IHS Holding Limited (IHS) Earnings Call Transcript & Summary

So welcome back. This is our last fireside for the day, and then we're going to have a final thematic panel later on. So I'd like to welcome back Steve Howden from IHS, Chief Financial Officer. I think you have been involved in our conference going back quite a number of years. So I appreciate your coming back. For those that are relatively new to the IHS story, maybe you could provide a little bit of an introduction.

Sure. Well, firstly, thank you for inviting us back all the years. It's always a good conference for us. We see a lot of different cross-section of investors, so good to be back. Yes. Good afternoon, everybody. I'm glad I'm not the only thing between you and cocktails, that there's one more panel. So IHS, what is it? We are an emerging market only tower infrastructure platform. We're listed in New York, but all of our businesses in the emerging markets and that, for us, means a pretty significant African business, a pretty significant Latin American business, which covers 10 markets in total, 10 geographies, about 40,000 sites all told and a couple of smaller fiber networks as well. We've been listed for about 3 years. We've been in existence for more like 25 years. And really, our story is all about trying to demonstrate that the towers business model can work well outside of developed markets. In fact, there's a lot of similarities between our own business and a lot of the more developed market names that I'm sure you're very familiar with. But we do it in markets where, firstly, connectivity is much more of a required utility. Maybe I'll explain a little bit more about that during the course of today. But also where, hopefully, over time, we can demonstrate higher growth rates and an area where people can then deploy capital into a safe and known business model, but with the opportunity to generate more rewards through growth. So our biggest markets today are South Africa, Brazil, Nigeria, and then we're across various other markets as well. We are, broadly speaking, a $1.7 billion revenue business. EBITDA this year will be plus/minus $900 million. Our equivalent AFFO metric is going to be around $250 million this year, and we're 3.9x levered. So that will give you a little flavor for what we are, and maybe we can dive into some of the topics.

So you recently concluded a comprehensive renewal and extension of contracts with MTN in Nigeria, and this includes the changes in contract structure. Can you paint a picture of the renewal, the new contract terms and how this benefits IHS?

Yes. Well, first and foremost, it's not just in Nigeria. So MTN is our biggest customer across all of our geographies. We have them present in 6 countries. That's all of our African countries. And over the course of the last roughly 12 months or so, we have been renewing and extending all of our MLAs with them. The biggest and the final piece of that puzzle was in Nigeria, which is our biggest single market, and therefore, they are our biggest customer in that biggest single market. And we renewed that contract in August. That had been a long time in the making. Obviously, we've been talking about it in the public domain probably a little too much, but we got that concluded in August and a few of the key benefits coming out of that particular renewal, firstly, all of our MTN business has now extended out through at least the end of 2032 and in some cases, 2033, '34, '35. So we've put 8 to 10 years extension on all of our contracts around Africa, which is really positive for us. That brings us to a total as a business of having $12.3 billion of revenue under contract now. And obviously, a decent chunk of that is with MTN, the largest carrier across the African continent. Within Nigeria specifically, one of the key areas where we spend a lot of time focused was around the overall contract mix. Historically, we charged MTN in dollar-denominated use fee and local currency-denominated use fee. We've changed that mix slightly because previously, we weren't hedged to power. So now we have dollars, power and local currency within that use-fee construct. So what we've managed to hopefully do is protect ourselves from an FX standpoint as well as introduce some hedge around the power, which over the last few years has led to some volatility in earnings. And all the time, retaining the usual CPI escalators in the case of our local currency CPI escalator in Nigeria, that's actually now semiannual, not annual. So we've been trying to optimize some of the different mechanisms within the use-fee structure to better cater to the realities of operating in Nigeria, but also to try to smoothen out our global earnings. Doesn't all come as a win-win, and we have to compromise in places, which we've done so in this particular contract. We offered very small discounts to MTN as a part of that and we concluded on some disputed sites as well. So I think both of us were suitably happy and suitably unhappy, which is probably the sign that it was a good compromise.

So in recent -- you alluded to this to maybe drill down a little bit more. In recent contract renewals, you've rotated your African business away from taking risk of providing power to be substantially more protected against volatility. So can you explain more on that?

