IHS Holding Limited (IHS) Earnings Call Transcript & Summary

All right. kicking things off. I'm Sami Badri with Crédit Suisse, lead research coverage on communications infrastructure and telecom and networking equipment. Right now, we have the CFO, Steve Howden of IHS Towers. Thank you, Steve, for joining us.

Thanks, Sami. Thank you for having us.

Absolutely. So just some housekeeping. For any of the audience members that want to ask a question, you can just shoot the question to me to my e-mail inbox. And then for now, I'm going to go through a prepared list of questions for you, Steve. So the first question I really want to kick it off, for people less familiar with IHS Towers, could you just start by providing a summary and overview of your footprint and just how the company came together over time?

Sure. Yes. So we are a telco by history, approximately 39,000 towers today across 3 broad regions being Africa and the Middle East as well as LatAm. We operate in a total of 11 countries. Historically, we grew up through Nigeria as our first market that remains our largest market today. And then we expanded through the African continent, then into the Middle East with Kuwait. And in the last couple of years, we've been expanding heavily in LatAm and that for us is Peru, Colombia, but principally Brazil. So we've now got about 7,000 sites in LatAm. We have about 1,500 sites in what we call MENA, Middle East and North Africa and the balance of sites in African continent. As I said, Nigeria is the biggest market. We've recently closed into another big market in South Africa. That transaction closed, what, 14 days ago. So very, very fresh. So a new market for us, one we're very excited about. I'm sure we'll talk about that later. But really, our business grew up through a variety of methods through the towers value chain. So the business started 20 years ago, as I said in Nigeria, we were a turnkey site builder. Then we morphed into managed services, where we're offering recurring services to carriers. And then eventually, in approximately 2010, we started building sites and owning sites for ourselves. So getting into the colocation model we know today. Fast forward to today's sort of pan emerging market presence and as I said, 39,000 towers, what we also have now is the beginnings of a fiber business as well. And we're being very thoughtful and mindful as to where we may expand into the wider communications infrastructure value chain. We offer fiber services in Nigeria and Brazil, and we'll look to do that in markets where we think technology warrants it, i.e., 5G is coming, there's no fixed line infrastructure, et cetera. So that's us today. Towers predominantly historically, we're on that cusp of looking at new wider comms infrastructure and lots of exciting growth ahead of us, we think.

All right. Thank you for that overview. When we try to think about comparing and contrasting your business and in your markets to some of the more comparable type operating companies in the U.S., what are some of the key differences or even key similarities, right? And in your larger markets, specifically, what are the number of carriers that you usually providing services to? And what are the kind of growth rates from a mobile user perspective are you guys seeing?

Yes. I mean I think, firstly, from a business model perspective, it's actually very similar to more developed markets that you'll be used to, whether it's U.S. or Europe. We are a long-term contracted business. We deal with the top 3 or 4 carriers in each market. They are typically investment-grade or very close to. That's how we look at choosing new markets based on the clients within that country as well as lots of other things. We always have annual escalators. We don't like churn right next to no second tenant discounts with lease amendment opportunities in terms of revenue. So we try to model the contractual elements of our business very closely to everything that people know and love about the towers industry all around the world. We're no different in many respects. Where I think we probably have some differences is things like power and FX. In some cases, we take power so that we can invest in it and generate outsized returns for ourselves. In the case of FX, we try to mitigate currency volatility through dollarization of contracts as well as annual CPI escalators across the board. So there's a lot of similarities, a few differences, but in those differences, we try to protect ourselves from fluctuations. And I think you'll see that in terms of our historical growth rates. Notwithstanding all the markets we operate in, yes, they come with extra volatility compared to developed markets, but actually our growth rates, both revenue, EBITDA, cash flow, et cetera, have been pretty smooth. And in terms of what we see within our markets, one of the reasons we are focused purely on emerging markets is because of the fundamentals of the underlying markets in which we're in. We're a taker of those telecom markets and the infrastructure requirements of those countries. So if we just touch on some of our larger markets like Brazil, like Nigeria, like South Africa, huge scale markets. In the case of Brazil and Nigeria, 215 million population. Mobile penetration hasn't reached 100%. Data penetration is hovering in the 40s, even a bit lower in the case of Nigeria and huge amounts of smartphone penetration that is still to come. So we have a growing population. We have growing mobile usage. We have growing smartphone penetration. We have demand for data services, which is otherwise not being met through more traditional fixed line infrastructure, which means that the reliance on wireless connectivity is huge. And we saw that through COVID. It was an 18-month, 2-year period, where everybody stayed at home, they needed connectivity there. And we continue to see our customers growing through that. In our biggest market, Nigeria, our top 2 customers are growing. They're public. So they announced their results, MTN and Airtel, they're growing 25% year-on-year. Their EBITDA margins are in the 50s. They are growing businesses themselves.

