Inversiones La Construcción S.A. (ILC) Earnings Call Transcript & Summary

Good morning and welcome to the ILC 4Q '19 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Trinidad Valdés, Investor Relations Officer. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining ILC's Fourth Quarter 2019 Results Conference Call. Before starting, I would like to invite everyone to download from our website a presentation prepared especially for this conference call. The purpose of this document is to go through the main events and achievements of the period as well as to explain the context and financial figures of each of the businesses where we participate. Additionally, we are broadcasting this conference call via webcast. Now please move to Slide #3, where you will see the main highlights of the year. During 2019, our company amounted CLP 91 billion profits, remaining stable when compared to the recurring profit of 2018. The better performance of AFP Habitat, Banco Internacional, Vida Cámara Chile and Peru was offset by a decrement in the result of Consalud in Brazil Inv. Confuturo, and in a lesser extent, Red Salud. Consequently, during 2019, the company continued diversifying its source of revenues. AFP Habitat and Consalud represented 51% of ILC's net result, below the 92% that both represented for our IPO in 2012. This decrement was mainly explained by the additional contribution of Confuturo and Banco Internacional, which represented 34% and 18% of consolidated profits, respectively, in 2019. Moreover, ILC was able to deliver an annual result of CLP 90 billion, above the average of CLP 70 billion recorded during the 2012 and 2016 period. 2019 was also a year where several milestones were achieved. First, in December 2019, AFP Habitat entered the Colombian pension fund industry through the acquisition of AFP Colfondos. With this $170 million investment, AFP Habitat became the second largest pension fund company in Latin America, excluding Brazil, consolidating its positioning in the Andean region, accessing a population over 100 million inhabitants and $850 billion of GDP. Moreover, during 2019, Confuturo merged with Corpseguros, consolidating all operations and balance sheet under Confuturo. Also in April 2019, ILC increased its stake in Banco Internacional from 50% to 67% through a public tender offer. Regarding the health sector, Red Salud continued its growth plan in the patient area. During 2019, Red Salud opened 6 new dental centers, increasing by 12% the number of dental chairs. The organization also invested in several equipments such as scanners, MRIs and other imaging assets, increasing by 12% its capacity when compared to 2018. Regarding liability management operations. In September 2019, ILC refinanced approximately 40% of its individual liabilities. This issuance allowed the company to extend the maturity of its financial obligations as well as to reduce the average rate from inflation plus 2.7% to inflation plus 1.7%. In addition, ILC made capital increases in Inversiones Confuturo for $70 million and Banco Internacional for $25 million in September 2019. This leaves the company with no significant capital requirements for 2020. Finally, regarding sustainability milestones. In 2019, ILC joined the Dow Jones Sustainability Index Chile and MILA for the second year due to Global Compact and its sustainability goals for 2030 and issued its first social bond according to social principles of the International Capital Markets Association. All these achievements are part of a strategic plan that pursues long-term value for all ILC's stakeholders. Now we will review the main operational points and key financial results of each of our companies for the fourth quarter of 2019 compared to the same period of the previous year. In Slide #4, you will see that ILC recorded an CLP 11 billion net income for the fourth quarter of 2019, CLP 600 million higher compared to the same period of 2018. This was mainly explained by a lower loss ratio in Consalud and Vida Cámara as well as by a higher return of the encaje of AFP Habitat, which was boosted by the stronger performance of investments abroad as well as by the U.S. dollar appreciation. On the positive side, AFP Habitat continued increasing revenues as there was a 5% increment in the average taxable income in Chile, a 57% quarter-on-quarter increase in the AUM per affiliate in Peru and the consolidation of AFP Colfondos in December 2019. Also Banco Internacional continued delivering a strong operating performance, with commercial loans growing 27% year-on-year, well above the 10% recorded by the Chilean banking industry. Moreover, it is important to highlight that the bank ended 2019 with an annual net income of CLP 25 billion, reaching an ROE of 16%. Finally, Consalud and Vida Cámara also showed a better operating performance during the quarter as the loss ratio of both companies went significantly down. Now all in all, if we turn to Slide #5, you will see that during the fourth quarter of 2019, ILC recorded a net profit of CLP 11 billion, 6% higher compared to the same period of 2018. This was mainly driven by a better result in Consalud, Vida Cámara Chile, AFP Habitat and Banco Internacional, which was partly offset by a lower profit in Inversiones Confuturo, Red Salud and Vida Cámara Peru. Now we will review the main operational events and key financial figures of ILC's financial sector. As shown in Slide #6, AFP Habitat recorded a 3% decrement in its operating