Yes. So historically, as a business -- let me go back in history. We grew up as an African tower infrastructure player. And even more specific to that, we originated in Nigeria, where the power environment is incredibly important. It's not just connecting your sites to the grid. You have to provide generator backups, battery backups. In more recent years, we've introduced solar power as well. Power is a big component of the value chain in operating towers in Africa and historically, we had quite often taken the stance that we will charge our customers, the carriers an all-inclusive use fee. So I'll charge you $3,000 a month to be on site. And then we will look after the power, whether that's good or bad. And that incentivized us to invest in that power and it meant that we took the benefits of where we could generate excess returns from operating in that power element. But what it did also do is lead to some volatility in earnings, i.e., when global oil prices go up, that filters through the diesel value chain. And therefore, it passed into our cost base and therefore, our margins. And what we've done during the course of this year in particular, and this is relevant in 2 specific countries, South Africa, to some extent, but particularly in Nigeria, is we introduced in Nigeria, roughly 1/3 of our use fee to MTN, our biggest customer there, is now indexed to diesel prices, Which means that if those diesel prices are moving around, that is passed through to the customer. If they go up, our cost base goes up, but so does our revenue. The customer has to pay for that. Likewise, if the price of diesel goes down, so does our cost, but the customer then benefits from that. So a bit more of a risk-sharing approach there, but it will lead to much smoother earnings from our perspective. And as I just mentioned, South Africa, we had -- it's something completely different where we were providing backup power under a certain contract. We've effectively removed that now, and we're a straight pass-through business in South Africa. So now we used to have a page where we compared our business model to U.S. telcos. And it used to be tick, tick, tick, all the same contract structure, CPI escalators no churn, leasing environment underneath the towers, et cetera. And the big difference was FX and power. And now we can put a tick next to power as well because we're effectively hedged throughout the business across all of our markets such that really the only difference now is FX, obviously, a significant one, but that's the only difference now.

So earlier, I'm going back a couple of questions but you mentioned AFFO equivalent, so recurring levered free cash flow. Any nuances to keep in mind around ground rent, amortization, working capital? How do you basically define that AFFO equivalent metric?

Yes. Short answer is no real nuances to keep in mind. We are not allowed as an FPI and a non-REIT business. We are not allowed by the SEC to use AFFO as a metric. But what we are allowed to use is a metric which gets to a very similar place, albeit reconciled in a different way. So we provide a metric that the investment community and the analyst community can compare on an apples-to-apples basis for the AFFO. We call it ALFCF, adjusted levered free cash flow. And what that does is basically give you a true keep the lights on cash flow metric prior to growth CapEx. So it takes into account taxes, interest, maintenance CapEx, leases, strip all that out and sees what's left for us as a business to allocate capital, however that may be. So it should be pretty comparable for you.

Last maybe exogenous question before we get into kind of your actual business and the growth drivers. But just FX more broadly, it's been -- you've had a couple of ventures in the past, and what is kind of the outlook for this year FX macro in Nigeria and any other geographies to kind of keep in mind?

Yes. I think for those of you that follow any of our markets in particular, you know that Nigeria has obviously been the biggest moving part this year. We saw a very significant devaluation in quarter 1, where the naira to the dollar moved from roughly NGN 900 to $1 to around NGN 1,500, so pretty significant devaluation. How our contract structures work are the local currency portion of our contract structures, they obviously are exposed to that, but then come back to us with semiannual CPI escalators. We have dollarization in the contracts as well, which short version of it is the following quarter, the contract resets up to the current FX rate and we now have diesel indexation, which also has a lot of dollar inputs into it as well. So what you tend to see with our business, and you can see this over the history is in the quarter of a devaluation, you'll see a temporary dip in earnings and profitability. And then in the next quarter, you'll see that bounce back as our contracts reset up to the current FX rate. So you saw that with quarter 1. So we saw a dip in profitability and then we saw a very substantial bounce back in Q2 as the contracts reset. So we've tried to protect ourselves from an FX point of view by saying we have some dollarization as well as annual CPI escalators in the mix. And that gives us an ability to ride out the macro pressures that otherwise we would face.

