Good morning, and welcome to the Corporación América Airports fourth quarter 2018 earnings call. A slide presentation accompanies today's webcast and is available in the Investors section of Corporación América Airports Investor Relations website at http://investors.corporacionamericaairports.com. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Gimena Albanesi of Investor Relations. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining us today. Speaking to you in today's call will be Martín Eurnekian, our Chief Executive Officer, and Raúl Francos, our Chief Financial Officer. Also with us today is Jorge Arruda, finance and M&A manager. All will be available for the Q&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. I also would like to remind you that following the categorization of Argentina as a highly inflationary economy, in accordance with IFRS, commencing July 2018, we began applying IFRS rule IAS 29. This rule applies retroactively starting January 1st of 2018.
For comparison purposes, in addition to presenting as-reported results, we are also disclosing the isolated impact of the adoption of hyperinflation accounting in Argentina and our results excluding Rule IAS 29. Additional information in connection with the application of Rule IAS 29 can be found in our earnings report. Note that for comparison purposes and a better understanding of the underlying performance, in our presentation today, we will be discussing results excluding hyperinflation accounting in Argentina. Let me turn the call over to our CEO, Martín Eurnekian.
Thank you, Gimena. Hello, everyone, and thank you for joining us today. It's a pleasure to welcome you to Corporación América Airports' fourth quarter 2018 earnings conference call. I will begin my presentation with a discussion of the highlights of the quarter. Raúl 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 open the call to your questions. Starting with Slide three. 2018 was a challenging year, with travel dynamics and results impacted by the unfavorable macro environment and a sharp devaluation in Argentina, our largest market, and to a lesser extent, in Brazil.
Beyond these headwinds, we served over 81 million passengers across our airport network, up 6% year-on-year, as we continued to add new routes and airlines and began operations at El Palomar, our newer airport targeting low-cost airlines in Argentina. Excluding inflation accounting, adjusted EBITDA margin ex-IFRIC for the year expanded 190 basis points to almost 37%, and adjusted EBITDA increased by low single digits. Looking at the fourth quarter specifically, adjusted EBITDA ex IAS 29 declined almost 19%, and margin ex-IFRIC contracted approximately 330 basis points year-on-year, impacted by the difficult economic conditions in Argentina, as inflation in the country is catching up with currency depreciation, reducing the strong operating leverage experienced in the third quarter. This more than offset the strong performance in other markets. For example, Brazil delivered a nearly 61% increase in comparable adjusted EBITDA, excluding one-time items, while Italy reported 40% growth in adjusted EBITDA.
These good results were further supported by the majority of our other countries of operations. With the goal of positioning the company for expected future growth and further enhance the passenger experience, we continued to advance our CapEx program during the year. During the fourth quarter, we made capital investments of nearly $70 million with full-year spending reaching $257 million. Investments were largely focused on our airport infrastructure, mainly in Argentina and Italy. Key investments for the full year included the start of the construction of the new departure terminal and multilevel parking at Ezeiza Airport in Argentina, expected to begin operations this year, and the start of the expansion of Aeroparque Airport. We also undertook the expansion of regional airports, including the Jujuy, San Juan, Comodoro Rivadavia, and Iguazu airports.
In Brazil, on the back of the four new international flights announced by Gol, we made capital investments at our Brasilia airport to expand the international boarding, baggage claim, and duty-free areas. We also invested in the construction of runway safety areas. Let me take a moment to give you an update on our commercial project at Brasilia Airport. We have redefined the project originally contemplated for this airport and are now planning a lower capital-intensive model. This new commercial space will be funded and operated by third parties, with the airport receiving a percentage of the net operating income of the complex. We have also been busy in Italy. We are particularly pleased with the conclusion of the environmental and urban impact studies and approvals with respect to our expansion plans at Florence Airport.
