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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
[Call starts abruptly] for Afya's First Quarter 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 contemplated by these forward-looking statements.
Forward-looking statements in this presentation include, but are not limited to, statements related to our business and financial performance, expectations and guidance for future periods or expectation regarding our strategic product initiatives, and the related benefits and 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 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, 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. The non-IFRS financial measures are not intended to be considered in the isolation or as a substitute for 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 the call over to Virgilio Gibbon, Afya's CEO starting with Slide 4.
Thank you, Renata, and thanks, everyone for joining us today. I’m very pleased to report a strong first quarter 2021 results, continue the positive trend of 2020 and also reflecting the successful execution of our strategic initiatives. We continue to deliver the combination for a strong and predictable world with high profitability and have cash generation.
But before we go through our financial highlights in detail [indiscernible], I would like to present our last acquisition. We are very excited and honored to announce UNIGRANRIO acquisition into enter definitely in Rio de Janeiro. This acquisition is a milestone for Afya. Considering the 308 seats from UNIGRANRIO, we will reach 1,159 seats acquired in less than 2 years, over delivering our guidance released during the IPO. After concluding [indiscernible] deals system.
This 308 authorized seats, translating 2,280 students at maturity represented an embedded growth of 25% considering the current medical student base of 1,800 today. Including UNIGRANRIO, our total medical students at maturity is expected to reach 1,880 students represent a CAGR of 9% from 2020 to 2026. Health science related course are important share of their business as well with more than 5,700 students. In 3 years, Afya's continuing education offering 806 health related graduate students will be integrated to our student base.
I would also like to highlight the prestigious brand and the great academic quality of institution. UNIGRANRIO has the highest quality score among all for profit universities and university centers in the state of Rio de Janeiro with a solid IGC continuous of 3.16.
Moving to the next slide to talk about synergies in this transaction. Today UNIGRANRIO has 1,800 medical students what represents an embedded growth of 25% and 2,200 medical students at maturity. And we will assure 100% of the occupancy. This large health ecosystem is a fertile opportunity to offer Afya's digital medical services and cross-sell continuing medical education programs leveraging the lifetime value of each student.
[Indiscernible] will be migrated to our shared services center. In our career plan and medical curriculum, it will also be implemented generating synergies already proved in past acquisitions. UNIGRANRIO has also a distance learning expertise with 79 distance learning centers in maximum quality score evaluation. All of these footprints and capabilities will be applied to improve margins of Afya's ex-health undergrad courses be graded on campus traditional students who are more hybrid learning process.
In terms of net revenues, UNIGRANRIO reported R$263 million in 2020, of which 49% comes from medical course and 68 also consider health related products. At maturity 2023, net revenue is expected to reach R$343 million, a 71% in medical course and 85% in health related products. [Indiscernible] maturation these transactions very accretive with an expected EV/EBITDA 4.1x
The aggregate purchase price is R$700 million with payment structure as follows. 60% paid in cash upon closing of the transaction. The remaining 40% is payable in cash in for equal installments through 2024, adjusted for CDI rate. There are 82 additional seats still pending approval. If approved, it will result in a potential earn out structured as follow. R$1.1 million per seat if the approval is granted in the first year after acquisition. R$1 million per seat, if the approval is granted in the second year after acquisition, and R$900,000, if approval is granted in the third year after acquisition. To get more information about this acquisition, I invite you all to see the presentation in our Investor Relations Web site.
Now moving to the next page, we will discuss the highlights for this quarter. First, I would like to reinforce that we will start in this quarter to segregate our results in three business units, undergrad, what used to call BU1 comprised of undergraduate medical courses, health science, and other products. Second, continuing education comprised of specialization in graduate courses. Third, digital services, which includes all services and products that compose the six pillars that our strategy is based on Content & Technology for medical education, Clinical Decision Software, Practice Management Tools & Electronic Medical Records, Physician-Patient Relationship, Telemedicine and Digital Prescription.
I'm pleased that we have concluded another two acquisitions to enhance our digital. At the end of January, we closed acquisition of iClinic, a practice management software. This acquisition consolidates our position to practice management tool, telemedicine and digital prescription pillar. At the end of the quarter, we also announced the acquisition of Medicinae, a healthcare technology company that’s specialized in healthcare payments in financial services.
