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

Hello, everyone, and thank you for joining us this First Quarter 2024 Results Conference Call. Today, with me is Rosario Letelier, Corporate --- Chief Corporate Development Officer of ILC. 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 five blocks. First, we will review the context of the period in order to continue with ILC consolidated results for the first quarter of 2024. 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 a Q&A session. Now I will turn the call over to Rosario in order to review the context of the period and ILC's consolidated results for the first quarter of 2024.

Hi. Good morning, everyone. During the first quarter of 2024, financial markets showed a good performance, as you can see in the graph shown in this slide, highlighting the returns of the stock markets where the S&P 500 and IPSA index had returns of approximately 10% and 7% percent, respectively. On the other hand, formal employment has shown some deterioration compared to the previous year, reaching a rate of nearly 72%. Inflation has reached more controlled levels and report our variation in the period of 1.7%, consistent with what was being seen in the past quarter and lower levels than the ones in the 2022. Considering that, the monitoring policy rate has been decreasing in response to more controlled inflation. And as of today, the rate is in 6%, as you can see in the graph below, following a 50 basis points cut during the last week. And as a complete overview, macroeconomic environment in Chile is still challenging with lower growth expectations compared to a higher historical performance that we have seen in the country. Slide 6 shows the main regulatory advances that have occurred in the Healthcare and Pensions industry. First, in healthcare industry, it's important to highlight the agreement reaching Congress were on May 24, 2024. The Short Laws of Isapres was presented in response to Supreme Court ruling of November 2022 regarding the change in the table of factors. This bill was approved and it's already in place. The next steps that will occur in the coming months include the establishment of the Advisory Council, the presentation and approval of payment plan and extraordinary premium per beneficiary, where it's important to highlight that the payment plan does not require warranties in the Supreme [indiscernible]. And a price adjustment of the plans according to a Unique Factor Table and not offering plans with prices lower than 7% of the gross salary, which is the value of the legal contribution, plus the implementation of an extraordinary premium, which is part of the plan to be approved as mentioned before. Regarding pensions, the pension reform project presented by the government in November 202 was voted on the Chamber of Deputies in January 2024, approving the idea of legislating. However, the central aspects of [indiscernible], such as the 6% increase in employer contribution, along with other aspects of creation of the Public Investor were rejected. And currently, the IPPA is under review in the Senate, especially in the labor commission, in the Upper Chamber. So we'll move to 2024 milestones. The first one is regarding the Ordinary shareholders' Meeting that took place on April 25, 2024, where the Annual Shareholders' Meeting elected new members of the Board. Also, it approved a final dividend of CLP 450 per share charged to 2023 profit, in addition to the interim dividend, we paid in October 2023 of CLP 150. Second, regarding Confuturo, in order to finance its growth and maintain its solvency indicators on April 23, an extraordinary shareholders' meeting took place and approved the capital increase plan for the upcoming years of up to CLP 74 billion. Vivir Seguros won a portion of the Sisco Insurance out of a total of seven portions with an acquisition rate of 1.73%. Benefits from this insurance that we won are partially shown in this first quarter results, as you will see in the next slide. And lastly, some important recognitions that we received in our subsidiaries during the first quarter of the year. First, AFP Habitat was ranked #5 in the Great Place to Work ranking. Red Salud obtained the first place in the Praxis Xperience Index ranking in the healthcare centers' category, an award that highlighted the service experience received by patients in our outpatient and dental centers. This prize has been awarded in certain years in [indiscernible]. And finally, Banco Internacional obtained a first place in the 2023 SeviTest Pyme, which is an award that measures the satisfaction of SME clients during year. As we have presented before, our strategy is based in five pillars. The strategy is founded in the continuous search for growth, organic and inorganic, looking for opportunities in this sense, profitability in our operations, flexibility in the businesses we participate in, a solid financial position and always considering ESG values and metrics in the businesses we participate in. This strategy supports our purpose, which is to be leaders in the construction of social and economic value that improves people's quality of life. As you can see in Slide 10 and in line with our strategy, the consistent results that the