Earnings Call: Q1 2024

May 28, 2024

Summary

Q1 net income reached CLP 59.3bn, nearly 70% higher YoY, led by financial subsidiaries and stronger investment returns. Loan growth and RedSalud’s improved operating performance were offset in part by Consalud’s GES-related revenue decline.

Hello, everyone, and thank you for joining us this first quarter 2024 results conference call. Today with me is Rosario Letelier, 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 5 blocks. First, we will review the context of the period in order to continue with ILC's 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 section. 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 show a good performance, as you can see in the graphs shown in this slide, highlighting the returns of the stock markets, where the S&P 500 and the IPSA index had returns of approximately 10% and 7% 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 recorded a variation in the period of 1.7%, consistent with what has been seen in the past quarter, and lower levels than the ones seen in 2022. Considering that the monetary 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 point cut during the last week. As a complete overview, macroeconomic environment in Chile is still challenging, with low growth expectations compared to 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 reached in Congress, where on May 24, 2024, the Isapres Short Law was presented in response to a Supreme Court warning 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 month 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 Superintendency of Health, and a price adjustment of the plans according to a Single Factors 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 2022 was voted on the Chamber of Deputies in January 2024, approving the idea of legislating. However, the central aspects of the proposal, such as the 6% increase in employer contribution, along with other aspects as the creation of the Inversor Previsional, were rejected. Currently, the project is under review in the Senate, specifically in the Labor Commission in the upper chamber. We'll move to 2024 milestones. The first one is regarding the annual 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 450 Chilean pesos per share, charged to 2023 profit, in addition to the interim dividend we paid in October 2023 of 150 Chilean pesos. 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 a capital increase plan for the upcoming years of up to 74 billion Chilean pesos. Vivir Seguros won a portion of the SISCO insurance out of a total of seven portions, with an acquisition rate of 1.73%. Benefit from this auction that we won are partially shown in this first quarter results, as you will see in the next slides. Lastly, some important recognitions that we received in our subsidiaries during the first quarter of the year. First, AFP Habitat was ranked number five in the Great Place to Work ranking. RedSalud 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 several years in RedSalud. Finally, Banco Internacional obtained a first place in the 2023 Servidesp study, which is an award that measures the satisfaction of SME clients during year 2023. 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, in line with our strategy, the consistent results that the company has had over time also achieving double-digit profitability in the last years, show that the pillars 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, Hábitat, 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 derived in 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. 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 Hábitat Chile had better performance of financial market, which boosted the performance of the pension funds. This resulted in higher reserve profitability. Along with revenues growing in line with increase in average taxable income of our contributor bases, which meant an improvement in profit of CLP 20.4 billion compared to the same quarter on 100% basis. The health sector showed mixed results. On one hand, RedSalud 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. In the health insurance sector, during the first quarter of 2024, Consalud reached a loss 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 insurance contract and the option of IFRS 17 methodology in June 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 line 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 $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 and the consolidation of its automotive loan portfolio. Commercial loans grew 13.6%, reaching $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 number 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 the previous year, mainly due to an increase in the interest income from loans, given the growth of commercial loans and consumer loan portfolio paying 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 CLP 50.7 billion, 60.4% higher than the same period the previous year. Operating expenses reached CLP 24.5 billion for the first quarter of 2024, higher than the same period in 2023. This was mainly explained by higher administrative expenses because of the consolidation of Autofin. The rise in operating expenses was proportionally smaller than the growth in operational income, leading to increased efficiency, which improved by 820 basis points compared to the same quarter of the previous year. Provision for credit risk 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 Basel III standards. Slide number 18 shows Banco Internacional profit and ROE evolution. The bank continues to show a sustained growth profit. Regarding 1Q24 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 operation and higher risk provision expenses. If we move to slide number 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 what we faced in the first quarter of the previous year. Consequently, the number of people choosing annuities increased by 16% quarter-over-quarter, while those opting for programmed 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 number 20, for Confuturo, the offered sales rate reached 3.24% compared to 3.22% in 1Q23. 