Yduqs Participações S.A. (YDUQ3) Earnings Call Transcript

Good morning, ladies and gentlemen. Welcome to the video conference of Yduqs on the merger between Yduqs and Afya. This video conference is being recorded, and the replay can be accessed at the company's website at www.Yduqs.com.br. The presentation with the slides is available for download also on the company's website. This presentation has been prepared in connection with the business combination, the transaction involving Yduqs and Afya, and may contain statements and information that express forward-looking statements, assumptions or projections about future results or events. Such information includes outlook for combined business, operating and financial results as well as statements regarding the growth prospects of both companies and the combined entity resulting from the transaction. The combined company information considers the 2Q '26 metrics of both companies as available in their financial statements. These forward-looking statements and information do not constitute a guarantee of future performance because they are subject to risks, uncertainties and factors related to the operations and business environment of these companies. They depend substantially on external factors such as market conditions, the performance of the Brazilian company, macroeconomic variables, the industry or the companies operate in international markets, and all of them are subject to change without notice. Even though Yduqs understands that information contained within is reasonable and based on information currently available, it cautions investors that such forward-looking statements involve risks as they refer to future events and therefore, depend on circumstances that may or may not materialize. This presentation was not subject to review or audit by independent auditors. The consummation of the transaction is subject to the fulfillment of conditions presented, including -- obtaining the applicable corporate and competition approvals, and there is no guarantee that the transaction will, in fact, be completed or that it will be carried out under the terms presented here in all documents necessary for the approval of the transaction, including the pro forma financial statements will be made available in a timely manner. This presentation is for information purposes only and does not constitute an offer to sell solicitation -- or solicitation of an offer to buy any securities, whether in the United States or any other jurisdiction. Yduqs common shares may be issued only to Afya shareholders who are qualified institutional buyers, accredited institutional investors, persons not resident of domicile in the United States of America or investors for whom the offer may be made under exemption from registration under the U.S. Securities Act. This presentation should not be construed as an investment recommendation and it does not substitute the detailed analysis for the definitive documents of the transaction as well as the periodic information, any public disclosures made by companies in accordance with the applicable regulation. It is important to note that for a better visualization of the presentation, you should enable the full-screen mode. Today, present at this video conference, we have Mr. Rossano Marques, CEO of Yduqs; and Mr. Alexandre Aquino, CFO of Yduqs. Now I would like to give the floor to Mr. Rossano Marques, who's going to start the presentation. Please, Mr. Marques, you may continue.

