Earnings Call - AFYA LTD

Explicit Guidance:

• Synergy Capture: Management targets $2.2 billion in cost, expense, and capex synergies to be captured within three years post-transaction (approx. 20-25% of combined market cap), with 80% of these synergies realized in that timeframe.
• Dividend Commitment: The combined entity commits to distributing $750 million in Free Cash Flow to Equity (FCFE). A "top-up" mechanism ensures AFIA receives its proportional share (69%) if eDUCS fails to meet the $750 million FCFE target, with AFIA covering the gap at a 31% contribution ratio (69/31 split locked).
• Cash Generation: The combined company projects generating $1.2 billion in annual FCFE post-synergies.
• Valuation Metrics: Post-synergies, the combined entity expects an EV/EBITDA multiple of 2.6x (down from 2.7% implied pre-synergy).
• Pricing: For the 2027 intake, tuition pricing is set with an increases of 25%, projecting above IPCA (inflation) forecasts for 2027.
• M&A Multiples: Historical M&A transactions yield an average of 4.0x to 4.6x EBITDA; the eDUCS transaction is valued at 2.7x EBITDA pre-synergy and 2.6x post-synergy.

Business-Segment Outlook:

• Undergraduate Education (Afia): Expected to reach maturity with full occupation. Growth strategy focuses on 10–15% volume increase in medical seats by maturing operations and expanding to small/medium cities.
• Undergraduate Education (eDUCS): Combined entity will expand reach to 135 companies with 21,000 medical seats (up from Afia's 89 companies/12,000 seats), increasing M&A pipeline visibility.
• Continuing Education & Lifelong Learning: Planning to expand capillarity across 25 cities, utilizing weekend capacity to increase frequency of engagement.
• Medical Practice & Digital Services:
  • Whitebook: Targeting 100,000+ daily active users in AI-driven clinical decision support; aim to scale clinical decision intelligence and prescription tools.
  • iClinic: 50,000 payers, 36,000 active users, 3 million monthly consultations; expanding generative AI for clinical reporting and decision support.
  • Prescriptions: Projecting growth in digital prescriptions (currently 20M in 12 months) driven by regulatory changes and platform adoption.
  • B2B Monetization: Pharma engagement expected to grow 40–50% YoY; prescription promotion (advertising during e-prescriptions) up 109% YoY.
• New Platform Launch: A new integrated Medical Updates portal scheduled for January (Q1) to consolidate cross-segment engagement.
• Physical Units: 25 units being transformed into doctor hubs to host events and B2B engagements; piloting expanded usage (Mon-Thu) to increase revenue per square foot.

Market and Competitive Outlook:

• Seat Market Stabilization: Anticipates a stabilization of new seat authorizations post-2026, following the Supreme Court ruling and ENEMAT approval; expects competitor frustration in filling newly authorized seats in smaller cities.
• Competition: Market remains competitive with varying commercial policies, but the combined entity aims to leverage scale to maintain differentiation and resilience.
• Market Expansion: Exploration of LATAM expansion (identified as a "blue ocean") and potential entry into Asia via partnerships.
• B2B Ecosystem Growth: Positioning as a marketplace to attract non-pharma sectors (hospitals, labs, financial services) to engage with the 500,000+ registered physicians.
• Demand Trends: Student mindset shifting toward higher certification standards due to new NMAD exam regulations (weighted averages, potential for second exams in 2027/2028), driving demand for high-quality prep and simulation tools.

Macro / Industry Outlook:

• Regulatory Environment: Monitoring the NMAD law approval and potential penalties for low proficiency (injunctions, penalties) starting 2027.
• Labor Legislation: Acknowledges potential cost impacts from the 6-to-1 work shift ruling and the Supreme Court ruling on DSR (Weekly Rest) which could increase labor costs for hourly teachers by 20% (from 1/6 to 2/5).
• Inflation: Pricing strategy assumes IPCA (inflation) projections for 2027.
• Digitalization: Regulatory push for digital prescriptions (yellow/blue prescriptions) expected to accelerate adoption and revenue growth in the medical practice segment.

Strategic Initiatives:

• Merger with eDUCS:
  • Timeline: Shareholder approval expected Nov-Dec; Antitrust (CADE) assessment expected to conclude between June and August (9–11 months); full integration target Day 1 to Day 100.
  • Leadership: Virgílio Dibon confirmed as CEO of the combined entity.
  • Integration Team: A dedicated "Clean Team" of 12–13 executives (50% from each company) working exclusively on integration planning, focusing on systems, culture, and talent.
• Capital Allocation:
  • M&A: Leveraging the combined balance sheet to acquire high-quality assets (medical schools) with 50%+ market share in regions where both entities have presence; targeting hybrid assets below 50% concentration for synergy extraction.
  • CapEx: Continuing investment in intangible assets (content, AI, tech) and physical infrastructure (labs, simulation rooms) to support ecosystem scaling.
  • Shareholder Returns: Commitment to maintain low leverage (~1.2x net debt/EBITDA) with cash generation supporting dividends and buybacks.
• Technology & AI:
  • Launching "AI First" curriculum for students.
  • Developing "physician avatars" to personalize learning journeys.
  • Scaling generative AI in clinical decision support (Whitebook, iClinic) to improve operational efficiency and data monetization.
• Ecosystem Unification: Merging 11+ health tech registrations into a single login system to create a unified physician persona and enable scalable B2B monetization.

Risks and Headwinds to Outlook:

• Regulatory Execution: Delays in Antitrust (CADE) approval or unexpected injunctions regarding seat authorizations could impact integration timelines.
• Labor Cost Uncertainty: Ambiguity in the interpretation of the 6-to-1 work shift and DSR calculation could lead to unforeseen increases in professor compensation costs.
• Market Volatility: Potential for competitor price wars or aggressive capacity expansion in the medical school segment.
• Execution Risk: The ability to capture $2.2 billion in synergies depends heavily on the disciplined execution of the integration master plan within the first 100 days.
• Student Certification Risk: New NMAD requirements (weighted averages, 2027 exam) may lead to student attrition or lower certification rates if prep programs fail to adapt.
• Data Privacy & Integration: Challenges in unifying data systems from two distinct ecosystems (Afia's on-site focus vs. eDUCS' digital focus) while maintaining operational continuity.

Management Tone on the Future:

• Confidence: High confidence in the "perfect complementarity" of the two ecosystems, citing identical governance, shared controllers, and deep mutual respect between executive teams.
• Strategic Certainty: Management expresses a "no apologies" stance on the transaction, emphasizing the unique opportunity to unlock value through a combined health and education ecosystem that no other player possesses.
• Growth Focus: Shift from organic seat growth to ecosystem monetization (B2B, digital services, data intelligence) as the primary growth lever for the next 10 years.
• Discipline: Emphasis on strict adherence to the integration plan and capital allocation discipline to ensure synergy realization.
• Long-term View: Management frames the next decade as "even more transformative," focusing on building a reference point in an uncertain world with a strong balance sheet.

Miscellaneous:

• IR Platform: Launch of a new IR website featuring an AI assistant for rapid information retrieval by investors.
• Social Impact: Reference to SROI (Social Return on Investment) studies showing reduction in hospitalizations and vaccination improvements in low-vulnerability municipalities.
• Research Output: AFIA is the top publisher of medical papers in Brazil, with 4,500 papers and 333 in international A1/A2 classifications (2025 data).
• Clean Team Governance: The Clean Team operates under strict antitrust protocols to plan integration without sharing sensitive commercial data until approval.