Afya(AFYA) - 2023 Q2 - Quarterly Report

Unaudited Interim Condensed Consolidated Financial Statements Statements of Financial Position As of June 30, 2023, Afya's total assets increased to R$7.85 billion from R$7.20 billion at year-end 2022, primarily driven by a rise in intangible assets from acquisitions; total liabilities also grew to R$4.40 billion from R$3.95 billion, mainly due to increased accounts payable to selling shareholders and loans, consequently, total equity rose to R$3.45 billion from R$3.25 billion Consolidated Statements of Financial Position (in thousands of BRL) | | June 30, 2023 (unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | 1,374,239 | 1,637,657 | | Total non-current assets | 6,475,229 | 5,561,882 | | Total assets | 7,849,468 | 7,199,539 | | Total current liabilities | 1,170,681 | 905,689 | | Total non-current liabilities | 3,232,590 | 3,043,692 | | Total liabilities | 4,403,271 | 3,949,381 | | Total equity | 3,446,197 | 3,250,158 | | Total liabilities and equity | 7,849,468 | 7,199,539 | - The increase in non-current assets was primarily due to a significant rise in Intangible Assets, which grew from R$4.04 billion to R$4.83 billion[2] - Current liabilities increased notably due to a rise in 'Accounts payable to selling shareholders' from R$261.7 million to R$401.8 million[2] Statements of Income and Comprehensive Income For the six months ended June 30, 2023, net revenue increased by 22.2% year-over-year to R$1.42 billion, however, higher costs and finance expenses led to a decrease in net income to R$205.3 million, compared to R$241.0 million in the same period of 2022, and basic earnings per share fell to R$2.17 from R$2.55 Consolidated Statements of Income (Six-Month Period Ended June 30, in thousands of BRL) | | 2023 (unaudited) | 2022 (unaudited) | Change (%) | | :--- | :--- | :--- | :--- | | Net revenue | 1,422,568 | 1,164,480 | +22.2% | | Gross profit | 890,666 | 758,508 | +17.4% | | Operating income | 406,182 | 371,013 | +9.5% | | Net income | 205,310 | 241,015 | -14.8% | | Basic earnings per share (R$) | 2.17 | 2.55 | -14.9% | - Finance expenses for the six-month period increased significantly to R$238.4 million in 2023 from R$165.0 million in 2022, impacting overall profitability[4] Statements of Changes in Equity Total equity increased from R$3.25 billion at the end of 2022 to R$3.45 billion as of June 30, 2023, with growth primarily driven by net income of R$205.3 million, partially offset by treasury share repurchases of R$12.4 million and dividends paid to non-controlling interests of R$10.3 million Changes in Equity for the Six-Month Period Ended June 30, 2023 (in thousands of BRL) | Description | Amount | | :--- | :--- | | Balances at December 31, 2022 | 3,250,158 | | Net income | 205,310 | | Treasury shares | (12,369) | | Share-based compensation | 13,398 | | Dividends declared (non-controlling interests) | (10,300) | | Balances at June 30, 2023 (unaudited) | 3,446,197 | Statements of Cash Flows For the first six months of 2023, net cash from operating activities was R$537.5 million, an increase from R$427.9 million in the prior year period, while a significant cash outflow of R$737.9 million was used in investing activities, largely for the acquisition of subsidiaries (R$640.9 million), and financing activities used R$150.9 million, resulting in a net decrease in cash and cash equivalents of R$351.9 million Consolidated Statements of Cash Flows (Six-Month Period Ended June 30, in thousands of BRL) | | 2023 (unaudited) | 2022 (unaudited) | | :--- | :--- | :--- | | Net cash flows from operating activities | 537,492 | 427,916 | | Net cash flows used in investing activities | (737,914) | (287,510) | | Net cash flows used in financing activities | (150,925) | (272,398) | | Net decrease in cash and cash equivalents | (351,886) | (132,312) | | Cash and cash equivalents at the beginning of the period | 1,093,082 | 748,562 | | Cash and cash equivalents at the end of the period | 741,196 | 616,250 | - The primary driver for the large cash outflow in investing activities was the R$640.9 million used for the acquisition of subsidiaries, net