Qualitas Controladra Sab

Thank you for standing by. This is the conference operator. Good morning and welcome to Qualitas' fourth quarter and full year 2023 earnings results webcast. The conference will begin now. It is my pleasure to turn the call over to Qualitas.

Good morning and thank you for joining Qualitas' fourth quarter and full year 2023 earnings call. I'm Santiago Monroy, Qualitas IRO. Joining us today are CEO and Chairman of the Board, José Antonio Correa, and Deputy CEO and Vice Chairman, Bernardo Rizul. As a reminder, information discussed on today's call may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during today's call. Qualitas undertakes no obligation to publicly update or revise any forward-looking statements, whether because of your information, future events, or otherwise. Let's turn it over to José Antonio, our CEO, for his remarks.

Thank you, Santiago. Good morning, everyone. Great to be with you. And let me start by wishing you all, once again, the very best for this year. It is likely that when we look back in a few years, 2023, will stand out as a year of remarkable performance, with a top line of 28%, strong momentum of our operating subsidiaries, and a notable growth in profits. The results also led us to surpass the 5 million insured units this year, reflecting the trust placed by our policy funders and more than 22,000 agents. We have invested heavily to improve the service experience both in our offices and throughout the many technological tools we have developed for them. Our constant efforts have paid off, and I am proud that more than 70% of our processes have a satisfaction rate within our 90% objective range. There are three milestones of the year that I cannot miss to touch upon. Number one, Qualitas achieved an annual record high in terms of insured units, with a total of 5.3 million units across the five countries where we operate. This is an increase of 527,000 units throughout the year. New car sales performance in Mexico, up 24% versus 2022 and 3% above 2019, were important drivers of volume growth. Growth makes us face an ongoing challenge of effectively delivering excellence in service and fulfill our customers' expectations. Throughout the year, we have created over 600 new positions to maintain quality standards for all our clients. Most of them are to support our call center, claims officers, and operational team. The entire organization works with horizontal structure to be able to provide service to our 562 service offices, and all our agents, who are our top priority. We must make sure that Qualitas DNA truly prevails in new employees' generations. Thus, we have strengthened onboarding programs of what we internally call the Qualitization Process. Number two, we keep strengthening our organization, implementing a sound corporate governance and succession plan, has been a priority. And as such, our board has been paying special attention when selecting its members to their experience and expertise, including their knowledge of the different regions where Qualitas is present. Some of the initiatives taken were the appointment of Bernardo as Qualitas Controlador as Deputy CEO, a new board member addition with punctual oversight to our business strategy, reducing the average age of our members. and board training sessions have related to sustainability topics, new regulations, among others. We are still in the recruitment process to find the best candidate for CFO position. Also, we have appointed a new CIO, which will start in mid-February, and have made progress in our talent development programs by filling key positions such as innovation and special projects, prevention, office and agents, development, road assistance, among many others, which are fundamental to shape our organization and integrate people and technology to successfully execute on our customer-centric objectives. On this front, there is still work to be done and will remain as a priority for me and the leadership team during the year. And number three, Qualitas corporate development plan has made progress Executing in line with our three-pillar strategy that we have deployed a couple of years ago, by which we aim to further diversify our business to fuel sustainable growth in the mid-long term. While we strive to continue winning in our core business, Mexico Auto Insurance, we want to have a portfolio of businesses that share the responsibility of value creation. On that regard, I celebrate three main achievements. We celebrated the first anniversary of Qualitas Salud, which is our first entry in the non-related auto business. Health insurance segment could represent an important potential for Qualitas, where our value proposition, based on prevention and excellence in service, will seek to satisfy an unmet need for the 92% of Mexican population without private insurance through a compensatory product with capped risk. In line with the plan, This year has been all about learning and adjusting, which we have. Our decision to enter organically allows to better control growth and exposure, adjusting product to what proves to create value, and with expectation to make Qualitas Salud a relevant contributor to the holding company in the long run. Second, including a technology company focused on telematics, business intelligence, and IoT to the Qualitas family, And this aims to increase our efficiency in Mexico by leveraging data analysis to increase value proposition through new products and better risk assessment. And thirdly, we continue to make progress on our entry into Colombia. Being able to serve a 50 million people market will represent a big test. One, we look forward while recognizing it will require resources, attention, and quality as DNA. As such, we have agreed that Colombia will will be our last geographic market expansion in the following years. We are pleased with this year's performance and recognize that growth comes with new challenges to overcome. While we have made progress, we still face external factors pressuring our costs. Our industry is cyclical, and Qualitas has weathered through many storms, and we are certainly coming out stronger of this one and we are ready to face whatever comes next. We are thrilled to start the new year, which brings 360 days of opportunities to service excellence and protect our policyholders, who is creating value to all stakeholders. And with that, let's move to the financial details and take a deeper dive into the quarter and year end results. Bernardo, please.

