IHS Holding Limited (IHS) Earnings Call Transcript & Summary

Welcome to the 51st Annual JPMorgan TMC Conference. My name is Phil Cusick. I follow the communications and media space here. I want to welcome Sam Darwish, the Chairman, Founder and CEO of IHS Holdings. Sam, thanks for joining us.

Thank you, Phil. Nice to see you.

Maybe we'll just start with -- earnings was yesterday. Can you talk about incremental at the margin changes this quarter? Anything going on that we should be thinking about? And then we'll get in a little more Q&A.

It was yet another strong quarter for us. I think we delivered strong on our organic targets. Outside the one-off that was mentioned yesterday, we did 27% organic growth in terms of our revenue. EBITDA growth slightly under 20. Still tracking on RLFCF growth. So quite a strong quarter for us.

Okay. Let's go through the businesses. Nigeria, it's been really strong. You talked about some repatriation this quarter. How should we think about the -- just the overall environment there post election?

Look, this current president, we're cautiously optimistic. Optimistic largely, to be honest, because I've seen him when he was in charge of Lagos. This guy was the Governor of Lagos, I think, 15, 16 years ago. I was there then. And I've seen how he transformed that state by building infrastructure, improving security, tax collection. And he has a vision and he knows how to execute. So that's why we are optimistic and hopeful that things could work in his favor. Cautious because, again, the size of the issues are big. I mean you have the subsidy problem, which is kind of like sucking dry the economy. You have the issue of the multiple exchange rates. You have the issue of the theft of oil. I mean that country used to produce 2.5 million barrels of oil at some point during Obasanjo's regime. Now last month, for example, it produced under 1 million. I mean it's mostly being stolen, I mean, to be honest. So those challenges are not easy to master. He has said publicly that he wants to fix them and address them. And I feel he can if he wants to. So that's why we are optimistic. And Nigeria has been -- with all the global macro headwinds and all the issues, Nigeria has been suppressed over the 6, 7 -- past 6, 7 years, somehow artificially by these structural problems. They're more about decisions rather than about the vibrancy and the size of the economy. And I feel if this guy, if this president unlocks some of these changes and allows Nigeria to kind of like start to act functioning normally, we can have an outsized growth, I mean, despite whatever is happening in the global economy.

So let's talk about the -- first, you talked about a potential devaluation or maybe you're preparing for that. Talk about where exchange rates are today? You said there's multiple. And then what the impact on you might be if there's a devaluation?

So at the moment, the country, I think, has at least three. We have the formal exchange rate, that's the CBN exchange rate. We have the NAFEX, which allows certain industries to trade on. We have where the airlines can buy. And of course, we have the free market or the parallel market. So multiple regimes ranging from 400-something to 700-, 800-something. So that's kind of like a broad range. Again, it's just -- it's a matter of scarcity and who can access what. All this is artificial. Now devaluation is expected to happen, especially if they want to merge these rates to kind of lift together and kind of like that's the right thing to do. That's what the World Bank has told them. That what everyone has told them. That's what he has said he wants to do. So there will be some kind of devaluation. Now the trick is, how is it going to happen? Is it going to happen in one go? Or we're going to have a dip and move on with our lives? Is it going to happen gradually? Most economists think it will happen gradually. We have guided to a situation where every 10% deval will hit our EBITDA by $25 million, but that's a short-term impact, in my view. The reason it's a short-term impact is because I feel this is a massive dark cloud hanging over us. I think the uncertainty of this multiple exchange rate regimes and where the devaluation is, it's kind of like embedded in our multiple compression at the moment. And I feel if that uncertainty is removed somehow, even if we suffer a small dip in our revenues or in our profitability for the quarter or few quarters, I think the overall removal of that uncertainty should outweigh any dysfunction or negativity that could come from those short-term dips.

And let's talk about your carrier contracts where you have -- I mean, we'll, number one, talk about your carriers, the major customers in Nigeria. These are global companies, who are not just Nigerian companies. And two, how your contracts are structured to protect you from devaluation?