of cash acquired[8] Notes to the Consolidated Financial Statements Note 1: Corporate Information Afya Limited is a Cayman Islands holding company listed on Nasdaq (AFYA), with Bertelsmann SE & Co. KGaA as its ultimate parent, operating the largest network of medical higher education institutions in Brazil and providing digital services for physicians, and in January 2023, Afya acquired Sociedade Educacional e Cultural Sergipe DelRey Ltda. ("DelRey"), with no significant direct impact from COVID-19 or the Russia-Ukraine conflict as of the reporting date - Afya is the largest educational group in Brazil by the number of medical seats, with operations in 19 states[10] - On January 2, 2023, the company acquired Sociedade Educacional e Cultural Sergipe DelRey Ltda. ("DelRey"), a post-secondary education institution[11] - The company's ultimate parent is Bertelsmann SE & Co. KGaA, following an acquisition of control on May 5, 2022[9] Note 2: Significant Accounting Policies The unaudited interim financial statements were prepared in accordance with IAS 34 and are consistent with the annual statements for 2022, with the Brazilian Real (BRL) as the functional and presentation currency, authorized for issuance on August 28, 2023, and the note also lists the company's subsidiaries and its 30% associate, UEPC, detailing the basis of consolidation - The financial statements are prepared in accordance with IAS 34 Interim Financial Reporting and should be read with the 2022 annual statements[20][21] - The company's functional and presentation currency is the Brazilian Real (BRL)[23][24] - The company consolidates all entities it controls, with a notable merger in February 2023 being ESMC with UnifipMoc[31][34] Note 3: Segment Information Afya operates in three reportable segments: Undergrad, Continuing Education, and Digital Services, with the Undergrad segment being the largest contributor for the six months ended June 30, 2023, generating R$1.25 billion in net revenue, while the Continuing Education and Digital Services segments generated R$70.6 million and R$105.7 million, respectively, and the Digital Services segment experiences seasonality with higher revenues in the first and last quarters - The company has three reportable segments: Undergrad (medical and health undergraduate courses), Continuing Education (specialization programs), and Digital Services (medical education content and technology)[38] Segment Net Revenue (Six-Month Period Ended June 30, 2023, in thousands of BRL) | Segment | Net Revenue | | :--- | :--- | | Undergrad | 1,246,240 | | Continuing Education | 70,584 | | Digital Services | 105,744 | | Total | 1,422,568 | - The Undergrad segment holds the vast majority of the company's assets, with R$7.41 billion out of a total of R$7.85 billion as of June 30, 2023[42] Note 4: Business Combinations On January 2, 2023, Afya acquired 100% of DelRey for a total consideration of R$832.2 million, including R$575 million in cash paid at closing, R$250 million in deferred payments, and R$7.2 million in digital solutions, resulting in preliminary goodwill of R$91.4 million and adding R$722.7 million in intangible assets (primarily licenses), with DelRey contributing R$116.3 million in net revenue for 2023 DelRey Acquisition Purchase Price Allocation (in thousands of BRL) | | Amount | | :--- | :--- | | Total identifiable net assets at fair value | 740,846 | | Preliminary goodwill arising on acquisition | 91,390 | | Purchase consideration transferred | 832,236 | | Cash paid | 575,000 | | Consideration to be transferred | 250,000 | | Digital solutions | 7,236 | - The acquisition includes a potential additional payment of up to R$105,000, contingent on the approval of 84 additional medical seats, which was not measured at the acquisition date[48] - The goodwill of R$91.4 million is allocated entirely to the Undergrad segment and is not expected to be tax-deductible[52] Note 5: Cash and Cash Equivalents As of June 30, 2023, cash and cash equivalents totaled R$741.2 million, a decrease from R$1.09 billion at the end of 2022, with the majority (R$724.1 million) held in financial investments