IHS Holding Limited (IHS) Earnings Call Transcript & Summary

Well, for those of you joining us online, welcome back to Citi's 2023 Communications, Media & Entertainment Conference. For those of you I haven't met, I'm Mike Rollins, and I cover the Communications Services and Infrastructure Categories for Citi. Before we get started, I'd just like to mention that we do have disclosures available at the registration desk and on the Citi Velocity page from which you're streaming the audio. We'll also work to incorporate your questions into today's discussion. So around the room, we have microphones, and you can turn those on, and we'll get to your questions. And if you're streaming, there should be a question box on the page, and you could just enter them in at your leisure. And with that, I'd like to welcome Sam Darwish, Chairman and CEO of IHS. Thank you for being here today.

Thank you, Mike. Happy New Year.

Happy New Year.

Well, one question that we like to start with with many of our companies is just to ask you about your strategic and operating priorities for the coming year. And are there any notable changes from these objectives relative to what you would have been thinking about in terms of priorities last year?

Thanks for the question, Mike. Look, more of the same, but I think maybe I should put things in context for a minute before I kind of like say why more of the same. We are a growth company at core, we operate currently in 11 markets across the world. I think we are the largest EM focused independent multinational tower company out there on a global level. Our markets cover 750 million inhabitants, 60% of those are under 25. Our markets remain in the 4G cycle. So a lot of growth prospects. So that's what we are. We are a growth company at core, whether through building, whether through leasing, whether through our M&A. So that's the strategy and no notable change, except that we're not isolated from where the world is at the moment. The global uncertainties that started last year with the rising interest rates, inflationary pressures. Of course, the uncertainty that the Russian war -- Russian Ukrainian war has kind of like also added into the mix. All these warrants a prudent lens. So we apply more of a prudent lens at the moment in terms of how do we generate our growth, where do we see our growth coming from. We've just recently, for example, announced an investment into our green energy efforts, $200-plus million that will help us generate $77 million of RLFCF over the next few years. We remain -- we continue to look at M&A. But again, cost of capital has increased. We haven't seen -- while public stocks have kind of like rerated downwards, we haven't seen the private part of things kind of like follow, and it normally takes time. So we sit on the sidelines and we watch. I think another key priority for us will be shareholder return. Sadly, there is a substantial dislocation between the actual value or intrinsic value of this company and where the share price is. Now for many reasons, we can get to that in a minute, but I think this needs to also remain -- become an area of focus of ours this year.

Great. Well, let's jump into those things. So as you look at the 2022 performance, when you look at the internal plans that you established for yourself at the beginning of the year, where would you say the areas of outperformance were? And where were the areas where maybe it didn't go quitely like you hoped?

Look, we definitely outperformed financially. I think that's the most important part. We raised our guidance, I think, once -- twice this year. I think we will be fine. In terms of diversification from Nigeria, we've kind of like -- while Nigeria keeps growing fast, we still managed to reduce overall -- Nigeria's overall weight in our business by 5% or 6% or something around that. So I think that is also trending in the right direction. The areas that need the most focus, in my view, are going to be the share value. I mean that's, I think, where we didn't perform as we should. Another area would be the margins, largely because of the pressure of the diesel. I think the margins should be better. And I think we're doing a lot of efforts to kind of like bring them back to where they should be in the 60s. That would be our target. But I would say those would be the areas that where we've done well and the areas that need a little bit more focus.

You mentioned the shareholder value a couple of times. So maybe we'll pivot to that for a few minutes and then come back to some of the questions about the organic business. So in terms of shareholder value, what are the opportunities for IHS in 2023 to access different tools in the toolbox to try to help on that front?

Look, we're a public company. We listed in October 2021, and we listed right there when the macro started to take a downturn. So the headwinds are strongly against us. At the same time, we have been performing quarter after quarter in the public eye. People have been seeing that this company is solid. Our balance sheet is super solid. Most of our debt is fixed. Most of our debt is in bonds, which are not due soon. We have $500 million of undrawn facilities added to our cash of $500 million. So the company is firing on all cylinders. The share price has been lagging. And I think we more or less appreciate why based on conversations we've had with you guys, with a lot of investors. We think the size of the float is a substantial problem. When we listed last year, we listed 18 million shares out of 330 million. All primary, none of our shareholders or existing shareholders, around 12 shareholders wanted to sell at $21 then. Our share price is now $6.70. How do you get them to sell more. At the core of this problem is to get them to sell more and kind of like increase the size of the daily trading. I mean this is what we have to do, and this is the problem we should focus on in my view to try and solve. The other problems, the other initiative, whether dividend, buybacks, some other form, all these to me are secondary. We need to find a way to convince our existing shareholders to sell more shares, hopefully, by convincing them if you sell 1 out of 10 or 2 out of 10, you rerate your 7 or 8. But unless we break that egg-chicken situation or that vicious cycle we're not going to know exactly what is the right initiative that could help rerate the price.

