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

Well, hello, everyone, and thank you for joining ILC Fourth Quarter 2022 Results conference call. Before starting, I will like to invite everyone to double at 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 financial figures for each of our businesses. Today with us is Pablo Gonzalez, CEO of ILC. He will review main highlights and figures of the last year. Okay. Pablo, please you may begin.

Thank you, Gustavo. Good morning to everyone, and thank you for joining us on this annual presentation for the results of 2022. I'll go through the main events of the year, as Gustavo mentioned and some highlights of the performance of the company during 2022. So before starting with a milestone we achieved in 2022, some comments on Chile. We would say that political uncertainty has declined over the last months with the public events you know. And at some point, that it's a good new to try to have a more reasonable and rational discussions on some of the industrial sectors we are. Moving into the milestones itself, I would say that the main points to mention on the first hand, we closed the restructuring process, the split of Avita between Avita Chile and [indiscernible] Administrade Americana de Inversiones, which as we mentioned in the previous conference calls, the main purpose of that is to give more flexibility to Avita to develop its businesses out of Chile and also out of the mandatory pension system. And I will speak about that in a couple of minutes. On the second hand, we agreed to acquire [indiscernible] and auto finance and finance company in Chile. This transaction was already approval by the [indiscernible] and we are waiting for the approval of the CMF, the Chilean SCC. On Consalud, we made the last capital increase May, June last year, mainly due to COVID-19 effects. And also during 2022, we adjust our base price and also our GES premium for the period 2022, 2025. On ILC, the main event was our inauguration debt inauguration bond on the debt capital markets in the U.S., we placed on or rule bond on the U.S. market at the end of January, $300 million. Out of that, basically 2/3, it's been covered through cross currency swaps. And if we translate that to the equivalent under Chilean U.S. currency, it means it represents a spread of 117 basis points over the treasury, which is more attractive than the levels we would find in the Chilean market. I -- at some point of that, the main use of proceeds of that bond is to refinance almost all of our debt. We made some early redemption on local bonds of close to USD 16 million. And also, we've been pushing for shares buyback program since April 2022. 2022 was a tough year from an internacional standpoint, from a local standpoint. But we ended up with a historical recurrent profit for ILC, close to CLP 147 billion, which gives us an ROE of 17%. There is the combination of results behind the gap. There is [indiscernible] what's been strong over the last year. Again, it sounds repeatedly, but looking for diversification and looking for new sources of results for the company. It is an increase of 66% over the result of 2021. And if you see the story of the company, again, we've been very resilient even in tough times, stable and very consistent in terms of results. The composition of this profit comes from our portion in [indiscernible]. We taking [indiscernible]. Our stake in Americana de Inversiones were 40%. The Confuturo [indiscernible] the year [Technical Difficulty] include our profit, the same as Banco Internacional. And if you put together the 3 companies on the health sector, I'm speaking about Red Salud, Consalud and [indiscernible], you will see that if you put the 3 of them together, we ended up with close to 0 result on the health industry. If you take a look to 2021 and do the same calculation, meaning putting the 3 companies together, we lost CLP 57 billion. So it's been an extraordinary recovery from the health area. And on the ILC stand alone, you will see a lower result than previous years, basically due to inflation. Most of our debt is indexed to inflation. And year to IFRS, our assets are not indexed to inflation on the books. So most of that effect is included on those 40.7 billion of negative results at ILC level. With that, we ended up with the results I mentioned. Again, and this is something we are very proud about. We've been working for years and years on diversification. The charge to the left reflects the composition of the profits of ILC in 2012, the year of the IPO. At that point, we were basically an AFP. 96% of our results came from the AFP. If you take a look to 2022, you will see new colors and the relative importance of those colors to the profit. We have the bank. We have felt, excluding, of course, the [indiscernible] and you have Confuturo recording for an extraordinary year. We are continuing looking for this ideal chart to the right in which each of the industrial sectors in which we are involved contribute with 1/4 or something to close to 1/4 to our result. It's a challenge, but we continue working on that. Some comments on each of the divisions, starting from the pension fund division. In Habitat, you will see that almost 1/3 of our revenues are coming from markets different from Chile. And from activity, I think it is different from the mandatory saving activity in Chile. The split I mentioned, the new structure, you can see that to the right, we are executing projects through acquisitions of mutual fund companies in Chile, either in Chile and in Peru. We are very close to launch brands, products on that business with the main focus of offering of being able to offer to our customers' different alternatives for the savings, different from the mandatory saving alternatives. We are very positive on that. We think it's a smart move in terms of being more flexible. This is a tough activity. It's difficult to reach breakeven points. It's not probably something that we are expecting that will contribute too much to our earnings, but it's from a strategic standpoint, it's something key. On the different countries, you see different market positions, depending on the [indiscernible] in Chile, we are #1, in Peru we are #3, and in Colombia, we are #3. In returns, there are different performance, but we are always looking for being market leaders and in terms of segments, we have a great challenge in Colombia and also in efficiency in that country. We are the second largest pension fund player in the [indiscernible] region with assets under management of more than EUR 60 billion and close to 5 million customers around the region. Some comments on each countries. In Chile, revenues increased mainly due to the inflation. Of course, an important portion of our customers, they have salaries adjusted to inflation. In terms of the cash, it was a bad year for the 3 countries, Chile, [indiscernible], Colombia, mostly driven by the performance of the markets abroad, but the results of being case was negative in Colombia, negative in Peru, much lower than 2021 in Chile. And in terms of profit, in Chile, we increased by 2%, including the cash. In Peru, we decreased by 5%, but again, most of that explanation is near. And in Colombia, is attributable to 2 main effects. On one side, you have the cash. And on the other side, you have the currency effect due to the depreciation of the cops. And also due to an increase on the loss ratio of the DNS, -- remember that in Colombia, the DNS is included on the fee and also core on the costs. So when you see the revenues, net from the revenue from the DNS, it was a decline. And also that effect is amplified by the currency effect I mentioned. Moving to Confuturo. Before going to the results, a couple of things that are important to mention in the industry. This chart is a chart that we have presented in the past. It reflects on the top the difference of the gap between the interest rate offered by the annuity, which is the red line and the gray line is the interest rate offered by the program we grow. And you may see that on periods in which this gap increase like 2020, 2021, you see that the preference for annuities went down. And in periods in which this great basis very close, you see that more than 50%, 60% of the people were choosing [indiscernible]. So what we are experiencing here is a very strong recovery on the market moving from a floor of 8%. That was the preference for annuities in January 2021 to 50% in December 2012. So there is a recovery in the market, we are returning to the levels previous to 2020. That's one quarter. The second comment is that given to the reform that was put in place in January 2022, one of the elements of that reform was a change in terms of the requirements to be eligible for an annuity. Before January 2022, the eligibility or the requirement to be eligible for an annuity was that you have to auto-finance with your own fund minimum pension subsidized by the government. So you need to have at that time, fund enough to finance a pension of around $200. There was a change in January in which this requirement moves from the minimum pension subsidized by the government to a number, 3 UF is around 120 and 130 dollars. So in summary, the amount of money you need to be eligible for an annuity is lower than it used to be before January 2022. So that is a driver that there is a potential demand there that wasn't there 2 years ago. And the second change is that in September 2022, there is a product that was authorized by the authority by the regulator that is called the scale it. And the scale annuity basically is offering you an alternative to have a pension up to 5 years and up to double the annuity you are getting, and then after that move down to the annuity for life. So in other words, it's a product that makes the annuity alternative much more competitive against the program we grow. Why? Because when you are at the age of retirement, you compare the 2 alternatives, you see an annuity, a regular annuity, but also you see this scale annuity that offers you a much lower gap even in some cases, a much higher pension for the first year. So that's another element that it provides this industry with potential demand, or rational demand for annuity. So in terms of the market set, I would say the 3 variables, interest rates, this requirement from annuities and this new product makes the coming months or years, we are expecting a growing market on the annuity industry. Other elements of the company, you know that we've been pushing for a different distribution channel or sales channel model. It's pushing for more sales done through the direct sales channel that gives us more control on the sales. That gives us more close relationship with the customer. And as of December 2022, 1/3 was -- of the sales we made was done through the channel. On the other side, when you see the efficiency, this is the second company in terms of efficiency in the market. When you see the SG&A or the AUM. So in summary, how many basis points we are spending over AUM you see that since -- in 2018. This number -- this metric is moving down and down. So you see the 20 basis points of difference between 2018 and 2022, and that's directly to additional spread. So we are getting more spread based on the efficiency we are gaining year-by-year. In terms of the portfolio, we are continue doing to what we have done in the past, meaning that we are reallocating fixed income to other assets with more yield, with more [indiscernible] again than the fixed income. We moved 20% of the portfolio over this period to foreign investment, alterative assets, real estate, and that's a key driver to explain the results. In terms of the investment result, there is the breakdown in which you can see that fixed income improved local equities was not so good. Real estate improved foreign investment was not so good as 2021 because 2021 was a record year, especially for alternate explained by alternative assets. And then you reach the net investment result for the year. In terms of the bottom line results. The company, again, as was in 2021, obtained historical results and historical ROIs. We -- it's important to mention here that we view those 2 years as extraordinary years. We don't expect those years to rebid. I mean, we wish to, but we don't expect -- as we mentioned in the past, we expect this company to perform on the CLP 45 billion to CLP 55 billion on a regular year. Banco Internacional, you know the story since the acquisition at the end of 2015, one of the things we have done -- we did was -- grew much more than the market. In terms of loans. These are commercial loans. The blue bar or the blue line is Banco Internacional, and the gray line is the market. So we grew much more than the market over the years. But then with the COVID-19 crisis, we stopped the growing process and we returned to levels close to the industry. But over the last months, we are returning to this growth path more than the industry that we experienced in