like Bank Certificates of Deposit (CDB) with highly rated institutions, yielding an average of 100.25% of the CDI rate Cash and Cash Equivalents (in thousands of BRL) | | June 30, 2023 (unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Cash and bank deposits | 17,057 | 57,509 | | Cash equivalents | 724,139 | 1,035,573 | | Total | 741,196 | 1,093,082 | Note 6: Trade Receivables Net trade receivables increased to R$552.4 million as of June 30, 2023, from R$495.4 million at year-end 2022, with the allowance for doubtful accounts also growing to R$59.1 million from R$44.0 million over the same period, and the majority of receivables are from tuition fees Trade Receivables Breakdown (in thousands of BRL) | | June 30, 2023 (unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Gross Trade Receivables | 611,545 | 539,445 | | (-) Allowance for doubtful accounts | (59,132) | (44,046) | | Net Trade Receivables | 552,413 | 495,399 | | Current | 509,520 | 452,831 | | Non-current | 42,893 | 42,568 | Change in Allowance for Doubtful Accounts (in thousands of BRL) | | June 30, 2023 (unaudited) | June 30, 2022 (unaudited) | | :--- | :--- | :--- | | Beginning Balance | (44,046) | (45,013) | | Additions | (39,086) | (30,420) | | Write-offs | 24,000 | 28,548 | | Ending Balance | (59,132) | (46,885) | Note 7: Related Parties Transactions with related parties include sales of educational content to associate UEPC and lease agreements with entities linked to shareholders, and as of June 30, 2023, accounts payable to selling shareholders included R$32.6 million due to shareholder Nicolau Carvalho Esteves, with key management compensation for the first six months of 2023 totaling R$17.0 million, including R$9.9 million in share-based compensation Key Management Personnel Compensation (Six-Month Period, in thousands of BRL) | | June 30, 2023 (unaudited) | June 30, 2022 (unaudited) | | :--- | :--- | :--- | | Short-term employee benefits | 7,131 | 8,037 | | Share-based compensation plan | 9,905 | 8,273 | | Total | 17,036 | 16,310 | - The company has accounts payable of R$32.6 million to shareholder Nicolau Carvalho Esteves related to the development of the ITPAC Garanhuns medical school, due in November 2023[61][62] Note 8: Other Assets Total other assets increased to R$264.4 million as of June 30, 2023, from R$243.5 million at year-end 2022, with the largest component being indemnification assets of R$148.2 million, which represent the selling shareholders' responsibility for pre-acquisition liabilities of acquired subsidiaries Other Assets Breakdown (in thousands of BRL) | | June 30, 2023 (unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Indemnification assets | 148,175 | 145,300 | | Advances | 29,013 | 30,626 | | Judicial deposits | 14,412 | 12,693 | | Other | 72,778 | 67,382 | | Total | 264,378 | 243,501 | Note 9: Investment in Associate Afya holds a 30% interest in UEPC, a medical school, accounted for using the equity method, with the carrying amount of this investment being R$52.7 million as of June 30, 2023, and for the first six months of 2023, Afya's share of UEPC's income was R$7.1 million, and it received R$5.1 million in dividends Reconciliation of Investment in Associate (in thousands of BRL) | | June 30, 2023 (unaudited) | | :--- | :--- | | Opening balance | 53,907 | | Dividends received | (5,101) | | Dividends receivable | (3,193) | | Share of income | 7,056 | | Closing balance | 52,669 | Note 10: Property and Equipment The net book value of property and equipment increased to R$588.2 million as of June 30, 2023, from R$542.1 million at year-end 2022, driven by additions of R$56.9 million and assets acquired through business combinations of R$25.0 million, offset by depreciation of R$35.6 million Property and Equipment Movement (Six-Month Period Ended June 30, 2023, in thousands of BRL) | | Amount | | :--- | :--- | | Net Book Value at Jan 1, 2023 | 542,087 | | Additions | 56,907 | | Business combinations | 24,980 | | Depreciation | (35,550) | | Write-off (net) | (246) | | Net Book Value at June 30, 2023 | 588,178 | Note 11: Intangible Assets and Goodwill The net book value of intangible