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Good morning and welcome to Corporación América Airports Third Quarter 2020 Earnings Conference 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 listen-only mode. [Operator instructions] 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. 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. Also with us today are Raúl Francos, our Chief Financial Officer; and Jorge Arruda, Head of Finance and M&A.
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 a forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances.
Note that for comparison purposes and for a better understanding of the underlying performance in our presentation today, we will be discussing results excluding hyperinflation accounting in Argentina, which became effective in July 2018. Additional information, in connection with the application of rule IAS 29 can be found in our earnings report.
Now, let me turn the call over to our CEO, Martín Eurnekian.
Thank you, Gimena. Hello everyone, and welcome to today's call. Results this quarter remain impacted by the ongoing effects of the global COVID-19 pandemic, which resulted in travel restrictions and lower passenger demand. However, we experienced a sequential improvement in our performance mainly driven by improved traffic trends in our key markets Italy and Brazil.
By contrast, in Argentina, travel bans to foreigners and lower local demand in international traffic, along with strict restrictions to domestic travel throughout the quarter resulted in limited traffic. More recently, the government relaxed some restrictions as the summer season approached. I will expand on these trends in more detail shortly.
Over the past six months, we have made significant strides working simultaneously on several fronts to mitigate the severe impact of this health crisis. To begin with, I am very proud of how our teams have reacted rapidly to these unprecedented challenges to ensure the health and safety of employees and passengers across our operations. Upholding high safety standards is of paramount importance for us, with several of our main airports already receiving independent health certifications.
We exceeded because we have some goals that we established for the second and third quarter of this year. This allowed us to lower our cash operating costs, excluding concession fees, by 48% compared to the same period last year. Importantly, our operations in Argentina, Uruguay, Ecuador, and Armenia achieved operating cash breakeven levels in the quarter.
On the debt front, we refinanced an important portion of our principal and interest payment and remain focused on strengthening our financial position. We have also been working with regulatory bodies and governments across our concessions to obtain compensation for the impact of this crisis and then we will discuss updates for the quarter shortly.
Now a quick overview of our third quarter 2020 results. Passenger traffic in the quarter was down nearly 89% year-on-year impacted by the pandemic, but was up 5x from the second quarter 2020 levels. This was further supported by better performance in Commercial revenues along with sustained recovery in Cargo activity.
Revenues ex-IFRIC 12 were down 76% year-on-year, but improved 45% when compared to the second quarter this year. Despite exceeding our cost reduction targets, adjusted EBITDA, excluding a non-cash impairment was a loss of $19 million. This was a sequential improvement from a loss of 33 million in the prior quarter. Nonetheless, significantly below the $125 million adjusted EBITDA reported in the same quarter last year, excluding a bad debt charge of $23 million.
Total liquidity at the quarter-end increased to $253 million from $230 million in the second quarter underpinned by additional financing obtained in the quarter, and our strong focus on cost. Cash and cash equivalents at December 30 stood at $180 million with t-bills and time deposits of $73 million. We'll discuss our balance sheet position in more detail shortly. More details on our third quarter 2020 results can be found in our earnings report file yesterday and in the exhibits of this presentation, both of which are available on our website.
On Slide 4, we provide an update on travel restrictions imposed by the different governments across our countries of operations to contain the spread of the virus. By country, Argentina was the most negatively impacted reflecting strict travel bans. Domestic commercial operations, which started last month restricted to essential workers or for specific work or health related reasons. International flights are still operated under special regime. Starting November, borders reopened to citizens from neighboring countries and entering which certain requirements.
In Italy, commercial operators were started in the first week of June with restrictions for travelers coming from certain countries. Traffic trends improved during the summer season. Although with COVID cases recently picking up, countries across Europe are now establishing new lockdowns and travels bans to contain the virus. While Uruguay restarted air travel in the first week of July, borders remain closed to non-resident foreigners and will remain closed during the summer season with certain exemptions, and requirements upon entry.