Got it. I wanted to shift gears a little bit and just talk about when you guys enter a new market, how do you guys think about it? Do you enter and organically develop? Or do you -- is M&A a big path you guys go down when entering specifically new markets?

Yes. Well, I mean, to back up, the first thing we do is assess whether we like a new country. And I've mentioned 1 of many elements in terms of who's the customer base. That's obviously very important to us, as well as making sure all those contractual structures I mentioned around escalators, length of contracts, currency, et cetera, making sure we understand we can deploy the business model into a country with great customers within a growing telecom industry. That's important to us. And that's predominantly towers, but we've also got a mind to what technology might drive us to in terms of fiber or maybe even data centers 1 day. So all of that country assessment is really, really important. And then the strategy of how we actually enter. Historically, we have -- so other than Nigeria, where we started the business, historically, we have always acquired our way into a country. It doesn't mean it has to be that way. It's just the acquisition allows you to gain scale and gain market share, start erecting barriers to entry for competition, for example. So our game is a scale game. You need to get to scale. We've always acquired at least 1, in fact, mainly 2 or 3 portfolios in every country that we've moved into to help solidify that market share. That gets us to be #1 in 7 of our 11 countries today, right. That's how we built that. But we always want to build as well because we see that as meeting the organic needs of the market. So we build in Nigeria, we've got in all of our countries in terms of newbuild sites, providing the economics make sense. Now the one exception to that would be Egypt, which is a country we're in the process of entering at the moment, where we have entered on the back of a build-to-suit strategy, but it's a scale one. It could be close to 6,000 towers over a number of years. And we like that market because there isn't currently any sort of scale or significant competition in that market. But there's also the added benefit that none of the carriers there have disposed of their sites either, so acquisition opportunities could come along. So long-winded way of saying the market is more important to start with, M&A gets you scale, we'll always look to build. And if there's a scale, BTS greenfield start-up opportunity like Egypt, then we're not averse to doing that as well.

Got it. Got it. One kind of other thing that I think would be helpful is when you compare and contrast how the U.S. tower business model is different than the emerging market business model, could you kind of take us through some of the key differences, so pricing escalators, tenancy, network sharing? Could you just go through some of the different elements of the business models and how you work with tenants?

Yes. I mean I sort of covered that earlier on. A lot of it is similar. Absolute pricing levels will be different, but they're different by every single country depending on the cost base within a -- in a country. But in terms of the mechanisms and the clauses in the contracts, it's actually very similar. So as I said, long-term annual escalators, ability to pass through additional revenue to customers when they take additional services from us, churn rights being next to zero. So all of those things are very, very similar. In terms of network sharing, it ranges between being completely prohibited in our contracts to being allowed providing that we get compensated for it, a pretty set compensation. So a lot of those things are very, very similar to everybody else I discussed with. The difference is, as I said, really around how we mitigate FX in our markets and the power that we take in certain instances.

Got it. Got it. We did get a question coming from the audience right now. And the question is on alternative fuels. So has IHS Towers looked at alternative fuels like methanol, fuel cells or any other types just for primary or even backup power tower sites. And just from a cost perspective, how big of a difference would this make?

Yes. So maybe ask that in a few different ways. So firstly, yes, we do look at those types of solutions. We are spending more time on, what I would call, traditional renewable energy solutions right now, things like solar, in particular, a little bit on wind. Some of the new fuel variants are a little bit further away in terms of whether or not they can be commercialized at scale safely and obviously, bearing in mind the impact on cost and the environment. So all of those things are taken into consideration. We're spending more time right now looking at solar, battery technologies and a little bit of wind as well as where we can be creative around hubbing sites together to share power solutions. And that's something that we've done a number of years ago. So about 42% of our African portfolio today is on some form of hybrid solar technology, and we define that as some combination of batteries and solar i.e., completely renewable and zero impact on the environment. And that's something that we are spending time right now internally looking at how do we do another round of investments to keep moving that reliance away from traditional forms of energy like diesel, a very African energy source, some more renewable solutions like solar. So that's what -- when people hear us talk about our Project Green, that's an initiative that we have. We're going to talk about that publicly in fall about what we're going to do to invest in the power systems of our African business. Driving down costs, hopefully driving down some long-term CapEx and driving down greenhouse gas emissions as well.

Got it. One other question. It's on the topic of edge computing. And I think what makes this question a little bit more interesting is when we talk about edge computing in developed markets, they usual are a lot of supplementary data centers and retail colocation operations that already exist. When we look at emerging markets, it's a little bit different from a network topology and just architecture perspective. So given these differences, would that -- what does that mean from an edge computing perspective for emerging markets and where IHS Towers is located?

