Earnings Call: Q3 2024

Nov 15, 2024

Summary

Through September, operating revenue reached COP 26T (+29%) and net profit COP 5.7T; excluding Nutresa transaction effects, revenue was COP 22T (+17% local currency) and net profit COP 2T. A plan to separate from Grupo Argos is underway.

This document may contain statements of future revelations related to Grupo Sura and its subsidiaries made under assumptions and estimates of the company's management, and may present variations. First, we'll have a pre-recorded section in which we'll talk about the company's results and then a live Q&A session. Today from Grupo Sura, we are with Ricardo Jaramillo, the CEO, Juan Esteban Toro, CFO, Juan Luis Múnera, VP of Corporate Legal Affairs, and Carlos González, the Manager of Investments in Capital Markets. From Sura Asset Management, we have Carlos Vallejo, VP of Corporate Finance, and Suramericana, Juan Fernando Uribe, the VP of Finance and Investments. Remember to send your questions any time during the call. Let's give the floor to Ricardo Jaramillo. Good morning, everyone, and thank you, Daniel. Before we present the results of the third quarter of Grupo Sura, I'd like to talk about the announcement made on October 25th, which is a milestone in the process of the development of the structure of ownership of Grupo Sura. Aligned with our long-term strategic vision and our commitment to create value for our shareholders, we reported to the market the signature of a memorandum of understanding with Grupo Argos, which has a clear purpose: to structure a transaction that allows us to reach two independent companies, therefore eliminating the cross-participations between Grupo Argos and Grupo Sura, directly or indirectly. The structure proposed to the board of directors should guarantee, among others, a fair treatment and a value generator for all shareholders, also ensuring an efficient and reliable process in terms of financial and legal matters. This agreement really has to do with the long-term vision and reaffirms our focus on financial services, focusing our efforts between investments that are of Suramericana, Sura Asset Management, and Bancolombia, leaders in Latin America. With this context in mind and projecting Grupo Sura to the future, we'd like to highlight the companies with high reputation and well-known, backed by strategic partners that are present in 10 countries and a base of more than 73 million customers, which shows our competitive position and scale in a market full of opportunities. Suramericana is the fourth insurer Latin American in the region with COP 20.4 trillion in premiums issued. Sura Asset Management is the company in Latin America leader in provisional fund management, asset management, and advise investments of COP 729 trillion, and Bancolombia is a leader with more than COP 353 trillion in assets. The development of these companies is a reflection of our knowledge of the financial America for several industries in expansion, driven by two key factors. First, the regional growth backed by a demographic bonus and a middle class in expansion that has doubled. America. Grupo Sura is well-positioned to capitalize the growth and ensure sustainable profitability on a long-term basis. In the past decade, we have had growth annually in our investments. Suramericana has increased its premiums 16%, Sura Asset Management, its revenue from commissions 12%, and Bancolombia, its assets in 9%. This growth, along with the strategy to rentalize, has allowed us to expand our profitability levels of the companies between 20 and 300 basis points in our investments and in Grupo Sura, showing a sound financial management as seen in the graph on the bottom left. The dividends received have experienced a significant growth with an annual compound rate of 16% since 2011, reaching COP 2 trillion for 2024. This is how we reiterate our commitment to continue creating value and yields that are sustainable for our shareholders and other stakeholders in coming years. I invite you now to look at the accumulated results as of September of Grupo Sura. Let's look at slide 8, please. In this period, we continue with the sound dynamics in our results. Operating revenue reached COP 26 trillion, representing a growth of 29%, but when we exclude the effects related to the transaction to Nutresa, revenue is at COP 22 trillion, up 17% in local currency. And taxes related to this transaction. This result is positive and is mainly due to the performance of the premiums of Suramericana, the revenue from commissions, and the return of the reserve of Sura Asset Management, and the good equity method of Bancolombia, as well as Grupo Argos. The operating profit as of September reached COP 8 trillion, which, by excluding the effects of the transaction mentioned, is at COP 4.1 trillion, up 26% by eliminating the effect of exchange rates. This increase shows the positive dynamics and developments in the expansion of margins and profitability of our subsidiaries and investments in this period. Lastly, as you can see, the net profit is at COP 5.7 trillion or COP 2 trillion when you exclude the effects of the transaction of Nutresa. These results and the