In Brazil, passenger traffic has been improving constantly since June and we expect to see continued recovery. Brazilian airport has become the second largest [domestic hub] in the country, up from holding the third position historically. In Armenia, restrictions on the entry of foreigners were lifted in mid-September, although meeting some requirements apply upon entry. Finally, commercial operations in Ecuador restarted at the beginning of June, although certain requirements apply.
Overall, the situation remains quite volatile, as governments worldwide adjust travel bans based on the evolution of the sanitary situation and travel remains quite weak.
On Page 5, we see preliminary monthly passenger traffic and cargo trend since April. After hitting a low in April, traffic has shown a gradual monthly recovery trend and has started last June with traffic in October down nearly 81% from the 98% drop in April. This slight improvement was driven mainly by Italy due to a standard commercial operations early June and by [indiscernible] where we have seen sequential improvement since May and while commercial operations have also reopened in Uruguay, Ecuador and Armenia, passenger demand remains low.
In terms of cargo trend, we continue to see slightly improvement since June with October posting a year-on-year drop in cargo compared to the 56% drop experienced in April. Despite this positive trend, we maintain a conservative outlook during the sustained uncertainty.
Please turn to Page 6. In [indiscernible] of COVID we have taken decisive actions executing on the strategic initiatives established at the beginning of the crisis. Starting with expenses. The success in cutting cost across the organization allowed us to achieve a linear structure despite our large fixed cost base and reduced cash operating cost by 48%, above our 43% year-on-year reduction target. This follows a 51% reduction of things in the second quarter. These figures exclude concession fees and construction costs.
[Lots] also benefited from the currency appreciation against the U.S. dollar in our main countries of operations in which we more than offset higher cost in certain areas, such as maintenance and payroll [indiscernible] operations in some markets. While we expect to continue benefiting from a streamline cost structure in the coming quarters, we also expect to see some increases in those operating cost lines as traffic continues to recover and government assistance programs are gradually reduced or discontinued.
Next, moving on to near-term negotiations with regulators and government support during this unprecedented crisis. In Argentina, the government extended its assistance to cover a portion of August, September, and October salaries, which accounted for a monthly relief of approximately $900,000. This assistance could be further extended for the remainder of 2020. At the same time In Brazil, we applied for the refinancing of 50% of the annual concession fee payments due this December.
Also, remember that last quarter, we obtained $20 million U.S. government grant in Italy to be spread over a two-year period. Conversations with the regulators in Uruguay and Ecuador to renegotiate concession fee payment remain [enrolled].
Finally, in terms of the longer-term review of the concession agreement in Brazil and Ecuador, which contemplates [indiscernible], we are in advanced stage to obtain economic compensation for the impact of COVID-19 2020 on our Brasilia and Natal airports and are in the early stages of this process for 2021. In addition, we are advancing in the process of obtaining economic re-equilibrium of the Guayaquil [indiscernible] airport concession.
In Italy, in August, the regulator granted a two-year extension to all airport concessions in the country. While in Argentina and Uruguay, we continue in conversations to review the concession contract to compensate for the significant impact of this pandemic.
Next, moving on to our balance sheet and liquidity on Slide 7. We closed the quarter with $180 million in cash and equivalents and $73 million in treasury bills and time deposits. Total liquidity increased to $253 million at the end of September, compared to $230 million as of the end of last June, benefiting from additional financing obtained in the quarter and our strong focus on cost reductions.
And on the slides, our efforts to reduce cash burn allowed us to reach operating cash flow, breakeven levels in our largest market Argentina, as well as in Uruguay, Ecuador and Armenia. In terms of financing, last August, we successfully closed a $40 million linked local bonds at a 0% interest rate with a two-year maturity in Argentina.
In addition, early November, we obtained an EUR85 million euro loan from a pool of financial institutions with a six-year term and the two-year grace period. The loan is guaranteed by the Italian public export credit insurance agency. In Brazil, we obtain an additional six months deferral on principal and interest payments for the debt at Brasilia and Natal airports.
