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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 morning, ladies and gentlemen, and welcome to Afya's Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this call will be recorded.
I would now like to introduce your host for today's conference, Renata Couto, Afya IR Manager. You may begin.
Thank you. I'm pleased to welcome you to Afya's Second Quarter 2019 Conference Call. With me on the call today is Afya's CEO, Virgilio Gibbon; and CFO, Luciano Campos.
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 involves known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those contemplated by those 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 in our expectations regarding the market.
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 information available to us as of the date hereof. You should not to rely on them as expectations 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.
Thanks, Renata, and thanks, everyone, for joining us for Afya's second quarter conference call. The year of 2019 has been transformational to our company. Afya became the largest medical education group in Brazil and the only player who provide education and digital content in every stage of the medical career. In 19th of July, we concluded our IPO at NASDAQ, taking a huge step into our future. This achievement demonstrate the tremendous commitment of our team, which remained devoted to our mission to create an extraordinary lifelong learning experience for medical and health care professionals, creating strong value to our shareholders and society.
During the first semester, we continued to deliver robust growth, much expansion and cash generation in line with our strategy. In addition, we have concluded an acquisition of 120 medical school seats and confirmed the authorization of a new medical school with 50 medical school seats, taking our network to 1,522 authorized medical school seats as of today. We will remain focused on the medical career, generating high predictable growth with high profitability and cash generation.
Moving now to Slide #4. We can see in more detail the recent acquisition of IPEC announced on August 14. IPEC has a campus located in Marabá, the State of Pará, and it's authorized to offer 120 medical school seats. We expect to start Marabá's operation this semester and to invest BRL 3 million to BRL 5 million of CapEx and less than [indiscernible] to enhance the campus infrastructure. This acquisition is aligned with our strategy to expand medical education network and enter into the new markets.
Moving on to the next slide. We recently confirmed the authorization to operate the Mais Médicos Medical School in Abaetetuba, also in the State of Pará. Abaetetuba is 1 of the 7 new undergrad campuses we were awarded in connection with the Mais Médicos program, the largest number awarded to any education group in Brazil. This school adds 50 medical school seats to Afya, and we expect to start operating in the second semester of 2020. Considering the IPEC acquisition and the new authorization of [indiscernible] is totaling more than 1,500 right now.
So now let's take a look at the second quarter highlights. It has been a positive first half, and we are delighted to report our results. Our ability to execute our business model strategy based on organic growth and acquisition has allowed us to grow our top line, improve our margin and cash generation.
This semester, we delivered 27% CAGR over our pro forma net revenue, totaling 5,600 medical undergrad students, an increase of 62% when compared to the same period of last year, and 10,500 students in our continuing medical education business unit. Our team continues to focus on growth and profitability. As you can see in our pro forma, it showed a net income of 75 CAGR since 2017 and an operational cash conversion ratio of 80%.
Now I'll turn this presentation to Luciano Campos, our CFO, to detail our financial results.
Thank you, Virgilio, and good morning, everyone. Before we dig into the numbers, please note that the pro forma figures give effect for the acquisition of Medcel by Afya in Brazil, which was completed in March 29, 2019, as if it had occurred on January 1, 2019.
Going to Slide #7, we can see that historical net revenue totaled BRL 323 million in the first semester of 2019, representing an increase of approximately 137% year-over-year. Our pro forma net revenue totaled approximately BRL 358 million in the same period. This increase was mainly due to organic grow and acquisitions. Since June 30, 2018, we have acquired 3 medical schools, the FADEP, Novafapi and FASA, 1 medical residency preparatory courses provider, Medcel, and 1 medical specialization institution, IPEMED. Adjusted EBITDA totaled approximately BRL 122 million, representing an increase of 145% year-over-year. The adjusted EBITDA margin increased from 37% in the first half of 2018 to approximately 38% in the same period of 2019, mainly due to productivity gains. Pro forma adjusted EBITDA totaled BRL 145 million, representing a margin of approximately 41% for the first semester of 2019. Finally, adjusted net income totaled approximately BRL 90 million, representing an increase of 110% year-over-year while our pro forma adjusted net income totaled BRL 110 million in the first semester of 2019.
Going to Slide #8, revealing only pro forma metrics to show that we ended the first half of 2019 on a high note with robust financial results. For instance, our pro forma adjusted EBITDA margin have increased from 27% in 2017 to 36% in 2018 and approximately 41% for the first half of 2019. This margin expansion has been mainly due to productivity gains and a higher contribution of medical tuition fees in the total amount of combined tuition fees, as we can see in the next slide.
