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

Okay. Hello, everyone. Thank you for joining ILC's Third Quarter 2022 Results Conference Call. Before starting, I would like to invite everyone to download from our website our 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 then financial figures for each of our businesses. This call will be divided in 4 blocks. First, we will review ILC consolidated results for the third 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 order to close the call with the Q&A section. Now please move to Slide #5, where you will see the main trends for the period. These first 9 months has been influenced by higher inflation rates, with a recovery in the formal labor market. [ For its ] part, increase in the number of people retiring compared to the previous year, put the annuity premium market. The health care services delayed by the pandemic and fewer operation restriction still raise the health care activity with high demand for outpatient and inpatient services. However, the mix of services this year is different. Also, there is a comparison base effect. So at the end of the extended maternity leave program during the third quarter of 2021, which, together with the inflation effect means a smaller loss in Consalud during the first 9 months of 2022 compared to a previous year. If we compare the first 9 months of 2022 to the same period of the previous year, we can highlight the increase in the diversification of ILC results, where to date, Confuturo, Banco Internacional and Red Salud together accounted for 79% of ILC's consolidated income. Now if we turn to Slide #6, we see ILC's net income variation. During the first 9 months of 2022, ILC recorded a net profit of CLP 83 billion compared to a net result of CLP 67 billion for the same period of 2021. This variation was mainly due to the improved operational performance of the financial subsidiaries and the elimination of the extended preventive parental leave during the third quarter of 2021. When we dip on the subsidiaries performance, AFP Habitat reported 11% year-over-year improvement in operational income, thanks to our recovered salary base, along with more efficient spending. This was partially offset by a lower performance of legal reserves. Confuturo continued to enjoy a strong performance from its investment portfolio and a higher annuity premiums collection. Banco Internacional, a stronger net interest margin because of the higher interest rates combined with 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. So we sold off inflation for the period and its effect on the financial debt reduced its contribution. In Consalud, the smaller loss was explained, as we mentioned before, of the end of the extended maternity leave program at the end of 2021 and the inflation during the period. Vida Camara decreased its contribution driven by lower sales from the DNS Insurance due to the end of the tender awarded for the June 2020, 2021 period. Finally, ILC's stand-alone based higher financial expenses to the effect of indexation on U.S.-denominated debt. After the summary of ILC net income performance, we will review the main operational events and key financial figures of ILC's subsidiaries. As shown in Slide #8, operating result increased 11% year-over-year mainly due to the rise in the salary base together with SG&A efficiency. Revenue increased by 9% in the first 9 months of 2022 compared to a same period in the previous year, reaching CLP 165 million. This increase was mainly explained by the 10% rise in the average taxable income of its contributors compared to the same period in 2021. As of September 2022, this figure exceeded the industry average salary by 20.2%. In addition, the average number of contributors grew by 1% year-on-year. Sales and administrative expenses during the first 9 months of 2022 reached CLP 62 million, 10% higher compared to the same period of the previous year. 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. Going to Slide #9. As we have mentioned before, on November 30, 2021, AFP Habitat ceased to be the controller of [ AFP Habitat Andina ]. The company created as a result of their spinoff at Administradora Americana de Inversiones as the new direct controller of [ Habitat Andina ], and indirect controller of its subsidiaries. Therefore, [ Habitat Andina ] and its subsidiaries, Habitat Peru and Colfondos are no longer part of the corporate structure of AFP Habitat. AFP Habitat Peru registered a 9% increase in fees income for the first 9 months of 2022, while Colfondos decreased 2% accounting together 29% of the revenues from ILC pension sector result. Administradora Americana de Inversiones reported profit of CLP 7.5 billion, mainly affected by returns on legal reserves of Colfondos. Slide #10 and 11 show Confuturo's performance. This entity registered CLP 105 billion profit for the first 9 months of 2022 in comparison to CLP 89 billion for the same period of the last year. As shown in Slide #10, during the first 9 months of 2022, net premiums totaled CLP 389 million, 72% higher than the same period in 2021 mainly due to increases in annuity premiums, DNS coverage and voluntary products sold by Confuturo. In the life annuity market [ annuity ] premiums increased by [ 39% ] in 2022 compared to [indiscernible] market share of 8% which position is fit in the annuity industry. And regarding other life insurance products, Confuturo had an industry-leading 26% market share in voluntary repayment savings. As shown in Slide #11, Confuturo showed a strong performance from its investor portfolio, mainly in investment funds and real estate. Investment result grew by 7% year-over-year, mainly due to a [ better ] performance of fixed income and real estate investments, partially offset by a lower result of foreign investment, mainly attributable to a lower performance of equity investments. Even though there is an extraordinary component here, the good performance during the 2021 and the first 9 months 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. Now if we turn to Slide #12, you will see Banco Internacional 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 year of risk expenses. Moving on to Slide #13. In terms of its bottom line, a stronger net interest margin because of higher interest rates and indexation combined with greater efficiency, led to CLP 41 million profit during the period compared with CLP 20 million gain for the same period of 2021. Return on average equity was 22% with an annual trailing net income of CLP 53 billion, This quarterly [indiscernible]. The bank continues its strength to be an important portion of ILC's net income, representing a total contribution close to 1/3 of ILC consolidated results. [ Despite ] this is a 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 1% of the bank's loan and if the operation is completed, this participation will increase to 10%. As of today, Autofin has roughly USD 200 million in loans and close to 32,000 customers with a good risk behavior and healthy levels of coverage, reaching a profit as of December 2021 of CLP 6.8 billion. Now I will turn the call to Magdalena as she will review financial figures and many highlights for ILC health sector.

