Good morning, and welcome to the Corporacion America Air Force 4th Quarter and Year End 2017 Earnings Call. A slide presentation will accompany today's webcast, which is available in the Investors section of Corporacion America Air Force Investor Relations website at investors. Corporacionamericaairports.com. As a reminder, all participants will be in a listen only mode. There will be an opportunity for you to ask your questions at As a reminder, today's conference call is being recorded.
At this time, I'd like to turn the call over to Ms. Helena Albanese, Investor Relations. Please go ahead, ma'am.
Thank you. Good morning, everyone, and thank you for joining us today. Speaking during today's call will be Martino Nican, our Chief Executive Officer and Noel Franco, our Chief Financial Officer. Also with us today is Jorge Arruda, 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 reconcilings 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 O'Neill.
Thank you, Gimena. Hello, everyone, and thank you for joining us today. It's a pleasure to welcome you to Corporacion America Airports' 1st earnings conference call. We are pleased to be discussing a solid quarter with very good performance across key metrics. As this is our first earnings call and many of you may be new to the story, I'm going to take a few minutes to discuss our company and our strategy.
I will then discuss the highlights of the quarter. Raul will take you through our financial results. Afterwards, I will go over our key business segments and our view for the year, and we will then open the call for your questions. Starting with Slide number 3, as many of you know, we completed our initial public offering on February 1. This was a strategic milestone for our company and positions us among the few airport groups fully listed in the U.
S. We sold approximately 28,600,000 shares of which $11,900,000 were primary and the remainder secondary. We are the only airport group solely listed in the New York Stock Exchange. Net proceeds to the company were 185,500,000 dollars which strengthened our financial position providing us flexibility to continue our growth strategy. Turning to Slide 4.
While I have the opportunity to meet many of you during the recent IPO roadshow, there are many that are new to our story. So before I get into the results of the recent quarter, I want to spend a few minutes discussing who we are and the opportunities ahead of us. Over our 20 year history, we have transformed our company from a 1 concession and 1 country operation into the largest private operator in the world in terms of number of airports and the 10th largest in terms of passenger traffic. We operate a diversified portfolio of 52 airports across 7 countries including Argentina, Italy, Brazil, Uruguay, Ecuador, Armenia and Peru. We hold dominant positions in airport markets in Argentina, Uruguay and Armenia representing over 90% of total traffic in each of these countries.
With our deep operating know how, we have established a strong track record of consistent growth and profitability, which along with a strong balance sheet provides us with a solid footing for sustainable growth in the coming years. Turning to Slide 5. We manage different business models including domestic networks in Argentina and Peru, key international airports in Argentina, Italy and Uruguay and hubs in Argentina and Brazil. Throughout our 20 years in operations, we have acquired deep know how in what we believe are the 5 key pillars of the airport business. 1st, keep a good and close relationship with airlines proactively proposing new routes and the development of new facilities for this the airlines such as maintenance centers.
2nd, fully develop our commercial operations by having the right mix and size to maximize revenues, while designing our terminals to optimize commercial revenues and facilitate passenger flow. Finally, we carefully evaluate our parking business to have the right tariffs to maximize revenues. 3rd, we permanently monitor our operations and keep very close dialogue with the airlines to meet their needs to assure a timely operation, keeping our minimum connecting time amongst the lowest in the industry. 4th, we continuously evaluate expansion opportunities and investment requirements with the goal of achieving an efficient allocation of resources. 3rd, we developed and keep a good relationship with regulatory authorities, federal and local governments.
Turning to Slide 6, we have significant growth potential ahead supported by favorable macroeconomic conditions in some of the markets we operate and positive industry trends. In particular, given the clear correlation between purchase capacity and trip potential for traffic activity to get closer to the levels experienced in developed countries. As you can see on Slide 7, low cost carriers are expected to be one of the main drivers of air traffic growth worldwide, and we believe to be very well positioned to capture this trend given the low penetration of low cost carriers in several of the countries in which we are present. In Argentina, for example, low cost carriers have only just recently began operations with the entrance of Norwegian, Flybondi and Leveld among others, supported by the government's Airplane Revolution Plan designed to attract new entrants to the market and further develop the industry. Actually, we anticipate that over the next 3 years, low cost carriers through competitively priced fares will absorb around 10,000,000 of the 30,000,000 passengers that currently travel long distance by bus.
