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 Second Quarter 2020 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 the second quarter 2020 earnings release and conference call presentation are available to download at the Investors section of ILC's website at www.ilcinversiones.cl. [Operator Instructions] Also, this event is being recorded. [Operator Instructions] Before proceeding, let me mention that 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 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 call over to Ms. Trinidad Valdés. Ms. Valdés, you may begin your call.

Thank you, operator. Hello, everyone, and thank you for joining ILC's Second 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 second quarter of 2020, ILC recorded a net profit of CLP 40 billion compared to a profit of CLP 25 billion for the same period of the previous year. This was mainly explained by the partial recovery in global financial markets after the historical drop recorded in March because of the COVID-19 pandemic. This resulted in a CLP 38 billion increase in the returns of the legal reserves of AFP Habitat for Chile, Peru and Colombia in aggregate, and a CLP 25 billion increment in the equity portfolio of Confuturo. Also, when analyzing the results of the financial sector, during the second quarter, there were higher impairments in Confuturo and larger provision expenses at Banco Internacional, most of them related to COVID-19 FX over macro perspectives and the activity of some specific industries. Regarding the health sector, COVID-19 affected demand for all medical services. However, the above was offset by the result of the health insurance companies on Consalud and Vida Cámara, as they were lower loss ratios during 2Q '20. Finally, it is important to remark that during the second quarter of 2020, all of our subsidiaries were 100% operative with the assumption of some medical procedures imposed by health authority. Also, ILC is facing this scenario with CLP 100 billion in cash, which could support one of our subsidiaries if capital requirements are needed. When analyzing the company's performance, as shown in Slide 4, during the second quarter, there was an improvement in Isapre Consalud and Vida Cámara as their loss ratios came down, and AFP Habitat as its legal reserves performed better quarter-on-quarter, all of the above was partly offset by a weaker demand in Red Salud due to COVID-19, lower annuity premiums and higher impairments at Confuturo as well as by greater provisions in Banco Internacional. Now I will turn the call to María de los Ángeles, who will review the main operational events and key financial figures of AFP Habitat and Confuturo.

