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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good evening, everyone. Thank you for joining us for Afya's First Quarter 2022 Conference Call. With me on the call today is our 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 expectations 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 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, 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 isolation or as a substitute of the 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 three.
Thank you, Renata, and thanks, everyone, for joining us today on our first 2022 conference call. For us in Afya, this quarter shows another great start for the year ahead. We can finally see the pandemic losing its trend, and I'm proud to present once again above the expectation results, reaffirming the success and resilience of our business, along with high and predictable growth and another record cash generation.
During this call, I will run through four main topics. First, I will remember some key points presented at our last investor and ESG Day, which took place last month. Second, I will reinforce our 2022 disclosed guidance with expectations of another round of growth. Third, we'll talk according on the transaction, an active change of control. And last but not least, on our fourth topic, I will present our financial highlights of the quarter, demonstrate our solid performance.
So moving now to Page number 4. On our last Investor and ESG Day presented to you on April 7. We discuss what makes us unique, where are we having to how we are building the future, what sustains our strategy, both on the education and digital services segments and our ESG accomplishes and expectations for the future.
Inside these topics, we can highlight, first, our digital services ramp up with the expansion of our ecosystem and implementation of our B2B and B2C strategies, building our addressable market with after digital health. Second, our business resilience which is guided by high net education demands, pricing power and industry barriers to entry.
And third, our ESG evolution, bringing up relevant points successfully performed such as the adoption of clean energy, social impact in vulnerable areas and embedded governance and ESG culture in the company.
In case we have missed the event, please feel free to check it out on our IR website page. In there, you'll find out all this information much more. Also, our 2021 Annual Sustainability Report is now available for all of you to check it out. This is our third addition of the report, and we are very proud of our achievement so far.
We have consolidated our leadership position in medicine and continue our inroads into the digital medical service segment, which is consistent with our proposal to be the physician partner in all stages of their academic training in Professional Journey.
This strategy which guides our business as well as unfolding its detail in the report, along with the results achieved from our operations. In it, we have also gathered information on our management structure and ESG practice. In addition to the social environment impacts we produce through our operations. We encourage you to join reading.
Moving to Slide number 5. As presented on our last results conference call, the resilience and high predictability of our business model enabled us to introduce our new guidance for the entire year of 2022. Take into account that successfully conclude acceptance of new meds with students, insurance, once again, 100% of occupancy for the year of 2022 in all of its medical schools and also the recovery of continued education segment.
Net revenue is expected to be between R$ 2.280 billion and R$ 2.360 billion, and adjusted EBITDA is expected to be between R$ 935 million and R$ 1.050 billion for 2022. Excluding any acquisitions that may be concluded after the issuance of this guidance. These figures are showing another strong year ahead and represents an incredible operational growth of more than 3 times when compared to Afya's results in 2019 when we became a public comment almost three years ago.
In the next slide, we will talk about this important exit operation, even though it happened after the quarter. This month, we announced the closing of the transaction where Bertelsmann, which has been a relevant partner since 2016 acquired 6 million Class B shares of Afya from Esteves family. As a result of the closing of this transaction, and will beneficially own approximately 57.5% and 33.1% of the voting interest and 31% and 17.9% of the total shares, respectively, in Afya.
As, we are delighted that Bertelsmann, one of the world's leading media companies with a significant footprint in education sector has advanced its commitments to after long-term strategy through its evaluation of increasing its stake. Also, we reinforce that we will continue to benefit from the vision and commitment of Esteves family with their significant shareholding and active participation in our company.
And now moving to my last two slides on this presentation, I will show our financial highlights for the first quarter, along with the first session takeaways. As I said at the beginning of this call, we have started 2022 with above the expectation results. Adjusted net revenue increased 41% year-over-year, reached R$ 567.7 million followed by an adjusted EBITDA growth of more than 30% year-over-year, reaching R$ 270.8 million with a margin of 47.7%.
One of the highlights of this quarter is the growth in earnings per share, reaching R$ 1.42 per share, more than 22% above last year. Even consider a higher net debt level and market interest rate, this result reaffirms our great operational results, capital allocation discipline on buybacks and M&A and efficient capital structure.
We also reported another great adjusted operating cash flow generation, ending the quarter with R$ 293.6 million, 51% higher than last year. We confirm our tripod of strong growth, profitability and cash generation.
Moving now to the operational update of the quarter. Our underground medical student reached more than 7,500 students represented a 36% growth compared to the same period last year. Approved seats grew 29% also in the same period. These results confirm our growth strategy that combines organic expansion to our capacity to acquire, consolidate and integrate new seats to our operation.