the past. The strategy, the bank, even though we've been very successful in terms of performance since the acquisition, we are conscious that we need scale. We'll continue needing scale and that scale is through, of course, organic growth and also we're continuing analyzing inorganic [indiscernible]. On the other side, we are growing through transactional growth. We are starting offering retail funding, to transactional products and we are looking for offering more services to our customers. We are entering into the retail market, on our own strategy, under our own reason and through different business models. We are leveraging our operations from -- by digitalization of products, especially on the retail segment. And out of in the acquisition we announced, it reflects of that. We -- [indiscernible], as we mentioned, is a CLP 172 billion loan business with more than 30,000 customers. We expect that the company to -- or the transaction to be closed on the coming weeks. It's been a while we signed in August '16. We submitted to the CMF at the end of September, and we got the approval of the national [indiscernible] at the end of December. So we're just waiting for the CMA. Some figures, risk -- the bank is continuing to managing the risk expense. You see the risk expense over the gross operation -- operating result and it's been -- 2022 was lower than 2021 in '19 and '17 compared to the market, what the industry, in which that metric was close to 20%. We also have in our books, voluntary provisions that are equivalent to 1 year of regular risk expense. We have not touched those voluntary provisions. Our strategy, part of our strategy is being very protected with collateral. We ended 2022 with close to 75% of collateral coverage on our loans, and that's much more than the industry, which is 53. Non-performing loans very close to the industry and in terms of solvency, the rate index 3, we are very close. I mean, we are in the industry in terms of capitalization. The results of the on this is the range that was away in 2015. And you may see in the graph that we are continuing improving and growing the performance and also the return on ROE and ROE. I would say that this is the 4, 5 years in a row in which we have reached an ROE very close to the average of the market and some years even higher than the average of the market. Moving to health. I will speak about the 3 companies together. There are -- this is an industry in which you will see 2 different sides of the -- or people of the coin. On one side, Red Salud has been very successful in all the metrics you may see activity, performance, EBITDA return. And on the other side, we are facing a very, very tough prices on the subsector. In Red Salud, when you see all the metrics on surgeries and medical consultations, exams, dental services, you will see growth. Growth in terms of the quantity of procedures, in quantity of activity in all the services. But we're more important than that growth, of course, is reflected on an increase in revenues. If you compare with 2018 that was probably the last regular year before the pandemic and the social crisis in 2019, you see that revenues moved up 62.5%. And when you go down and you see what happened to the EBITDA with that huge increase on revenues, you see that the EBITDA moved up close to 90%. So we were able to capture an EBITDA, this increase in volume in revenue meaning that this is very important for us that the strategy we've been transmitting to the market over the last years in terms of consolidating a network of hospitals, medical centers and dental centers and trying to manage those as if they were one single company and gaining a benefit from the efficiency of that is reflected in this chart. So in other words, the PowerPoint strategy, we are seeing that on results over the last 2, 3 years. We expect this activity to continue. Given the situation in the public sector, given the situation in the country. And as I will show you in some slides later, given that people insured by the public insurance is more and more looking for service, more and more testing and trying private health services as the one we are offering. So we don't expect changes on the level of activity. And of course, our challenge now is how to be -- to continue being efficient under this scenario. But these figures, and let me finish with this slide, these figures in terms of EBITDA revenues, et cetera, you are seeing in Red Salud, Otherwise, we were expecting for 2027, 2026 a couple of years ago. This is what I was mention. When you see the breakdown of the revenue breakdown by type of customers or by insurance of our customers, you see that in 2015, almost 30% of our customers were coming from the public insurance. And in 2022, it's more than 40%. So we are an efficient network that knows how to work with the public insurance system, and we know how to manage our costs for the type of fees or the level of fees at the public insurance offers. And at the same time, you see that the relative importance of the private health insurance system is declining. We expect that this [indiscernible] to continue over the coming years. Other important element is that this increase in EBITDA from 2017, 2016 to 2022 was based on icy the same infrastructure we had 6 years ago. You see on the bottom the CapEx, the annual CapEx. Those levels of CapEx for a company like Red Salud, basically is reposition CapEx plus something else. But it's -- we've been able to reach this level of EBITDA of margins with basically more or less the same installed capacity we had 6, 7 years ago. And without an important increase on the debt, the 30% increase in debt over the last 6 years for a company that is very intensive in terms of assets. It's something very reasonable. Let's move to Consalud. In Consalud is a public that we are facing at crisis. But it's important to stop one moment in understanding why we are here. Well, the first effect is COVID-19. You see in the graph that COVID-19 was an additional cost that was not in the regular, let's say, technical models of a health insurance company before 2020. So when you see the effects of COVID-19 year-by-year, you ended up that COVID-19 was an additional cost for us of around CLP 110 million, CLP 115 billion. At the same time, we were not able to adjust prices during the COVID-19 crisis during 2020 and 2021 was a loss on one out. And at the same time, there are health and especially medical lift costs that we are not required to finance by law. Actually, this