Good morning, ladies and gentlemen. And welcome to Afya’s Second Quarter 2020 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’s, Head of IR. You may begin..

Thank you, and good morning, everyone. Thank you for joining us for Afya’s second quarter 2020 conference call. With me on the call today is Afya’s CEO, Virgilio Gibbon; and Luis André 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, the statements related to our business and financial performance, expectations and guidance for future periods regarding our strategic product initiatives, and the related benefits and our expectations regarding the market as well as the potential impact for COVID-19.

These risks include those more fully described on 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 obligations 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 measures to the most directly comparable IFRS financial measures in this presentation.

Let me now turn the call over to the Virgilio Gibbon, Afya’s CEO and starting with Slide 4..

first, strategic M&A.; second, pushing further into our digital initiative; third, successfully integrate acquisitions; fourth, delivering sustainable and predictable growth; and five, maintaining a health balance sheet.

Beginning with M&A, which has been and will continue to be a key component of our strategy, we have completed six acquisitions after IPO, both medical schools and digital. Importantly, we have a solid pipeline that has been growing during this challenge period.

As I mentioned earlier, we are working diligently to further enhance our digital capabilities. We will continue to invest in our strategy to add more digital assets and solution to support our medical students and other health professionals.

While BU2 represents a small part of our overall sales to date, we see significant opportunity to grow this business. Our solid balance sheet, coupled with strong cash flow generation, create a virtual cycle, providing the financial flexibility and competitive advantage to continue executing on our M&A strategy.

And given the high predictability of our business model, I’m confident in our ability to generate meaningful cash flow, further strengthening our financial position. Overall, our consistent momentum is continuing, and we are pleased with our results in the first year as a public company.

For the second half, we have already fulfilled 100% of the medical seats, and we are confident to achieve our second half guidance, confirming the resiliency and the right predictability of Afya’s business model. I will now turn this call over to Luis for more color on our financial results and second half 2020 guidance. Thank you..

second half 2020 adjusted EBITDA margin ranging between 45.5% and 47%; our guidance includes the impact of the adoption of IFRS 16 and includes UniRedentor starting February 2020, São Lucas from May, PEBMED from late July, and excludes any other acquisitions that may be concludes after the issuance of this guidance.

And as we look ahead, we have a complete intake process for the upcoming semester and even the strong demand we saw for seats, we have filled 100% of our medical seats, maintaining our revenue growth resilience and high predictably, even under these uncertain times.

Additionally, included in the revenue outlook is the revenue recognition for some practical classes that could not be held during the first half and were pushed out to the second half of 2020 upon the reception of the classes. This amounts to R$14 million.

To sum up, we are pleased with the strong quarter and first half results and the continued momentum in our business.

We’re confident the strategic investments we are making to advance our growth strategy will enable us to continue to deliver consistent revenue and profitability growth as we remain on track to achieve or exceed our fiscal 2020 financial targets. Afya is in the strong financial positions with a high liquidity.

We have a history of robust cash generation that clearly defines margin growth strategy and this team with a proven track record of delivering results and handling difficult times. And COVID-19 has not changed any of these factors. This ends our prepared remarks. We are now ready to take your questions. Operator, please open the lines for questions..

[Operator Instructions] And today’s first question comes from Marcelo Santos of Banco JPMorgan. Please go ahead..

Hi. Good morning. Thanks for taking my questions. I have two. The first question is regarding BU2.

Could you please provide a roadmap of your plans for the next two years? How do you plan to monetize and integrate these assets? Whatever you could – whatever light you could share that would be very interesting for us? And the second question is regarding M&A.

We have limited information, but with our information it seems that the recent acquisitions have been a bit more expensive than the previous one. Maybe that’s just by the quality, but they look more expensive. So the question is, are we seeing the good assets are like – we’re getting to the end of the good assets or is competition hitting up.

We have been seeing other players also becoming more vocal on med schools in the past they were not. So any comment there would also be very helpful. Thank you..

Hi, Marcelo. This is Julio here. Hi, everyone. Thank you for participating in the call here. So answering your first question in regards to the roadmap for BU2.

So more and more BU2 is an extension of course, of what we’ve been doing with our undergrad business, right? So we’ve been focusing a lot first on the digital part of integrating more and more our digital platforms. So this is the first thing.