Good morning, everyone. As José Antonio mentioned, in what is still a challenging environment, Qualitas posted very strong results during 2023, staying true to our core competitive strengths and our service commitment to policyholders and agents, while adjusting to the evolution of the market dynamics and needs, including pricing and products. Going directly to our top-line performance, written premiums were up 32% for the quarter and 28% for the year. being the traditional segment the most important driver of this growth and representing two-thirds of our quarterly growth and 74% for the total year. Topline is worth celebrating not only for being unprecedented in terms of premiums, but for proving that even in a mature business and despite all headwinds, strong growth is still possible. Around half of our premiums growth was driven by new volume, with $5. 527,000 additional units, and 11% increase versus last year. As Jose Antonio mentioned, this organic growth was boosted by the strong gear in new car sales, in addition to being able to attract new customers. Although at this point we have no hard data, we would like to think there could be a slight increase in car insurance penetration. The balance of our growth was driven by tariff increases, which on a compounded average were up 24% during last year. The highly competitive environment we have been facing over the past two years has not made it easy, but we have stayed the course to cope with claim cost increases and car prices. In some cases, these increases have led us to be ahead of the market, and while we will closely monitor price competitiveness, we're committed to restoring the 5% to 7% target in operating margin. At this point, we expect that most of our pricing catch-up has already been made and will materialize and log the year. 2024 pricing will incorporate a couple of points that are yet pending, as well as the evolution of industry costs. The combination of volume and pricing resulted in a stronger leadership position in Mexico. By the end of the third quarter, which are the latest industry figures, Qualitas held 31.9% written premium market share, up 120 basis points versus the same period a year ago. In the heavy equipment segment, the market share is now 43.7%, rose 45% last year, reflecting Qualitas' rational tarification and a more competitive segment. Market share is always a good thermometer, but in the case of Qualitas, it's a KPI that is not linked to anyone's performance. Top-line growth was seen across all businesses, with our international subsidiaries representing 6% of the total holding company underwriting by the year-end. When breaking it down by market, Mexico grew 30% in the year with an extraordinary fourth quarter performance of 32% and surpassing 6 billion pesos in a month for the first time. Latin America subsidiaries, which include El Salvador, Costa Rica, and Peru, grew 41% in local currencies for the year, and they are on the right path to maintain profitability and become accretive to the holding company ROE objective. Finally, in line with our strategy, the U.S. subsidiary had a flat performance during the full year 2023 to mainly focus on restoring profitability and shift the portfolio to buy national products. Our cross-border premiums increased 22% in the year. Earned premiums for the whole company were up 31% and 24% for the quarter and full year, respectively. High growth led to high reserve constitution. This fourth quarter, we constituted 2.4 billion pesos of reserves, 792 million pesos more than last year's fourth quarter. On an annual basis, we constituted 4 billion pesos a 2.5 billion increase versus 2022. Moving now to our cost, the loss ratio for the quarter stood at 70.7 and 70.9 for the full year. To better understand progress and challenges, I will provide specifics on our two main markets. First, in Mexico, the loss ratio stood at 67.5 for the quarter and 69.2 for the full year, confirming we have reached the inflection point and sequentially moving towards the desired and sustainable range of 62% to 65%. Fourth quarter results include a hurricane autist impact of around 290 million pesos, which was partially offset by our $5 million catastrophic reinsurance policy for a net impact of around 200 million pesos. Service and costs continue to be stressed by the increasing number of claims that were up 11% in the fourth quarter and 13% annually. Frequency is also trending slightly up, closing the year at 28.4% versus 27.9% in 2022. Average claim cost was up 9.3% versus last year. Biggest callouts come from spare part inflation and robberies. Even though official statistics show spare part inflation easing versus last year, internally, we have not seen