Well, firstly, I think there's a big opportunity. But it is an opportunity at this stage and one that certainly we are spending time looking at in some of our larger markets. And again, it's very different by market, as you say, based on what's the market context of data and how it's stored and distributed within the country. But there's also things like how does power affect that as well. Remember, we have 39,000 unique locations that have some land around the foot of the tower, and they are all powered. So that means that we have the opportunity to utilize space on that ground, utilize the power that's already there. And we already have the end of the data transmission, if you like, i.e., the wireless signals being propagated. So what we're looking at is whether we can utilize our existing assets, add on things like edge computing, mini data centers, which is getting -- which is pushing data out to the edge, close to the eyeballs, close to where it's actually being consumed by people and see if that could end up being a viable business. Now it will take time, and it will be based on 5G technology, frankly, in terms of who is streaming what and in how much quantity. But that's certainly something that we are assessing. We're looking at the developed markets to see what solutions exist there. We have that benefit of lagging by a couple of years, technology evolutions versus developed markets so we can watch and learn. But we're also working with customers to see exactly what they think they might need to deliver for their subscribers. And we've got proof of concepts running at the moment, and we'll see what that looks like and see if it becomes a viable business for us.

Got it. Thank you for getting those two. I want to shift gears back to the similarities and differences between IHS and developing and emerging markets versus some of the more developed market data center operators. Two-part question. First is when you look at inflation-linked escalators in your business, are there any caps to those escalators when you're negotiating them with your tenants and your customers. And then the second question is when you do feel the need to escalate in regard -- or in response to inflation, is there a lag between when prices that you're seeing go up versus actual inflation escalations that you put on to the contracts to your customers? Could we kind of go through any kind of lag or if there is no lag, you can cover that?

Yes. I mean, generally speaking, there aren't significant caps. No. That's something that we've sort of fought hard to keep in our business. We have a variety of different types of escalators, but they're all linked to CPI of a country or if it's U.S. dollar-denominated then it's linked to U.S. CPI. And we try to avoid caps where we can. So that's sort of that piece. In terms of the lag timing, so our CPI escalators are generally -- the vast majority of them are annual. A bunch of them get passed in Q1, a bunch of them get passed on anniversaries of transactions or commercial agreements. So typically speaking, you'll see it blend out over the year, but they are annual. And so as we're passing CPI, yes, there is that sort of annual lag, but that's similar to a lot of people, I think you'll find -- there's not many people that have more frequent CPI escalators than that.

Got it. Got it. I wanted to hit on commodity price impacts to the company. So the price of oil has moved higher this year. Can you just walk us through the exposure of IHS and how you're able to navigate the landscape with these kind of key input commodity prices going up the way that they have?

Yes. So to put it in context, we spent about $225 million on diesel last year in 2021 when the oil price environment was, as we know, in the kind 70s. Of that, we can pass through about 30% of that $225 million in terms of diesel pass-throughs to customers based on contractual mechanisms. But what it does mean is that when oil price goes up, then we do have a headwind on that, and we've been talking a lot about that publicly through our results and guidance. A rule of thumb for us is approximately a $5 per barrel movement in the oil price translates to about a $7 million annual hit to us in EBITDA. And in terms of what we put our guidance for the year on an EBITDA level of $1 billion -- just over $1 billion to $1.25 billion in terms of EBITDA for the full year, that's based on Q1, let's assume Q1 actual and then $120 oil barrel -- oil per barrel for the Q2 through Q4. So we'll see how that continues to make sense through the course of the year. It will make sense through Q2 given where we are right now in the quarter. We'll see if that makes sense for the remaining quarters as we get to update guidance through the quarters.

Got it. I want to shift gears a little bit and talk about telecom standards and upgrades. So what does 5G look like in emerging markets? And how would you -- maybe you're not even at 5G, you might be at a much earlier generation in some of your end markets. And what does that look like for some of the markets that you're in versus some of the more developed markets that are actively deploying and discussing 5G deployments?

So the end game will be reasonably similar. In fact, you're right, we're behind in terms of the lag, the lag on technology I mentioned earlier. But what I would say, if you look at our 3 largest markets, Nigeria, Brazil and South Africa, they have all issued 5G spectrum in the last 6 months. So Brazil did it, which has taken it 6 months. Brazil did it in November. Nigeria did it in about April time. South Africa also did it about April time as well. So the component parts of rolling out 5G networks are starting to drop into place in our biggest markets. We are not going to see any form of commercial rollout on 5G coming through our business this year. We are doing proof of concepts for customers, but that's not going to move any form of needle on our $1.6 billion of revenue this year and $1.9 billion guided revenue this year. But certainly, our key carriers are now getting into shape to roll out 5G. I would just continue to harp on that. There's a number of constraining and important factors when it comes to 5G, and that's what is the fixed line infrastructure in the country. Because 5G is backhaul, 5G needs backhaul. And that's why we're spending time connecting last mile fiber of our towers in Nigeria. It's why we've invested in a fiber network in Brazil, which was a mobile laid fiber network, so that we are ready for 5G as and when it comes, not just on the towers, but also the backhauling of that, which we rent capacity for. And that fiber network also means that we have the ability to infill densify small cells, street furniture, et cetera, which is also going to be dictated by 5G. So we're trying to prepare ourselves from an infrastructure perspective to be reactive to our customers. And we know it's not just going to be macro sites. It's going to be macro plus smaller solutions plus fiber. And that's what we're spending time doing. Real genuine commercial rollout in our markets, maybe a bit in 2023, probably more likely in 2024 in terms of scale and size.