As these trends materialize, we are leveraging our expertise and relationships developed through our concessions in Italy, mainly the successful low cost carrier operation at Pisa Airport. Separately, as a result of a solid macro dynamics and air traffic trends in the region, Latin America is expected to be one of the 2 most attractive regions worldwide in terms of passenger growth over the next 20 years, expanding at around 6.2% per year during that period. Turning to Slide 8. We also seek to grow by extending our concessions. At year end 2017, our airport portfolio had a weighted average life of approximately 14 years with the potential of increasing our weighted average life by approximately 8 years through concession extensions, reaching a weighted average of 22 years.
Have successfully extended 2 concessions in our portfolio, Caraco Airport in Uruguay and Guayaquil Airport in Ecuador, which have gone through this process to date. Turning to Slide 9. We also have 3 major expansion projects within our portfolio that will enable us to capture additional passenger traffic as well as higher commercial revenues. In Argentina, we are working with the government developing a significant CapEx program to increase capacity and line size in transaction, mainly at the Cece and Aeroparque airports to address the anticipated growth in passenger traffic. In Brasilia Airport, the 3rd largest in the country and the main domestic hub in Brazil, we seek to unlock higher commercial revenue growth by expanding the commercial area of the existing terminal.
We plan to add 40,000 square meters of gross leaseable area, taking advantage of the airport's area of influence with 500,000 residents and one of the highest income per capita in the country. At our airport in Florence, we plan to build a new terminal that will have 48,500 square meters and a new 2,400 meter runway that will be able to capture a higher volume of passengers. Finally, we continuously assess new opportunities, auctions and acquisitions to continue to expand our portfolio, leveraging our expertise and solid balance sheet. We target airports with room for new infrastructure investments, potential for new routes or hub strategies and potential to capture higher commercial revenues, among others. We keep a disciplined approach and seek only to make investments that provide a positive return to our capital.
Please turn to Slide 10 to go through some of the key highlights of the quarter. We had a strong year on the back of positive dynamics across our key operating metrics. Passenger traffic was up almost 8% in the Q4 and 7% in the 12 months to 2017 with more than 76,000,000 passengers traveling through our airports worldwide. This good performance was mainly by favorable macro and industry trends across the region, along with our efforts to add new routes, frequencies and airlines. In line with our strategy to enhance airport infrastructure across our operations, we made capital investments of $90,000,000 during the quarter, mainly focused on Argentina, Brazil and Italy and bringing total CapEx for 2017 to 280,000,000 dollars We are also very pleased with the addition of our 37th airport in the country through the incorporation to the AA2000 concession of El Paromar Airport in Greater Buenos Aires, granted by the Argentine government last December.
Taking a deeper look at our operating performance by region on Slide 11, we reported strong traffic growth across our operations. Argentina, our main business segment with over 37,000,000 passengers in 2017 delivered strong passenger traffic growth in the quarter, up 13%, reflecting new routes and additional flights to existing destinations, along with the entrance of new airlines, all of which contributed to increased domestic connectivity and expand international travel. In Brazil, we are encouraged with the 4% growth in traffic at Brasilia Airport in the Q4 of 2017, contributing to annual traffic of 17,000,000 passengers, signaling a recovery from the recession experienced earlier in the 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 solid performance during our first earnings call. Coming to Slide 12, we delivered solid top line growth across the organization with total revenue up over 8% year on year in the quarter and 6% when excluding constructions. Aeronautical revenues increased 8% in the period, mainly driven by Argentina and Italy, with the majority of our segments also contributing to top line growth.
Commercial revenues were up 5%, again principally reflecting a strong performance in Argentina driven by higher passenger traffic, further supported by new performance in Armenia. Moving down the P and L to slide 13. Total operating costs and expenses rose almost 3.7% year on year to $336,000,000 in the quarter and were flat excluding construction costs. Note, however, that comparison were impacted by certain one time items in those quarters. Q4 2017 includes a onetime $2,800,000 benefit from an adjustment in the concession fee in our Brazilian airport due to an increase in the discount rate used to calculate this fee.