Thank you, Gustavo. Moving to Slide 15. Despite [ imported ] and continued negative results as a result of sustained growth in medical leave, coupled with the freezing of base rate in 2020 and 2021, Consalud has managed to partially reduce its notice. Revenue increased 10% during the first 9 months of 2022 compared to the same period of previous year, reaching CLP 498 billion. This increase was mainly explained by a 12% rise in [ Habitat's ] contribution, driven by inflation for the period and the 7.6% base price readjustment. Cost of sales for the first 9 months of 2022 were CLP 499 billion, 1% more than the same period in 2021. This to rise is primarily explained by the increase of 17% in a total cost of coverage for outpatient services, partially offset by decreases of [ 3% ] and 1% in the cost of coverage for inpatient services and medical leave, respectively. The average cost of coverage for outpatient services increased by 16% and the number of services provided for this concept increased by 1%. The average cost of coverage for inpatient services decreased by [ 3% ], and the number of services provided remain stable. And regarding medical leave, the average cost decreased by 15%, while the number of leave cases increased by 16%. Regarding medical leave, it should be noted that the total cost of medical leave related to COVID-19 decreased by 34%, mainly due to the elimination of extended paternal leave during the third quarter of 2021. Due to elimination and high inflation during the period in addition to the recent application of 2022 base rate adjustments, enabled Consalud to close the first 9 months of 2022 with a loss of CLP 28.8 billion compared to a loss of CLP 60.5 billion during 2021. And the next slide, please. Regarding Vida Camara, as shown in Slide 16, gross profit during the first 9 months of 2022 decreased by CLP 5 billion when compared to the same period last year. This decrease was mainly attributable to the end of 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 contribution margin for the first 9 months of 2022 reached CLP 7 billion, 60% higher compared to the same period of the previous year. Premium income increased by 5%, mainly due to the rise of inflation, while cost increased by 2%. This resulted in a drop in the loss ratio of 288 basis points year-over-year. During the first 9 months, the supplemental group health insurance industry reached [ 12 million UF ] in premiums, 3% higher than 2021. Vida Camara enjoyed 11% market share by premiums, ranking 4th in the industry. And as of the end of September 2022, Vida Camara had 386,000 beneficiaries, 7% higher than the end of September 2021. All of the above led to profit of CLP 2 billion for the first half of 2020 to first 9 months compared to profit of CLP 6 billion in the same period in 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 and the resuming of services postponed by the pandemic. During the first 9 months of 2022, there was an increase of 11% in medical consultations and 13% in imaging, while surgical interventions grew by 33% compared to the same period of the previous year. However, lower occupancy of critical care beds together with an increase in costs influenced by inflation during the period led to a 6% contraction in EBITDA, reaching CLP 56,352 million during the first 9 months of 2022 and an EBITDA margin of 12.1%. 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 10 billion for the first 9 months of 2022 in comparison to CLP 19 billion for the first 9 month of last year. Now in order to conclude our third quarter results conference call, please turn to Slide 19, where Gustavo will refer to our financial and cash position.