result. The larger income from fees in Chile, Peru and Colombia was offset by higher legal, financial and tax expenses related to acquisition and consolidation of AFP Colfondos. Regarding Chile, growth in revenues was mainly driven by a 5% increment in real terms of the average salary quoted. It is important to note that as of December 2019, average taxable income of AFP Habitat exceeded the industry average by 20%. This responds to a strategy followed by the company to position itself in the high income segment. Revenues from fees of AFP Habitat Peru increased by 42% quarter-on-quarter, totaling CLP 8 billion. After a 6-year history in Peru, Habitat reached 1 million affiliates, achieving 14% of market share. Moreover, as of December 2019, the company managed USD 3 billion in AUM, 54% higher when compared with the same month of 2018. This is an important fact as Peru has a mixed fee, charging over salary and AUM. All the above resulted in a CLP 3 billion profit in 4Q '19, above the CLP 0.6 billion gain recorded in the fourth quarter of 2018. Finally, it is important to mention that AFP Habitat operates in Colombia since December 2019. During that month, AFP Colfondos contributed with CLP 2 billion in revenues. The company is the third largest pension fund manager in Colombia, managing USD 12 billion in assets, with 811,000 contributors as of year-end 2019. SG&As for the fourth quarter of 2019 reached CLP 32 billion, 37% higher than 4Q '18, mainly due to acquisition and consolidation expenses related to Colfondos as well as to larger commercial and administrative expenses. Regarding nonoperating income, AFP Habitat was benefited by the higher return of its encaje, in response to the greater performance of equity markets and other type of investments worldwide as well as by the U.S. dollar appreciation. All the above resulted in a CLP 9 billion improvement in results when compared to 4Q '18. Therefore, AFP Habitat recorded a CLP 22 billion profit the fourth quarter of 2019, 20% higher than the one obtained the same period 2018. Finally, it is important to highlight that AFP Habitat Peru and Colombia represented 13% of Habitat's consolidated result before encaje and taxes in 4Q '19. Slide #7 shows Confuturo's performance, which recorded a CLP 5 billion decrement in its operating result quarter-on-quarter. This responds to a share decrement in premiums sold during the quarter, a weak performance of the Chilean equity market as well as by higher pensions paid, among other reasons. As you can see in the chart at the bottom left, Confuturo annuity premiums in the fourth quarter of 2019 decreased by 80% compared with the same period of 2018. It is important to highlight that annuity premiums of the whole industry dropped by 48% as the spread between programmed withdrawals and annuities increased 90 basis points quarter-on-quarter, above mid a reduction in the preference for annuities from approximately 65% in 4Q '18 to 40% in 4Q '19. Additionally, the amount of people retiring decreased by 14% quarter-on-quarter, reaching 9,900 people in 4Q '19. Moreover, Confuturo has been reducing sales since May 2018, responding to its commercial strategy that correlates premiums with the availability of investment alternative at attractive returns under a specific level of risk. In addition, during 2019, Confuturo ranked fifth place in the industry in terms of premiums, reaching a 9% market share. Regarding net investment income, Confuturo increased its result by 25%, reaching CLP 73 billion. This increment was mainly attributable to an FX effect over international investments related to life insurances as U.S. dollar appreciated during the quarter. Also sales in the fourth quarter of 2019 amounted CLP 85 billion, 43% less compared to the fourth quarter of 2018. This responds to a lower constitution of reserves as annuity collections decreased during the quarter. The above was partly compensated by larger pensions paid as well as by a 14% increment in the loss ratio of life insurances. Regarding SG&As. During the fourth quarter of 2019, there was a CLP 3 billion increment quarter-on-quarter, mainly explained by an update in the methodology to account credit provisions. Finally, the nonoperating result of Confuturo improved by CLP 1 billion mainly due to the depreciation of the Chilean peso in 4Q '19, resulting in a higher valuation of international investments related to life insurances as of the end of December 2019. All in all, Confuturo reached CLP 1 billion net profit in the first quarter of 2019 compared with the CLP 4 billion gain recorded in 4Q '18. If we turn to Slide #8, we will review Banco Internacional's operating performance for 4Q '19. Net interest margin amounted CLP 18 billion, 13% higher compared to the same period of 2018. Income from interest increased by 25%, mainly explained by a CLP 5 billion growth in interest from commercial loans. Regarding cost of funds, interest expenses increased by 32% quarter-on-quarter, which was mainly explained by the 44% increment in the liabilities of the bank, particularly in those related to bond instruments. Regarding credit provisions, there was a CLP 5 billion increment quarter-on-quarter, totaling CLP 6 billion. This was mainly explained by a higher stock of loans as well as a CLP 4 billion provision due to the weaker economic scenario in Chile in response to the social turmoil. Overall, the risk expenses over gross operating result ratio reached 22% the fourth quarter of 2019. In