IHS Holding Limited (IHS) Earnings Call Transcript & Summary

Thank you. I am Phil Cusick. I follow the comm services and infrastructure space as well as media here at JPMorgan. I want to welcome Sam Darwish, CEO and Chairman and Founder of IHS Towers. Sam, thank you for spending time with us today.

Thank you, Phil, appreciate the time.

Let's just start at a high level. This is your first time here. As you look at all the markets where you operate around the world, can you just talk about carrier activity that you forecast in the next few years versus the last few years and talk about where that might be differentiated?

Sure. We currently operate in 11 countries across 3 geographies, the largest being Brazil in Lat Am, Nigeria, South Africa, Egypt. We're in Kuwait also, among other places. Our markets cover roughly 750 million people. Average age in our markets is roughly 24. Our markets are largely in the 4G stage at the moment. I would say probably rollout is almost done on 4G. So we are still in that phase. Brazil, I would say 98% or more than 95% of all towers have now 4G equipment on them. In Nigeria, I would say 75% or more have 4G. So that kind of like phase is almost done. Most of our markets have auctioned 5G spectrum, but they have not yet started or begun the commercial trials. Brazil did an auction recently. All 3 carriers got a good chunk. Nigeria did an auction in December. Also kind of like a couple of the carriers got some chunks. South Africa is in the process. So very soon, 5G will be unlocked. And I believe the next 5 years will be about 5G.

Let me ask about that 4G comment. Nigeria and Brazil are a little higher than I would have thought. Is that each of your carrier tenants has 4G on those towers or is it 4G exists from one of your tenants or run on each?

Each. Like in Brazil almost everyone now has 4G, almost all the towers.

Almost each of the leases, 95% of leases?

In Nigeria, the 2 big carriers that we work with, I would say 3/4 of all their sites have 4G equipment, which means 4G service.

Got it.

Now having said that, many towers still have 2G also, Phil, 2G, plus 3G, plus 4G because again the networks are so diversified. In those areas, you still use feature cells. There are still remote areas which kind of like basically only use voice or certain packages that only use voice. So for our towers, even as you are one tenant, you still have the 2G, plus the 3G, plus the 4G, and you're paying for all of those.

Right. In the U.S. over the years, as 2G went away and then 3G went away, there was always questions about, well, does that mean your lease revenue is going to come down? And how have you structured those contracts? Is there a risk of revenue going away as I take down 2G, for example?

Look, I don't see it. The reason I don't see it is because there is such an explosive, so structurally in the contracts there is no availability. There is no. It is not possible. But again, we have to be mindful of the dynamics of the carriers. If equipment is indeed pulled, does that really reduce the need to use the tower? And I haven't seen it and I don't see it because 2G, for example, uses 900 megahertz spectrum. If you stop using 2G on 900 megahertz, what are you going to do with the 900 megahertz? It's one of the most valuable spectrum out there. Are you just going to put it there idle? You have to do something with it. You have to even bring in another technology to start transmitting through that. And once you do that, it's a separate antenna. The 900 is not going to be the same antenna as the 5 giga or the 2.6 or the 1,800. So I really don't see that happening, to be honest. I see more rationalization in terms of usage of power over time as equipment becomes more efficient. But the antennas, as you're transmitting spectrum and frequencies, I don't see that happening.

Okay. Let's talk about power. It's been a big topic over the last sort of 6 to 9 months as oil prices have gone up. You've talked about, I think it's called Project Green, where you want to go in and green some of the energy needs. Talk about where you are in terms of your obligation on power and what that could do over the next few years?

Look, across our 11 markets, I would say Nigeria is unique because Nigeria doesn't have a functioning grid. Almost every other market, we have some kind of pass-through. Brazil is a pass-through market. South Africa is a power pass-through market. Egypt would be a power pass-through market. Nigeria is unique because, Phil, it's such a big country and it doesn't have a functioning grid. 95% of our towers in Nigeria do not have a connection to the grid, which means if you want to provide a 24/7 service, you have to put the diesel generator, you have to put the solar, you have to put the battery. So that's a specific problem to Nigeria. Last year alone, we spent roughly $300 million on the diesel in Nigeria only. And this is why kind of like Project Green is largely focused on Nigeria at the moment. We just want to attack that amount and try to hopefully eradicate it over time.

