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

Okay. Good morning, everyone, and welcome to ILC's First Quarter 2022 Results Conference Call. I am Trinidad Valdes, Chief Investor Relations and Sustainability Officer of ILC. And joining me today is Gustavo Maturana, Head of Investor Relations and Martina Morales, Investor Relations. We have prepared a complete presentation for the call which is on our website. This presentation resumes or summarized many highlights of the quarter, the main financial figures. We will review this presentation. And at the end of the call, we will have some time for Q&A. Regarding the agenda of the call; first of all, we are going to give the many highlights of the quarter from a consolidated point of view. Then we're going to refer or we're going to do like a deep-dive into each business divisions. And finally, we're going to summarize the balance sheet and the financial position of the company. Regarding the consolidated results, in this slide, you will see the main trends of the quarter. We highlight the main trends. However, I think that we have 2 of them that are the main ones. The first one is that we had our user performance of financial markets, not a bad performance of financial markets for the first quarter of this year. However, the first quarter of the last year was extremely good. So in a comparison basis, of course, this quarter is weaker, but it was a good quarter in terms of return. And second, you have to remember that the Omicron variant in Chile and as I said with a big -- during February, you know that for the first wave of COVID in Chile in 2020. So we had the record high number of cases, was probably in the range of 10,000. For the Omicron this year through February record a maximum of 40,000 new infections per day. So all of that, of course, that may -- or had an impact in our results, especially in Consalud. Then we have other trends that are just high inflation and rates. We also experienced a salary base recovery. We also continue having a strong demand in terms of an activity in Red Salud. And finally, you have to remember that during 2020 and 2021, we had a positive effect arising from the award of the D&S in [indiscernible] that this year is not in our results. So all in all, you will see that this quarter, we had a net profit of CLP 24 billion, which is, I would say, in line with the average quarterly net income that we are used to have. Last quarter or the same quarter of last year, we had an extremely good quarter. So the effect or the main valuations are mainly explained because of the 2 trends that I mentioned before. The first one is the weaker return of financial markets worldwide and you have to also remember that the conflict of Russia and Ukraine started at the end of February and that affected financial markets. And we also had this third wave of COVID-19 in Chile that also affected the results of the health sector. However, if we see these -- the quarterly results, an evolution of the quarterly results of ILC, you will see that this quarter was an average quarter. We always say to investors that, of course, they didn't have some quarters above this average or below this average. However, we have been having resilient the current report, and that is shown in this slide. And also, we continue on the trend of the past in order to have a very diversified net income portfolio. Of which, we target to have 25% of our net income coming from Confuturo, 25% from the pension fund company, 25% from the health sector as a whole and 25% of [indiscernible]. Now, I'm going to turn the call to Gustavo Maturana who will review the main highlights of our financial company.

Thank you, Trinidad. Well, I will review the main trends on the financial sector of ILC, marking key messages of each of them. In the first place, I will review EBITDA performance. On the Slide 9, the chart at the left shows Habitat revenue. One of the main trends or the main drivers of the revenues in this case is the salary base. It is the number of former labor market multiplied by the salary of the contributors. It's the base in which we charge fees. Since mid-2021, we have seen a recovery in the labor market. We have seen the effect of that in Habitat revenue. So in other words, the labor market has recovered Habitat's revenues resumed its normal trend, reaching pre-pandemic levels. In the same chart, the blue line shows efficiency that the Company had gained over the last years. The COVID-19 has been an opportunity in terms of efficiency. This is not a different case. The sales force is declined in the industry as well as in Habitat. And strategy here has been to try to retain our customers, try to continue increasing revenues, targeting the high income segment for new customers and control the level of administrative expenses. So given the recovery of the labor market plus the efficiency that the company has gained in the last years, we saw a 17% increase in operating results quarter-on-quarter. So on the chart on the right of the slide you will see Habitat and Americana figures. If we consider for a moment the 2 companies, the whole asset manager business close to 30% of revenues and close to 20% of profit came from out of Chile. Trinidad mentioned before, ILC started the diversification process like 9 years ago in the same way as Habitat did the same process in terms of regional diversification. This is a process that Habitat started in 2013 when it entered to Peru looking for other sources of revenues out of Chile. While later in 2016 when we partnered Prudential