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

Okay. Hello, everyone, and thank you for joining ILC Fourth Quarter 2024 Results Conference Call. With me is Rosario Letelier, Chief Development Officer of ILC. Before we begin, I invite everyone to download the presentation prepared for this call from our website. This document provides an overview of the key events and achievements for the period as well as the financial performance and context of each of our businesses. Today's call will be divided into 5 blocks. First, we will review the economic and industry context for the period, followed by ILC's consolidated results for the full year 2024. Next, we will analyze our subsidiaries' financial performance and key highlights for the year. After that, we will provide an update on our financial position. And finally, we will conclude the call with a Q&A section. Now I will turn the call over to Rosario, who will review the period's context, ILC's 2024 milestone and our consolidated results for the year.

Thanks, Gustavo. As you can see on the slide, we present the macroeconomic context for year 2024 compared to 2023. First, looking at the market returns on the left side of the slide, you can see the performance of the IPSA Index, S&P 500 and the Pension Fund C, where all these experienced a positive annual returns in year 2024. IPSA posted a lower return compared to 2023, 3% versus 17.8%. Meanwhile, the S&P 500 and the Pension Fund C, which is a proxy to [indiscernible] legal reserve return showed similar returns for both years. Inflation on 2024 stood at 4.5%, exceeding the 3.9% shown in year 2023. This increase was primarily driven to volatility in energy and food sectors. Regarding monetary policy, you can see on the right side of the slide, the monetary policy rate performance in the 2023 and until January 2025. The Central Bank of Chile has continued reducing their monetary policy throughout the year, bringing it down from 11.25% in early 2023 to 5% by the end of the year. And this also, during year 2024, showed a reduction of 300 basis points. Lastly, in macroeconomic terms, Chilean economy grew by 2.6% compared to 0.5% in 2023, which has been consistent with a lower growth in the past years. Slide 6 outlines the key aspects of the Pension Reform approved in the Congress in January 29, 2025. After being presented in November '22 and several months of discussion. On the right part of the slide, you can see some highlights or main changes this reform has. First, there's a gradual increase on the guaranteed Universal Pension Fund, which is the PGU, to reach CLP 250,000 per month for the most vulnerable part of the population, the 90% most vulnerable part of the population. There was also established a mixed contribution pillar, 10% individual contribution paid by the employee will be complemented by an additional employer contribution. The total will be distributed in an individual pillar where it stands previous 10% of taxable salary paid by the worker, an additional 4.5% taxable salary paid by the employer. And after 20 years of the reform's enactment, this will be increased by 0.15% annually for 10 years, reaching a total of 6%. On the other hand, solidarity pillar will have a 1.5% gross salary paid by the employer, which will be directed to a state-backed loans with protected returns for 20 years. And after this period, it will decrease annually, 0.15% for 10 years, and this is part of which will go to the individual pillar, as I mentioned before. Finally, the D&S will incorporate a framework that considers women's longer life expectancy, establishing a contribution of 2.5% of the gross salary. This will be paid by the employer. And currently, the D&S stands at 1.38%. In terms of industry changes, there will be a new entity, the Pension Protection Fund Administrator, which is an autonomous state-owned entity that will collect contributions plus state-owned -- sorry, the solidarity contributions mentioned before, plus state contributions that will finance the defined benefit payments. There's an opportunity for fund manager -- management entities to enter into the fund management business, allowing them to subcontract support from the IPS, which is the Social Security Institute. Pension funds and these new entities must report support functions and account administration separately. There will be a bidding process every 2 years for 10% of the current portfolio and also the new affiliates that incorporate the system, starting 33 months after the reform's approval. This process will be awarded to the bidder offering the lowest commission, which must be maintained for 5 years, and affiliates will have an option to withdraw 30 days before and after the transfer. So there's right to opposition to be moved into this pension fund that wins the bidding process. And there's also changes in reserve requirements for Pension Administrators, shifting from 1% of AUM to 30% of the annual commission revenues. This will be implemented from the second year and gradually over the period of 6 -- 4 years, sorry, since the law's publication. There will be a replacement of the 5 risk-based funds to 10 generational funds, starting 24 months after the reform's enactment. And finally, there will be a reduction in the minimum pension funding requirement for immediate and deferred annuities, decreasing from 3 Unit Fund, which is the current minimum requirement to 2 Unit