You're a private company and grew as a private company substantially over a number of years. Does the Board ever think about whether or not being public is the right option and maybe just taking a different path than being a public company?

The Board is very supportive of being a public company. We are extremely happy that we have become a public company. Public company means we adhere to better governance. Public company means we have more tools available to us. Public company means the whole world now can see the kind of performance you're doing and hopefully kind of like build a bridge between emerging markets, Africa, in particular, and the New York Stock Exchange. There aren't many companies, if any, that have originated with this kind of history, become a global player and then came to the New York Stock Exchange. So I think there is a precedence there that we're trying to set. Investors need to be comfortable year after year, quarter after quarter as you continue to deliver. Now having said all of these things, nothing is cast in stone, Mike. If strategic shareholder return, project or idea presents itself that requires another form of existence, whether through a private or whether through some merger, we'll always look at all these options.

And in terms of just the portfolio exposure, you mentioned that you've been bringing the mix of contribution from Nigeria down with the diversification initiatives. Where is Nigeria currently in terms of the cash that's locally held versus upstreamed? And how should investors think about just the currency headwinds, possible currency headwinds in that market, if that's even an issue at this point. Just curious for your perspectives on this.

Look, we have roughly $500 million of cash, as I said, on the balance sheet. Most of it is in hard currency. I would say the amount that is in Nigeria is under $100 million, but we need that anyway for day-to-day and for business activities and this and that. Now people worry about upstreaming cash out of Nigeria. We've never had an issue. I mean it gets tighter, it gets looser, but we've always been able to do it. In 2021, for example, we upstreamed $175 million, if I recall correctly. This year, 2022, we upstreamed $147 million up until Q3, and we just did $60 million few weeks ago in December. So this is something new. I'm telling you, Mike. So this year, we would have upstreamed $210 million out of Nigeria. Not bad in a very tough year globally. So people get over-fixated in my view on it. People forget that Nigeria is a 210 million people country. Nigeria is the most populous, largest economy on the African continent. I mean this is not to be ignored. And even if things get tightened, it never shuts down. I mean, it's too huge to shut down. So we will find when it comes there. Devaluation could happen because I don't think where the central bank has priced its currency at the moment is the right price. But we have debts in Naira, and we're going to benefit from those. We have escalators in our contracts that are linked to local CPI, which we'll benefit from those. And don't forget, 50% of our global revenue is dollar denominated. So we are protected on many different layers, Mike.

Maybe we'll turn the page to the organic side of the business, and we could start -- since we've been speaking about Nigeria, maybe start there and go to some of the other regions as well. How are you seeing organic growth? And what are the opportunities to continue to extend the growth as your customers are investing in their networks and upgrading to new technologies?

Phenomenal. I mean if you look -- start by looking at what our clients are reporting on the African continent, for example, MTN and Airtel are reporting 50% data growth year-on-year. They're reporting 20% top line growth. I mean these are carriers reporting this number, they're massive in terms of growth. We have seen -- we haven't even seen 5G begin to happen. All our markets, actually, including Latin America, Brazil are still in the last leg of the 4G rollout cycle. All of them, South Africa, Brazil, Nigeria, all of the big ones have just gotten 5G spectrum. So we expect 2023 to see some form of 5G rollout. I don't expect massive rollouts in 2023, probably 2- to 5-year kind of like horizon but we will see activities in 2023. And another important factor driving some of this growth is the proliferation of noncore services such as Fintech, for example. Fintech and the growth of Fintech on the African continent is amazing. More than 75% of sub-Saharan population, if I remember correctly, doesn't have a bank account. I mean these are open target for these carriers who have created now wallets, who have created electronic Fintech services and they're targeting these guys. Many of these guys ordinarily can't even meet a proper bank requirements to open a bank account. Now it's as simple as have a phone number basically and an ID. So a lot of these services will help propel growth. And I think it will help us grow by extension, whether in building new sites, whether in lease amendments by adding more technologies on our existing towers or by simple colocation activities.

And you mentioned some of the geopolitical and macro factors that can influence performance for IHS. Focusing on the revenue side, let's not -- we'll get to the cost side in a moment. But focusing on the revenue side, how much of the activity and investment from your customers is being generated because of all the traffic growth that you were describing and the importance of broadband connectivity for more and more people over time, relative to some of these macro uncertainties, whether it's geopolitical, whether it's possible recession and factors of that nature?