As a result of the new financings obtained in the quarter, total debt increased by 5% sequentially or $56 million to $1.2 billion, but was down $11 million from the year-end 2019 levels. Note, all of our debt is held at the subsidiary level. So while net debt level is increasing slightly sequentially, lower profitability since the start of COVID-19 significantly impacted our net debt to last 12 months adjusted EBITDA ratio.
As a result, the ratio which excludes the impact of non-cash impairment increased to 7.4 times from 5.3 times in the second quarter and 2.9 times in the first quarter. As a remainder, we are not subject to debt covenants at the consolidated level. Earlier in the year, we renegotiated that debt maintenance covenants for debt held in our subsidiaries in Argentina and Uruguay until November 2021.
Finally, subsequent to quarter-end, in Italy, we have obtained a waiver for the debt leverage ratio covenant in connection with the EUR60 million notes due 2024 for the periods ending June and December 2020.
I am very proud of the significant achievements we have made to protect our financial position in a very short period of time. We continue to work closely with the financial community across our operations to manage our debt maturities in the challenging year ahead.
Turning to Slide 8, as I mentioned in our last call, we have adopted our airport network to meet the new health and safety requirements to limit the risk of infection. Moreover, Ezeiza airport in Argentina, along with our airports in Brasilia, Guayaquil and Galapagos are already among the 100 airports worldwide that have obtained ACI’s recently launched Airport Health Accreditation, elevating health standards in face of COVID-19.
We are also working towards completing API certification for Montevideo airport, in Uruguay. In addition, our airports in Pisa and Florence were the first in Italy to receive independent certification of health protocols. All of our airports have been operating under these same strict health protocols that were developed in conjunction with aviation industry regulators, and infectious disease experts to ensure the maximum health standard across our airport network. Upholding this strict safety standards is crucial in regaining customer confidence to travel by air and support the continuity of operations.
Now, to wrap up, turn to Slide 9. The initial signs of the crisis began, we immediately put an action plan into place and have been executing against it while continuing to monitor the evolving situation in all of the markets we serve. Our teams are working tirelessly. And I want to thank all of my colleagues for the continued efforts as we navigate these challenging environment and continue on the path of achieving the goals we established in the first quarter of this year.
While traffic remains heavily impacted by the pandemic, we have seen sequential improvements since May, mainly led by Brazil that continues to recover and supported by higher activity in Italy during the summer. We maintain a cautious outlook for the near-term as we monitor the new outbreaks in Europe, while we expect to see improved performance in Latin America over the summer holidays.
Longer-term, our visibility remains low. Sustained recovery is subject to consumers gaining confidence on health protocols that have been established by the air travel industry worldwide, progressively lifting of government restrictions, the widespread availability of vaccines, and overall improved economic conditions.
We are now ready to take questions. Operator, please open the line for questions.
We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Roberta Versiani from Citibank. Go ahead.
Hi, good morning. I'm sorry, if already talked about that, I had some connectivity issues here. But I'd like to know what are your expectations for the Argentina airport extension, and how is the timeframe of [force majeure] discussions in [indiscernible] concessions such as Brazil? And also, if I may as another one, I'd like to know if you understate further cost reductions such as maybe adjustment in your workforce and et cetera? Thank you.
Hello, Roberta. This is Martín. Thank you for your question and your interest. Regarding the discussions with the different governments and the Argentina one, as we said earlier, we continue having an engaging the regulator, regarding the pandemic and [regarding] on the concession to find the ideas in ways to compensate for this crisis. Once we have a clear information or an event, we will keep the market informed as soon as that happens, but so far, we are continuing with the discussion. The same thing happens in the rest of the countries where we're having very similar discussions regarding each of the concession frameworks that we have.
And regarding your second question on cost reductions, they were basically all over our cost structure. We have some restrictions in different countries regarding how we can handle employees. But in places where there are no such restrictions, we have made adjustments to our payroll size and headcount. And in others, we have taken different measures across our cost of the company in terms of OpEx contracts and everything you can think of. We are using different methodologies in different countries to come up with the most aggressive cost reductions possible. Thank you very much.
Okay, thank you.