SG and A in the quarter also includes onetime IPO expense for 3,800,000 dollars 4th quarter 2016 in turn includes a onetime expense of $15,600,000 in Brazil as a result of the write down of the value of the Nattel concession agreement. Including construction costs and these nonrecurring items, operating costs and expenses will have increased 6.3% year on year. This was mainly the result of the impact of inflation in Argentina. Now moving on to our profitability on Slide 14. Adjusted EBITDA increased 17.8% year on year to $106,900,000 in the quarter.
However, as I mentioned in the previous slide, our results were impacted by onetime items in both quarters. In addition, with those items included in our operation costs and expenses, adjusted EBITDA was hit by a $9,400,000 provision in connection with the termination of Chinchero Cuco International Airport concession in Peru. This expense is reported under the share of loss in associates line item. Excluding one time items and construction services revenue and cost in both quarters, adjusted EBITDA will have increased 6.3% year on year or €6,800,000 to €113,100,000 This growth was principally driven by Argentina as a result of the 13% increase in passenger traffic in the period, further supported by Italy and Armenia. Adjusted EBITDA margin ex IFRS and excluding onetime items will have remained relatively stable at 33.6 percent Q4 2017.
In terms of balance sheet on Slide 15, our strong financial position provide us with a solid foundation and financial flexibility to continue to grow our business. Total net debt at year end was $1,300,000,000 the majority of which is held at the subsidiary level. This compares with the net debt of $900,000,000 at December 2016. We have a healthy maturity profile with only 20% of our debt maturing this year. 52 percent of our debt was
in dollars, BRL37
and 11% in euros. Net debt to adjusted EBITDA in 2017 was 2.7x compared with 2.1x in the prior year. Since then, we have paid down 126 700,000 with proceeds from the offering. Let me now turn the call back to Martin, who will go over the performance at our key business segment and will comment on our outlook.
Thanks, Saul. Taking a deeper look at our main business segments, starting with Argentina on Slide 16. We reported a robust passenger traffic growth in the quarter year resulting in revenue growth ex construction of 7% in the quarter and almost 12% in the year. A significant highlight in the quarter was the award by the government of the El Palomar Airport bringing the A2000 concession to a total of 34 airports. The strategy for this airport is to attract low cost airlines that will contribute to satisfy increase in demand in the Greater Buenos Aires area.
Fly only began operations at the airport this February and we expect to see continued growth in the near future. We also invested $70,000,000 in Argentina mainly for the construction of the new terminal building at the Feza Airport, which is expected to be finalized in 2019. And the improvement works on the runway at that airport. In Argentina, our strategy contemplates significant investments at Ezeiza, Aeroparque and El Palomar airports to absorb passenger traffic growth resulting from continued improved macro conditions and the government's airplane revolution plan to attract new airlines including low cost carriers and open new routes to serve the expected growth in demand. Accordingly, we are working closely with the government to develop the CapEx program for the next year to satisfy this anticipated increase in passenger traffic.
Moving to Brazil on Slide 17, traffic increased almost 3%, reversing the negative trend we have seen earlier in the year and signaling a recovery from the recession we have experienced in the country for the past 2 years. In line with our strategy, in the quarter, we added new frequency 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 Brasilia Airport, up 4%. Natal airport, a summer tourist destination, posted negative single digit figures as operations were still impacted from the maintenance of the main runway that took place in the Q3 of 2017, which we view as temporary. Revenues declined almost 11% year on year affected by the devaluation of the real against the U.
S. Dollar. In local currency, however, revenues showed a positive trend growing low single digits along with the recovery in passenger traffic on the back of the incipient economic recovery. At Brasilia Airport, we continued to make headway in the development of the expansion plan for the commercial area. We have received approval from the airport regulator and expect construction to begin during the latter half of 2018.
Finally, taking a look at Italy on Slide 18, we continue to deliver steady passenger growth, up almost 2% year on year. We delivered stronger aeronautical revenues, which were up 13% in the quarter with commercial revenues up almost 7%, driven by the euro appreciation in the period along with passenger growth. We invested 8,000,000 dollars in the quarter mainly to reconfigure the terminal at Florence Airport to adapt to higher traffic and master plan projects. During the quarter, we also received the environmental approval for the construction of a new runway at Torren Airport. We expect to begin construction in the second half of the year.
