Afya Limited Announces Second Quarter and First Half 2020 Financial Results

Rhea-AI Summary

Afya Limited (Nasdaq: AFYA) reported robust financial results for Q2 and H1 2020, driven by a 53.6% YoY increase in Q2 net revenue to R$274.2 million and a 69.2% YoY rise in H1 revenue to R$546.5 million. Adjusted EBITDA surged 76.6% YoY in Q2 to R$118.2 million with a margin of 43.1%. The company achieved an adjusted net income of R$82.6 million in Q2, up 163.1% YoY. Afya’s strong cash position stands at R$1.1 billion, and a series of acquisitions, including PEBMED, are set to enhance its digital health services segment.

Positive

• Net revenue increased 53.6% YoY to R$274.2 million in Q2 2020.
• Adjusted EBITDA rose 76.6% YoY to R$118.2 million, with a margin of 43.1%.
• Adjusted net income for Q2 2020 reached R$82.6 million, up 163.1% YoY.
• Cash position of R$1.1 billion provides strong liquidity.
• Acquisition of PEBMED strengthens digital health services.

Negative

• R$14.4 million of net revenue deferred due to practical class interruptions.

NOVA LIMA, Brazil and MINAS GERAIS, Brazil, Aug. 27, 2020 (GLOBE NEWSWIRE) -- Afya Limited (Nasdaq: AFYA) (“Afya” or the “Company”), the leading medical education group in Brazil, today reported financial and operating results for the three and six-month periods ended June 30, 2020 (second quarter 2020, 2Q20 and first half 2020, respectively). Financial results are expressed in Brazilian Reais and are presented in accordance with International Financial Reporting Standards (IFRS).

Second Quarter 2020

• Net Revenue in 2Q20 increased 53.6% year over year (YoY) to R$274.2 million, this value does not include R$14.4 million of net revenue, that was deferred due to the interruption of practical activities on campus. Net Revenue excluding UniRedentor and UniSL grew 22.6%, reaching R$218.8 million.
• Adjusted EBITDA in 2Q20 increased 76.6% YoY reaching R$118.2 million, considering the deferred revenue recognition of R$14.4 million related to the interruption of practical activities on campus, with Adjusted EBITDA margin of 43.1%, expanding 560 basis points (bps). Adjusted EBITDA excluding UniRedentor and UniSL grew 46.6%.
• Adjusted Net Income in 2Q20 of R$82.6 million was 163.1% higher than 2Q19.

First Half 2020 Highlights

• First Half 2020 Net Revenue of R$546.5 million, up 69.2% YoY, this value does not include R$14.4 million of net revenue, that was deferred due to the interruption of practical activities on campus. Net Revenue excluding UniRedentor and UniSL increased 47.3% YoY reaching R$475.8 million.
• Adjusted EBITDA for first half 2020 (1H20) increased 82.7% YoY reaching R$258.8 million, with Adjusted EBITDA margin of 47.4%, expanding 360 bps. Adjusted EBITDA excluding UniRedentor and UniSL increased 66.5% YoY, reaching R$235.9 million, with Adjusted EBITDA margin of 49.6%.
• Adjusted Net Income in 1H20 of R$206.6 million was 143.3% higher than 1H19.
• Cash conversion of 82.6% with a solid cash position of R$1.1 billion at quarter-end.
• Subsequent events:
  • Entrance into the digital health services segment with the acquisition of PEBMED, strengthening BU-2. PEBMED helps physicians in the decision making process through Whitebook with more than 165,000 active users per month, of which 91,000 are paying subscribers. It also provides Nursebook app and PEBMED portal;
  • Entrance into a purchase agreement for the acquisition of Faculdade Ciências Médicas da Paraíba, or FCMPB and Faculdade de Ensino Superior da Amazônia Reunida, or FESAR, adding a combined total of 277 medical seats. The transactions are subject to customary closing conditions and antitrust regulatory approvals. It is Afya’s first medical school in Paraíba state and FESAR, the second one, in the state of Pará.

Table 1: Financial Highlights
	For the three months period ended June 30,											For the six months period ended June 30,
(in thousand of R$)	2020		2020 Ex Uniredentor and UniSL		2019		% Chg		% Chg Ex Uniredentor and UniSL			2020		2020 Ex Uniredentor and UniSL		2019		% Chg		% Chg Ex Uniredentor and UniSL
(a) Net Revenue¹	274,211		218,813		178,493		53.6	%	22.6	%		546,515		475,811		323,071		69.2	%	47.3	%
(b) Pro forma Net Revenue¹ ²	274,211		218,813		184,229		48.8	%	18.8	%		546,515		475,811		402,172		35.9	%	18.3	%
(c) Adjusted EBITDA³	118,152		98,072		66,909		76.6	%	46.6	%		258,796		235,867		141,639		82.7	%	66.5	%
(d) = (c )/(a) Adjusted EBITDA Margin²	43.1	%	44.8	%	37.5	%	560 bps		730 bps			47.4	%	49.6	%	43.8	%	360 bps		580 bps
(g) Pro forma Adjusted EBITDA¹ ²	118,152		98,072		68,127		73.4	%	44.0	%		258,796		235,867		152,509		69.7	%	54.7	%
(h) = (e)/(b) Pro forma Adjusted EBITDA¹ ² Margin	43.1	%	44.8	%	37.0	%	610 bps		780 bps			47.4	%	49.6	%	37.9	%	950 bps		1170 bps
(i) Adjusted Net Income³	82,558		68,689		31,376		163.1	%	118.9	%		206,569		190,654		84,907		143.3	%	124.5	%
1. Due to the interruption of pratical classes during the pandemic R$ 14.4 million of 1H2020 Net Revenue will be recognized in the 2H2020.
2. Includes the pro-forma results of Medcel, IPEMED and FASA, as if the acquisition had been consummated on January 1, 2019.
3. See more information on "Non-GAAP Financial Measures" (Item 8).