Fund. Now we'll go over the significant events that have occurred during this year. First, we signed a shareholders' agreement with Banco Internacional minority shareholders in order to acquire up to 100% by May 2027. In December 2024, we completed the purchase of additional shares, increasing our ownership to 78.1%. And afterwards, we carried on a Public Tender Offer directed at minority shareholders, raising our total stake in Banco Internacional to 78.2%. Next, on July 2, Banco Internacional completed the first bond issuance in the Swiss public market. This 3-year secured bond maturing on July 2027 carries a [indiscernible] coupon in Swiss francs at a rate of 2.8%, equivalent approximately to 4.4% in [indiscernible]. And the proceeds of this placement will be used to fund the bank's lending operations and also is a source of diversifying the funding source of the bank. Both Confuturo and Banco Internacional approved capital increases plans this year to support growth in the bank and insurance business. In April, Confuturo shareholders approved a plan to increase capital by CLP 74.5 billion and subscribed in June CLP 18.9 million. Similarly, Banco Internacional shareholders approved a capital increase plan of up to CLP 27 million with CLP 14.3 billion subscribed by the end of the year. Of that part, ILC subscribed CLP 11 billion, which is the conversion of the stake we have in the bank. In 2024, we would like to highlight that the bank grew 16% in loans year-over-year, outperforming the industry, which grew 3.9% and Confuturo achieved a 15% market share in 2024, growing 6% in real terms. In pensions, we highlight 2 developments. One is the alliance between Prudential Pension Fund -- General Fund Manager, sorry, and AFP Habitat, strengthening our position in pension fund management and the creation of the new insurance company in Colombia. Finally, regarding the health sector, we have successfully overcome the health crisis while diversifying products and revenue streams. And initially, we achieved a 59% growth in the supplemental insurance beneficiary over the past 2 years. This year, we also would like to highlight that ILC has achieved a major milestone in sustainability, ranking fifth place globally in the financial nonbank industry in the Dow Jones Sustainability Index. Our score improved to 73 points, placing us in 99th percentile, which is an important milestone towards sustainability this year and ranking reinforced our role as a leader in the sustainability within the financial nonbank sector. As you can see in the slide, we reaffirm the 5 pillars of our strategy, which we have positively emphasized this periods from the foundation of our approach drives our organic and inorganic growth opportunities. Our focus remains on achieving profitability in our operations, maintaining flexibility in the business we're engaging, ensuring a strong financial position. And as we mentioned before, also we work with ESG values and metrics all across our activities. These frameworks directly supports our purpose, which is to be leaders in creating social and economic value that improves people's quality of life. As you can see here, Slide 11, we show that the company has got consistent returns over time, aligned with our strategy and the goals that we set in our study plan. ILC has maintained double-digit profitability, showcasing steady growth and resilience. As I had mentioned previously, the company is now entering in a new phase where growth is expected to be driven primarily in the financial business. In 2024, ILC recorded profit of CLP 180.6 billion before accounting adjustment related to the application of the Short Law of Isapres, maintaining our performance in line with historic levels from 2023. After this effect, ILC report our net profit of CLP 148.2 billion for the year, which is shown in the last column of the graph. Regarding net income composition for 2024, the company was primarily driven by the contribution of Confuturo, AFP Habitat, Banco Internacional, Vivir Seguros and RedSalud. Confuturo achieved higher annuity premiums and improved investment performance, driven by better investment fund results along with the release of impairments in fixed income assets. AFP Habitat experienced revenue growth along with the increase in average taxable income of its contributors and additionally improved due to the financial market performance, this resulted in higher returns on legal reserves. In the healthcare sector, Redsalud increased its results to a better mix of inpatient services and higher income from dental services. This was offset by Consalud CLP 49.5 billion loss, which is mainly explained by the effect of the accounting under IFRS of the liability related to the Short Law of Isapres and also due to lower revenues because of the GES reduction and increase in its beneficiary space. This was partially offset by reduced inpatient costs. Lastly, Vivir Seguros showed high results, mainly explained by the performance of contract SISCO 7, which explains mainly -- the main result of this year for the results. Overall, as I mentioned before, ILC achieved total profit of CLP 148.2 billion for 2024, where the main contribution came from its financial subsidiaries and Red Salud, consistent with the strategy we have for the upcoming years. Now we'll turn the call to Gustavo to review the main operational events and key financial peers of ILC's subsidiaries.