Moving on the chart, we will highlight our results. Starting with our top line, adjusted net revenue grew 48% year-over-year, reaching R$403 million in the first quarter due to the consolidation of acquired companies, by duration of medical school seats, and expansion of digital services active paying users. Adjusted EBITDA also increased 48% the same period, reflecting the synergies extracted from this acquisition.
Adjusted net income was up 22% year-over-year, reaching R$160 million. Total growth was partially offset by lower financial results due to the three reasons. The increase in loans and financing in R$530 million, an exchange rate depreciation between Brazilian Real and U.S dollars of 11% from December 2020 and March 2021, combined with 29% exchange deprecation rates between Brazilian Real and U.S dollars from December 2018 and March 2020. That increased the financial results at the time due to our position in U.S dollars. And lastly, lower income from financial investments due to the increase of Brazilian interest rate, CDI and lower cash position.
Cash conversion reached 103% in the first quarter of 2021, with a solid cash position of R$966 million slightly lower than 2020 due to the payments to selling shareholders. It's worth to recognize our collection process then even consider the more flexible renegotiation policy adopted in 2020 because of COVID, our cash conversion ratio was 22 percentage points above last year's same period. The number of medical students was up 62% due to the consolidation of acquisitions and maturation of medical seats. Without considering acquisitions, the number of medical student was up 22%, reflecting only the maturation of currencies.
Moving to the next page, we will discuss the guidance issued for the first half of 2021. During our last earnings results for the full year 2020, we issued guidance on net revenue and EBITDA margin for the first semester of 2021. Net revenue is expected to be between R$740 million and R$780 million and EBITDA margin is expected to be between 46% and 48%.
Excluding any acquisition that may be concluded [indiscernible] of this guidance. For instance, when if mark is not being considered, we expect to conclude this operation on June 2021. We are on track to achieve our guidance with the first quarter results. Reported net revenue for the quarter was R$403 million, achieving 53% of the middle guidance. In terms of adjusted EBITDA, we achieved 60% of the middle guidance, with an adjusted EBITDA margin of 52% for the quarter.
This strong results stem from a combination of medical school seats and average seat maturation, distribution of digital services to our ecosystem and successful concluded acquisitions.
I will now turn the call over to Luis, who will detail our financial results.
Thank you, Virgilio, and good morning, everyone. Turning to the next slide to discuss the financial highlights of the first quarter 2021. I'm pleased to present the high growth track records that we were able to achieve in the last 3 years. Since 2019, we saw a strong trend in all key metrics.
Adjusted net revenues for the year was up 48% year-over-year to R$403 million, reflecting acquisitions and organic growth. Excluding the acquisitions, net revenue grew by 11% year-over-year, reaching R$301 million. Such increase was primarily driven by maturation of medical school seats and increase in the average ticket.
In terms of adjusted EBITDA, we almost tripled our result in just 2 years, reaching R$208 million, representing 48% growth year-over-year. EBITDA margin remain flat comparing to the first quarter of last year, reflecting higher EBITDA margins of integrated companies that were offset by lower margins of recently acquired companies. Adjusted net income was up 22% year-over-year, reaching R$160 million, partially offset by the reasons mentioned by Virgilio.
Our EPS had an increase of 6%, reaching R$1.16 per share. Cash flow generation remained strong in the 3 months period, increasing 81% to R$194 million, which resulted in a cash conversion ratio of 103% compared to 81% in the same period of 2020.
Moving on to next page for a discussion of key metrics by business unit, starting with Undergrad. Operating medical seats, increased 25% year-over-year to 1,900 operation seats. Medical students were up 62%, reaching a base of almost 13,000 students, reflecting medical seats maturations and acquisitions. Our average monthly medical tuition fees were up 6% compared to the first quarter 2020, reaching 8,700 excluding acquisitions. This reflects a combination of new students enrolling with a higher tuition rate combined with students graduating with a lower tuition rate. Talking about revenue mix, 80% of our combined tuition fees are derived from medical school, up from 77% in the same period of the prior year. In terms of total tuition fees, we reached R$414 million, up from R$252 million, an increase of 64% year-over-year.