is about information. We demand we sue the government on that. We paid CLP 23 billion on medical leave attributable to special treatments on the delivery and birth medical lives costs that was not a requirement in the loan. So that spending so is there. But that's the first reason why -- there are 2 first reasons why we are here. COVID-19 and the law that wasn't to the Congress that didn't allow us to adjust prices during 2020, 2021. In 2022, we adjusted prices. The base price by 7.6% in real terms starting in September. And also the GES premium that you remember that this premium is -- you have the right to adjust that premium in the 2 scenarios, one either every 3 years or if there is new illnesses included to the list in this case, was the anniversary of the GES -- was a 3-year anniversary. So we were allowed to adjust those prices at the end of 2022. You see the results over the last quarter of the [indiscernible], they improved significantly. I comment on the base price, I comment on the GES price adjustment. What is pending and is the main issue behind the crisis is this risk factor payable issue. The risk factor table when you commercialize and is at the plan, the [indiscernible] plan fee is composed by 3 parts. First, there is a base price that is being multiplied by this risk factor. And then there is the GES tariff. So when we do this, we do this under the regulation and under the law. When we sell a plan to our customer with a risk factor tailwind with a base price and with GES, that plan is approved by the regulator. That risk factor table is approved by the regulators. So over the last 2 years, 1.5 years, there was starting to be some utilization activity on this risk factor table. And the Supreme Court in December 2022 grew that all the contracts must be updated to a single case. But at the same time, required a regulator to rule that and to implement that. We haven't had any new from the regulator on the way they are planning to. At the same time, the government is speaking about special law for this. And there is a term for the implementation of this file that was published by the Supreme Court. And did that -- that being sorry is the end of May. But you can imagine, we are waiting these weeks and coming months for the resolution on that and for the potential solutions that. We don't have more information than the one that is being on the news on the market. We expect from the regulator from the authority and from the Congress, if that is the case, the solution or the way to walk through this is going to be through a low to be rational and to understand that we haven't done anything illegal. We haven't charged any peso or dollar to our customers that is under the -- it's not under the regulation [indiscernible]. That's more or less what we can tell on the [indiscernible]. On the supplemental health insurance side, you know we have a company that is offering basically and mainly full group supplemental set insurance. The company, as you may see on the bottom of the slide, it's increasing, it's growing in terms of number of beneficiaries. We are reaching 400,000 customers in this. These are insurance that play the game on top of the [indiscernible], the public insurance or the private issuance, the [indiscernible]. Something that is very important is that the margins on the health insurance products everywhere, even if there are mandatory or they are supplemental are very low. So this is an activity that we've been in the market for a while. This that is, of course, part of the industry itself. But our main goal here is to have people issue. This is not going to change the bottom line of ILC. I mentioned this. You see the 3 companies together on the health sector, Red Salud, [indiscernible] and also the submental health insurance, you see that we moved from a minus CLP 60 billion in 2021 to close to 0 in 2022. So in terms of results, we are again closing the negative results and also moving forward to results more similar to the ones we had in the past on these 3 areas of business. Our financials, you heard at the beginning when I explained the bond we placed in the U.S. market. In this chart, you see the vision we are receiving from our subsidiaries year-by-year. We used to be on the area of CLP 40 billion, CLP 50 billion the last few years are exceptional. 2020, the explanation is very simple. Remember that at that time when we were starting the COVID-19, it was a probably a discussion on whether it was ethnical or not to distribute more than 10% of billions. And almost all the companies went to that point. We were not an exception to that. And what you see here in this gray circles, the level of catch and equivalents, we have in our balance. And you see that our liquidity position, our cash position is very strong and probably the strongest of the history of the company. This is our profile. We have, again, enough liquidity to face all of our commitments in bonds, basically and some banks in the coming years. What is important behind this strategy is that after placing the bond in the U.S., this is a company with access to the Chilean banking sector, in which we have not much debt, access to the Chilean debt capital markets through bonds. Again, we are paying our bonds. We are buying back our bonds or risking our bonds, and we are cleaning our lines in Chile, basically and we opened the door for the U.S. capital market through this month. And with that, you may know that it's also been the access to private markets like Switzerland or Japan, [indiscernible], Chilean companies went in the past. So we have a very flexible financial position composed by, again, a lot of liquidity and different access to the different debt markets, either in Chile and abroad. So in summary, industry context, the annuity industry is -- the perspective is good in terms of size as for the reason, as I explained. The health industry is also strong, and we are facing strong demand, and we are being able to manage that strong demand with a firm margin. The banking industry, a lot of opportunities for us. In terms of milestones, I mentioned those in terms of [indiscernible] in Banco Internacional, the bonds we placed in the market in the U.S. And in terms of the delivery, the company is delivering diversification, recurrent and very consistent results over time. And also, we have a very solid financial position, as I mentioned in the couple of slides before. So with that, I will open the room for questions... Gustavo, I think you are mute?