So we've always operated on multiple levels. Number one, all these contracts are long term. And the quality of the anchor tenant is critically important, or the counterparty is critically important for us. So we typically have 10- or 15-year contracts. We typically have those contracts, as you rightfully said, with the likes of MTN, Airtel, Orange, [indiscernible]. So quality tenants basically. Then beneath that, you start kind of like feeling more and more protections. The first would be dollar indexation. So we do have an element of dollar indexation in Africa, largely, especially in Nigeria, for example. It's a substantial dollar indexation portion. I think that's number one. Beyond that, we have CPI. We have escalations -- yearly escalations linked to country inflation. And whether it is on dollar or whether it's in local currency. I mean, if it's in dollar, we follow the dollar CPI, as an escalator. If it is a local currency, we follow the local currency inflation. And over years -- over a longer period of time, what we find is that somehow offsets whatever we have in terms of currency deval.

Okay. And what about on your balance sheet? What kind of Naira exposure are you carrying there?

Naira, if I'm not mistaken, 20% local currency, 30%, $300 million. So it's almost 10%.

And you've been repatriating some of that moving into dollars and out of the country?

We've been repatriating dollars on a yearly basis, yes.

Okay. Okay. So let's talk about the actual business in Nigeria for a minute. So what are carriers doing in terms of builds and amendment activity these days compared to, let's say, 2 years ago?

Amendment remains kind of like hot. They still are moving more equipment onto our sites basically. The cycle of 4G deployment is kind of like more or less towards this end, but they're still using more capacity. They want more power. They want more antennas. They are using more spectrum to kind of like propagate more capacity into the signal. They recently bought more spectrum, 5G spectrum. Actually, they bought 5G spectrum, both of them, both big players, MTN and Airtel. They've started now the testing, the pilots of those. And at some point, 5G is going to start exploding again. That's going to be another layer. Now in terms of numbers, for example, 4% roughly came of our growth for this quarter, I think, came from amendments versus 1.5% coming from [ colos ]. So roughly 3x or 2.5x more from amendments than from actual [ colos ].

And you've been grooming your tower count a little bit because of the third player?

That third player, we don't recognize the revenue. It's on a cash basis. Actually, this is a positive thing because those were towers that only them exist upon. And we were servicing them maintenance, diesel, this and that, without recognizing the revenues. This is going to be helpful to our cost base.

Okay. You're talking about diesel. Just talk about the power in the country? You have this project, Project Green, to sort of green the energy usage in those networks. So where are we in that? And what's the sort of path from here?

So that's roughly $40 million to $50 million CapEx program that we started last year. It's expected to generate around 77 million to 80 million of RLFCF impact by annualized when it's over, when it's done. The plan was to get it done by next year, but I think we're expediting the rollout this year. So we're going to spend more than we had anticipated just because we want to expedite the NPAT. This is a project that's going to generate 30% IRR or more. So it's a very, very sound project. And at the same time, it's going to provide us with a hedge against movements in oil prices, and that's what's happening at the moment. So we're very optimistic about this. It's also going to allow us to meet our emission reduction targets, almost half of it within 2 years.

So tell me exactly what you're going to do. Do you have a tower that has a diesel generators right now? What's that going to look like going forward?

So we've analyzed our 16,000 towers in Nigeria. Many of them, if not all of them actually have batteries. Some of them have solar. Many of them have diesel generators. Some have grid connection, not a lot. So it's a hybrid project, add a grid connection where you can, even if you have to spend a little bit more on the wires or on the transformer, beef up the size of the batteries in certain instances, put more solar where the space allows you to put more space, get more efficient generators, where you kind of like need efficient generated. It's a combination of all these things, studied on a per site basis that allows us to get there. It's not a 1 solution fits all kind of thing.

Are the carriers returning or paying for this in some way? Or is this coming out of your sort of energy budget that you've contracted to give?

They're not paying. In Nigeria, we have fixed use fees for them, which kind of like leaves the upside for us. But again, puts the downside on us. That's what you saw last year when oil prices went up. So from there on, it's just going to become our upside.

Okay. And as I think about the construction in the country, it's interesting, you've sort of reduced the number of towers you're building in Nigeria. And we'll talk about Brazil in a minute, where you've raised that up. We've seen American Tower cranking up their African tower builds. Is there just as much demand? And you're sort of choosing to not do this?