Looking ahead, we are confident that we will continue to see growth opportunities in our markets, supported by healthy macro dynamics and airline trends. In this context, we are focused on increasing capacity to capture expected passenger traffic growth and higher commercial revenues, particularly in Argentina, Brazil and Italy, as I just mentioned. Our strong balance sheet provides a solid foundation to further support our organic and inorganic growth initiatives to continue building our platform. We are now ready to take questions please. Operator, please open the call for questions.
First question, Roberto Otero, Bank of America.
Hi, good morning, everyone. Thank you for picking up my question. I just have a follow-up question on El Palomar. So if you could share with us more details on this new airport in terms of the concession terms and conditions, your expectation for future capacity and traffic and also the CapEx demanded for this project as well? This is my question.
Thank you. Thanks very much.
Thank you, Roberto. This is Martin again. El Padua Airport is not a separate concession. It was included into our main concession in Argentina, the Puerto San Argentina 2000. As the concession for the Group A of the National Airport System in Argentina.
So far 33 airports and what the government did is use across in the contract that allows us to move the airport to that Group A of airports without consent to include this 34th airport into the same concession with the same regulatory framework as the other 33. So it's now one 34 airport concession that before was 33, but the concession terms are the same. Regarding the airport in 2020, we made an initial investment to put it in the operation that had a part on the airside area of the airport, revamping runway lighting to make the airport operational as well as other ancillary works. And also on the land side, we did a very quick CapEx program to increasing the small terminal that was there to be able to handle commercial operations. And we did that very fast.
And in the beginning of that terminal was opened and Livonbi, this first low cost carrier from Argentina, a start up company, started flying into airport and is currently doing. The overall CapEx program entails 3 stages. What we've just done is stage 0, which is this quick work to make the airport operational commercially. Then we have a Stage 1, which entails turning to hangars, passenger terminals to also fairly quickly add operational capacity to the airport. And then a 3rd stage or a Stage 2 that creating a new terminal in apron area in the opposite side of the airport, the other side of the runway for bigger commercial operations.
We are still in discussion with the government on 1 to execute stages 12. At the current stage, an investment of
So now we have invested more or less $1,000,000
$5,000,000 in the Stage 2. Stage 1 will require around $40,000,000 and Stage 3 is still undervalued in terms of the CapEx size.
Our next question comes from Ian Zaffino, open
line. Hi, great. Thank you very much. Just wanted to know, Martine, have you done any other discussions with the existing government surrounding A2000? Or maybe give us an idea of like how that's going and if there's a chance we might be able to see kind of an early renewal of that contract?
Thanks.
Okay. So if I understood correctly, you're asking about the possible extension of AA 2000? Yes.
So the question was, have you been in discussions now with the government regarding the renewal or the extension of AA2000? And is there a chance that maybe we could see kind of an early renewal to get the contract extended? Or is this going to we're not going to see something for several years? Thanks.
Okay. Well, first of all, the concession contract allows this extension to be executed up to the previous year before the last of the concession, And we have the same period in the quarter for 2027. On the other hand, the government has been discussing with us extending the CapEx program of the company to further develop the industry. The government has a very aggressive plan for the aviation industry in Argentina. They call it the airplane revolution, and that entails doubling the actually in their 1st 4 year term.
They are aiming for that. And with that in mind, the conversation we've been having with the government is on
in
Argentina to allow this growth to happen. This is the conversations we've been having with the government. At the same time, we've public knowledge that the government has hired a consultative firm to assess the capacity and have an idea on passenger forecast, airport capacity and also the airport in Argentina, which we believe is going to be the first step into being able to sit down with the government to do a revision of our contract. How long can that take? There are technical, political and bureaucracy issues around all this.
We hope that this happens very soon, but it's difficult to put timing wise a clear idea of if it will take 6 months or a year and a half. We know that the government will have around 4 more months to finalize and deliver the results. And we know for sure that nothing will happen until that consultancy finishes. So that
Okay. And also, can you just touch upon some of the M and A opportunities you're seeing out there or anything you maybe timing or size or just something like just any type of detail you could give us about kind of what you're doing on the M and A front? Thanks.
