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

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to ILC's 1Q '20 Earnings Conference Call. Today with us, we have Trinidad Valdés, Investor Relations Officer of ILC; Gustavo Maturana; María de los Ángeles Arce; and Cristina Trejo, Investor Relations. We would like to inform you that 1Q '20 earnings release and conference call presentation are available to download at the Investors section of ILC's website at www.ilcinversiones.cl. Questions can only be answered by telephone, so if you are connected through the webcast, you should e-mail your questions directly to the IR team at [email protected]. Also, this event is being recorded. [Operator Instructions] Before proceeding, let me mention the forward-looking statements are based on the beliefs and assumptions of ILC's management and on information currently available. They involve risks, uncertainties and assumptions because they are -- because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of ILC and could cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Ms. Trinidad Valdés, Ms. Valdés, you may begin your conference.

Thank you, operator. Hello, everyone, and thank you for joining ILC's First Quarter 2020 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 for each of our businesses. Additionally, we are broadcasting this conference call via webcast. Now please move to Slide 3, where you will see the main highlights for the quarter. During the first quarter of 2020, ILC recorded a net loss of CLP 24 billion compared to a profit of CLP 36 billion for the same period of the previous year. This was mainly explained by the historical drop in global financial markets at the end of March because of the COVID-19 pandemic. This resulted in a decrease of CLP 72 billion in return on the legal reserves of AFP Habitat for Chile, Peru and Colombia in aggregate and a CLP 29 billion drop in the equity portfolio of Confuturo. When analyzing the company's operational performance, as shown in Slide 4, during the first quarter, there was an improvement in AFP Habitat's operating result, which was driven by the consolidation of AFP Colfondos in Colombia at the end of 2019. Banco Internacional also showed 31% growth in commercial loans as well as better margins and efficiency. Finally, Red Salud was enjoying recovering activity levels prior to the arrival of the COVID-19 in Chile. All of the above partly offset lower annuity premiums at Confuturo as well as higher loss ratio at Red Salud. Now I will turn the call over to Gustavo who will review the main operational events and key financial figures of AFP Habitat and Confuturo.

