Good morning, and welcome to the Corporacion America Airports Second Quarter 2019 Earnings Call. A slide presentation accompanies today's webcast and is available in the Investor section of Corporate Accion America Airports Investor Relations website at http: investors.corporacionamericaairports.com. As a reminder, all participants will be in listen only mode. There will be an opportunity As a reminder, this call is being recorded. And at this time, I would now like to turn the conference over to Gimena Albanesi of Investor Relations.
Please go ahead.
Thank you. Good morning, everyone, and thank you for joining us today. Speaking during today's call will be Martino Uronellyan, our Chief Executive Officer and Raul Trancos, our Chief Financial Officer. Also with us today is Jorge Urduga, Finance and M and A Manager. All will be available for the Q and A session.
Before we proceed, I would like to make the following Safe Harbor statement. Today's call will contain forward looking statements, and I refer you to the forward looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward looking statements to reflect new or changed events or circumstances. Note that for comparison purposes and Adera and in Argentina, which is in its active July 2018. Additional information in connection with the application of Brule IAS 29 can be found in our earnings report.
Now let me turn the call over to our CEO, Martino Messiannis.
Thank you, Gimena. Hello, everyone, and thank you for joining us today. It's a pleasure to welcome you to Corporacion America Airports' 2nd quarter 2019 earnings conference call. I will begin the presentation today with an overview of the highlights of the quarter and then Raul will take you through our financial results. Afterwards, I will provide an update on our key business segments and our view for the remainder of the year.
We will then open the call to your questions. Starting off with an overview of our performance on Slide 3. We are operating in a challenging environment, particularly in Argentina, our largest market, and to a lesser extent in Brazil. Operations in Argentina remain impacted by weak macro and currency depreciation. In turn, we saw a continued mix shift towards more affordable domestic traffic, weaker commercial revenues and the negative FX translation impact on local currency revenues.
While we also experienced softer traffic in Brazil, results from Brazil and Italy were also affected by currency depreciation. Close to 20,000,000 passengers traveled through our airport network in the quarter, up nearly 4% year on year as we continue to add more routes and airlines. Domestic traffic increased 9%, while international traffic was down in the low single digits. Comparable adjusted EBITDA excluding inflation accounting and a one time item that Raul will discuss shortly declined 9% year on year with the margin ex IFRIC remaining flat at 37%. Better margins this quarter in Italy and Uruguay were more than offset by margin contraction in Argentina, Ecuador and Armenia.
Despite these near term headwinds, we continue to make the necessary investments that will enhance the passenger travel experience and increase capacity to capture future growth. In the Q2, we invested BRL108 1,000,000. Majority of the funds were allocated to expand and modernize our airports in Argentina. In particular, we have been making very good progress on the construction Seysa International Airport, which we expect will be inaugurated this coming September. Investments were also made in Armenia and Ecuador.
Moving on to Slide 4. Total traffic growth of close to 4% year on year was mainly driven by soil expansion in Argentina, which offset a weaker performance in Brazil. Note we faced easier comps from the shift in the Easter holidays, which this year took place in April, while last year it was in March. Argentina delivered 12% year on year growth in traffic driven by sustained mix shifts to our domestic travel, which continued to expand at a solid pace, up 22% year on year. This more than offset a 6% drop in international traffic.
In Brazil, traffic was negatively impacted by the cessation of operations of Avianca Brazil in May. The combination of these factors resulted in nearly 10% year on year decline in traffic. Traffic in Italy was flat year on year. Growth of 5% year on year at Florence Airport driven by the addition of new airlines, routes and frequencies was offset by low single digit decline at Pisa Airport, reflecting the reduction of operations by a Russian low cost carrier. Our other market posted improved performance as the company continues to execute its strategy of expanding the number of airlines, routes and frequencies across its airports.
Passenger traffic was up 9% in Armenia, which also benefited from the improved political conditions. In Ecuador, while total traffic was up 2% year on year, international from the 6% drop experienced in the prior quarter, while Uruguay also posted slight improvement in traffic trends compared to the prior quarter. I will now hand off the call to Raul Francos, who will review operations and financial results. Please, Raul, go ahead.
Thank you, Martin. Good day, everyone. As Gimena noted at the beginning of the presentation, for a better understanding of our performance, we will discuss our results excluding the impact of hyperinflation in Argentina. Starting with revenues on Slide 5, Top line growth remains impacted by difficult macroeconomic conditions in Argentina. On a comparable basis and excluding construction revenue, total revenue fell 7% year over year.
