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

Okay. Good morning, everyone, and thank you for joining ILC's 9 months 2021 Results Conference Call. I am Trinidad Valdés, Chief Investor Relations and Sustainability Officer. And joining me today is Gustavo Maturana, Head of Investor Relations. We have a complete presentation prepared for this webinar on our website. So if you want to follow the main ideas and messages, you can just go there and download it. Okay. So the agenda for today's call has 3 main chapters. The first one, we are going to refer about -- very briefly about the main results at a consolidated level. Then we're going to do like a deep-dive in each of our business divisions. Then we're going to jump into a wrap-up and conclusion chapter. And finally, we're going to open a Q&A section. So please, if you have any questions, write them on the chat. And at the end of the call, we are going to answer all of them. So -- okay, which are the main trends for the year. We have a year, which is 2020, which was impacted by the hardest period of the pandemic compared with 2021, where countries have been -- began to advance in the fighting of COVID, mainly through massive regulation plans. So the main trends here, as you can see in the slide, we had a global financial markets rebound, which was benefiting, for example, the case of AFP Habitat and Confuturo. Then we also had lower risk provision and expenses. This was reflected in the case of Banco Internacional, for example, where in 2020, they recognized about, I think, CLP 19 billion in voluntary provisions. And in the case of Confuturo, they also recognized some impairments. Then we also have been seeing during 2021, a recovery of the formal labor market, which has been benefiting the provisional sector. Then we have seen also a greater inpatient, outpatient and dental activity, which has benefited Red Salud. However, the other side of the coin is that the health insurance, this has been some impact in terms of medical leaves and higher loss ratios. So when we see the quality of results for ILC, we see that we have been seeing some better operating performance in all business divisions. This is the case, for example, for AFP Habitat, which we have been seeing an increase in income, basically driven by higher revenues in Chile and Colombia. Then in the case of Confuturo, we have been seeing also some increase in results driven by higher operating investment result. In the case of Banco Internacional, we have seen also a higher interest income. And in the case of Red Salud we have seen -- during the year, we have been seeing also higher activity, which has boosted margins. However, all the above was partly offset by higher loss ratio in the health insurance side. So all in all, when we see the response of this year, we see a jump of 83% in terms of net income. This was mainly driven by the financial sector of ILC, leaded by Confuturo. And also, we saw a recovery in health care. We have to recover or we have to recognize that in 2020, this sector was impacted by the start of the pandemic here in Chile and the above was partly offset by a higher loss ratio, especially in the case of Consalud. Okay. So if we see these results, and we -- if we link this to the conversations that we have been having with you, with investors, we see that during the 2013 and 2016 period, which was very, I would say, very linked to the consolidation of ILC where we started -- for example, we entered life insurance industry where we entered -- we acquired Banco Internacional. This was a consolidation period where the recurring net income of ILC was close to CLP 70 billion. Since 2017, until we think 2023, we're going to be on another state, very focused on diversification and growth. So there, you will see that the average recurring profit reached roughly CLP 100 billion. In terms of diversification, when we made the IPO in ILC, we had a company where 90% of net income came from 2 main subsidiaries. One was AFP Habitat and the other one was Consalud. Right now, we are in the past, in order to reach a target that we have in which we have a balance on between the 4 sectors that we have, which are pensions, health, banking and life insurance. In order to reach that, we should have or we should see a growth in the representation of Banco Internacional and the health sector as well. So now I'm going to turn the call to Gustavo Maturana, who will review the main, I would say, highlights and drivers of the financial sector of ILC.