yet happen. New brands arriving to the Mexican market without enough inventory have been pressuring even more the costs. Regarding robberies, and in line with the performance close to federal elections in Mexico, they have increased 10% for qualitas and 4% for the industry. Qualitas recovery rate stands at 43%, outperforming the rest of the industry average by 4% of points. Mixed and still high value vehicles also play an important role when calculating their impact as a percentage of our total cost. Before I move to the U.S. business, there's one item related to Otis I would like to touch on. As I believe, it helps understand Qualitas DNA in terms of its commitment to policyholders, our agility on decision-making, as well as our social responsibility. Back on October 25th, when Otis, a Level 5 hurricane, impacted the Mexican Pacific coast, directly hitting Acapulco, we quickly knew that it was likely going to become the most expensive single event Qualitat has faced, and it did. But it was also a situation where we needed to be our best, and we also did. Just 48 hours after impact, we announced that we were not only ready to help our clients, but we also waived all individual deductibles up to 20,000 pesos as a means to support those that had lost everything. Moreover, a crew of 22 people moved to Acapulco as soon as the road opened to install temporary service centers to support, manage, and pay claims. When we think about our purpose of insuring cars and protecting people and how we're embracing ESG, this is it. I feel proud to be part of a company that goes over and beyond our obligations when people need it, and while doing so, we increase loyalty of agents and policyholders. So now let me move to our U.S. business, where we continue to execute our strategy of executing the domestic market to focus on the cross-border and binational products. The journey continues to be bumpy, recognizing that it's not fast, simple, nor cheap, as we need to bring to closure the craze that traced back to five or even seven years ago. These quarterly financials were impacted by the updated actuarial analysis in which adverse developments of historic claims or verdicts led to higher reserves constitution. In addition, there were two other decisions impacting results. First, we have agreed with the California Department of Insurance to not only operate on the low end of our reserves range, but to move to the midpoint in a four-year plan. This meant a $7 million increase in 2023. And second, due to our external audit recommendation, we will start building DTA reserves as a conservative and unlikely case if we're not able to turn around the business in a way we credit these taxes. All in, U.S. business posted a loss close to $20 million in the quarter and $30 million for the year, part of which relates to reserves and provisions that we could recover when shifting the business. Moving further down the P&L, our acquisition ratios stood at 21.4 and 22.3 for the quarter and the year, respectively, in line with our historical average and expectations. We're benefiting from a short performance in the traditional segment, which carry a lower commission rate. We feel comfortable with our neutral portfolio composition between annual and multi-annual year policies, which is now at 81.2 and 18.8%. Operating ratio for the quarter was 2.3%, benefited by the strong underwriting performance, which represents higher income from underwriting fees. Year end ratios to the 2.9%. The operating ratio is also benefited from our third party vertical subsidiary sales, reflected as an income in the operating line. As a reminder, within our operating expenses is the EPS, employee profit sharing, which for the year represents 80 basis points of the total operating cost. Qualitas continues to stand for its commitment to cost control, not only staying within the desired target, but below the industry average which is around 4.5%. All of the above resulted in a combined ratio of 94% for the quarter, ending the year at 96% and being close to our 90 to 94% target. We feel proud of the ability to create value and being true to our commitment to stay profitable at operational level, even in the already mentioned challenging dynamics. Now shifting gears and moving to our financial performance, our portfolio was successfully set up to benefit throughout the year from current interest rate levels. 