What could it cost you to sort of have an alternative power source in half of that diesel?

So it's not going to half, to get rid of half of it, I think, look, Colby will kill me if I start releasing numbers. We'll come back with numbers before this year ends. But we are excited about this project. We're going to do a lot of great things, and we're going to be able to substantially reduce the diesel bill.

Maybe instead think about it in sort of, what's the potential return on capital with oil at $110 of alternative uses?

Substantial, materially high, very high, very high.

Bigger than 15%, 20%?

Bigger than 15%.

Okay. He's not even paying attention.

Good. He's recording everything.

No. I know. I know. Well, let's continue down the path in Nigeria. And we saw very strong revenue and especially EBITDA growth in Nigeria this quarter. What are you seeing in terms of demand there?

Massive. Look, I think COVID has taught us one thing. I mean, the world was able to live, could have lived without planes and cars and Disneyland and all these things, but couldn't have lived without the phones. And then more so in countries like Nigeria, where it's not only about or Africa or emerging markets in general. It's not only about the social communication need and then the interaction. Many people use this for their own livelihood, for their own work. For example, people don't have bank accounts in Africa, but they use the phone to transfer money and process money and use it as a wallet, for example. So COVID has kind of like taught us that. And then post-COVID, we've seen a lot of focus from the carriers on kind of like continuing, finishing this 4G rollout quickly because they want to satisfy this demand. If you look at MTN's numbers for this quarter, for example, they're coming at more than double-digit growth. Airtel's number is the same thing. The data consumption numbers are kind of like skyrocketing. MTN, a carrier, the leading carrier on the African continent, has a 55% EBITDA margin. Does AT&T have a 55% EBITDA margin?

Yes.

That's amazing. With an ARPU of 75.

$50?

Huh?

$50?

ARPU in Africa is $2 or $3.

Yes.

I mean, it's an impressive thing.

You need to charge more. Well, I think the assumption has been that higher oil prices globally would help economies like Nigeria. Have you seen it impacting anything in terms of demand or maybe the supply of dollars to get money out?

So it makes sense what you just said. I mean, Nigeria is one of the producers of oil on Earth. It used to be the sixth or the seventh largest producer. And sadly, they're not that anymore. They produce, I think, 1.5 million barrels a day. They have a quota of 2.5 million with just kind of like bad infrastructure. So theoretically, there should be a windfall from higher prices, but also Nigeria is one of those governments that subsidizes refined products, and they don't have refineries yet. So they import. So the cost of subsidy increases as the oil prices increases. The windfall increases the cost of subsidy and kind of like it washes, it's net-net 0. Now Nigeria is also in the process of building a $20 billion refinery. Aliko Dangote, the richest African man, is building it. It's about to go live, so hopefully this year or next year. It has the ability to store 5 billion liters of refined product. That is going to be a game changer for Nigeria in terms of pressure on dollars because it's just going to relieve overnight a lot of the subsidy cost the Nigerian government is kind of like carrying. And we expect a substantial improvement in the liquidity position. Now having said that, Phil, I've lived in Nigeria for 20 years. Nigeria goes through ups and downs. It never chokes. It's such a big, big, big economy. People don't appreciate that it's 200-plus million people, average age 18. When I moved to Nigeria in '98, it had 150 million people. Today, it has 215 million. It added 65 million people in 20 years, the size of France. I mean, this is the kind of growth we're talking about. Last year, we upstreamed money, $180 million from Nigeria as difficult as it was, the year before COVID, upstreamed money. It never shuts down. 2019, of course, we upstreamed $500 million, substantially more. But it never shuts down. This year, we've already done more than $100 million. So even with the issues, we can still get dollars out. As the situation of the refinery, as the refinery comes into play, we expect a substantial improvement.

That's interesting. That's the first I've heard of it. Okay. And you mentioned doing $100 million already this year. I think you've been sort of sourcing dollars in other places to get money out of Nigeria. Can you talk about that a little bit?