assets and goodwill rose significantly to R$4.83 billion as of June 30, 2023, from R$4.04 billion at year-end 2022, primarily due to the DelRey acquisition, which added R$814.0 million in intangibles, including R$576.6 million in licenses and R$91.4 million in goodwill, with goodwill now totaling R$1.35 billion Intangible Assets and Goodwill Movement (Six-Month Period Ended June 30, 2023, in thousands of BRL) | | Amount | | :--- | :--- | | Net Book Value at Jan 1, 2023 | 4,041,491 | | Business combinations (DelRey) | 814,044 | | Additions | 45,250 | | Amortization | (71,553) | | Other (Remeasurement, Write-off, etc.) | (249) | | Net Book Value at June 30, 2023 | 4,831,529 | - Goodwill increased from R$1.26 billion to R$1.35 billion due to the DelRey acquisition, and licenses with indefinite useful life increased from R$2.19 billion to R$2.77 billion[71] - No impairment of goodwill or intangible assets was indicated for the six-month period ended June 30, 2023[74][75] Note 12: Financial Instruments This note details the company's financial instruments, as of June 30, 2023, total financial liabilities at amortized cost were R$3.80 billion, up from R$3.45 billion at year-end 2022, with the increase mainly from higher accounts payable to selling shareholders related to acquisitions, and the company manages market, credit, and liquidity risks, with primary exposure to interest rate fluctuations on its floating-rate debt Loans and Financing Total loans and financing stood at R$1.93 billion as of June 30, 2023, a slight increase from R$1.88 billion at year-end 2022, with the largest components being an R$825.0 million loan from Softbank and two loans from Banco Itaú totaling R$550.1 million, and the majority of the debt is indexed to the CDI rate Loans and Financing Breakdown (in thousands of BRL) | Financial institution | June 30, 2023 (unaudited) | | :--- | :--- | | Banco Itaú Unibanco S.A. (CDI + 1.90%) | 517,844 | | Softbank (6.5% p.y.) | 825,003 | | Debentures (CDI + 1.80%) | 537,426 | | Other | 44,881 | | Total | 1,925,154 | Leases Lease liabilities increased to R$851.8 million as of June 30, 2023, from R$769.5 million at year-end 2022, primarily due to R$65.4 million in lease liabilities assumed from the DelRey acquisition and R$35.1 million from remeasurements Lease Liabilities Movement (Six-Month Period Ended June 30, 2023, in thousands of BRL) | | Amount | | :--- | :--- | | Balance at Jan 1, 2023 | 769,525 | | Business combinations | 65,408 | | Additions & Remeasurement | 37,625 | | Interest expense | 49,033 | | Payments | (66,239) | | Write-off | (3,507) | | Balance at June 30, 2023 | 851,845 | Accounts Payable to Selling Shareholders This liability increased significantly to R$764.6 million as of June 30, 2023, from R$528.7 million at year-end 2022, with the primary driver being the addition of R$250.0 million in deferred payments for the DelRey acquisition, and this balance represents future payments due to the sellers of acquired companies Accounts Payable to Selling Shareholders Movement (Six-Month Period Ended June 30, 2023, in thousands of BRL) | | Amount | | :--- | :--- | | Opening balance | 528,678 | | Additions (DelRey) | 250,000 | | Interest | 47,758 | | Payments and deductions | (64,397) | | Remeasurement | 2,556 | | Closing balance | 764,595 | - The largest outstanding balances relate to the acquisitions of Unigranrio (R$230.8M) and DelRey (R$266.1M)[82] Financial Risk Management The company is exposed to market (interest rate, foreign currency), credit, and liquidity risks, with the primary market risk being interest rate risk on floating-rate debt (CDI-indexed), and a sensitivity analysis shows that a 150 basis point increase in interest rates would decrease pre-tax profit by R$17.4 million, while foreign currency risk is minimal, and credit risk is managed through monitoring of receivables, with liquidity risk managed by maintaining reserves and monitoring cash flows - The company's main financial risk is interest rate risk, as a significant portion of its debt is tied to floating rates like CDI and SELIC[93] Interest Rate Sensitivity Analysis (Effect on