Thank you, Trinidad. As shown on Slide 5, AFP Habitat reported a 26% increment in net operating income. The consolidation of Colfondos in Colombia meant additional revenues for CLP 13 billion, whereas Habitat Peru also increased its revenues by 8% Q-on-Q. Regarding Chile, revenues decreased by 0.4%, mainly driven by a 6% reduction in the number of contributors Q-on-Q. This was partially offset by the 2.3% increase in real terms in average qualifying salary. It is important to note that as of June 2020, the average qualifying salary for AFP Habitat exceeded the industry average by 22%. This is a result of the company's strategy to target the high-income segment. AFP Habitat Peru saw an 8% quarter-on-quarter increase in fee revenue, totaling CLP 7 billion. Despite the temporary suspensions of fees over salaries and the 25% retirement of savings due to the COVID-19 pandemic, the growth in AUM recorded year-over-year allowed Habitat to continue growing in terms of revenues. This is an important fact as Peru has a mixed fee charging based on salary and AUM. As we have mentioned before, AFP Habitat has operated in Colombia since December 2019. During the second quarter of 2020, AFP Colfondos contributed CLP 13 billion in revenue, representing 20% of consolidated income and CLP 4 billion in terms of net profit. The company is the third largest pension fund manager in Colombia, controlling USD 10 billion in mandatory savings with 756,000 contributors as of June 2020. SG&A for the second quarter of 2020 reached CLP 36 billion, 59% higher than the second quarter of 2019. This was mainly due to the consolidation expenses of AFP Colfondos, which represented 83% of the total increase. Regarding nonoperating income. During the second quarter of 2020, AFP Habitat was benefited by the recovery in global financial markets after the COVID-19 pandemic spread through Asia, Europe and America in March 2020. This was solid in increases of CLP 53 billion and CLP 4 billion in returns on legal reserves in Chile, Peru and Colombia, respectively. Therefore, AFP Habitat recorded CLP 65 billion profit for the second quarter of 2020, CLP 27 billion higher than the same period in 2019, derived from the recovery in the returns on legal reserves. AFP Habitat's profit before taxes and legal reserves was CLP 32 billion, 2% lower than the second quarter of 2019. Finally, it is important to highlight that AFP Habitat Peru and Colombia represented 13 of Habitat's consolidated results before taxes and legal reserves in the second quarter of 2020 compared to the 9% recorded in the same period of 2019. Slide 6 shows Confuturo's performance. This MTD saw a CLP 13 billion reduction in operating results Q-on-Q, mainly because of the lower premiums collected during the quarter, historical drops in investment funds, especially in private equity, due to the COVID-19 pandemic, and higher impairments recognized during the period. As you can see in the chart at the bottom left, Confuturo annuity premiums in the second quarter of 2020 decreased by 52% compared with the same period in 2019. The industry as a whole reported a 62 decrease in annuity premiums as the spread between scheduled withdrawals and annuity increased 110 basis points Q-on-Q. The above led to a reduction in preference for annuities from approximately 56% in the second quarter of 2019 to 29% in the second quarter of 2020. Moreover, the number of new retirees that chose annuities decreased by 65% Q-on-Q, reaching close to 2,000, whereas the number of people choosing scheduled withdrawals totaled 6,000 in the second quarter of 2020. Now it is important to remember that Confuturo has been reducing sales since May 2018, as its commercial strategy correlates annuity premiums with the availability of investment 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 a 27% market share. Confuturo increased its net investment income by 44% to COP 124 billion. This increment was mainly attributable to the partial recovery in global financial markets in the second quarter of 2020 after the historical drop related to COVID-19 pandemic in March 2020. Excluding returns from equity investment from life insurance with savings components since Confuturo has a fiduciary role with them, the company recorded a COP 25 billion gain on its local and international stock portfolio. All the above was partially offset by an CLP 18 billion drop in the [ valuation ] of investment funds quotas, especially in private equity funds as they were affected by the COVID-19 pandemic. Local fixed income and real estate investments also show a weaker performance, decreasing results by CLP 2 billion and CLP 6 billion, respectively. As of the end of June 2020, Confuturo held more than CLP 370 billion in cash, which is equivalent to 10 months of pensions payments. Cost of sales in the second quarter of 2020 amounted CLP 105 billion, 34% less than the second quarter of 2019. This is explained by lower reserves because annuity collections decreased during the quarter. The [ growth ] was partially offset by the 5% increment in pensions paid. Regarding SG&A, during the second quarter of 2020, there was a CLP 10 million rise over the same period in 2019, mainly explained by higher impairment provisions related to international and local bonds, especially from airline companies as COVID-19 hamper the operations and cash flows. However, as of June 30, 2020, impairments represented only 0.5% of the Confuturo's investment portfolio. All in all, Confuturo reported a net profit of CLP 6 billion for the second quarter of 2020 compared with profit of CLP 11 billion in the second quarter of 2019. Now I'll turn the call over to Cristina, who will review the financial figures for Banco Internacional and Red Salud.