looking for new opportunities in the region, with the acquisition of Colfondos SAS and important milestones. Another important milestone in this story is what we did last November speeding of the mandatory pension business in Chile from the rest of the operation. The idea behind this we already said before, we already explained, but it's to look for more flexibility, and open new lines of businesses. We were out of our range because the unique role of the mandatory pension fund business in Chile. Basically, with this [indiscernible], we will be able to offer more products to our customers to increase our range of services, different than the 5 funds in the mandatory system that we used to offer in the past. At Administradora Americana de Inversiones, the new entity now has all the businesses, but the mandatory pension fund businesses in Chile. So the idea is for the Habitat will maintain being a strong leader in the mandatory pension fund business in Chile. While Americana will focus on Peru, Colombia and other products that we could offer what we can add in Chile or the region. This is the case of our last acquisition in April, the asset fund manage division. This last acquisition, this is a small acquisition. But it shows that we are in line with our strategy to develop opportunities to manage voluntary assets in the region. So in summary, in Habitat, we have recovery of the operating results. Thanks to the recovery of the labor markets. And we continue our process of diversification with more flexibility. If we go to the next slide; you see Confuturo performance. This is the -- this slide shows the evolution of annuity and product withdrawal rates. This is the main driver of the preference between these 2 retirement alternatives. As you can see as of the end of 2019 and the beginning of 2020, due to the growth in the spread between -- I mean the spread of this rate, the preference where annuity dropped to close 50% and the market, as you can see in the slide, consequently decreased. In the history, we used to have between 60 to 70 of the people choosing annuities. Now because of this spread, we are seeing the opposite case. However, now driven the lower spread faced in the last month [indiscernible]. But the market is starting to recover then. Another important thing here is, together with the reform of the warranty universal pension approved at the end of the last government. An important change for annuity business is the size of the funds you need to be eligible to choose an annuity decreased 40%. These lower requirements for the eligible for annuity is helping to increase demand on the retirement choice. And in the case of Confuturo, for example, in the last month, 20% of their customers, 80% of its annuity premiums came from people who before wasn't able to choose this alternative. You see in the next slide regarding the investment results, the investment performance of the company is a good performance. However, there is something that I will explain later. For investments, private equity continues to deliver results. The good performance during 2021 and the first quarter of 2022 is not an accident. We were working in the asset allocation of the company. This is a result of a 7, 8-year strategy, where we will -- we look for the justification and focused on alternative investments, foreign investments. And 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 matured and it plays a big portion of the results of the company. However, as I said, this quarter, we faced a high comparison base to an extraordinary equity performance during the first quarter of 2021, an impairment reversal of CLP 11.7 billion during the same period. So in summary, in Confuturo, the annuity market is starting to recover. And there is a new regulation that will help us to increase our sales. And asset allocation is continuing showing what we were looking for a stable company is generating a consistent results over the time. Regarding Banco Internacional, for Banco Internacional, something that we have said before, the organization shifted from the growth focus, we deployed in from 2015 to 2018 to one-off risk, solvency and liquidity in response to the pandemic. As a result, the bank now has the highest capitalization level in its history. It's in line with Basel III standards and the highest level of collaterals coverage since 2021, a low level of risk expenses. And also along with risk policy that included a CLP 22.5 billion in voluntary provisions. This is a response to the pandemic, the situation macroeconomic condition. So the bank is growing now at industry levels with solid balance sheet. In the next -- yes, this slide in left, we can see the consistent results for the bank. The bank has gained scale, increased its interest margin benefited by the higher inflation and higher rates, resulting in a quarterly record by income. So, this is a small bank. The bank is also increasing its presence in retail banking, offering online services for customers and noncustomers, meaning opportunities to growing its client base. And the bank continued its trend to be an important portion of ILC's results. And as doing that, as we mentioned before, we expect in the midterm, it represents close to 25% or more of the consolidated results. So in summary, the bank has a strong financial position with a consistent performance of all time, being every year more important in ILC's consolidated results. Now, I will turn the call over to Trinidad. She will review financial figures and highlights of ILC health sector and our financial position.