Thank you, Rosario. Moving to Slide #15. As of December 2024, Banco Internacional loans grew by 16% compared to the previous year, marking the second highest growth in the industry that expanded by just 3.9%. The commercial loan portfolio grew by 12.7%, with increases in loans to company operating in the trade and investment sectors. Meanwhile, the consumer loan portfolio increased by 62%, mainly due to the growth in Autofin's portfolio and digital consumer loans, reflecting the expansion of the bank's digital services. As a result, the bank achieved a market share of 1.6%, 2.8% and 1.2% in total, commercial and consumer loans. The bank recorded an annual growth of 17.4% and 67.7% in commercial and personal banking clients, reaching 8,000 and 86,000 clients, respectively. Looking ahead, Banco Internacional is focused on 3 key areas: expanding its presence in large corporation while developing its retail banking segment and diversifying its products and funding sources. Now if we move to the next slide. Banco Internacional has made significant progress in developing its funding structure, reflecting a strategic shift towards greater diversification and more stable funding base. In 2024, the composition of funding sources, so a higher reliance on bonds and retail time deposits, while the bank funding decreased from 19% to 14%. We strengthened the access to local and international markets, ensuring liquidity and diversification. In 2023, we secured $255 million A/B loan through the IDB, reinforcing the long-term funding. In July 2024, we successfully issued our first bond in the Swiss market for CHF 100 million for expanding international funding sources. Liquid reserves remain invested in Chilean government securities and certain bank instruments, considering as well financial stability. Looking ahead, we see 3 main funding opportunities. We will continue scaling the retail financing base by enhancing customer acquisition and retention. We will continue expanding the local and international corporate portfolio to strength funding sources. Developing a digital financial products with streamlined onboard process, increasing accessibility and efficiency. Now if we move to next slide, Slide #17 presents Banco International operating performance for last year. Gross operating result grew by 11% reaching CLP 190 million in 2024, driven by higher loan spreads in commercial and consumer loans. Operating expenses increased by 36%, totaling CLP 105 billion, mainly due to the full year consolidation of Autofin in 2024 compared to just 4 months in 2023. That implies an efficiency ratio rose close to 1,000 basis points, reaching 55.3%, impacted by the base effect from the recognition of badwill related to the Autofin acquisition last year. Risk provision expense of CLP 3 billion for consumer loans, which last year was recorded as SG&A expenses in 2024. But if we adjust for these effects, efficiency would stand at 53.7% in 2024 compared to 47.9% in 2023, which reduced the gap between both years. Overall, despite the higher loan spreads and strong loan portfolio, these gains were partially offset by the end of FCIC support and the increased consolidation expenses, as I mentioned. On the next slide, on Slide #18, we can observe risk expenses have decreased during the period, mainly explained by lower provision for commercial loans. Total risk expenses decreased to CLP 3.8 billion in 2024, down from CLP 27.6 billion in 2023. During the period, we experienced the release of additional provision of CLP 3.4 billion and the full year consolidation of Autofin in 2024 compared to only 4 months in 2023. Provision expenses over gross operating income reached 12.5% in last year compared to 16% in 2023. As of December 2024, the NPL remained steady at 2.9%, in line with the same period of the previous year. The risk index reached 1.9% compared to 2.5% from the industry in terms of collateral coverage. Banco Internacional continues to lead the industry, achieving 68% as of December 2024. Other thing to highlight, additionally, the Banco Internacional fully complies with Basel III standards, maintaining a solvency ratio of 14.8% as of December 2024, reflecting a strong capital position in line with regulatory requirements. If we continue the presentation, we will move to the next slide. Slide #19 shows the evolution of Banco Internacional's profit and ROE over time. While the bank has shown growth in profit historically, for 2024, there was a decrease in profit compared to the last year. The higher loan spread, lower risk expenses and increased contribution from Autofin were offset by lower results due to the end of FCIC and the high comparison base, given the regulation in 2023 of an intangible assets related to Autofin acquisition for CLP 5.2 billion, which is quite similar to the difference between both years. Despite the short-term decrease, Banco Internacional continues to maintain a strong long-term growth with profit reaching -- I mean CLP 50.5 billion and ROAE of 13.9% for 2024. It's important to highlight here that