Message from Management

Virgilio Gibbon, Afya’s CEO, stated:

Our organization has responded and adapted to the challenges of the COVID-19  in an incredible and agile manner. I am extremely proud of the way Afya has adapted and executed to meet the significant changes and delivered an outstanding performance during the second quarter, which was ahead of our expectations.  

The story of the second quarter was dictated by the COVID-19 pandemic. Our priorities remain unchanged as we continue to navigate these challenging times. We are focused on taking care of our employees and students and operating in a safe environment that protects both our team members and students. To that end, in mid-March, we shifted all our classes online and moved to a remote work situation for all corporate employees. Our ability to adapt to these changes allowed us to deliver a strong performance in the second quarter and surpass our first half guidance. Importantly, we closed the quarter having exceeded all the key financial targets we laid out for first half 2020.

We began the year with a very strong intake process, had completed the enrollment process and delivered 100% occupancy for the first half. We also saw strong demand for medical seats for the upcoming semester, thus, we are once again assured of 100% occupancy for the remainder of the year.   

The COVID-19 pandemic intensified and accelerated some behavior shifts that were already underway, and caused us to rethink where best to invest our resources. In addition, as evidenced by the pandemic, the medical community and patients alike have embraced a digital component to healthcare. We discussed in the past that digital assets were appealing to us so that we can add more services to medical students and professionals, thus maximizing our product offering. Subsequent to quarter end, we furthered our Afya Digital with the acquisition of PEBMED, our first and significant acquisition in the health tech segment. This acquisition enables us to deepen our relationships with our students as well as getting our brand in front of many new doctors, nurses and other medical personnel and students, enhancing our competitive position and our capabilities.

Additionally, and also subsequent to quarter end, we announced two medical school acquisitions adding a further 277 seats – marking our entry in the state of Paraíba and strengthening our presence in the state of Pará. We are successfully executing on our strategy as we have completed 15 acquisitions over the past 2 years - 6 since we became public one year ago - and have added close to 700 medical seats in less than one year, or approximately 70% of our three-year target of 1,000 seats shared during our IPO. Importantly, we have a solid track record of integrating acquired companies and delivering cost efficiencies and synergies that can be seen in the margin expansion we are delivering. These acquisitions set us up to deliver continued strong results in the months and years to come.

We continue to have a peer-leading capital structure, providing agility to adapt to the dynamic environment we are operating in. Given our strong free cash flow and liquidity, we remain committed to our long-term capital priorities, with a balanced approach to invest in the business and return strong cash to our stockholders, all while keeping our students, faculty members and employees safe and managing through this volatile environment.

We are celebrating our one year anniversary of being a public company. Since then, we have all experienced significant change and new challenges over these past several months. Things we never predicted are now realities that we are all adapting to. Things we thought would evolve over the course of several years have changed in weeks. We are very pleased with our first half performance and are encouraged with how the back half is shaping up which is reflected in the guidance that we are introducing today.

To close, I could not be prouder of the Afya organization for how they have responded, the way we kept our focus on our people, students and physicians and delivered superior execution, leading to an outstanding first half in 2020.

1.  First Half 2020 Guidance

		Guidance for 1H20	Actual 1H20
Net Revenue(1)(2)		R$475 mn ≤ ∆ ≤ R$510 mn	R$516.1 mn
Adjusted EBITDA Margin(3)		45% ≤ ∆ ≤ 46.5%	48.1%

(1) Includes Uniredentor starting February 1^st, 2020, and excludes any acquisition that was concluded after the issuance of the guidance; for instance, it does not include UniSL that was concluded on May 5, 2020, subsequent to the original issuance of guidance.
(2) Includes the postponement in the recognition of Net Revenue in the amount of R$14.4 million, due to the interruption of practical classes during the pandemic. 
(3) Includes the impact of the adoption of IFRS16.

2.  Second Half 2020 Guidance

The Company is introducing guidance for 2H20 which takes into account the successfully concluded acceptances of new medicine students for the second half of 2020 and assuming a certain degree of potential impacts of COVID-19 into the business during 2H20. We assume that the practical educational on-campus activities resume in second half but some portion might be provided only in 2021.