89% of our total portfolio is invested in fixed income positions with a duration of 1.5 years and a 9.6 yield to maturity by year end. In the case of our Mexico business, the yield to maturity is 10.4%. The balance of our portfolio is mostly allocated in equity in Mexico FIBRAS, and U.S. and global ETFs. We have already migrated more than half of our ETFs target allocation, and we will continue to do so in a gradual pace, taking advantage of the current FX levels. Our investment strategy does not foresee relevant changes, aiming to bring fixed income duration as close as it can get to two years before the reference rate cuts in Mexico. Our portfolio follows the guidelines, advisory, and strategy decided by our investment committee, as part of our institutionalized corporate governance. We deliver a financial income of $1 billion to the quarter and $4 billion annually, implying a 9.4% annual ROI. Important to highlight that 15% of our portfolio is allocated outside Mexico, mostly in U.S. dollars, which implied a different reference rate. All in, Qualitas posted a $1.1 billion net profit for the quarter and $3.8 billion for the year, representing an annual 7% then margin. This represents 72%, or 1.5 billion pesos, more than in 2022. Our 12-month ROE stood at 18.4%, reflecting bottom-line growth and performance, but also our capital position. Structurally, if we were to exclude around $300 million of the excess cash we consciously have, our ROE would stand at 21%. Next, we close the year with a higher-than-expected top-line growth and a strong momentum. We deliver positive underwriting profit that outstands in the industry and a very well-positioned financial portfolio that benefited our financial performance. Once again, we confirm Qualitas' resilience and capability to create value. Let me touch on our regulatory capital. By the year end, it stood at 4.6 billion, with a solvency margin of 14.7 billion pesos, equivalent to 420 solvency ratio. Capital allocation will continue to follow our corporate development strategy, which identifies avenues of future growth all within the insurance ecosystem. Three of them are now under execution, and we're assessing two due diligence process to strengthen our vertical operation and non-insurance business. Dividend distribution will continue to be part of our capital allocation, and although the decision relies on our AGM, from a management standpoint, we believe upcoming dividend may once again be at the high end of our policy range, which is 40% to 90%. Anticipating the question that I have been receiving quite frequently regarding a potential extraordinary dividend, as mentioned, we're open to assess it Although given the expected volatility in 2024 and with the upcoming federal elections in Mexico and the U.S., we do not consider Putin to appraise it in this year. Before moving to the Q&A session, let me provide you some color of what we could expect for this year's performance, reminding you that since a few years back, we do not disclose a formal guidance or targets, but rather some overall expectations. Top-line growth momentum is expected to continue, but at a at a slower pace with an estimate to be in the mid to high teens. Premiums growth is expected to be mostly driven by tariffs carry over a new pricing, while the number of units should reach the ongoing targets of low to mid single digit behind new car sales expectations and competitive pressure. Top line will continue to be fueled by Mexico and Latin America markets as they continue to grow in a consistent pace. while the U.S. is expected to decline or be flat at best. Regarding our loss ratio, one of our core priorities, we expect to continue making progress to our technical range objective of 62 to 65%. For the total year, we should expect to be close to our targets and certainly better than the past three years. Acquisition ratio and operating ratio should continue within historical levels with no major changes. The above metrics should lead us to be in a combined ratio that could be close or within our objective range between 92 and 94%. Finally, our financial performance would be similar to results posted in 2023, keeping our fixed income duration strategy with an ROI of around 10%. As we head into a year of macroeconomic and political volatility, we will double down on our strategy, We will address opportunities to outstand our service throughout the entire customer experience, and perhaps most importantly, we will remain agile to quickly adjust as needed. We like how Qualitas is set to start the year, and we foresee a scenario in which we could see a nice trifecta with continued strong top-line momentum, a recovery in the underwriting part of the business, and a well-positioned financial portfolio to maximize return. All of that We'll continue working on projects that will allow Qualitas to keep on creating value for years to come. We are truly excited. We are truly excited about the future. And now, operator, please open up the line for questions. Thank you.