Look, I would say, recession -- I mean, we look at recession as if it's the U.S. moving into a recession. The world is hundreds of countries. And we've seen through our own countries that some of them went into a recession already. I mean, Nigeria has been in a recession for a while. I actually expect Nigeria post-elections to kind of like come out of this hopefully, recession or subdued economic activity just because it just needs some structural changes. So it's much easier. I won't see or say a recession is the biggest problem. I think inflation is more dangerous. I think rising interest rates, which is kind of like sucks dollar or kind of like our hard currencies out of those markets and investments is more of a challenge for those markets. But to be honest, Mike, we operate in a very, very strong sector of any economy. In Nigeria, for example, the telecom industry is the -- probably the only vibrant industry in that market. I mean like how do you slow it down? Even at $4 or $5 of ARPUs, these guys are generating 52%, 53% margin. I mean what is AT&T's margin in the United States with $75 ARPUs, like it's not up to that. So they are solid, strong companies. I don't think they're going to slow down based on some of these temporary issues. I don't see they may rationalize a little bit. They may cost -- push more towards cost optimization, but I just don't feel they're going to slow down their rollout programs, and no one wants to lose market share.

So you view the demand for co-location and amendment activity where it's applicable to be durable relative to these macro geopolitical factors because of the underlying demand?

I do. And because we're still behind, way behind. We're still way behind where we're supposed to be.

One of the areas that, in the past, IHS has been excited about is the build-to-suit program. Can you share us how you're doing on the build-to-suit program in terms of the volume investments and is that pacing ahead, in line, behind expectations and how that evolves?

Look, again, we started as a site built company. It is part of our DNA. We like to do it. We love to do it, economically makes sense, it's a good thing to do also filling gaps of coverage. Thousands of villages still in Africa don't have a cell phone, don't have a cellphone tower, don't have cellphone coverage. I mean, in this modern age, I mean it's a shame that we don't contribute to that. So it makes a lot of sense. This year, I think we're going to build around -- what we're guiding toward, 1,400 roughly BTS. We're going to get there. Next year, I think we'll do same or even more. We're not guiding, but I don't see why we should not be doing more. I mean on average, we do these kind of numbers, and we will continue to do it.

And similar being -- I mean, sorry, next year being 2023?

This year, yes.

Yes. It's always -- this is the hardest time because we just put the...

Adjust.

Yes. It's -- yes, it's hard to keep that straight right now.

Colby is going to tell me now, why did you guide on the towers for 2023, right? But ...

So economically, are those returns changing at all? As you've had inflation impacts, changes in environments, how have been the returns for the build-to-suit program? And do you expect similar returns going forward?

Look, our cost of capital has increased, so did everybody's. I think that's why the hurdles become higher but BTS remains a no-brainer. BTS is so much margin and just -- it's always a no-brainer, and we keep pushing. Now in terms of where do we want to do more than where, I mean, I'd rather do more to be honest, in Brazil at the moment than in Nigeria, but we're not going to choke Nigeria's growth just because it's oversized in our portfolio.

And how is the Middle East going? And what's the progress been in trying to break into the market in Egypt?

I think Egypt -- Middle East, in general, is fine. We're pursuing activities there. We're looking at various opportunities potentially. I mean, we bought Kuwait, we didn't want to stop at Kuwait. So we're looking at other things. We may continue, we may not, depends we'll see. Egypt, in particular, has been difficult, in my view, over the past 1 year. When we took the license in Egypt, Egypt was kind of like firing again on all cylinders and then suddenly, again, inflation, interest rates, it sucked a lot of investments out of that market. Then they're overly exposed to the Ukraine, Russia situation due to their wheat importations, and we kind of like heard them. So we've decided to be honest to slow down in term our rollout activities there. Now there could be a situation where we change or we kind of like push back again. But at the moment, I feel prudence warrants we kind of like slow down.

As you're thinking about maybe some inorganic opportunities, and you mentioned Middle East, can you address multiple priorities at the same time in terms of the opportunity to look at acquisitions, maybe invite some outside capital to come in? And could that be a catalyst that investors should be thinking about as an opportunity to try to maybe help the shareholder value equation and expand the business and diversify it more quickly?

Yes. Look, these are tricky conversations. And they're tricky because fundamentally, we don't need the cash. We have, as I said, $500 million of cash. We're generating cash on a yearly basis. We have $500 million of undrawn facilities. Our targeted leverage is 3x to 4x. We operate at the 3.2x level, which is kind of like on the lower side, and hopefully, within a year, will be substantially less. So we've got dry powder, right? I mean could we consider using other capital to partner in certain geographies? Maybe. Could we consider looking at some things to do that could help rerate the share price by using external shareholders? Maybe. But they're not fundamental to the business or to our needs when it comes to growing the business. They're going to be -- if we are going to do things like that, it's going to be more about shareholder return and how do we help the share price, to be honest.