The global Coronavirus outbreak is an unprecedented and still evolving situation. When considering Afya’s guidance for 2H20, it is paramount that shareholders and the market in general be advised that the COVID-19 pandemic is still evolving in Brazil, some state authorities may maintain quarentines or “shelter in place” status for a still undefined period of time and/or take other actions not contemplated into the guidance, all of which are outside of the Company’s control.

Considering the above factors, the guidance for 2H20 is defined in the following table.

Guidance for 2H20	Important considerations
Net Revenue is expected to be between R$600 million – R$640 million	Includes PEBMED starting on July 20, 2020. Includes R$14.4 million of Net Revenue related to the 1H20 that was not recognized due to the postponement of practical classes during the pandemic. Excludes any acquisition that may be concluded after the issuance of the guidance. For instance does not include FCMPB and FESAR.
Adjusted EBITDA margin is expected to be between 45.5-47.0%	Includes PEBMED starting on July 20, 2020. Includes R$14.4 million of Net Revenue related to the 1H20 that was not recognized due to the postponement of practical classes during the pandemic. Excludes any acquisition that may be concluded after the issuance of the guidance. For instance does not include FCMPB and FESAR. Includes the impact of the adoption of IFRS 16.

3.  Overview of 2Q20

Operational Review

Afya is the only company offering technological solutions to support students across every stage of the medical career, from undergraduate students in its medical school years through medical residency preparatory courses, medical specialization programs and continuing medical education.

The Company operates two distinct business units. The first (Business Unit 1 or BU1), is comprised of Undergraduate – medical schools, other healthcare programs and ex-health degrees. Revenue is generated from the monthly tuition fees the Company charges students enrolled in the undergraduate programs. The Company also offers Residency Preparatory and Specialization Programs, as well as Digital Health Services (Business Unit 2 or BU2). Revenue is comprised of fees from these programs.

Table 2: Key Revenue Drivers	Six months ended June 30,
	2020	2019	% Chg
Business Unit 1: Educational Services Segment ¹
MEDICAL SCHOOL
Approved Seats²	1,866	1,352	38.0	%
Operating Seats	1,516	1,102	37.6	%
Total Students	9,097	5,550	63.9	%
Total Students (ex-UniSL and ex- Uniredentor)	7,319	5,550	31.9	%
Tuition Fees (ex- UniSL and ex- Uniredentor - R$MM)	358,214	239,280	49.7	%
Tuition Fees (Total - R$MM)	406,439	239,280	69.9	%
Medical School Avg, Ticket (ex- UniSL and ex- Uniredentor - R$/month)	8,157	7,186	13.5	%
UNDERGRADUATE HEALTH SCIENCE
Total Students	13,853	6,939	99.6	%
Total Students (ex-UniSL and ex- Uniredentor)	7,031	6,939	1.3	%
Tuition Fees (ex- UniSL and ex- Uniredentor - R$MM)	52,249	49,570	5.4	%
Tuition Fees (Total - R$MM)	68,723	49,570	38.6	%
OTHER UNDERGRADUATE
Total Students	16,031	12,711	26.1	%
Total Students (ex-UniSL and ex- Uniredentor)	8,723	12,711	-31.4	%
Tuition Fees (ex- UniSL and ex- Uniredentor - R$MM)	58,829	60,504	-2.8	%
Tuition Fees (Total - R$MM)	80,707	60,504	33.4	%
Business Unit 2: Prep Courses & CME and Medical Specialization
Active Paying Students
Prep Courses & CME - B2C	10,594	8,415	25.9	%
Prep Courses & CME - B2B	890	732	21.6	%
Medical Specialization & Others	4,513	1,728	161.2	%
Medical Specialization & Others (ex-Uniredentor)	2,188	1,728	26.6	%
Revenue from courses (ex- Uniredentor - R$MM) ³	86,643	23,371	270.7	%
1. Uniredentor average tuition fee for medical school in 1H2020 was R$9,431 and for UniSL was R$7,691.
2. This number does not includes FCMPB and FESAR that were acquired in August, 2020 and contribute 277 seats to Afya.
3. As Medcel and Ipemed were acquired on March 31, 2019 and on May 9, 2019 respectively, revenue from courses for BU2 were not accounted for in 1Q19. The number of students is disclosed to contribute with investors analysis.

Along with the active paying students, 11,619 medical students from 46 public and private medical schools are still accessing the Company’s Digital platform with a temporary free access during the pandemic crisis.

Total monthly active users (MaU) increased 27.6% quarter over quarter, reaching 20,420 users at the end of June. MaU represents the number of unique individuals that consumed Afya’s digital content in the last 30 days. Afya’s offers to its MaU a significant amount of learning assets, comprised of e-books, videos, podcasts and question/answer documents.

Table 3: Key Operational Drivers for BU2	2020
	2Q20	1Q20	% Chg
Total Monthly Active Users (MaU)	20,420	16,008	27.6%

*Does not include PEBMED’s numbers

Seasonality

Afya’s two businesses are impacted by seasonality but at different time periods. The first is associated with the concentration of prep course revenues in the first and fourth quarters of each year, when new content (books and e-books) is delivered and most part of the revenues are recognized. The second is associated with the maturation of several medical schools, which leads to a higher enrollment base in the second half of each year. As a result, in a typical year, the first quarter is normally the strongest. The fourth quarter is normally the second strongest, followed by the third and second quarters, respectively. Finally, the second half of the year is normally stronger than the first half.