recent businesses position us to end the year profit per stock in the past five years. Our controlling profit reached a figure of COP 2.5 trillion for the last 12 months, a figure that excludes EPS in this period and by 2023, and that does not incorporate profits from the implementation of the agreement. This figure is a new maximum level and evidences the developments of the expansion of profitability of our subsidiaries, aligned with our strategic goal to increase the profitability, optimizing the print of the business. Our ROE adjusted shows an uptrend reaching 12.2% that I mentioned in the last 12 months. Likewise, I would like to make a special emphasis on the annual profit per stock that we can see on the right-hand side, reaching COP 6,295, up 61% compared to 2023 and an annual growth of 19% since 2019. This growth is the result of the good operational performance of our subsidiaries, investments, and of a higher reduction in the number of stocks after completing the agreement and the liquidation of Sociedad Portafolio. These results reaffirm our strategy to continue reaching a profitable growth and our commitment to create value for all of our shareholders. Now let's give the floor to Juan Esteban Toro, who will talk about the financial results of our subsidiaries. Thank you. Thank you, Ricardo. Hello to all of our shareholders and those that join us in this call. Before we begin to analyze the results of our subsidiaries, it's important to highlight that we will continue emphasizing that the variations that exclude the exchange rate for the conversion of the figures, and therefore to reflect the operational reality and the performance of the business better. Premiums issued in Suramericana come from countries outside of Colombia, and the exchange rate in Colombian pesos appreciated 10% to 21%. On slide 12, we will analyze several highlights of the request of a gradual removal plan presented to the Colombian authorities this past May 28. On this removal plan, Suramericana has responded to different requests of information and clarification made by the authorities, who have been evaluating this request but have not ruled yet on it. Just in the previous call, we presented the results of the figures pro forma. These exclude the effects of the consolidation of the IPS for 2023 and 2024 to allow a proper comparison. In the third quarter of this year, Suramericana identified an operational error in the recognition of the tax. This grew 12% in accounting variation and 26% in constant exchange rate. The technical margin expanded 132 basis points for the first nine months of this year and closed at 13%. As to premiums issued pro forma, these reached close to COP 15 trillion in the accumulated and keep a pace close to COP 5 trillion a quarter. Loss ratio is at 59.4%, increasing 81 compared to September 2023. This reduction is mainly to the effect produced from high returns of investments shown the year and 15.5% respectively. This shows that the company still is focused on consolidating, advancing the profitability of its business. Now let's look at the growth of the premiums in the different segments. The premiums issued show a growth of 6% at constant rate. The segment of life has the mandatory automobile solution in Colombia called SOAT, and the seasonality of Seguros SURA Chile, which in the third quarter of the year before, issued multi-annual policies that were not renovated this year. Remember that this past quarter, the health segment only included the IPS and Ayudas Diagnósticas rate. Let's look at slide is at 65.4%. This result has been seen or driven by the performance of the voluntary health solutions and labor risk, which for the year before included updates and reserves on long-term basis, such as the extra longevity reserve. On the other hand, in property and casualty, the loss ratio increased 197 basis points because of a higher loss ratio in the SOAT and events of major severity in the portfolio of companies in Colombia. In addition, the combined reason of casualty reduced to 76 basis points converging towards our goals, which aim at taking it below 100%. This shows the commitment to improve the technical profitability and highlights the efforts that Suramericana has been making for more efficiencies and to expand margins. To close the results of Suramericana, let's review the contribution of each segment to net profit. As you can see here, the business of insurance, including casualty, contribute COP 748 billion for the first nine months of the year. We have to highlight that the segment of life decreased 27% because of the base effect that showed investments the year before. The net profit is at COP 522 billion, up 41% compared to the year before. Now let's analyze the results of Sura Asset Management on slide 17. Revenue from commissions at the end of September reached 2. So it's below those of the revenue from commissions, which has allowed us to record a growth in 2 digits for the accumulated of the year and in the quarter, reaching COP 1.6 trillion and COP 735 billion respectively, and setting the operating margin at 34.2%, which is better than the 32.8% accumulated of the year before. Here, it's