Good morning, everyone. I think that you are all well. I'm very happy to be here to talk about this agreement for the merger between Yduqs and Afya. We've been working on this for a long time. We gave the indications. We believe that the market should consolidate even more. And this merger really reflects our pathway, our strategies, our vision to companies that are incredibly complementary that can potentialize the mission of both companies. So this agreement is still subject to the approval of the governance of both companies and market regulation agencies. So we'll talk about the terms of this agreement and how we can obtain all the benefits and impact of this business. We are going to go over the main points. This material has been widely published. It's in our portal. So we are very pity going to go over the main points. And obviously, afterwards, we are going to have our traditional Q&A session. So now starting on the first slide, we are going to highlight the main -- highlights, the main points of this deal. No. So starting on this slide. Now we are creating Brazilian's largest higher education platform with nationwide reaching more than BRL 9 billion annual revenue, 176 campuses in all 26 states, more -- almost 6,000 medical seats and access to more than 200,000 physicians. So we have access to premium exposure. It's going to go from 32% to 52% in the combined company. And the company still has very significant growth levers, more than 45%. We see an upside for IBMEC as we've been talking to the market -- so the platform of medical specialization for both companies. This really potentialized companies. Afya has a very well-established platform of continuing education, medical specialization. So we are aware that we have great potential for growth, and we still have many capacities and we have significant business synergies. Two companies that have a proven track record of using synergies. So we have something between BRL 2 billion and BRL 2.2 billion of synergy and PV net of Pillar 2 and these synergies with 80% captured within the first 3 years. And all this capacity and the track record of the companies to capture value, and you're going to hear the details. So we are very confident in terms of the feasibility of capturing these results. The other thing is that this transaction provides an upfront premium for Yduqs shareholders. And so this in August the last unaffected date when we announced that we had ongoing negotiations. In addition to the 45% premium to VWAP, there is an extraordinary dividend of BRL 750 million between signing and closing. And additionally, we believe that this transaction will provide a potential ADTV that is significant, and we're going to give details further ahead. As to the anchor shareholder, leadership from both companies. So Bertelsmann as a committed long-term anchor shareholder complemented by leadership from both Afya and Yduqs very much committed with the governance of the novel Ocado, the new market in Brazil. Now moving on to the next slide. So here, you can see the impact of this combination. So you can see Yduqs in 25 states with 113 campuses, 19 medical schools with a very strong set of markets, combined with Afya with 63 new campuses, 32 campuses of medicine. So this is a powerhouse. So in medicine, we are going to have 50 campuses of medicine with very complementary brands, with very complementary geographical footprint on helping the other therefore. Now once again, about the consolidation. And once again, you can see the numbers and the debt by all governance agencies, a potential value created by the new company. We get almost 1 million undergrad students, almost 6,000 medical school seats, total and net revenue of 9.5 almost and adjusted EBITDA of 3.5. And an amazing Frick cash flow to equity. So there are strong cash generators and combination of the two companies, you can see almost BRL 1.2 billion in the last 12 months. And here, you can see what we are going to have, and this is very relevant and significant considering the last 12 months. So this is a comparison with the rest of the market -- positions Afya as the unarguable or undisputed leader in this segment. And something else important about this merger, this increase of the concentration of the portfolio in premium products. And so we have been evolving over the last few years, and we talked a lot about this. 46% of our EBITDA is exposed to premium medicine and combining with Afya were more than 88% of its revenue coming from premium services and the combined company, we're going to have more than 66% of the EBITDA exposed to premium products in the business segment that is very profitable, stable with very good macroeconomic indicators, and this is thereby creating a huge growth potential according to the strategy that we have been adopting for a while already. Now here, you see that the new company and it size places us on a different level of comparison. So EBITDA is above the main global peers comparatively so it has very significant numbers. And also the discount versus the global peers -- considering the new company's multiple avenues for growth. And I'm going to highlight one of the main factors. So we've been talking about our expansion potential in the medical, education and continuing education. So we are very small still in the segment. So there is a natural trend of gaining share with a huge potential in this combination with Afya, there is a platform that is well developed combined with the Yduqs business platform can really leverage the whole potential that's still underused. So we have a very wide-ranging portfolio in-house to have a history of execution for lifetime coming from Afya that is very significant for the new company. And also with IBM -- there is this premium platform, very strong, very strong brand, very well known, not just geographically but also in terms of its platform and outside medicine, it has a clear avenue for growth -- 45% year-on-year, and the segment has been validated by the Ministry of Education. And as we said, so this business generates value and synergies and all the numbers that we have mapped. It's very well structured in terms of value capture. So here, we can see MAP line by line, the main drivers. So here, the bottom line of the NPV, almost BRL 2.2 billion, a very significant amount considering the current numbers of companies. So it does not consider any new revenue upside. And in addition, it's net of the negative impact of So you know that the controller of the consolidated company and what is generated is subject to Pillar 2, but with a limited impact as you're going to show and below the analytics. Just to give you an idea, giving you an idea of 2026, if applied, there would be an increase of 2.2 percentage points getting close to 5%. And the benefits that we have that reduce our -- the rate of discount that we can give go down and down a long time gradually until 2033, but even in the limit getting to the final amount, the final value projected is between 7% and 9% as the terminal rate going from 5% if we apply 2026. And this was applied once the companies are combined and this rate grow gradually until 2023, about 2.2 percentage points over the current range of 2%, 3%, and it may be as high as 7% or 9% by 2023. We estimate that 80% of these levers will be captured in the first 3 years. Everything is very much under our control. We're just sharing these numbers with you because we really trust this has been -- the plan has very -- been very well designed by first rate international consulting company. So we have the conditions, and we are very confident that 80% of the synergies will be captured within the first 3 years. So as I said, in reforcing both companies have a very sound track record with many acquisitions, 7 acquisitions by Yduqs since 2020. And this is a very selevant case of talent. So this was in the middle of the pandemic. We had the margin in 2020. We had a capture of BRL 96 million in amount of synergies and we closed BRL 136 million. So more than promised, very successful when we are talking about capture of amounts. So we have a case of a tenant that clearly demonstrates the potential and capacity of capturing these values and makes us very confident in designing the projections that we have about the potential business. And now getting to the chart to demonstrate that the value creation. So here, if we freeze the price of shares in the last unaffected date, August 21, the implied value transaction is issue a premium of 45%. If we combine this with the synergies that we have been talking, the great value of synergies that we are finding, we get to more -- the potential premium higher than 118%, very significant for shareholders. So here, we're not talking about any rerating. If there's any rerating of the shares of the new co, the new company, the future companies. So we would get to a level of BRL 19 per share, so considering global players. It's very significant addition to the objective value that is in our hands, we have a great potential of increasing value. Now in terms of value creation and continue, you can see that the combined company has a leverage of 1.2x EBITDA, goes from 1.55 from Yduqs. So coming from the market, we were headed towards a less leveraged company. This was a -- our objective to have a lower leverage. So we have a very strong capacity to generate cash in this -- is going to go down and down significantly. This makes us confident that this is an agreement. The negotiation is committed dividends for Yduqs shareholders that will be paid out this number, even though it's paid and considering our guidance. So in the period between signing and closing, that will be about 12 months will generate similar to the guidance that we are depreciating, and we are super optimistic considering a scenario of growth of company. But being conservative, 2026 and its projections would be in the lower range, getting -- increasing leverage at the floor to 1.3x, at the sealing to 1.4x. So I'm really confident in terms of cash generation, considering its leverage. So we want to have the payout ratio of 50% after the new co is formed with a very significant payout of dividends. This demonstrates our confidence of the management team and shareholders. So this yield of BRL 750 million at the price of BRL 2.94 [indiscernible] is more or less equivalent to 38% dividend yield, which is really amazing. Now moving on. Going into another factor of the value created. It's not just the final value of the company that is going to increase, but also the daily volume that is traded. So if the combined company keeps the same value as we have today, we would have ADTV to almost 100. So we can increase this significantly. We have had simulations in excess of BRL 90 million. And it may unlock value with many more investors and the potential inclusion in many indexes. And in the Brazilian market, this may unlock the value of the company. with this new amount that can be quite significant. Now about value creation between the corporate structure and the two companies merged. So Afya and this controller will be the controller of the new co with 47%. So they have the right of appointing the members of the Board and the two families are and steps have the right of appointing one board member each. So it's 31% to 69%. The company is going to be listed in B3 new markets. So as soon as the transaction is approved, -- when we talk about the governance structure. So in terms of the governance structure, Kay Krafft is going to be the Chairman of the Board of the combined company. Virgilio Gibbon is going to be the CEO of the new company, and I'm going to continue as President of High Education ex medicine. We are all super engaged, super committed by the results created by this transaction and not the value to be delivered in the future. So moving on, we are going to talk about next steps and expected time line so soon as we get the approval from the shareholders meeting. And so soon as we have it in November, the Extraordinary General Meeting, and then we wait for the approval of regulation and the carry of the antitrust council in Brazil. So, so soon as the antitrust council in Brazil approves it. And we think that this is going to take place in up to 12 months after signing. Now we end the presentation. So once again, reinforcing the highlights, it's going to be Brazil's largest higher education platform with nationwide reach. We are creating a lot of value, not just because of the absolutely feasible synergies capacity of capturing the synergies with a proven track record, both by Yduqs and Afya, solid value creation for Yduqs shareholders from day 1 with significant premium in the swap and we are going to have an attractive liquidity profile under multiple lenses with a large trading volumes expected. So once again, reinforcing our trust in the business that we have proposed. We thank you very much for your presence, and we are going to turn it over to the mediators to start the questions-and-answer session.