Revenue

Total Net Revenue for second quarter 2020 was R$274.2 million, an increase of 53.6% over the same period of prior year. Pro forma Net Revenue, which considers results of Medcel, IPEMED and FASA as if they were acquired on January 1^st 2019, was R$274.2 million in 2Q20, up 48.8% over the same period of the prior year. Excluding UniSL and UniRedentor, Pro Forma Net Revenue in 2Q20 increased 18.8% YoY, reaching R$218.8 million. This increase was primarily driven by organic revenue growth, mainly due to the maturation of medical school seats and increase in average ticket.

For the six-months ended June 30, 2020 Total Net Revenue was R$546.5 million, an increase of 69.2% over the same period of last year. For the six-months ended June 30, 2020, Pro forma Net Revenue increased 35.9% over the same period of last year, to R$546.5 million. Excluding UniSL and UniRedentor, Pro Forma Net Revenue in six-months ended June 30 increased 18.3% YoY, reaching R$475.8 million.

Taking into account the interruption of on-campus activities and that some non-practical educational activities had to be rearranged to 2H20, according to IFRS15, the Company concluded it was necessary to defer R$14.4 million of its 2Q20 Net Revenue, with no postponement of costs or expenses in the same period. The Company expects these activities to gradually resume during 2H20 and the associated deferred revenues to be recognized at that time.

Table 4: Revenue & Revenue Mix
(in thousand of R$)	For the three months period ended June 30,									For the six months period ended June 30,
	2020	2020 Ex Uniredentor and UniSL	2019		% Chg		% Chg Ex Uniredentor and UniSL			2020		2020 Ex Uniredentor and UniSL	2019		% Chg		% Chg Ex Uniredentor and UniSL
Net Revenue Mix
Business Unit-1	240,102	190,064	156,940		53.0	%	21.1	%		451,886		389,168	301,518		49.9	%	29.1	%
Business Unit-2	34,109	28,749	23,371		45.9	%	23.0	%		95,606		86,643	23,371		309.1	%	270.7	%
Inter-segment transactions	-	-	(1,818	)	-		-			(977	)	-	(1,818	)	-46.3	%	-
Total Reported Net Revenue	274,211	218,813	178,493		53.6	%	22.6	%		546,515		475,811	323,071		69.2	%	47.3	%
Total Pro Forma Net Revenue¹	274,211	218,813	184,229		48.8	%	18.8	%		546,515		475,811	402,172		35.9	%	18.3	%
1. Includes the pro-forma results of Medcel, IPEMED and FASA, as if the acquisition had been consummated on January 1, 2019.

Adjusted EBITDA

Adjusted EBITDA in the three-months ended June 30, 2020 increased 76.6% to R$118.2 million, from R$66.9 million in the same period of the prior year. Adjusted EBITDA margin of 43.1% was up from 37.5% reported in the three-months ended June 30, 2019. For the six-months ended June 30, 2020, Adjusted EBITDA increased 82.7% to R$258.8 million, from R$141.6 million in the six-months ended June 30, 2019. Adjusted EBITDA margin of 47.4% was 360 basis points higher than the 43.8% reported in the six-months ended June 30, 2019.  

Excluding the consolidation of UniRedentor and UniSL, Pro forma Adjusted EBITDA in the three-months ended June 30, 2020 increased 44.0% YoY to R$98.1 million from R$68.1 million while Pro forma Adjusted EBITDA margin increased 780 basis points, to 44.8% from 37.0%. For the six-months ended June 30, 2020, Pro forma Adjusted EBITDA excluding Uniredentor and UniSL increased 54.7% YoY to R$235.9 million up from R$152.5 million and Pro forma Adjusted EBITDA margin increased 1170 basis points, to 49.6% from 37.9%. Both improvements reflect mainly operational leverage, synergies obtained from recent acquisitions and other improvements.

Table 5: Adjusted EBITDA
(in thousand of R$)	For the three months period ended June 30,											For the six months period ended June 30,
	2020		2020 Ex Uniredentor and UniSL		2019		% Chg		% Chg Ex Uniredentor and UniSL			2020		2020 Ex Uniredentor and UniSL		2019		% Chg		% Chg Ex Uniredentor and UniSL
Adjusted EBITDA	118,152		98,072		66,909		76.6	%	46.6	%		258,796		235,867		141,639		82.7	%	66.5	%
% Margin	43.1	%	44.8	%	37.5	%	560 bps		730 bps			47.4	%	49.6	%	43.8	%	360 bps		580 bps
Proforma Adjusted EBITDA¹	118,152		98,072		68,127		73.4	%	44.0	%		258,796		235,867		152,509		69.7	%	54.7	%
% Margin	43.1	%	44.8	%	37.0	%	610 bps		780 bps			47.4	%	49.6	%	37.9	%	950 bps		1170 bps
1. Includes the pro-forma results of Medcel, IPEMED and FASA, as if the acquisition had been consummated on January 1, 2019.

