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

Good morning, and welcome to the ILC's Second Quarter 2020 Conference Call. [Operator Instructions]. Please note that this event is being recorded. I'll now like to turn the conference over to Matt Galena Morales of Investor Relations. Please go ahead.

Hello, everyone, and thank you for joining ILC's Second Quarter 2022 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 for the period as well as to explain the context and financial figures for each of our businesses. This call will be divided in 4 blocks. First, we will review ILC's consolidated results for the second quarter of 2022. Then we are going to analyze our subsidiaries' financial results and main highlights for the quarter. Afterwards, we will do an update regarding our financial position in the order to close the call with a Q&A section. Now please move to Slide #5, where you will see the main highlights for the period. During the first 6 months of 2022, compared to the same period of the previous year, we can highlight 6 main trends: first, the higher inflation and rates during the period; second, the increase in the number of people retiring, which meant a higher annuity premiums in Confuturo. Also, we still see a recovery in the formal labor market. On the health care side, we continue to see increased activity with high demand for outpatient and inpatient services. However, the mix of services this year is different. COVID-19 still pressures loss ratio in Consalud, but the elimination of the extended maternity leave program during the third quarter of 2021, meant a lower loss during the first 6 months of 2022, compared to the first half of the last year. Now if we turn to Slide #6, we see ILC's net income variation during the first half of 2022, ILC recorded a net profit of CLP 63 billion compared to a profit of CLP 49 million for the same period of 2021. This variation was mainly attributable to a better operating performance of the financial subsidiaries and the elimination of the extended maternity leave program, during the third quarter of 2021. When we dip on the subsidiary performance, AFP Habitat reported a 13% improvement in operating income, thanks to our recovery salary base along with more efficient expanding. Confuturo continued to enjoy a strong performance from its investment portfolio, mainly due to improved returns from investment funds and real estate investments. At Banco Internacional, a stronger net interest margin because of higher interest rates, combined for the greater efficiency led to a higher profit. Red Salud continued to see increased activity with high demand for outpatient and hospital services. However, the lower occupancy of critical beds at higher indexation losses as a result of inflation for the period and its effect on U.S. [ delegated ] financial debt reduced its contribution. In Consalud, the lower loss was explained by the end of the extended maternity leave program, at the end of 2021. Vida Camara increased its contribution driven by a lower result from DNS insurance due to the end of the tender awarded for the June 2020, '21 period. Finally, ILC's stand-alone fit higher financial expenses due to the effect of indexation of US-denominated debt. After this brief summary of ILC, the income performance, we will review the main operational events and key financial figures of ILC's subsidiaries. As shown in Slide 8, AFP Habitat operating result increased 13% year-over-year, mainly due to the rise in the salary base, together with an SG&A efficiency. Revenue increased by 9% in the first half of 2022 compared to the same period in 2021, reaching CLP 109 billion. This increase was mainly explained by the 9% rise in the average taxable income of its contributors compared to the same period in 2021. As of June 2022, this figure exceeded the industry average by 20.7%. In addition, the average number of contributors grew by 1.3% quarter-on-quarter. This is a result of the company's strategy to target the high-income segment. Sales and administrative expenses during the first half of 2022 reached CLP 39 billion, 2.3% higher compared to the same period of the previous year. The COVID-19 has been an opportunity in terms of efficiency, and this is not a different case. While the sales force is declining, the strategy has been trying to retain our customers, targeting the high income segment and control the level of administrative expenses. As we have mentioned before, on November 30, 2021, AFP Habitat ceased to be the controller of [indiscernible] . The company created as a result of their spinoff at Administrade Americana de Inversiones as the new direct controller of [indiscernible], an indirect controller of its subsidiaries. Therefore, AFP Andina and its subsidiaries, AFP Habitat Peru and Colfondos are no longer part of the corporate structure of AFP Habitat. Moving on to Slide #9. AFP Habitat Colfondos registered a 3% and 5% increase in fix income for the first half of 2022. This increase was offset by lower returns on legal reserves. And Administrade Americana de Inversiones contributed CLP5.4 billion to the bottom line, accounting for 31% of the revenues from ILC pension sectors' results. It is important to mention that Ameritrade Americana de Inversiones acquired Americana Al de Fondos Devassa in March, indicating a process to diversify its services offering. Slide 10 and 11 show Confuturo's performance. This entity registered CLP 72 billion profit for the first half of 2022 in comparison to CLP 48 billion for the same period of the last year. As shown in Slide #10, during the first half of 2022, net premiums totaled [ CLP 807 million ], 64.2% higher than the same period in 2021 mainly due to increases in annuity premiums, voluntary products and DNS coverage sold by the Confuturo. In the life annuity market, the introduction of the guaranteed universal pension reduced the requirement to opt for a life annuity from a self-finance pension of approximately 5 UF to 3 UF. The foregoing meant that more people can access a life annuity. As for the sales rate, Confuturo offered a 3.7% average rate in the first half of 2022 compared to 2.8% for the same period in 2021. Consequently, the number of people choosing life annuities grew 159% year-over-year, versus a 75% increase in the scale of withdrawals. During the period, Confuturo attained a market share of 9%, which positioned it fifth in the annuities industry. Regarding other life insurance products, Confuturo had an industry-leading 27% market share in voluntary repayment savings. As shown in Slide #11, Confuturo continued to enjoy a strong performance from its investment portfolio. Even though there is an extraordinary component, the good performance during the 2021 and the first half of 2022 is not an accident. We have been working in company as a delegation since our acquisition in 2013, looking for diversification and focusing on alternative and foreign investments. Investment results grew by 23% year-over-year, mainly due to a better performance of investment funds and real estate investments partially offset by a lower result of fixed income investments, mainly attributable to a provision revolution of CLP 11.4 billion in the first half of 2021. Now if we turn to Slide #12, you will see Banco Internacional's operating performance. As we have seen, the bank shifted from the growth focused employed from 2015 to 2019 to one of risk solvency and liquidity. As a result, the bank now has one of the highest collateral coverage and capitalization level in its history, along with a risk policy that included CLP 23 billion in voluntary variations which is equivalent to 1.5 years of risk expenses. Moving on to Slide #13. In terms of its bottom line, a larger interest margin boost the result. Therefore, Banco Internacional recorded a CLP 21 million profit during the period compared to CLP 12 billion gain for the same period of 2021. Return on average equity was 18% with an annual trailing net income of CLP 41.9 billion. The bank continues its strength to be an important portion of ILC's net income, representing a total contribution of 22% of ILC consolidated results. In spite of this small bank, the bank is also increasing its presence in retail banking, offering online services for customers and noncustomers meeting opportunities to growing its client base. In line with this, the bank has signed an agreement to acquire 51% of the Auto Finance Company, Autofin. This transaction will allow the bank to diversify its income and risks and improve its position in retail banking. Retail segment represents 3% of the bank's loan and if the operation is complete, this participation will increase to 10%. As of today, Autofin has roughly USD 200 million in loans and 32,000 customers with a good risk behavior and a healthy level of coverage, reaching a historical profit as of December 2021 of CLP 6.8 billion. Now I will turn the call over to Magdalena as she will review financial figures and main highlights of ILC's health sector.