Thank you, Gustavo. If we move to the health sector, we will see that, as I said before, COVID-19 is still especially in margin, especially in the case of Consalud. You have to remember that, as you can see in this chart, you will see the yellow lines, which are our revenues. And you will see the bars which are our costs. So what you can see here is that since 2021, revenues are not enough to offset the cost that the company has been having. And this has been mainly explained because prices of base plans have been poised since 2020. During 2020 and during 2021, we have not been able to raise prices in the same level that cost has been raising. So that is one of the main reasons why we have been experiencing operating losses. Also, there has been a significant increase in terms of ALVs. We have been telling investors this every quarter. But if you see, for example, this quarter, we have a 20% increase in medical leaves, the number of medical leaves. So that is hitting also our margins. And finally, you will see that we have an important portion of the results explained by COVID. Since the pandemic arrived in Chile in 2020, we have been having cost of CLP 110 billion in related to COVID, exclusively to COVID. So of course, that we are assuming an important impact of the pandemic, okay? However, a good news for the industry is that we have been allowed to raise prices this year. We announced the last day of March, a price increase of 7.6%, which was the maximum allowed by the regulator. All the industry announced the same price increase. And a good thing is that we didn't have the day after a lot of politicians saying that they are going to do like a project in order to freeze again price. So I think that this price increase is going to be executed and should be started in July this year, okay? So probably during the second half, we are going to see the results of this hike in price, okay? ILC continues to support this business division through capital increases. We have been injecting over CLP 111 billion in COVID in 2020 which is, if you look at the number of this figure was the one of the impact of COVID of CLP 109 billion. You will see there is a match between the amount of resources that we have been injected to Consalud with the effect of COVID. And the other important thing, we have been always telling investors that during this year, probably the first half is going to continue to be tough in terms of stock. But in the second half of this year, as I explained before, we should see the impact of the price increase in base prices and also in the new premium. So probably in November, you will have another -- we're going to see another interest in terms of revenues. That will allow us to see Consalud with new numbers once again. Not significant, we have to say to realize that Consalud is a business with a net margin in between 1% to 3%. However, this business is quite important because [indiscernible] theory of in order to fill up our profits, okay? And the last thing, which is important to say is that Consalud still a completion claim against the state of Chile regarding the maternity leaves in the pandemic. In Chile and maternity leaves are covered by the state. It's a public policy. So we were forced to pay maternity leaves with our balance sheet, with our equity. So that's the reason why we made a consultation claim to the state of Chile of CLP 22.4 billion during the last days, we saw that -- made the same. So this is something that it should take some time. But of course, there are putting our, let's say, where we are asking for something that we think that is certainly unfair, okay. Now here, you will see the response of Vida Camara, the Vida Camara in this chart, you will see the loss ratio of Vid Camara. But right now, it's at 92% roughly. If you compare this loss ratio of 92% with the one at Consalud, which is around 101%, you will see that this lower loss ratio is mainly because of 2 factors. The first one is that the Vid Camara is allowed to raise prices every year. So that is something that Consalud has not been having during the last 3 years. And also, in the case of Vida Camara, they don't reimburse medical leaves. So that is also a good explanation in order to explain to you why this both for Consalud and Vida Camara are health insurances, why they have this difference in terms of loss ratio, okay? And that's the main, I would say, the main message for the account. In the case of Red Salud, we continue to see a solid activity. However, the mix has been changing. As you may