So you talked about power volatility, currency volatility and then some of the events around your largest customer. Moving past all that, what are your kind of principal financial and operational priorities going forward?

Yes. I would you say, hopefully, in the last 6 to 12 months, we've ticked off a lot of those big issues around customer renewals, continuing FX protection as before and now power protection. So as we look to the future, what are we really focusing on? I think we came out earlier in the year and said we were conducting a strategic review around the business. Our view is that the share price of IHS hasn't reflected fair value for a significant period of time now. And that means that we have to think differently and have to think about how do we demonstrate the true value of IHS. And we've been thinking in that lens for a period of time and certainly publicly for the last few months. So what that means right now is we have all sorts of internal programs running, and we're looking at how can we continue to improve profitability, how can we continue to improve cash flow generation and what should we do with that cash flow generation. From the profitability side, embedded within our guidance for the rest of this year, gets you to roughly a 56% EBITDA margin for Q3 and Q4, given what we've posted already this year. And that's showing incremental step-up from prior years when we were more like 52% then 53%, then 54%. So we're slowly pushing up from a profitability perspective. We want to get to 60% EBITDA margin. That is a, let's say, a medium-term target of ours. So moving up from, call it, a run rate, 56% to something closer to 60% over the coming few years. So that's important for us. What else is important for us is we've changed our view on CapEx investment at this point of our cycle. Again, we feel like we haven't been rewarded for growth in our markets. we understand why. And so therefore, it's not prudent of us to continue investing in those markets at the same rate. In 2022 and 2023, we invested plus/minus $600 million a year in CapEx. Now some of that is maintenance CapEx, but the majority of it was growth CapEx. We've trimmed that quite substantially to be in the range of $330 million to $370 million all in this year. We've actually been guiding to the low end of that range. So prioritizing only the growth CapEx that we think is giving the biggest bang for our buck, recognizing that we could do much more but recognizing that we're not in that point of the life cycle, we're not getting rewarded for that right now. I'm sure we will do again at some point in the future. And then we've also said we want to focus through a bit more. We've spoken about disposing of $500 million to $1 billion of assets, trying to really highlight the value of the sum of the parts of the business and doing that through monetizing different bits and pieces around the group. Haven't been too specific on what that involves yet because we want to negotiate that in the private, not in the public. But we'll get there, and we have a whole bunch of balance sheet initiatives that we're running right now as well. So back to your question, operationally, it's continuing to drive the utilization of all the sites. The nuts and bolts colocation, lease amendments, the best type of business, being very careful and considerate with our growth CapEx and what we're rolling out. in particular in which markets and then continuing to realize the value of the business through focusing down into fewer markets and utilizing those proceeds, all of that excess cash flow that we'll generate, we'll pay down some debt and we'll think about share buyback programs as we get a bit further into that program.

So you kind of answered part of my next question about capital allocation. A lot of companies have had to adjust their strategies for higher interest rates and just general macro factors. Just remind us of your current capital allocation strategy and then any further update that you would want to allude to on asset dispositions, notwithstanding the fact that you want to keep it all private, which is broad strokes?

Can't give you any scoops. So current capital allocation is we are investing some CapEx back into growth, particularly in Brazil. That for us is a -- continues to be a core growth market, one that continues to be interesting, lots of opportunity available, the right returns available. And we feel like our stakeholders continue to value that growing part of our business. So the growth CapEx that we have allocated this year is largely going into Brazil, most of that into towers, some into fiber. And then outside of that particular destination for our capital, we're not in outbound M&A mode right now. We have been historically. I would expect us to be again in the future but right now, not so. We are paying down debt as a primary use of that excess cash flow, if you like. And we have a share buyback program in place right now, albeit we have paused it whilst we get through our strategic view. So there's the potential to reinvigorate that in due course. We haven't historically paid a dividend we'll consider that in the fullness of time.

So Brazil has gone through some changes in the MNO landscape and then going just a little bit further back, there's been some notable portfolio sales and obviously, you acquired your way into Brazil. But as you think about kind of the build-to-suit priorities, is that on the back of principally one MNO relationship? Or is it balanced across all the 3 majors? How would you describe that?