Aeronautical revenues declined almost 4 percent mainly as a result of the mix shift to domestic from international traffic in Argentina and the FX translation impact on domestic revenue from the strong currency depreciation. In Brazil, our nonrecurring revenues were mainly affected by the decline in traffic and currency depreciation, which basically offset the benefit from the August 2018 increase in tariff at Brasilia Airport and the significant growth in international traffic. We are very encouraged with the result we are seeing in Ecuador, which posted another quarter on revenue growth fueled by higher international passenger traffic at Lazakila Airport. Moving on to commercial revenues, we saw a decline close to 12% year on year, mainly affected by lower cargo in spots and softer passenger demand in Argentina, as well as FX translation impact on local currency revenues in Argentina and Brazil. In local currency, commercial revenues in Brazil increased close to 4% more due to higher recurring volume, VIP launch and advertising revenue among others.
Armenia posted another quarter of commercial revenue growth supported by higher fuel demand. In Italy, revenues in local currency increased 10%, fueled by new commercial agreement with Car Rental and higher VIP launch and food and beverage revenues stemming from the remodeling of some commercial areas at our airports. Moving to our cost structure on Slide 6. As we noted in the past, a significant portion of our fixed costs are denominated in local currency. Therefore, the FX depreciation in our main market offset the lower fixed cost dilution resulting from the decline in revenues.
Total operating costs and expenses ex IFR12 declined in line with revenues. Cost of services fell 5% year on year, mainly due to lower maintenance costs in Argentina and Brazil, which benefited from currency depreciation as well as lower concession fees and labor costs in our main markets. Cost of services also benefited from a $2,200,000 one time gain arising from the positive outcome of legal trend against the Ministry of Transport in Italy. SG and A declined almost 18% year on year, supported mainly by lower sales taxes and labor costs in Argentina as well as lower professional fees at the holding level. This was partially offset by higher bad debt charges in Argentina and Brazil related to commercial activities.
Now please turn to profitability on Slide 7. Adjusted EBITDA at CIFR declined nearly 7% to 100 and $13,000,000 in the quarter. Excluding the $2,200,000 one time gain in Italy, comparable EBITDA was 9% lower year on year, while the margin remained flat at 37%. Solid margin improvement in Italy and Brazil this quarter was offset by a weaker performance in Argentina. As you can see on Slide 8, our financial position remains healthy.
This is particularly important in the current environment. Our priority is to drive shareholders' value and we will continue to maintain adequate cash level to support business needs while investing for future growth. We ended the quarter with a cash position of BRL 222,000,000 and net debt of $915,000,000 Net debt to last 12 months adjusted EBITDA was 2.1x, up from 2x in March 2019. I would also like to comment on transactions we recently completed. On August 9, our Argentine subsidiary entered into 2 credit facilities for a total principal amount of $120,000,000 These loans will match you on the 3rd anniversary of the execution day.
Proceeds will be used for the development of the value scrap fixed programs across our Argentina concession. Let me turn the call back to Martin, who will go over performance at our key business segments and will comment on our outlook.
Thank you, Raul. Starting with Argentina on Slide 9. Revenues ex IFRIC declined 14% year on year as the macro backdrop continues to impact our financial performance in several ways. First, we saw a continued mix shift from international travel to more affordable domestic destinations. Domestic travel rose 22% year on year, driven by new routes and frequencies operated by low cost carriers along with higher promotional activity.
By contrast, international travel declined nearly 6%. As per the National Statistics and Census Institute, within international traffic, inbound traffic by non nationals rose 18% mainly from neighboring countries, while travel by nationals fell 15%. 2nd, commercial revenues were lower. This was due to decline in duty free sales and in cargo activity. Finally, FX translation effects resulting from the 86% quarterly average year on year depreciation negatively impacted local currency aeronautical and commercial revenues.
In terms of profitability, adjusted segment EBITDA declined 15%, while adjusted EBITDA margin ex IFRIC 12 contracted 80 basis points to nearly 43% in the Q2 2019. As anticipated in prior calls, the impact from higher inflation on cost of services more than offset the benefits from the currency depreciation on our peso based cost as inflation is catching up with the peso depreciation. We have made significant progress on our CapEx program this quarter, investing $87,000,000 Funds were mainly allocated to the construction of a new departure terminal building and multilevel parking at Ezeiza Airport. The goal is to enhance the travel experience, increase capacity and drive higher operating efficiencies. The new terminal that will concentrate all domestic and international departures will count with nearly 150 check-in counters and 60 self check-in kiosks as well as new commercial areas and the new multilevel parking connected to the terminal.