addition, the impaired portfolio index continued improvement quarter-on-quarter, going down from 4% in December 2018 to 2.1% in December 2019, aligned with industry levels. Banco Internacional's SG&As in 4Q '19 were up by 33% compared to 4Q '18. This was mainly due to higher personnel expenses. The improvement in the gross operating income of Banco Internacional resulted in 1,005 basis points strength of the bank's efficiency ratio, reaching 44% in 2019. Therefore, Banco Internacional recorded a net income of CLP 5 billion in 4Q '19, 6% higher compared to the same period in 2018. Return on average equity was 16%, with an annual net income of CLP 25 billion. Moving into Red Salud in Slide #9. You will see that during the first quarter of 2019, revenues remained stable when compared to the same period of 2018. During 4Q '19, the activity at Red Salud was affected by the local scenario in Chile, which implied difficulties in the transport of citizenships resulted in a higher no-show ratios, impacting the normal operations of hospitals and medical centers. However, Red Salud's geographical diversification throughout Chile allowed the network to diminish the impact of the local contingency. In addition, during December of 2019 and January of 2020, there was a strike of 2 unions of Red Salud's Centros Médicos y Dentales personnel that also affected the operation. All the above resulted in a consolidated slowdown in terms of activity, showing quarter-on-quarter declines of 6% in medical and potential consultations, 2% in bed days, 10% in reservation of surgery rooms and 4% in images. Cost of sales increased by 1% in 4Q '19 compared to the same quarter of 2018. This increment was mainly explained by larger medical and staff remunerations, which were partly offset by lower leases. When measuring costs over revenues, this ratio went down from 77% in 4Q '18 to 76% in the fourth quarter of 2019. Red Salud's SG&As in 4Q '19 were up by 13% compared to 4Q '18. This was mainly due to a larger depreciation and amortization in response to the implementation of IFRS 16 as well as by higher impairments and marketing expenses. All in all, when measuring SG&As over revenues, this ratio went up from 18% in 4Q '18 to 20% in the current period. Consolidated EBITDA decreased 7% quarter-on-quarter driven by a lower activity and higher SG&As. This result in a CLP 9 billion EBITDA in 4Q '19, implying an EBITDA margin of 9.2%. A result, Red Salud recorded a net loss of CLP 1 billion in 4Q '19 compared with a CLP 2 billion gain registered the fourth quarter of 2018. Moving to Slide #10, we'll see that Isapre Consalud improved its results, company that has been facing a scenario with increased costs and SG&As. Consalud recorded a 12% increase in revenues, which was mainly explained by a 4% increase in the number of contributors, inflation as well as by price adjustments in base contracts and GES premiums. Cost of sales during 4Q '19 amounted to CLP 121 billion, 6% higher than the same quarter of 2018. This increment was mainly attributable to the 3%, 7% and 22% rise in the cost of inpatient, outpatient and medical leaves coverage, respectively. Consalud's 4Q '19 loss ratio decreased by 495 basis points compared to the same quarter of 2018, totaling 84%. The increase in revenues offset the rising costs of inpatient and outpatient services and medical leaves quarter-on-quarter. Consalud's sales and administrative expenses for the fourth quarter of 2019 increased by 9% compared to 4Q '18. This was mainly due to higher salaries expenditures and administrative expenses. All the above resulted in a CLP 6 billion profit for Consalud during the fourth quarter of 2019 compared to a net result of CLP 1 billion in 4Q '18. Regarding Vida Cámara, gross profit during the fourth quarter of 2019 increased by CLP 3 billion when compared to the same period of 2018. It was mainly explained by the better result of its life and health insurance segment as a result of a lower loss ratio, particularly in the patient reimbursements. Operating result was also boosted by a 6% rise in the number of beneficiaries following the growth trend recorded during the last years. It is important to mention that Vida Cámara has more than 347,000 beneficiaries in complementary health insurances, which is roughly half of the total beneficiaries that we maintain in our mandatory health insurance company, Consalud Now in order to conclude our 4Q '19 results conference call, please turn to Slide #11. Given the scenario that we are currently facing this 2020 worldwide as a consequence of the coronavirus, we would like to highlight that in ILC as well as in -- with all our subsidiaries, we count with an operational continuity plan, which has implemented home office in those areas and functions that are allowed to. In Red Salud's specific case, we are prioritizing emergency services during the next few days without disregard other medical services that all our patients throughout Chile require. Moreover, we would like to emphasize that ILC counts with approximately USD 100 million of cash, which allows us to confront in a better way an eventual restrictive scenario in terms of liquidity. Finally, in September 2019, we refinanced 40% of our liabilities and capitalized our subsidiaries, Confuturo and Banco Internacional, which leave us with no further liquidity requirements for the year 2020. This final message concludes today's presentation. Operator, we will now open the floor for questions.