Our next question is from [indiscernible] from Goldman Sachs. Go ahead.
Hi, good morning. Thank you for taking my question. Very quickly, on the – your negotiations with regulators across the board, what are your expectations regarding CapEx and tariffs, especially in Argentina? And my second question would be how are you seeing local capital markets liquidity now in Argentina? If you need to access local markets, how do you think you could raise cash there? Thank you.
[Indiscernible] thank you for your questions. First of all, the discussions with the regulators, most of our concessions have the usual parameters we can use to compensate or create or recover economic equilibrium, be them capital adjustments, tariffs, length of the concession and concession fee, those are the main levers we can pull to create or to regain economic equilibrium.
And at this time, I think depending on the different structures and frameworks of the concession we own, all of them are into discussions. But as I said before, there are still discussions. Once we have a concrete agreement, we will go back and inform the market and investors as soon as soon as we can.
In terms of local market liquidity in Argentina, as you can imagine, it’s fairly volatile given the macro conditions and the pandemic situation in Argentina. But as you saw in August, we were able to access the market with a $40 million note that was for zero percent interest. So again, the conditions of the market are fairly volatile. But so far, we've been able to access it and we keep monitoring it very closely to understand [indiscernible] we have in terms of access to liquidity there. Thank you very much.
Thank you.
Our next question is from Peter Bowley from Bank of America. Go ahead.
Good morning, Martín and Raúl. Hey, thank you for your time and taking my questions. I have two focused on Argentina. Given the significant progress on cost rationalization, can you share any color on how much you expect these costs to persist? Are these cost cuts to persist as volume, you know, ramps up in 2021? And my second question is if you could share any update on the negotiation of the syndicated bank loans, given the Central Bank’s new foreign exchange restrictions? Thank you.
Hello Peter, thank you for your question again. As I mentioned before, the opportunity brought by the pandemic into going very, very deep into our cost structure to gain efficiencies and cost, we think that it's going to last going out of the pandemic. In what size or how much of it will last is difficult to say now, as we are adjusting very fast to reopening of the new traffic, and we understand what is required operationally in terms of the new health measures and so on.
But personally, I can tell you that the way that this pandemic hit us and the fact that we had to stop operations, gave us the time that we usually did not have to go very, very deep into the analysis of our costs and the renegotiation with many suppliers. And also, we were able to adapt very interesting methodologies to go into this analysis and cost cuts. So, I personally expect a leaner company going out of the pandemic. How much compared to pre-pandemic levels? It's very difficult to say right now.
But I'm sure that the teams have used this time as much as they could and that we will see the profits from that in the future, very surely. But it's very difficult to put a number on it as of today with the amount of uncertainty that we have going into the future. I will pass it on to Jorge Arruda to answer your second question regarding the syndicate loans in Argentina.
Thank you, Martín. Hi, this is Jorge. in connection with your second question regarding the new rule issued by the Central Bank of Argentina last September, in connection with the syndicated – well, let me start with the bond, in connection with the bond on November 1, we were able to pay the interest due and payable or the debt service due and payable under the portion of the bonds that have not participated in the exchange.
We were not – the way our debt service works and the bond didn't fit exactly the new rules, however, we obtained an authorization from the Central Bank to make that payment and we are working with the Central Bank in connection with the February payment for the syndicated loan, so we do not see an issue. There is only one portion that of the syndicated loan that would have to be paid outside Argentina, because part of it is payable locally, although denominated in U.S. dollars. And currently, we expect that these restrictions would not be extended beyond the period that they have determined in the first – in the rule that was issued in September. So in summary, it's under control for us.
Thank you very much.
[Operator Instructions] At this time we have no question. So, we’ll conclude our question-and-answer session. I would like to turn the conference back over to Martín Eurnekian for closing remarks. Go ahead.
I'd like to thank everybody for joining us today. We really appreciate your interest in our company, and we look forward to providing updates on our business initiatives as they become available. In the meantime, the team remains available to answer any questions that you may have. Thanks everybody. Bye, bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.