We are now going to start the question-and-answer session for investors and analysts. [Operator Instructions] And now our first question comes from Caio Moscardini from Santander.

Can you tell me about dividends. When do you think you're going to announce? Is it in the shareholders' meeting that is going to approve the deal in November? Or is it going to be next year? And about synergies, could you break down a little bit how much is going to be in G&A? And what is coming from other OpEx lines, CapEx improvements? This will help us and provide a little bit more visibility.

Thank you for your question, Caio. Well, first, about dividends, we do not yet have a clear definition. This is going to be discussed along the way. So the agreement does not have a timing for this to happen, and we are going to let it happen to have very clear projections to make our decisions. And we are going to do the payout between the first and second quarters and leave the rest to the end of the time. And we are going to discuss this along the way. We haven't yet made any decisions. I'm going to turn it over to Aquino to talk about the synergies.

Good morning, everyone. Thank you very much for your presence. Let me explain about the synergies. When we have a project that is the peak, we have hired a very high standard consulting company to see best practices and indicators. And then we have an estimate of the capture of synergies and best practices. Some areas are very clear that we're not going to have two ERPs. So some costs -- some expenses are very scalable, so we can have significant synergies when we have the combination of businesses as big. Now we have a shared services center also and then we can have significant synergies whenever we combine businesses that are this big. But there are other synergies related to micro aspects. So small silos differences between one and the other. We may analyze, choose the one that provides the most benefit to students to and then work on costs. So in the slide on synergies, we give you the broad numbers, but we cannot yet go into very small details.

Our next question comes from Samuel Alves from BBTG Pactual.

We have two questions. The first one is about lockup. So does the agreement have lockup for reference shareholders of Afya and Yduqs? How are you going to manage that? And the documents of the offer mentioned, the total and partial lockup, if you could explain how this is going to work? This is my first question. And the second one is part of Pillar 2. The effective tax rate that you are assuming that Yduqs would start paying. So why is the effective rate smaller than what Afya provisions today? And which compensations are you assuming for the calculation of the effective rate?