So going to Slide #9, we can see that the medical schools tuition fees represented 68% of total combined tuition fees in the first semester of 2019, an increase of 5 percentage points when compared to the same period of 2018. This increase was mainly due to maturation of our campuses and acquisitions of medical school seats, as you can see in the first graph, and average medical tuition fees adjusted above inflation, as you can see in the second chart. On Slides 10 to 12, we present a reconciliation between financial performance and adjusted figures. We believe these measures provide investors with a supplemental measure of the financial performance of our core operations that facilitate period-to-period comparisons on a consistent basis.
With that, I would like to turn the floor back to Virgilio so he can present our final considerations.
Thank you, Luciano. So the first semester of 2019 was a transformational milestone to us. I couldn't be more proud of everything we have done. We listed our company on NASDAQ, acquired 3 new institutions in this first half and became the largest medical education group in Brazil, increasing even more our responsibility with all Afya's stakeholders.
We will continue to integrate our recent acquisitions into our operational model, reinforce our culture, leverage our distribution channels and pursuing potential M&A that will complement our services through all the medical career and generate more value to all Afya's stakeholders.
Thank you all for joining us, and I will turn the call over to the operator for the Q&A session.
[Operator Instructions] Our first question or comment comes from the line of Susana Salaru from Itaú.
The first one is related to Medcel. We saw the number of the descriptions in the quarter. It reached 8,600 students. We're just also wondering how is the seasonality for the intake of Medcel, if it's more concentrated in the beginning of the year or in the second half of the year? Because we were expecting actually an acceleration. So I just want to confirm if our forecast for an acceleration makes sense. That will be for Medcel.
And if you could comment a bit about the M&A. We remember that at the time of the IPO, you were in talks with 300 med seats -- actually 300 meds who are with already MOU. How that evolved since the deal?
Susana, it's Luciano speaking. Starting with the first question about Medcel. It gives us actually the opportunity to explain a little bit more the seasonality. We actually included a slide also to understand when each company contributes to our results in historical gains on a pro forma basis. Please have a look on the appendix for that particular information.
But particularly to your question, Medcel is now -- is in the runoff of the students that acquired preparatory courses last year and are preparing to have their tests, their exams, towards the end of this year. So we do not have many new sales of these preparatory courses in the second quarter and in the third quarter, and we resume the biggest portion of the new sales in the fourth quarter and first quarter. An addition of the seasonality of the sales itself, there is a seasonality of the revenue recognition that currently is based on the delivery of the books that they should have also received. That portion brings almost 90% of the revenues of Medcel recognized in the fourth and the first quarter of every year, okay?
Pardon, the fourth and the -- sorry, Luciano, the revenue recognition happens in the fourth quarter and in which other quarters? Sorry.
In the first -- in the fourth and the first quarter of every year, that's the majority of the revenue recognition. So to be clear to your question, you have to think about 2 seasonalities. One is sales, when then the number of students is defined.
And the second one is the revenue recognition seasonality. That's when revenue then shows up. So in your projections, you should think about a declining number of students in the second and the third quarter and then rising up again in the fourth quarter and first quarter with new sales. The revenue recognition is then mostly in the fourth and the first quarter.
Yes. And Susana, this is Virgilio. It's worth to mention here that we are fully aligned with our plan on the Business Unit 2, considering the seasonality in the second quarter and also the third quarter. So we are aiming as the Business Unit 2 to deliver what we are expecting in the long term.
The second question about M&A. We are -- we remain very active on that front. We don't have an update on the number of MOUs. It's been increasing the number of active conversations. We already delivered the acquisition of Marabá with 120 seats. So we are, I would say, in line to deliver our plan to acquire 1,000 seats in future years, as we explained during IPO.
Our next question or comment comes from the line of Thiago Bortoluci from GS.
First of all, congrats on the long-awaited IPO. We are pretty sure there'll be a long and [indiscernible] appearance. We actually have a few questions, all of them are related to growth. The first one is on seasonality, following up on Susana's point. Given the lack of few pro forma historical figures, it is difficult for us to reconcile where this quarter is relative to your whole number projects for us to be careful in your projects, right? You already commented on Medcel. But on a consolidated basis, could you please give us a rough estimate of how much the first semester should represent in terms of 2019 full year sales and EBITDA? This is the first one.
The second one is related to Mais Médicos. You just announced that you got a favorable ruling from the Ministry of Education, allowing you to launch another unit in the State of Pará. This is on top of the 5 campuses that are already in the pipeline, right? And if yes, what's your plan for each one of those? And when do you expect them to have them open for intakes?
And finally, the last one, I promise, on M&A. You have a long track record and a pretty consistent historical on M&A multiples, but it's also true that competition is catching up. For example, you've mentioned the recent news from [ Promina ] and from [ FASA ]. I would also add that your own IPO could be another important valuation reference for peers and for potential targets. By inching, are you seeing an increase in competition for a new office? And what should we expect from average prices going forward? Those are the questions. Sorry guys if I took too much time.