company has had over time also [indiscernible] profitability in the last years. So that the [indiscernible] and the strategy that we put in place have shown good results. As we mentioned earlier, the company is currently in a new stage with focus on financial businesses growth, which is also reflected in the first quarter results of 2024, as we will show now in Slide 11. As you can see, ILC's net income composition in the graph on the left side of the presentation. As a global figure, ILC recorded a profit of CLP 59.3 billion, primarily driven by the results of ILC's financial subsidiaries, specifically Banco Internacional, Confuturo, Habitat and Vivir Seguros. Regarding Banco Internacional operations, the organic growth of the commercial and consumer portfolios, along with the acquisition of Autofin, that we consolidate in the bank since August 2023, show a growth in our portfolio, which derives the higher interest income, partially offset by higher risk provision, as Gustavo will show you in a closer look over the presentation. All this resulted in a profit of CLP 14.7 billion during the first quarter of 2024 compared to CLP 12.5 billion in 2023, on a 100% basis. At Confuturo, the dynamics in the market have continued to show growth, and specifically for Confuturo, the annuities business grew 9% in real terms compared to the same quarter of the previous year. And this also came along with a strong performance of the investment portfolio, which resulted in CLP 27.6 billion in the first quarter of 2024 compared to CLP 13.3 billion in 2023. AFP Habitat Chile had better performance of financial market boosted -- which boosted the performance of the pension fund and this resulted in higher reserve profitability. Along with revenues growing in line with the increase in average taxable income of our contributor basis, which meant that improvement in profit of CLP 20.4 billion compared to the same quarter on a 100% basis. The health sector showed mixed results on 100%, Salud showed a higher result, mainly explained by a better mix of complexity in inpatient services, this derived in higher efficiency ratios and operational efficiency, which was complemented with lower impairment of accounts receivable. And in the health insurance sector during the first quarter of 2024, a Consalud retailers of CLP 5.2 billion, mainly related to lower income due to a reduction of the GES tariff, which took place in January 2024. This was partially offset by lower medical costs. Lastly, it's important to mention that as a consequence of the adjudication of a portion of the SISCO service contract -- insurance contract, and adoption of IFRS 17 methodology in 2023, Vivir Seguros reached a profit of CLP 7.3 billion. All in all, first quarter of ILC, as I said before, reached CLP 59.3 billion, almost 70% higher compared to the same period of previous year, which will now be zooming in our different business lines by Gustavo.

Thank you, Rosario. First, in relation to Banco Internacional, it is important to mention the growth of its loan, which outpaced the industry. As of March 2024, Banco Internacional total loans reached USD 3.6 billion, showing a 21.9% increase in loans quarter-over-quarter. This was explained by the organic growth of its commercial and consumer portfolios, along with the acquisition of Autofin, the consolidation of its automotive loan portfolio. Commercial loans grew 13.6%, reaching USD 3.1 billion. The consumer loan portfolio increased mainly due to the acquisition of Autofin in August 2023 and the growth of digital consumer loans, which grew close to 70% quarter-over-quarter. The industry, on the other hand, grew 5.9% in commercial loans and 3.1% in consumer loans. Banco Internacional achieved a market share of 2.14% in commercial loans and 1.3% in total loans. The next slide, Slide #15, shows Banco Internacional operating performance during the quarter. Net interest income for the first quarter of 2024 reached CLP 40.5 billion compared to CLP 18 billion in the same period of the previous year, mainly due to an increase in the interest income from loans, given the growth of commercial loans and consumer -- loan portfolio being earlier. On the other hand, financial operating income increased by CLP 7.9 billion quarter-over-quarter, mainly due to lower results in foreign exchange hedge. Consequently, Banco Internacional reported gross operating income of 50.7% -- I mean, CLP 50.7 billion, 60.4% higher than the same period of the previous year. Operating expenses reached for CLP 24.5 billion for the first quarter of 2024, higher than the same period in 2023. This was mainly explained by higher administrate expenses because of the consolidation of Autofin. The rise in operating expenses was proportionally smaller than the growth in operational income, leading to risk efficiency, which improved by 820 basis points compared to the same quarter of the previous year. Provision for credit increased by CLP 8.1 billion quarter-over-quarter. Mainly due to higher provision for commercial loans of CLP 5 billion and consumer loans of CLP 3.1 billion, as the first quarter of 2023 did not include the subsidiary Autofin's portfolio, which began consolidation with the bank since August 2023. The bank maintains