Well, look, I don't know how much details I can say here. But in Nigeria, if you work, if you have good banking relationships, there are a few banks that are strong enough, big enough, present across the continent. They have reserves. Some of them kind of like raise eurobond and have dollar availability. And we work with a couple of them. That's how we get our dollars out. And they worry about how it should be done. There's a friction cost somewhere between 10% and 20% to the formal rate at the moment, but no one accesses the formal rate. It's impossible to get money on the formal rate.

But that's the rate that you use to charge your customers?

No. We charge our customers, so it's confusing, there are multiple rates for the currency in Nigeria. You have the official rate. You have the NAFEX rate. You have an exporter's rate. Then you have a black market rate. So there are multiple rates. So the official rate is the lowest rate, but no one can access it. The NAFEX rate is somewhere in the middle. That's the biggest window, and that's where our contracts are indexed.

I see. Okay. Talk about other major markets for you in Africa, the legacy markets. Any sort of getting better or worse that we should be thinking about?

Look, the legacy markets, so we have 4, Zambia, Côte d'Ivoire, Rwanda and Cameroon. We bought the towers from the largest and second largest carriers in each of those countries, so MTN and Orange in that instance. And these were among the first portfolios that we did 7 or 8 years ago. It's kind of like more on the mature side. I mean, it's kind of like more stabilized in terms of the growth. We're having 3%, 4% growth a year. I don't see a lot of activities now. We're going to see some maybe in 2, 3 years as 5G starts to take over. But for now, it's kind of like more stable than anything else.

Okay.

And then we are now in 2 new markets. We are now in South Africa. We signed the acquisition of the 5,700 towers late last year. We will close it this quarter, imminently. I mean, we've just revised our guidance to include the numbers from that transaction. So it's about to happen. And we're very bullish about South Africa. I mean, American Tower, SBA have been there for years now, right? And then we come and overnight, we become the largest independent tower company in South Africa. I mean, I'm very happy about that.

Remind us what multiple you paid for that South Africa business?

9x, under 9x.

Okay. And as you look at that 9x versus some other sort of markets in the world like Brazil, where you paid more like mid-teens, what are the differences in the quality of those assets or the potential growth that it came at a lower price?

Look, it is not that. That asset, the MTN asset is peculiar in the sense that even between signing and now closing, the load shedding, the utility, the situation of the power utility has deteriorated. 2 years ago, 3 years ago, South Africa had some of the best power systems, best grid. I mean, Eskom used to be an example of what to do as a grid, as a power utility. And then over the past few years, things have been deteriorating year after year after year. It is very common now to have hours of no power in a day in South Africa. And that's why MTN wanted us to take over that portfolio, not others. Because with our experience in managing power systems in Nigeria, we can do a great job in South Africa. So not only they sold the towers to us, but they also gave us another 6,000 towers to manage in terms of power for their South African market.

And so are those, not only the towers you just took on, but the 6,000, are those for the most part without generators and you need to, as they start to have grid problems?

They're mostly their own equipment on other people's towers. They don't have generators, but they have some form of batteries. They have to provide the power themselves to those sites. And then they used to kind of like simply connect it to the grid 24/7. And now that the grid is not working, what do you do with those 6,000 towers?

Right. So what do you do?

We need to find a solution. We need to put more battery. We need to put sometimes solar. We need to talk to the counterparties, who else is there like a Vodacom, like a Telkom and say, look, guys, can we do something together and let's start the discussion around power as a service. And we have started the discussions of power as a service, not only buying towers with others because there are 3 or 4 carriers at the moment in South Africa. Vodacom have not sold. Telkom have not sold its towers. You have the smaller guys, the Rain and then the One and MTN. And now MTN has sold its towers, but others have not. So we are in discussions to see if we can do something about power.

So is this a potential substantial use of your capital or do you imagine the carrier sort of funding this side vehicle?

It could be either, but it's largely about us using our own capital. I mean, that's how. We don't want to go and just do a service for the sake of service. Unless there is a strategic, I mean, we are owner of towers. We are owners of towers. That's what we want to do. That's our business. If we need to utilize our power operation expertise to help that, fine. But to do it just on its own just because we can charge money for it, this is not what we want to do.

That's interesting. Talk about the opportunity in Egypt. Where are we from what you would have expected where we'd be a year ago?