Thank you. We will now begin the question and answer session. To join the question queue, you may press the raise your hand button in your screen, and we'll open the mic for you. or you can send it through the chat in the Q&A box. To withdraw your question, please press the button once again. We will pause for a moment as callers join the queue. Our first question comes from Jorge Henderson. Please state your company name and then ask your question.

Hi, thank you. Can you hear me? This is Jorge Henderson. I'm from Santander. Thank you very much for the opportunity to ask questions. My question is regarding your guidance. You talk about mid-to-high teens premiums growth. And I just wanted to check. You mentioned right now that you expect low to mid-single digits growth in volumes, right? So what should we expect, like, in terms of price and volumes, like, behind these – like what are the underlying assumptions behind this? I'm just trying to understand. For example, this year, auto car sales were 24% year over year. That was the growth. So I'm just trying to understand if that would work as a proxy. What can we use as a proxy to measure how volumes of qualitas are evolving? This year you grew around 12%, I believe, around 10%, 12% the number of insured units and their qualitas. So just trying to understand what to expect in more precise terms. That would be my first question. Thanks.

Hello, Jorge. Good morning, and thanks for your question. Indeed, we are building our expectations of premium growth with two considerations. First, unit growth. And given the lack of certainty, we are going after what the AMDAF stated as the target for the industry. In this case, for 2024, it's expected to grow between 5% and 7%. So there's a significant slowdown versus the 24% that the industry grew this year. I think this was somehow expected. The 5% to 7% would be on the historical averages. And that is our base for unit growth assumption. This would imply somewhere in the 250,000 to 300,000 units. Now, the balance of that growth to get us to that mid-teens to high-teens would imply the carryover of the pricing that we took, especially towards the second half of 2023. And we are considering to continue making the right adjustments as needed, both to cover up for what is pending. We estimate there's a couple points yet to compensate from historic industry inflation past years and what we are expecting to be the industry inflation for 2020. So it is the balance of both organic volume growth and the pricing carryover in addition to new pricing.

Okay, just to clarify, that 5% to 7% that's on auto car sales, right?

Yes, auto car sales. Yeah, that is correct, Jorge. And let's remember that last year, the AMDA also had about the same, no? And it was a surprise for everyone, as much as the behavior of the economy, by the way, in Mexico, no? So, at this point, we don't know. It's going to be a difficult year, as Fernando indicated. And there's the political things in terms of elections and all that. And... We don't know if it is a conservative estimate by NAMDA, but in the year, we have to be cautious on the estimates going forward.

And just to wrap it up, I think it's important to consider that there's big changes in the auto industry dynamic. 5% of the new car sales in 2023 were of electric and hybrid cars. So that's new things that we need to incorporate in our service structure. Moreover, 30% of new car sales come from Asian brands, mostly Asian brands that did not exist pre-pandemic. So I think it's important to incorporate those new dynamics in the industry as we set up our service structure to always be able to serve our customers.

Thank you. That's very helpful. Just another question, if I may. It's about your OPEX growth. I was looking at the results yesterday, and I noticed that you are now including Qualitas Salud in your vertical sub-series line. So that's just a question. I don't know if you can maybe disclose what was the amount that you – of revenues that you had in Cuálita Salud in the quarter?

Jorge, at this point, Cuálita Salud is still not meaningful. We are now opening up the details for you to have some perspective as we continue to evolve in what is meant to be a big driver of growth in the next 10 years, not necessarily in the next two to three years. I think that would be relevant. And by the way, what you would see in Qualitas Salud also incorporates the company policy. At this point, all Qualitas employees are now being served and protected by Qualitas Salud, and that is helping us to continue to learn and test as we have now the most demanding consumers, which is us as Qualitas employees. Okay.

Okay, thank you. Just a question, a follow-up. Do you mean that top-line growth of me to high teams, the growth, is that related to premium? That's related to premium growth, right, not to earned premiums? To written premiums, I meant. Yes, premium growth. Written premiums, right?

Written premiums.

Okay, okay. So, okay. Thank you very much.

Thank you. Our next question comes from Jorge Echeverria. Please state your company name and then ask your question. And Jorge, I believe you are on mute. You may now unmute yourself.

Hi, good morning. Jorge Echeverria from Morgan Stanley. Hi, Jose Antonio and Bernardo. Thank you for your time for taking our questions. So very quickly, I just want to ask about the costs per employee. So your employee base grew 13% year-on-year this quarter. You added almost 10% of employees in the last two quarters. And when I look at the average cost per employee, it went up a lot this quarter. I know there's some seasonality, the PTU, But what I really want to understand here is, you know, in the past, you have built up provisions for the PTU early in the year. So are you catching up with the new hire, the growth in the workforce in the second quarter? Is that what's happening? Or are you investing on the future growth for 2024, 2025, and this should normalize next year? If you can... grill down in the dynamics of costs, that'd be great. Thank you.

