Good morning, and welcome to the Corporación América Airports first quarter 2018 earnings conference call. A slide presentation accompanies today's webcast and is available in the investors section of Corporación América Airports investor relations website, http://investors.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 Albanesi, Investor Relations. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining us today. Speaking during 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 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, Martín Eurnekian.
Thank you, Gimena. Hello, everyone, and thank you for joining us today. It's a pleasure to welcome you to Corporación América Airport's first quarter 2018 earnings conference call. I will begin my presentation with a discussion of the highlights of the quarter, and then 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 then open the call to your questions. Starting with slide three, 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 first quarter, with almost 20 million 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 million 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 the infrastructure of our airports. Moving on to our regional performance on slide four, we reported robust traffic growth across the majority of our countries of operations. Argentina, our core business segment with over 10 million 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 Brasília Airport in the first quarter of 2018, contributing to total traffic of 5 million passengers in Brazil, reflecting the incipient economic recovery. In other markets, Italy continues to report a 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 fourth quarter last year. 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. I'm pleased to be discussing our good performance during the first quarter of the year. Turning to slide five, 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 good performance. First, aeronautical revenue were up almost 10% in the quarter, mainly driven by solid growth in Argentina, Uruguay, and Armenia. Second, 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 initiatives and the appreciation of the euro against the U.S. dollar. Other revenue had some puts and takes in the quarter.
On the positive side, we reported $4.9 million one-time benefit related to the CPI inflationary effect of airport fees at Florence Airport in Italy for the period 1999 through 2008, as per the Ministry of Economy and Finance. This was partially offset by $3 million related declassification 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 in SG&A. Marketing support expenses in the first quarter of 2017 for an approximately similar amount are reported under SG&A expenses. Moving down the P&L to slide six, total operating costs and expenses increased almost 9% year-on-year to $288 million. Excluding construction costs and one-time IPO expenses of around $800,000, costs and expenses were up 4.5% 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 costs of fuel in Armenia, higher salaries in Brazil from collective wage agreements, and in Italy from the appreciation of the euro against the U.S. dollar. Costs also reflect the impact of inflation of maintenance expenses in Argentina. Although reported SG&A rose 1.2% year-on-year, excluding the one-time IPO expense, SG&A would have declined 0.6%. Note that SG&A this quarter reflects the reclassification of marketing support expenses in Italy from SG&A to other revenues, as I just explained. This decrease was partially offset by a $1.1 million increase in professional fees we incurred as a result of being a publicly traded company, and $0.8 million increase in Brazil, mainly due to larger bad debt provision and higher professional services fees. Moving on to our profitability on slide seven.
Adjusted EBITDA was up almost 13% year-on-year, reaching $137 million in the quarter. However, there are a few one-time items worth mentioning. Excluding construction revenue and cost along the one-time IPO expenses and concession fee gain I just discussed, comparable adjusted EBITDA will have increased slightly over 9% year-on-year to $132 million. This represented a margin expansion of 98 basis points to 39% in the first quarter of 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 slide eight, 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 $950 million, down from $1.2 billion as of December 2017, principally reflecting loans repaid by our Brazilian subsidiary and by our holding company. Our net debt to trailing 12 months adjusted EBITDA ratio improved to 1.99 x at the end of the quarter, compared with the 2.74 x at the year-end of 2017. 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 debt was in U.S. dollars, 28% in real, and 15% in euro. Let me now turn the call back to Martín, who will go over performance at our key business segments and give comments on our outlook.
Thank you, Raúl. I will now provide more details on our main business segments, starting with Argentina on slide nine. 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 four weekly flights to Barcelona launched by Level, among others. Servicing the domestic market, Aerolíneas Argentinas and LATAM added more frequencies to existing routes in Argentina. Flybondi, 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 million 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 million in Argentina, mainly for the construction of a new terminal building and improvements to the runway and boarding area at Ezeiza Airport, and the remodeling of the terminal at Aeroparque Airport. The construction of a new terminal 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 growth.
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 on average, around 85% 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, we 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 two years.
