Afya Limited
Q3 2020 Earnings Call Transcript

Published: 4 Dec 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to Afya’s Third Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instruction will follow at that time. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference Renata Couto, Afya’s Head of IR. You may begin.

[Renata Couto:]

Good morning everyone. Thank you for joining us for Afya’s third quarter 2020 conference call. With me on the call today is Afya's CEO, Virgilio Gibbon; and Luis Andre Blanco, our CFO.

[Virgilio Gibbon:]

Thank you, Renata, and thanks, everyone, for joining us today. I hope that you and your families are all doing well. Since our last earnings call, the overall business environment did not materially change. Our key priority remains the health and safety of our students, faculty, and employees. Although there has been some disruptions from COVID-19, our teams devoted to leverage our online and virtual technology capabilities and adjust offerings for our students that allowed us to generate strong results this quarter. We once again saw organic revenue growth contribution from acquisitions, underlying margin expansion, and cash flow generation. Before we start with our financial and operational highlights, I'm proud to share with you that we have just refreshed our brand. We are the only complete medical education platform serving every stage of the doctor's career, providing solutions and methodologies for a personalized experience. And when company awareness grows, its brand also does, so this is our new logo that reflects our DNA and will support gradually every service and local brands. Please take a few minutes to watch our brand manifesto.

[Luis Andre Blanco:]

Thank you, Virgilio, and good morning, everyone. Moving to Page 9. Similar to past calls, my discussion this morning will focus on the main and most significant P&L items. There is additional info in the earnings press release that you can refer to for further more information. I'm pleased that we delivered another good quarter across all key metrics. Let me highlight a few. Both medical seats and students saw a significant increase during the quarter. With respect to the number of medical seats, we added 294 seats year over year for a total of 1,516 seats. Reflecting the seat maturation process and acquisitions, the total number of students in the third-quarter 2020 was 9,567 students, an increase of 50% over the same period of the prior year. Adjusted net revenue for the quarter, which includes the impact of the state decrees and individual and collective legal proceedings related to the strongest grade rated to COVID-19 on site classes restrictions was up 52% year on year to BRL313 million, partially benefiting for recognition of revenue that has been deferred earlier on the year when practical classes were unable to take place. This deferred revenue amounted to BRL14.4 million in the quarter. Excluding the acquisition of UniRedentor, Sao Lucas, and PEBMED, net revenue grew by 16% year over year reaching BRL239 million.

[Operator:]

Thank you. Our first question comes from Marcelo Santos of JP Morgan. You may proceed with your question.

[Marcelo Santos:]

Hi, good morning. Thanks for taking my questions. I have two. The first is if you could provide some update on the intake for the medical unit in 2021. If we're being able to fill the seats and kind of ticket outlook you could discuss. And the second is about PEBMED integration and cross-sell initiatives. If you could provide us an update on how this is going and if you're ready -- about to launch some initiatives that could perhaps put together Medcel courses that matter. Anything in that sense would be very helpful. Thank you.

[Virgilio Gibbon:]

Hi, Marcelo. Thank you for your question. I'll take the first question here then Julio will help me with the second answer here. So the intake for our medical seats for 2021 it's in very good trend. We are not expecting any kind of surprise and keeping the same trend to have 100% of occupancy of all seats, including the maturation and the new institutions acquired in 2020. So there will be no surprise on the intake side and also renewal for the following semester. On PEBMED, integration and cross-sell opportunities, Julio?

[Julio de Angeli:]

Hey, Marcelo. Hello, everyone. I hope everyone is healthy and fine there. In regards to PEBMED, we started not integrating the Company yet, Marcelo, but we started with all the activities in terms of offering products to the different audiences. So Medcel has been promoting PEBMED and the other way around as well. So we just finalized, especially now the Black Friday period, which is important in terms of subscriptions for both business and enrollments. So we don't have yet concluded, but we've been doing integrated activities, commercial activities at this point. So far, I mean, PEBMED is now at a very, very different level. I mean, it's been growing, it's above 100,000, subscribers at this point, and Medcel has been doing quite well as well in the intake, where we started in September. So it's been growing above market levels as well. But so far, answering your questions, we are doing more of the commercial activities at this point. We have a couple of projects to be launched, especially with initiatives where we're going to add educational components to the offer. And we are about actually to launch a specific marketplace where students will be able to have bundle offers from the different services and this is yet to come.

[Operator:]

Thank you. Our next question comes from Susana Salaru with Itau. You may proceed with your question.

[Susana Salaru:]

Hi, guys, good morning. Thank you for taking our questions. We have two. First is related to the MedPhone and the WhiteBook. Are you guys going to maintain both lines? Or are you planning to unify and have a new combined product? That will be our first question. And the second question is related to the Medcel student base, which is -- which didn't evolve comparing to the previous quarter. What should we expect going forward? And if you are seeing a scenario that is different from what you had in your business plan for Medcel? That's it, guys. Thank you.