Okay. On that sense, what we discussed during the rollout, we'll be active and looking for new opportunities. Our focus is still the Americas and in Southern and Eastern Europe. We are looking at processes. We are working in the process that Jamaica is carrying out on the Kingston Airport, and that is also of public knowledge.
And we are looking at the opportunities in the next round of airport options in Brazil. And we'll be actively looking for new opportunities that may arise in Eastern Europe and the Americas. So far, all of those are in early stages and but we still remain active into the sector looking for opportunities of inorganic growth. That being said, we have most of our and masters today put into delivering the business out and being able to take the opportunities that our current concessions are offering, mainly Argentina with the big passenger growth that we are expecting with this aggressive and the CapEx program to go with it that will not only enable passenger growth, but also enable the growth of commercial revenues that are very important for our company. We are very happy on seeing that the economic crisis is over and we went through the tipping point where passenger volumes started to pick up again.
It's pushing us to go ahead into our plans in Brazil to further expand Brasilia Airport to really take its potential in commercial revenues as well. And we're effort in that. Management is very focused on delivering those parts of the business plan that we discussed before. And also Italy, where the potential for Tuscany will be impaired by this lack of infrastructure, mainly in Florence. So our plan and efforts into creating this new runway in Florence that will unleash the is very important.
We are putting a lot of our management's efforts into that. And as we know, as you know, we have an important milestone for that, which is the environmental approval for the new runway number. And we had a development last week where the aviation authority in Italy also gave the first step into that actually happening, which is what they call Comprerencia Ecerolisis, which is the first step into putting all of the entities and government bodies on 1 in one room to coordinate the airports. The first one will be in the runway and the government has published last Friday the land to be expropriated by our company to start that. And this is a huge milestone for our current operation and part of these efforts that we are putting into harnessing the potential of our current operations.
The next question comes from Stephen Trent with Citi.
Hi, good morning everybody and thanks for taking my questions. Just 2 for me at this point. I'm wondering in terms of El Palomar transfer where you are in that process where you are in that process? Is this now fully finalized? Or are there any municipal requirements or tax requirements that have to be met before the transfer occurs?
And the second question pertains to a follow-up on the gentleman who just asked. In terms of M and A or new auctions, is there a threshold that you guys have in mind in terms of the size of new auctions at which you would have to raise debt or equity capital in order to get the M and A done? Thanks very much.
Thank you for the questions. In terms of El Adomar, the government issued in December 27th, awarding the airport or putting it inside our A2000 concession. So after that was the main event, putting that airport into our hands, and that is that actually happened in December. And since then, we've got the post inaugurated the Stage 0 that I was that I was talking about before, where flights already start commercial flights already started going in and out of El Palomar from this terminal. So as of today, the airport is operational, and we are managing it.
So there are no other steps or much taken for that to happen. It happened, and the airport is there, and passengers are flowing in and out every day since February. Regarding as we said, we are going to opportunistically keep looking for operations or for new opportunities. I couldn't say we have a sweet spot because even if you look at our current sizes of airports within our portfolio And no matter the size, we find opportunities for good investments in different different types of efforts. So quite open in that sense looking at different opportunities.
And as far as we are today and in the foreseeable future with the processes where we do not see the need to go back to the market raising more equity. If anything happened in that sense, we expect to fund it with debt at the operational level as we've done so far. But that will evolve as we look into different opportunities.
Okay. I really appreciate the color and apologize on that first question. Part of your call cut off, so I couldn't hear your initial explanation, but appreciate that. And I'll let someone else ask a question.
The next
The next question comes from Matt Russell with Goldman Sachs.
Thanks for taking my question. Just wanted to step back to one of the earlier questions, make sure I understood your outlook properly. So is it your belief that the government wants in Argentina wants to resolve the CapEx program before the next general election in 2019. Did I understand that correctly? And is that what gives you the outlook for the 6 to 18 months resolution around that CapEx program and any update on the concession?
So well, political events of the equation that made us give that wide range in terms of what we think it might take to have an idea on any conversations with the government. But that is one element. Bureaucracy is another element and also, of course, technical discussions and and issues are others. So I just said yes, but that not being the only driver for how long this may take.