worth mentioning that the increase in the operating margin compared to 2021 is above 300 basis points, in which you can highlight the control of expenses in a time of high inflations. All of these figures reflect the growth of the revenue from commissions, the efficient management of expenses, and the good result of the reserve. The net profit grew 37%, reaching COP 881 billion as of September, showing an operating soundness in all of the business. The return over the equity of the company reached figures of double digit at 11.3%, while the profitability of the asset management, brokerage, and investment management, all recording growths of double digit. In addition, the salary base, excluding El Salvador because of comparability effects, grew 7% in local currency, favored by higher inflation, which has driven higher salaries. However, it's important to highlight that this trend can be modeled because inflation has begun to decrease, which anticipates a gradual normalization of salary conditions. All this has led to have revenue for commissions in the segment of savings and retirement at the end of September at COP 2.6 trillion, up 10%, excluding the effects of the exchange rate. These investments both figure 15% increase compared to the same period the year before. This growth shows the results of Bancolombia, which contributes COP 1.1 trillion. Bancolombia reached an equity return of 15.7% annualized and shows strength in its business model, which has allowed it to maintain very good results during challenging times in this credit cycle. Right now, we would like to highlight the announcement made by Bancolombia to create the Grupo Cibest matriz, with which we see potential to benefit all of those that are shareholders of the bank, while the entity is strengthened. Especially, we'd like to highlight that the reorganization proposed provides flexibility for the development of the bank's corporate strategy and enables the repurchasing programs. As to Grupo Argos, we can highlight several results that are very good as well, which contribute COP 620 billion as results that are driven by the gains in the transactions made. It's worth highlighting that the year before for the quarter, the method is set at COP 399 billion, which is in line with the third quarter of 2023, where Bancolombia contributed COP 368 billion. [Foreign language] In the bar of others, you can see the recognition of the added value as well. This is proportional as well presented by Suramericana before. Which for the consolidated financial statement of Grupo Sura does not apply a re-expression and therefore is reflected in results of the third quarter of 2024 and in the accumulated. This adjustment of previous periods known in the results, which total COP 191 billion and impacted the net profit of COP 155 billion during the quarter. After we reduced the administrative managements and others, Grupo Sura records a net profit adjusted of COP 2 trillion, including the effects of the transaction of Nutresa and of EPS, reaching COP 5.7 trillion. To conclude, we have consolidated results that reflect the power of the business print in our portfolio in Latin America. With this, we end the first part of the call, and we can move on to the live Q&A session. [Foreign language] Good morning, everyone, again. [Foreign language] We will begin the Q&A session. I would like to ask Carlos González to begin to read the different questions that we have received throughout this presentation. Thank you, Ricardo. First question sent by Santiago Marzo. Good morning. Thank you for your presentation. Could you please expand on the structure of what is happening with Grupo Argos? Is it just reducing a percentage or what is really happening there? Santiago, good morning. Thank you for your question. As we have said in this presentation and in the memorandum of understanding, the transaction with Argos has a purpose, and it is to have two independent companies, each focused on its industry. Argos focused on infrastructure, Grupo Sura on financial services, in which we will not have any participation directly or indirectly in each company. This process will take time. Again, as we have said in the memorandum of understanding and in this presentation, we would like to highlight first the purpose and three fundamental premises. One is this operation should be entirely fair and transfer value for the shareholders, potential and ordinary of the company. Second, to have a structure that is feasible in terms of financial efficiency, legal, etc., and in times of execution. Third, to aim towards the assignment of capital focused on the financial services for Grupo Sura. So right now, that is the information we have of the transaction. We are aware of the how, but during the process, while we have the approvals and discussions are made with different corporate governance members, we will keep you all aware of each step taken. Remember, this is a milestone in the history of these companies, and we have to do it with care. We have been doing it with the support of financial, legal, strategic advisors because we know the relevance of the transaction we are facing right now. [Foreign language] Second