Look, Egypt remains an impressive market, I mean, 100 million people, again, average age low. You have 4 carriers, including Vodafone, including Orange, including Etisalat. 25,000 towers are still captive in the hands of these carriers. So the country has not sold. It's still 3G, 4G. Internet is bad. I mean, they badly need better communications. And then the government just decided last year to license this one tower company. They came as a partner with us with 20%. It's the only tower company of scale and nature at the moment in Egypt. They want us to build 5,700 towers, if you remember, over a 3-year period. But we have to go and negotiate MLAs and contracts with the market. There is no tower market there. People are not familiar with it. The carriers are not familiar with it. The markets are not used to it. We have now to educate as we are trying to get deals also at the same time. So that's what's taking time, but it will happen.

So what's the carrier reaction been? I can't imagine they weren't involved in the government discussion.

They were. Everyone loved the principle, loves the fact that someone else can take over the CapEx and kind of like they pick and choose. It helps their rollout, allows them to focus on other things. But again, at what price, at what terms? What's the tenor? What's the escalator? What's the deal? What's that? I mean, you're basically creating the market structure for an industry for the next 50 years, us and them. We just have to be careful.

Right. Fun. Okay. Let's talk about Latin America. You completed the GTS acquisition. I think it was this quarter. And on the call, you noted that the broader coverage the assets give you. Can you just talk about where you are in Brazil overall? Why was it important to come into this market, where you've come from sort of 0 to, I can't remember the number, 3 or 4.

7,000 towers. Look, when we moved to Brazil, just remember where we started again. Why Brazil? Because when we started, we started from Nigeria 20 years ago, right? And then Nigeria is highly cash generative. We're making money. I mean, what do we do with the money? That was the decision. What do we do with them? Do we create a yield play from Nigeria? I mean, is that attractive? Or do we kind of like use our expertise, what we have gained from that baptism in fire with the cash we are generating to basically grow and start buying assets outside Nigeria. And that's what we started to do. So we started to go into Cameroon, to Zambia, Rwanda. And then we realized, look, we are engineers. We've been doing this for 20 years. There is no other towerco or infraco in the world at the moment that originated from that core, is still run by engineers, is still kind of like operationally focused, service-oriented focus that kind of like has the balance sheet and then the remit and can look at the whole emerging market universe and say, you know what, I'll pick and choose wherever I want to go to. It moves you into a 3 billion, 4 billion people universe. You can decide where you want to go and then you can build synergies. And it really doesn't matter where you operate because wherever you operate, you're owning local assets. You're operating local assets. You have to put your team in. So whether I have 100,000 towers distributed in one country or over 20 countries, it's not going to, the operation, actually it will help me because then I can get some synergies around, for example, rural. There are rural solutions now that we are shifting to Brazil. We were able to lower the cost of using satellite bandwidth for rural just because we lumped Brazil together with Nigeria, for example. So that's why we decided, you know what, let's just look at the globe. Whatever we see there is a market that makes a lot of sense for us in terms of size, in terms of growth prospects, as long as it has similar growth characteristics, strong tenants because we are in a business where 3, 4, 5 clients are 80% of your revenue. And at the end of the day, if you're entering 10-, 15-year contract with these guys, the only thing that matters is that are these guys going to be there in the next 10, 15 years. So you just want to work with healthy guys. So if we move into a market that is big enough, has growth prospects, has decent anchor tenants, why not? And then when we moved to Brazil, again, Phil, 2 years ago, as you rightfully said, we had no towers. Today, we have 7,000 towers during a COVID, during a pandemic period. I mean, that's how fast we move. And not only we have 7,000 towers. We have now one of the 3. We own one of the 3 large fiber-to-the-home networks across the whole country, 6 million homes passed, plus another 3 million homes that we are building over the next 3 years. That is a massive capillary network. We bought the fiber, including the drop to the home, including the drop, excluding the modem. And we leased it back to TIM on a long-term basis with escalators, kind of like made it, brought it into the tower model. But now we have 60,000 kilometers of fiber on the streets of Brasília, on the streets of Rio. We also bought a landbank last year, Skysite, a company called Skysite that owns 25,000 exclusive options on locations that are church rooftops, more rooftops. Between that and then the fiber, we are the only company in Brazil at the moment that is ready for a massive 5G deployment. If TIM tomorrow comes and says, I want to be on 5,000 5G locations, I can give them that because the fiber optic network, it's highly capillary, it's on the street. The locations are there. And of course, we continue to build our macro tower portfolio, 7,000 towers now. We are now the third largest after American Tower and SBA, and I have my eyes set on leadership eventually, hopefully.