[Julio de Angeli:]

Hey, Susana, Julio here. So in regards to the first question, so far with MedPhone, I mean, we still want to keep the application up and running. And at this point, we are trying actually to convert the users from MedPhone to WhiteBook subscribers, so that's what we are doing now. In terms of the future, what -- the plan is actually we still need to keep both those applications just up and running and -- but the focus is to grow WhiteBook's user base. The other one about Medcel, again, answering your question, the student base actually declined a bit, but it's mostly because of the -- the cause is we had to deal with the pandemic. But the intake, as I mentioned on the previous answer to Marcelo, the intake, which is the most important for Q4 and for next year is doing well again, above the market growth level.

[Susana Salaru:]

Well, thank you, Julio. Just a follow-up on the Medcel student base. The cross-selling for the students -- for the last year students and the students that are before the last year students, is this happening? Or you are just -- the majority of the sales are happening just for the students that are graduating?

[Julio de Angeli:]

Yeah. Well, the majority of the students, they are actually -- let me explain how this works. So the intake actually during this period of the year, September to December, most of them, the majority of them are still in the school. So they're still graduating, so they're finishing fifth year or the sixth year and the intake with doctors actually that are already physicians that are already graduated is higher after January, so January to March, April. So, so far now, it's more of students that are -- and this hasn't changed a lot. But what we see is that the market is growing and we're growing in the same pace, but more -- at this moment of the intake, it's more of the students that are still not graduated and it's just following the same pattern as other years.

[Operator:]

Our next question comes from Fred Mendes with Bradesco. You may proceed with your question.

[Fred Mendes:]

Hello, and good morning, everyone. Thanks for the call. I have two questions as well. The first one regarding the discounts that you recognized in this quarter. Just wondering if this is something that you already recognized. The mandatory discounts, right, that's something that you already recognized everything? Or should we expect to see more of these discounts as we move forward? This would be my first question. And then on the second question, I know as the state of the total revenue is not as much, but we saw a significant decrease in the number of students not related to healthcare course. So just wondering what can you expect from this business as we move forward? Thank you.

[Luis Andre Blanco:]

Thanks, Fred, it's Luis speaking. Regarding the mandatory discounts that we had on the third quarter, it's all that we got on the third quarter, okay? It's related to state decrees that requires us to give the discounts at this period and reflects the discount that at the first instance the judge has ruled us to give this discount. So we have this BRL3.9 million of discounts on the third quarter. Moving forward, we have some states laws that are still in place. So we will see at the fourth quarter, some discounts. I think this number should be around 1% to 2% of our net revenues, okay, this -- this amount.

[Virgilio Gibbon:]

Hi, Fred. Just to add a point here. This is Virgilio. So that will not put in risk the guidance, we are very comfort to reach the guidance for the second semester. On your second question about the nonmedical programs, we are closing many of them. That's one of the main reasons of the leverage in our operations, many of the programs from the institution acquired. They came with low margins of negative operational results, so we are closing these programs. And also we have seen the impact on COVID for the traditional on-campus undergrad program. So that's a combination of this, too. We are closing. We are very disciplined in closing programs that is not sustained in the long term. We are not going to challenge the competition or if there's distance learning and lowering our price. So we are just keeping on track the program that is sustainable and make the difference on the region that we have the operation. So it's expecting to dilute nonmedical programs on our penetration. Last year, if I'm not wrong, it's around 18% and this year it's around 14%. So also this is considered on our expectation for the entire year.

[Operator:]

Thank you. Our next question comes from Mauricio Cepeda with Credit Suisse. You may proceed with your question.

[Mauricio Cepeda:]

Hello, guys. Thank you for the time, for the questions. I have two questions that are kind of specific. We noticed that the receivables for the quarter are still up versus last year. We'd like to know if this is a new level or if it's something that is contingent to COVID only? And also, we saw that the cash flow this quarter specifically was a little bit lower than last year's. So if you could give a little bit of more qualitative insight on this. We saw that it was something related to tax payables and advances from customers. But if you could give some more, let's say, rationale for what's happening. Thank you.

