Good morning, and welcome to the Corporacion America Airports First Quarter 2018 Earnings Conference Call. A slide presentation accompanies today's webcast and is available in the Investors section of Corporacion America Airport's Investor Relations website, coloninvestors. Corporacionamericaairports.com. As a reminder, all participants will be in listen only mode. There will be an opportunity for you to ask questions at the end of today's presentation.
As a reminder, today's conference is being recorded. At this time, I would like to turn the call over to Gimena Albanese, 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 Urmegen, our Chief Executive Officer and Raul Francos, our Chief Financial Officer. Also with us today is Jorge Heruda, 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 statement 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. With that being said, I would now like to turn the call over to our CEO, Martin Ornequan.
Thank you, Gimena. Hello, everyone, and thank you for joining us today. It's a pleasure to welcome you to Corporacion America Airports' Q1 2018 earnings conference call. I will begin my presentation with a discussion 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 with slide number 3, We had a strong start to the year with revenues up 10.5% and adjusted EBITDA growth of 12.5% year on year, driven by positive dynamics in our key operating metrics. More importantly, this is the result of successful execution across the organization. Total passenger traffic was up 7.6% in the Q1 with almost 20,000,000 passengers traveling through our 52 airports globally. Cargo volume was up 14%.
Overall, positive economic conditions in the majority of the countries where our airports are located, along with our focus on adding new routes, frequencies and airlines were the key factors driving traffic growth. To further strengthen our platform for long term success, we made capital investments of $50,000,000 in Q1. These investments were mainly focused on Argentina and to a lesser degree in Brazil and Italy, keeping up with our strategy of enhancing airports. Moving on to our regional performance on Slide 4, we reported robust traffic growth across the majority of our countries of operations. Argentina, our core business segment, with over 10,000,000 passengers in the quarter posted strong traffic growth, up over 11% year on year.
We continue to be encouraged with the 4% growth in traffic at Brasilia Airport in the Q1 of 2018 contributing to total traffic of 5,000,000 passengers in Brazil reflecting the incipient economic recovery. In other markets, Italy continues to report steady traffic growth, up 2% year on year. We are also pleased to see our business in Ecuador show signs of recovery with a moderation in traffic declines. In the quarter, traffic was almost flat declining 0.5%. This was a significant improvement from the 7% drop in the Q4 last year.
I will now hand off the call to Raul Francos, who will review our operations and financial results. Please, Raul, go ahead.
Thank you, Martin. Good day, everyone. I'm pleased to be discussing our group performance during the Q1 of the year. Turning to Slide 5, we report healthy growth with total revenue up almost 10.5% year on year. Excluding construction revenue and one time fee adjustment in Italy, total revenue would have increased a healthy 6.4% year on year.
Let me provide some details on what drove our growth good performance. 1st, Aeronautical revenue were up almost 10% in the quarter, mainly driven by solid growth in Argentina, Uruguay and Armenia. 2nd, commercial revenue were up over 4%, thanks to a good performance from our Armenian operations, driven by higher fuel demand and prices. This was further supported by higher commercial revenues in Italy resulting from commercial initiative and the appreciation of the euro against the U. S.
Dollar. Other revenue has some puts and takes in the quarter. On the positive side, we reported a $4,900,000 onetime benefit related to CPI inflationary effect of airport fees at Florence Airport in Italy for the period 1999 through 2,008 as per the Ministry of Economy and Finance. This was partially offset by €3,000,000 related to classification in marketing support expenses in Italy from a change in the advertising agreement, which are deducted from other revenues, whereas in the past, we have recorded these expenses initially. Marketing support expenses in the Q1 2017 for an approximately similar amount are reported under SG and A cost and expenses increased almost 9% year on year to $288,000,000 Excluding construction costs and onetime IPO expenses of around S800 dollars cost and expenses were up 4.5 percent year on year, which was below revenue growth.
Cost of services excluding construction were up slightly over 5.2% in the period. This was mainly due to higher cost of fuel in Armenia, higher salaries in Brazil from collective wage agreement and in Italy from the appreciation of the euro against the U. S. Dollar. Costs also reflect the impact of inflation of non tenant expenses in Argentina.
Although reported SG and A rose 1.2% year on year, excluding the onetime IPO expense, SG and A would have declined 0.6%. Note that SG and A this quarter reflects the reclassification of marketing support expenses in Italy from SG and A to other revenues as I just explained. This decrease was partially offset by a €1,100,000 increase in professional fees we incurred as a result of being a public traded company and €800,000 increase in Brazil, mainly due to larger patent provision and higher professional services fees. Moving on to our profitability on Slide 7. Adjusted EBITDA was up almost 13% year on year, reaching $137,000,000 in the quarter.