Thank you, Thiago. It's Luciano here, and starting with the first question, the pro forma and historical numbers. Please have a look on our Slide 16 in the presentation, it's in the appendix, to give you exactly which companies are contributing to each result.
There is another way to look at seasonality in terms of semester. The second semester should be stronger than the first semester for 2 reasons. We have several medical schools in the maturation process, so they have an additional class in the second semester compared to the first semester. And we have been able to sustain our strategy to keep 100% occupancy of those seats that is staged today at the prices that we expected, no changes in the price and quality. So that gives you a sense of how the second semester can be stronger than the first.
And for the core products in the Business Unit 2, as we call it, that includes Medcel and IPEMED. Both operations are growing, especially in the core products. And then you can also expect a better contribution from the second semester than the first semester also in the second business unit. We are considering preparing a guidance for the second semester that can help you guys with these seasonalities, which are recognizable. Difficult to analyze, but we will come back to the market when the numbers are solid, okay? But we are very confident that second quarter results contribute to the annual figures that we expected and have been discussing with the market.
Second question was about...
It was about the Mais Médicos job. We are expecting to start enrolling new students. So 2 of this is new institution. Still in 2019, we are waiting the Minister of Education to confirm the visit at the beginning of this semester. Right now, we have the construction already placed. It has also got the recognition to open the enrollment for this half. The other 3 institutions, excluding Abaetetuba, we are expecting to start in the beginning of 2020. In Abaetetuba, we start to have the first enrollment in the second half of 2020.
And about your last question about the M&A competition. We only -- we always have seen in this market competition in the assets and the institution that we acquire in the last 2 years. So we continue to see a very good pipeline. Our pipeline is very fertile at this moment, and we are not seeing any difference in terms of negotiation, what we have in the last [indiscernible] you had right now, very good result in terms of acquisition for the next 12 to 24 months. It's a very good asset that we are having conversation right now in terms of MOU and initial conversations at this moment right now, okay?
Just adding about the pro forma -- the first question, we -- just remember that we acquired FASA in April of 2019. So it's a very large medical school. We also have 600 students that just add revenues 2 months in the second quarter. This institution will also be fully integrated on the second half and also adding value, still adding more students above the maturity of what we had in the first quarter. So just to add in that. We still have FASA with more than 600 students in our student base in the second quarter.
Our next question or comment comes from the line of Marcelo Santos from JPMorgan.
The first question is about the seasonality of margins in the BU1. So when we see the cost of service of that unit, we see that there was a high increase versus revenues from the first, second quarter. This also happened last year, although this quarter was a little bit more. Could you just explain -- I mean what are the factors that make the second quarter more like heavy in terms of cost versus the first quarter for the medical unit?
And the second question is just a clarification on FASA. You acquired FASA on the beginning of April, right, 3 April. So is it 2 months that were in the second quarter? Or 3 months that were in the second quarter? Just wanted a clarification on that. These are the 2 questions.
Marcelo, starting on your last question. It's 3 months. We acquired in the beginning of April. So we had 3 months of results coming from FASA, they have those 2 campuses with medical school there.
About the seasonality in the BU1, as we are maturing many of our programs, we have the faculty costs lower in the first quarter and also in the third quarter because we have the maturation of the classes. And some of the professors, they are engaged and enrolled at that classroom in February and March. So the faculty cost is a little bit lower in January and July, it's 1/2. But it's a very -- a low seasonality when you consider this -- the entire semester. So first and second semester, no seasonality when you compare just between first and second quarter then third and fourth quarter.
Our next question or comment comes from the line of Javier Martinez from Morgan Stanley.
Let me start asking -- saying sorry to ask you again about the same, but we need some clarification here. So to -- so the seasonality pro forma of some of the acquisitions, bringing only seats, not -- still makes our life a little bit more difficult. So I understand that you don't want to give guidance today for the second half. But -- so what you mentioned, Luciano, about the second half was going to be stronger than the first semester and all the operations are growing. So should we read these at least the second half EBITDA should be higher than the first half EBITDA?
Yes, it is definitely a conclusion that -- we won't give you a guidance here, Javier. It's a conclusion that you can reach with public data. When you think that we have several medical schools that now have 1 extra class of students in the second half versus the first half, you can estimate how many additional students we have in medical schools in the second half, how much that contributes to the weight that medical school represents to the total revenues and that gives you then a sense of what can be the difference in terms of EBITDA margins from one semester to the other. It gives you a significant difference between first and second half, okay?
