Earnings Call Transcript - IHS Q4 2021

Operator, Operator

Good day and welcome to the IHS Holding Limited Results Call for the 3-month period and Full Year ended December 31, 2021. Please note that today's conference is being webcast and recorded. At this time, I'd like to turn the conference over to Colby Synesael. Please go ahead, sir.

Colby Synesael, SVP of Communications

Thank you, operator. Thanks also to everyone for joining the call today. I'm Colby Synesael, the new SVP of Communications here at IHS. With me today are Sam Darwish, the Chairman and CEO of IHS Towers; Adam Walker, CFO; and Steve Howden, Deputy CFO. This morning we published our financial statements for the 3-month period fiscal year ended December 31, 2021 on the Investor Relations section of our website and issued a related earnings release and presentation. These are the consolidated results of IHS Holding Limited, which is listed on the New York Stock Exchange under the ticker symbol IHS, which comprises the entirety of the Group's operations. Before we discuss the results, I'd like to draw your attention to the disclaimer set out at the beginning of the presentation documents on Slide 2, which should be read in full along with the cautionary statement regarding forward-looking statements set out in our earnings release and annual report on Form 20-F. In particular, the information to be discussed may contain forward-looking statements, which by nature, involve known and unknown risks, uncertainties and other important factors, some of which are beyond our control, that are difficult to predict and other factors which may cause actual results, performance or achievements or industry results to be materially different from any results, future results, performance or achievements or industry results expressed or implied by such forward-looking statements, including those discussed in the risk factors section of our 20-F filed with the Securities and Exchange Commission today, and our other filings with the SEC. We will also refer to non-IFRS measures that we view as important in assessing the performance of our business. Reconciliation of non-IFRS metrics to the nearest IFRS metric can be found in our earnings presentation, which is available on the Investor Relations section of our website. With that, I'd like to turn the call over to Sam Darwish, our Chairman and CEO.