However, there are a few one time items worth mentioning. Including construction revenue and cost along the onetime IPO expenses and concession fee gain I just discussed, comparable adjusted EBITDA will have increased slightly over 9% year on year to €232,000,000 This represented a margin expansion of 98 basis points to 39% in the Q1 2018. This was principally driven by good results in Argentina supported by low double digit increase in passenger traffic in the period with modest contribution from Armenia and Uruguay. In terms of the balance sheet on Sumerizade, with a solid financial profile that provides the flexibility to pursue our growth plans. Total net debt at the end of this quarter was approximately BRL 950 1,000,000 down from BRL1.2 billion at December 2017, principally reflecting loans repaid by our Brazilian subsidiary and by our holding company.
Our net debt to trailing 12 month adjusted EBITDA ratio improved to 1.99 times at the end of the quarter compared with the 2.74 times at the year end 20 17. Importantly, we have a healthy maturity profile with only 8% of our debt maturing this year and a balanced currency mix. At the end of the quarter, 57% of our return was in U. S. Dollar, 28% in reals and 15% in euros.
Let me now turn the call back to Martin, who will go over performance at our key business statement and will comment on our outlook.
Thank you, Raul. I will now provide more details on our main business segments, starting with Argentina on slide 9. Revenues ex construction were up almost 6%, mainly driven by a 9% increase in aeronautical revenues. We added new routes and airlines over the past 12 months, supporting increased connectivity through the country as well as internationally. Some of the airlines driving international traffic include the daily flight to New York operated by United Airlines and several regional flights by Avianca.
Let me also highlight low cost carrier Norwegian's direct route to London and the 4 weekly flights to Barcelona launched by level among others. Servicing the domestic market, Aerolineas, Argentina and LATAM added more frequencies to existing routes in Argentina. And Playbondi, a low cost carrier, started flying to several domestic destinations beginning in February this year. Now moving to profitability. Higher traffic and cost dilution from the Argentine peso depreciation resulted in adjusted segment EBITDA growth of almost 10% to $93,000,000 in the quarter, with adjusted EBITDA margin ex IFRIC expanding 170 basis points.
We were also busy in the quarter making improvements to our airports in Argentina. We invested almost $45,000,000 in Argentina, mainly for the construction of a new terminal building and improvements to the runway and boarding area at the Seiza Airport and the remodeling of the terminal at Aeroparque Airport. The construction of a new terminal's building and the expansion of the parking at Comodoro Rivadavia Airport as well as runway improvements and parking expansion at Iguazu Airport and the remodeling of the terminal at El Palomar Airport. Moving forward, despite recent macroeconomic events in Argentina, we remain committed to investing in our airports to absorb expected traffic While the depreciation of the Argentine peso will likely impact domestic traffic, we expect international traffic demand to remain relatively stable over time. Our past experience shows that when the peso depreciates over time, we experience an increase in traffic from foreigners in Argentina that offsets the decline in residents going out of the country.
Keep in mind also that in average around 85 percent of our revenues in Argentina are denominated in U. S. Dollars or dollar linked, while most of our operating costs are in Argentine pesos, which supports profitability. Finally, continue to work with the government to develop the CapEx programs for the next years to satisfy this anticipated increase in passenger traffic. Moving to Brazil on Slide 10, traffic increased 2.4% supported by continued signs of economic recovery from the recession we have experienced in the country in the past 2 years.
In line with our strategy, in the quarter, we added new international and domestic routes and more frequencies to existing destinations, which also contributed to this improved performance. Keep in mind that growth was mainly driven by a good performance at our Brasilia airport, where traffic grew 4% year on year. Brasilia accounts for almost 87% of the total traffic in our Brazilian operations. Revenues increased almost 1% year on year, driven by passenger traffic and commercial initiative and was partially offset by the depreciation of the Brazilian real. Adjusted segment EBITDA remained stable at $4,200,000 in the quarter, while margin declined 22 basis points to 13.1%, reflecting higher salaries from collective wage agreements and bad debt provisions, partially offset by lower concession fees due to an increase in the discount rate used to calculate this fee.
In local currency, adjusted EBITDA margin expanded more than 200 basis points reaching low teens. This quarter, we invested $1,400,000 for project structuring and completing the new firefighting system in Brasilia Airport and repair the glass facade in Natal Airport. Finally, taking a look at Italy on Slide 11. We delivered strong revenue growth of 20.6% year on year. Excluding construction and the one time gain from concession fee adjustment discussed before, revenues would have increased almost 7%, above steady traffic growth of 2%, driven by a couple of factors.