[Operator Instructions] And the first question is from Barbara Angerstein of Itaú.

Apologies if I ask about something that you already mentioned. I was temporarily cut off from the call. I just wanted to know if it's possible that you give us some insight of how your health care operation is working, both in terms of demand at an urgency level but also on demand for other services. We saw in the fourth quarter results that the social disruption had an effect on demand for inpatient services. I imagine that's for elective surgeries mainly. What have you seen here over the last couple of weeks? Is there any insight you can give us at this point?

Yes. Thank you, Barbara, for the question. Maybe -- yes, I know that you asked about Red Salud, but maybe we can I thought like a broader answer regarding what's happening in not only in Red Salud but in all our subsidiaries. So regarding the potential impact of coronavirus in our operations, I think that we can split the answer in two. First, the impact, what is here, what I think that is more important in terms of liquidity for the whole company, and then the impact in our operations. So first, in terms of liquidity, as we said before in the call, 2019 we refinanced like roughly 40% of our liabilities through bond issuance, with an 8-year terms. So this way, we have a very balanced amortization schedule for the coming years. In addition, we have currently $100 million in cash at ILC level, and we have just capitalized Confuturo and Banco Internacional in 2019. So we do not have any further capital requirements -- relevant capital requirements for 2020. So that's the first point, because I think that right now, all the things regarding liquidity are pretty much or very important. Now in relation to our operations. Here, it's difficult to share like a forecast because this is the first time that we faced a situation like this. In all ILC and our subsidiaries, we're having -- or we have a contingency operation plan, which was already approved in October and November 2019 after the social unrest that we suffered in Chile. And given that we are the largest pension payers in Chile, the largest institutional investor, one of the many health insurances, continuity in operation is something that is pretty much in our DNA. So we have been testing those systems last year, and we are operating with them this year. And until today, we have not suffered any problem at all. Additionally, the majority of our personnel is with home office in order to reduce any potential infection. Now regarding the impact in our financial performance for our health subsidiaries going into your question. We think that it's difficult and too soon to know what is going to happen for the next month. We have new information every day. For example, in Consalud, our health insurance company, we think that there should be an increase in terms of licenses derived from coronavirus-infected people, and as we'd -- have been noticed yesterday, the people that is classified as close contact according to the World Health Organization definition. However, this increase in the number of licenses could be offset by decreasing the outpatient disbursements as people could probably postpone or avoid medical procedures or surgeries, as you said in your question. Now the other side of the coin is Red Salud. You know that, as you said before, Red Salud was hit during the fourth quarter of 2019, especially in those centers that were pretty much close to the center of Santiago. That was the case, for instance, of Clinica Red Salud Providencia. But at the beginning of this year, the -- let's say, the activity was somehow recovered for the levels that we are -- used to have on the first quarter because you have to remember then in Red Salud we have a seasonality during the second and third quarter which are stronger because it's winter in Chile. So at the beginning of this year, we saw some recurring in the activity levels. However, this year, we should be seeing a change in -- probably, we're going to see a change in the mix of medical services provided, but there should be less outpatient activity and postponable services executed, as you said in your question. However, the inpatient activity could rise due to coronavirus-infected patients. Today, we do not have any cut of services, but probably, this is a situation that we must track every day because as soon as we have more infected people, probably a lot of people is not going to go to the physician. And we're going to see more, let's say, critical surgeries or more, let's say, urgent surgeries, plus a lot of coronavirus-infected. So that is how the mix could change. And regarding the impact in our financial companies. Here, we should be pretty much aligned with the reality that other players in the banking and life insurance industries are facing with a weaker economic scenario. Risk and impairments could increase, and investment returns could also be hit. So with this update, I hope that this could answer your question, Barbara.

[Operator Instructions] There are no questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Trinidad Valdés for closing remarks.

Okay. Thank you, everyone. That's everything for today. Thank you for attending this conference call. Regarding IR activities, due to the coronavirus, some conferences and non-deal roadshows have been rescheduled for the second half of 2020. However, we are open for any requirements that you may have, especially because here, as you know, we are having new information every day. So if you have any further question, please feel free to contact our Investor Relations team. And everyone, have a nice day. Hope that you and your families remain healthy. Goodbye, and see you next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.