Profit Before Tax, in thousands of BRL) | Increase in basis points | Effect on profit before tax | | :--- | :--- | | +75 | (8,704) | | +150 | (17,408) | Note 13: Fair Value Measurement This note outlines the fair value hierarchy for the company's financial instruments, where all disclosed financial assets and liabilities, including non-current receivables, loans, leases, and payables to selling shareholders, are categorized as Level 2, with their fair values determined using observable inputs, such as discounted cash flow (DCF) models with current market rates, and there were no transfers between levels during the period - The company's financial instruments, including loans, lease liabilities, and accounts payable to selling shareholders, are measured at fair value using Level 2 inputs (significant observable inputs)[106] - The fair value of interest-bearing borrowings is determined using the Discounted Cash Flow (DCF) method, reflecting the issuer's current borrowing rate[89] Note 15: Labor and Social Obligations This note details compensation plans, for the first half of 2023, share-based compensation expense was R$13.4 million, comprising R$9.7 million for the stock option plan and R$3.7 million for the Restricted Stock Units (RSU) program, and the company granted 45,000 new stock options and 24,000 new RSUs during the period - The company has two main share-based compensation plans: a stock option plan and a Restricted Stock Units (RSU) program[111][117] Share-Based Compensation Expense (Six-Month Period Ended June 30, in thousands of BRL) | Plan | 2023 (unaudited) | 2022 (unaudited) | | :--- | :--- | :--- | | Stock Options Plan | 9,672 | 11,581 | | RSU Program | 3,726 | - | | Total | 13,398 | 11,581 | Note 16: Equity As of June 30, 2023, Afya had 93.7 million shares outstanding, and during the period, subsidiaries CCSI and IESVAP paid R$10.3 million in dividends to non-controlling shareholders, and in March 2023, the board approved a new share repurchase program for up to 2 million Class A shares, under which the company repurchased R$12.4 million worth of shares by June 30, 2023 - On March 24, 2023, the board approved the fourth share repurchase program, authorizing the buy-back of up to 2,000,000 Class A common shares until December 31, 2024[125] - In the first six months of 2023, the company repurchased 216,339 shares for R$12.4 million under the new program[125][127] - Dividends of R$10.3 million were paid to non-controlling shareholders during the six-month period ended June 30, 2023[123] Note 17: Earnings Per Share (EPS) For the six-month period ended June 30, 2023, basic EPS was R$2.17, calculated on a net income of R$194.9 million and 89.9 million weighted average shares, diluted EPS was R$2.16, reflecting the potential dilution from stock options and restricted share units, and this is a decrease from the R$2.55 basic and diluted EPS in the same period of 2022 EPS Calculation (Six-Month Period Ended June 30) | | 2023 (unaudited) | 2022 (unaudited) | | :--- | :--- | :--- | | Net income attributable to parent (thousands BRL) | 194,916 | 231,115 | | Weighted average shares (basic) | 89,872,136 | 90,740,133 | | Weighted average shares (diluted) | 90,429,310 | 90,740,133 | | Basic EPS (R$) | 2.17 | 2.55 | | Diluted EPS (R$) | 2.16 | 2.55 | Note 18: Revenue Net revenue from contracts with customers for the six months ended June 30, 2023, was R$1.42 billion, up from R$1.16 billion in the prior-year period, with revenue primarily from tuition fees, which totaled R$1.73 billion before deductions, and the vast majority of revenue (R$1.39 billion) is recognized over time Revenue Breakdown (Six-Month Period Ended June 30, in thousands of BRL) | | 2023 (unaudited) | 2022 (unaudited) | | :--- | :--- | :--- | | Tuition fees | 1,729,136 | 1,400,931 | | Other | 127,092 | 98,693 | | Deductions (Discounts, Taxes, PROUNI, etc.) | (423,660) | (335,144) | | Net revenue from contracts with customers | 1,422,568 | 1,164,480 | - Revenue is primarily generated in Brazil, and the Undergrad segment contributed R$1.25 billion to net revenue in the first half of 2023[131][133] Note 19: Expenses and