We are on track to complete the new terminal building during the Q3 of 2019. This quarter, we also inaugurated the new terminal building at Comodo Rivadavia Airport, a fully sustainable building. We are also making progress on the landfill for the construction of a new car parking facility on Costaneda Avenue at Aeroparque Airport. Investments also included the construction of a new terminal building at Iguacu and Cuhui airports as well as improvements to our runways and taxiways at Cordoba Airport. We also made terminal expansions as well as various CapEx programs across several of our regional airports in Argentina.
Moving on to Italy on Slide 10, passenger traffic was stable year on year. Florence Airport delivered a strong performance with traffic up 5%. In addition to Easter comps due to a pilot strike last year and the Easter holiday effect this quarter, traffic growth at Florence Airport was also driven by the good performance of TAP Airlines, additional flights by Iberia, the addition of SaaS Airlines and a new route by Eurowings. This offset weaker performance at Pisa Airport as Pobeda reduced its operations in the quarter. Revenues ex IP12 were flat year on year impacted by the 8% depreciation of the euro.
In local currency, however, aeronautical revenues were up 6%, benefiting from lower marketing support expenses together with increases in passengers with reduced mobility fee granted last February. Commercial revenues in turn were up 10% in local currency, driven by new commercial agreements with car rentals at Pisa Airport as well as from new food and beverage tenant at both airports. New VIP lounge agreements also contributed to this increase. Our Italian airports delivered strong profitability supported by higher cost dilution. Comparable adjusted EBITDA excluding a one time gain from a legal claim was up 9% year on year, while the ex IFRIC 12 margin increased 2 47 basis points to 30% in the Q2 of 2019.
Moving on to CapEx and a few words about the Florence Airport expansion program. As you might recall, this project has been delayed. An appeal has been filed against the judgment that has overturned the favorable environmental impact assessment decree for the project outlined in the 20 fourteen-twenty 29 master plan. As we have more information, we will keep the market informed. While we wait for clarification, we made capital investments for $5,000,000 in Italy this quarter, mainly on the master plan development at Florence Airport and new equipment at Pisa Airport.
Finally, let me note that our plan to expand the terminal building at Pisa Airport to accommodate expected passenger growth remains on track and we expect works to begin by the end of the year. Now, please turn to Slide 11 for a discussion about Brazil. Total traffic declined almost 10% year on year, reflecting a similar decline in domestic passengers, mainly driven by the cessation of operation of Avianca Brazil. While traffic this quarter was impacted by these external events, we remain focused on adding new domestic and international routes and expect these efforts to act as a counterweight in the near future. Last June, GOL started a direct flight to Cancun from Brasilia Airport, the 4th international flight announced over the last 10 months and has also announced the addition of several domestic frequencies as it continues to expand its operations in Brasilia.
Local currency revenues increased 2% year on year, mainly driven by commercial revenue growth. Despite weak traffic volume, our VIP lounge continued to perform well and we also benefited from higher cargo volume. We continue to work with our concessioners to enhance our commercial offering and this quarter we added 6 new food and beverage operations. This month, we are starting construction of the pickup plaza at the Achille airport, which is expected to be completed early next year. The plaza will concentrate oil pickup of car hailing companies, in particular, Uber and some of the car rentals, creating a new gravity center, allowing to create new revenues particularly in food and beverage.
Aeronautical revenues in local currency were flat as the decline in passenger traffic was offset by increase in tariffs at Brasilia Airport that took place in August 2018 and the significant growth in international traffic. However, the 9% FX depreciation of the Brazilian real in the period resulted in a 7% decline in as reported revenues. In terms of profitability, adjusted EBITDA in this quarter increased 18% to $3,000,000 with the margin expanded 2 20 basis points to 11%. This was driven by lower concession fees, partially offset by deleverage in SG and A expenses as a result of higher bank debt charges mainly from certain commercial tenants. In July, we made a capital injection on our Brazilian subsidiary to meet the annual payment of the concession fee.
While second quarter results were worse than expected due to Avianca Brazil and weak macro conditions, we remain encouraged with the long term potential of our Brazilian airports. Now, please turn to Slide 12 to review our Uruguayan operations. Traffic at Uruguay remained impacted by the cancellation of a daily route to Bogota and weak travel demand from Argentina. However, we saw an improvement on the back of easier comps from the Easter and winter holiday shifts. Despite the weak traffic performance, revenues were flat year on year.