question from Camilo Restrepo has to do with Sura Asset Management. How do you expect the profitability of equity to evolve in the future? Carlos Vallejo will answer. He is our new financial VP of Sura Asset Management. Let us allow him to answer. Thank you, Ricardo. Camilo, greetings, and thank you for your question. We have seen a significant growth in the profitability of Sura Asset Management in recent years as a result of an operational leverage and higher revenue that we have sustained double digit in recent years, while expenses are growing below. They are much more tied to inflation. So we have a ROE of 11%, close to 11%, as of September 2024, and ROTE of 100%. So we expect that the strategies or efforts will be sustainable, and that is why we are optimistic of keeping a profitability or ROE close to double digit for the next periods. Clarifying, of course, that by the end of the year, we see it close to 10%, while the accounting systems of the reserve normalize, which have been good up to September 2024. It's also important to mention that we're taking a good look at the process of the pension reforms that we're having in Colombia and in Peru, and that these reforms could provide some variation to the profitability expectation that we have on a medium-term basis. It's an ROE of double digit. I would like to complement Carlos' answer to emphasize that the result that Sura Asset Management has been showing this year is quite positive. Since we acquired the company, we have never seen a double-digit profitability level, and that's thanks to the effort of thousands of people in the provision, like adding value to the clients and voluntary in the growth of AUMs, which we see in the region. So it's a major milestone for the optimization of the company. Next question from Andrés Uribe: What's the direct share, direct and indirect, of Grupo Sura in Grupo Argos to date? Hello, Andrés. Thank you for your question. Good morning to everyone that's joining us today. We directly and indirectly have 286,000 stocks of Grupo Argos. That's 34% of the total stocks of Grupo Argos. Next question from Mario Garcés. According to these very positive results in which practically in the third quarter, you meet the projections of the entire year, what could be the dividend expected for 2025? Mario, this discussion is usually made at the beginning of the year with the board of directors that recommends it to the shareholders. But still in this year, we haven't specifically discussed the dividend of 2025. But according to the results and how the year ends, the commitment of top management and shareholders and the board of directors will be shared with our shareholders. And surely, this is based on our good results. Mario sends us another question. Other investors and other investors, too, related to the difference between the prices of ordinary and preferential stocks. Do you have any plans to close this gap, like conversion of stocks or something? Thank you, Mario, for your question. It's a question that is common in these calls. We are totally aware of the relevance of the discount between both species. And what we can say now is the structural change that we have, or we will have in the ownership of Grupo Sura, clearly keeps in mind preferential stocks. These have the same underwriting, and we believe that the structure that we're working on will be simpler to understand for the different investors that will allow us to attract more investors and to access, eventually, different markets, as you've mentioned. This, along with different initiatives like the liquidity provider that we began several months ago with both types of stocks. We believe that these are signs that we have to work on. We have to look at the depth of the Colombian market in terms of liquidity that does not allow to change so much the price of stocks. But within our goals, we will show the gap between both species. Economically, we do not know why it really exists, but if you have a preferential stock or an ordinary stock, you have the same underwriting stock. Within the structural changes that we are making, the ownership of the company, as we said in the premises, it will be a fair treatment that will create value for our shareholders, including the preferential shareholders that we have. Next, Juliano Sinque. Good morning. Could you tell me if there is a relation to create Grupo Cibest and the plan to separate Grupo Argos and Grupo Sura? Hello. There is no relation in the process or the initiative that Bancolombia is making with the process that we are making between Grupo Sura and Grupo Argos. However, we will take your question to make a comment on this initiative of the bank. From the viewpoint of our own position as a shareholder of the bank, we think it is an important operation that will provide more flexibility of capital for the bank, for the financial and non-financial businesses of the bank. It will give a more efficient capital management to the bank, and it can allow it to reacquire stocks which the bank has mentioned. We believe that goes aligned with showing a better value or reflecting a better value of the stock that the bank can or is entitled