control of its risk indicators by monitoring the NPL ratio with a high level of collateral coverage. As of the end of March 2024, the bank maintains a solvency level of 15.2%, in line with base of previous standards. Slide 18 shows Banco Internacional profit and ROAE evolution. The bank continues to show a sustained growth profit. Regarding to 1Q '24 profit, as we mentioned before, the higher result was mainly due to higher interest and net adjustment income, partially offset by reduced income from financial operations and higher risk provision expenses. Then if we move to Slide #19, it shows pension market dynamics. Regarding the annuity market, as Rosario mentioned earlier, the average sales rate during the first quarter of 2024 reached 3.22%, 50 basis points higher than we faced in the first quarter of the previous year. Consequently, the number of people choosing annuities increased by 60%, quarter-over-quarter, while those opting for program withdrawals decreased by 6.7%. The annuity market continues to show great dynamics, reaching a preference of [ 5% ] of new pensioners. In the next slide, in Slide #20. As for Confuturo, the operated sales rate reached 3.24% compared to 3.22% in 1Q '23. During the quarter, Confuturo achieved a market share of 13.1% in annuity sales, positioning it fourth in the industry. As I mentioned earlier, the market continues to show great dynamics, favoring the growth of the company. In this scenario, Confuturo has been increasing its market share throughout the quarter, reaching 15% market share in March 2024. Slide #21 shows Confuturo investment portfolio performance. Investment result grew by 39% quarter-over-quarter, reaching CLP 136 billion. This increase was mainly due to better results from local and foreign investment funds, along with higher returns from local and foreign fixed-income investments. Additionally, real estate investments improved its result by CLP 2.5 -- CLP 2.4 billion. Furthermore, during the quarter, impairment of CLP 6.4 billion were released, totaling total result of CLP 136.2 billion for the period. Slide #22 shows Confuturo's profit and ROAE. All in all, higher annuity premium income together with improved investment portfolio returns boosted Confuturo results. The company posted a profit of CLP 27.6 billion during the first quarter 2024 compared to CLP 13.3 billion the same quarter of the previous year. Regarding AFP Habitat, as shown in Slide 24, AFP Habitat revenue increased by 3.7% compared to the same quarter period of the previous year, reaching CLP 62.7 billion. This increase was mainly explained by commission associated with mandatory savings, totaling 8.1% nominal increase in the average taxable income per contribution -- contributors compared to 1Q '23. As of March 2024, this figure exceeded the industry average salary by 22.1%. All these offset the 3.6% quarter-over-quarter decrease in the average in a number of contributors. On the other hand, the better performance of financial markets boosted the performance of pension funds, resulting in reserve earnings of CLP 25.4 billion. Now if we move to the next slide, we will see AFP Habitat profit evolution. The better result was mainly explained by a higher return on the legal reserve explained earlier. Slide #26 shows AFP Habitat Peru And Colfondos performance. Regarding AFP Habitat Peru revenues grew due to higher fees as well as larger AUM. Legal reserves return improved by 25%, mainly due to better performance of Funds 1, 2 and 3. It is important to note that under Peruvian regulation, this figure is not considered in the P&L. And regarding Colfondos, revenues from mandatory pension fees saw an increase of 22%, mainly attributed to lower D&S fee and higher salary base. The subset -- this was offset by lower legal reserve returns, resulting in a profit of COP 32.9 billion, 18% lower than the first quarter of 2023. Then regarding our health sector, if we move to Slide 28. We will see Red Salud activity indicators. Red Salud's revenue reached CPL 172 billion in the first quarter of '24. Representing an 8.4% increase compared to the same quarter of the previous year. This growth was driven by a more complex maintenance, as Rosario explained earlier, mainly in the inpatient activity. The patient segment, the number of Medical Consultation and Exams decreased by 8.8% and 2.7%. And on the other hand, Dental Services grew 1.1%. The patient segment, the number of surgical interventions decreased by 3.5% quarter-on-quarter. However, as we mentioned before, with a higher complexity mix. As such, revenues in Outpatient and Dental Centers, Metropolitan Region Hospitals and Regional Hospitals grew by 5.25 -- I mean, 11.2% and 6.6%, respectively. Then, if we move to the next slide, Slide #29 shows that Salud's EBITDA breakdown. EBITDA increased by CLP 6.3 billion totaling EBITDA of CLP 20.6 billion for the first quarter of 2024. This increase was mainly due to greater efficiency, lower equipment expenses, primarily in Metropolitan Region Hospitals, along with a better mix services in the inpatient sector. This resulted in a CLP 4.8 billion increase in quarterly EBITDA for Metropolitan Region Hospitals, CLP 113 million increase in Regular Hospital and CLP 1.7 million increase in Outpatient