[Luis Andre Blanco:]

Hi, Mauricio, it's Luis speaking. About the receivable base that we got on the third quarter, yes, it was a little bit higher than the days that we had on the third quarter last year, but it's lower than the one that we have presented on the second quarter. What's the difference between the years of it? What we got, there are three main reasons. The first one is the advances that we got from our students. If we compare this year with the 2019, the number of advances that we got from the students were lower, okay? So it's common that the students anticipate the payment of the semester to get a little bit of financial discounts on that. The second one is the installments that we -- the financial support that we provided to our students during this -- this pandemic. We have established the support through the installments to them instead of giving them discounts. So we were expecting a little bit of increase of our receivable days and that's the core. But it's already moving down as we reduce our receivable days from the third quarter if you compare that to the second-quarter 2020. And the third reason, if you compare with the 2019, it was Medcel. Medcel was incorporated with Afya during the second quarter last year and the Medcel business is the one that you recognize the revenue first on and then you got the receivables. So last year, we had recognized the revenue before Medcel was incorporated into Afya and we continue to get this cash on the second quarter, the third quarter last year. So this -- these are the three major factors giving more colors about this change on the receivables, okay?

[Operator:]

Our next question comes from Irma Sgarz with Goldman Sachs. You may proceed with your question.

[Irma Sgarz:]

Yes. Hi, thank you for taking my question. One question, more technical, follow-up question. Your earlier remarks were very helpful. And from what I understand from all the answers, you're quite sort of comfortable, if I may say so, in terms of how underlying dynamics are shaking out, all things considered. In terms of dropouts, anything that you feel sort of additional that one is worth mentioning here and how you expect that to evolve from here and the ability to -- for early dropouts to reposition? You're speaking to 100% occupancy, so I assume that's sort of baked into there. But anything additional that you feel worth mentioning would be helpful. And then just as you look sort of beyond the near-term and into the medium-term, just sort of from an M&A perspective, to the extent that you can speak to it. Sort of what incremental are you looking for -- incremental new characteristics from a regional perspective or from a quality perspective or any other aspects of variables that you're taking into consideration as you look through at incremental sort of last bit of M&A targets? And third question is just a quick update on the approval process for the remaining Mais Medicos' two campuses. Any update there you can provide? Thank you.

[Virgilio Gibbon:]

Hi, Irma, this is Virgilio. I got your first and the third question about Mais Medicos. About the dropouts, before renewing all students for the second semester, we are expecting to see a higher dropout, but when we finished the reenrollment, we didn't see that. The renewal rates was the same pattern that we had previous year and we will start renewal on January because you have a very long second semester because of the COVID and we are not expecting as we -- any problem in the renew and keeping the 100% of occupancy of the students. It's worth to mention that demand is keeping a very high level. So the candidates perceive it's very healthy and we are still in the beginning of the classes. But I think, it will be no surprised in terms of student pay for medical students in the first half of 2021. On other programs, ex medicine, will be tough, we are seeing dropouts, lower intake, the competition of distance learning doesn't make any sense for us. So we will keep very discipline in closing programs that doesn't make sense in terms of sustainability for operations and improving our penetration of closing -- getting close to 90% of our BU1 revenues coming from medical program, okay? On the Mais Medicos side, we already had the first intake for Santa Ines. That was our first license authorized. And we are expecting a very short term, maybe in weeks to have the second approval for another institution on North region. For the others, we still have five to get the final authorization and expect to be two by the end of first 2021 and the other three by the end of next year.

[Luis Andre Blanco:]

Irma, it's Luis. I'm going to take the questions regarding M&A. Talking about the M&A opportunities that we have on the BU1 first. We are very close to reach the 1,000 seat goals that we have established on the IPO. We have a very fertile pipeline. We have some views that are in our hot pipeline. So we can get -- reach this 1,000 seat goals in the short term. Moving forward though on BU1, I think we're going to be more strategic on our movements. We are -- we are keeping our disciplines on -- just focus the units that had more than 6% of their revenues on the maturation that comes from the medicine business -- from the medicine part of the business and we established our minimal IRR in those acquisitions. So we continue to see opportunities and we're going to keep our discipline on that. Regarding BU2, we -- first of all, it's important to remember that we are between signing and closing of iClinic. We're supposed to get the iClinic closing in the very, very beginning of January. And we are discussing with the Bruno of PEBMED and with Julio, the opportunities that we have to keep going on the health tech business. We have this view that we have to repower the physicians. We want that the physicians have the access to the best tools for them to get the best outcome, to give them the best efficiency, to increase their productivities, and we want them to provide the tools that give them flexibility, mobility on their day-by-day business so they can focus on patients. We have mapped the market on this health tech, on these functionalities and we are working together to see the next movement, to plug them in this future environment that we are building to provide this to empower of the physicians. So, we are very excited for the opportunities that we have in the M&A in both business units.

[Operator:]

Thank you. I am not showing any further questions at this time. I would now like to turn the call back over to Virgilio for any closing remarks.

[Virgilio Gibbon:]

Thank you all for joining us today. We remain very confident that our strategic investment will establish a solid foundation of our company. We have a very good trend to end 2020 as expected in our guidance released. So, I hope to see you all on our next quarter earnings call safe and sound. So have a nice day for everyone. Bye-bye.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.