know, during the first quarter of 2021, in Chile, we were starting to vaccinate people. So there were still a lot of cases that ended up with a hospitalization. That is not the case or that is -- has been not the case during the first quarter of this year that with Omicron the severe of its infected case was lower. So what we have during the first quarter is that we had an increase -- a significant increase, I would say, especially on medical consultancy. And also on that, you know that the center had a record high activity levels. We were doing a lot of surgeries that were postponed given the pandemic and also we are doing the normal surgeries that we do every quarter. You have to remember that it previously common to have out the first quarter in terms of the days that it's kind of weak because it's summer holiday season in Chile. However, this was a very strong quarter, okay? The EBITDA margin for the entire organization was 12.2%, lower than the almost 17% that we have a year ago. And this was mainly because of what I explained before that we had a different complexity mix and also because demand was significantly high. However, we had a medical staff that is exposed that it was on holiday season. So it was kind of difficult to match the high demand with the supply and especially in terms of medical staff, okay? So that increase in staff costs and that also hit our mark, okay? However, we have been always telling investors that had with an institution that is target a margin in between 12.5% to 13.5%. So these are good margins. However, the margins of the last year were extraordinary, okay? Now, something that we would like to highlight, especially looking forward of the next trend or maybe what's going to happen in Chile in terms of insurance, of health insurance, I would say that -- probably the network that has the largest exposure to FONASA. FONASA is a Public Health Insurance, 37% of our revenues come from people from FONASA compared to, I would say, 29% or 30% a couple of years ago. So the main message here is that if we have -- if we look at -- or if we look forward to health industry that should be I'd say the role of the public insurance will be higher. We are more prepared for that, okay? You have to remember also the Red Salud is a health care network that is in the home country. It's both so one of the -- I'd say, we'll look to be one of the cheapest health providers. So that also helps us in order to be a very competitive provider for FONASA. And still with this composition in terms of revenue, we have been able to reach EBITDA margin from 12.5%. So in order to close the call, we are going to give you a summary for our financial situation, especially because you may know, during the first quarter of this year, we issued a bond in the U.S. So, in terms of dividends received by ILC; this is a company that it was usually has in the range of CLP 50 billion per year. Of course, the 2020 because of the pandemic, we took a conservative approach. So we received less dividends from our subsidiaries. However, this was recovered in 2021. That's the reason why we had dividends in the range of CLP 130 billion. And during 2022, we have received over, I would say, or roughly CLP 70 billion. So the situation of the company looking it's financial or dividend per year, it's quite strong. Finally, here, you will see our amortization profile, which is a very comfortable amortization profile. With the bond that we issued in February this year in the U.S., we have covered all their financial needs, including amortization, including dividend interest for the next 4 years. So in that sense, we feel pretty comfortable with the strategy that we have. We also opened a new market for us. We were very local in terms of financing our balance sheet. This was the first season abroad. So we feel very, very happy in order to have another market to target -- the federal market in Chile, we already have where it's more depressed, okay. In terms of total net debt for ILC individual is CLP 300 billion is the same or pretty much or close to the one that we have at the end of last year. You have to remember that all the funds raised from the issuance that we have in February are on the cash side, so that's why the reason why our net debt didn't change significantly. So with that said, I will open the floor for questions that you may have.

Trinidad, I have a question here from [indiscernible]. And she asked about our view of rough of the new constitution what impacts or risks do you see for Chile and especially for ILC?