Autofin accounted for 6.7% of Banco Internacional's total profit and 7.7% of its total loans. Now if we move to -- shift into the annuity market, seen on Slide #21, the annuity market grew by 4% in real terms compared to last year with the preference for annuities over program withdrawals averaging 56% during the whole year versus 54% in 2023. In this scenario, Confuturo's premiums grew by 6.2% in real terms, reaching 14.8% market share compared to 14.5% in the previous year. Regarding annuities industry changes, the Pension Reform 2025 reduced, as Rosario mentioned before, reduced the eligibility requirements for annuities from 3 UF to 2 UF, improving access for more individuals. As we have seen in the past, these adjustments helps promote market growth and expand annuity coverage in the country. If we move to results. Slide #22 shows Confuturo's investment portfolio performance for the year. The investment result grew by 18% year-over-year, reaching CLP 479 billion. This increase was primarily driven by results from alternative investment funds along with impairment releases. Looking ahead, we remain focused on alternative investments, particularly in private equity and real estate as key drivers for the further diversified our portfolio and enhance long-term returns. Slide #23. So in Slide #23, we can see that Confuturo posted a profit of CLP 86.3 billion in 2024 compared to CLP 70 billion in 2023. This increase was mainly due to a higher annuity premium income along with improved risk returns from the alternative investment portfolio and fixed income impairment releases. Overall, Confuturo's ROAE for 2024 was 14.6%, higher than the 12.4% recorded in the same period of 2023. Now regarding our pensions, especially in AFP Habitat. As shown in Slide #25, revenues increased by 5% in 2024 compared to 2023, reaching CLP 251 billion for 2022 -- I mean 2024. This growth was mainly driven by fees related to mandatory savings supported by 7.9 nominal increase in the average taxable income of Habitat's contributors compared to the previous year. The average taxable income for Habitat contributors as of the end of 2024 was 21.6% higher than the industry average. This was partially offset by the 3.4 year-over-year decrease in the number of contributors. Moreover, the better legal reserve result of AFP Habitat was mainly due to the higher performance of funds with higher exposure to equity and foreign investments. These both things, as we can see in the Slide #26, AFP Habitat -- it helps the profit of AFP Habitat. AFP Habitat has maintained a stable profit over time with profit reaching CLP 140 billion for 2024, 6.5% higher compared to the previous year. This increase was primarily driven by higher fees aligned with the increase in taxable income and return on legal reserves due to the better performance of financial markets. Then moving to AAISA, which is the holding company of AFP Habitat Peru, Colfondos, we highlight the revenue growth in these both subsidiaries. AFP Habitat Peru reported a 22,1% increase in revenues, reaching CLP 37.9 billion, primarily driven by higher fees from larger average taxable income, partially offset by a lower AUM following the seventh pension fund withdrawal, which occurred in May of the last year. Bigger reserve return in AFP Habitat Peru decreased by 40% year-over-year, reflecting a lower nominal pension fund return, mainly due to financial market performance. For it's part, Colfondos in Colombia saw a 44% revenue increase, reaching CLP 87.9 billion, driven by lower D&S fee, a higher average salary base and increased revenues from unemployment insurance. Legal reserve returns in Colfondos grew by 22% year-over-year, reaching CLP 16.2 billion. Slide #28 highlights the profit evolution of AAISA, driven by improved performance in AFP Habitat Peru and Colfondos. AAISA profit grew by 20% in 2024, reaching CLP 37.4 billion. The result was primarily due to higher fee revenues supported by larger taxable salary base and increased pension contributors with higher returns on legal reserves contributing more profitability, partially offset by higher operating expenses. All these factors reflect continued business expansion and a resilient pension market in the region. Now in -- if we move to health care in Slide #30. This slide highlights the increase in RedSalud's EBITDA margin, which grew from 10.8% in 2023 to 11.8% in 2024, meaning an increase of 100 basis points. This improvement was primarily driven by a better mix in the inpatient sector, I mean, reflecting a shift towards more complex procedures. Higher activity in the dental services contributed to -- as well to the revenue growth improving efficiency in managing medical fees and personnel expenses, leading to cost optimization. But despite this increase, despite increases in certain costs such as clinic materials, overall efficiency gain supported margin expansion. This trend reinforces our focus on enhancing operational performance and optimizing the service mix to drive sustainable -- I mean, to drive growth in the health care