Thank you, Magdalena. During time, we have been able to maintain a solid liquidity position, thanks to our conservative cash flow management. Also the interior 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 regarding our debt and liquidity structure. After even USD 300 million in international debt, the company has continued its refinancing process. To date, it has taken out 7 cross-currency swaps for USD 202 million has [ ridden ] up to USD 1.5 million in local debt, has invested the cash in instruments -- low-risk instruments that allow it to reduce its financial carry, maintains ample liquidity to meet future commitments. With this, we conclude today's presentation. We now will open the floor up for questions.

Okay. Here are a question about Consalud. They are asking if Consalud recovery will continue and some perspective of -- in 2023?

Okay. The accumulated losses in Consalud got smaller year-over-year, but are still important. However, the elimination of the preventive parental leave, higher inflation during the period, have been reducing last quarterly losses. In addition, for the fourth quarter, we expect higher revenues from the base rate adjustments and the [ GES ] rate adjustment, is to -- adjustment give us better perspective for the last quarter of the year, but we must continue to monitor the financial situations of Consalud.

And here is another one. It's about the recently pension reform. Can you please explain little bit of that on the impact?

This is something that probably will arise in the question. On November 7, a pension reform bill was entered into the Congress. In summary, the proposal consists of a reform regarding, first, increasing the warranty universal pension through increasing the government contribution from CLP 193,000 to CLP 250,000. Second, increase in contribution charge to the employer and the employees from 10% to 10.5% for the employee and 6% to the employer. The third, decoration of mixed contributory pillar with solidarity defined warranty and supplement for pension [ focus ]. Four, changing industry participants on the role, in the proposal, a new public entity will centralize support functions, affiliation, collection, pension and benefits, processing member care information among other things, now the EFPs too. Then, only for the 10.5% contribution, you can choose between -- I mean, the people will choose or -- a public or a private investor, which will also be a new entity to whom all the funds that people already have in the EFP can be transferred. Changing commission charges from charge over salary to charge over AUM. Also the elimination of the [ cash ] and legal reserves and the elimination of the [ scale ] or withdrawals among other things. That is this summary. This was proposed –- readily entered to the Congress. It is currently under discussion in the lower chamber and the discussion may take – we don't know. It may take several months. It's important to mention that this is the third proposal been discussed in the last 10 years. The discussion is just beginning. And right now, we are analyzing the proposal and the development of the discussion.

Thank you, Gustavo. There's a question about Confuturo on how sustainable are the results of the subsidiary in the medium term?

Well, results 2021 and 2022 has been extraordinary years in terms of [ profitability ] for Confuturo. Part of the results are explained by the extraordinary performance of foreign investment funds. These funds have a certain correlation with the U.S. stock market. So some correction can be expected. But as we mentioned in the call, the good performance during 2021 and the first 9 months of 2022 is not an accident. We have been working in company as [ allocation ] since our acquisition, looking for diversification and focusing on alternative offering investments. Even though it is important to mention that a normal year in Confuturo approaches profit ranges close to USD 50 million, which is more what we expect for the coming years.

And here is a question about the risk expense in Banco Internacional. What is the reason for the higher rates this year compared to the last year?

Well, this year has been influenced by higher inflation, higher rates. In this context, where we see more income from interest fees. At the same time, we probably -- we will see more rate expense during the -- I mean, this year. Taking that in mind, and as we have seen, the bank shifted from the growth focus it had played from -- I mean, 2015 to 2018 to one of risk solvency and liquidity. So a result, the bank now has one of the highest collateral coverage and capitalization level in its history along with our risk policy that included CLP 23 billion in voluntary provision, which is equivalent to 1.5 year or 1 year of rate expenses.

I think that's no more questions. But anything as you can, write to us.

Okay. So that's everything for today. Thank you all for attending this conference call. It's important -- as Magdalena said before, it's important to remember that we are always open to answer any further questions. Just feel free to contact our IR team. Have a nice day, and we hope you and your families remain healthy. Goodbye, and see you next quarter.

Goodbye.