Okay, thanks for your question. And yes, when we understand cost, operating cost, I think it's important to isolate what is the EPS or employee profit sharing than the balance of controllables. In an ideal world, we will continue to grow operating cost behind that employee profit sharing item, no? When we look at just the PTU or employee profit sharing, the swing on the fourth quarter is significant. There's a $216 million swing, sorry, $16 million peso swing. Because fourth quarter of last year, we had a release of $90 million peso. Now we had a disappointing fourth quarter last year of lower basis. And then this year, we're certainly catching up and we built a reserve of 125 million pesos. So the swing on a fourth quarter versus fourth quarter this year, last year, it's significant. It's actually explaining 90% of the growth on operating expenses. If we were to just look at the controllable piece, I think those are quite under control. We continue to be benefited by the high growth and as a percentage of the premium growth our employee cost continues to go down. Now, having said that, you would expect, as we have seen in the past six months, a catch-up. We've increased our headcount close to 600 employees, most of that from the operating and service areas, because we need to cope with the increase of units. But I don't expect to be that a significant change moving forward. We are, as always, a very diligent company in terms of looking for productivity efforts and making sure our cost remains better than the industry average. So I hope that explains. But again, 90% on the operating cost increase, quarter versus quarter, is explained by earning employee profit share.

Perfect. That's very clear. Thank you.

Thank you. Our next question comes from Tiago Paura. Please state your company name and then ask your question.

Hi, guys. Tiago Paura here with BTG Pactual. Can you hear me?

Loud and clear, Tiago.

Great. Thank you, Santiago. Good morning, everyone. Congratulations on the numbers. I have a question here that's probably a follow-up on the first question, just trying to get a bit more details on the dynamics of the top line for the short to medium term. Bernardo and Jose Antonio mentioned, and we saw that Qualitas and also the whole industry implemented a big price adjustment during 2023. However, now there is some kind of an imminent expectation that at some point in time, there will be a slowdown and possibly even a competitive pressure for price reductions. How do you perceive this dynamic? I mean, how easy, not easy, but, you know, yes, how easy will it be to, you know, implement these price increases that you mentioned during 2024 without seeing a major shift on churn, for example? Are you already seeing any pressure from competitors to lower prices over there in Mexico? That's it. Thank you.

Good morning, Thiago. This is Antonio. Let me tell you that the dynamics are really the way we work in terms of price. In the case of Qualitas, we do what we need to make sure that we have a profitable business to begin with. Now, having said that, let me tell you that I've seen that most competitors recently in the just a quarter or so, have really made some catch up in terms of pricing. There are some of the biggies that are still competing on price, and that would be always the same. And I want you to remind you that in the past, for instance, we knew that in the competition of heavy equipment, for instance, after the pandemic, we saw a number of competitors taking prices down significantly. We were able to maintain our customers via service in great part. But at the time, I saw that they were doing, let me call it, dumb things. And at that time, I knew that it was not sustainable. So these things will continue to happen. Every now and then, that will happen, no? And as you know, last year, a couple of competitors dropped out of the heavy equipment. So the dynamic is changing, typically pricing and the growth in the top line for auto is about two, three times the growth of the economy. So while we don't know what is going to happen in 2024, what I see is a bit more compulsory, if you will, But it will depend also on how the performance of the economy, particularly in the second part of the year. So at this point in time, I do not expect any particular problems, so to speak. And we will continue pricing to make sure that we have profitable business for us and have the right pricing. You know, recently I had a chance to talk with one of the big car manufacturers about the financing of the manufacturers. that they didn't want to increase our prices. And we said, so, you guys, we are only increasing and we are declining our share there, which is not important. It's not relevant, by the way. But the important thing is that we are doing the right things in terms of pricing to maintain a healthy both top and bottom line growth. Yeah.

Thank you, thank you. That's super clear, José Antonio. Just a follow-up on the impact of the hurricane, if I may. Just to check if there is any residual amount from Maltese yet to be booked in early 2024, or if the total amounts have already been booked in the fourth quarter. Thank you.

So, Thiago, what we know about Maltese is, I would say, Basically, everything has been already reserved for and is reflected on fourth quarter. There was a significant impact, as we said, the net already considering the reinsurance, the $5 million reinsurance policy that we have. It's around 200 million pesos. And if we were to isolate, the claim cost for the quarter would drop from 70.7 that we have to 69.2. So that's a one-time effect that we have from all these. And I believe that's worth to consider. But net-net, we wouldn't expect any major new impacts from Otis in 2024.