Thank you, Maria. If we turn to Slide 7, you will see Banco Internacional's operating performance for the second quarter of 2020. Its net interest margin was COP 17 billion, 18% higher compared to the same period in 2019. Interest income was down by 1%, mainly explained by the lower inflation and rates recorded in the second quarter of 2020. Regarding cost of funds, interest expenses decreased 14% quarter-on-quarter due to a lower loan indexation and rates as well as by the additional lines provided by the Central Bank. Regarding credit risk provisions, there was a CLP 11 billion increase quarter-on-quarter to CLP 16 billion. This was mainly explained by a larger loan portfolio, a higher level of risk, as well as by a CLP 5 billion voluntary provision constitution, in addition to the CLP 4 billion recognized in December 2019 as macro situation in Chile have weakened. It is important to highlight that voluntary provisions recorded in June 2020 represented roughly 50% of Banco Internacional's net income for the first half of 2020. As of the end of June, approximately 10% of total loans were rescheduled, which was also considered in credit provisions. Finally, there were CLP 3 billion in provisions in April related to state-guaranteed student loans, which should be reversed at the end of the year. Banco Internacional's SG&A in the second quarter 2020 were up by 16% compared to the second quarter of 2019. This was mainly due to higher personnel and administrative expenses. The improvement in the bank's gross operating income resulted in 1,070 basis points strengthening of the bank's efficiency ratio, reaching 40% as of June 2020. Therefore, Banco Internacional recorded net income of CLP 2 billion for the second quarter of 2020, CLP 5 billion lower than the same period in 2019. Return on average equity was 13%, with an annual trading net income of CLP 23 billion. I would like to close our message about Banco Internacional, remarking the efforts undertaken by the organization to manage risk. During 2020, the bank has improved its solvency, liquidity, constituted voluntary provisions, controlled its MPLs and increased its cash flow generation, among other measures. Moving on to Red Salud on Slide 8, you will see that during the second quarter of 2020, revenue decreased by 35% compared to the same period in 2019. The recovery that we saw in activity during January and February was reversed in March as COVID-19 arrived in Chile. Public health authorities have integrated the public and private networks to respond to bed mechanical ventilator and equipment requirements in a centralized manner. Therefore, as the number of people infected with COVID-19 started to increase in Chile and as quarantines were established in mid-March, medical activity plumped during the second quarter of 2020. Surgeries during the second quarter of 2020 were down by 51%, whereas medical consultations decreased by 54% and medical tests dropped 36% among other health services when compared to the second quarter of 2019. However, it is important to highlight that as of today, the lowest activity levels were recorded in April 2020. Since then, outpatient activity started a mild and gradual recovery. Whereas inpatient services started to face a greater demand from COVID-19-infected patients. Red Salud increased its critical beds by 150% due to the higher demand and the requirements established by the local health authorities. The pandemic also pushed the organization to adapt its operations to keep running smoothly. That is why Red Salud launched new services such as telemedicine, reaching more than 19,000 medical consultancies during the second quarter of 2020. As of today, we keep tracking a partial recovery in outpatient services, whereas inpatient activity has decreased a bit since June, as we have just passed through the peak of the first wave of coronavirus. We hope to resume postponed treatments of chronic pathologies and elective surgeries, which are very likely to cause a deterioration in Chilean's health if they are not managed in a timely manner. To achieve this, we have a complete plan of safe caring clinics and medical centers in order to continue providing health solutions through our network in Chile. In relation to cost of sales, there was a 17% decrement in the second quarter of 2020 compared to the same quarter in 2019. This decrease was explained by a lower staff remuneration and medical supplies as there was a lower activity in our network. SG&A in the second quarter of 2020 were down by 10% compared to the second quarter of 2019. This was mainly due to Red Salud's health expenses control plan, which was launched in March 2020 to afford activity drop caused by COVID-19. All in all, consolidated EBITDA amounted minus CLP 7 billion, CLP 21 billion lower quarter-on-quarter, explained by a CLP 7 billion decrement in each of the EBITDAs for our metropolitan hospitals, regional hospitals and medical and dental centers units. As a result, Red Salud recorded a net loss of CLP 11 billion in the second quarter of 2020 compared with a profit of CLP 3 billion for the second quarter of 2019. Now I will turn the call over to Gustavo, who will review the financial figures of our health insurance companies, Consalud and Vida Cámara.

Moving on to Slide #9, we see that the Isapre Consalud reported better results due to the weaker health care activity in since March 2020 as COVID-19 arrived in Chile. Consalud recorded a 12% increase in revenue, which was mainly explained by a 3% increase in the number of contributors, inflation and price adjustments to the base contracts and GES premiums. It is important to highlight that Consalud is the largest Isapre in Chile in terms of contributors since 2019, becoming also the first private health insurer in terms of beneficiaries in May 2020. Cost of sales during 2Q '20 amounted CLP 112 billion, 8% lower than the same quarter in 2019. This decrease was mainly attributable to the 44% drop in the total cost of outpatient coverage as the demand for these kind of services has plummeted due to COVID-19. Consalud's 2Q '20 loss ratio decreased by 1,663 basis points compared to the same quarter in 2019, totaling 76%. Regarding medical licenses, as of the end of June 2020, there were 19,300 medical leap related to COVID 19, which represented 25% of total licenses approved by Consalud during the quarter. All of the growth resulted in a CLP 13 billion net profit for Consalud during the second quarter of 2020 compared to a CLP 7 billion loss in 2Q '19. Regarding Vida Cámara, gross profit during the second quarter of 2020 increased by CLP 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 6.3% rise in premiums following the growth trend from the last years. Vida Cámara has more than 335,000 beneficiaries of supplementary health insurance products, which is roughly half of the total beneficiaries of our mandatory health insurance company, Consalud. For the second quarter of 2020, Vida Cámara ranked third in life and health insurance, with a market share of 12%. Now in order to conclude our 2Q '20 results conference call, please turn to Slide #11, where Trinidad will refer to final remarks.