Thank you, Trinidad. Well, I will review the main trends on the financial sector of ILC, and I will not give messages of each of them. In the first place, I will review Habitat performance in the -- what we have in this -- I mean, Trinidad, can you please go to the next slide? Thank you. What we have here, this slide is a chart that shows what we call salary base. I mean in the left, this is the number of formal labor market multiplied by the salary. It's our base in which we charge fees. We were seeing in the last month is a very strong recovery in the labor market. And in the right chart, we see the effect of that. Even -- I mean, given the recovery of the labor market, we are reaching again the same operational result that we had before the COVID-19. So in other words, so the labor market has recovered, the operational result of AFP Habitat resumed its normal trend, reaching prepandemic levels. So in the next slide, Slide #13, we see the efficiency that the company had gained. COVID-19 has been an opportunity in terms of efficiency. This is not a different case. The sales force is declining. And the strategy here is to try to retain our customers, try to continue increasing revenues together with a lower level of administrative expenses and, of course, continue the company's strategy to target the higher segment in every country. It is important to highlight here that close to 30% of the revenues came from the foreign segment. So in the next slide, talking about diversification. This is a process that we started in 2013 when we entered to Peru looking for other sources of revenues out of Chile. Like I mentioned before, as of September 2021, 30% of our revenues and 21% of profit before taxes and legal reserves came from out of Chile. In terms of other figures, such as affiliates, we're starting to see 3 colors. In terms of AUM, we see the same trend. So based on consolidated operations in Chile, Peru and Colombia, AFP Habitat has 4.9 million members, 2.2 contributors and USD 72 billion in assets under management, make it the second-largest pension fund manager in the region. So in the next slide, you see a summary of the -- every picture of the split of Habitat approved in the extraordinary shareholder meeting, which took place last September 2021. The proposal here was to split the company into -- in the left -- and of the right chart, you have the continuation of the company, which will maintain our mandatory pension fund business. On the right, you have a new company called Administradora Americana de Inversiones, which will have all the businesses but the mandatory pension fund businesses in Chile. This is AFP Habitat in Peru, Colfondos as well as the real assets in Chile. The idea behind this is -- we're looking for more flexibility. We want to open new lines of businesses out of the mandatory pension fund business in Chile. The division now is subject to the approval of the Chilean and Colombian regulators. We are working in all the paperwork and requirements, the regulatory in Chile and Colombia. So, in summary, in Habitat, we have a strong recovery of operational results, thanks to the recovery of the labor market. Efficiency in all 3 countries. We continue our process of diversification, and we are looking for more flexibility. So Confuturo. In Confuturo in the Slide #17, you see here the evolution of annuity and program withdrawal rates. As you can see, as of the end of 2019 and the beginning of 2020 due to the growth in the spread of rates, the preference for annuity dropped close to 15% and the market consequently decreased. In the history, we used to have 60% to 70% of the people choosing annuities, are now driven the lower spread faced in the last month, even though it is too soon to tell. The market is starting to recover size with a preference in September reaching 36%. In the -- this is Slide 18, you can see how we switched our commercial strategy from most of our sales came from sales agents to another in which we have the control we like to have in terms of how to manage the level of premiums, sale month by month. We switched to a strategy, putting more efforts in the direct sales. As today, we have a very flexible strategy. So in which this company can sell almost 0 in 1 month and the next month, can sell USD 30 million to USD 40 million without the need of hiring more sales staff. So in the market, what we are seeing now, I mean, volatile market, we want to manage, have control over it. We were working in asset allocation of the company. This is a result of 7- to 8-year strategy, where we -- we're looking for diversification and focus on alternative investments. That asset allocation delivered results. You have the example of the performance of the private equity. This is a program we started in 2014. Now it's mature, explain together with the reversal of impairment provisions, a big portion of the results of the government. So in summary, the annuity market is starting to recover. The company now has more flexibility. And the asset allocation is continually showing what we were looking for, a stable company that is generating consistent result over time. If you go to the next slide, Banco Internacional. As for Banco Internacional, the organization shift from the growth focus it employed from 2015 to 2019 to one-off risk solvency and liquidity in response to the pandemic. So result, the bank now has the highest capitalization level in its history, the highest level of collaterals coverage. And it's just starting to see one of the lowest levels of its business, along with the risk policy that included CLP 23.5 billion in voluntary provisions. So if we see in the next slide. In this slide, we can see the consistent results of the bank of September 2021, the company has gained scale, embraced its interest margin, partially offset by a lower performance of the treasury income. The bank is continuing its trend to be an important portion of ILC. And as Trinidad mentioned before, we expect in the mid-term, it represents close to 25% of the consolidated results. So in summary, this is a bank with flexibility, with a strong financial position and consistent performance over the time. So now I will turn the call over to Trinidad. She will review financial figures and main highlights of ILC's health sector.