So we were investing in the development of the integrated solution where we offer one single platform for all of our students. So just as an example, we are now launching still this year the app that integrates the digital experiencing the graduate business adding more services to our students on the graduate business.

So first thing is that we are providing this digital platform and now actually with Whitebook the app from PEBMED the idea again 90,000 users – paying users for that particular app. Imagine the potential that we have to distribute and to market other courses that we have for continue medical education, with more micro learning.

So ideally we want – the roadmap is based on having our students and students and medical students using our platform so we can provide and sell and cross sell products – educational products, and now moving also to digital services.

So this is – for the next two years is to integrate the digital platform so that we can serve all of our students having one single experience on the digital platform. So, hopefully I’m answering your questions, but I’ll hand over to Luis for the second one..

Thank you, Julio..

Hi, Marcelo. This is Luis to take your second question here about the M&A. Of course, that the pipeline M&A and the competition is getting high, it’s getting more vocal. That’s one of the costs to be a public company for sure.

But in our view here they’re more mature transactions when we are acquiring more mature institutions will be completely related to EBITDA multiples.

And we are doing very accretive transactions considering that we are investing our capital, our cash that you can extract synergies in a very short-term, four to five years jumping revenue, jumping margins, and also it’s not only a six year duration program that we are taking into consideration here. We’ll have a very long relationship.

As a goal, we are aiming at least a 20% of IRR for all of this opportunity. And in terms of multiples after synergies, both synergies will be around 4x to 5x most of them. So that’s the way we are looking and keep looking there’s more traditional acquisitions..

And Marcelo just adding some points, what Luis just said, of course, we analyze each one of these acquisitions. Virgilio in his speech told that we have a pipeline with more 800 seats that we are analyzing case by case, always referring to its – evaluating it with IRR and EBITDA multiples in maturation. Each process is different.

Each process, each acquisition is different. One of them that we announced in these last 10 days, one of them was a competitive process. Of course, in this one, we face a little bit more pressure in price. There are other – the other acquisition was a direct negotiation.

So what you can expect from us is to keep our financial discipline in these acquisitions, always try to give the best return on our capital allocation..

And our next question today comes from Mauricio Cepeda with Credit Suisse. Please go ahead..

Yes. Good morning, everyone. Thank you. Thank you for this time to answering the question. In fact, I just had one and it will be a follow one of my colleagues insisting a little bit on M&A.

As the other groups are now much more vocal and possibly are really in more need of this kind of medical seat acquisition as the other higher education business are not doing well. And so far, we saw that you are paying progressively more for these targets. And you are right, they are accretive so far in terms of low cost.

In a feedback methodology, it’s a very simple one, we see that it takes some years to get investment back anyhow.

But in a case where the competition gets tougher and your competitors start to overpay for the targets, what are your plans? Are you more willing to do a defensive move, not to let them win or do you privilege a little bit more the financial rationale of the transaction? Thank you..

Hi, Mauricio, this is Virgilio here. First, the type of assets that we are targeting, they have to be very concentrated in medical and health programs, above 60%, 70% of the revenues coming from this program.

So I truly believe that we are 100% focused on these offerings, had some kind of differentials not only because of the quality of our program, but we are also licensing our platform for the institution. So there is a component of reputation here that we are getting close, on most of the other institution focus on medical school.

Of course, if the price comes up, it’s like a competition grows even stronger and become a war, in our side, our strategy is we already have an ecosystem distribution channel, very, very large.

So it makes a lot of sense to start partnership [indiscernible] licensing our platform, capturing these students at the beginning of the career as a third-party students using our platform and tracking [indiscernible] years offering our portfolio. We continue to serve and also now with health and digital services using platforms such as PEBMED.

So that’s made a lot of sense and a better use of allocation instead of getting our war. I’d like to see all of the other players as a potential partner that can use our platform, our system, [indiscernible].

So having said that, we still see an opportunity to have good great transaction in medical school and also now we are complete aligned and focused for additional services in our PEBMED platform. So that’s how we’re thinking..

Very clear, thank you..

And our next question today comes from Irma Sgarz with Goldman Sachs. Please go ahead..

Yes, hi, good morning. I hope you all are doing well. And congratulations on the very strong results. And thanks for taking our question. The first one that we have here is related to the margins..

Hello..

