions per year.

Q: Competitive environment on the prep course business; why B2B revenues in continuing education is contracting; clarification on margin for medical practice business.

A: Luis Andre Blanco said prep course competitive environment not relevant in Q2/Q3 as sales are Q1/Q4 focused; Virgilio Gibbon said prep course enrollment growing with rebuilt curriculum; Luis Andre Blanco said B2B revenues in continuing education were pandemic-related and more flat, medical practice solution post-restructuring has positive EBITDA around 10-15, aiming for close to 20% contribution margin.

Q: About Unidom, expected consolidated margins after integration, sources of synergy, timeframe; on medical practice solutions, simplification helping margins and if there's a different strategy/positioning.

A: Luis Andre Blanco said working on Unidom integration, synergy from top line, capacity fullness, revisiting costs, implementing national curriculum, centralizing back office; medical practice solutions simplification led to margin improvement, focusing on certain digital services with revised strategy.