Okay. Thank you, Gustavo. We're going to start with Consalud. As you can see here in this slide, Consalud has 2 main stages. The first one was one stage where cost leads to an incremental cost in the range of 11.2% annually. However, as an organization, we were allowed to increase prices in order to match this higher cost. However, since 2019, the company or due to the pandemic and the social crisis that we had in Chile, prices has been freezed since then, since 2019. So we were not allowed to match these higher costs with our revenues. And in addition, we have COVID-19 that impacted the company, especially in terms of licenses, okay? So as you can see in this slide, medical leaves has doubled in 4 years. Of course, we have an effect here related to COVID-19, due to medical leaves, due to paternity leaves also. And we have seen as well an increase in mental health medical leaves, okay? They should -- they were used to represent roughly 30% of total licenses. And right now, they represent 34% considering that we have a lot of licenses related to COVID-19. So what we have here in the case of Red Salud is a perfect storm because we haven't adjusted prices since 2019, we have an impact of COVID-19 that we saw in the last slide that the -- medical licenses related to COVID-19 amount up to CLP 54 billion. So they are CLP 54 billion, roughly out of this, almost CLP 69 billion, and we have also increment in other medical leaves as well. However, at the end of the day, we see some light at the end of the tunnel. As in 2022, we should be allowed to move prices up. When we decided to freeze prices or what the Congress decided to fix prices, they said, okay, in 2021, you're not going to move prices. However, estates Isapres are going to be allowed to move prices with a cap, which is the, let's say, the inflation in the health sector. And that should be lower than the increment in the budget of the Health Ministry, which this year is around 10%, okay? And on the other side, you know that every 3 years, we had the GES premium adjustment. So next year corresponds that we can move this premium up. So at the end of the day, this loss that we have this year should be hopefully somehow reversed for 2022. In the case of Vida Cámara, Vida Cámara also experienced a higher loss ratio. However, it is important of what I would like to mention here is that the difference between Vida Cámara and Consalud, you have to remember that with Consalud, we have a loss ratio of 110% that compares with this roughly 90% loss ratio of Vida Cámara. This loss ratio is significantly lower because of 2 factors. Vida Cámara adjusts its prices every year related to loss ratio of the portfolio -- of the client portfolio. And in addition, they don't have medical leaves. So that at the end of the day, that means that the loss ratio is significantly lower, okay? Now in the case of Red Salud, as we have been talking with you and with investors, Red Salud started an organizational restructuring in 2015 that includes changes in management in the Board of Directors and in the strategy as well, the main idea here was to reach an operational excellence process. You have to consider that Red Salud is a network with 9 hospitals spread through Chile, more than 40 medical centers. We are the largest dental provider in the country. So -- but at the end at 2015, we didn't have any network at all. They were working -- all of them were very separated, each one from the other. So we started working since then in this operational excellence model with a focus also in the consolidation of the network. We are starting a new period where we want to go more into the medical model. And that has been reflected in margins and EBITDA. As you can see at the bottom, we have here the evolution of the EBITDA of the company. Of course, that 2020 was impacted by COVID-19. And in 2021, we have all the recovery of a lot of medical services that were postponed, both because we have sanitary restrictions in terms of supply. And in terms of demand, there was a lot of people that didn't want to go to hospitals because they don't want to get infected with COVID-19. Importantly, I think here is that in Red Salud, this is a business where you have a lot of fixed costs. So it's very important to achieve a lot of volume at the end of the day. So for example, if we compare revenues, 2021 with 2019, which -- so we're excluding COVID-19, you saw that you had a 33% improvement in revenues. However, you had a 62% improvement in the EBITDA. What does it mean? It means that every time that we have a higher revenue due to higher activity, marginal activity becomes more efficient with volumes, okay? So here, the main message with things that we have learned with the pandemic is that it is very important to fill up the clinics and hospitals and medical centers because marginal activity at the end of the day has higher margins. Other lessons of the pandemic. First of all, due to sanitary restrictions, you know that we must have beds in order to attend COVID-19-infected patients. So we started designing new services such as Cirugía en Un Día. This is a service where you arrive to the hospital at 7:30 a.m., you had a surgery and you can go to home at 4:00 p.m. We didn't have a -- well, developed this service before the pandemic. And right now, we have it. And of course, that we also launched another service such as telemedicine. We are doing around 16,000 medical consultancies each month, which is equivalent to, I would say, a high-productivity outpatient center here in Santiago. Also, another important thing, Red Salud, it's a very diversified player in terms of insurances, I would say that 43% of our revenues come from Isapre. Consalud