Hello, can you hear me? Hello..

Hello this is the operator.

The speaker locations, can you hear me speaking?.

Yes Irma go ahead..

Okay, thank you..

You can hear me. Okay, perfect. So back to – I wanted to ask about margins. You had obviously very strong underlying margins in this last quarter, and they evolved very well.

If we think and obviously, we see the guidance for the back half of the year, but when we think a little bit beyond sort of for the next couple of years, again, understanding that your guidance is restricted to the second half of the year, but could you just help us understand the average maturity of your legacy medical campuses and also the average maturity of the recent acquisitions that you’re integrating, please, because it will be helpful to just think through how your margin can still progress from here? And then second question we have is regarding the mice medical projects.

If you have any update that you could share there, please. Thank you..

Hi, Irma thanks for the question.

In terms of margins, as we have many institutions that were recently acquired, we still have a lot of room for improvements, still have low-hanging fruits, I said in my speech, that we still have large institutions to have full integration and capturing more synergies and efficiency, such as on Uni Novafapi, Uni San Lucas and UniRedentor, they are very large institutions, and we are not extracting – not even the 50% of the synergies that we are looking for these assets.

So we are aiming to have at least five percentage points for gross margins where we are operating this Business Unit 1, considering IFRS 16. So there’s still opportunity and room for improvement in our efficiency on this side.

On your second question about the mice medicals program, we still are waiting for the final conclusion, at least for two institutions. We are very close to have two, I expect this year to have the final authorization. And the other five, I think, it’s more reasonable to expect for 2021.

So two of them very close to have the final approval, the final signature for the Minister of Education. We are seeing some of series in the 28 series from the last mile medical process being already authorized, and I think we are very close to have the first ones starting..

And Irma just adding some points in the first – to your first question, let me just give you an example that is São Lucas and UniRedentor as you can see now in our press release, the consolidation of these two units that we bought on the first merger has reduced our consolidated margin.

So, of course, we have different institutions, different percentage in these institutions between medicine, health and other programs. We have different maturation stage, so it’s very difficult to put an average on that.

But what you can see in our presentation that when we acquire the institution and use our playbook, doing the cost reductions in the first half, migrating these institutions to our chart set of center, implementing our people plan and after it’s implementing our full national curriculum, what we can see that we captured this efficiency along of this process.

So we are very confident in our playbook, and then very confident that we can track the synergies in each one of these acquisitions..

That’s great. Thank you very much..

And our next question today comes from Susana Salaru with Itau. Please go ahead..

Hi, good morning, guys. We have two questions here. First, I just wanted to clarify the answer related to the partnerships that Afya – that Virgilio mentioned that Afya had with several other potential projects. I’m sorry, we couldn’t understand properly the answer.

You guys have a – you aim to have partnerships with the next targets or the potential targets in term of acquisition or you have already some kind of MOU or some kind of non-binding offer with some of the target of product that you aim to much realize in the future? We didn’t understand what was – what is the kind of contract that you have with these potential targets that will facilitate your acquisitions relative to the other players in the market.

That would be our first question. And then our second question is related to PEBMED. We discussed a lot about PEBMED potential upside and cross-sell with the medical seats by school students, sorry. We know that PEBMED also used for other healthcare careers.

So we were wondering if – when we should also take into consideration the percentage of students that you have in health care and if you’re going to leverage PEBMED cross-selling for those students as well or you’re going to focus exclusively in certainly medical of students and in nursing? Thank you..

Okay. Susana, I’ll take your first question here, then Julio help me on the second here. But just to separate, at this point, we have around 40 medical institutions using our personal platform to help them during the COVID-19 to keep running their learning process and all the semester for these students.

Some of them, we have a B2B contract as a licensed learning, traditional learning system products to help them for more than one, two years, just it’s not for free problem. For an institution using today, you have six of them paying SaaS module per user our platform.

Of course, that this relationship can be an opportunity for us to leverage M&A acquisition. And also when I said about 800 seats of this pipeline, it’s under MOU contracts. We are doing our diligence, so the pipeline is getting bigger and it’s very fertile.

So it has something to do with this relationship that we have, but we have a road map all the medical institution that makes sense for us in terms of target for M&A area..

Okay. Susana, Julio here. In regards to the strategy with PEBMED, if you see the numbers, of course, the number – the revenues, they come from the doctors and medical students that are using specifically WhiteBook.