As we see the behavior on a day-by-day basis and the Otis started, we have seen that it is, you know, mostly it's ending for us. We don't expect, as Bernardo said, anything else for the rest of 2024.

Great. Thank you. Thank you, Bernardo. Thank you, Jose Antonio. Thank you, Santiago. Have a good day.

Thanks. Our next question comes from Ernesto Gavilondo.

Hi. Thank you, Ernesto Gavilondo from Bank of America. Good morning, Jose Antonio and Bernardo, and thanks for the opportunity to ask questions. My first question will be on Peru. Just wondering if you're expecting any potential impact from El Niño in your business. So far we have seen it has been a moderate El Niño, but we have seen some floods in the country. Then my second question will be on your investment portfolio or what will be quality of sensitivity to a reduction of 100 basis points to the interest rate, maybe you can provide us an amount in pesos. It will be very helpful. And for my last question, where are you seeing your ROE in 2024 after what you mentioned in your guidance? And also, where are you seeing Qualitas' sustainable ROE in the long term? Thank you.

Ernesto, I'll take the first one and start off with Peru. El Niño phenomenon, we know it's going to occur, but it's mainly going to impact the north of Peru. Now, relative to a few months back expectations, the good news is that we're expecting now a milder and softer El Niño impact. So cities such as Trujillo, Chiclayo, and Pura By the way, we have now an office operating there. That's the biggest one in terms of relevancy. We would expect certain impact, but nothing that would be significantly moving the needle for the parent company. So we're hoping for the best. And again, we expect that the local forecast continues to be right. And we are now expecting a much milder than was expected and hopefully no impact at all.

Yep. Let me take, Bernardo, the second and third question. Good morning, Ernesto. Good to have you in our call. Let me tell you that the sensitivity of interest rates is important for us, too. And we have, you know, we know that around every 25 basis points, the change has an impact of around 130 million or so. So, But it's important to note here that we have positioned our portfolio in a very good manner, as we have discussed in the past with you guys, with the whole community, in terms of increasing the duration. That will help a lot. Where the rates are going, probably you know better than us, but there are a number of expectations of where it is going to turn out for the rest of the year, particularly in the case of Mexico. And as for the sustainable ROE, I would simply say that we should be around, that's our target, our sustainable ROE, that's our target, around the 20%. Around the 20%, which we are close this year on that one, by the way. We are moving up after what we had in the last couple of quarters. And we are starting with a good momentum going forward. As you also know, it will also be dependent on the excess capital that we have. But that part, you know, Bernardo made his remarks that we will be dealing with that. And that's where we're going to be playing by the year in terms of the situation evolving in Mexico in general. But our sustainable medium long-term is 20-ish, around the 20%.

No, thank you very much, José Antonio Bernardo. Just to follow up on the sustainable ROE, I believe our numbers and market numbers are already assuming sustainable ROE is between 27, 28%. So just wanted to have your opinion if it's kind of high or you think it's achievable, any color on that will be helpful.

Yeah, I think José Antonio just put it on. I think 20% of It's what we're now losing at. There's always scenarios, and there is indeed a scenario at Nestle which we could be on the high end of the 25% that we have consistently mentioned. If you look back at history, there's been years that we've way surpassed that 25%. We always strive for that. I would like to commit to a 26%, 27%. because I think it would be responsible considering there are so many factors, macroeconomically, politically, and even in the industry, that are yet to be seen to stabilize. So I think that would be kind of what we will ask and encourage our investors to consider, that 20% to 35% corridor will continue to be true for the mid to long term.

It's important, and let me add to what Bernardo said, that I remember in pre-pandemic days, Ernesto our ROE was well above 40, not well above, it was about 40%. And I recall that at the time I talked with the community, investors community, and saying that that was not sustainable. Now, but in the end, the thing that was not sustainable was the pandemic. And the pandemic, you know, changed everything, the dynamics changed everything. and, you know, competition and price reductions. And then, you know, it was a complete change in dynamics. So much as at the time we said that it was not going to be sustainable, I think that what Bernardo was saying, and I'm saying around the 20%, continues to be a good assumption for investors to know.

Perfect. Thank you very much, Antonio and Bernardo.