Costs by Nature For the six months ended June 30, 2023, total costs and expenses amounted to R$1.01 billion, up from R$791.9 million in the same period of 2022, with the largest expense categories being payroll (R$529.9 million), depreciation and amortization (R$138.3 million), and maintenance (R$48.6 million) Expenses and Costs by Nature (Six-Month Period Ended June 30, in thousands of BRL) | Expense Category | 2023 (unaudited) | 2022 (unaudited) | | :--- | :--- | :--- | | Payroll | (529,916) | (419,197) | | Depreciation and amortization | (138,264) | (99,089) | | Maintenance | (48,622) | (35,633) | | Hospital and medical agreements | (41,446) | (30,131) | | Allowance for doubtful accounts | (39,086) | (30,523) | | Consulting fees | (32,488) | (14,869) | | Other | (184,886) | (162,462) | | Total | (1,014,708) | (791,901) | Note 20: Finance Result The company reported a net finance expense of R$186.8 million for the first six months of 2023, a significant increase from the R$117.5 million expense in the same period of 2022, with the rise driven by higher interest expenses on loans (R$152.4 million) and lease liabilities (R$49.0 million), reflecting a higher interest rate environment and increased debt levels Finance Result (Six-Month Period Ended June 30, in thousands of BRL) | | 2023 (unaudited) | 2022 (unaudited) | | :--- | :--- | :--- | | Finance income | 51,579 | 47,443 | | Finance expenses | (238,357) | (164,967) | | Interest expense | (152,404) | (95,165) | | Interest expense on lease liabilities | (49,033) | (41,392) | | Finance result | (186,778) | (117,524) | Note 21: Income Taxes For the six months ended June 30, 2023, the income tax expense was R$21.2 million on a pre-tax income of R$226.5 million, resulting in an effective tax rate of 9.3%, which is significantly lower than the Brazilian statutory rate of 34% primarily due to tax exemptions from the PROUNI federal program, providing a tax benefit of R$167.7 million Income Tax Reconciliation (Six-Month Period Ended June 30, 2023, in thousands of BRL) | | Amount | | :--- | :--- | | Income before income taxes | 226,460 | | Income taxes at statutory rates (34%) | (76,996) | | PROUNI - Fiscal Incentive | 167,681 | | Unrecognized deferred tax assets | (91,241) | | Other adjustments | (1,304) | | Income taxes expense – current | (21,150) | - The company had unrecognized deferred tax assets of R$1.02 billion (tax-basis) as of June 30, 2023, due to a lack of available tax planning opportunities to support their recognition[139] Note 22: Legal Proceedings and Contingencies As of June 30, 2023, the company had provisions of R$202.9 million for labor, civil, and tax proceedings where loss is deemed probable, with a significant portion of these potential liabilities (R$148.2 million) covered by indemnification agreements with the selling shareholders of acquired companies, and additionally, there are proceedings with a possible risk of loss totaling R$77.5 million for which no provision has been made Provision for Legal Proceedings (in thousands of BRL) | Type | June 30, 2023 (unaudited) | | :--- | :--- | | Labor | 24,400 | | Civil | 26,683 | | Taxes | 151,857 | | Total | 202,940 | - The company has an indemnification asset of R$148.2 million, corresponding to provisions for legal proceedings arising from events prior to acquisitions, for which selling shareholders are responsible[144] Note 24: Subsequent Events After the reporting period, on July 31, 2023, the company modified its share-based compensation plan, allowing holders to exchange stock options for Restricted Stock Units (RSUs) and changing the index for strike price adjustments from CDI to the IPCA inflation rate, and in August 2023, a subsidiary settled a tax proceeding with the municipality of Rio de Janeiro by paying R$14.8 million through a tax amnesty program - On July 31, 2023, the company approved changes to its share-based compensation plan, including an option to exchange stock options for RSUs and changing the strike price index to IPCA[146] - In August 2023, subsidiary Unigranrio settled a tax proceeding by paying R$14.8 million under a tax amnesty program[147]