We are awaiting the final approval by the Ministry of Transport and expect to initiate works in the fourth quarter of 2019. We also started the expansion of the terminal building at Pisa Airport, aiming to accommodate expected passenger growth. An important event in the year was the agreement we entered into with Investment Corporation of Dubai to jointly identify and develop new opportunities in the airport sector in Italy, Eastern Europe, and the Middle East. Finally, in our other markets, note that we have successfully extended by five years our concession agreement in Ecuador, which we executed last July. Additionally, this month, we extended for another 14 years the concession agreement in Punta del Este, Uruguay. Moving to slide number four, traffic growth for the fourth quarter slowed to nearly 4% year-on-year, mainly driven by Argentina, negatively impacted by difficult macro conditions and sharp FX volatility, as already mentioned.
Passenger traffic in Argentina continued to decelerate, up to 4% from almost 6% in the third quarter, reflecting the overall slowdown in travel demand. We also continue to see a mix shift in traffic, with more affordable domestic travel up 12% year-on-year, while international traffic declined over 8%. In Brazil, traffic growth decelerated to nearly 3% year-on-year, from over 5% in the third quarter. Italy posted a strong performance, with traffic up 5% compared to 3% in the prior quarter. The addition of new routes and airlines drove a pickup in international traffic, more than offsetting the softer domestic travel demand. In Uruguay, traffic contracted almost 3% year-on-year, as performance remains affected by softer travel demand from Argentina. However, we saw a seasonal improvement from the 5% drop experienced in the prior quarter.
Traffic in Armenia remained strong, up close to 12%, mainly due to the addition of new frequencies to destinations in Russia. Ecuador continued to post a strong performance, with traffic up over 7%, reflecting the addition of new routes in the year. Peru posted a slowdown in traffic growth following the suspension of operations of a low-cost airline. I will now hand off the call to Raúl Francos, who will review our operations and financial results. Please, Raúl, go ahead.
Thank you, Martín. Good day, everyone. As Gimena noted at the beginning of our presentation, for a better understanding of our performance, we will discuss our results excluding the impact of hyperinflation in Argentina. Note, however, that in the fourth quarter 2018, the application of IAS 29 resulted in a positive impact in reported numbers when compared to the previous accounting, given that the indexation effect exceeded the translation impact from using the closing exchange rate, as opposed to using the average exchange rate for the reporting period. Starting with the top line of slide five, total revenue declined close to 13% year-on-year to nearly $363 million, and 9% when also excluding construction revenues. Consolidated revenues were impacted by the mix shift from international to domestic traffic, as well as lower travel demand in Argentina.
Revenues were also affected by the FX translation impact from the strong currency depreciation of both the Argentine peso and the Brazilian real. Aeronautical revenue declined 7%, mainly due to weaker international traffic in Argentina and currency depreciation in Brazil. By contrast, we are very pleased with the results we are seeing in Ecuador and Armenia, posting another quarter of revenue growth. Finally, in Italy, traffic increase is not entirely reflected in the revenue line, given that again, this quarter, marketing support expenses are deducted from revenues, while in the year ago quarter, they were included in SG&A. Commercial revenue declined 12.4% year-on-year, mainly reflecting lower demand in Argentina and the FX translation impact in both Argentina and Brazil. In local currency, commercial revenues in Brazil increased 15%, benefiting from higher VIP lounge and advertising revenues, together with higher cargo volume.
In Italy, our initiative to enhance our service offering, coupled with a higher traffic growth, are showing positive results. Armenia continued to perform well with growth, mainly driven by higher fuel demand and prices. Coming to our cost structure on slide 6, this quarter, we saw lower cost dilution, particularly in Argentina, our largest market, as inflation is catching up with the strong currency depreciation we experienced through the year. The mix shift in revenues from international to domestic also contributed to lower cost dilution. Cost of services ex IFRIC 12 declined almost 5% year-on-year. As a percentage of revenue, we saw an increase of over 300 basis points. This was mainly due to lower labor cost dilution arising from salary increases, reflecting both growth in the employee's base, mainly in Argentina, inflation adjustments, as well as higher maintenance costs.