Aeronautical revenues were driven by an increase in passenger fee together with the increase in international traffic from higher margin routes. Commercial revenues were impacted by a decline in duty free and parking revenues as a result of softer demand from Argentine passengers coupled with the FX translation impact from the 16% currency depreciation. This was partially offset by higher VIP lounge revenues from new commercial agreements signed in the quarter. Turning to profitability, adjusted EBITDA was up 2% to $12,000,000 with margin ex April 12 expanding 91 basis points to 45% in the quarter. Lower cost of services more than offset the impact of a new variable compensation policy and higher SG and A.
Our cost structure also benefited from currency depreciation together with lower utility fees, resulting from the implementation of a solar energy generation system. In addition to contributing to savings in energy cost, this initiative reinforces our commitment to sustainability. Now to wrap up, turn to Slide 13. Looking ahead, despite the challenging times, we remain focused on executing our long term strategy. In Argentina, our key market, we are navigating a difficult environment with weak macro conditions and heightened volatility surrounding the presidential election, adding another layer of uncertainty to the second half of the year.
Despite these challenges, we have been operating in Argentina for over 20 years, many of which were under uncertain scenarios. We also have a resilient business model with nearly 80% of revenues generated in U. S. Dollars and a solid balance sheet that provides additional flexibility. Looking towards the future, we are moving ahead with our investment program in Argentina as we modernize and expand capacity to meet overall growing demand and offer a convenient travel experience.
In Brazil, weak economic growth together with the cessation of operations of Avianca Brazil continue to weigh on traffic trends and results. We also expect Avianca's former capacity at Brasilia Airport to be gradually restored by the 3 other carriers with domestic operations at this airport starting by year end. In Italy, while we continue to monitor the evolution of Alitalia and the development of Brexit, we are expecting a good summer travel season. In sum, while we continue to face several headwinds in Argentina and Brazil in the near term, our solid balance sheet provides flexibility and support for our strategy of advancing on investment projects that will better position the company for growth as volatility in Argentina receipts and the macro environment improves. We are now ready to take questions.
Operator, please open the line for questions.
And our first question today comes from Ian Zaffino with Oppenheimer. Please go ahead.
Hi, good morning guys. This is Mark on for Ian. Thanks for taking our questions. So just to start off, first question in regards to A2000. Is there any updates on discussion with the government in regards to potential extension, just given what has been going on down there, in terms of the shift and government election coming up?
And any insights on timing would be much appreciated as well.
Thank you.
Thank you, Mark, for your question.
As you can imagine the situation in Argentina is a little confusing right now because we have a virtual winner of the primary elections and we're waiting for October to have a real result on the elections. So my best guess would be that the government would be ready to start discussions with us once we know who it is after the elections.
Okay, great. Thank you. And then just another quick one in regards to your balance sheet. Are you guys looking to potentially look at new M and A or new concessions just given where your balance sheet strength is? And if so, are there any that are up and coming or you guys are interested in?
Thank you.
Thank you for your question. As we always say, we are always our business development team is always looking for opportunities that can bring an upside to Corresia America airports and its shareholders. We are looking at the opportunities that have arrived recently in the regions that we operate. But so far there are no formal processes in which we are involved.
Okay, great. Thank you guys very much.
And our next question comes from Stephen Trent with Citi. Please go ahead.
Good morning, gentlemen, and thank you, gentlemen and thank you for taking my questions. I was curious in regards to the kind of a follow-up from the gentleman from Oppenheimer. Aside from the potential extension of AA2000, can you give any more granularity with respect to how that asset IRR is running versus the guaranteed IRR? And whether that gives you leverage to have some conversations?
Thank you for your questions, Stephen. As we always say, we believe that the mixture of required investment for future growth in the next years of the concession. And the way the concession has performed so far opens an opportunity for us to discuss the extension clause in our concession contract. Nevertheless, to comment on that, we wouldn't really need to understand the regulator's point of view once they review the economic equation of the concession. Once that happens, we can have a clearer view and also have a position on whether if we agree with it or not.
So in that sense, we hope that we will soon get news from the regulator. And as soon as that happens, we can have a clear view on that. Although within the company, there is a belief that we are lower than the target. But we will still have to discuss this with the regulator in terms of the numbers they create.
Okay, Martin. That's very helpful. And just two quick follow ups. Just to be clear, I mean, that guaranteed IRR was something that was granted by a former Kirchner administration, if that's correct?
The current form of the contract was signed in 2007 during the first government of Necker Kitchener. That's correct.
Yes. Great, great. Thank you. And just one last question from me. And apologies if I missed it, as I had some trouble dialing in.