Thank you, Trinidad. As shown in Slide 5, AFP Habitat reported a 25% increment in net operating income. Greater fee income in Chile and Peru, coupled with the consolidation of Colfondos in Colombia, boosted revenues by 36%. This was partially offset by a 51% increase in SG&A, mainly driven by the consolidation of AFP Colfondos in December 2019. Regarding Chile, growth in revenue was mainly driven by a 7% increase in real terms in average qualified salary. It is important to note that as of March 2020, the average qualifying salary for AFP Habitat exceeded the industry average by 21%. This is a result of the company's strategy to target the high-income segment. AFP Habitat Peru saw a 51% quarter-on-quarter increase in fee revenue, totaling CLP 9 billion. After 7 years operating in Peru, Habitat reached 1 million members and 14% market share. Moreover, as of March of 2020, the company had USD 3.3 billion in assets under management, 44% higher than the same month in 2019. This is an important fact as Peru has mixed fee, charging based on salary and AUM. Finally, AFP Habitat has operated in Colombia since December 2019. During the first quarter of 2020, AFP Colfondos contributed CLP 13 billion in revenue, representing 18% of consolidated income. The company is the third largest pension fund manager in Colombia, managing USD 10 billion in assets, with 791,000 contributors as of March of 2020. SG&A for the first quarter of 2020 reached CLP 33 billion, 51% higher than the first quarter of 2019. This was mainly due to consolidating expenses of AFP Colfondos, which represented 85% of the total increase. During the quarter, there were also higher commercial and administrative expenses in Chile and Peru. Regarding nonoperating income, AFP Habitat was strongly affected by the record drops in global financial markets as the COVID-19 pandemic spread through Asia, Europe and America. This resulted in decreases of CLP 61 billion, CLP 4 billion and CLP 7 billion in returns on legal reserves in Chile, Peru and Colombia, respectively. Therefore, AFP Habitat recorded a CLP 12 billion net loss for the first quarter of 2020, CLP 49 billion lower than the same period in 2019, derived from historical drops in financial markets worldwide. AFP Habitat's profit before taxes and legal reserves was CLP 39 billion, 21% higher than the first quarter of 2019 due to the improved operating performance across the region. Finally, it's important to highlight that AFP Habitat Peru and Colombia represented 18% of AFP Habitat's consolidated results before taxes and legal reserves in the first quarter of 2020. Slide 6 shows Confuturo's performance. This entity saw a CLP 49 billion reduction in operating results quarter-on-quarter, mainly because of the historical drops in equity markets worldwide due to the COVID-19 pandemic as well as lower premiums collected during the quarter, large extension pay and higher impairment recognized during the period. As you can see in the chart on the bottom left, Confuturo annuity premiums in the first quarter of 2020 decreased by 72% compared with the same period in 2019. The industry as a whole reported a 35% decrease in annuity premiums as the spread between scheduled withdrawals and annuity increased 84 basis points quarter-on-quarter. The above led to a reduction in preference for annuities from approximately 61% in the first quarter of 2019 to 30% in the first quarter of 2020. Moreover, the number of new retirees that choose annuities decreased by 45% quarter-on-quarter, reaching close to 4,000 whereas the number of people choosing scheduled withdrawals increased by 97%, reaching 9,300 in the first quarter of 2020. It is important to remember that Confuturo has seen reducing sales since May 2018 as its commercial strategy correlates annuity premiums with availability of investments alternatives at attractive returns under a specific level of risk. However, Confuturo has been increasing premiums from other life insurance products such as savings and voluntary pension savings, maintaining its leadership with 25% of market share. Confuturo reduced its net investment income by 60% to CLP 38 billion. This decrease was mainly attributable to the record drop in global financial markets in the first quarter of 2020 as the COVID-19 pandemic spread around the world. Excluding returns from equity investments from life insurance with savings component, since Confuturo has a fiduciary role with them, the company suffered a CLP 29 billion loss on its local and international stock portfolio. In addition, there is a high comparison basis from a real estate divestment in Santiago in the first quarter of 2019 that resulted in a CLP 7 billion gain. All the above was partially offset by improved performance from the foreign fixed income portfolio. As of the end of March 2020, Confuturo held more than USD 350 million in cash, which is equivalent to approximately 9 months of pension payments. Cost of sales in the first quarter of 2020 amounted to CLP 98 billion, 35% less than the first quarter of 2019. This is explained by lower reserves because annuity collections and their respective accounting loss decreased during the quarter. was partially offset by a larger pension pay as well as by a 14% increase in the loss ratio of the life insurance segment. Regarding SG&A, during the first quarter of 2020, there was a CLP 14 billion rise over the same period in 2019, mainly explained by higher impairment provision because Confuturo methodology to account for credit provisions considers the issuer's stock price. However, as of March 31, 2020, impairment represented only 0.5% of the total financial assets. Finally, Confuturo's nonoperating income improved by CLP 15 billion, mainly due to the depreciation of the Chilean pesos in the first quarter of 2020, resulting in an increase of the valuation of the international investments for life insurance with saving components as of the end of March 2020. All in all, Confuturo reported a net loss of CLP 9 billion for the first quarter of 2020 compared with a profit of CLP 17 billion in the first quarter of 2019 as international markets were strongly affected by COVID-19. Now I will turn the call over to María de los Ángeles who will review the financial figures for Banco Internacional and Red Salud.

Thank you, Gustavo. If we turn to Slide 7, you will see Banco Internacional's operating performance for first quarter 2020. Its net interest margin was CLP 17 billion, 60% higher compared to the same period in 2019. Interest income was up 48%, mainly explained by a 31% increase in loans as well as by loan indexation of CLP 11 billion due to higher inflation in first quarter 2020. Regarding cost of funds, interest expenses increased 40% quarter-on-quarter, which was mainly explained by a 32% rise in the bank's liabilities, particularly those related to bonds. Regarding credit risk provisions, there was a CLP 4 billion increase quarter-on-quarter to CLP 6 billion. This was mainly explained by a larger loan portfolio, a low basis of comparison and a CLP 500 million net rise in provisions and impairments. Overall, the ratio of gross expenses to gross operating income reached 25% for the first quarter of 2020, up from 11% in first quarter 2019. In addition, loans with installments more than 90 days past due continued to increase quarter-on-quarter, falling from 3.5% in March 2019 to 2.0% in March 2020. Banco Internacional's SG&A in first quarter 2020 were up by 11% compared to the first quarter 2019. This was mainly due to higher personnel expenses. The improvement in the bank's gross operating income resulted in a 1,360 bps, a strengthening of the bank's efficiency ratio, reaching 44% as of March 2020. Therefore, Banco Internacional recorded net income of CLP 6 billion for the first quarter of 2020, 44% higher than the same period in 2019. Return on average equity was 16%, with an annual trailing net income of CLP 27 billion. Moving on to Red Salud on Slide 8. You will see that during the first quarter of 2020, revenue increased by 1.3% compared to the same period in the 2019. The recovery that we saw in activity during January and February was partially reversed in March as COVID-19 arrived in Chile. Public health authorities have integrated the public and private networks in order to respond to best mechanical ventilator and equipment requirements in a centralized manner. Therefore, surgeries were down by 14% quarter-on-quarter, whereas medical consultations, dental procedures, laboratory tests and imaging remained stable during the first quarter of 2020 compared to the same period in 2019. Cost of sales increased by 3% in first quarter 2020 compared to the same quarter in 2019. This increase was explained by greater staff remuneration, affecting mainly regional hospitals and outpatient centers. The ratio of cost over revenues went up from 77% in first quarter '19 to 78% in the first quarter of 2020. Red Salud SG&A in first quarter 2020 were up by 3% compared to the first quarter 2019. This was mainly due to higher personnel expenses, impaired receivables and IT costs to enhance remote channels. All in all, the ratio of SG&A over revenue went up from 19.5% in first quarter 2019 to 19.9% in the current period. The units with the highest rise in SG&A were regional and metropolitan hospitals. All in all, consolidated EBITDA decreased 12% Q-on-Q. This resulted in EBITDA of CLP 8 billion in first quarter 2020 and an EBITDA margin of 7.9%. As a result, Red Salud recorded a net loss of CLP 2 billion in first quarter 2020 compared with profit of CLP 56 million for the first quarter of 2019. Despite the recovery in activity levels during January and February, the COVID-19 contingency affects supply and demand for medical procedures. Red Salud has concentrated all its efforts on ensuring the well-being of its workers, patients and suppliers as well as keeping its entire network running smoothly. Now I will turn the call over to Cristina, who will review the financial figures of our health insurance companies, Consalud and Vida Cámara.