No, I think it's a question of capital allocation. It's a good question. It's a question of capital allocation. At a time when we have $500 million of cash, we don't have a problem. It's not about capacity. Our leverage is 3.1 versus all our peers. I mean almost every one of our peers now that matter kind of like is over their highest end of -- they're outside their comfortable range. You know them, American Tower is higher, Helios is higher. I mean it's all due to M&A that they've done recently. We are at the lower end of the range. So we have a lot of dry powder on our balance sheet. Probably $1 billion to $2 billion to be able to do things. So it is not the lack of ability, it is kind of like caution in my view. At the moment, the value of the dollar is high. The world remains uncertain in its outlook. Interest rates are kind of like keeps rising. Inflation remains stubbornly high, even in the United States in here. There are so many binary issues around Russia, Ukraine, the geopolitical tensions with China. I mean, Jamie Dimon yesterday, he led a very clear picture on -- the world is not out. I mean we are -- we could be in this for a few years. So it is very valuable. It's very smart, very prudent at the moment to just kind of like take a step back and say, "Okay, where do I need to do what? And where do I need to spend my capital?" So this is why, for example, in Nigeria, it makes way more sense to me to spend dollars on green than it is on a new BTS if we don't have to. But in Brazil, for example, it makes more sense to us to spend more on towers there than on other things. So it's just a question of where do you want to allocate our capital, knowing that the bar, the bar is much higher at the moment.

I want to go back to one thing you said on the 5G spectrum that the carriers just bought. How should we think about your contracts for amendments and incremental radios and spectrum versus the U.S. tower contracts?

I don't know what we disclosed there, but we basically have the potential and ability to charge more with new technologies, whether it's through the use of power, the use of space, or simply the use of more technology depending on which contract do we have which client.

Okay. So you'll see a similar level of amendments for 4G to 5G. What was -- what did that look like from 3G to 4G?

I'm not sure we've disclosed those numbers or we have them, but it's...

Qualitatively.

I mean we've double-digit grown for the past 5 years. The CAGR was 15%, 16%. I would say a good part of that came from amendments, not from [ colos ].

Okay. Okay. Well, let's expand in Africa and talk about the South Africa business. You bought this a year ago, I think, and it came with a big power obligation or opportunity. Help us think about why you did that and what that market looks like now?

South Africa is the second largest economy in Africa. I mean, it's the most industrialized nation. I mean this country is a heavyweight. And our move there was strategic and by design, and we're very happy about this. And we bought a 6,000 tower portfolio. Our peers, some of our peers, American Tower, SBA, have been there for years, and they kind of like, overnight, we became the largest independent towerco in that market. So we are very happy with the position we did. Now again, at the same time, South Africa, so that's one transaction. That's the transaction. It has its own MLA. It has its own requirements.

And the customers there are?

MTN, Vodacom, Telkom, Rain, a multitude of clients. Our main customers are these three: MTN, Voda and Telkom. Now over time, what happened basically is like last year, the load shedding, the status of power provision because in South Africa is just one company that provides power. It's a government-owned entity, the utility is called Eskom. And they used to provide more capacity than what the country needs and suddenly generating units not coming into place, maintenance, rollout issues, global pressures, COVID, multiple reasons, politics, kind of like got into a place where they started kind of like somehow disintegrating from within. Last year, load shedding or lack of availability of electricity starts to become an issue. When we signed the contract with MTN, it was typical to have 2, 3, 4 hours of daily outages. So the problem was becoming there, but it's not -- it wasn't like a beast, like a huge problem. So MTN has designed some kind of a Power as a Service contract, which is separate, that says up until those low level of load shedding provide this kind of support us.

So load shedding is hours of lack of grid power?