In line with our strategy, in the quarter, we added new international and domestic routes and more frequencies to existing domestic destinations, which also contributed to this improved performance. Keep in mind that growth was mainly driven by a good performance at our Brasília Airport, where traffic grew 4% year-on-year. Brasília 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 $4.2 million 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 $1.4 million for project structuring and completing the new firefighting system in Brasília 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. First, aeronautical revenues were up almost 16%, mainly reflecting the appreciation of the euro against the U.S. dollar. Second, commercial revenues were increased over 30%, 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 million in marketing support expenses, as Raúl just explained. While for the year-ago quarter, these costs were included within SG&A. Moving to profitability, adjusted segment EBITDA was up $5.1 million to $6.6 million. However, excluding construction services and the one-time concession fee gain, adjusted segment EBITDA margin contracted 51 basis points to 4.2%, mainly due to lower cost dilution from the euro appreciation. Finally, we invested $2.3 million in the quarter, mainly in the reconfiguration of the terminal at Florence 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. 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 Brasília Airport. Furthermore, we are committed to making investments to strengthen our platform for long-term success while providing the best experience to passengers traveling through 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 session. To ask a question, you may press star then one on your touch-tone phone. 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 also ask that you limit yourself to one question and one follow-up, and you may queue back for more questions. At this time, we will pause momentarily to assemble our roster. 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&A side. You had recently mentioned the airport auction in Jamaica, as well as some potential to acquire some assets in Italy. I know you've done one of the two, I believe, taken an additional stake in your Italian concession. Just wondering if these are the two geographic spots we should continue to watch, or if you are seeing opportunities in other parts of the world. Thank you.
Thank you, Stephen. This is Martín 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 focused in the areas where we feel more comfortable, being the Americas and Southern and Eastern Europe. We still see some opportunities upcoming, but none that we see materializing in the near future. We'll continue to work on it and keep everyone posted.
Okay, Martín, appreciate that. Thanks very much.
The next question comes from Bruno Amorim from Goldman Sachs. Please go ahead.
Hi, good morning, and thanks for the call. 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. The second question relates to margins in Brazil. EBITDA margin was 13% in the first quarter. 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?
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.
Thank you for your questions. On the depreciation side, yes, that creates an instant margin increase for our operation in Argentina.
Regarding a tariff review, we cannot comment on what the government the way they take all the calculations to arrive to the tariff revision. I wouldn't expect increase in the context where we are in, where we are deploying CapEx in Argentina the way we are today. Yes, we expect a margin increase. Although of the process for the tariff revision, that wouldn't be expected. Regarding margins in Brazil, the main game changer for our scenario are the projects we are taking on regarding boosting commercial that will 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 two years' time. Regarding traffic in Argentina, we usually give monthly traffic reports for all 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 surveys that we make. We do not release publicly.
Thank you very much.
The next question comes from Ian Zaffino from Oppenheimer. Please go ahead.
Hi. Good morning, guys. This is Mark standing 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 [audio distortion].
I'm sorry. Can you speak louder or away from the microphone? I get a blurry sound that I cannot understand. Sorry.
Sorry. I was just wondering, in terms of your balance sheet and financial flexibility, is there any additional capital allocation strategy that you could share in terms of maybe additional M&A or deleveraging? Anything around there will be much appreciated. Thank you.
Thank you. The sound was not good, as far as I understand, you're asking about capital allocation and how our debt profile is going to look, deleveraging or those sorts of strategies. What I can tell you is that most of our debt is at the OpCo levels and is amortizing debt. 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.
Great. 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 three 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.
Once again, if you would like to ask a question, please press star then one. The next question comes from Gabriela Benjamin from Goldman Sachs. 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? If so, when will that be? 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. 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. We will expect the government to finish their work and publish the results.
Okay, great.
The CapEx?
Yes, the CapEx.
Okay. Can you repeat it, please, slowly?
Sure. Yeah. 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's any timing on that.
Well, the timing that it is available to discuss is government has taken by hiring a consultant to do work for them regarding our concession. That work is expected to end in three to four months, as far as we know. After that, we hope a negotiation table will be created to begin with this process. As far as we can see through the process, it will not begin for the next three to four months.
Okay. Thank you.
Once again, if you have a question, please press star then one. The next question is a follow-up from Stephen Trent. Please go ahead.
Thanks again, everybody. Just one other from me. With this location we've seen in markets recently, I know there's several airlines that are still launching operations within the region. I'm aware of only maybe Latin American Wings, which has maybe shut down its operations. 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 is Norwegian. That has kept their workforce in Argentina and continues to do work towards establishing a domestic airline in Argentina, but has said that a delay 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, Martín.
Once again, if you have a question, please press star then one. This concludes our question and answer session. I would like to turn the call back to Martín Eurnekian for any closing remarks.
Well, thank you, everybody, for joining us today. Thank you all for your questions. 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 i f 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.