Okay. Thank you, Gustavo. The process that I assume that this was a question it was supposed to be reviewed during the call. So I prepared some slides. In this slide, I put all the information about the health rate that is under the draft in the contribution. The open about the social right of health, okay? I highlighted in yellow the things that have been rated to the industries where we participate, okay? But basically, what we have here is that we have a quota system for private and public hospitals. We should see a national health system, okay? And the graphical constitution states expressively that it should be composed by prices and public hospitals, okay? So this is something that is warranted by the constitution. However, the law will determine the requirement for the private to participate, okay? So -- but the important thing here in the constitution is that we are allowed to continue participating in the -- let's say, in the -- with our private hospitals, okay. And this is a system that should be integrated. We have been working integrated during the pandemic. It was a positive I would say experience for us with a very good perception from population and consultants. And I think that that was something that maybe help us in order to continue to be participating in the health industry, okay. Something that it was rejected at the plan, you know that, first of all, we have some work at the commissions in this case, the social rights commission. I mean, at some point in time, this commission proposed to the plenary, that the private hospitals that are going to participate in this national health system should be only allowed to participate those with nonprofit entity. So in that case, we should be supposed to be excluded because our hospitals are profit-oriented. However, this was rejected at the plenary, okay. And what we think about hospitals here private hospitals is that it's very difficult. This is my personal view. It's very difficult to shut down the profit by the hospitals because as you may see in the first chart at the bottom, the waiting list of Chile one of the main problems of health, this waiting list went significantly up during the pandemic, of course, because the public system was 100% oriented to solve the case of COVID-19. So here, you will see that waiting list of medical consultancies up surgeries another and GES illnesses went up from 2 million to 2.4 million. So it's very, very difficult to exclude medical providers because you know that waiting lists are significantly important issue. Again, you know that as the chart in the middle shows you the significance of the medical and the private hospitals in Chile. This was for 2020. You know that private providers provide 63% of medical consultancies, 30% surgeries, 40% of medical tests, 20% of hospitalization. So again, it's difficult to exclude private hospitals from the health system in Chile. And finally, here, related the response to a survey, the current survey that is very well known in Chile, where it said that 62% of Chileans put a mark of 6 to 7 in a 1 to 7 scale to private hospitals, okay? So they have a very good perception from stable industry. So just to summarize that this part private hospitals are expressly in the drop of the new constitution, the way that they should be operating will depend on the law. However, we think that it's very difficult to say or to shut down private hospitals because the -- I would say, the challenges that we have in health are significant, okay. And people and authorities have a good perception about the integration. Now, regarding health insurance, distribution is different. The constitution of the top of the constitution talked about a National Health System that is universal total public that this is very important public and integrated. So probably the role of mandatory health insurance companies or its separate has to change. At the beginning in this commission, you know that its commissions probably we have more extreme use with compared to the plenary. But what it was proposed, it was that, okay, there could be private insurance, like supplementary home insurance with that goal. But they are not allowed to provide any coverage on diseases or illnesses that are covered by FONASA. So the industry, in that case, should be significantly reduced to I would say, aesthetic surgeries and nothing else, okay? So that was rejected at the plenary. So what we should be seeing if this constitution is approved is one single universal public and integrated health insurance FONASA basically. However, the transition to move to an entire -- our 100% public health insurance, it was proposed for a year. So you have 1 year to push that down, it happens. This was rejected because it's like a big bank. You know that FONASA right now has 16 million people. You should be adding another 3 million people from one day to another, and that is something that is very difficult. So probably the transition should be slow, okay? What we have here, I want to show you in the first chart at the bottom, you will see in the blue lines or bars, all what is a mandatory contribution. You know that Chileans are -- have to contribute every month 7% of our further net salaries or salaries, gross salaries I am sorry. So probably these blue bars are going to go entirely to the state, okay? Everyone is going to have FONASA. And the industry should be reduced to the bars in gray, okay, which are -- you know that in Chile, it's mandatory to contribute 7% in health. However, they have it given that I like some specific providers or when I have a coverage, it's very common to have people contributing 10.5% instead of 7% because they want a higher, I would say, quality solutions. So you have to pay more. So that is CLP 1.3 billion in terms of premium. We have also an industry of supplementary health insurances. And also individual health insurance, so all of that should be the new, I would say, like the new universe or markets where probably the health insurances are going to move forward and granting and