sector. The other thing to highlight in RedSalud is RedSalud continues to diversify its revenue sources. The revenue breakdown by insurer shows a growing share from the public insurer, Fonasa, which has gained increasing relevance in 2024. By -- I mean by 2024, Fonasa represented a 48% share of RedSalud's revenue, reflecting RedSalud's strategy to diversify its income sources and reduce its dividends on the private insurer, ISAPRE. All in all, Slide #32 represents RedSalud's EBITDA evolution for 2024. EBITDA increased by CLP 15.1 billion, reaching a total of CLP 87 million, up from CLP 71.9 billion in 2023. This growth was primarily driven by a better mix of services in inpatient sector and increased dental services activity alongside improved efficiency in personnel expenses and medical fees. This resulted in a CLP 7.7 billion increase in EBITDA for hospital in the metropolitan region, a CLP 5 billion increase for outpatient and dental centers and CLP 4.2 billion increase for regional clinics. In addition, the EBITDA margin improved from, as I mentioned, from 10.8% in 2023 to 11.8% in 2024, which was mainly driven by better operational efficiency, mainly in the inpatient sector. Now if we move to Slide #33, this slide tries to highlight the recovery of average monthly contribution in RedSalud -- I mean in Consalud, our mandatory health insurance, which was supported by the implementation of extraordinary premium in late 2024. Contribution saw a decline in early 2024, mainly -- I mean, mainly due to the impact of adjustments to the ESP pricing. This situation stabilized following the implementation of the single factor payable and the 7% minimum contribution in September 2024 as well as the extraordinary premium during November 2024. By 4Q '24, we see the average monthly contribution recovered to CLP 280.7 billion, which, as I mentioned, was supported by those effects. Despite fluctuation, the loss ratio ended for the last quarter were 86.3%, reflecting this financial stability. For Slide 34, this slide illustrate the evolution of Consalud's beneficiaries and market share. Here, I want to highlight that the deceleration and decline towards the end of 2024. What we want to highlight is the most significant drop in beneficiaries occurred in 2023 and early 2024, with a 20% decrease from December 2022 to December 2023. The decline showed in the second half of 2024 was only a 1.2% drop from September to December 2024. Despite the reduction in total beneficiaries, Consalud maintained its market share stable at 19% by the end of the year. The industry wide loss of beneficiaries was mainly due to shift towards the public insurer, Fonasa. Lastly, Slide #35 shows Vida Cámara performance for 2024 in terms of growth. Premium income rose by 27% due to an increase in beneficiaries. The number of Vida Cámara beneficiaries reached 621,000 as of December 2024, reflecting a 20% year-over-year increase. Vida Cámara contribution margin for health and life insurance increased by CLP 8 billion compared to 2023. All in all, Vida Cámara reached a profit for 2024 of CLP 5.7 billion compared to CLP 2.6 billion recorded last year. That was our subsidiaries' performance for 2024 compared to 2023. Now if we move to Slide #37 regarding ILC's debt and liquidity structure. The company reported a net financial debt-to-equity ratio of 0.35x, I mean, compared to 0.32x in 2023, mainly due to the payment related to the acquisition of Banco Internacional. ILC maintains CLP 136 billion in liquid assets to meet future obligation and manage its cash reinvestments aimed to reducing a financial [ carry ]. We have also hedged the foreign bond from foreign currency exposure. Slide #38 shows ILC's stock price. It is something that we watch very closely. In 2024, ILC's stock price rose 27.4%, including dividends, outperforming the IPSA 8.3% return. This positive trend continues in 2027 -- I mean, this year with ILC reaching a 27% return year-to-date. An important milestone for us, the period last week, when S&P announced that ILC will rejoin IPSA index. Starting March 24, 2025, ILC will once again be part of the IPSA Index, which is the Chile's leading stock market index, which includes 29 most relevant stock in the country. Now in order to wrap up. In summary, ILC continues to advance its strategic objectives strengthening its presence across the key sectors. We have reinforced our financial business expansion, mainly in Banco Internacional and Confuturo. Regulatory certainty has improved in AFP Habitat and Consalud, supporting stability and growth. In the health care, we have focused on overcoming the challenges. We diversified our revenue streams and enhance efficiency in RedSalud and Vida Cámara. All in all, our commitment to creating social and economic value remains at the core of our strategy, ensuring sustainable progress for our stakeholders. With this foundation, we are well positioned for continued growth and value creation in 2025 and beyond. With this, we conclude today's presentation. Now we will open the floor for questions.