Yes. So we took the view or the strategy with Brazil to acquire our way into the business, build mass through bolt-on acquisitions. As many people know, there's a long tail of potential towercos in that market in a number of years. And from the period -- when we entered in 2020 up until really 18 months ago, we continue to consolidate, to build scale, to put us at #3 in that market. We've got close to 8,000 towers there but along the way, have a build program as well. The economics in Brazil are pretty clear. It is much more beneficial to build the tower -- excuse me, as it is to buy a tower but the reality is you can only do so many builds in any one year given the market. So we've had a pretty active build pipeline in the last 2 years, in particular, in Brazil. Again this year, we forecast to do 600 sites this year. We may end up doing a few more. There's plenty more in copper as well for next year. There's a huge amount of pipeline opportunity. It's not just one carrier. We've spent a lot of time with TIM in the last few years, principally because we have a joint interest in the fiber business there as well. But we're actually seeing demand across the board from all 3 carriers; Vivo, Claro and TIM. So whereas historically, it's been a bit more focused on TIM. It's actually broadening out now to be pretty equal.

So you're nearing the end of Project Green. Maybe you can summarize what Project Green is for the audience? And what's been invested, what sort of benefits you've seen, any transferability or learnings that might apply to other regions such as Latin America?

Yes. So Project Green was a very imaginatively entitled project targeting renewable energy, and it really had 2 principal aims. One was to drive down the reliance on diesel and therefore, drive cost savings. That also had tangential benefits on maintenance CapEx because we wouldn't need to invest as much in replacing generators. So call it, cash flow savings. And the second benefit was around going towards meeting our carbon intensity reduction targets. So we announced in the fall of 2022 that over the period to 2030, we would reduce our carbon intensity by 50%. And Project Green in rotating to more renewable forms of energy, solar, battery backups, et cetera, was going to help us deliver that. And in terms of how it's gone, so we originally said that we would invest $214 million of capital over a 3-year period. We are largely through that CapEx plan now. We've got about $8 million or so of it left to do. And so we've been rolling out those solutions to our sites. We said that in 2023, we would expect $22 million of savings for the year. We actually generated $24 million of savings. This year, we said we expect to see $51 million of savings. We're not done on this year yet, but we're on track for that and next year, we told everyone that we expect to see $77 million of savings from that program. So you can figure out it's a pretty high returning project and something that we are pretty keen to finalize. We're very close to finalizing the operational rollout, and we'll see the full impact of that through the course of 2025. So cost savings is very much on track. On the emissions side, of our 50% reduction Project Green to the end of 2023 delivered 11%, we will see more in '24 and more in '25. We forecast that, that project by itself will deliver about half of those overall -- that overall reduction in carbon intensity. So yes, it's a really important project for us and one we're pretty proud of so far.

Talk a little bit about the shareholder base, how that's evolved during your period as sort of a public company.

Yes. So we listed the business in October of 2021, so just coming up for 3 years now. When we listed the business, we had a pretty small free float. It was a 5% primary only deal. And we have continued to try and evolve that into a much higher free float. Right now, as we sit here today, we've probably got something in the order of 21%, 22% of the total ownership outside the hands of pre-IPO shareholders. So we've done a 4x on the so-called float. And we've also seen our ACV increase about 4x in the same period of time as well. So we started off as a pretty small, low liquidity stock. We've been improving that. There's more to do there, for sure, but we're certainly trending in a really positive direction from that standpoint.

Great. Let's pivot to fiber. It's a good segue into kind of the coming panel that we're going to have. So Brazil, you co-own I-Systems with TIM. You co-own I-Systems with TIM, residential footprint of 8.8 million homes, 24,000 fiber route kilometers. Give us an update on kind of tenancy growth that you're seeing there and performance relative to expectations? And then I'll follow up with your journey in fiber.