In this quarter, we can gradually see continued education recovery after the pandemic impacts on practical classes, presented a strong revenue growth of 24% year-over-year. On the digital service highlights, we ended the quarter with R$ 47.5 million, and our ecosystem reached 260,000 active users, a growth of 17% year-over-year. This represents more than 33% of the Brazilian market of physicians.
To summarize, all I said so far on the next slide, Afya's predictable strong growth, high profitability and cash generation are related to high and resilient demand, continuous pricing power, margin expansion and M&A expertise. After first quarter 2022, even considered the adverse macro scenario, we already timed the top of 2022 guidance and expecting another round of solid results with continued education taking off and a huge upside on our Blue Ocean Digital Health Services opportunity.
I will now turn the call over to Luis Blanco, our CFO, to give more color on the financial and operational metrics. Thank you.
Thank you, Virgilio, and good evening, everyone. Moving to Slide 10 to discuss the financial highlights of the first quarter. It is with a lot of satisfaction that I presented another strong quarter results for Afya. Adjusted net revenue for the quarter was up 41% year-over-year to R$ 568 million, reflecting the maturation of medical seats increase in the average ticket of medical programs and consolidations of acquisitions of medical schools and digital services.
Also important to mention to continue education recovery, which I will give more color further on and the adjustment of R$ 1.4 million in discounts in tuition fees granted by individual, collective legal and public procedures related to COVID-19, mostly ceased it in December due to the Supreme Court decision.
Adjusted EBITDA for the quarter was up more than 30% year-over-year to R$ 271 million, while adjusted EBITDA margin decreased 390 basis points to 47.7%, mainly to the consolidation of acquisitions with lower EBITDA margins and the decrease in net sale, mainly due to high competition in residency preparatory markets.
Adjusted cash flow generation has been shown quarter-after-quarter growth. And in this one, the increase was of 51% year-over-year to R$ 294 million, which resulted in a cash conversion ratio of 113% compared to 103% in the same period of 2021.
Adjusted net income for the quarter was R$ 167 million, 4.5% higher than the same period of the prior year. The GAAP improvements between net income and adjusted net income in this quarter was mainly related to the decreases of 40% and 79% in non-recurring expenses and in share-based compensation expenses.
Moving to Slide 11 for discussions of key operational metrics by business unit. Starting with the undergrad programs. Our number of medical students grew 36% year-over-year, reaching more than 17,500 students with proven medical seats increased 29% year-over-year to 2,759 approved seats. Considering additional organic and inorganic seats expectations, we have an upside to achieve more than 32,000 undergrad medical students at maturity.
The medical school net average ticket for the year, excluding acquisitions, was R$ 7,900 and 8% growth compared to R$ 7,300 from the prior year.
In terms of total tuition fees for the quarter, we've reached R$ 649 million, up from R$ 418 million from the prior year, an increase of 55%. Talking about revenue mix, 77% of these are derivative from medical school students and 89% from health-related courses represent continued education metrics.
In this quarter, we saw a great recovery in our continuing education segment, which reported a strong intake process, increasing the number of students by 9% quarter-over-quarter despite the decrease of 6% year-over-year. Net revenues increased 24% when compared to the same period of the prior year. This recovery was specialty due to better performance of repayments, mainly related to the interruption of the effects of COVID-19 pandemic.
Moving to Slide number 13. I will discuss the digital service operation metrics. On the first graph in the slide, you can see the total active payers which are the ones that generate revenues in B2P. So far, in this quarter, we have reached a number of 176,000 paying users, a 26% growth year-over-year.
Our ecosystem reached 260,000 monthly active users this quarter, 17% higher than the same period of the prior year representing more than 33% of all medical students and physicians in Brazil, as Virgilio said before. Digital service net revenue decreased 11% due to a lower performance of net sale in this quarter, which was caused by higher competition in the resident spread markets, as I said before.
Also from now on, since we have disclosed our B2P and B2B strategy expectations, we will start to break down our digital service net revenue within these 2, as you can see on the last graph. So from the R$ 47 million of the digital service net revenue, R$ 41 million came from the B2P and R$ 6 million came from the B2B once the B2B strategy is still in the beginning.
Moving to the next slide. Speaking of our digital service strategy, we have exciting news to share with you today. In addition to Alidamitcina and Catopapers, we are proud to announce another business combination, our third of 2022.
Glic, a free diabetes care and management app solutions for physicians and patients that use technology to improve diabetes educations and daily routine practice connecting users, devices and health care providers. With these acquisitions, we will add 1,100 active physicians in our ecosystem and monitor more than 90,000 patients.