Exactly. And they have it ranked into stages. Stage 2, 4. When we designed our contract, it was 4. South Africa today is going into Stage 8. I mean it's like 8 is like 12, 10, 13 hours of daily outages. The problem is becoming massive. And it's obvious now to everyone that this is at least a 5-year problem. I mean the outlook needs to change. This is not a temporary thing where Eskom is just going to wake up tomorrow and start providing excellent grid. So the carriers now are in kind of like in a more together with people like us who are experts in power. I mean who on the continent today or even in the world today has this experience of managing and creating solutions and managing those solutions for thousands of sites distributed locations all over places like Nigeria or Cameroon, Côte d'Ivoire IHS and American Tower to another scale. But we are like -- we started this 22 years ago. So yes, we are a towerco. Yes, we want the simplicity of just being able to be a landlord, but this is an important part of our DNA and our leverage and our -- how we got there. That skill step that we have acquired. So at the moment, we feel it's a duty somehow, it's a duty to apply that experience, that knowledge to help our partners in South Africa, figure out how do we tackle this 5-year problem? So this is what we're busy with at the moment. This is what the carriers are busy with at the moment. It's a collective effort. What's the best approach? I mean you have to think about the technical solutions, but you also have to think about the commercial approach on how do we do it. There are no obligations on us. So that's what I wanted to be clear. The problem is not big enough. It's outside our liability obligations, but we can't just let it happen. I mean we have to be there with them. We have to help them with the intellectual considerations. We have to help build some of those solutions. We may even need to help them with some of the process, the procedures, even the operational part of things that needs to be done. But it's our decision. We'll decide as and when things mature, what are we going to do with this? But it's a problem that needs to be resolved. And I think the carriers and people like us are considering it very heavily at the moment.

So let me think about this for your financials. You've closed the tower side that's done in the financials. Yes. And you have a particular normal margin on the towers. The power side of this is closed, but how does this sort of filter through the financials?

We had a power deal closed last year on -- that help them up to a Level 4 load shedding. That is no more a valid situation in the country. That's why I'm saying. We're outside our liability obligations.

And yes, I imagine you're still providing tower. So how...

We're not providing power. And our role was never to provide power. Our role was to provide organization and operational support and some kind of -- but power was more or less pass-through and the underlying cost was a pass-through. So even under the previous agreement. So it's not a Nigeria situation. The Nigeria situation, we, as private engineers, entrepreneurs 10, 12 years ago, when we designed or help kind of like create the tower cost structure in Nigeria. We thought there is so much waste in the way the carriers are doing the power. If we took it up on us as a fixed fee, there is a lot of upside for us, and we have proved it, and we have done it. We have shown it. When we did it 12 years ago in Nigeria, I didn't envisage it we're going to list this company at some point and we want the simplicity of the story and the model and align more with the landlord. I just wanted to make money. It was like -- it sounded like a very profitable opportunity. So it's a different case in South Africa. We don't take any of those costs on.

But I want to understand -- Is there a power to the sites that you're working on today when the grids are down?

Services. More like the operational side of things, sort it out, help it, maybe get a knock up and running, this and that. But we're not -- the diesel, the electricity is a pass-through all these things. It's separate. All the electricity bills, for example, are pass-through.

No, I'm not asking, are you under some huge obligation...

Because in Nigeria, for example, the electricity is not pass-through. Right? I mean if the grid comes into the network, it's our upside. In South Africa, it's a pass-through. That's what I'm trying to say.

I understand. I'm just wondering how you're helping them. So are you aiding them?

The technical solution, like what do you put on each side? What kind of solar? What kind of battery? Because you don't want -- you want to minimize diesel. I mean diesel will be part of the solution, but we really want to minimize it. What kind of operation do you set out? Where do you put your teams? Who maintains what? What kind of preventive maintenance do you do? What's the meantime to reach a side? What kind of anti-theft protections do you implement? Do you put your batteries in a concrete something and burry them underground? And how long will it take them to break through those batteries. And then meanwhile, you have a patrol that's kind of like what time -- how many patrols do you need in that region so that by the time this guy breaks this block of concrete, all these things are like science that we have built over the years that is essential to finding a solution to the problem at the moment. Again, because the problem is not a location. This is not the Western and you just have to kind of like secure the Western. You're talking about tens of thousands of different locations distributed all over the place. You can't just have human being standing there and kind of like doing everything 24/7.

Right. So that's what I wanted to hear. So what's the timing on sort of figuring this out? I imagine that...

I can't comment on that, but it seems to me like yesterday.

Okay. Okay. Let's talk about Brazil, where you bought your way into that market over the last few years. Just talk about the business overall and where you are.

