Earnings Call - AFYA LTD

Financial Performance:

• AFIA reported 2026 revenue of approximately R$3.8 billion (approx. $670M USD at time of IPO context, now scaled 5-6x from 2019), with adjusted EBITDA reaching R$1.7 billion; UFIA highlights a 21% revenue CAGR and 22% EBITDA CAGR over the past five years.
• Free Cash Flow to Equity (FCFE) is robust at R$1.2 billion; the company maintains a low net debt leverage of 0.8x EBITDA.
• Capital allocation strategy prioritizes shareholder returns (dividends and buybacks), with R$1.1 billion returned to shareholders from 2021-2026 (36% of FCFE).
• M&A track record shows an average valuation multiple of 4.5x EV/EBITDA post-synergy, with 22 acquisitions since IPO totaling nearly R$4.1 billion for medical seats.
• The merger with eduX (10 years of growth in one transaction) targets a combined company valuation multiple of 2.6x EV/EBITDA post-synergies, with a commitment to distribute R$750 million in free cash flow to equity, with AFIA providing a top-up if eduX misses targets (69% AFIA, 31% eduX split).
• Investments in intangibles and content totaled R$178 million over 18 months, with R$205 million invested in physical infrastructure (labs, clinics).

Guidance and Future Outlook:

• Management projects 20% to 25% revenue growth potential via synergies, with 80% of the R$2.2 billion synergy target expected to be captured within three years.
• Future growth levers include expanding medical practice ecosystem reach to increase patient/doctor frequency by 10-15%, extending lifelong learning into new geographies (North-Northeast), and scaling hybrid/digital education platforms.
• The combined entity aims to increase M&A target pipeline from 89 companies to 135 companies (21,000 medical seats) post-merger.
• Long-term goal is to transition from a purely medical education focus to a comprehensive health ecosystem, targeting B2B monetization with pharmaceuticals, hospitals, and labs, with pharma engagement expected to grow 40-50% YoY.
• Management anticipates stabilization in the regulatory environment for medical seats after 2026, with high barriers to entry for new competitors.

Business Segments and Product Lines:

• Undergraduate Medicine: Expanded from 7 states (1,200 seats) in 2019 to nearly 20 states (3,800 seats) in 2026, maintaining 100% occupancy.
• Medical Practice & Digital Solutions: Includes Whitebook (clinical decision support, 32M annual searches, 564k registered users), iClinic (50k subscribers, 3M monthly consultations), and e-prescription platform (20M prescriptions in 12 months).
• Continuing Education: Serves 10,000+ students and 56,000+ users; integrates physical hubs (25 units) with digital platforms and AI-driven "AI First" curriculum.
• Strategic Ecosystem: Connects 1,000+ doctors, 1,700+ medical school staff, and 3,500 collaborators; over 300,000 doctors as users, 600+ partnerships with government and healthcare providers.
• New Initiatives: Launch of "AI First" curriculum, generative AI integration in clinical decision support, and a new medical update portal consolidating content consumption across physician career stages.

Market and Competitive Landscape:

• AFIA is the largest medical education ecosystem in Brazil, serving 80% of registered physicians and 500,000+ active users.
• The merger with eduX creates a dominant platform with combined capital (R$10B+ valuation potential) and footprint, addressing market saturation in traditional medical seats by pivoting to health ecosystem services.
• Competition exists in the medical seats sector, but AFIA differentiates via high accreditation (9 SAIM accreditations), full occupancy, and a unique "flying wheel" ecosystem connecting education, practice, and industry.
• Regulatory challenges include the NMAG exam implementation and potential labor law changes (6-to-1 shifts), but management views the current landscape as favoring established, high-quality players.
• B2B revenue opportunities are expanding with the shift in the pharmaceutical industry toward digital engagement and the ability to offer targeted data-driven marketing.

Risks and Challenges:

• Regulatory Approval: The merger requires antitrust and other government approvals, expected to take 9-11 months (closing by August 2027).
• Integration Complexity: Merging distinct operating models (AFIA's on-site focus vs. eduX's digital scale) requires a "clean team" to plan integration without violating antitrust restrictions during the pre-closing period.
• Labor Costs: Potential impact from labor court rulings on weekend work (6-to-1 shifts) could increase professor costs if the "one-sixth" bonus is reclassified as "two-fifths," though management disputes the immediate financial impact on admin staff.
• Data Privacy and AI: Scaling AI solutions and data monetization requires careful navigation of data privacy laws and ethical AI usage to maintain trust with physicians.
• Synergy Execution: Realizing the R$2.2B synergy target depends on the successful integration of IT architectures, academic operations, and talent retention.

Management Commentary and Tone:

• Tone is highly confident and optimistic, emphasizing the "transformation" of the company from a pure education provider to a "full health ecosystem."
• CEO Virgílio Dibon stressed the strategic necessity of the merger to unlock growth in a mature market, highlighting the complementary nature of AFIA's physical footprint and eduX's digital scale.
• CFO Luiz Blanco reinforced a disciplined capital allocation framework, focusing on low-leverage M&A and consistent shareholder returns.
• Head of Digital Services, Lelio, detailed the "AI First" vision, framing technology as a core differentiator for clinical decision-making and B2B value creation.
• Integration Officer Dennis expressed strong commitment to a "clean team" approach to ensure zero disruption and precise synergy capture post-merger.

Analyst Questions and Answers:

• Antitrust & Geography: Q regarding antitrust overlap; A: Overlap exists in Rio, Teresina, and Paraná, but market dynamics (students traveling) mitigate concerns; strategy involves hybrid assets and non-competitive regions (e.g., SP).
• Pricing: Q on pricing resilience; A: No de-investment plans; pricing will increase (e.g., 25% for 2027) above inflation to maintain quality and differentiation, leveraging full occupancy.
• NMAG Exam: Q on impact of new medical licensing exam; A: NMAG acts as a barrier to entry, favoring AFIA's preparation ecosystem; student pass rates improving with simulation tools.
• Synergies: Q on revenue vs. cost synergies; A: Cost synergies (SG&A) are primary quantified target; revenue synergies (cross-selling to eduX students, pharma) estimated at R$800M NPV but not yet fully guided.
• Labor Laws: Q on 6-to-1 shift impact; A: Admin impact is minimal due to productivity gains; academic cost impact depends on final court interpretation of weekend compensation, potentially a 20% cost increase for professors.
• Capex/Technology: Q on cost structure differences; A: eduX has superior digital scale; AFIA will apply eduX's digital efficiency to its physical units and leverage AFIA's high utilization rates to optimize eduX's digital operations.

Other Key Points:

• AI & Data Intelligence: AFIA demonstrated real-time epidemiological tracking (e.g., measles in São Paulo) using aggregated, anonymized Whitebook search data to alert doctors and health authorities, showcasing a unique B2B data product.
• ESG & Social Impact: AFIA reported a Social Return on Investment (SROI) of 20, measuring reduced hospitalizations and increased vaccination in low-vulnerability municipalities; a World Bank financing deal with social covenants reduced interest rates by 15 basis points.
• Digital Transformation: The company launched a new IR website featuring an AI assistant for investors and is integrating 11+ health techs into a unified user identity system.
• Culture & Governance: Post-merger, Virgílio Dibon will remain CEO; governance includes a controlling group with both AFIA and eduX shareholders; a dedicated 13-person "clean team" is exclusively planning integration.
• Academic Excellence: 4,500 scientific papers published in 2025 (90% medical), with 333 articles in A1/A2 journals, positioning AFIA as a leader in medical research in Brazil.