On the next page, represent continuing education metrics. We saw a 30% decrease in net revenue due to a reduction in paid students, primarily driven by practical problems that are not being offered since August 2020, and represents an impact of R$7.9 million in net revenues and physicians' decision to postpone the intake in specialization courses due to the COVID-19 pandemic. Although with the combination of opening of six new campuses in 2021, and expanding the specialization portfolio, we have a strong intake process that started in the second quarter, IPEMED’s reached 1,800 students in April 2021.
Going to the next slide, I will discuss digital service metrics. From the first graphic you can see our active paying users per pillar. Those are their active subscribers that generates revenues. Medcel active paying students grew 50% year-over-year. Clinical management tools reported a subscribers base of more than 13,000 users and clinical-decision software of more than 110,000 active users. We have a great opportunity here to distribute our products in this ecosystem. This results reflected in a 48% increase in digital service net revenue. The last graph on the page shows that the monthly active users that reach 221,000 students and physicians all over Brazil. These accounts for approximately 30% of the market of medical students and doctors in Brazil.
Moving to the next page, I will discuss in more details, the net revenue and EBITDA growth. We saw a 48% increase in net revenue year-over-year, of which 78% are coming from the consolidations of acquired companies. On the right side of the page, we show the bridge of adjusted EBITDA for the first quarter 2021. During this period, adjusted EBITDA also increased 48% year-over-year to R$208 million with high margin as we presented in the past years. 75% of the increase is coming from acquisitions and the other 25% is coming from the synergies extracted from acquired companies that we have integrated into our [indiscernible] centers and increased occupations of medical usage to 100% and the implementations of our career plan and integrated curriculum.
Moving next to discuss cash and net debt position. Cash and cash equivalents of R$966 million at the quarter end were 8% lower than 2020, reflecting the payment of acquired companies. This cash position does not consider the closing off Softbank operation, which was closed in the -- this quarter. The total net debt was R$230 million in first quarter 2021, up from R$167 million in 2020. Considering digital acquisitions batch were closed subsequent to the quarter end and UNIFIPMOC and UNIGRANRIO acquisitions that were already signed but not closed, our pro forma net debt would reach R$1.3 billion.
I will now open the conference for the Q&A session. Thank you.
Our first question is from Gabriel Martinez from JPMorgan.
Hi, everyone. Do you hear me well? Hello, can you hear me?
Yes, we can.
Yes.
Okay. Thank you very much for the call. We have two questions here regarding UNIGRANRIO. So the first one is regarding their distance learning operation, which is very robust as you're pointing out. And we would like to see what's your plan on this business in terms of how can you extract the synergies and perhaps increase the amount of distance learning on your no health operations based on their expertise? This would be the first question. And the second question is regarding the potential for ticket increase at UNIGRANRIO. How do you see that and which levels tickets are nowadays? And also if you're thinking in creating new campus units on UNIGRANRIO level which are related only to medicine? So these were our questions. Thank you.
Hi. Gabriel. This is Virgilio. Thanks for your question. About your first one, regard distance learning. We are going to apply all the expertise coming from UNIGRANRIO as our Afya's distance learning platform and use to leverage all on campus or migrate on campus ex-health programs to this platform. So these are huge opportunities for us to give a health operation for these programs and also leverage margins for the recent acquisitions and for the following acquisitions that can come and also will be great helping us in integration [indiscernible] faster after a new medical school acquisition that comes with additional programs.
On the ticket, the average tuition for UNIGRANRIO today is around R$8,500 on medical programs. They still have maturation on enrollments and also on tuition. The first year students the tuition is around R$10,000, so we have the opportunity to maturate the cohort of these higher tuitions through the next 3 to 5 years. So still have opportunities for ticket improvements considering the cohort maturation.
About the campuses location, we have two main campuses -- three main campuses, one in [indiscernible] is the largest one. The second one is in [indiscernible] and the third in [indiscernible] where we have 100% of health operation with the new medical school that is still maturation -- still maturing. We are still analyzing and making a go-to-market of all sides, all campuses, we now have another campuses in the north of the state that maybe -- it's an opportunity to close this campuses because there's a very small operation and [indiscernible] the on campus programs to distance learning platform. So it's too early to analyze what we are doing. But yes, it's an opportunity to manage the location of those campuses.
Thank you, Virgilio. Very clear.
Thank you, Gabriel. So our next question is from Caio from Morgan Stanley.
Hi. Good morning, everyone. Can you guys hear me?