should be 25%. So it's very related to market share. However, the public insurance FONASA represents around 46%. So it's significantly. And we are a provider that we can have an EBITDA margin in the range of 13%, 14%, with the public sector that is very high. So that is reached due to a cost focus or a cost strategy that is very focused on being very efficient. And that's key. So in order to wrap up the health sector, here, you have an evolution of our net income. What is very common to have in ILC is that there is a hedge or this used to have a hedge on between the provider results and the insurance, the insurer results because when activity is low in the health care side, you have that -- I would say, a lower loss ratio in the case of the insurances and just the other way around. Of course, for 2021, we are COVID-19. However, if you take away the COVID effect, probably you should see the same trend of the previous years. Another important thing that we also discussed on the last quarterly conference call is that as I see, we had a higher exposure to the public insurance, public health insurance, FONASA. We think that this is an advantage as probably with the discussions that we are seeing right now in terms of regulations, in terms of contributions, et cetera. If the -- if FONASA takes more room, adding more affiliates or receiving the mandatory, let's say, 7%. This is a network that is very familiar to deal with FONASA. For example, in the case of Red Salud, 45% of our revenues come from FONASA. In the case of Vida Cámara, we have over 300,000 beneficiaries. And from them, 60% of them belong to FONASA. And in the case of Red Salud, as you may know, this is the -- Isapre with the lowest ticket in the industry. 60% of our beneficiaries were used to be in FONASA, so as you know that they, again, if FONASA gains more relevance. In the future, as ILC, we are very familiar to deal with this public insurance. It is also very linked to our history. As you may know, I'm going to link this with sustainability, but this is a company that one of the main players is to increase access to basic services, such as health. So that's why Red Salud, for example, is very focused on cost efficiency because we want to increase the access of health of Chileans to health care services. The same happens with Consalud. As we said before, this is the cheapest, Isapre in the industry. And in the case FONASA or in the case of Vida Cámara, the same happens as well. In order to touch liquidity, as ILC, we just capitalized Red Salud, Consalud, Banco Internacional and Vivir Seguros, which is our -- this ability of membership that company that we have in Peru. So as ILC, we don't forecast any significant capital additions in the short term. In October 2021, the extraordinary shareholders meeting of ILC just approved a share buyback program. So that is something that we should be starting over the coming months. And in terms of amortizations, we do not have any important amortization in the near term as well. Here, you see amortization schedule. We have some amortization next year, but a high percentage of them correspond to committed lines. So we have cash and cash equivalents in the range of CLP 80 billion so that gives us a comfortable situation in terms of liquidity. And finally, 2 weeks ago, we were -- we have the announcement that we were -- for the fourth consecutive year, we were included in the Dow Jones Sustainability Index, both in Chile and Mila in the -- you can see here a graph where it shows you our evolution in terms of percentile of the diversified financial industry. And this is basically a response to the model that we have been working with special, I would say, quite a support for the last couple of years, which has 6 main components. The first one is governance in ILC and our subsidiaries, we have a sustainability committee were participating, the Board of Directors, the CEO and the leader of sustainability of each one of our subsidiaries. We have a sustainability strategy that is basically based on 4 pillars, which are inclusion and access, service culture and ethics, responsible investment and contributing to public debate. We are part of a global compact. We are committed with the sustainability goals. We have 2 measuring tools, which -- one is down -- is the Dow Jones Sustainability Index that allow us to bring or to advance to the main trends in terms of sustainability world. And we also have the SSIndex, which is a tool that measures ESG risk for all of our stakeholders. In terms of reporting, we have a GRI, Integrated reporting. We are working in order to be reporting under the value reporting foundation next year. So we are moving forward to report under SASB as well GRI, Integrated Reporting. We are also doing our first I would say diagnostics in order to implement CFD. And finally, we have also a corporate social responsibility strategy that is quite focused on doing in-house programs in order to support elderly as we are very exposed to elderly or aging population in Chile. So in order to conclude the call, -- we have been working, as Gustavo said before, as we review it on the health sector and having more flexible companies in order to adapt the different scenarios that we can have in terms of market, in terms of regulation. And we are preparing our structure for the future. That's the reason why we just announced the split of AFP Habitat. That's why we are working in some consolidation that we can have on the health sector as we have the insurer and the provider in order to face any regulatory changes or market conditions in the future. So that's today's presentation. So if you have any questions, now I will try to answer that.