SG&A in turn was down slightly over 1% year-on-year, but increased as a percentage of revenues, impacted mainly by the increase in bad debt charges in Brazil related to Avianca Brasil's receivables, partially offset by lower sales taxes in Argentina. SG&A included one-time items in both quarters: IPO expenses in the fourth quarter of 2017 and the write-off of the commercial project in Brazil, due to its recent redefinition this quarter, as Martín just mentioned. Moving on to profitability on slide 7, adjusted EBITDA ex IFRIC declined 18.6% to $ 87 million in the quarter. Growth in Italy, Armenia, and Uruguay was more than offset by the weak performance in Argentina and to a lesser extent, in Brazil. In addition, adjusted EBITDA margin ex IFRIC contracted over 330 basis points to almost 28.1% from 31.4% in the same quarter of last year.
We anticipated in our last earnings call, the strong margin expansion we saw in our previous quarter moderated as inflation is catching up with the currency depreciation in Argentina, reducing the benefits from the currency devaluation on cost. In addition, as I mentioned in the previous slide, non-recurring items in Brazil also impacted the margin. More details of these non-recurring items is included in the earning release published this morning. Moving to the bottom line, despite lower operating results, our net income showed a significant increase due to a positive variance in non-controlling exchange gains in Argentina, mainly arising from the US dollar-denominated debt as the peso appreciated during the quarter. This was partially offset by higher income tax expenses recorded in the quarter. As shown on slide 8, we continue to maintain a healthy balance sheet that provides financial flexibility to continue developing our strategic initiatives.
Total debt at the close of the quarter was relatively stable at $1.1 billion. Our net debt to last 12 months adjusted EBITDA ratio slightly decreased to 2 times from 2.1 times in the prior quarter. Importantly, we maintain a conservative maturity profile with around 10% of our debt maturing within the year and an adequate currency mix with about 60% of our debt denominated in US dollar, 20% in BRL, and 14% in EUR. Let me now turn the call back to Martín, who will go over performance at our key business segment and will comment on our outlook.
Thank you, Raúl. Starting with Argentina on slide nine. Revenues ex IFRIC declined 16% year-on-year, despite the 4% increase in passenger traffic impacted by several factors. We continue to experience overall slower travel demand, along with a mix shift from international to lower price domestic destinations. This resulted in a 12% increase in domestic traffic and an 8% drop in international travel. As the country is experiencing challenging macro environment, we are seeing a sustained increase in activities from low-cost airlines. For example, during the fourth quarter, Norwegian Air Argentina started local operations with five domestic routes, while Chilean low-cost carrier JetSmart launched international operations from El Palomar, designated as an international airport last October, and Flybondi added routes to Paraguay and Punta del Este.
At the same time, aeronautical revenues from domestic passengers and the portion of our commercial revenues that are peso-denominated remain affected by the FX translation impact from the sharp peso depreciation that took place in the third quarter. We are also seeing lower commercial revenues from international passengers, particularly in duty-free. Revenues were also negatively impacted by the mix shift in cargo volume with higher export activity and the sharp reduction in higher margin imports. Against this backdrop, adjusted Argentine segment EBITDA declined nearly 27%, and ex IFRIC 12 margin contracted approximately 514 basis points to 35.7%. Differently from the third quarter, and as anticipated in our prior earnings call, the impact from higher inflation on cost of services more than offset the benefit from the currency depreciation on our peso-based costs, as inflation is catching with the peso depreciation.
We continued to advance our CapEx program in the country and invested $ 56 million in Argentina. Funds were mainly allocated to the construction of new departures terminal building and multilevel parking at the Ezeiza Airport, the repavement of the runway and new terminal building at Comodoro Rivadavia Airport, the construction of new terminal buildings in Iguazu and Jujuy Airport, as well as several other investments across other airports in our concession, as I mentioned earlier. Our CapEx program is targeted to absorb future passenger traffic growth. We continue supporting the government's airplane revolution plan and plan to invest between $250 million to $300 million this year to be funded with cash flow from operations. This is in line with the CapEx program we are developing closely with the government. Now, please turn to slide 10 for the discussion about Brazil.