Remind me, is GTS done? Do they have another tranche to do?

They have another tranche.

Okay. Any reason why that wouldn't be attractive?

There's no reason, no.

Yes. Okay.

Look, I feel that there is no pressure. I feel at the end of the day, we are builders. This is the most important thing. 10,000 or so of our towers were built over time. People kind of like forget that because the size of a Helios, for example, I mean, we build towers. We love building. We build. So we continue to build those.

Okay. To do whether it's a 1,000-site deal like a GTS or something substantially larger, do you need equity to do that? What's your capacity to do that with debt?

Look, we have guided the market to 3 to 4 leverage, which is relatively low compared to others. We're at 2.5 now. Even when we close South Africa, we'll probably rise to 3, and then we will delever very quickly. So a turn on our EBITDA is easily out there for us. That's $1 billion. We have an EBITDA of roughly $1 billion, and we've guided to $1 billion this year. So let's say, we have $1 billion. We have roughly $500 million of cash on our balance sheet. So I have at least $1.5 billion of dry powder at the moment that I can use for acquisitions. So unless something big comes, we don't have an equity check requirement.

Okay. You came public at nearly twice the current trading price. And remind us the reason to come public and why you chose the U.S. at the time.

Look, there is no reason why this company can't double, triple, quadruple the size of its towers in the next few years. I mean, I look at the universe as like, we operate in 11 countries that cover 750 million people. At the end of the day, there are 3 billion, 4 billion in the emerging market universe, excluding China and India. There's no reason why we shouldn't like substantially capitalize on that opportunity. And that's why we felt we need the share, the public share as a currency at some point to do some of these deals. I think it's important, and thus the listing. And then, of course, if you want to list, you have a prime asset. You are the leader of providing telecom infrastructure in Africa, the leader or one of the largest in the emerging markets, you list on the New York Stock Exchange. Now you alluded to our price is less to what we've listed last year. I've been told that 25, the average loss on the 25 TMT IPOs that were done recently is what, 40%. Year-to-date, our peer group is down by more than 20%. We're down 20%-ish. 80%, 85% of all IPOs last year are now below trading. It's a peculiar period. And for me, as long as we are performing, this is the second quarter that we've put out there. We've grown year-on-year 23% revenue in dollar terms. We've grown our EBITDA by 14%, I mean, despite all these issues. I mean, we are a very, very solid company. We're very resilient.

Yes. There was an article, and I think it was Barron's last weekend, about broken IPOs that people should look at. And so I was looking in there to see if you were in there, maybe on the next one.

Not enough people were looking. That's why I'm here. I want people to pay attention.

Right. And in the meantime, you have some pretty major owners who, some are customers. What's been the feedback from them?

Look, the biggest problem, one of the biggest problems we have at the moment with our share price is the size of the liquidity. It's not big. We're talking about a few hundred millions of flows with daily trading of $1 million, $2 million. That's very small. Many of the big guys of investors whom I meet, they're like, we love the business. We want to build big positions. How do we do that? Most of my shareholders don't want to sell, especially at these prices. I mean, they all think the fair value is somewhere between $25 and $30. We're trading at $11. I try to convince them to sell. I mean, I did my elbow. I did my kick. I was like, look, it's a chicken and egg situation. You need to put more in here so that the flows can become bigger, so that can relate the balance. It's not easy. We'll get there. I think once we resolve that, once we find a solution for that, the rest becomes much easier.

It wouldn't help your liquidity, but it would be a nice signal to see you buying shares.

I've told them. I said, look, I want to buy. I roughly have 4 percentage of the business at the moment. It's going to be roughly 5% with some further options. So it's not that I don't have a lot of money in the business itself. But I said, I want to buy more because someone is going to double, triple their money on a technicality in a year. Whenever we resolve this, with this like don't dabble with this thing. I said, okay, let me signal to the market, don't dabble with this thing, but the company may consider some kind of buyback. Although I feel, again, the buyback is a step in the wrong direction. If you're trying to kind of like increase the size of your daily trading, you do a buyback, yes, I will make money as a company on the buyback. But again, is that a step in the right direction? We need to assess that together with our Head of Communications and determine the solution.