Trinidad, there's the question about Red Salud. How sustainable are the Red Salud's margin? Is 15% of EBITDA margin new normal?

Yes. I will try to move back to Red Salud. Okay. Yes, as we have been saying before, Red Salud started a reorganization period in 2015. We saw some advances in terms of EBITDA margin. This was an organization that before 2015, it was used to have an EBITDA margin in the range of 9% to 10%. With this reorganization process, we are reaching or before, let's say, before the social crisis and before the pandemic, we were reaching margins in the range of 11% to 12%. We think that with the lessons that we've experienced that we have gained after COVID-19 in the fields of operational efficiency, in terms of flexibility, in terms of new services, we should be allowed to reach an EBITDA margin close to 12% to 13% in the medium to long term. It is important here to highlight, however, that you should consider that this is a network. So we have hospitals from the very north of Chile to the very south. We have more than 40 medical centers and dental centers. So to manage a network is different than to manage a single hospital in, let's say, high-end sector of Santiago, okay? In addition, you have to consider that this is a network that 45%, but probably in the range of 40% to 42% of revenues should come from the public sector, from the public insurance. So taking all of that in consideration, we think that our EBITDA margin in the range of 12% to 13% should be totally reachable.

Thank you, Trinidad. Here, we have another question. What is the regulatory scenario after elections we had in Chile last week?

We like to have a crystal ball for answering this question. But yes, regarding the regulatory changes that we should see, especially in terms of the pension, I would say, pension fund system. Here, we have 2 products. The first product is related to the constitutional discussion. Right now, in the current constitution that we have the constitution says that every Chilean must be served a pension that provides them welfare and provides them the coverage of basic needs, okay? That is in the current constitution. And the other 2 topics are on the current constitution. The first one is related to modifications in the system. The constitution states that every adjustment on the constitution must come or any bill must come from the executive so from the President. So that is one thing. And the other thing is that in order to gain or in order to have stability, we have some super majority products in order to change or to move regulatory issues or regulatory projects, okay? And the last thing that we have here is that the constitution says that both private and public players could participate in the pension or in social security, okay? Because this is something that, of course, could change. However, we think that is not that -- of course, that could happen, but we think that it does have a high probability because the constitutional discussion is subject to international trade agreements. So at the end of the day, the discussion must be or it has like a framework that must respect, say, international trade agreements. That's one front. On the other front, is the regulatory discussion. Right now, we have a pension reform, which was approved by the lower chamber in January in 2020. Right now, the bill is on the Senate. However, we are in the middle of the second round elections. So we think there is a probability of having further changes or further announcements. What we have right now in the case of Gabriel Boric, he has a proposal that says he has a pension warranty by the state of 2050 -- not CLP 250,000 for every person high that -- from 65 years over. And we should have a contributory pillar of going up from 10% to 18%. However, this amount of money is not going to go to your individual accounts, it's going to go to a common fund. And you're going to have some notional -- or you should have some notional accounts. So at the end of the day, you will going to be allowed to withdraw money related to the amount that you contributed in the past. You're going to have an autonomous public entity, which is going to manage these savings. They are also proposing a voluntary pillar as the one that we have today where private or public entities could participate. And in the transition, the current contributors are going to be allowed to choose if they want to stay in the current -- with their current savings in the EFPs, for example, or if they want to move their funds into this common fund, okay? And there's no formal statements, but in some interviews of the economic advisers of Gabriel Boric, they say that probably pension fund companies, if you stay in pension companies, pension companies are going to be allowed to charge over you, okay? On the other side, Juan Antonio Kast has a proposal of increasing contribution from 10% to 14%. The entirely contribution is going to go to your individual accounts, you're going to be allowed to choose if you want to have your money in the pension fund companies or if you want to go to other institutions is not that detailed. There's going to be a basic pension financed by the states. And if you contributed less of -- of 5 years, you're going to be allowed to withdraw 100% of your savings once you retired. Okay? However, that -- those are the main proposals. However, you see that -- what we have seen the first sign-off is that probably both candidates are going to move their proposals more into a center. And of course, that all of these proposals, one thing is what the executive proposed. And the other thing is what the Congress approved. And in that sense, we have a Congress, which is more balanced, especially in the senate. 50% of the senate, it's from the right wing. So at the end of the day, having a very radical pension reform, has a lower probability probably, but I don't have the crystal also. So that's the main thing. So here, we have 2 fronts, the constitutional front. We have also the regulatory front. We have to see what is going to happen with the proposals of Gabriel Boric and Antonio Kast ostomate. However, we have a Congress, hopefully, for the next 4 years and with a composition that is more balanced. So the possibility of having very radical reforms, I think that is lower compared to what was expected.

There's no more questions. Thank you, Trinidad.

Okay. So if there are no further questions we should see on the next quarterly conference call. We will be very happy if you have any further questions. You can just contact Gustavo or me, and we'll be happy to answer your questions. So we have a nice day, and take care. Bye-bye.