Thank you, Gustavo. Moving on to Slide 15, we see that Isapre Consalud results was affected by increased medical leave, no adjustments for the past 2 years and our [indiscernible] in health care provider activity. Cost of sales for the first 6 months of 2022 were CLP 331 billion, a 4% more than the same period in 2021. This rise is primarily explained by increases of 17%, 3% and 1% in the total cost of coverage for outpatient services, inpatient services and medical leaves, respectively. The average cost of coverage for outpatient services increased by 18% and the number of services provided for this concept decreased by 1%. The average cost of coverage for inpatient services decreased by 3%, but the number of services provided increased by 7%. Regarding medical leave, the average cost decreased by 14%, while the number of leave cases increased by 18%. Regarding medical leave, it should be noted that the total cost of medical leave related to COVID-19 decreased by 2%, mainly due to the elimination of extended paternal leave during the third quarter of 2021. All of this meant a half year loss of CLP 25 billion, of which CLP 24.8 billion are attributable to COVID care in comparison to a loss of CLP 30.5 billion for the same period in 2021. Finally, it's important to highlight that during 2022, ILC carried out for capital increases in Consalud for a total of CLP 26 billion in order to support this subsidiary financial situation which has been mainly affected by COVID-19. Regarding Vida Camara, as shown in Slide 16, gross profit during the first half of 2022 decreased by CLP 8 billion, when compared to the same period in 2021. This decrease was mainly attributable to the end of the disability and survivor insurance tender awarded for the June 2020, 2021 period, partially offset by better performances by health and life insurance products. Regarding supplemental health and life insurance, Vida Camara's contribution margin for the first half of 2022 reached CLP 6 billion, 35% higher compared to the same period of the previous year. Premium income increased by 6% and costs decreased by 4%, mainly associated with the release of COVID-19 and life insurance research. This resulted in a drop in the loss ratio of 100 basis points year-over-year. All of the above led to profit of CLP 2 billion for the first half of 2022 compared to profit of CLP 8 billion for the same period of the previous year. Moving on to Red Salud on Slide 17. Red Salud continues to see increased activity with high demand for outpatient and inpatient services favored by reduced operating restrictions. During the first half of the year, there was an increase of 10% in medical consultation and 14% in imaging, while surgical interventions grew by 45% compared to the same period of the previous year. However, the higher activity, the lower occupancy of critical beds due to change in the service mix from more COVID-19 patients and high occupancy of critical best during 2021 to outpatient and surgery activity in 2022 led to a contraction of 14% in EBITDA, reaching CLP 37 billion in EBITDA and an EBITDA margin of 12.4% for the first 6 months of 2022. As a result of the above factors and higher indexation losses, as a result of inflation for the period and its effect on U.S.-denominated financial debt, Red Salud reported profit of CLP 6 billion for the first half of 2022 in comparison to CLP 15 billion for the first half of 2021. Now in order to conclude our first half results conference call, please turn to Slide 19, where Gustavo will refer to final remarks.