and Dental Centers. EBITDA margin benefited from a better operational efficiency and lower impairment account receivable, mainly due to a better payment behavior from the Public Insurer finance. Slide #30 shows Red Salud's revenue breakdown, breakdown by Insurer, public and private. So public insurer Fonasa, is increasing its relevance in the revenue breakdown, reaching up 46% share. Red Salud still diversifying sources of income in order to reduce regulatory risk. If we move to next slide, Slide #31, we will see Red Salud EBITDA and EBITDA margin evolution. Red Salud's EBITDA showed a sustained high level regarding the first quarter of 2024, as we have mentioned before, Red Salud continues to face high demand for hospital and patient services. During this quarter, results were favored by a more complex in patient mix, lower impairments and higher operational efficiency. Next slide shows Isapres industry beneficiaries evolution, mainly due to the regulatory uncertainty, the Isapres industry has reduced its number of beneficiary over the past 4 years. Industry beneficiaries decreased by 9.5% quarter-over-quarter. Meanwhile, the number of Consalud beneficiaries decreased by 14.8%. Moving to the next slide. We see Consalud's revenues and cost breakdown. Revenue decreased by 23.1%, mainly explained by 15 drop, I mean, 15% drop in the average number of beneficiaries explained earlier, along with a 6.7% decrease in an average contribution due to the reduction in GES rates. Cost of sales for the first quarter was CLP 148 billion, 14% lower compared to the same period in 2023. This decrease was mainly explained by the drop in average beneficiaries, resulting in a decrease of [ 17%, 8% and 20% ] in the total cost of inpatient, outpatient and medical leaves coverage. Slide #34 shows Vida Camara's performance. During the first quarter of 2024, Vida Camara's contribution margin for health and life insurance, up CLP 3.1 billion, it was mainly due to the lower loss ratio. Premium income from life and health insurances grew by 42%, in line with the increasing beneficiaries and better collection. This resulted in a quarterly profit for the first quarter of 2024 of CLP 2.3 billion. Then if we move to Slide #36, concerning ILC's debt and liquidity structure. The company achieved a net financial debt-to-equity ratio of 0.3x. ILC maintains now a high level of liquidity, reaching CLP 241.3 billion in liquid assets to meet future commitment and manage its cash through investments in instrument that allows it to reduce [ securing ] and to avoid the foreign currency [ that ] we have in the 144A bond placed [ approved ]. During the past quarters, the company has reduced its gross debt by remaining part of its local or foreign debt along with normally [indiscernible] bond and bank debt payments. We go to the next slide, Slide #37, shows ILC's stock price evolution, which is ILC performance, the IPSA index year-to-date. The stock price has increased more than 30% with a dividend yield of 7.1%, considering the close price of 2023. IPSA Index for its part increased 9.3% year-to-date. So in summary, ILC's 1Q '24 results were explained by better results in Banco Internacional, mainly due to the growth of its commercial and consumer loan portfolio. Regarding Confuturo, annuity market continues showing great dynamics together with a higher investment result as a consequence of better performance of its local and foreign investment funds. Then the Habitat portfolio, financial markets contributed to improvement in legal reserve returns of AFP Habitat, which boosted its results. Regarding the health sector, [indiscernible], Consalud losses was mainly associated with lower revenues due adjustment of GES premiums, particularly offset by lower medical costs. On the other hand, Red Salud increased its EBITDA as a consequence of more complex inpatient mix. Finally, as we just review, ILC has maintain a strong financial position as one of its strategic pillars. This concludes our First Quarter '24 presentation. We will now open the floor up for questions.

We have a question from [indiscernible], he asked about the results of Consalud. And how are we -- explain the reason behind the lower revenues and higher ratio? And what we may expect in the next quarter? Well, to answer this question, I will go back to Slide #33, the cost of sales or Consalud decreased mainly good to the increase of beneficiaries in the quarter. This is -- this was in line with the decrease in health coverage and medical leaves coverage. Also, this quarter is -- I mean this quarter, it's important to mention that the reduction of GES premium in January 2024, which reduced its contribution per beneficiary from [ USD 1.4 ] per beneficiary to [ USD 0.6 ] per beneficiary. That impacted the average contribution in 6.3%.

It's maybe to complement Gustavo's answer, [indiscernible] has the effect of the reduced revenue. So if you see cost in absolute terms and maybe have more details in our press release, you will see a decrease in each of the lines of health costs, medical leaves and hospitals and outpatients. So that is to complement what Gustavo just said, we have seen a decrease in the cost. But you see a higher loss ratio because of the effects of revenues.