These business combinations represented Afya's entry into physicians' patient’s relationship pillar and further strengthens our strategy and ecosystem. Our information related to acquisitions is now available in our IR website and can be accessed through this key.
And now moving to my two last slides. I will discuss our cash and net debt positions, also giving more color on our cost of debt. Cash and cash equivalents at the end of the quarter were R$ 789 million, a decrease of 18% compared to the same period in the prior year.
Net debt totaling R$ 1.4 billion compared with a net debt of R$ 230 million in the first quarter of 2021. This increase was mainly due to 9 business combinations and license acquisitions executed during this 12-month period and payments related to share repurchase programs, partially offset by free cash flow generation.
On the next slide, you can see a table with breakdown of our gross debt and our average cost of debt consider our main debts, the SoftBank transactions, lowers in finance and accounts payables to selling shareholders. This ends our prepared remarks.
I will now open the conference for Q&A section. Thank you.
[Operator Instructions] The first question comes from Cepeda from Credit Suisse. Cepeda, you may now go.
Thank you for the time. I have some questions here. The first is about the continued education. We see that there was a recovery in the tickets, which is very healthy. Although there was a small decrease in the student base. So my question would be if the tickets that we are now seeing are something that we expect going forward? Or if there is additional potential in these tickets?
The second question is about the non-health courses that we see that the student base is declining considerably 11%. And we see currently that the other educational groups who have similar businesses. They are at least now stabilizing the student base. So my question would be if it's not the case to double down the effort to sell some of these courses knowing that the other players are kind of stabilizing the business? Thank you.
Thank you, Cepeda. It's Blanco speaking. I'll take the first question. Regarding the continued medical education segment, we have to -- we have in mind that we have our major operations in the segment being. But it's not the only one. We have some operations that have post graduate courses in their offerings.
So what happened in this quarter that we continue to decrease these courses in other institutions and increase the amount of students in the e-payment. So it's a question more of mix between students that we have because we are focused all our efforts on growing the IPEMED brands, the IPEMED offer as our flagship in the continuing medical education. So it's more a question of mix decreasing the other offers, other than IPEMED that then increase just in ticket.
Before Virgilio gets the second question, Cepeda, it's important to mention here that the net ticket is higher than in other courses that we have. So sometimes we acquire institutions such as UniRedentor that comes with wet courses, as Luis already said and they have different tickets. So if you look for IPEMED ticket, it's close to something around R$ 3,000 to R$ 4,000 per month.
And in these other institutions, we have tickets with lower value like R$ 1,000, R$ 2,000 per month. And why is that, remember that mostly of IPEMED activities are related to in-person activities, right? So it's attending physicians. And in these other positions, we have a different kind of courses, mostly of their income. So in the end of day in the future, we should have just one model that we should be the IPEMED model.
Just add about the and remembering that we launched 7 new campuses just offering this transitional graduate, a lot of seats type of content or very high-value tuition. So the trend is that we'll be much more concentrated on this type of program, high value. So the mix effect will also help in terms of ticket. And remember that we are resuming and we'll see for the following quarters, the student base continues to grow and be even higher last year, even consider that we are showing this offering other institution different from IPEMED.
Taking your second question about the other programs. It's worth to mention that we also saw some important growth in other health science programs. So we saw on an organic base, we resumed growth on our student base for high-value ticket that's much more important on our operation.
And also, we have some good trend for these programs in terms of onto issue. Different from health science, a lot of other grad this type of product, most of them, we are seeing a negative contribution, mainly on the new acquisition that we had in the last two years.
So we will continue our discipline to shut down this type of product that is not generating value. It doesn't make sense to continue on our offer and also it's not sustainable in our operation.
Of course, that if we have any campus that we can separate and sell in the market, we will do it. But remember that in terms of regulation, this is complicated, because we have the license operate in the different type of programs together on a university center or in a university. So -- but it's lower than 10% of our undergrad total revenue, we will continue to dilute all the undergrad programs on our operation.
Okay, very clear. Thank you.
So our next question comes from Victor Tomita.
Hello, good evening everyone and thanks for taking our questions. I have two questions from our side. The first one is on what is your more general strategy for physician patient relationship software? And whether we should expect further acquisitions to complement Afya's offering portfolio in that new pillar?
And the second question would be also on digital, we saw some reduction in monthly active users for telemedicine and digital prescriptions. At the same time, as we saw an increase in monthly active users for clinical decision software. Is that being driven mostly by people resuming face-to-face consultations and more activity at clinics and hospitals? Or are there any seasonal factors or other factors that we should take into account?