Thank you, Magdalena. In order to conclude our first half 2022 results conference call, please turn to Slide #19, where we will review our financial and cash position. During time we have been able to maintain a solid liquidity position, thanks to a conservative cash flow management. Also, the nature of our businesses as well as our revenue composition has resulted in a highly stable and consistent income generation even during the recent years where we faced the COVID-19 pandemic. This income stability has also led to a stable and diversified dividend inflow. Finally, moving to Slide #20, and regarding our debt and liquidity structure. After the international debt placement of USD 300 million, the company has continued its refinancing process. To date, it has signed 3 cross-currency swap for up to USD 130 million as invested in instruments that reduced financial carry and has a suitable liquidity cushion to meet future commitments. This concludes today's presentation. Operator, we will now open the floor for questions.

[Operator Instructions] Our first question will come from Adrian Garcia with Invesco.

I'm curious what is the cash position at Consalud after the capitalization? And what is the -- do you foresee any additional need for injecting cash to the business?

Adrian, Gustavo here. Thank you for your question. To give you a bit of context and to all the participants here, the Isapre industry is having big losses in the last period. This is highly related with no price adjustments for the past 2 years. And the COVID-19 care. Even more, if we compare our losses with COVID-19 care, it's almost the same. In 2021, a law was approved that allow the sub plans to be raised with respect to a certain CPI that will be calculated by the Health Superintendency. That calculation meant 7.6%. And we, like all the Isapres, decided to increase our plans by 7.6%. Contrary to was supposed since there was a law here, these increases were -- where we lawsuits against, I guess, Isapre, which reached the last intents, the Supreme Court. 2 weeks ago, we've had the Supreme Court ruling that the communication that we sent on March of this year is nullified. I mean the communication of the price adjustment for all the beneficiaries. Consequently, the percentage in the base price is not effective. In our case, as I said before, it was 7.6%. That's the same as the whole industry. The superintendency of health will order to our Minister -- I mean what are the measures so that has been charged to the affiliates for the increase in the base price will be reimbursement. And fourth, and this is very important for us, the Superintendency of Health will send to the sobres the instructions to comply with rounds and with background information. The base price adjustments in accordance with some legal parameters that the Ministry of Health will verify. The latter is -- I mean, the last that I said is very important for us. because what the Supreme Court is doing is recognizing that the Isapre got the right to do the price adjustments. The problem was recognized in the way in which these increases were justified. Another important thing here that the ruling set is left with no effect the cost of claims that are the main driver of the [indiscernible] in the system. What we are doing today, today, we are in working sessions. Today is the third session, a table with the Ministry, which represent the government, the superintedency and Isapre. The intention here is to provide a solution to the separate situation. As I said before, today, we have the third meeting in 2 weeks in these working sections, we are very aligned. The government is very aligned in solving the main issues that occur in this industry, which are related to the way in how Isapre will implement this price adjustment. And the decrease in the medical leaves was -- is an issue as for the government with the public insurance as for the private system. Regarding your specific question about the -- how much capital that we need in Isapre. We probably need some capital in the way we see advances in the -- in these working sessions, we will see when this capital increases will occur. We expect most of the capital increases already happened. I mean, we think it's not a big portion of the total capital increases that we have done in Isapre. But the amount is probably related to the timing that fell -- I mean, the superintendency will release the way how we can and adjust the prices.