But I wasn't sure if there's an update on El Palomar Airport and how that process is progressing?
So we have 2 airlines operating at the Palomar, 2 low cost airlines, FlyBondi and JetSmart from Chile that's also started operations in Argentina. The airports are performing really well. It runs in the top airports in Argentina by traffic right now. We had a recent ruling. We have started international flights from the airport as well.
We recently had a ruling from a judge, carrying flights during nighttime from 11 p. M. To 6 a. M. But aside from that, that is being contested by the authorities.
The airport is running really well.
Okay. Appreciate it. Let me leave it there. Thanks, Martin.
Thank you.
And our next question comes from Bruno Amorim with Goldman Sachs. Please go ahead.
Hi, good morning. So my question relates to CapEx, which has increased in the second quarter. So just wanted to confirm if all this CapEx can be considered as part of the additional $1,000,000,000 that has to be included in the contract? Or is part of this CapEx you have made in Argentina in the second quarter? Is it still related to the original agreement you had with the regulator?
And also in that regard as well, until what point do you intend to keep doing the CapEx prior to discussing with the regulator the offset for this additional CapEx on top of what was initially expected? So do you intend to continue doing the CapEx at the same pace going forward? Or can we see a deceleration until you have a final agreement on either concession extension or other way for the company to be compensated for those additional investments? Thank you.
Thank you for your question, Bruno. Towards the end of last year, we reached the CapEx amount that was foreseen in the original contract. So what we have done since then has been in excess or beyond that. We are definitely going to finish all the different works that we started. And going forward, we most probably will sit down and discuss with the government the continuity of the CapEx program and how that translates into the probable extension.
Although, I wouldn't say definitive answers because we will make decisions as we go in terms of the dialogue that we will have with whomever is in the government during the next year.
Thank you.
If I can make an addition to your question, everything all the CapEx we are doing is approved by the regulator and hence it's put in the regulatory accounting of our concession contract and the IRR.
Understood. Thank you.
And our next question comes from Juan Gazzas with TBCG. Please go ahead.
Hi, good morning. I was wondering given that you are going to finish this investment in Argentina, how much CapEx is yet to finish the projects are ongoing? And also following what you said about the Italy airport, the Italy expansion in Pisa, how much do you plan to invest there? And also in Brazil, I don't know if you're still planning to do any expansions there?
Thank you.
Thank you for your question. During the second half of this year, we expect to invest around $150,000,000 in Argentina. The work in Italy has not started. We have some budgets, but we will probably come into that when we start the works and we assign the works through a public tender process there that can freeze the right amounts of the works we are contracting. And you had a question on Brazil regarding CapEx?
Yes, exactly. I believe before in all calls you mentioned you were planning to do a commercial expansion there. I don't know if there's been any development regarding that or is there some other type of expansions in Brazil?
The only expansion we foresee in Brazil go ahead, Jorge.
Okay. Hi, thanks for your question. This is Giorgio Aruta. I'm Head of M and A and Corporate Finance and also Head of Brazil. So I'll take this question regarding Brazil.
Regarding your specific question about the commercial area, this would be a 3rd party funding. This would be we would lease the area to a 3rd party that would put the CapEx. And regarding that, we have redesigned the projects to further adapt with the reality of the airport and the region and the trends of the market and are discussing with investors that will, as I said, put the money. So this is progressing nicely, but again is no CapEx from our side. From our side, as was mentioned during the conference call, we began construction of what we call pickup plaza to concentrate all the car pickups from Uber and other car hailing companies, car rent some of the car rental companies and creating a new gravity center.
It's not a huge CapEx, it's about $2,000,000 to $3,000,000 We have a plan to expand the international area. As Martin has said, GOL has put has just put the 4th international flight and LATAM announced officially, in fact, the day before yesterday, very closely watch how these flights perform. The initial task looks good. That's the feedback we have from the airlines. We are also in discussions with some other airlines to introduce new flights.
So if we indeed see that this is a trend that it is there to stay, we will more seriously consider expanding the international terminal. It's again not a huge CapEx. We are talking about $10,000,000 to $12,000,000 maximum and which can be executed in 12 months.
And this will conclude our question and answer session. I'd like to turn the conference back over to Martin Yurnekian for any closing remarks.
Thank you very much.
Thank you very much for joining us today. We really appreciate your interest in your company. We look forward to meeting more of you over the coming months and providing financial and business updates on the next quarter. In the meantime, the team remains available to answer any questions that you may have. Thank you very much and enjoy the rest of your day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time and have a wonderful day.