What was the decision to sort of release some of the current owners from the over time obligation of selling shares?

Yes. So the existing owners, when we listed, we agreed on a 30-month lockup period, whereby every 6 months, 6 months, 20% of their shares kind of like get released. But even when they get released, they get released, they can only sell through a registered offering or they have to work with us. So we've waived that. We've told them, you don't have to do that anymore, just go and sell. It's a way of us encouraging people to sell, but we haven't seen much.

You haven't seen much. Nobody wants to sell at $11.

We haven't seen, I would say none. I've seen none.

Okay. Okay. Talk about other potential growth opportunities. You've talked about buying fiber. We've talked to other tower companies today around the world who are looking at, some are looking at data centers, some are looking at small cells. Do you see this as a tower company in 5 or 10 years or is it a sort of much more broad digital infrastructure business?

Look, I see this as a tower company. I would like to continue it being as a tower company. I prefer the towerco model to the fiberco model, to the data center model. I love the fact that it's just such a simple business model. I mean, it's brilliance is in stupidity with just a piece of land and height and just an elevated height because if you want to propagate a wireless signal, you need height. You just kind of like have to put your equipment somewhere. So it's such a simple business model agnostic to technology, agnostic to anything. You can put one of the ETACS on it or you can put 5G or 8G or 10G. It just doesn't matter. As long as it's a wireless signal, you know you need this height. So it's a very durable business model. So we want to stay there as much as we can. Now the move to fiber, in my view, is necessary. Otherwise, we'll become less relevant because up until now, deployment has happened where location is critical because of the macro size, you have a few miles, the zoning, et cetera, et cetera. But with 5G, as we're going to condense all these cells, we're going to wire buildings. We're going to wire bus stops. The connection to that location is going to be as important as the location itself, thus, the move to a fiber. I don't want to move to the fiber just because I want to create a separate business that is called fiber. It is because I don't think we're going to be as relevant in the future as we are deploying 5G if we just offer the tower without the connectivity. And that's the thinking around the fiber. Now the data center is a separate proposition. The data center is not to make ourselves relevant, is to leverage that piece of land that we own under the tower. As computing shifts closer and closer and closer to the edge, eventually, it has to become a necessity. If driverless cars, for example, are going to proliferate, low-latency applications, if VR is going to become something, the gaming, you have to shift some of the computing closer to where the handset is. And what is the closest piece of land to a handset today? It's the land under the tower. So I will have the advantage. I will be able to leverage. I will be able to generate more revenue from that piece of land as and when the edge happens. I don't want to create a separate data center business. But we may build 1 or 2 data centers in certain locations in Africa, for example, where it is needed at the moment just to build some kind of an expertise. But to create a big, separate data center business, this is not something we want to do. And even on the fiber, Phil, as long as I can stay away from the home, from having to figure out consumers and market trends, again, keep it simple, this is how I want it to be. This is what we've done in Brazil. This is what we are doing in Nigeria, just fiber to the tower. Sometimes you may need to do a little bit more, but we want to try and keep it as simple as possible.

Do you think that sort of broadening the business now and making it more complicated is a little bit counter to the idea of trying to get the stock and people's interest?

Look, how do I say this? It's necessary. It may complicate the story, but it's necessary. I just don't see a towerco being able to deploy 5G successfully or have a decent, strong 5G offering for deployment if we don't somehow find a solution to connectivity. I mean, you're a carrier in Brazil. I come to you. I have a landbank of 25,000 locations that you could use for 5G. And I have 60,000 kilometers of fiber on the streets where those locations are. Versus someone who comes with just locations, who has a stronger offering when it comes to 5G deployment? It's a no-brainer. I mean, for me, it's no. But again, we do not want to dilute the towerco model. It's very important. The long-term leases, the escalators, the build-to-suit component, sorry, is very important, keep it business to business as much as possible.

Okay. I think that's a good place to leave it. Thank you very much, Sam.

Thank you.

Nice to see you.

Thanks, everybody.

Thank you, Phil. Thank you.