Virgilio speaking here. It's good to hear from you Victor. Maybe I will start with the first question. So on the physician patient relationship in which we just acquired since we have announced it. Our main goal here is to improve the relationship on treatment, mainly on chronical treatments like the case of clinical supports the diabetes treatment, generate more demand for physicians and make it easier for patients to improve the treatment and to adhere the treatment.
So the idea is to increase our penetration senior physician cohorts -- in most of the case, those are the physicians in-charge of the chronic disease treatment. We are also enabling the B2B offerings that we are planning to have, demand generation. We -- by chronic disease treatment, we can improve and increase the demand generation for medications, for tests and for any operations in a hospital, for example, and also to allow a more intelligent access from the pharmaceutical to those patients and physicians. This is the first question.
On the monthly active users, so telemedicine and prescription are both part of our practice management suite. So this is get an increase year-over-year. So we are seeing more clinics using our practice management, too. Although you're right, so telemedicine maybe steady, not growing so fast anymore, but we are not disclosing the access to those. So the overall number of physicians using our solutions are increasing. And this is an important enabler for our B2B strategy.
And Tomita, it's Blanco speaking, just give you more color why we have this reduction on now on the clinical management tools, is that why we exclude from the first quarter 2022 numbers, all the assistance from the physicians that are users in the systems but they were not a physician itself.
So every time a physician hires iClinic, for instance, they put their systems as a user as well for free. So we are counting the number of users. From the first quarter of 2022, we exclude this assistance from the MoU. And we put a note on the MoU table explaining that. So we are not showing this number.
If we put this axis that are iClinic users on the spreadsheets almost 20,000 non-active users. We're going to jump to 41,000 users. So the growth in the number of the users would be something about 50%. That is in line with the number of the iClinic payers. So that's just a question to better show the monthly activity users on this metric. We decided to exclude this number from the first quarter 2022 ahead.
Very clear. Thank you. And Sorry.
No, no problem. Just to remember well that we have been doing a great work with our data. We made a bet a lake that we also said about that during after day. And that's the -- what we want to have the better quality of data to understand who is the first one that is using our products. And we understood that was fair to the investors to see to understand how many physicians were using not only assistance. And we didn't have the same view of this data when we acquired the company and what we have at right now. So it's just a way to be more clear for you guys.
Very clear. Thank you all very much.
Of course. Next question comes from [indiscernible]. Muka [ph], you may now go.
Hi, everyone. Thank you for taking our question. So can you please give us further detail on the competitive landscape for Medcel? And what could we expect for the top line dynamics for the rest of the year? And then secondly, if you could please comment on the integration process of when the recent developments on this end, would be very helpful? Thank you.
I can start here with Medcel competition landscape. So in 2019, we usually -- we used to have 4 to 6 players in the market. And the benchmark was and it still is somehow med group with more physical course. During the pandemic time, in all the advance of Internet and digital influencer, a lot of new competitors arised. So we have nowadays 24 to 25 -- 24 to 30 new competitors in the market, most of them with simpler offerings. So their offerings are more, I would say, sophisticated -- the options are more solicited in the market.
So there are a lot of competitors offering a specific content for a specific residence program for a specific part of the content like, for example, question simulations or much more competitiveness in the market share in the market right now. And we are working on our content. That is a very good content, high-quality to repackage it to be more competitive in this new scenario of the residency program market.
We are also seeing some delay in the residence testing. So it seems that most of the students or some of the students are preferring to have higher salaries in the market as there are a lot of open position for physicians and delay a little bit the decision to take residence program or they may be also more in debt along all these years with the pandemic. The families struggle a little bit. So we're seeing more competition on the company side and maybe a more steady demand on the demand side.
I'll get the second question here. Luca, I don't know if you have any additional question or comments about later explanation.
That was very clear. So -- if you just please comment on no integration process, that’d be great, if you can?
Okay. So we are very anticipated in the process of the academic integration, the new provider in place that help us to move our tuition price for fresh for new students that we roll in the beginning of this year, and we will enroll in the second half of 2022. It's already in place. So all the top line and guarantee 100% of occupancy was already implemented. Also we have a successful record intake for ex medicine programs, health programs and also different than other undergraduate programs.
So helping us to ramp up our results on internal. Remember that when we close the operation, the contribution margin on gene was close to 25%, and we are close to 40% as a contribution margin coming from the units. What we have in front of us for the next quarters, we're expecting to have the full integration process, our shared services and other rollouts by October of this year, second half.