Okay. But if I look at Slide 19 on your cash position, if I understand this slide correctly, you have CLP 336 billion of total cash at a consolidated level. And at the lower part of the slide you have how much is at each subsidiary. And for the last quarter, Q2 2022, it doesn't seem that there's any cash at Confuturo. Is that the case?

You mean Consalud?

Yes, sorry. I meant Consalud, yes. So I'm trying to find out is the cash position of the subsidiary Consalud.

Yes, yes, sure. The Consalud, I mean, in cash and equivalents, it doesn't have much catch. What we do have is -- what we do have is warranties and the Isapre has high-quality guarantees from their -- I mean, the reimbursement to their affiliates. We probably -- I mean if the price adjustments are postponed for a mid period, I think I'm saying -- it doesn't happen -- it won't happen this year. Probably we will carry out additional capital increases in Isapre. We expect from to maybe -- I mean we're in the rates of -- from CLP 15 million to CLP 25 million. This is our proxy, our forecast.

What is that proxy, CLP 15 million to CLP 25 million, what is that number?

It's what we are expecting to -- I mean, to expect the capital increase expected in Consalud if the price adjustment is delayed.

Okay. So if no price adjustment is implemented in near term, you'll have to capitalize the business between CLP 15 million and CLP 30 million?

CLP 30 million, so something in that range. It's similar or close the same amount that we already capitalized this year, which is CLP 26 million.

Okay. And how is that -- how would that be funded? What would that..

It will be funded by the dividends of the other subsidiaries. We also decreased -- I mean, it's half-on-half with the dividends of our other subsidiaries and also there's a portion that we will decrease the dividends to the shareholders. It's very similar that we have done in the past. We are ready do this -- did this in the last year.

[Operator Instructions] It appears there are no further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to Gustavo Maturana for any closing remarks.

Yes. One final message here is impossible to not refer what is happening this Sunday. The events that we will face on Sunday has certain implications in our industries. We are well prepared, I mean, for this implication. But at the same time, it presents a change in the political scenario. The reaction option is chosen. The government will probably lose political capital to promote these [indiscernible] reforms. And the agenda, we will guide much of the government's time will be the way to carry out a new constitutional process. In the event that the approval option wins, the government will probably continue with its agenda. But it's probably to remember that they don't know have the majority in either the upper or the lower chamber. And of course, I need to -- regarding to the text, the text present certain changes in the industry where we participate. I would say the main changes is in the mandatory health insurance industry. Regarding this, it is very clear, the mandatory contribution will finance the public insurance. And it will be -- it gives 18 months for the government to present a transitional reform, which Congress has 2 years to discuss. In this new scenario, private insurer could offer voluntary insurance products. Today, a person who contributes to the private insurance system use the mandatory is 7% of their salary plus in average, a voluntary component amounting to about an additional 4% in order to get a plan. This 4% is about USD 1.5 billion, I mean in the whole industry, which added to the supplementary, which is the voluntary health insurance here in Chile. Industry on fleet, an industry of between USD 2 billion to USD 2.5 billion without -- and this is very important, the medical leaves within the cost of structure. It's important to highlight here that medical leaves are about 35% of the cost of Isapres. It is the cost that has grown the most in the recent years. It is the only component that we are -- not have the provider hedge. We were prepared for a change of this endure, both in the provider and insurance sectors. Several years ago, the company has been prepared for changing private insurance sector, and it says it developed a client base of more than 350,000 collective supplementary insured people in Vida Camara, I meant. So those who, if we added to those insured by Consalud reached 1 million people. On the other hand, our clinics or hospitals and medical centers in Consalud, which today serves the same, close to 1 million people, has coverage through the entire country, together with a medium cost structure, which position ourself as a good alternative to develop alliance in a scenario like the 1 percentage. I mean if the approval option wins selection, Red Salud today has a good relationship with the public insurer, which represents approximately 45% of its revenue. So in summary, the company has the necessary assets to develop its business in either of the 2 scenarios. So if you don't have a question this is everything for today, thank you all for attending this conference call. Regarding IR activities, all of them are published on our website. If you have further questions later, feel free to contact our IR team. Have a nice day, and we hope you and your family remain healthy. Goodbye, and see you next quarter.

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