are going to operate under this new scenario. That is the first thing in terms of revenues. However, also in terms of cost, this reality should be changing. You know that the 1% of the costs of [indiscernible] are on medical leaves and probably that is going to be assumed by the state with this 7% contribution. So probably, the universe in terms of clients, it's going to change compared to today. It's going to be smaller. However, the cost structure of this new industry should be different of what, okay? And here, the main message is that in ILC, we have 3 vehicles that are very important. First of all, Consalud, which is the largest health care provider in Chile with a strong focus on FONASA, which is looking forward something that would help us. We have Consalud, which is the largest southern Chile in terms of the number of beneficiaries. And we have also Vida Camara -- I am sorry and Consalud has a very deep understanding and know-how in terms of selling individual health insurances. And we also have Vida Camara, which is the first largest supplementary health insurance company in Chile, which has an expertise in terms of collective complementary health insurances. Right now, 60% of their clients come from FONASA. So they are also being used to work with them. So the main message here is that if the industry changes, we are supplying for that. For example, this week, the last week, we have a new Chief Development Officer; this person operating the year and she was the former CFO of Red Salud. And the idea of corporation is to help the organization in order to work in a more, let's say, closed and integrated health model, okay? In terms of questions, this is everything what the drop of any constitution site. I would say that it probably is quite more open. And it doesn't talk about -- specifically about pensions, talk about positivity, okay? And the main highlights here is that the drop is more back in terms of -- in the health side they talk about -- specifically about private providers, private providers here is more open, I would say. They will be the ones that will determine the social community law. No specification about this is going to be -- socials community is going to be a home work only from the state, no private, it doesn't say anything about that. What it says, what is important is that it says that social security or, let's say, the funds raised from the personal contributions or from the contributions from employers for sustainability is going to be estimated entirely to social security. So that opens a question mark about the evidence of the funds because -- is not a security base. So that is something that is a question mark for the current class of the contribution. And also have some changes that it was something that it was also, I would say, promoted in [indiscernible] pension fund reform is that we have to include in the governance of resident companies, unions of workers or employees, et cetera, et cetera, et cetera. So that's why it appears on the draft company constitution. So hopefully, I would like or I solved the question.

Thank you, Trinidad. And we have another question, regarding the CapEx forecast for Red Salud and Consalud taking in mind that those 2 industries, I mean, the health care industry is suffering COVID for a one side in the cost, on the one side with a strong demand.

Yes, I would say that in terms of CapEx for Red Salud especially in 2020, Red Salud was suffering a strong decrease in terms of activity. So you have to remember that we have a very tough situation in terms of liquidity because we have the hospitals, but you didn't have enough demand to fill those hospitals. So that was the reason why as ILC injected CLP 15 billion as a capital increase. So a lot of investments at the point in time were on hold, okay? So, today, the Red Salud resuming some projects, Red Salud has right now, CapEx or OpEx, let's say, USD 24 million in terms of maintenance. As another USD 16 million CapEx in terms of growth CapEx and that is basically, I will say on the ambulatory or the outpatient sector. Remember, in 2020, we have an Investor Day where we always said and the pandemic showed the evidence of this that we are moving towards more an outpatient model rather than in patients, and that is, for example, also showed by the study genetic program that was launched in 2020. And this USD 16 million program as is before it's focused on the outpatient sector with new emerging centers or machines, then some centers. You know that Red Salud is the largest dental provider in the country. And also, you have to remember that in 2016, we inaugurated or we launched a new building in [indiscernible] which is our new hospital. However, we had a brand-new hospital tower and just besides it, I would say, a tower that it was from the 1990s, okay? So we are updating all that this tower to the standards that we have in the new tower. So that is the main explanation for the CapEx. And also what is very important here is that we are investing USD 8 million in CapEx for SAP with this ERP, and which is the health information system. You know that Red Salud is investing significantly in this stage in order to have stronger data solutions and also in order to integrate the network with this piece. You might have the medical story for each patient independently. It hits or here attention was in a hospital in comparison or if an outpatient center in Santiago. So the idea here is to further in this integration and that's the reason why we're investing this USD 8 million in terms of systems.

Thank you, Trinidad. There are no further questions.

Okay. So thank you, everyone for joining this conference call. During the next day, we should be participating, if you want to see us in keeping more agents and the conference. We are also participating on credit -- and the bank conference as well. And please, if you have any kind of questions, we have a tutorial team, very often to answer all the inquiries you may have. Okay. So thank you for connecting, and have a nice day. Bye-bye.