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, driving the growth of the company. In this scenario, Confuturo has been increasing its market share throughout the quarter, reaching a 15% market share in March 2024. Slide 21 shows Confuturo investment portfolio performance. Investment results grew by 39% quarter-over-quarter, reaching 136 billion Chilean pesos. 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 2.4 billion Chilean pesos. Furthermore, during the quarter, impairments of 6.4 billion Chilean pesos were released, totaling a total result of 136.2 billion Chilean pesos for the period. Slide 22 shows Confuturo's profit and ROE. All in all, higher annuity premium income, together with improved investment portfolio return, boost Confuturo results. The company posted a profit of 37.6 billion Chilean pesos during the first quarter of 2024, compared to 13.3 billion Chilean pesos the same quarter of the previous year. Regarding AFP Habitat, as shown in slide 24, AFP Habitat's revenue increased by 3.7% compared to the same quarter of the previous year, reaching 62.7 billion Chilean pesos. This increase was mainly explained by commission associated with mandatory savings due to an 8.1% nominal increase in the average taxable income of AFP Habitat's contributors compared to 1Q23. As of March 2024, this figure exceeded the industry average salary by 22.1%. All this offset the 3.6% quarter-over-quarter decrease in the average number of contributors. On the other hand, the better performance of financial markets boosted the performance of pension funds, resulting in reserve earnings of 25.4 billion Chilean pesos. Now, if we move to the next slide, we will see AFP Habitat profit evolution. The better result was mainly explained by higher return on legal reserve explained earlier. Slide 26 shows AFP Habitat Perú and Colfondos performance. Regarding AFP Habitat Perú revenues, grew due to higher fees as well as larger AUM. Legal reserves return improved by 35%, mainly due to better performance of funds 1, 2, and 3. It is important to know that under Peruvian regulation, this figure is not considered in the P&L. Regarding Colfondos, revenues from mandatory pension fees saw an increase of 22%, mainly attributed to lower DNS fee and higher salary base. This was offset by lower legal reserve returns, resulting in a profit of 32.9 billion Colombian pesos, 18% lower than the first quarter of 2023. Regarding our health sector, if we move to slide 28, we will see RedSalud activity indicators. RedSalud's revenue reached 172 billion Chilean pesos in the first quarter of 2024, representing an 8.4% increase compared to the same quarter of the previous year. This growth was driven by a more complex mix, as Rosario explained earlier, mainly in the inpatient's activity. In the outpatient segment, the number of medical consultation and exams decreased by 8.8% and 2.7%. On the other hand, dental services grew 1.1%. The inpatient segment, the number of surgical intervention increased by 3.5% quarter-over-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 5.2%, 11.2%, and 6.6% respectively. RedSalud's EBITDA breakdown shows EBITDA increased by 6.3 billion Chilean pesos, totaling EBITDA of 20.6 billion Chilean pesos for the first quarter of 2024. This increase was mainly due to greater efficiency and lower impairment expenses, primarily in metropolitan region hospital, along with a better mix of services in the patient sector. This resulted in a 4.8 billion Chilean pesos increase in quarterly EBITDA for metropolitan region hospitals, 113 million increase in regional hospital, and 1.7 million increase in outpatient and dental centers. EBITDA margin benefited from a better operational efficiency and lower impairments account receivable, mainly due to a better payment behavior from the public insurer, FONASA. Slide number 30 shows RedSalud's revenue breakdown. Breakdown by insurer, public and private. Public insurer, FONASA, is increasing its relevance in the revenue breakdown, reaching a 46% share. RedSalud is still diversifying its sources of income in order to reduce regulatory risk. If we move to the next slide number 31, we will see RedSalud's EBITDA and EBITDA margin evolution. RedSalud's EBITDA showed a sustained high level regarding the first quarter of 2024, as we have mentioned before. RedSalud continues to face high demand for hospital outpatient services. During this quarter, results were favored by a more complex inpatient mix, lower impairments, and higher operational efficiency. Next slide shows ISAPRE industry beneficiaries evolution. Mainly due to the regulatory uncertainty, the ISAPRE industry has reduced its number of beneficiaries over the past four years. Industry beneficiaries decreased by 9.5% quarter-over-quarter. Meanwhile, the number of RedSalud beneficiaries decreased by 14.8%. Moving to the next slide, we see RedSalud's revenues and cost breakdown. Revenue decreased by 23.1%, mainly explained by a 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 fees. Cost of sales for the first quarter was 148 billion Chilean pesos, 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 coverage. Slide number 34 shows Vida Cámara's performance. During the first quarter of 2024, Vida Cámara's contribution margin for health and life insurance was up 3.1 billion Chilean pesos. It was mainly due to a lower loss ratio. Premium income from life and health insurances grew by 42% in line with the increase in beneficiaries and better collection. This