to according to its profitability levels and its results, to expect the stock exchange to show the true price of the stock. The initiative is very important for the bank, and since we are major shareholders of the bank, it should have a major impact on Grupo Sura because the stocks of the bank will increase. Mauricio Meza asks about the same topic of the bank's reorganization for the reacquisition of stocks. Do we have a similar strategy to have an impact on the stock of Grupo Sura? Yes. Thank you, Mauricio, for your question. First, years ago, we have a reacquisition stocks program that advanced some. Then, during the pandemic, given the priorities of taking care of cash flow, we were prudent in its execution. Then we had the transaction of Nutresa. Remember, Grupo Sura, as a result of that transaction, reacquired 32% of its capital. The reacquisition, which ends up being the most important one that we have made, is to reacquire its own stocks. If you look at the indicators of the stock, intrinsic value, dividend, et cetera, when you look at it by stock, it has grown significantly. Of course, that is value for the shareholders. Okay, additional reacquisition of stocks programs. Right now, the priority is to simplify the structure, again, because of the big reacquisition we made. However, there are other initiatives that we are working on for liquidity. We have got the liquidity formers that we began, what, a month ago? Which has, again, liquidity formation for both species. As we have said in the past, the reacquisition of stocks in the world and in Colombia now is something that we have in our toolbox. As the cash flows, the stocks, the structure of capital reaches a good point, this tool is something that we will keep in mind always. Juan Uribe asks, good morning. Could you please give us an update on the transaction with Grupo Bolívar and its participation in Sura Asset Management? Sure, Juan. Grupo Bolívar and we are ready to close. The regulator in Mexico is still underway. Remember, all of the dividends that Sura Asset Management is paying before closure is with the price adjusted for economic purposes then. We have already incorporated in the contract, and it may take longer, and this will be good for Grupo Sura. So we are keeping a good eye with this program in Mexico to close it. Next, Diego Patiño asks, the revenue from Grupo Argos as dividends, how will they be compensated? Thank you, Diego. Good morning for you. Revenue received by Grupo Sura from Grupo Argos. No, the revenue Grupo Sura receives are the dividends of the different investments it has. Right now, the portfolio has four investments, three financial and Grupo Argos. Grupo Argos, with dividends that we showed you, that we received in 2024, close to COP 2 trillion. Grupo Argos is contributing 200-- let us say 10% of those dividends. Our goal or purpose as management, and after having discussions with different companies, is to see that 10% of the dividend, how we can replace it with the good results that all three financial companies have made. This is something that will build in time, but I would like to underscore that while we made a major reacquisition of stocks, we have to keep in mind the dividend received versus the dividend paid. So I invite you to look at the dividend paid by stock, which is what Juan Esteban mentioned, which is an indicator that we have to follow up constantly, and our purpose as management is to see how we can work to increase constantly that to pay our shareholders as they expect from this company. Next question, Gustavo. Good morning. What is the progress of EPS Sura gradually leaving the health system? Good morning, Gustavo. Thanks for your question. The process is advancing with the Superintendencia Nacional de Salud. We have had different meetings and discussions with them. We have been providing the information they have requested. And really, we have been exposing everything, and we expect to have an answer in December or January. Again, we will be having this answer and to develop even more what will happen with the EPS. We believe it will be in operation, but it is not an immediate closure. Remember, it is a transition. It is something gradual. Remember, it is a gradual removal plan. Let me reinforce or complement what you have said, Juan, by saying that since we presented on May 28th the gradual removal plan, the management of Suramericana has been focused more than what it has been in the past 30 years. We have been managing the company in complex situation. However, the results of the company, although it is not consolidated, they have been aligned with the team's management. So we could give a proper service to the 5.5 million subscribers that we have of mandatory health in Colombia. Next question is related to managing in debt. Simón Díaz and Santiago Marzo, I will join your questions. What is the strategy of the company to handle liabilities, ROEs, and guidance? Do you expect a decrease on a medium-term basis? Simón, Santiago, in terms of debt, we are expecting to reduce it organically, as we said in the last call. We would be paying the taxes of the transaction next year, and this is the last milestone