1st, Aeronautical revenues were up almost 16%, mainly driven by new advertising and ground transportation contracts along with higher revenues from the recently redesigned VIP lounge and terminal. Note that revenues this quarter are net of $3,000,000 in marketing support expenses, as Raul just explained, while for the year ago quarter, these costs were included within SG and A. Moving to profitability. Adjusted segment EBITDA was up $5,100,000 to 6,600,000 dollars However, excluding construction services and the one time concession fee gain, adjusted segment EBITDA margin contracted 51 basis points to 4.2 percent, mainly due to lower cost dilution from the euro appreciation. Finally, we invested $2,300,000 in the quarter mainly in the reconfuration of the terminal at Torrance Airport and master plan development.
We remain on track with our investment program and construction schedule at both airports, which is expected to start in the second half of this year. Looking ahead, we are cautiously optimistic that we will continue to see healthy dynamics in our markets. Although we expect slower domestic passenger traffic growth in Argentina given the recent currency depreciation experienced in the country. By contrast, following the currency depreciation of the Argentine peso, international traffic in Argentina tends to remain relatively stable over time as the weaker currency makes traveling to the country more attractive, offsetting lower traffic from residents. In terms of adjusted EBITDA margin, we benefit from this currency depreciation given that the majority of our revenues are denominated or linked to U.
S. Dollars, while most of our operational costs are in Argentine pesos. In Brazil, we are closely monitoring the macro environment and the upcoming presidential elections and if these events could have an impact on our operations. We have a clear vision for growth in our portfolio. A key component is further route development and added frequencies.
And you heard us discuss the progress we've made in recent months. Additionally, we are focused on expanding capacity in Argentina to absorb expected passenger traffic growth, while in Brazil, we remain focused on driving higher commercial revenues at Brasilia Airport. Furthermore, we are committed to making investments to strengthen our platform for long term success, while providing the best experience to passengers traveling to our airports. At the same time, we continue to assess new projects within our concessions, which we look forward to sharing with you as they materialize. Importantly, we have the financial resources to support this growth.
We are now ready to take questions, please. Operator, please open the call for questions.
We will now begin the question and answer And the first question comes from Stephen Trent from Citi. Please go ahead.
Hi, good morning everybody and thanks for taking my question. I actually was curious just wanted to follow-up on what you guys are seeing on the M and A side. So you had recently mentioned the airport auction in Jamaica as well as some potential to acquire some assets in Italy. And I know you've done one of the 2, I believe taken an additional stake in your Italian concession. Just wondering if these are the 2 geographic spots we should continue to watch or if you are seeing opportunities in other parts of the world?
Thank you.
Thank you, Steven. This is Martin again. Well, as we discussed before, we are in a public process in Jamaica, and we continue to analyze the situation. And we'll make a decision whether or not to make a bid closer to the bid submission date. Other geographies in Italy, we remain with our opportunistic focus looking at different geographies, but mainly focus in the areas where we feel more comfortable being in the Americas and Southern and Eastern Europe.
We still see some opportunities upcoming in but none that we see materializing in the near future. But we will continue to work on it and keep everyone posted as.
Okay, Martina. Appreciate that. Thanks very much.
And the next question comes from Bruno Amorim from Goldman Sachs. Please go
ahead. Hi, good morning and thanks for the call. So I have three questions, if I may. The first one relates to your comments on the depreciation of the peso and the potential positive impacts on EBITDA going forward, which make all the sense. My question is just if as of the next tariff revision, this could imply that tariffs in dollar terms would be reduced so that your returns are not much higher than the previously agreed return on your investments.
And the second question relates to margins in Brazil. EBITDA margin was 13% in the Q1. I'd like just to understand what's your expectation going forward? Should it increase only through operational leverage as traffic grows? Or is there any other factor that could boost profitability in Brazil?
And the third question, you have mentioned a potential increase in traffic related to foreigners traveling to Argentina as a result of the currency depreciation. Is it possible to share with us the breakdown of inbound versus outbound traffic in your international operations in the country? Thank you very much.
Well, thank you for your questions. On the depreciation side, yes, that creates an instant margin increase for our operation in Argentina. Regarding tariff review, we cannot comment on what the government is doing in the way they take all the calculations to arrive to the tariff revision. But I wouldn't expect increase in the context where we are in, where we are deploying CapEx in Argentina the way we are today. So yes, we expect the margin increase, but although of the process for the tariff provision, that wouldn't be expected.