Thank you, María de los Ángeles. Moving on to Slide 9, we see that Isapre Consalud reported weaker results due to the recovery in health care activity in Chile during January and February. Moreover, there was a one-off effect of CLP 5 billion for a hedge price adjustment as the diseases covered by this premium increased from 80 to 85 for the next 3 years. The new diseases included in this plan are Alzheimer's, lung cancer, thyroid cancer, kidney cancer and multiple myeloma. Consalud recorded a 14% increase in revenue, which was mainly explained by a 3% increase in the number of contributors, inflation and price adjustments to base contracts and hedge premiums. Cost of sales during the first quarter of 2020 amounted to CLP 130 billion, 17% higher than the same quarter in 2019. This increase was mainly attributable to the 11%, 6% and 29% rise in the total cost of inpatient, outpatient and medical lease coverages, respectively. Consalud's first quarter 2020 loss ratio increased by 232 basis points compared to the same quarter in 2019, totaling 88%. The increase in revenues was not enough to offset the rise in costs of inpatient and outpatient services and medical needs quarter-on-quarter. As of the end of March, there were 1,700 medical licenses related to COVID-19, which represented 5% of total licenses approved by Consalud during that month. Consalud's sales and administrative expenses for the first quarter of 2020 increased by 33% compared to the first quarter of 2019, which was mainly explained by the aforementioned effect of additional legal expenses during the quarter. All of the above resulted in a CLP 3 billion net loss for Consalud during the first quarter of 2020 compared to profit of CLP 2 billion in the first quarter of 2019. Regarding Vida Cámara, gross profit during the first quarter of 2020 increased by CLP 0.8 billion when compared to the same period in 2019. This was mainly explained by improved results in its life and health insurance segment as a result of a lower loss ratio. Net operating income was also boosted by a 5% rise in the number of beneficiaries, following the growth trend from the last few years. Vida Cámara has more than 350,000 beneficiaries of supplementary health insurance products, which is roughly half of the total beneficiaries of our mandatory health insurance company, Consalud. For the first quarter of 2020, Vida Cámara ranked third in life and health insurance, with a market share of 11%. Now in order to conclude our first quarter 2020 results conference call, please turn to Slide 10, where Trinidad will refer to final remarks.

Thank you, Cristina. Given the global scenario we are currently facing in 2020 as a result of COVID-19, we would like to highlight that ILC is currently working on a 4-step plan: first, to ensure the well-being of our workers and customers; second, to adapt the organization to COVID-19 challenges; third, to preserve our financial position and cash flows; and finally, to continue with our social commitment as part of our DNA. Moreover, we would like to emphasize that ILC has approximately USD 130 million in cash, which allows us to better face a potential scenario of restricted liquidity for ILC and our subsidiaries. Finally, in 2019, we refinanced 40% of our liabilities and capitalized our subsidiaries, Confuturo and Banco Internacional, which leave us with no further material liquidity requirements for the year 2020. This concludes today's presentation. Operator, we will now open the floor up for questions.

[Operator Instructions] There are no questions at this time. This concludes the question-and-answer session. I will now turn over to Ms. Valdés for final remarks.

Okay. Thank you, Sara. Well, that's everything for today. Thank you all for attending this conference call regarding IR activities due to the COVID-19 contingency. As you may know, some conference and road shows have been rescheduled. However, all our activities are published on our website. So now if you have further questions, feel free to contact our IR team. See you next quarter. Bye-bye.

Thank you. This concludes today's presentation. You may now disconnect your line at this time, and have a nice day.