of the framework agreement. We do not foresee or expect a higher debt. As to the management of liabilities, we have an extensive availability of credit lines of local and international banks, and Suramericana, remember, as a company, has access to capital markets. What we found in different discussions that we have many guarantees, and we will be using all these lines to reduce our debt. Next question from Carlos Enrique Angulo. Thank you for your presentation. Is there a sanction in taxes because of the mistake made on the financial statements? What was the amount, and why wasn't this detected before? Thank you for your question. Regarding the VAT, it was an operational error. When we looked at the invoices of the subsidiaries of insurance in Colombia, an error that we detected, the management of these companies, and that we're correcting voluntarily. Indeed, we have quantified this, and the amount that we mentioned in the report contains in that amount our calculation of the tax that was delayed in payment, the sanctions. We calculated COP 13 billion. So for the years 2021, 2022, and 2023, when the mistake was made. Andrés Uribe asks, what's the equity value of the stock after the Sociedad Portafolio process? Our intrinsic value or equity value as of September is COP 70,000 per stock. We are almost at COP 68,700. Let me correct that number for you and the rest. This is with stocks as of September, but the liquidation of Sociedad Portafolio was early October. It was COP 61,100 per stock. Next question, Catherine Ortiz. What major cash flows does Suramericana have for this year, 2025, after paying taxes? How much do you still have to pay Grupo Bolívar? Catherine, the Grupo Bolívar is shown on our financial statements. If you look at our debt, you will find a line that's for Grupo Bolívar. When we pay the transaction, we will substitute that debt with other bank lines, local banks. So that's what we're seeing that will happen by the end of the year. With regards to the framework agreement, that will be paid April next year. So that's what we have on a short-term basis. Let me complement Juan's answer with the large accounts that you can make of the cash flow of Suramericana. Suramericana receives COP 2 billion in dividends. It's got expenses, taxes, expenses of interest, which while the interest rate drops, these are lower expenses. That leads us to have a company that has about COP 1 trillion in operating cash flow. That cash flow is basically destined to three things: to lower the debt, to pay or compensate our shareholders with a dividend, which we hope is higher, and new investments. This year, we've made a big investment, which is the reacquisition of our stocks. That was paid with an additional debt and the Nutresa Alimentos. So we have a cash flow. The compensation of shareholders, the decrease of the debt is our priority for next years. However, right now, we do not have another obligation besides that of taxes that's special in our cash flow management. Next question, Nicolás Ruiz. How do you see the change of the government of the U.S. for the group? What are the opportunities in the future with the new president?" Thank you, Nicolás. That question is quite difficult. I would start by saying that the print of the business of Grupo Sura and of the companies that we have in the region is on a long-term basis, and that long term should allow us to go through different governments in different countries, like in those that have a big influence, like the U.S. Surely, we are aware that interest rates, exchange rates, measures taken in the U.S. will have an impact on the different companies of our portfolio, but the competitive edges that we have built on a long-term basis will allow us to remain with a profitable path that grows under the challenges and uncertainties that global issues have today. We have said this in different webcasts, the only thing that is true now is uncertainty. It does not scare us. We have to manage it and see how we advance, again, backed on a company that is focused on financial services with three leading companies in different sectors and a world of opportunities in terms of penetration, possibilities to decrease informality, and clearly, we will be taking a look at the global dynamics to see how we can better position our portfolio. Ladies and gentlemen, we end the time that we have for this webcast. Ricardo? Thank you all for joining us today. We are very happy. The results that we have shown you today, we believe it is a reflection of a strategy that has taken shape in the companies. Especially, I would like to thank thousands of the company's employees, because this is a result that is due to the efforts of each one of you, and even more to the trust of our millions of customers and suppliers in the region. We have a way of working, a clear strategy, a vision in the future that we will remain despite our different ownership structure. We are always asked about that. That is preserved and will be maintained because our focusing on people and talent and the long-term strategy is something that will remain. We want you to know that we are moving on. Again, thank you all for joining us.