Regarding margins in Brazil, the main game changer for our scenario are the projects we are taking on regarding a boost in commercial. We have an effect in commercial revenues. We are constantly working on that, but major developments will come with the projects that are expected to be completed in about 2 years' time. Regarding traffic in Argentina, we usually give traffic monthly traffic reports for all of our operations. We have the overall traffic data coming from reliable sources.
The breakdown international versus domestically generated traffic comes from different sources that are out of our control and service that we in surveys that we make. So we do not read publicly.
Thank you very much.
And the next question comes from Ian Zaffino from Oppenheimer. Please go ahead.
Hi, good morning guys. This is Mark Zane on for Ian. Thanks for taking our question. Just a quick one. In terms of your balance sheet strength and your sound financial flexibility and clarity, what are some
I'm sorry, can you speak louder or away from the microphone? I get a blurry sound that I cannot understand. Sorry.
Yes. Sorry. Yes, I was just wondering in terms of your balance sheet and financial flexibility, is there any additional sort of capital allocation strategy that you could share in terms of maybe like additional M and A or deleveraging, anything around there will be much appreciated. Thank you.
Thank you. The sound was not good, but as far as I understand, you're asking about capital allocation and how our debt profile is going to look and deleveraging those sorts of strategies. What I can tell you is that most of our debt is at the OpCo levels and is amortizing that. So we what we expect is to keep the amortizing schedule that we have today and we do not foresee major debt profile in the near term.
Okay, good. Thank you
very much. To comment something else on that, what we might do is take additional debt required by the CapEx programs that we have discussed previously in the 3 operations or business plans for CapEx expansions such as Argentina, Brazil and Italy, where we have clear CapEx programs that we are currently executing.
Okay, great. Thank you very much.
And the next question comes from Gabriela Benjamin from NfL. Please go ahead.
Hi. Yes, my question is in regards to the negotiations with the Argentine government on twofold. Will there be a tariff revision this year in both the domestic and the dollar denominated international tariff? And if so, when will that be? And second question is regards to the CapEx for the extension of the contract, if there is a date of when those negotiations are going to conclude?
Thank you.
Can you repeat the first part of the question, please?
Sure. The first part of the question is, if there will be a tariff adjustment this year And if so, when for the domestic international tariff, the domestic to repass inflation and the international to adjust for the FX?
Okay. So regarding tariff revisions, we expect that to happen, but we cannot say when. It's up to the regulatory body to finish the work and come up with the result of the revision with a possible tariff increase. The tariff will reflect the framework of the contract we have in Argentina, Some relationship with inflation and currency exchange, but it's not directly linked to that. So we would expect the government to finish their work and publish the resource.
Okay, great. And then I have a question on CapEx?
Yes, the CapEx.
Okay. Can you repeat it please? The sound is Sure.
Yes, the line on your line is also breaking up occasionally. It's regards to the CapEx that you are negotiating with the Argentinian government to possibly have an extension of the contract, if there is any timing on that?
Well, the timing that it is available to discuss is has taken by hiring consultant to do work for them regarding our concession. That work is expected to end in 3 to 4 months as far as we know. And after that, we hope we can create or that a negotiation table will be created to begin with this process. But as far as we can see through the process, it will not begin for the next 3 to 4 months.
Okay. Thank you.
And the next question is a follow-up from Stephen Trent. Please go ahead.
Thanks again everybody. Just one other from me. With the dislocation we've seen in markets recently, I know there's several airlines that are still launching operations within the region. And I'm aware of only maybe Latin America Wings, which is maybe shut down its operations. And I'm wondering what you're seeing in the ebb and flow of new airlines.
Are they generally sticking to their plans? Or do you sense any of these folks taking a more conservative view on their growth trajectories?
Well, as far as the contacts we have with airlines, most of the airlines that have expressed interest to set up operation in Argentina are continuing with their work. The only one that has expressed the need for some delay in the beginning operations with Norwegian that has kept their workforce in Argentina and continues to do work towards establishing a domestic area in Argentina, but has said that delayed regarding issues or their programming at the headquarter level. The rest of the companies that have set up or are setting up, we still see movement and activity that does not signal a stop or a change in that sense.
Okay, got it. I appreciate that. Thanks for the color, Martin.
And this concludes our question and answer session. I would like to turn the call back to Martin Yaronachian for any closing remarks.
Well, thank you everybody for joining today. Thank you all for your questions. And we remain available as a team and we'll keep our work focused mainly on the execution of our business plans in the current business segments if we have some more news to share with you. Thank you very much.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.