Nursebook, if you consider the number of nurses and the number of technicians on nursing as well, I mean, it’s a significant number, it’s about 2 million people in the country. The penetration so far is about 60,000 users. There’s still room to grow, of course, but there’s a – it’s a different audience, right.

So we’ll keep investing, but always thinking that the WhiteBook is the one, it’s the application that we want to grow and consolidate because there is where we extract more value, specifically, again, on the journey of the doctor that we’re focused on. But there is room to also invest in other – in multi-professional careers, of course.

And since doctors, they don’t work alone, and my point here is that we think about the point of care. That’s where we are thinking. And if the application and the software, everything that we’re discussing makes sense for the point of care, then we will invest.

We have a significant number of other students from different healthcare courses, but still the main focus is WhiteBook so far.

Consolidate there, increase the market share that is already high, we have opportunities, if you see on the slide, opportunities to grow specifically for those doctors that are more than five years that they have already graduated to create more specialized and more personalized experience. But then again, Nursebook will keep growing.

We’ll invest more to grow the base, and then that could be an opportunity to do without the healthcare careers as well..

Thank you, Julio. Very clear. Virgilio, just one clarification on your answer.

You mentioned 800 seats under MOU, this seat is on top of – it includes the four companies that you have already a business relationship through the digital platform or these are the four companies that you have the business relationship will be additional potential targets over – on top of this 800 seats that you have under MOU?.

Susana, these 800 seats, they are out of this – the institution that we had, the B2B relationship, but some of them – under MOU, some of them are in our pipeline. We are having conversations in the first stage, okay..

Perfect. Thank you..

[Operator Instructions] Our next question comes from Vinicius Ribeiro with UBS. Please go ahead..

Yes, guys, good afternoon everyone. Thanks for taking my question. So just very quick one, two quick ones. So first will be a color on the pricing on this intake processes. I just wanted to get a sense if you guys change your pricing point in term for entering students? And the second question is similar to one that was already asked about the BU2.

Just like to understand how has been your kind of your approach for attracting students during this pandemic? And how should we kind of expect this to behave for the rest of the year? Thanks a lot guys..

Hi, Vinicius. About your first part of your question, price point, we did change our strategy doing this first semester and also in the second semester. We are just changing related to inflation.

Remember that we have – including migration on our average ticket because when we acquired institution [Technical Difficulty] So that change because of the COVID, of course that case by situation with some credit in terms of installment for this to renew of the following semester, but will not impact our good balance sheet and cash flow generation.

On the BU2, about what we are doing in terms in the impact that physicians were hurt during….

You’re breaking.

Can you guys hear us?.

Yes. It’s a little bit….

I’ll repeat here. If you’re don’t hear me well, Vinicius, please give just in terms of pricing, we did change our strategy. We acting the same dynamics that we are adjusting tuition semester over semester, so that’s the way we’re doing.

And remember that we have maturation effect on our tuition that we changed our price when we acquire an institution amidst our agreement. Okay. So let’s remember that we have the recurring effect of maturation in our institution because change and come back 2034 situation, and we can move having this positive effect on price for next four, five years.

On BU2, the intake process for graduate students, we have impact the COVID-19 crisis. We were performing due to season, we enrolling graduate program for following semester for second semester.

So what we are seeing demand is there, it takes for us go through September and beginning of October to close [indiscernible] graduate program, and we are taking very good [indiscernible] and in terms of volume to start in class in October.

Also in the first semester, we saw 20% to 22% of growth on our BU2 and the second semester of cost, we are having the new the program started in the September. So it was starting before 2020, 2021. Now in September, it goes in due February, March of the next year. So it’s too early so now how would be the dynamics for the following semester..

Okay. Thanks, Virgilio. Thanks a lot for repeating it..

And ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the conference back over to Mr. Virgilio for any final remarks..

Okay, thank you all. I think we have some interruption in the call. Sorry for that. And this is the first half of 2020 and the first year as a public company has been unique for us here in Afya. We navigate firmly and steadily even under all this uncertainty, and we have – keep optimistic for the following semesters in the following years.

So thank you all for the support during this first year as a public company, and I really hope to see you all safe in the next quarters. Thank you, and bye-bye..

Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day..