Yes. So that business, to be clear, is it's quasi-residential, but for us, as an infrastructure provider, it's much more like towers. So we own fiber between cabinet and the home, but TIM retains the end subscriber. And so what we are charged with, what we're focused on is the ownership, maintenance and subsequent rollout of cabinet to home. TIM is our anchor tenant. So we lease capacity on the fiber back to TIM. Effectively a towers contract so long term, no churn escalators, et cetera, et cetera. And then it's open access, so we can go and rent capacity on that same fiber to other customers. So what we try to do with that specific part of fiber in Brazil, we'll say, we're happy to be in fiber as long as it's complementary to our towers business and as long as it looks and feels in terms of contracts and economics like towers. And so that's what we managed to achieve with that business by extension, returns should be towers like as well. How is it going? It's going good. It's going well. We are somewhere just south of 9 million homes passed at the moment with a target to get to 10 million homes passed by 2027. And what we're also doing within that overall count is swapping out copper for fiber through TIM. And so that's part of the plan and we're continuing to do that. I think the pace of rollout probably a little slower in the last 12 months than we would otherwise want. But at the same time, rollout means CapEx invested. And so we're more incentivized to make that CapEx good CapEx rather than just do it to a time line that we originally set with TIM. So the business is going well, going fine, and we are starting to get other tenants on the network as well. So we've got something like 20 contracts in place with ISPs and other customers, and we're just starting to get some of those customers onto the network.

And then turning to Nigeria, I think it's 10,000 route kilometers. Maybe talk a little bit about the government -- the role government in fostering fiber penetration. Any opportunity for you to kind of take advantage of that?

Yes. So more like 14,000 now kilometers, have been continuing to roll that out. That's a bit different to what I just described in Brazil. In Nigeria, it's much tightly -- much more tied to the tower. It's effectively connecting our own towers to a carrier's metro ring. So it is really an extension of the tower. So whoever is on the tower, we don't lease capacity on the fiber to, and it's a pretty interesting kind of extension of the tower. How is it going? Again, that business is going well. It's small. It's growing nicely, but it's quite small. Fiber for IHS is about 5% of total revenue. So although we spent time talking about it, it's reasonably small in the overall scale of the business. In terms of, let's say, regulatory support or governmental support, there is different programs available to further the digital agenda within Nigeria, in this case. Those are really related to pushing out to rural connections, which is something that we obviously are involved with as part of our presence in the market and being in the U.K. system. But I think the real bang for your buck in that particular business is in the urban setting where we can do short connections between our own towers and metro rings, and we know that we've got 1, 2, maybe 3 tenants on the site, and we can push those customers onto the fiber as well. There, the government doesn't need to help us with that. That's for us to do. So there is some help, but more of the commercial aspect of it is where we tend to focus.

We got time for one or two audience questions, if there are any. So maybe just to wrap it up, looking to maybe the medium to longer term as 5G build-out continues across Africa and perhaps there's things around edge computing, AI, but anything to kind of call out around technological development as either a threat or an opportunity to your core business or an adjunct to your core business?

Yes, I think we're looking at it as all opportunity at this point in time. So within our portfolio, Brazil, okay, outside of Africa, but Brazil, Nigeria, South Africa, are all in the first innings of 5G. They're starting to -- all the carriers have spectrum, and they're starting to be rolled out. We're starting to see 5G being rolled out onto our network. About 3,000 of our 40,000 sites have a 5G antenna on them. So a lot of that growth, that densification, that growth is yet to come in our core markets. So it's a real opportunity to drive the next wave of growth for us over the next 2, 3, 5 years. So we're pretty excited about that. The densification element could lead to more rollout in different forms, not just on existing infrastructure. And we are not seeing much of that, to be honest, at this point in time. We're seeing carriers overlay existing positions to begin with, which frankly, is the best business for us as well. So we're pretty excited about 5G. In terms of AI, that for us is really a big internal opportunity. How can we operate our business more efficiently using artificial intelligence like a lot of the comm infrastructure companies, we have a huge amount of data within our business, which we, frankly, are figuring out different ways to utilize such that we can then layer on AI applications and drive efficiencies from that. That's anything from how we supply diesel to towers in Nigeria to revenue recognition such that we have a constant real-time feed on what equipment is on site can we derive more revenue from customers, et cetera. There's all sorts of revenue and cost opportunities that we think we can achieve through AI.

Great. We are just out of time. So I want to thank you for spending time with us.

Thanks, Jon. Thank you.