In different dynamics, you have similar conditions creating a better second half also for BU2, especially because when you think about IPEMED, it had -- before we acquired the company, it had a poor admissions that now means a lot of graduations and a lower student base for IPEMED in the first half of 2019. That is now being corrected with a consistent admissions of graduate students at IPEMED that also contributes to a better second half. And based on the seasonality that you already know about Medcel, our core products are growing significantly. So the base of students in the second half has also a good support to -- for the company, not necessarily to be higher in the first half, in the case of Medcel, but it's a good contribution when you think about year-over-year. That can also produce a better quarter and semester-to-semester comparison, okay? I don't know if that was clear or not, but yes, the second half, if there is nothing else new, should be not just -- should be significantly above than the first half every year.
And Javier, and just adding here what Luciano just said, we talk about doing the road show on the IPO that we are -- we have this growth, very predictable in terms of new enrollments on this embedded growth that we are calling. So just maturing our legacy, our institutions, that we still have room for growth for the first semester, the second semester, just volume will be close to 50% that this is just making the calculation, how many seats do we have to fulfill by the end of 2024.
So just in terms of volume, the schools that we have already in our operation. This maturation means around 50% of volume. You can put on top of that all the maturation of our average ticket that you can see the dynamics of our top line. And also, still in the BU1, we'll have 6 months of FASA. So in this first half, we only had 3 months of results. So we expect a much stronger results in the BU1 on the second half and the same for the BU2 IPEMED. We plug in, in our operation in May, and we have a very strong dynamic in terms of intake for the second half. So -- and adding the seasonality coming from Medcel, we also expect a much better result in the second half for the entire BU2.
Okay. That's very useful. So now that we know that you're going to deliver at the year-end, I have 2 suggestions for you guys.
I think that the part of the investor education effort that you did, that was great. I think that will be helpful to have the guidance that you have mentioned now. And also, if you could provide us with historical quarter results, at least last year, if you can go even after that -- before that in terms of pro forma so we can -- embed it on the seasonality going forward and we don't have this kind of surprise, okay?
Thank you for the suggestions, Javier. The guidance is something that we are really working on that. And in terms of the historicals, I understand what this means for you guys. It's just that everything that we produce and present here has to be audited with the standards required by the regulation that we are under. And that may have to wait until we produce each quarter, okay? And it's unfortunate but that can be the case. We think that the guidance for the second half of 2019 and for the year of 2020, when that happens, may give you some support to mitigate the lack of the historicals until they become ready to be delivered to the market at the standards required by the regulation that we have to provide to, okay?
[Operator Instructions] Our next question or comment comes from the line of Maria Azevedo from UBS.
My question is on the recent acquisition, IPEC. How long do you expect it to take for the integration process? And if you can also comment on IPEMED and FASA integration, if it's already mostly done. And then as a follow-up question, if you can also comment on your undergrad ex medical business performance. Your higher education competitors are seeing a lot of competitive pressures and dropouts. Are you seeing a more challenging environment on that front as well?
I'm taking the first 2 questions, and Luciano can have the third here.
About IPEC, we are expecting to start the first semester the end of September, beginning of October. We are just announcing our entrance exam and begin enrolling students still in September. So we are very confident to fulfill 100% of the seats still in September and start classes in October.
IPEMED and FASA, they are in the middle of the integration in terms of the cost process. We'll be rolling out our ERP systems, the back of -- and the math, everything by the end of December and beginning of the first quarter of 2020. So we are at -- in the middle of the process. In terms of offerings, we just doubled the number of graduate programs offering through IPEMED brand and also adding by the end of this semester 2 to 3 new distribution channels to leverage our operation.
In terms of competition, Luciano can add here, but we are not seeing any issue in terms of enrolling 100% of our students. We still have a very good predictability how we're going to fulfill all the seats available by the next 4 to 5 years in our medical school operations.
Maria Tereza, it's Luciano speaking. Just concluding your last question about the non-medical students, it's probably similar to what you may have seen to other players that operate in the same segments. The differences are that we do not have business learning operations and we do not play in several lower-duration, lower-ticket segments that tend to be -- to suffer more from the impact of business learning. So our impact -- the impact on our student base on that particular segment are also a little bit milder than you see from other players. But it's a tough environment for everyone.
I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.
Okay. So thank you, everyone, for participating here in our first quarterly results. We are very proud and confident about the results that we are delivering and about the -- what we have -- still have in front of us in the second half.
In terms of results, we think the seasonality in the BU2 in terms of that was expected in our operation here, and we are very confident to deliver a very strong result aligned with all the expectations that we talked with the market, doing our roadshow in -- last, last month in July and June.
So once again, thank you again for the participation, and we'll be more than glad, and our IR Manager, Renata, here can help you to clarify any question that you still have for you guys. Once again, thank you. Bye-bye.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.