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Good morning, ladies and gentlemen, and welcome to the Afya Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.
With me on the call today are Afya's CEO, Virgilio Gibbon; CFO, Luciano Campos; and Head of IR, Renata Couto.
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 the 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 our future periods or expectations regarding our strategic product initiatives and the related benefits and 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 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 refer to non-IFRS financial measures on this call. The non-IFRS financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IFRS. We have provided a reconciliation of the 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. You may begin.
Thank you, and thanks, everyone for joining Afya's third quarter conference call. I'll begin with an overview of the key highlights of the quarter and then Luciano, our CFO, will discuss our financial results.
To begin, I'm very pleased to report a strong third quarter and nine month results that reinforce our guidance for the second half of 2018. On the M&A front we have completed in August the acquisition of IPEC with a 120 medical school seats in the State of Pará. Additionally, in November, we announced plans to acquire UniRedentor, a medical school in the State of Rio de Janeiro with additional 112 seats and a strong portfolio of medical and healthcare graduate programs, fully aligned with our strategy to expand our service to every stage of the medical career.
We had a great quarter across all key metrics. Our revenue increased 124% over the same period last year, driven by the maturation of our medical schools and the consolidation of our acquisition since September 2018. Our strong top-line growth combined with synergies from our recent acquisition supported an adjusted EBITDA R$80.9 million representing a growth of 147% over the same period last year with a margin expansion of 380 basis points.
Our cash generation has remained very strong, with an operating cash conversion of 108% of our adjusted EBITDA for the nine months ended September 30, up 84% from the same period in 2018.
Finally, with respect to our key operating metrics on slide number four, we have reached 1,572 medical seats approved and 6.4 thousand medical students enrolled by the end of the third quarter, 15% above the final student base in the first half of 2019. Afya is the leading medical educational player in Brazil with a potential to reach 11.3 thousand medical students considering the seats already authorized.
Our average tuition fees in the third quarter reached R$8.1 thousand, 8% above the second quarter this year. This increase is in line with our strategy and explained by the mix effect of the new students’ cohort enrolling with higher tuition combined with the students graduated with the lower tuition. As regard to BU2 our crash course and CME in medical specialization student grade grew by 12% over the first semester, showing already a strong growth in the first intake process concluded after IPO.
Now, I'll turn this presentation to Luciano Campos, Afya’s CFO to detail our financial results.
Thank you Virgilio and good morning everyone. As I will demonstrate in the presentation, our focus on medical education provides highly predictable growth, strong profitability and cash generation for Afya’s investment case.
Before I get into the details of the quarter, as a reminder, along with our reported figures we also provide pro forma figures for some key line items. The 2019 pro forma figures in respect to the acquisitions of Medcel, FASA and IPEMED as if they had recorded in January 1, 2019. It is also important to remember that our adjusted EBITDA and net income excludes the impact of IFRS 16.
Starting with net revenue on slide number 5, we have provided a breach for our reported figures in 2018 to our third quarter and nine months results in 2019. Our net revenue in the third quarter of 2019 increased 124% year-to-year to R$207 million and for this quarter the reported and pro forma figures are the same. Growth was driven by an increase in medical school enrollments, higher average tuition fees as well as the acquisitions of Novafapi, FADEP, FASA, IPEMED and Medcel.
For the nine months period, revenue increased 133% to R$530 million; and on a pro forma basis, reached R$609 million with a contribution of approximately R$79 million from Medcel, FASA and IPEMED.
On slide number 6, we have our net revenue by business unit. Business Unit-1 net revenue of R$176 million represented 85% of total net revenue of the third quarter and increased 91% year-over-year. The factors driving our growth were: First, medical school seat maturation. Remember that average seat of medical school takes six years to mature and reach full potential; Second, medical admission fees increased above inflation; And finally, acquisitions in the period.
Next, Business Unit-2, net revenues of R$31 million represented approximately 15% of our net revenues in the third quarter. It is important to remember that Business Unit-2 revenues are concentrated in the first and fourth quarter of each year. And while this still is more of the portion of our business, we are very excited about the growth opportunities of this segment of medical education.
Moving on to profitability on slide number 7, adjusted EBITDA increased 147% year-over-year to approximately R$81 million in the third quarter of 2019 with EBITDA margin expanding 380 basis points to 39.2%, driven by operating leverage from the maturation of medical schools, higher average tuition and synergies from acquisitions. For the first nine months of 2019, adjusted EBITDA increased 150% year-over-year to R$203 million with adjusted EBITDA margin expanding 260 basis points to 38.3%. Note that on a pro forma basis, adjusted EBITDA for the nine months reached R$231 million.