Thank you, Gustavo. Given the global scenario that we are currently facing in 2020 as a result of COVID-19, we would like to highlight that ILC is currently working on a first step plan: First, to ensure the well-being of our workers and customers; second, to adapt the organization to COVID-19 challenges; third, to reserve 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 allow us to better face a potential scenario of restricted liquidity. Finally, in 2019, we refinanced 40% of our liabilities and capitalized our subsidiaries, Confuturo and Banco Internacional, which leave us, as of today, with no further material liquidity requirements for the year 2020. This concludes today's presentation. Operator, we will now open the floor for new questions.

[Operator Instructions]

I have a question here regarding the capital increase in Banco Internacional. So yes, I would like to refer to that argue that this is part of a capital increase that was already announced in January 2018. As you may remember, at that time, the bank was starting a new phase of growth. So in order to achieve that, they approved a CLP 60 billion capital increase to finance these growth plan for 2018 until 2021. As of today, CLP 53 billion were already executed. So the capital increase that was announced in June 8 is part of completing this capital, this process, and the amount is around CLP 13 billion, which is equivalent to the remaining part that was executed, adjusted by inflation, basically.

And we do have 1 audio question, if we're ready to take that.

Yes.

And that question will come from Daniel Auza with Banchile.

I have a couple of questions, please. A couple of questions. The first one, could you please explain the difference on your clinics occupation, on the difference between regional clinics and in Santiago? The regional ones are dropped significantly in Santiago. The occupation didn't drop as much as it did out of Santiago. That's the first one. I'll go on. No, let's solve that question first, please.

Okay. No, thank you, Daniel, for the question. Yes, regarding occupation, as you may know, the commit here in Chile, I would say that it was pretty much very strong in the metropolitan region. So that's why the occupation rates in Santiago were higher. Red Salud, for you to have an idea, at the beginning of March, they have like 60 beds in the whole net health care network that were clinic beds. Because of the local authority requirements and because of the higher demand, we increased that number up to 150 and pretty much concentrated in the metropolitan area. So you -- for you to have an idea, the occupation rates that we reached, I would say, mid-June or at the end of June, were almost 100%, and 85% of the demand that we have in critical bed were related to COVID-19 patients. So that's the main difference. I would say that explains almost all the difference. I don't know if it's clear.

Yes, yes. Okay. It solves the question. And how are you seeing occupation in July and August? Do you have some color?

Yes. Regarding occupation, I will say that, first of all, for Red Salud, as we said, I would say the month with the strongest impact was already April because it -- the COVID-19 pandemic was just entering Chile. We have some lockdowns. So for instance, for example, in the clinics, we have that in April, medical consultancies were down by, for example, 55%. The same for images, for laboratory. Hospitalization went down like 10%, whereas surgeries, for example, went down by 60%. So that one was pretty much very, very strong. And then once COVID-19 started spreading with -- especially during June and July, where we have the peak of the first wave, hospitalization rates here in Santiago especially, went up by, I would say, 20% compared with last year. So there was a growth. That is also explained by the additional beds that we have been enabling in the network. But I would say that since the end of July, we have been reducing the number of critical beds because demand has been also going down. So to have an idea, in June in Chile, there were like 400 patients in critical beds in Chile. That was like the peak of the first wave of coronavirus. Right now, we have like 175 as our local authorities are telling us. So that's why the, I would say, the in-patient activity has been going down a bit. But all the other activity in the clinics has been with a mild and gradual recovery. For instance, for example, medical consultancies that we said that in April were down by 55%. Right now, they are in the range of 30%. We have that surgery, as we said before, that went down like 60% in April, right now are at the rate of 35%. So we're seeing some recovery in the inpatient activity, accepting the hospitalization. And in terms of outpatient activity, the recovery has been, I would say, also mild and very gradual. Right now, medical consultancy has -- in April, they were down by 50%. Right now, in the range of 20%. So we are also opening more dental centers. Right now, 70% of our capacity is open. We hope to keep advancing in this plan in order to reach 100% in October. So we are moving. We are also adding more security and safe leads to our employers and to our clients. So with all those protocols, we think that -- hope that this could be also in the recovery way.