resulted in a quarterly profit for the first quarter of 2024 of 2.3 billion Chilean pesos. If we move to slide number 36, concerning ILC's debt and liquidity structure. The company achieved a net financial debt-to-equity ratio of 0.31 times. ILC maintains a high level of liquidity, reaching 241.3 billion Chilean pesos in liquid assets to meet future commitment and manage its cash through investments in instrument that allows it to reduce Financial carry, and to avoid the foreign currency that we have in the 144-A bond placed abroad. During the past quarters, the company has reduced its gross debt by refunding part of its local foreign debt, along with normally scheduled bond and bank debt payments. We go to the next slide. Slide number 37 shows ILC's stock price evolution, which ILC outperforming 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. In summary, ILC's 1Q24 results were explained by better results in Banco Internacional, mainly due to the growth of its commercial and consumer loan portfolio. Regarding Confuturo, the 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 better portfolio, the financial markets contributed to improvement in legal returns of AFP Habitat, which boosted its results. Regarding the health sector, on one hand, Consalud losses was mainly associated with lower revenues due to the adjustment of GES premiums, particularly offset by lower medical leave costs. As on the other hand, Consalud increased its EBITDA as a consequence of a more complex inpatient mix. Finally, as we just reviewed, ILC maintains a strong financial position as one of its strategic pillars. This conclude our first quarter 2024 presentation. We will now open the floor up for questions. We have a question from Eliseo, from Larraín Vial. He asked about the results of Consalud and how we explain the reason behind the lower revenues and high loss ratio, and what we may expect in the next quarter. To answer this question, I will go back to slide number 33. The cost of sales of Consalud decreased mainly due to the decrease of beneficiaries in the quarter. This was in line with the decrease in health coverage and medical leaves coverage. Also, this quarter, it's important to mention that the reduction of GES premium in January 2024, which reduced its contribution per beneficiary from 1.4 UF per beneficiary to 0.6 UF per beneficiary. That impacted the average contribution in 6.3%. Maybe to complement Gustavo's answer, Eliseo, sinistralidad has the effect of the reduced revenue. If you see cost in absolute terms, and maybe you 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. 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. A question regarding capital increases announced in Confuturo. Ask if we can give some explanation and more color on this. Okay. As we have, I think, said in different parts of the presentation today, the dynamics in the annuities business have shown what we see as a good opportunity of continue growing and participating in this market. Considering that is that the administration proposed and the shareholders meeting approved a capital increase plan for the next years. It is a plan to employ in the next 2, 3 years, in line with, again, continue participating in this market and take advantage of the leadership we have as a position in this market. Thank you, Rosario. There is another question regarding Consalud, what we expect after the law that we mentioned that released in the last week. I would say that regarding the Isapre situation, as Rosario mentioned before, on May 24, 2024, the Isapres Short Law was proclaimed in response to the Supreme Court ruling of November 2022. This law established the milestone of the next steps required to implement the Supreme Court ruling. We mentioned some milestone and the timeline that we were facing. We say nothing about the timeline. Regarding the timeline, I would say that in the immediate term, the Superintendency of Health will send a circular that will guide the pending aspects of the implementation of the payment plan and extraordinary premium. Then the Isapre will have 1 month to present to approval of the Superintendency of Health. After the 1 month to present, this will be subject to the approval of Superintendency of Health, their payment and adjustment plan, including a proposal for refunds for using tables different from those of Circular IF/N° 343, with a maximum term of 13 years and the incorporation of an extraordinary premium per beneficiary, considering an increase in the contribution that not exceed 10% of the one agreed upon in July 2023, where RedSalud was in a profit level. This extraordinary premium will be determined so it covers the obligation with its affiliates, operating and non-operating costs, and also the cost containment initiatives proposed in the plan. Then in a process that has been agreed to be carried out simultaneously, contract plans price will adjust to a Single Factors Table and with a minimum payment of 7% the gross salary, which is the value of the legal contribution for health. Referring to the question to any impact in Consalud, there's still some circulars that are pending, which are essential to correct estimation, the plan and extraordinary premium. As Rosario mentioned at the beginning of the call, it's important to highlight that this payment plan does not constitute any warranties. We are continue studying and waiting to these circulars in order to have the best estimation and the correct plan and the extraordinary premium per beneficiary that we are planning to have. I think there's no further questions. Thank you for joining us this time in this conference call. Please feel free, if you have any further questions, to contact our IR team. Thank you, and see you again in the next quarter conference call. Thank you very much. Have a nice day.