We have a question regarding the pension reform and how it will impact our AFP business as well as the annuity businesses. I don't know if you want to address or?

Yes, of course. And please complement anything that I may leave aside. As I mentioned before, we went over the main impacts the reform will have in the industry and also in the affiliates. In our case, in Habitat, we believe that we are in a strong competitive position regarding all the track record the company has. We will also believe that this -- the implementation across the years, we will give time for -- to adapt to these changes. And also in the case of Confuturo, it will be an opportunity as we have seen in the past 2 to 3 years to see a bigger market in the annuities business because of the decrease on the minimum requirements. And also since the individual capitalization and all the savings will increase because of the reforms. This will lead to a higher AUM that the pension fund or the annuities company will have to administrate the timeline of the pension. So all in all, we see opportunities in this business.

Thank you, Rosario. There's another question regarding our perspective of Isapres, how could negatively impact our performance?

Okay. So as we went over the past calls, the Isapres reform has -- aims to give a financial stability to the sector. And that's the key point of the whole reform, is to allow this stability for the coming years with a combination of the reimbursement that took place since the end of 2024, combined with a new premium and special premium that, again, aims to give financial stability to the sector. So all in all, what we see for the Isapres for the upcoming years is to be part of this stability that the pension -- sorry, that the Isapres reform aims. And this is -- sorry, what we have seen in the past months since the enactment of the reform.

Thank you, Rosario, for your answer. There's -- so there is a question from Director Beth from MetLife. The question is about the reduction of [indiscernible]. What is the amount you're expecting to receive that ILC after taxes and proportional ownership in Habitat and in which year, sorry. Okay. As Rosario mentioned in the presentation, the reduction of [indiscernible] will occur -- begin in 2027, I mean, 24 months after the publication of the law, and it will be gradual in a 4-year period. Our estimation for that is we took the figures that we have right now, but it will occur in 2 years from now. That meant a release of close to 85% of the current amount, totaling around USD 350 million net of taxes at the Habitat level. And if we think 40% of that at ILC level is USD 140 million.

To complement Gustavo's answer, the proceeds of -- or the uses of that release will be analyzed in due time. As he mentioned, this will be in 2 years more or less from now. So at that point, we will analyze and either we will analyze what's better use of that proceeds at that point.

Thank you, Rosario. There is a question about if we -- how we [ outlook ] Consalud. I think it was mostly addressed by Rosario. If we plan to put capital in the company. Also regarding Banco Internacional, two questions in one. Regarding Banco Internacional, do we expect to see more debt issuance like we have done in 2024.

As I mentioned before, Consalud, what we expect for 2025 will be, as the reform aims, to have stability, financial stability. And along with this, we do not foresee any capital requirements in Isapres as it has occurred in the past years, okay. I would like to reinforce that all the reimbursement and liabilities that are reflected in the IFRS are not reflected in the [indiscernible] accounting standards and also have no requirements for royalties. So as I said before, we do not foresee any plans to put capital in Consalud. Regarding Banco Internacional, as they have done in the past years, they will be analyzing different funding alternatives and sources. As we mentioned in the key milestones of 2024 opening the Swiss market alternative is very useful for the bank, and probably we'll be analyzing different alternatives for 2025 in local markets and in international markets.

Thank you, Rosario. I think that's everything for today. Now if you have further questions, feel free to contact our IR team. Thank you all for attending this conference call, and see you in the next quarter.

Thank you very much. Goodbye.