Moving to Slide 8, adjusted net income increased 155% year-over-year to R$72 million in the third quarter of 2019. Our net income benefited from top-line growth, margin expansion and higher financial income and FX gains associated with the cash receipts from our IPO. For the nine month period, our adjusted net income increased 130% year-over-year to R$164 million
Moving next to a discussion of balance sheet and cash flow on slide number 9, we maintained a healthy financial position with net cash of R$911 million, which we believe to be sufficient to support our growth strategy. The increase in cash compared to the year-end of 2018 reflects the IPO proceeds. In addition, as we show in the right side of the slide, we continue to deliver a strong operating cash flow generation with a cash conversion of approximately 108% for EBITDA in the first nine months of 2019, supported by tuition prepayment and seasonality of Business Unit-2. And especially because of the seasonality effect, we recommend to focus on longer periods rather than on quarters for the analysis of this cash conversion method.
Summing up, I'd like to conclude my remarks with a discussion about market consensus, our guidance for the second half of 2019 and the seasonality of our business.
On Slide 10, we show that our adjusted EBITDA of approximately R$81 million in the first quarter is approximately 9% above the average consensus of R$74 million that we had gathered from the analysts and published on November 11, 2019. As a reminder, it is important to normalize consensus estimates for the impact of IFRS 16 and for the impact of acquisitions, and that is why we published the normalized consensus for this quarter and plan to continue to provide that in the future.
Moving to the Slide 11, our results for the third quarter of 2019 are well aligned with our guidance. Therefore, we are maintaining our guidance for the second half of 2019, which includes net revenues between R$415 million and R$430 million and adjusted EBITDA margin in the range of 38% and 40%. As a reminder, our guidance eliminates the impact of IFRS 16 and excludes the acquisitions consolidated after the first half of 2019, thus it excludes the results of IPEC.
Finally, moving to the Slide 12, I would like to remind everyone about the two seasonality factors that affect our business. And it's important to pay attention to in order to properly interpret our results in this quarter, any future quarters. The first and most important factor is the revenue recognition of Business Unit-2, which is concentrated in the first and fourth quarter when printed books and e-books are delivered to our prep students. The second is the ramp up of our medical schools, which has two admission cycles for new students and run at a 100% occupancy rates. As a consequence, while we have schools ramping up, the second half of each year would normally have more students and higher tuition revenues compared to the first half. In the balance of these two factors in a typical year, the first and fourth quarters are the strongest revenues and EBITDA, the second quarter tends to be the weakest, while the third quarter fits in between these two groups. So far 2019 seems a typical year.
With that, we end our prepared remarks, and we would like to open up for questions. Operator, please open up the lines.
[Operator Instructions]. Our next question comes from [Bruno Giordano] with Bank of America.
Good afternoon, everyone. Congratulation on the results. First question on the EBITDA of third quarter. Quite strong number. Assuming that fourth quarter, you're seasonally -- results are seasonally stronger, is it fair to assume that it's a lot of upside for the second half in terms of compared to your guidance or are you expecting anything different in the fourth quarter in terms of seasonality? And second question on CapEx. Correct me if I'm wrong. But I did a calculation here, I saw an R$80 million expenditure in PP&E plus intangibles, and it's substantially higher than what you have spent for -- are to spend in the second -- in the first half. So could you please let me know if it's correct? And also what do you expect in terms of CapEx for the full year? Thank you.
Hi, Bruno, it's Luciano speaking. Starting with the first part of your question about seasonality, we do not expect anything different in terms of seasonality when you think about it in the conceptual terms. So we do expect the recognition of the revenues of all the new products and contracts we are selling in our prep business, for example, which then increases revenues in the Business Unit-2.That's not different in the conceptual terms. What will be different then is intensity, every year will be a little bit different than the other. And especially while we're growing, the fourth quarter could be a little bit higher or a little bit lower than the first quarter, okay? But that's within the range of expectations.
The second question about CapEx. Just to consider please that the acquisition of IPEC, since it does not have an operation, it’s considered as we are buying intangibles. So if we exclude that, because that's not organic CapEx, our organic CapEx spend is pretty much where it should be. Okay?
Our next question comes from Thiago Bortoluci with Goldman Sachs.
Yes. Hi. Good afternoon, everyone. Thanks for the question. First, let's just go a little bit more in on the guidance. Given that as Luciano mentioned, the seasonality should be stronger in the [third] quarter as expected, I see that 73% of the high end guidance for revenues is already delivered, 72% of the high end for adjusted EBITDA. Shouldn't be there any space for upside revisions to the guidance or at least to leverage up the guidance given where we are right now? This is the first question.
The second question is on Business Unit-2, I think results were very strong and the ramp up in and of itself seems to be going higher and faster than expected. Any update on the go-to-market that we are using within the platform, new partnerships that you got for the second semester and initial feedbacks from this -- the first year post the duration would be very welcome? Those are the questions. Thank you very much.