Got it. A really good segue. You did bring up the Brazil acquisition. When we think about just pro forma for the MTN closing. This is a little bit of a segue. Your -- net leverage of the company is about 3x. Can you walk us through the puts and takes on financing costs and leverage capacity given the recent rate movements and FX volatility.

Yes. So we disclosed that we would be 3x pro forma on the March results with SA. There's, obviously, various sort of things going on. I think, will be a very low 3 the next results. What are the puts and takes on it? We've always said that our leverage target was 3x to 4x and that was really an acquisition-led target range that we would like -- I prefer a CFO to operate in a low 3 or even slightly off the bottom of that range from a steady state leverage point of view. And I still maintain that. I think it's getting more and more relevance and importance in the current interest rate and credit market environment. As we all know, borrowing costs are going up. Now we are fortunate because 73% of our debt is fixed. It does mean that we have small amounts of floating rates, but those are typically our local currency facilities which we like to have from a FX matching perspective on our balance sheet as well. So we're pretty comfortable in terms of leverage and what that means. Now what it means for future acquisitions, as everybody knows that future acquisitions are getting more difficult to justify given the higher cost of financing. And that's the same for us. That means we have to be prudent and disciplined. We'll continue to look. We have an active inorganic strategy as our business, but we don't need to do anything. We don't need to force ourselves to do anything if we don't want to. We just closed a deal in South Africa. We closed on towers, 2,100 towers in Brazil in March. We acquired our way into the fiber business in November in Brazil. So we've got enough to digest right now, but we'll keep looking to see if there's something opportunistically that we could do, particularly in our big existing markets like Brazil, like Nigeria -- sorry, Brazil, South Africa and Egypt.

Got it. As we kind of think about going forward and your goals in 2022 and beyond, how would you kind of lay out the company plans and objectives. And I know you kind of hit on a lot of key things here. We hit a lot of specifics about the business, how things are different than the developed markets. But if we were to talk about the road map of the company from here, how would you characterize the priorities?

So I sort of think about it in terms of -- sort of the finance person. I think about it in terms of financial statements. So for me, revenue growth, really important to maintain, particularly on the organic side, making sure that we continue to deliver double-digit USD organic growth. That remains really important to us. That's something we challenge all of our countries to maintain. That's very important. And then as we get into the cost side of things, power is obviously a big focus for us right now on controlling that. Inflationary environment on our cost base, which isn't impacting us significantly right now because we have inflation escalators in our revenue. But obviously, it's something that we have to keep a watchful eye on and that goes into the wider supply chain as well, supply chain environment. We have seen CapEx costs increasing in unit terms. We've managed to be offsetting those with bulk and scale, et cetera. But that's certainly something that we need to keep in mind -- a mindful eye on. So those are really the big priorities as I think about revenue cost and CapEx. Capital allocation, the question that you just hit on is really important right now. So we're continuing to review internally what's the right way to allocate capital. And that includes CapEx budgets in countries as well. I think we all know -- maybe we don't all know. I think there's a widely held view that we are heading towards a global recession. And I think it's the right thing to do to reflect within. So we're not making any changes right now, but we're certainly keeping ourselves educated and abreast of what we could do in the future. I think that's very important. And all of that's really aimed at making sure that we continue to not just control the cost, but control the margins all the way down to cash flow conversion as well. Project Green, as I mentioned, is a really important element to us in terms of removing our prevalence on diesel, but that goes through lots of different things. That goes through the cost itself, EBITDA margin, cash flow margin, future CapEx requirements, lots of things. So there's lots of focuses for us right now. And then from a more wider sort of strategic point of view, again, as I mentioned, we're just trying to stay current to make sure that we're in the right space to meet longer-term needs within communications infrastructure, make sure we continue to be as relevant in our markets as we possibly can be from an infrastructure perspective.

Got it. Well, Steve, that's kind of all the questions I had, and I cleared my inbox out. And thank you for spending time with us. And thank you again for participating with us in the communications conference at CS.

Thanks, Sami. We really appreciate you having us on today, and we look forward to continuing dialogue with you guys, but also with all the investors that follow us.

Absolutely.