Moving over to the margin side of the equation. You mentioned some of the headwinds from power. You also mentioned the opportunity from Project Green to invest in more efficient power delivery solutions and improved cash flow from that. Are there other areas of the cost structure that are moving around in a positive or negative way that's different from the typical operating leverage of the tower business model?

Given that we are a dollar reporter, and we operate in 11 emerging market countries, I think all our local structure is -- and given dollar is strong, anyway, our local costs are kind of like flat to down, to be honest. I mean even as you apply indices pertaining to their inflation, local cost remains in our favor. We spoke about debt. For example, we take local debts, 20% or more, 25%, probably roughly 20% to 25% of our total debt is in local currency, and that kind of like could benefit also from weakening currencies. The outlier is diesel. I mean 50% of our OpEx is diesel and I would say the majority of our maintenance CapEx is diesel related, and we need to attack that cost component. That's the most dangerous cost component within our cost structure.

As you think about growth opportunities beyond traditional towers, can you give us an update of the types of things that you're looking at fiber, data centers? And what have you learned from your investments in Brazil in terms of the fiber business?

I'm a fundamental believer in the simplicity and the purity of the tower model. I want to keep it as much as possible to that simple basic tower model, long asset with a long-term tenant. The tenant is high quality, you have yearly indexation on prices and nothing is better than this. So I don't want to overcomplicate life by kind of like trying to move into other areas and other systems that could add complexity. Now having said that, we have to also be cognizant that the way we rolled out networks up until 4G is going to change with 5G. Up until now, location was the most important part, especially with zoning and et cetera, et cetera. Going forward with 5G, location will remain important. But given that we kind of wire bus station and wire building and this and that, that the location is going to be in my view, the connection to the location or the fiber link is going to be as equally important in my opinion. And we want to be ready for that. That's why we went into Brazil, and we bought fiber-to-the-home, 7 million homes covered today, 60,000 kilometers of single-strand fiber. Now having said that, we didn't buy it in a fiber-to-the-home model. We don't want that. We bought it, including the drop to the home, but on a -- from them and leased it back to them. So we own the whole fiber, including the drop to the home, but we don't own the home. So we operate on a long-term contract with them. It's kind of like similar to the tower model, long-term lease, escalators, there is a build-to-suit component, there is a yearly growth component, kind of like made it like the tower business model, but now we have a highly [indiscernible] 1 of 3 networks in Brazil, basically. I mean the Oi network, which is now BTG, Vivo's and ours, 1 of 3. We have our towers and now we're the only towerco in that country that I believe can offer a proper 5G rollout service.

So as part of that fiber, are you able to branch off from this fiber and leverage it, the connected towers, to connect the buildings to offer small cells?

Exactly. That is exactly the reason. And we have technologies that we can use now whereby we can use -- where the tower can become like a home. I don't have to create a parallel infrastructure. I can use an actual drop and branch into a tower through using something called GPON, where I can use the tower somehow as an extension or as a home into the network. And we have tested that, and it works in Brazil, and that's how we want to do it.

What's the business growing at? Like how does the growth of that business compare to like the tower business in Brazil?

I mean we took over -- when did we close it? Early this year? Early last year, we had 6.4 million homes covered. Today, we have 7 million homes covered. I mean this is a metric I can share with you. It's doing well.

So does that infer 10% or better growth?

We should. We should, definitely. I mean we are a double-digit top line growth company anyway. We don't want to do things that don't generate -- that dilute debt or make our life harder.

As you look at the durability of your customer...

Sorry, Mike. And that opportunity in Brazil is replicable in Africa also. I feel Brazil is 3, 4 years ahead of Africa when it comes to that. South Africa, for example, is ahead of Nigeria when it comes to fiber-to-the-home. There is no reason why we would not use some of those infrastructure to kind of like connect our towers. And we are doing this in Nigeria. We are connecting our towers fresh through new links because Nigeria lags behind when it comes to fiber infrastructure. But we can replicate that model anywhere we want.

So given the financial flexibility you were describing earlier and the enthusiasm for some of these projects, is it reasonable for investors to expect the possibility of IHS accelerating investment and just into the markets and exporting what you've learned in Brazil into Africa, into other places?