Paolo, one question here. Given the situation that the banks are experiencing abroad? What can we expect from the internacional -- Banco Internacional for 2023?

Well, I think the first thing is that we don't have in our investment portfolio of the bank, we don't have any bond or instrument under the same classification of -- what we saw on the U.S. We are -- we think the Chilean regulation and the Chilean banking system is it's different from the U.S. in terms of this type of potential crisis. We think this is going to pass. We think the markets are returning to more [indiscernible] more. So we don't see potential effects on the coming weeks or months on Banco Internacional due to this internacional event...

Thank you, Paulo. There is another question regarding Red Salud. Red Salud prepared to handle crises in the [indiscernible] system.

Well, the sale is very unique in terms of -- as I mentioned, as I showed the graph in terms of being efficient offering services to the public insured people, there is no other private network, which close to 50% of the revenues is it's being -- serving public short people. So on that side, I would say that it's very prepared for a crisis in which we will have more people on the public insurance side. In terms of receivables, of course, Red Salud, they offer services to [indiscernible] customers, and there are receivables going down there. But given the Chilean system, the [indiscernible] system, with sales, they have to work with the guarantees, either guarantees from bank or catch with a special purpose for guarantee, their liabilities or the obligations with the clinics or with the health care sector. So I would say that the question there is the Visa crisis on -- in terms of revenues, in terms of potential activity, of course, it's going to be an effect. But in terms of receivables, the question mark is the size of the bad debt attributable to that. If the provisions we have are enough to face -- or the bad debt provision is enough to face a crisis like that, but it's something that Red Salud can and we expect can manage.

Thank you. There's another question from Rodrigo Alloy of Brain Corp. Considering that you have not expanded capacity of Red Salud. What do you expect to capture the growth opportunities coming from the increased preference from [indiscernible] to be served by the private network?

I would say the world is changing. And when we are seeing a growth in countries like the U.S. or Germany is that the increasing capacity is being more increasing capacity on medical centers on [indiscernible] and labs, more than hospitals. We are seeing that the number of beds, every 100,000 abidance of a country is declining in developed countries. So to answer the questions, we see a lot of opportunities and a lot of room for growing on a bullet service on medical centers, services and dental services and the investment. We need for that type of development is something that is reachable. So that's more what we are seeing in the coming years. We are not looking for building a new hospital or doubling a new hospital and existing hospital. We are more type of investment more related to the Ambulatory treatment side of the equation...

Thank you, Paolo. There are no other questions.

Okay. Thank you again for being here today. As always, the company is very open to address any doubt or any consultations you may have on the results or other elements of the company through Gustavo and the rest of the team and also myself, we will be happy to address those questions you may have. Have a great day.