Total traffic in Brazil increased nearly 3% year-on-year, although a slowdown from the prior quarter. Along with the gradually improving macro environment, growth was supported by the addition of new domestic and international routes opened by Gol in the fourth quarter of 2018, partially compensating the fleet adjustment at the leading Latin American airline and difficulties at the Brazilian airline. Local currency revenues were up nearly 12% year-on-year, driven by the growth in both aeronautical and commercial revenues. We are very pleased with the good performance in commercial activities resulting from the new commercial agreements and higher cargo volumes. On a reported basis, however, revenues declined almost 5%, impacted by the FX translation effect from the depreciation of the Brazilian real. Adjusted segment EBITDA, in turn, was down 80% to BRL 2 million, with the margin contracting to almost 6% from 27% in the prior year quarter.
This was mainly due to nearly ARS 4 million bad debt charge in connection with the Brazilian carrier and ARS 3 million write-off resulting from our decision to no longer deploy capital to construct the new commercial area at Brasília Airport, and instead develop a lower risk model, as I explained earlier. This was partially offset by lower SG&A. We invested over ARS 4 million during the quarter for the expansion of the international boarding areas, together with the construction of runway safety areas and engineering projects at Brasília Airport. Now moving to Italy on slide 11. Traffic trends remain strong, up 5% year-on-year, driven by international traffic growth. Comparable revenues ex-IFRIC and excluding marketing support expenses remained flat in the quarter. We posted a good performance at our new retail and duty-free stores at Florence Airport, as well as higher car rental revenues from new areas opened in November.
Adjusted segment EBITDA was up an impressive 40%, and adjusted segment EBITDA margin ex-IFRIC expanded by over 526 basis points to 16.6% in the quarter. We invested over ARS 7 million in the quarter, mainly for the expansion of the terminal at Pisa Airport and master plan development at Florence Airport. Now that we have concluded the environmental and urban impact studies, we expect to obtain final approval in the next few months and to start construction of the Florence Airport expansion in the fourth quarter of 2019. Now, please turn to slide 12. To wrap up our presentation, while 2018 was a challenging year marked by significant macro and FX volatility in Argentina, and to a lesser extent in Brazil, which impacted our results, we continue to make progress on our strategic initiatives, further strengthening our airport platform for when the macro environment improves.
Looking into the current year, we expect travel trends in Argentina to remain impacted by the difficult economic dynamics in the country, in addition to the added uncertainty of this being a presidential election year. While we expect the macro backdrop to improve gradually in the second half of the year, given the lag between the purchase decision and the actual travel date, an overall pickup in international traffic trends in Argentina is anticipated to flow into our results in early 2020. Domestic travel is expected to continue to improve throughout the year as connectivity continues to increase in the country.
We also expect to see an ongoing gradual pickup in inbound international traffic as traveling to Argentina becomes more affordable on the back of the weak peso, but not fully offsetting the fall-off in outbound traffic by locals. Taking these factors into account, we expect to see a single-digit increase in total passenger traffic growth in Argentina for the year. By contrast, in Brazil, we expect to see the economy continue its improving trend, with traffic growth continuing throughout the year. This is mainly the case for international passenger traffic, which is benefiting from the recent opening of international routes. We see a similar positive trend in Italy, complemented by solid traffic trends in our other markets.
We remain fully committed to elevating the travel experience across our airports, developing new routes and frequencies, while continuing to expand infrastructure mainly in Argentina and Italy, and further strengthening our global platform for long-term success. This is the end of our prepared remarks. We are now ready to take questions. Operator, please open the line for questions.