Net Income

Adjusted Net Income for the second quarter 2020 was R$82.6 million, increasing 163.1% over the same period of the prior year. For the six-months ended June 30, 2020, the Company reported Adjusted Net Income of R$206.6 million, compared to an Adjusted Net Income of R$84.9 million in the six-months ended June 30, 2019, an increase of 143.3%. Both increases reflect mainly the revenue contribution, synergies captured and margin expansion from the consolidation of acquisitions as well as organic growth.

(in thousand of R$)
	For the three months period ended June 30,							For the six months period ended June 30,
	2020		2019		% Chg			2020		2019		% Chg
Net income	63,886		21,326		199.6	%		167,556		70,802		136.7	%
Amortization of customer relationships and trademark (1)	12,515		9,182		36.3	%		24,416		12,196		100.2	%
Share-based compensation	6,157		868		609.3	%		14,597		1,909		664.6	%
Adjusted Net Income	82,558		31,376		163.1	%		206,569		84,907		143.3	%
(1) Consists of amortization of customer relationships and trademark recorded under business combinations.

Balance Sheet and Cash Flow

Cash and cash equivalents, including restricted cash, at June 30, 2020 were R$1.1 billion, compared to R$1.3 billion at March 31, 2020, a decrease of 19.0% due to the acquisitions concluded during the 1H20.

For the six-month period ended June 30, 2020, Afya reported an Adjusted Cash Flow from Operations of R$201.8 million up from R$111.2 million in same period of previous year, an 81.5% year-over-year increase.

Operating Cash Conversion Ratio for the six-month period ended June 30, 2020 was 82.6% compared with 85.4% in same period of the previous year. This decrease was mainly due to the consolidation of Medcel results in 1H20 figures and our students renegotiation of overdue monthly installments due to Covid-19 crisis. Prep course’s revenues are recognized mainly in the first and fourth quarters of each year, but the receivables are mostly stable during the year, Medcel’s results negatively affects cash conversion in the first and fourth quarters.

Table 6: Operating Cash Conversion Ratio Reconciliation	For the six months period ended June 30,
(in thousand of R$)	Considering the adoption of IFRS 16
	2020		2019		% Chg
(a) Cash flow from operations	189,417		108,810		74.1	%
(b) Income taxes paid	12,397		2,392		418.3	%
(c) = (a) + (b) Adjusted cash flow from operations	201,814		111,202		81.5	%
(d) Adjusted EBITDA	258,796		141,639		82.7	%
(e) Non-recurring expenses:
- Integration of new companies (1)	4,982		3,607		38.1	%
- M&A advisory and due diligence (2)	5,636		1,099		412.8	%
- Expansion projects (3)	2,091		943		121.7	%
- Restructuring Expenses (4)	1,762		5,749		-69.4	%
(f) = (d) - (e) Adjusted EBITDA ex- non-recurring expenses	244,325		130,241		87.6	%
(g) = (a) / (f) Operating cash conversion ratio	82.6	%	85.4	%	-280 bps
(1) Consists of expenses related to the integration of newly acquired companies.
(2) Consists of expenses related to professional and consultant fees in connection with due diligence services for M&A transactions.
(3) Consists of expenses related to professional and consultant fees in connection with the opening of new campuses.
(4) Consists of expenses related to the employee redundancies in connection with the organizational restructuring of acquired companies.

4.  Subsequent Events

Acquisition of PEBMED
On July 20, 2020, the Company announced the acquisition of 100% of the total share capital of PEBMED, through its wholly-owned subsidiary Afya Participações S.A. PEBMED offers content and clinical decision applications with the aim of assisting healthcare professionals make quicker and/or better decisions by providing up to date information at their fingertips, through its products WhiteBook, Nursebook and Portal PEBMED. The business model consists of both paid subscriptions and free content. The net purchase price was R$132.9 million, with the assumption of estimated net debt of R$7.1 million, of which: (i) 86.8% was paid in cash, and (ii) 13.2% was paid in Afya’s stock. The price multiple is equivalent to 4x PEBMED’s annual recurring revenue.

Acquisition of Faculdade Ciências Médicas da Paraíba (FCMPB)
On August 20, 2020, the Company announced it entered into a purchase agreement for the acquisition, through its wholly-owned subsidiary Afya Participações S.A., of 100% of the total share capital of Faculdade Ciências Médicas da Paraíba. FCMPB is a post-secondary education institution with government authorization to offer on-campus, undergraduate courses in medicine in the State of Paraíba. The projected Net Revenue for FCMPB in 2024 is R$107.0 million with an EV/EBITDA post synergies and maturation of 6.3x, all derived from its medical school. The aggregate purchase price is R$380.0 million, of which: (i) 50% is payable in cash on the transaction closing date, and (ii) 50% is payable in cash in four equal installments through 2024, adjusted by the CDI rate. The acquisition will contribute 157 medical school seats to Afya, increasing Afya’s total medical school seats to 2,023.