Okay. And now on Consalud, we're seeing here that the inpatient reimbursement increased 25% year-on-year, and that is explained by the amount of reimbursement. Could you please give more color on that 18% amount of reimbursements on inpatient? How is the breakdown between April and in June? And also, is that high increase related mainly to COVID?

Yes. I will say that regarding the inpatient reimbursements in Consalud, do you know that in outpatient reimbursement, there is not a significant lag on between the service that's provided and the payment. Whereas in inpatient services, there is a lag, I would say, in between 60 days approximately. So probably, a part of all the reimbursements that you see on the second quarter are related to medical services provided in the first quarter. And also, during the second quarter, there were some payments in advance to some, say, health care providers, especially because of all the situation that they are having of lower demand. So there is a combination between those 2 things.

[Operator Instructions]

I have here a last question regarding telemedicine. Telemedicine, you know that it was a service that was supposed to be launched this year. Probably it was not with the same effort that we have to do it after the COVID-19 entered Chile. So for example, for the second quarter, we have 19,000 medical consultancies with a peak of over, I would say, 4,000 medical consultations per week. This is equivalent or this is higher than the amount of medical consultancies that we have in, let's say, in a clinic for a -- in a clinic in Santiago or in a medical center in Red Salud. So the growth that this kind of service has been experimenting during the last month has been pretty much high. During June, we reached 2,500 medical consultancies; during July, 19,000. So it has been growing significantly. During the last weeks, we have been seeing some stabilization. We think that it's mainly because a lot of people, because of the relax in the lockdowns, they are all returning to the physical, the same medical centers. But yes, this is a service that has been significantly growing in terms of demand. So -- and according to the figures that the health authority give, this amount of services has reached a total of 130,000 medical consultancies by telemedicine in Chile. So this is a kind of service that is growing. We saw it in our network. We started with 5 specialties, and right now, we have over 15. So yes, that's the story for our telemedicine for Red Salud.

At this time, I'm seeing no further questions. Ms. Valdés., would you like to proceed with concluding remarks? Or apologies. We do have a follow-up from Daniel Auza with Banchile.

Yes, a follow-up regarding telemedicine now that you mentioned. Are you seeing -- maybe too early to tell, but are you seeing in August or July, a decrease in no-show rates given the telemedicine infrastructure now?

It's -- I'm sorry, if I've seen some occupation?

If you are able to reduce the no-show rates now that you have a broader or higher capabilities on the telemedicine front.

Yes. I'm sorry, you're talking about the occupation? I'm sorry.

The no-show rates, right?

The no show, yes.

If you're being able to reduce -- to tackle better the no-show rates.

Yes. The burn that we have with the no-show rates if that's -- we had a lot of people that want to ask for permissions in order to go or to move through the city under lockdown. So for you to have an idea, some time, we used to have, at some point in time, for the medical consultancies, we have like 8 no-shows. So that was a very significant rate. So -- but yes, as I said before, it was -- some of them were in order to have this permission for going out-of-home in the middle of the lockdown. And in the case of Red Salud and telemedicine, that was another product and it goes in another way.

And at this time, there are no further questions. This will conclude the question-and-answer session. I'd like to turn the conference back over to Ms. Valdés for any closing remarks.

Okay. So Carl, that's everything for today. Thank you all for attending this conference call regarding IR activities. Some conference and other road shows have been rescheduled. You have all the information on our website right now. During the following weeks, we are going to be participating in the Andean conference, the same for Credicorp. And please feel free to call our IR team if you have any further questions. Goodbye, and see you next quarter.

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

Okay. Thank you.