Thank you. Our next question comes from Jitendra Singh from HSBC.

Hi, everyone. Hello, Antonio Bernardo. Congrats on the results and thank you for taking my question. So my question is on your financial income. So your strategy for investment portfolio has been cleared. You have been increasing duration for your fixed income portfolio and moving towards ETFs for equities. So I just wanted to understand what do you expect the normalized level of ROI could be, especially from next year, 2025, when interest rates in Mexico will come down to, you know, mid single digit and lower rates in the U.S.? ? So maybe expectation on normalized level of ROE. So that will be my first. Second, I just wanted to understand on effective tax rate, it was lower during the quarter. So could you provide some color on that and what do you expect effective tax rate to be for this year? And last, if I may just follow up, as you stated that, you know, some part of unit sale in Mexico is coming from the Asian brands now. So I just wanted to understand, so has there been any kind of, you know, supply chain constraints or issues that can have impact on your claim ratio target? Thank you.

Good morning. Take the first question, the financial income ongoing rate. I think, As Antonio mentioned, we are nicely set to know that 2024 will provide a return on our investment that would be close to what you saw this year, potentially slightly higher. Now, the ongoing rate would be a hard one to answer because it will depend on the reference rate. If you go back a few years ago, what we said, we want it to be between 100 to 150 basis points above reference rate. Obviously, if the reference rate is lower, we're able to get to that higher end of the bridge. Our appetite for risk and volatility has decreased, and that is in line with our corporate governance and independent board members' direction. But I would say that ongoing, we could see back to stating to be 100 to 150 basis points above reference. Now, the near term, That means the next 12 to 18 months, we should be looking more in the 9 to 10, given where we stand today in our portfolio duration. Now, your second question regarding tax rates. Yes, let me remind everyone our tax rate for the year was 22.4%, but we did see a low rate in the fourth quarter of 15.3%. Now, what is behind that? First, let me just clarify, there's absolutely no tax planning. We're fully compliant with regulation. We did see some impacts on the year end because we look at accounting adjustment for all items, including inflationary adjustments. And that's where we do some balance for the year. So we did see lower than expected for the tax rate. But on a normal basis, we're a couple points lower than the what we should expect. Even if you see the corporate rate of 22.4%, that includes certain countries or markets such as the U.S. that posted a negative result, and that decreases. If you see on a standalone Mexico, we're more into 23.4% on average, and that is slightly more in tune with the ongoing rate. Now, what can we expect moving forward? I would say a fair assumption to be in the 25 to 27% effective tax rate, which has historically been .

Let me take the third one, Fernando, in terms of supply constraints. You know, it is difficult to say, Chitendra, but we have seen an improvement over the past year in terms of this. In our repair shops, we've had some issues. Obviously, It has not gone away, but it has improved. And it varies also by brand. You know, we have some unforeseen events that we don't know what's going to happen. As you have seen, the Red Sea attacks and also the Panama Canal, you know, having some problems with that. We don't know how that's going to play out. But generally speaking, it has improved. We are not to the levels we were prior to the pandemic. And there are particularly some Asian brands that continue to have some issues regarding availability of spare parts. But we don't foresee, as we see today, any major problems that we had in the past.

I think we can go now with the written questions. We have one written question from Javier Lozúa. And please, could you remind the dividend and buyback figures for 2023? And will you do further of this in 2024? Thank you.

So, Javier, good morning. So the dividend policy continues to be that we will distribute 40 to 90% of our net profit of the prior year. This is a decision that needs to be taken by the General Assembly. And as we have been saying, given our capital position, it would be fair to assume that we could once again recommend something on the higher end of that range. As a reminder, in 2023, we distributed two billion pesos on two exhibitions, first being paid in May and the second in November. Each one of them was for two and a half pesos, for a total of five pesos, the first stock here in 2023. Okay? Our share buyback program, we have been having that in place for a couple of years. We like how it has been operating. I think proof of that is our liquidity. We're now trading close to $8 million per day, something that was unexpected considering that we traded around $1 million five years ago. So I think there has been several efforts to drive that, one of which is our share repurchase program. on one that you could continue to expect towards 2024. Thank you for your question.

I think we have no more questions, so thank you for joining the call.

This concludes today's conference call. Thank you for participating and have a pleasant day.