Acquisition of Faculdade de Ensino Superior da Amazônia Reunida (FESAR)
On August 26, 2020, the Company announced it entered into a purchase agreement for the acquisition, through its wholly-owned subsidiary Afya Participações S.A., of 100% of the total share capital of Faculdade de Ensino Superior da Amazônia Reunida. FESAR is a post-secondary education institution with government authorization to offer on-campus, undergraduate courses in medicine in the State of Pará. The projected Net Revenue for FESAR in 2024 is R$88.6 million with an EV/EBITDA post synergies and maturation of 4.7x adjusted by the real estate. The aggregate purchase price is R$260 million, of which 100% is payable in cash on the transaction closing date. The enterprise value also includes real estate which is valued at R$21.0 million. The acquisition will contribute 120 medical school seats to Afya, increasing Afya’s total medical school seats to 2,143.

5.  Conference Call and Webcast Information

When:		August 28, 2020 at 11:00 a.m. ET.
Who:		Mr. Virgilio Gibbon, Chief Executive Officer Mr. Luis André Blanco, Chief Financial Officer Ms. Renata Costa Couto, Head of Investor Relations

Dial-in: +55-11-3181-8565 or +1-844- 204-8586 or +1-412-717-9627 (International), conference ID: Afya

Webcast: ir.afya.com.br

Replay: available between August 28, 2020 until September 9, 2020, by dialing +1-412-317-0088 conference ID: 10147648.

6.  About Afya Limited (Nasdaq: AFYA)

Afya is the leading medical education group in Brazil based on number of medical school seats, delivering an end-to-end physician-centric ecosystem that serves and empowers students to be lifelong medical learners from the moment they enroll as medical students through their medical residency preparation, graduation program, and continuing medical education activities. Afya also offers content and clinical decision applications for healthcare professionals, through its products WhiteBook, Nursebook and Portal PEBMED. For more information, please visit www.afya.com.br.

7.  Forward – Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. All statements other than statements of historical fact, could be deemed forward looking, including risks and uncertainties related to statements about our competition; our ability to attract, upsell and retain students; our ability to increase tuition prices and prep course fees; our ability to anticipate and meet the evolving needs of student and teachers; our ability to source and successfully integrate acquisitions; general market, political, economic, and business conditions; and our financial targets such as revenue, share count and IFRS and non-IFRS financial measures including gross margin, operating margin, net income (loss) per diluted share, and free cash flow. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, such as statements about the potential impacts of the COVID-19 pandemic on our business operations, financial results and financial position and on the Brazilian economy.

The Company undertakes no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law. The achievement or success of the matters covered by such forward-looking statements involves known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. Readers should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent management’s beliefs and assumptions only as of the date such statements are made. Further information on these and other factors that could affect the Company’s financial results is included in filings made with the United States Securities and Exchange Commission (SEC) from time to time, including the section titled “Risk Factors” in the most recent Rule 434(b) prospectus. These documents are available on the SEC Filings section of the investor relations section of our website at: https://ir.afya.com.br/.

8.  Non-GAAP Financial Measures

To supplement the Company's consolidated financial statements, which are prepared and presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board—IASB, Afya uses Proforma Revenue, Adjusted EBITDA, Pro Forma Adjusted EBITDA, Pro Forma Adjusted Net Income and Operating Cash Conversion Ratio information for the convenience of investors, which are non-GAAP financial measures. A non-GAAP financial measure is generally defined as one that purports to measure financial performance but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure.

Afya calculates Adjusted EBITDA as net income plus/minus net financial result plus income taxes expense plus depreciation and amortization plus interest received on late payments of monthly tuition fees, plus share-based compensation plus/minus income share associate plus/minus non-recurring expenses. Pro Forma Adjusted EBITDA is calculated as pro forma net income plus/minus pro forma net financial result plus pro forma income taxes expense plus pro forma depreciation and amortization plus pro forma interest received on late payments of monthly tuition fees, plus pro forma share-based compensation plus/minus pro forma income share associate plus/minus pro forma non-recurring expenses. The calculation for Adjusted Net Income is net income plus amortization of customer relationships and trademark, plus shared based compensation. We calculate Operating Cash Conversion Ratio as the cash flows from operations, adjusted with income taxes paid divided by Adjusted EBITDA plus/minus non-recurring expenses.

Management presents Adjusted EBITDA, Pro Forma Adjusted EBITDA and Pro Forma Adjusted Net Income because it believes these measures provide investors with a supplemental measure of the financial performance of the core operations that facilitates period-to-period comparisons on a consistent basis. Afya also presents Operating Cash Conversion Ratio because it believes this measure provides investors with a measure of how efficiently the Company converts EBITDA into cash. The non-GAAP financial measures described in this prospectus are not a substitute for the IFRS measures of earnings. Additionally, calculations of Adjusted EBITDA, Pro Forma Adjusted EBITDA, Pro Forma Adjusted Net Income and Operating Cash Conversion Ratio may be different from the calculations used by other companies, including competitors in the education services industry, and therefore, Afya’s measures may not be comparable to those of other companies.