We're very happy with where Brazil is. I think our position is commandable. We just reported an 18% growth for Q1 in LatAm. That's likely in Brazil. We have roughly 7,000 towers there. Our fiber to the home network and the model we have built it remains, in my view, an example. I think it remains one of the strongest kind of like assets, fiber assets in that country at the moment. We're very happy with that. We continue to build as evidenced by the shift in BTS guidance for this year in Brazil. And we continue to be bullish. If Brazil is, again, one of those amazing countries. The geography is massive. Penetration remains decent kind of like on the lower side, in my view, against the benchmarks. Consumption of gigabytes of data remains. On the lower side, they just began the 5G penetration, the 5G cycle at 3%, 4% penetration. Still nothing compared to where it should be. So Brazil is going to have another 5, 10 years of growth. when it comes to telecom. Now again, Brazil also saw presidential elections. And I think it was a clear indication of how democratic that country is. I mean Bolsonaro was there. He was attached to the country. He was talking about the Army and this and that. And the voters basically ejected him. And then this new guy has come. Is Lula going to be a responsible president? I don't know. Yet to be seen. When he ruled that country, the country progressed. It didn't kind of like retrack. So that's a good sign. Another thing that we feel good about is that the Senate or the legislative is on the other side. I mean he's more on the left. They are more on the right. So good checks and balances could occur. That country is also benefiting massively from the appreciation in commodity and agricultural prices. I mean, some of the numbers that like half the world orange juice, for example, comes from Brazil. Did you know that? I mean, I found out [indiscernible] half, like 50%. I mean that country is massive.

All those orange grows in Florida and [indiscernible].

But they make the juice. So look, we're very bullish on Brazil and we'll continue our growth efforts there. We may also consider moving into other -- strengthening our position in some other markets. I mean I think there are other markets in LatAm that are worth kind of like people looking more into Colombia, for example. I like Colombia, I think Colombia has a bright future, big market. So yes, LatAm and Brazil in general. LatAm, in general, in Brazil in specific, in particular, are a very important market for us.

I don't think there's been a Colombia carrier tower sale in a long time. Is there one that people are talking about?

I cannot.

Of course, of course. So let's talk about fiber. I was amused when -- amused is the wrong word. But American Tower sold their fiber...

Interested.

Interested. When American Tower sold their fiber in Mexico recently and Tom Bartlett said something effective like it turns out running fiber is kind of hard. Yes, it's a lot harder than a tower business. And so talk about buying that fiber network in Brazil and how it's turned out versus what you expected?

Look, what they had in Brazil was totally different, completely different. Yes, sorry, in Mexico. And I think if I'm not mistaken, I think they got it as part of a bigger deal, that they went and bought it and they wanted it, and they strategically thought this is a good thing. So now for us, the fiber structure and situation in Brazil is totally different. I mean -- when we went to Brazil, and again, our policy has always been and strategy always been the location and then maximize the leverage and the cash flow ability -- cash flow generative ability of that location. That's how we think about...

The location is the tower?

Yes. The tower. And whether it is the tower, or whether it is fiber to the tower, or whether it is space on the tower that could be used for edge, anything that could help us make that location more profitable we should do it. That's how we think about it. So the fiber to the tower was important from that perspective. Now add to that, that as the rollout of networks change, 3G, 4G, location critical. 5G as we start becoming denser and closer in terms of the cells and then the size of the cells, the location to those cells is going to be as equally important. They're going to be on, let's say, 5 on the street. I mean the location to those [ lamp post ] or street furniture, this is going to be as equally important as those locations themselves. And being able to have a capillary fiber on the cities of Sao Paulo, on Rio, that is used to the home that could be used for that 5G growth is instrumental, is powerful because now we are the only towerco in that country that has the locations, but also the fiber that is capillary enough on the dense street. If a carrier wants 1,000 or 2,000 5G locations within a few months, a very short period of time, we're the only towerco that has both offering and then can put it on the table right there for 5G growth. So that was the strategic aspect of why we wanted to do that fiber and how do we do it. Now we managed to convince Tim and Tim is very kind of like advanced in their thinking. They're very commercial, I have to commend them. Now let's create a neutral host kind of like system. And it has to become a business to business from our side of things because we do not want to dabble with homes and how people understand and this and that. So we bought the network from them. And it has to be more or less like a towerco model. So we bought the network from them on a buy and leaseback, long-term contract, CPI escalations, minimum returns because of the homes passed, then it adds up when the homes get connected. An element of build-to-suit. We're converting now almost every capillary link we have in Sao Paulo into fiber, and we're doing it very fast. We're adding more regions et cetera, et cetera. And then we buy it up to the home, but we don't buy the home. The modem remains with you guys. You decide on what do you do with the home. If you lose the home, I want to be able to rent that home to someone else or run that link to someone else. Even if you don't lose it and some -- and that home wants to buy two modems, I can use that link to supply both. So we have a neutral host network in the country that is profitable, that is basically on the same model and same economic returns as a towerco business, but it gives us a strategic advantage of being ahead if the 5G rollout picks up at some point.