We will now begin the question-and-answer session. If you would like to ask a question, please press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We ask that you limit yourself to one question and one follow-up. You may re-queue for additional questions. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Roberto Otero with Bank of America. Please go ahead.
Hi, gentlemen. Actually, this is Pedro here. Thanks for taking my question. I have one quick question from our side, now more focused on the A2000. Could you give us any update on the ongoing negotiation with the government regarding the concession 10 years extension? In your view, how should the upcoming election impact your negotiation? If you could give us a sense of timing, should we expect any final terms happening still in 2019, or maybe it will be more conservative to assume this happening only 2020 onwards? That's my question. Thanks.
Hello, this is Martín Eurnekian. Thank you for your question. It would be difficult for me to give you an idea on when the government will be ready. We are engaging with them as often as possible to understand when can we officially launch a negotiation. To be honest, the fact that we have entered the election mode in Argentina has, at least in our perception, shifted the administration's priorities in terms of what they need to achieve, because, as you probably understand, everybody goes into election mode once we start getting closer to the primaries and presidential elections. This is the feel that I can give you. Although not impossible to do a negotiation this year, I think that the fact that everybody's focusing on elections puts a little bit of strain in that possibility of being able to really close before the end of the year.
All right, Martín. Thanks for responding to my question.
Our next question comes from Ian Zaffino with Oppenheimer. Please go ahead with your question.
Hey, good morning, guys. This is Mark on for Ian. Thanks for taking our question. If you guys could provide a little bit more detail on the timeline of the capital spend, particularly at A2000, I'd be much appreciated. Just a couple is, potentially give us a sense of when Ezeiza will open in 2019, just like, a first half or second half event, and what's the timeline on the Aeroparque expansion. That would be much appreciated. Thank you.
Okay. We have a set of inauguration mark for this year, Ezeiza being the main one. As of today, the set date for inauguration of the new terminal in Ezeiza is the end of September. That will be fine-tuned with the group that is doing the actual CapEx and the government as well. For the rest, we have a calendar for opening of the works that we've been doing so far. We can definitely provide that to you, but it will be publicly announced each time we decide on exact date for the openings that we have this year.
Okay, terrific. That's very helpful. Okay, sorry. Okay, great. Thank you guys very much.
Once again, if you would like to ask a question, please press star then one. Our next question comes from Bruno Amorim with Goldman Sachs. Please go ahead.
Yes. Hi, good morning. I have two questions. The first one is, out of the additional ARS 1 billion in CapEx expected to be included in the concession agreement in Argentina, how much have you already done so far? Also, has the regulator recognized or authorized this investment, or is it something to be discussed only when the additional ARS 1 billion is approved by the regulator? The second question is, when should we expect to see the next tariff revision in Argentina? Is this negotiation tied with the discussion around concession renewal and additional investment for ARS 1 billion, or are those separate discussions? Could we see tariffs being adjusted before the final decision on the extension? Those are my two questions, please.
Thank you. First, the two things are totally separate. According to our current contract, the tariff revision should be done yearly. The regulator is a little bit late. As far as we know and from the interactions we have, they are getting ready to finish the exercise to be able to publish it. It's not a negotiation. They have to run the numbers and do the adjustments. It's not linked to any negotiation or anything else whatsoever. Regarding the CapEx question, as the discussion we are having end of 2018, we were either at the number agreed in the concession contract in terms of total CapEx for the concession or a little bit, or slightly beyond that number. For 2018, that is the fact. For 2019 is where we are going beyond that number.
Everything we do is approved by the regulator and taken into account into the regulatory accountancy and the concession contract.
Very clear. Thank you very much.
This will conclude our question and answer session. I would like to turn the conference back over to Martín Eurnekian for any closing remarks.
Thank you very much for joining us today. We really appreciate your interest in our company. We look forward to meeting more of you over the coming months and providing financial and business updates the next quarter. In the meantime, the team remains available to answer any questions that you may have. Thank you again, and enjoy the rest of your day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.