9.  Unaudited Pro Forma Condensed Consolidated Financial Information

The unaudited interim pro forma condensed consolidated statement of income for the three and six months ended June 30, 2019 is based on the historical unaudited interim consolidated financial statements of each company, and gives effect of the acquisition of Medcel, IPEMED and FASA by Afya Brazil as if it had been consummated on January 1, 2019. Pro forma adjustments were made to reflect the acquisition of Medcel, IPEMED and FASA by Afya Brazil.

10.  Investor Relations Contact

Renata Couto, Head of Investor Relations
Phone: +55 31 3515.7564 | +55 31 98463.3341
E-mail: renata.couto@afya.com.br

 

11.  Financial Tables

Interim condensed consolidated statements of income and comprehensive income

For the three and six-months periods ended June 30, 2020 and 2019

(In thousands of Brazilian Reais, except earnings per share)

		Three-month period ended						Six-month period ended
		June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net revenue		274,211			178,493			546,515			323,071
Cost of services		(106,683	)		(82,283	)		(195,934	)		(136,647	)
Gross profit		167,528			96,210			350,581			186,424
General and administrative expenses		(90,039	)		(59,584	)		(176,762	)		(90,818	)
Other (expenses) income, net		(689	)		576			(748	)		370
Operating income		76,800			37,202			173,071			95,976
Finance income		13,954			4,650			42,780			9,817
Finance expenses		(23,130	)		(19,721	)		(40,802	)		(31,957	)
Finance result		(9,176	)		(15,071	)		1,978			(22,140	)
Share of income of associate		2,603			920			4,905			920
Income before income taxes		70,227			23,051			179,954			74,756
Income taxes expense		(6,341	)		(1,725	)		(12,398	)		(3,954	)
Net income	96	63,886			21,326			167,556			70,802
Other comprehensive income		-			-			-			-
Total comprehensive income		63,886			21,326			167,556			70,802
Income attributable to
Equity holders of the parent		60,679			16,317			160,495			57,852
Non-controlling interests		3,207			5,009			7,061			12,950
		63,886			21,326			167,556			70,802
Basic earnings per share
Per common share		0.65			0.23			1.74			0.91
Diluted earnings per share Per common share		0.65			0.23			1.73			0.89

Interim condensed consolidated statements of financial position

As of June 30, 2020 and December 31, 2019

(In thousands of Brazilian Reais)

		June 30, 2020		December 31, 2019
Assets		(unaudited)
Current assets
Cash and cash equivalents		1,041,462		943,209
Restricted cash		10,902		14,788
Trade receivables		238,874		125,439
Inventories		5,375		3,932
Recoverable taxes		18,774		6,485
Derivatives		8,720		-
Other assets		14,108		17,912
Total current assets		1,338,215		1,111,765
Non-current assets
Restricted cash		2,053		2,053
Trade receivables		13,611		9,801
Other assets		41,240		17,267
Investment in associate		50,539		45,634
Property and equipment		192,686		139,320
Right-of-use assets		376,023		274,275
Intangible assets		1,835,823		1,312,338
Total non-current assets		2,511,975		1,800,688
Total assets		3,850,190		2,912,453
Liabilities
Current liabilities
Trade payables		23,234		17,628
Loans and financing		42,094		53,607
Derivatives		-		757
Lease liabilities		46,920		22,693
Accounts payable to selling shareholders		149,879		131,883
Notes payable		9,322		-
Advances from customers		40,621		36,860
Labor and social obligations		98,916		46,770
Taxes payable		32,483		19,442
Income taxes payable		4,395		3,213
Other liabilities		14,662		376
Total current liabilities		462,526		333,229
Non-current liabilities
Loans and financing		19,308		6,750
Lease liabilities		347,320		261,822
Accounts payable to selling shareholders		245,567		168,354
Notes payable		69,115		-
Taxes payable		23,924		21,304
Provision for legal proceedings		19,807		5,269
Other liabilities		3,048		1,999
Total non-current liabilities		728,089		465,498
Total liabilities		1,190,615		798,727
Equity
Share capital		17		17
Additional paid-in capital		2,300,513		1,931,047
Share-based compensation reserve		32,711		18,114
Retained earnings		276,411		115,916
Equity attributable to equity holders of the parent		2,609,652		2,065,094
Non-controlling interests		49,923		48,632
Total equity		2,659,575		2,113,726
Total liabilities and equity		3,850,190		2,912,453

Interim condensed consolidated statements of cash flows

For the six-months periods ended June 30, 2020 and 2019

(In thousands of Brazilian Reais)

