IHS Holding Ltd. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Renewals with MTN: Extended and renewed tower contracts with MTN in Nigeria through 2032 covering nearly 13,500 tenancies, and across other African markets, totaling approximately 26,000 tenancies. These renewals provide a more sustainable currency split and introduce power indexation to hedge against energy price fluctuations.
• Strategic Review: Focus on improving governance, increasing operating profitability, reducing CapEx to improve cash flow, and assessing portfolio of markets. Aim to raise $500 million to $1 billion for debt reduction, share buybacks, or dividends.
• Governance: Proposals to amend articles of association approved at AGM, aligning governance with mature US-listed companies. Engaged with MTN on outstanding governance issues.
• Balance Sheet: Comfortable with balance sheet while pursuing initiatives to extend maturities, manage interest expense, and shift debt to local currency. Ended Q2 with $746 million available liquidity.
• LatAm and Brazil: Completed sale of Peru subsidiary, built 136 towers in Brazil during the quarter, and reorganized Brazilian operations to integrate tower and fiber businesses for cost efficiencies and speed to market.

Segment Performance

• Nigeria: Second quarter revenue was $270 million, a 26% year-on-year decline on a reported basis, but organic growth was 105% driven by FX resets and escalations. Segment adjusted EBITDA was $171 million, a 22% year-on-year decrease but a 66% increase from the previous quarter, with a margin of 63.6%.
• Sub-Saharan African: Towers and tenants increased by 1.3% and 3.5% respectively year-on-year. Revenue decreased by 12.3% due to unwinding power managed services, but segment adjusted EBITDA increased 21.5% with a margin of 70.7%.
• LatAm: Towers and tenants grew by 10.4% and 6.7% respectively year-on-year. Revenue decreased by 3.9%, with organic revenue growth increasing 1.5%. Segment adjusted EBITDA decreased by 6% with a margin of 71.6%.
• MENA: Towers and tenants grew by 8.5% and 8.8% respectively. Revenue increased by 12.7% including 6.4% organic growth. Segment adjusted EBITDA increased 14.5% with a margin of 55.4%.

Guidance

• The agreement with MTN Nigeria negatively impacts 2024 results by approximately $30 million to $35 million (annualized headwind of ~$47 million).
• Expect continued strong performance in KPIs with higher adjusted EBITDA margin moving forward after the dip in Q1 due to Nigeria devaluation.
• Anticipate leverage to remain within the target range of 3 to 4 times net leverage ratio this year, with potential drop upon future disposals.
• Guidance implies continuation of higher margins versus 2023, benefiting from colocations, amendments, and reduced diesel price exposure.

Risks

• Macroeconomic Conditions: Fluctuations in currency exchange rates, particularly the Naira devaluation, can impact revenue and earnings.
• Power Price Risks: Prior to contract renewals, exposure to power price fluctuations, but now more hedged with power indexation and pass-through mechanics in various markets.
• Carrier CapEx Spending: Carriers' CapEx plans can affect leasing and new build activity, though fundamental growth characteristics remain.

Question and Answer

Q: Good morning. Thanks for taking my questions. Just wanted to get a sense as to how you characterize the overall new lease activity in both Nigeria and your broader African profile. Any -- I mean, you mentioned some activity. Do you feel like there is more of a positive kind of macro view at this point? And would you -- at what point -- any time in this year, would you expect that leasing activity to step-up or accelerate? Thank you.

A: Hey, Jim. It's Steve here. Yeah, certainly the quarter is demonstrating that the fundamental growth characteristics continue to be there. So if we think about the different buckets of growth we have right now in terms of new build sites, we did 207 in the quarter. Now a chunk of that is in LatAm, where we've decided to continue investing growth CapEx when we pulled back in Africa. But actually when you look at the colocation, which there was close to 400 in the quarter, and the lease amendments where there was 1,200 plus in the quarter, a lot of that's actually being driven out of the African portfolio, scattered around a little bit. We had a good chunk of colocation in Rwanda in the quarter, where we had reached a new deal with one of the carriers there, some in Nigeria as well. A lot of the lease amendments are actually coming out of Nigeria, particularly South Africa, as we see the continued slow and steady 5G rollout in those two particular markets. So, yes, the signs still continue to look good. I don't think we'll get too ahead of ourselves in terms of knowing that the carriers are looking at their CapEx spend plans and trying to sort of rationalize where they can given how global macro is impacting everybody in the industry. But we still see kind of a steady growth in our key markets.

Q: I think Cricket has a lot of innings, so 7th to 9th inning might actually qualify as early. But I'll let you be the judge of that. So I was just interested, two things. On the strategic review, there's a lot of flexibility that you talk about in terms of potential outcomes, capital allocation, fair buybacks, dividends and so forth. But you also talked about not ruling out further initiatives to continue increasing shareholder value, which we continue to assess in parallel. Can you talk a little bit about what might be behind that and what would drive you towards that decision? And then just more of a LatAm question. I noticed that amendments increased significantly and what's driving that? Thanks.