This is Luciano again. Starting with the first question, Thiago, the results are very supporting but not enough to make us to change the guidance, okay? You can make those calculations in terms of what it means to what position of the range we would fit it if you compare the third semester -- the third quarter with the total guidance, but we are not changing the guidance at this moment, okay?
The second question about Business Unit-2, just consider that what you are looking at there is not Medcel yet, okay? You have other products that would help the results that we are looking at, at that moment. Medcel, the new sales which are up only in the fourth quarter.
Just to add on that, Thiago -- just to add on that what Luciano said, Thiago, about the Business Unit-2, we closed the second half intake in September. In IPEMED, we have a very strong intake when we compare to the figure that we had in the last year. So as we mentioned at the second quarter announcement, we had a student base that was decreasing at that moment, so we had inflection point because of the very strong intake in the second half. So we see some kind of stable about 2% growth quarter-over-quarter. And Medcel, although don't have any revenue recognition, we also finished a very good engage at the end of this first and second half of 2018.
Okay. That’s very clear, Virgilio. Just how -- just show ramp up here, is it fair to assume that Business Unit-2 overall is running above your expectations for 2019?
Full year, we’re well above and at least in line with the expectation that we had in the second half of 2018, that we just concluded the acquisitions, they grade those comments. So, a very strong intake and the execution that we had that we believe at this moment was better than expected.
Our next question comes from [Bruno Littorio] with JP Morgan.
I have two questions. First is regarding the Revalida exam. How do you see as an opportunity for BU2 since you could take part on that? And do you see as a threat for BU1, so if you could make some comments on that? And the second question is regarding IPEMED, which you just incorporated. The number of students was flat this quarter. How do you see that evolving? When you're going to change the intake process and when we should start seeing that expanding more? Thanks. Those are my two questions.
Okay. After all your questions, it seems a multi-year. Again the first question about the Revalida, this changing that’s announced -- but we still don't have the nominative instruction how they are going to -- how the instructs will work. We are thinking a very good trend about the Revalida that can leverage our prep course volumes, also combined the prep course with some prep rather than offering. So as soon as we get the first proposal making clear how bigger rules that the Revalida will follow, we are thinking that we have a very strong Revalida prep course in place combined with the residency prep, that's a very good opportunity for our Business Unit-2.
And going to your second question, IPEMED is kind of flat quarter-over-quarter. That was because the student base was decreasing when we acquired this asset. We have a very strong intake at the end of this first half, beginning of the second half, that we worked our student base trend and we could see already a 2% of growth quarter-over-quarter, a very good expectation on student base growth on IPEMED at this moment.
Our next question comes from Susana Salaru with ITAU.
Our first question is related to the M&A space. We are seeing that other companies are looking for med school as well as med schools acquisitions. So should we expect the multiples to go up going forward compared to the previous acquisitions? That will be our first question. And related to the ramp up of the recent acquired med school companies, how has been the process of matching up the tuition with the integrated companies? How fast do you believe it will be matched? Thank you.
Hi, Susana. So about the M&A pipeline, we are not seeing any difference in terms of competition landscape this last nine months. We are seeing the same competition that we saw in the last two years and that is even more clear with the price, so the price based on the multiples that are shown on the screen and also all the announcement of all the recent acquisitions announced by other players. So, the price is going to be more clear for all the negotiations that we have in the pipeline. So the pipeline is fertile. We are very focused to deliver this 1,000 seats after the IPO and we already believe it’s 25% of this guidance.
In terms of tuition maturation, that depends on the asset. These last two acquisitions, one of them, the first one, IPEC, they have -- we having a tuition that is very close to the average that we have. And UniRedentor that is we are not operating, we still have wait an antitrust approval. We have a very high tuition that combined that we have as said even higher tuition increase moving forward. So, even that -- even considered that we are not pushing our price above inflation, just the effects of the mix that we’re evaluating students have very low tuition -- the fees in the sixth year. And we are enrolling new students with very high ticket into the first and the second year. This effect will give us 1 to 3 percentage points above inflation by 2025. That's our guidance in the long-term and we are not changing that.
[Operator Instructions]. And I'm not showing any further questions at this time. I'd like to turn the call back over to Virgilio for closing remarks.
Well, thank you. We are very pleased with our year-to-date performance and are confident to deliver our second half 2019 guidance. We continue to deliver strong organic and inorganic growth based on the maturation of our students, the acquisition of new medical schools and also the addition of new content onto technology new our platform. Our team is successfully executing on our strategy and differentiating our products offered for the entire medical career in creating long-term value for all stakeholders. Thank you for joining us today. And we look forward to speaking with you next quarter.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.