Yes. Perfect.
Yes, so great. So my question is regarding the expected margin at maturity, which would be around 50%. Is it really feasible to arrive at those margins, especially in a very competitive market, like Rio de Janeiro that have very big players? So I was wondering, what are the drivers that should lead to the -- this very strong margin expansion?
Hi. Caio. Its Luis speaking. When we make these projections for Rio de Janeiro, we've reached on the maturations portions of Medicinae revenues to the total coming around 70%. 15% of that coming for other health programs. If we compare these kind of profile with institutions that we have on our portfolio that have the same profile, we are confident that we can achieve this kind of margins. And even though that's a very competitive market, most of the revenues come from the Medicinae business on the maturations. And we see that we can have this ticket like we just settled dollars from R$10,000 approximately as the ticket for new students. So we are pretty confident that implementing now the playbook of synergies that we have in place that on 2023, we can reach these kind of margins.
Yes, if I may add here, Caio, we have our more mature schools operate in a very much higher margin than the 50%, contribution margin for this medical schools operating above 55 and some of them above 60% of contribution margin. So when you compare and make an internal benchmark of the portfolio for 80% in maturation coming from health education, more than 60% coming from medical programs. We have a very good view where we can reach in terms of [indiscernible]. So 50% in a city like Rio de Janeiro with one of the highest tuition that we have in Afya's, consider that the new students are enrolling for almost R$10,000 as the first tuition, we are very confident to reach this contribution margin in UNIGRANRIO in 3 years.
All right. Thank you guys. Appreciate it.
Okay. Next question comes from Vitor Tomita from Goldman Sachs. You can go on Vitor.
Thank you. Thank you all for taking our questions. So our first question would be what do you believe could be the main challenges in integrating such a large asset as UNIGRANRIO. And if you anticipate any potential operation and rolling out Afya's curriculum into UNIGRANRIO? And our second question also related to UNIGRANRIO is whether this acquisition could change the focus of overall M&A strategy, namely, if you are now more likely at least in the near-term to focus more on smaller targets or on digital solutions. Thank you.
Hi, Vitor. Thanks for your question. In terms of M&A, for sure, it will be the most complex acquisition in terms of integration, to have the full integration between 12 to 18 months from now after closing the deal, we expect the next few months. And first of all, is that our curriculum will be at sale to all UNIGRANRIO community. I think there's a lot of enhancement that we can implement there in terms of technology, in terms of all digital services that we plug into our curriculum to help during the learning process for the first of the 6 year. So there's a lot of plug-ins, that's a win-win in terms of curriculum for the medical programs. So I don't think there will be some kind of resistance on that.
On the other health programs, I think there's something that we also can join with our curriculum here. They have a lot of expertise in health programs. Dentistry program is very traditional in Rio de Janeiro. Also some [indiscernible] mastering doctor in programs in the health areas that we will leverage our professor portfolio in terms of doctors and masters in our operation. So it will be a very careful integration, very long-term. On the first wave, will be for sure, integrating our medical curriculum and also all the enhancements that we can plug-in for the entire student base.
In terms of focus on the digital opportunities, we are organized on our M&A area, almost in two avenues. One is completely dedicated to analyze all the digital services opportunities, and the other one leveraging medical school opportunity. So we are guarantees in parallel. So it's not hurting our strategy here in terms of opportunity costs or reducing our speeds to keep attracting new tech companies to our operation here.
[indiscernible] that?
Yes, yes.
Thank you, Virgilio. Thank you, Vitor for your questions and adding to what -- give you more color to what Virgilio just said, first of all, of all that we are very glad that we've achieved -- surpassed the goals that we provide to the market as the use of proceeds in IPO. So we are now with 1,159 seats within our portfolio. Having said that, about the undergrads opportunities that we have, we're going to keep growing the market we see that it's accretive -- very accretive for us for keep going on acquiring institution that has a portfolio for medicine that is over a 6% on the maturation. So we see much value on that. We have a very fertile pipeline on these undergrads. And with guidance, the market that from 2022 we're going to keep adding more than 200 seats per year.
And about the digital service, we have the six pillars of strategy in place. We want to fulfill all of them with our service to provide the power for the physicians in his career. So we are keeping talking with these health tax providers to see what the best entrepreneurs, the best service to aggregate in our portfolio. So the acquisitions of UNIGRANRIO do not change at all in any point of our strategy. We can -- we keep being aligned what we are being said in kind of size and kind of profile of companies and in the digital side keeping, adding service for the physicians.