A: So I'll comment first on the strategic review, then I'll let Sam jump in and add a bit of flavor as well. And then I'll come back to LatAm on the lease amendments. So in terms of the strategic review, look, the way we consistently characterize that is, we are looking at a whole broad variety of opportunities. We're very, very focused on what can create value for shareholders. And whilst we wanted to provide some guidance as to how we were thinking about it last quarter when we set those targets, we also don't want to rule out, potential other value-creating opportunities. Now, what we would also say is, things like the progress on the governance, things like progress with MTN renewal, that all sits squarely in our minds in terms of value creation. It might not be disposals of any type, but that sort of internal work, if you like, is also very important. So there's lots of different strands to our thinking around value creation, the disposals we've characterized so far, what we're targeting initially, and when we said, we will look to pay down some debt with that and we'll think about other shareholder direct return methods after that. So all of that remains the same. But Sam, I don't know if you want to add anything specific on that before I go back to LatAm. Sam Darwish: Yeah. Hi, Jon. Look, I think it's very important that we remain focused on shareholder value unlock. We really believe our -- there is much more intrinsic value than the market is really awarding us. I mean, our free float at the moment is more than 20%. We have no major renewals anymore coming for at least eight years. We have more than $12.3 billion of contracted revenue, yet our market cap remains under $1 billion. So we will announce things as they happen. We'll wait until the ninth inning to kind of like finish and then we'll say what we've done. But for now, we will leave no stone unturned until the market realizes there is much more value to this company than it's been awarded. Steve Howden: And then, Jon, on your lease amendment question, so there wasn't too much of a step-up on LatAm lease amendments. So there are about 196 now in Q2. They were 186 last quarter, albeit they were sort of 69 when you're looking at the comparative quarter from a year ago. Where we did see some step-up in lease amendments this quarter versus Q1 was in the SSA segment, which was in South Africa, and that's -- that was 5G rollout in South Africa.

Q: Hi. I have two questions, one kind of macro level and then one more company-specific. What are you seeing in Nigeria and your other major markets on data usage? Is it growing at the rate that, I guess, you had expected? And then on -- specifically for the company, as you kind of transition to more indexation and less of the power managed services, are there costs that could come out of the business? And maybe, talk a little bit about potential cost initiatives overall?

A: Sure. Sam, do you want to take the data usage one? I'll just cover the cost side of things first, but if you want to take the macro one. So Richard, you're right. The initial areas to look at are obviously locally within the OpCos, which we've been doing as we've been transitioning those business models. And so that's kind of been happening as we go along and you'll see the realization of that in elements over this quarter a little bit, but then into next quarter as well. As it relates to further kind of cost initiatives, and that is also an element of our strategic review, if you like, which is looking at profitability around the group, including central cost structures. And we're continuing to look at different ways that we can operate more efficiently. Some of that's because of the shift in business model away from this power element, but some of it's just new ways of working. We're looking at trying to introduce more technology, trying to use artificial intelligence, such that we can be more efficient, more accurate, and, ultimately, reduce overall costs. So that's kind of an ongoing element of the strategic review and will continue that for quite a period of time there. Don't want to put any numbers on that just yet, but that is happening. Sam Darwish: In terms of the market growth, we're seeing massive growth on the African side, Richard. So, for example, in Nigeria, I believe, MTN reported recently more than 50% increase year-on-year in terms of data usage. I mean, these are the kind of numbers we're seeing. So that runway remains there. LatAm is more modest, but again, data growth remains large.

Q: Yeah. Good morning, guys. Thanks for taking the question. I've got a couple, please. The first one a follow a bit on from Richard's question on identification and traffic growth. When I was on the Helios call last week, they were talking very -- a very sort of upbeat message really around the operator need for densification, partly for traffic but also new coverage. And I think they were referring to it as here and now as well as the future. You seem to be a bit more cautious and I'm just keen to understand if that's more to do with geographic mix, so more LatAm and Nigeria rather than differences between the companies. And the second question is on Nigerian EBITDA trajectory. I doubt you want to give 2025 outlooks quite yet, but investors are asking quite a lot around the moving parts of cost and revenues for next year in EBITDA. I guess you're happy tailwind coming from CPI resets, you'll have the tailwind from the increased tenancies in Airtel. You'll have a -- presumably a headwind from the lost 1,100 tenancies. So just if you could walk us through some moving parts, even if you can't say you think EBITDA will go up or not in Nigeria next year. Thank you.

A: Let's talk about that last one first. So, Maurice, I mean, you're right, we're too early for 2025 metrics and guidance, but you have started to unpack some of the moving parts. Another element I would point you to is macroeconomically speaking, obviously the biggest driver for IHS in 2024 so far, and one looks like it's going to be for the rest of '24, was the Q1 devaluation. So obviously there was a significant dip in revenue and earnings in Q1 post the Naira devaluation, which has then now rebounded in Q2. But obviously as you drop that quarter of dip, let's say, then you start to get a more even run rate through the back end of the year. So as you move forward into 2025 we'll be having a good hard think about what our forward curve looks like, but certainly at this point in time, one would hope it doesn't include any kind of form of step change, but let's see. So that's probably one area to look at. You're absolutely right. In Nigeria, organic growth being driven by Airtel. MTN are continuing to do business by the way, so they'll come through as well. We're seeing plenty of traction in Brazil towards the back end of this year and into next year around new build sites, around colocation, around more lease up -- excuse me, more lease amendments as 5G starts to roll out more seriously. I think as it relates to LatAm, the 5G take up while it's there, I think it's been a bit slower than people had originally thought, but it's now starting to gather some pace. I think we're going to see that come through into next year. So -- and then you're right, in terms of contractual resets, those will all flow through as usual. So those are some of the moving parts without us putting numbers on it yet. And obviously, it's a bit early for that. Steve Howden: Yeah, densification point. I mean, I think it's a little bit to do with different markets at different points in their technology cycle, right? And so I'm not sure you can draw a complete apples to apples across it. Our markets are largely 4G penetrated now and we're sort of on that cusp of 5G. We're starting to see it a little bit in Nigeria, but early days. We're starting to see a bit of it in South Africa. I would still say early days, but more advanced than Nigeria. And as I just mentioned LatAm, it's starting to flow now. So I think it's more a question of where are we in the technology cycle of the given markets, recognizing that over the last few years we've continued to add thousands and thousands of lease amendments and colocations as well. Just keep in mind, Helios report those two metrics differently to how we do. We split them out, they merge them. So just keep that in mind.