And so in the year -- or more than a year, you've owned that, what has been the result versus what you expected on the model going in?

I mean I don't know what can we disclose, but...

Better? Worse? more exciting?

No, I mean it's 55% margin. Is that something we can -- I've already said it. So it's positive.

And you're responsible for building that fiber to the home? Or is that Tim doing it and then -- for you?

We are responsible. We are not the infra provider, so we build the fiber. We run the fiber. We manage the fiber. Parts of that network that we bought was also copper. Not all of it was fiber. Of the 7 million homes we bought, a few millions were fiber, most of them were fiber. Some of them were copper. We are now changing all the copper into fiber, especially the ones in Sao Paulo.

Have you talked about how much of your capital spending is going to this project?

It's already in the budget and in the guidance and the forecast, I just don't remember seeing the number.

Okay.

That's why I want to be careful with you -- you put me on slippery slope sometimes. And I like to talk, and Colby then starts yelling at me.

Well, we've got a few minutes left. I want to talk about your balance sheet. Actually, I want to go back to strategic for a second. You talked about -- I distracted you with Colombia. But we've seen a few years of less carrier tower sales around the world than we had and probably because interest rates are a lot higher and stock prices are a lot lower. What do you see from carriers around the world in terms of their need for capital and the progress of more tower sales coming out?

Look, I think there are some processes out there not as many as we saw 2, 3 years ago, for example, for sure. I think the dislocation between what you said between public stock prices or public valuation and private valuation remains there somehow, like private sellers have not adjusted yet to the new reality. And again, who can? I mean we still don't know whether interest rates are going to keep rising, going to stop rising, and it's an inversely proportionate to where things are on the industry on the towerco -- so private investors have not sold or have not been selling or have not adjusted to the new realities. We're beginning to see some doing it at the moment. So there are some more processes coming out with like more tapered down expectations for valuations -- but until things start to transact, I wouldn't count on it. And that's why our position has been like we're growing double-digit organically 20-plus percent. We've got the cash. We've got the dry powder. We know that things are going to be probably cheaper in 6 months or a year from now than they are at the moment. There's no rush. We just sit and watch. And if we find an asset that is good and that it's cheap enough, we'll go for it otherwise. We sit on the sidelines. We just watch.

Okay. And your balance sheet in the meantime at three turns. Your share price has been under a lot of pressure. I mean yesterday, I thought earnings were pretty good and the stock was down quite a bit. You've had this focus on increasing the liquidity of the shares in the market. How do you do that and incent your holders to sell when there doesn't seem to be enough demand to pick them up?

I think the demand is one thing, but to be honest, the supply is another problem. Like my shareholders are not selling. I mean, we have -- we've unlocked Block A, Block B, roughly 40% of the shareholder base is at the moment unlocked that can sell. We haven't seen a lot of movement. And it's not because I think the market is not there, at these prices for sure. I mean -- most people that I talk to tell me your share price is undervalued. So they see value there is that our current shareholders still find it hard part ways with this company, whom they've been with for so many years. They love it. They respect it. They like the asset. They value it at these valuations. But again, it's -- this is not a science, this is more of a day-to-day grid kind of hard thing that you just have to put a little here, a little bit there, little bit here. And we're making strides. I mean, last year, our 90-day ADTV was what? I mean, it doubled basically. It's almost doubled from 120,000, 130,000 to 250,000 at the moment. So we're making strides. But again, Rome wasn't built in a day.

Okay. That's a good place to leave it. Thanks, Sam.

Thank you.

Thanks, everybody.

Always good to see you, man.

Thank you.