So we'll have another round of synergy that you can extract and also maturing and scaling the medical program will help us to even go further in terms of margin contribution. So just a summary here. So we are better than expect in terms of integration in our calendar here, and we expect to be fully integrated by October of the 2022.
[Operator Instructions] Next question comes from Jessica [ph] from JPMorgan. You may now go, Jessica.
Thank you for taking my question. How have the candidate set rates you've been behaving within Afya units? And how are medicine tickets expected to behave?
Jessica, so we closed this first half intake on average around 5.1 candidates per seat, all seats in Brazil. Of course, that we have some regions that we have higher ratio candidates per seat, but the national average was 5.1%. So it's kind of flat year-over-year in terms of this ratio.
In terms of tuition moving forward, we have changed our price a little bit over 8% in this first quarter. The largest -- the highest changing on price was for the new acquisition that was on and also that was not counted on we consider the average because we exclude the acquisition to count the average tuition year-over-year. So we keep considering everything together, we would move around 8% and 10% by the end of this year in terms of medical programs.
Yes. And complementing this question, Jessica. Remember that we are gaining more value to our student’s correct vision. So we now have whitebook integrated to our students. Medcel is something that we already did. We have now into 4.0. That's a new initiative. So all of this we are doing so they shouldn't can perceive and have more value when they are in age. So in the end of the day, we want to have reasons that we can increase prices in the future and the student can perceive why they are receiving a premium offer.
Having said that, and it's important to highlight as well that we put it added to our offering to our students, Medical Harbor as well and mostly that we've launched for ongoing the students, the Medcel station offer, that's the digital way digital value propositions for the students for the first to the fourth year. So it's being tested through all the students in. This offer is very, very interesting and getting the feedback we're going to provide these solutions for every office students and after it to offer these to other institutions as well.
So our next question comes from Vinicius Ribeiro from UBS.
Hope everyone is listening to me. Two questions on -- and the first but not necessarily tie results, we saw a change in the rules, that they regulate the medicals seat granting process. I just wanted you guys to clarify if that changes kind of something about your operations and your prospects of gaining new seats going forward?
And our second question, it's also a little bit on side. We are seeing, in addition to the pressure on the public equity markets, the sort of venture capital work is also being be with higher interest rates and all that, which might have some repercussions going forward. Just wanted to get your sense on how does that change your strategy on capital deployment going forward, if you guys are already seeing some better opportunities if that's some if valuation should change to such extent, so just if you guys provide some color there would be helpful?
Vinicius, I'll get your first question here, then Blanco will help me with the capital allocation question. So under the management because the rule that was released last week was at kind of and in the procedure how in institution can ask for additional seats under the Mais Medicos programs. So that was the main idea behind this normative rule last week.
And for today in the morning, we have this normative role cancel. So they return what was before the normative rule we released last week. That was you can only ask for once to increase the seats for any Mais Medicos campuses from a Mais Medicos Mais Medicos. So no change and the idea was trying to give that more clarification for this new process. But to keep the same rule that was expected before the rule was released.
Vinicius, Blanco speaking, about the -- your second question, when you mentioned the VCs pressures, I understand that you -- you want to talk about the digital completeness of our ecosystem. Within the acquisitions that was just announced today, we completed all the pillars in our view. So we have the most completed ecosystem offering for physicians in the country with this 260,000 active physicians and medical students using our physicians. Then what we want with these solutions to increase usage to increase penetration within that.
So in terms of offer, we are now satisfied with the completeness of it, and we are going to move forward. We can move forward in acquisition if these acquisitions add volumes on these offers. But for now on, as we complete the patient physician’s relationship, we are where we completed the ecosystem as a whole.
Giving more color, if we talk about this or let's talk about the undergraduate as well. What you can expect that we keep our disciplines on business combinations. We still see that we can grow 200 seats per year as we guided the market. So we are working on that. And of course, we know that the increase in capital that -- the cost of capital that we had with this increase of interest rate, increase of risk and we keep our discipline in allocating the capital.
And allocating the capital, we have to mention the buyback as well. We just concluded in May, our third buyback program. So we are 100% completed, and we keep evaluating opportunities, keep in evaluating the possibility to put in place another buyback. But -- as of today, we disclosed to the market that we have completed our third buyback program, 100% in the beginning of May.
Got it. Thanks, Virgilio and Blanco.
So as we don't have any more questions, I would like to thank you all for participating today. I make myself available if you need anything else from the Investor Relations. And just a reminder that we just disclosure today our sustainability report. Okay, guys. Thank you so much, and have a good night.