For sure. We're in constant discussion with some of our carriers and carrier partners to basically say, look at Brazil, because in a way, Brazil offers kind of like the future in hindsight for Africa, especially for markets of similar size. Nigeria has 215 million people, Brazil has 200-plus million people. I mean, these countries can offer a lot of learnings from each other. South Africa can learn from sadly the power management experience of Nigeria because up until a year ago, South Africa had an amazing power system or a very functional grid, not anymore. And that grid is expected to degrade over the next 2 to 4 years, which offers opportunity for people like us to fix the problem and offers a lot of lessons learned from a country like Nigeria.

And then just in terms of rounding this conversation in terms of these emerging areas. So as communications infrastructure evolves, people are using more interactive streaming services in these markets. Do you foresee an opportunity to be in data centers, building edge data centers, C-RAN hubs for your communications customers? Or is that a little too far afield from what you feel like should be the core focus of the company?

Look, we own -- our business at the end of the day owns 40,000 exclusive locations. That's how I see it. And these locations within a wireless network are the closest possible to the eyeballs, to the actual ultimate users. We want to leverage those locations to the maximum possible. So the tower, the lease amendments, adding a fiber connectivity to that tower, it all helps with the leasing capacity. At some point, when edge becomes a reality, if it becomes a reality, people are going to need space, they're going to need power on those locations. So that's why we want it, and that's why we want to be part of it and like it. Now we may end up doing a data center or 2 along the line, just to kind of like learn more about this. I'm not sure it's essential, but we may, especially our markets offer a lot of prospects for growth when it comes to data center. But it's such an awfully long-term play, but I don't see warranting like investing hundreds of millions of our dear money at the moment just to kind of like be in there. It's a great business, but it's kind of like us also owning, I don't know, like another restaurant business or something, which is great, but I just don't see how synergetic is it to us today as we speak.

One of the things in our experience for the international markets is as they evolve, there's some level of rationalization and consolidation and there's been some that you've managed through and continue to manage in Africa, there's some in Latin America. As you -- ballpark, as you look at the revenue what percentage of your revenue comes from customers that you have a lot of confidence in their durability as an ongoing provider in those markets? And what percent of the revenue is sort of like, well, not sure how it's going to end up, but it's possible that they merge with someone, consolidate with someone, just in terms of thinking about the portfolio composition?

Yes. Look, in Africa, close to 100% of our revenue, the majority, definitely more than 95% comes from the leading players, MTN the largest MNO on the continent, Airtel, Orange and the likes. When you go to Latin America, Brazil, in particular, for example, you find most of our revenue comes from TIM, from Vivo, from America Movil, a little bit of exposure to Oi just because we bought recently some of the Providence towers, but nothing substantial. I would say the absolute majority comes from creditworthy leaders, people that I know that they will be there in the next 5, 10 years.

So from a churn perspective, there's nothing that you would flag for people to say, just be aware that this is going to go away or this is an issue at some point down the road?

I think the only carrier is 9mobile in Nigeria because they've become weak over time, but this is under 3% of our revenue, and I don't think it's material enough to change the equation. Now every once in a while, especially around contract expiries, MNOs want to negotiate this and that. But if you are a leading tower company in their area, if a substantial part of the network is on you, I mean churn is minimal. For me, avoiding the weaker guys is very important. So I mean if they need us, fine, we'll come, they will -- we will take their money, but it's not going to be featured as part of our certain revenue or how we feel about the revenue.

So as one of our last questions, taking a step back, how should investors think about the multiyear growth opportunity of revenues and cash flow for IHS? What's the simplest way to think about what that can be for this company over time?

Look, again, Mike, I said it originally, I see a runway of 5 to 10 years in our markets of growth just because we want to catch up with the rest of the world. I see this as inevitable and COVID -- again, the COVID -- the 2020 year when we spent all -- everyone kind of like lived without cars and planes but no one could live or could have lived without their phones and without that connection. I think that's an irreversible trend. Everyone will have that at some point. Now, where I think -- so that is the most fundamental -- sorry, the question again.

Just in terms of like just as investors just think about [ that ] long-term trajectory that you're on? And what's the reference that investors should be thinking about?

Double-digit top line for sure. We want to stay there, 60% margin, definitely want to get ourselves there. At some point in time, we want to bring actually, in the medium term, want to bring Nigeria under 50% of our overall mix. I think that's another important data point I can guide to. Eventually, if we can even bring it under 40%, that would be the right thing to do and continue to function in a prudent way, control your costs, appreciate the value of the liquidity you have. I won't just throw it out there just because there are lucrative opportunities out there. I mean, we'll bide our time and wait for the right one.

Sam, thank you so much for joining us today.

Thank you, Mike. Always a pleasure. Happy New Year again.

Thank you. Thank you.