About lockup is 180 days after closing date for the four main shareholders, the four anchor shareholders so that there's a lockup of 180. So there is a minimum limit of shares that we need to keep during this period of lockup to keep the position in the Board. So it's effective 180 days. About Pillar 2. So it's important for us to understand this relationship, so it's international. We want to avoid the vision of Texas, and there is a minimum rate to be paid in the country of the controlling company -- offshore operations, it's less than 15%. But there are mechanisms. So in our case, we can discount from the basis to calculate the tax, two very important things. Number one is related to personnel, either our own or contracted. And the other is the immobilized assets coming from CapEx or rental. So as our basis of assets is greater. And in terms of personnel is much higher than Afya, if we apply to the current law we have an effective tax rate that is well below what Afya currently has. So if you take the year of 2025, that calculated, they had a tax to be paid a little bit more than BRL 100 million. In our case, we won't have 0. Applying the loss in effect, there would be no tax to be paid. Now when we look at 2026, our rate would grow in terms of the effective rate that we are paying currently, and we would go from 2%, 3% to 4%, 5%. So this protection that the law provides, the local costs has different reduction rates. Today, we can reduce our discount 7.4% in the lines that we have. Each one has a different rate, both numbers go down constantly until 2033. So if we get our projections for the future in terms of our bottom line in terms of EBITDA and other And this rate going down a long time, we are going to have an increase in the payment of effective projected tax paid of 4 or 5 percentage points. So we pay something between 7% or 9% in 2023. So we are going to pay more than we paid today, but still much less than Afya.

Our next question comes from Victoria Antonello from JPMorgan.

I have two questions. What about your revenue gains that in NPV from 2 points to be? So you did not include the gains in revenue. Can you share with us what are the gains that you're expecting in terms of revenue? And now moving to other synergies, marketing synergies. How much of the marketing synergies can you see considering the combination and the aggregation of medicine programs? So this advertising, could you increase demand for other courses that are not in such high demand as medicine?

Victoria, thank you for your question. About your question about the gain of role, we wish we could have numbers that we could very confident and So we showed to you the expenses of the company, and we can capture the results, as we said, with the acquisition of Red talent in 2020 and 2 years, we even exceeded initially set targets. So we are very confident that the NPV to 2.2 of capture. But as you said, we also have the potential of capturing upside of revenue. The main two levers is the penetration in continuing education in medicine. So we always saw potential in this segment. So as the number of the positions or the places in medical schools increase, well, we have more doctors in the market, and they will need continuing education. So this is the biggest company in the market in medical education, but a very small share of the market, considering the lifelong learning in medicine. So this was already a strategic lever. So both graduate and many different kinds of courses and it would take a while for us to build everything and to get there. But now with the merger, with the platform is ready, and it's going to very -- to fit perfectly into the pipeline of medical education. So they're going to have their medical degree to graduate from medical school, and then they would need to have specialization. So an entire portfolio of products -- so along their professional lives, there's a portfolio of services associated to their initial degree. And this was already in Yduqs and really accelerates our curve of growth. Second important point is the presence that is going to address a little bit but a national presence. And the higher number of campuses is a strength. So in the beginning, we had individual tests to admit or new students. So we have really augmented the registrations. So today, one student can take a single test and depending on their score, they can apply to many different places in Brazil. So if you combine with Afya, they have 51 options of campuses for their entrance tests. So this really increases the capture potential. And so going to the second one. So they are not really relevant between 2% and 2.2%. Why? Because Vietnam over role of medical programs is lower than in other courses. So there's a lot of money to be captured. So really believe in medicine that has a strength in terms of local brands that needs to be preserved. We may some times, and this is not yet defined and how we are going to operate -- at country level, there may be some modifications in brands and some camping and there may be some savings there. So this mapping has been conducted by one of the major international consulting that detailed the niche end and prepare the -- and designed very well a project for this. And we have a whole year, 9 to 12 months. We're also going to be working in a model to get very ready to close in to expedite the process of capture of synergies. And we're saying that it should be captured in 3 years. And if we work very well, it might even be in a shorter time. And thank you very much for the opportunity for asking this question, and we are really confident and well prepared to deliver not just Yduqs, but Afya also has a very long track record of integration of mergers and capturing synergies. I hope I have answered your question.

Our next question comes from Lucca Marquezini from Itau.

I think that you have answered most of my questions. But what you said in the presentation, this transaction depends on some regulation approvals. Now when you look at the overlap of schools and everything as a whole, what are the potential risks and some remedy in -- so we talk about the studies that you conducted?

Lucca, thank you for your question. So we have 15 days before the initial submission to the Brazilian antitrust agency. So I would like to emphasize that actually, this is the combination of business in Brazil with the smallest overlap. They are very complementary in terms of product portfolio and geographical footprint. Of course, it varies from one region to the other -- a very strong thesis that is going to help us. So we have the initial submission and we want to focus on the model that we are going to have in the future. I may not have answered 100% of your question, but I hope I may have clarified a few points.