Very clear, Thank you both.
Okay. So our next question comes from Cepeda from CS. Cepeda, you can go now.
Can you hear me?
Yes.
Okay. Thank you. Thank you. Thank you for the time, for the questions. Just one question. We see that the acquisition of UNIGRANRIO was, of course, a very large acquisition, a distinctive milestone in your history. And thank you for showing the pro forma net debt. My question is about do you intend to go for more capital in the short-term, so you can accelerate the acquisitions, specifically, of Medicinae schools? Or do you -- or are willing to consolidate a little bit more the undergrad business before going for more acquisitions and concentrate in the tech business? Thank you.
Hi, Cepeda, it's Luis here. Thank you for your questions. About the capital strategy, what we have, first of all, it's important to remember that we generate a lot of cash, even in these difficult times. The adjusted cash flow generation was over 100% due to our successful, I would say that policy of learning that we have implemented on the COVID that was proved very, very strong. And providers these cash flow -- strong cash flow generation in these -- in the first quarter.
The second point is to remember that this number do not reflect in the net debt position. The operations that we've achieved with Softbank as net debt [ph] that we're going to perceive debt and cash with flows of these operations more than R$800 million in May. So we have -- in the pro forma base because of these operations, we have very strong cash flows, a strong cash positions and important to highlight that we've negotiate a seller's finance with this new offer, UNIGRANRIO that we just paid a 60% the moment of the close, the 40 remaining percentage we're going to pay in the next year's through a sellers finance. So we are keep coming the targets in [indiscernible] segments, okay.
Very clear. Thank you.
So just to remember, if you want to ask a question, just raise your hand. The last question comes from Lucca Brendim from Bradesco. You can now go, Luca.
Okay. Can you hear me?
Yes.
Okay. So my question is regarding the continuing education. We saw in the first quarter that it was impacted by physicians' decision to postpone enrollments. So my question is, should we see a positive effect from pent up demand going forward in the segment? And if so, what's the magnitude of this impact? And when should we start to see this? Thank you.
Thank you, Luca. That's a important point. On 2020, we have an impact delivering the practical programs for graduate students. So the second half intake was very, very, very low. And we have an impact on the rhythm of net revenues recognition on this first quarter. That impact just for [indiscernible] around R$8 million when you compare to the same period last year. But on the other hand, this practical classes resume this year. And also the intake that we closed at the end of April was very strong as we announced during the Afya Day. We enroll more than twice the volume of students that we had last year and the same period. So the student base now passed the inflection point, and we'll start seeing this result in the second half. You still see some reduction on the second quarter.
But under the second half, we'll see a growth on this line and we expect it to be very aggressive growth for the following semesters. We just launched eight units. Last year, we have only five. Now we are operating with 11 and in the second half we have 13 centers distributing our graduate programs. Also in terms of programs, we had last year 16 programs, and now we have more than 60 being offered through all these centers. So it's a huge opportunity to leverage this operation and have a very good growth rate.
I think it's worth to mention that in this quarter, we are seeing digital services growing very fast. [Indiscernible] not only because of the acquisition, but on organic, we are just showing Medcel results as this would have been 15% pure organic year-over-year. But for the second half that when we start joining Medcel -- I'm sorry, IPEMED and the other health care companies, we expecting a 20% MRR [ph] above the second half last year because of the number of doctors enroll in our platform. So this is very important for the future forecasts on the digital services.
Okay, very clear. Thank you.
Okay. So received here a question in our chat. And it is you have an EBITDA guidance for the year of 2021. Could you provide an EBITDA breakdown between the business units? So we have a guidance actually that's quite semestered. We release guidance each second quarter and fourth quarter for the following semester. For this first semester, it is R$740 million to R$780 million of net revenue and EBITDA margin from 46% to 48%.
Regarding the EBITDA margin for business segment, we did not disclosed it. But we can give you a better understanding of that if you want please just follow-up with us and send me a mail on investor relations.afya.com.br, okay? I think that we do not have any more questions. I want to thank you all for participating today. And please feel free to contact us if you still have any doubts. Have a nice day.