				June 30, 2020			June 30, 2019
				(unaudited)			(unaudited)
Operating activities
	Income before income taxes			179,954			74,756
		Adjustments to reconcile income before income taxes
			Depreciation and amortization	51,330			28,441
			Allowance for doubtful accounts	13,953			8,606
			Share-based compensation expense	14,597			1,909
			Net foreign exchange differences	(14	)		(1,858	)
			Net (gain) loss on derivatives	(19,430	)		2,809
			Accrued interest	11,017			9,873
			Accrued lease interest	20,428			14,540
			Share of income of associate	(4,905	)		(920	)
			Provision for legal proceedings	1,183			(347	)
Changes in assets and liabilities
	Trade receivables			(104,831	)		(28,624	)
	Inventories			(976	)		884
	Recoverable taxes			(11,464	)		(2,827	)
	Other assets			2,940			(15,758	)
	Trade payables			996			5,257
	Taxes payables			10,214			1,139
	Advances from customers			(13,317	)		1,428
	Labor and social obligations			39,605			13,352
	Other liabilities			10,534			(1,458	)
				201,814			111,202
	Income taxes paid			(12,397	)		(2,392	)
	Net cash flows from operating activities			189,417			108,810
Investing activities
	Acquisition of property and equipment			(37,583	)		(20,674	)
	Acquisition of intangibles assets			(7,766	)		(718	)
	Restricted cash			3,870			(1,153	)
	Payments of accounts payable to selling shareholders			(67,304	)		(30,674	)
	Payments of notes payable			(1,611	)		-
	Acquisition of subsidiaries, net of cash acquired			(240,631	)		(148,880	)
	Loans to related parties			-			(1,695	)
	Net cash flows used in investing activities			(351,025	)		(203,794	)
Financing activities
	Payments of loans and financing			(99,096	)		(23,868	)
	Issuance of loans and financing			911			-
	Payments of lease liabilities			(25,538	)		(17,316	)
	Capital increase			-			150,000
	Proceeds from issuance of common shares			389,170			-
	Shares issuance cost			(19,704	)		-
	Dividends paid to non-controlling interests			(5,770	)		(7,621	)
	Net cash flows from financing activities			239,973			101,195
	Net foreign exchange differences			19,888			-
	Net increase in cash and cash equivalents			78,365			6,211
	Cash and cash equivalents at the beginning of the period			943,209			62,260
	Cash and cash equivalents at the end of the period			1,041,462			68,471

Reconciliation between Net Income and Adjusted EBITDA, Pro Forma Adjusted EBITDA

(in thousand of R$)
	For the three months period ended June 30,							For the six months period ended June 30,
	2020		2019		% Chg			2020		2019		% Chg
Net income	63,886		21,326		199.6	%		167,556		70,802		136.7	%
Net financial result	9,176		15,071		-39.1	%		(1,978	)	22,140		n.a.
Income taxes expense	6,341		1,725		267.6	%		12,398		3,954		213.6	%
Depreciation and amortization	26,383		19,387		36.1	%		51,330		28,441		80.5	%
Interest received (1)	1,810		1,410		28.4	%		5,327		3,915		36.1	%
Income share associate	(2,603	)	(920	)	182.9	%		(4,905	)	(920	)	433.2	%
Share-based compensation	6,157		868		609.3	%		14,597		1,909		664.6	%
Non-recurring expenses:	7,002		8,042		-12.9	%		7,002		8,042		-12.9	%
- Integration of new companies (2)	1,862		2,607		-28.6	%		4,982		3,607		38.1	%
- M&A advisory and due diligence (3)	2,886		959		200.9	%		5,636		1,099		412.8	%
- Expansion projects (4)	1,308		638		105.0	%		2,091		943		121.7	%
- Restructuring expenses (5)	946		3,838		-75.4	%		1,762		5,749		-69.4	%
Adjusted EBITDA	118,152		66,909		76.6	%		258,796		141,639		82.7	%
Adjusted EBITDA Margin	43.1	%	37.5	%	560 bps			47.4	%	43.8	%	360 bps
Adjusted EBITDA comparable to guidance	107,363		66,909		60.5	%		248,007		141,639		75.1	%
Adjusted EBITDA Margin comparable to guidance	44.0	%	37.5	%	650 bps			48.1	%	43.8	%	430 bps
Pro Forma Adjusted EBITDA	118,152		68,127		73.4	%		258,796		152,509		69.7	%
Pro Forma Adjusted EBITDA Margin	43.1	%	37.0	%	610 bps			47.4	%	37.9	%	950 bps
(1) Represents the interest received on late payments of monthly tuition fees.
(2) Consists of expenses related to the integration of newly acquired companies.
(3) Consists of expenses related to professional and consultant fees in connection with due diligence services for our M&A transactions.
(4) Consists of expenses related to professional and consultant fees in connection with the opening of new campuses.
(5) Consists of expenses related to the employee redundancies in connection with the organizational restructuring of our acquired companies.

FAQ

What were Afya's net revenue results for Q2 2020?

Afya reported net revenue of R$274.2 million for Q2 2020, a 53.6% year-over-year increase.

How much did Afya's adjusted EBITDA increase in Q2 2020?

Afya's adjusted EBITDA increased 76.6% year-over-year to R$118.2 million in Q2 2020.

What is the adjusted net income for Afya in Q2 2020?

Afya's adjusted net income for Q2 2020 was R$82.6 million, reflecting a 163.1% increase compared to Q2 2019.

What are Afya's financial guidance expectations for H2 2020?

For H2 2020, Afya expects net revenue between R$600 million and R$640 million, incorporating deferred revenue from H1.

What acquisitions did Afya announce recently?

Afya announced the acquisition of PEBMED and entered into agreements for Faculdade Ciências Médicas da Paraíba and Faculdade de Ensino Superior da Amazônia Reunida.