Absolutely. No, yes, fully understand. There's just several drivers, but just wanted to understand where we were coming up with the range. And then if we just step back and looked at the business as a whole moving into 2018 and this is another situation where there's a lot of different drivers. But if you were to look at the margin profile of the business, do you think it's reasonable to see EBITDA margin expansion in resume in 2018?
Yes. Here is Raul Francos. Well, yes, we expect due to the evolution of traffic and also Brazilian recovery, we expect then these numbers for passengers and for revenues will increase and that means that margins will
Great. Thank you for taking my question.
The next question comes from Michael Simpson, Barrington.
Hi, good afternoon. Thank you for taking my question. It's actually three questions, if I may. The first one is, could you give a little bit of color regarding the decline in revenues on an annual basis in Brazil? It was down 10%.
Perhaps that's currency or it's more of a one off because it's a change in trend. The other question is regarding the Chincheroz airport in Peru, the $9,400,000 loss. If you could just give us a little bit more color on that. I didn't know that there were loans given to that airport concession that has been scrapped. And the third one, do you have any color on what's going on in the country of Armenia?
It seems like the President has resigned and there are some political situations there and if you expect any impact on your business as a result of what's going on in that country. Thanks guys.
Yes. Here is Raul. Again, the first
part of your question was about the revenues of Brazil. You saw that in dollars, those revenues went a little down. But this is a matter of exchange rate. Local currency reals, there was a low increase
and that's due to the
initial recovery from the recession that this country suffers for the last 2 years. We saw at the last quarter that passenger traffic went up again, but up slowly at very low pass at the beginning.
Okay. But in local currency, the revenues about the situation, the Euro
airport, The loss that we mentioned there as one time event was due to the
provision
that this new
project has
with Aeropuertos and Vinos de Peru, the operating concession there in Peru. And that was just one time effect.
It's going to happen as
you know and we mentioned before, the internal concession
finished.
Okay. So we so that's truly a one time item that we should not expect that anything should be coming from Peru in the future? Okay.
Yes. For the last question, you mentioned about Armenia.
This is Martin again. I'll take on the there were constitutional changes in Armenia changing the way the government is elected going from a presidential model to a parliament that in and after that change the chosen Prime Minister, which was the former President, had a very low support from the people and there were a lot of social unrest because of his nomination. His resignation to me is actually good news because it's lowering the social pressure and turning things back to normal in Armenia. We expect the regions to be affected by this as long as we hope social unrest will end with his resignation, that will not be the case.
Okay. Thank you.
Our next question comes from Louis Caiusz with Nom.
Nordea. I had a question. I understand from what you said before that you're already starting CapEx in Argentina that is not part of the current economic balance of the concession and that therefore it would require the extension of the concessions to get the concession to get properly rewarded. So I take it from this that you obviously see a high probability of the concession being extended. But what happens?
What if the confession is not extended or if it gets extended at a lower allowed return? Thank you.
So as today, we have a valid contract that is still kind of regulatory model. So despite any future negotiation with the government regarding extension of the contract, Our current contract provides for the inclusion of additional CapEx. That the contract already has a provision for CapEx that has not been executed under the current form of the concession contract. That is the current situation. And we are fairly confident that despite of any uncertainty, the current regulatory model is good and can serve to do the CapEx that already remains in the current contract and we agreed with the government.
And regarding precisely what you said, am I right to think that those CapEx additions to the existing economic balance are limited in terms of amount or unlimited? You could add whatever. It's just a matter of the years left of confession you have to get full reward.
There is no fixed or established agreement that can be agreed with the government. So as long as there is a mutual agreement, we can proceed doing CapEx.
Okay. Thank you.
This concludes today's question and answer session. I'd like to invite Mr. Martin Ilesrahim to proceed with his closing remarks. Please go ahead, sir.
Well, if there are no more questions, I'd like to thank all of you 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 business updates next quarter. In the interim, the team remains available to answer any questions that you may have. Thank you and enjoy the rest of your day.
That does conclude the Compuracion America Air Force Audio Conference for today. Thank you very much for your participation.