Sam Darwish, Chairman and CEO

Thanks, Colby. Welcome, everyone. Thanks for joining our Q4 and the financial year 2021 earnings results call. This is the second such call following our listing on the New York Stock Exchange last October. Welcome also to Colby, who just joined us at the start of March. Today, I'm going to run through our 2021 highlights, an amazing year for IHS, and also touch on how we are building a global digital infrastructure company that we believe will deliver long-term growth and value creation for our shareholders. I will also discuss how our focus on sustainability is core to our business model, a focus that has been at the heart of IHS since I founded the company in 2001. Then I will turn things over to Adam and Steve to take you through the results in greater detail, after which we will open the line for Q&A. Slide 4 of the presentation highlights IHS key accomplishments in 2021, many of which occurred during the fourth quarter, a very exciting time for us. As the leading independent multinational company focused solely on emerging markets, IHS ended 2021 with over 31,000 Towers spanning nine countries on three continents. We continue to focus intently on executing our organic and inorganic growth strategy, including our objectives to further diversify our asset base and lower our cost of capital. We are pleased with the multiple steps we’ve taken recently in support of this strategy. With our current and near-term growth driven largely by the implementation of 4G in our main markets of Nigeria and Brazil, we are very happy to see that 5G is now on the horizon as well. Our recent acquisitions are all designed to position IHS to benefit from the coming technological transition. In addition to our October IPO on the New York Stock Exchange that brought new equity capital and public shareholders into the company, IHS executed a successful $1 billion bond offering and refinancing in November, which lowered our cost of debt and cost of capital. In terms of entering new geographies, IHS also undertook several important steps in Q4 to diversify into attractive markets in a disciplined fashion. In October, we entered Egypt through a licensed partnership, and we are in discussions with the carriers there regarding commercial opportunities. More significantly, in November, we announced an agreement to acquire approximately 5,700 towers in South Africa from MTN which will make IHS the leading independent TowerCo in Africa's most advanced economy. Together, Egypt and South Africa have over 160 million in total population. These two transactions further cement IHS stature as the leading power company on the African continent. As we will now be serving the three largest economies, important 5G is starting to become a reality in our markets. Nigeria just recently started issuing spectrum, and South Africa is expected to do that shortly. In Brazil, where 5G spectrum has also just been auctioned, we closed the TIM fiber transaction early in November to create I-Systems, a leading fiber company in Brazil. The transaction further builds upon our entry into LatAm, which included the acquisitions of Skysites and Centennial Brazil and Colombia earlier in 2021. Moreover, we have continued our Brazilian growth in 2022, as we announced an agreement in January to acquire the GTS SP5 portfolio of more than 2,000 towers that complements our existing tower portfolio. When GTS closes imminently, IHS will have over 7,000 towers and a fiber network in LatAm in just over 2 years following our strategic entry there. I'm also delighted with the financial performance of the Group in 2021. In financial year '21, we delivered 12.6% reported growth and 16.1% on an organic basis versus financial year '20. Demand for communications continues to grow globally, and our two principal customers in Nigeria again announced strong results this past quarter driven particularly by data uptake. In 2021, IHS added 3,236 net towers, including 1,348 we constructed ourselves, as well as 3,550 tenants and 9,141 new lease amendments. Moreover, we expanded our EBITDA margin in 2021 versus '20, even in the face of rising energy prices compared to the lows of 2020. Overall, we remain pleased regarding our financial position and the significant opportunities ahead of us. Although as you will hear from Adam and Steve, we are focused on mitigating the impact of the increased macro volatility. We are seeing in our markets in the form of higher energy prices, upward inflationary pressures, rising interest rates and supply chain disruptions, not to mention the increased global political uncertainty from Russia's invasion of Ukraine, of course. As for COVID, while we’ve experienced no material financial impacts from it, we remain vigilant regarding its potential impact. On this front and beyond, we continue to broaden and deepen our commitment to sustainability through numerous initiatives that I will discuss shortly, in greater detail. I mentioned earlier that I will discuss some of the steps we are taking to build a world-class global company in the digital infrastructure. So, I wanted to highlight some of the senior members of the IHS team who have joined us recently as we work to take our company to the next level. As you heard, Colby Synesael joined us two weeks ago from Cowen as Senior Vice President of Communications to direct our Investor Relations and Communications Program and serve on the executive committee. Colby was most recently the number two ranked Research Analyst in the communications infrastructure sector in the U.S. where he covered American Tower, SBA, Crown Castle, among other top companies. We anticipate participating in more Investor Events to enable investors to become familiar with the team, our company and our strategy, and we look forward to continuing to engage with investors. Furthermore, Bill Bates joined IHS at the start of 2022, as Senior Vice President and Chief Strategy Officer and a member of the Executive Committee. Bill will be responsible for the Group's organic and inorganic strategy, running the M&A and commercial functions while complementing Steve's previously announced transition to CFO starting April 1 upon Adam's retirement. Bill brings over 20 years experience in the telecommunications sector, and was instrumental in driving international growth throughout emerging markets for SBA communications during his 15 years there. Finally, I'll be remiss if I didn't specifically thank Adam Walker, our CFO on this, his last earnings call before his retirement on March 31. Ending an executive career during which, he has served as Group CFO for 20 years consecutively, culminating in his contribution to IHS during the last 5 years with us. Adam was instrumental in building out a public company level corporate reporting and finance function on a global scale and guiding IHS through our multiple bond issuances and recent IPO, as well as serving on the executive committee. I congratulate Adam on his retirement, of course, and welcome Steve to the role of the CFO. Turning to Slide 5, IHS entered its 21st year of operations in a strong position and firmly focused on executing a strategy of becoming the world's leading digital infrastructure company targeting emerging markets. I mentioned the South African and GTS acquisitions in the last slide, but saved the punchline for here. I am proud to say that pro forma for the anticipated closure of these transactions, IHS will become the third largest independent multinational tower company globally by tower count, based on the current market with nearly 39,000 towers across 11 countries in Africa, LatAm, and the Middle East that collectively serve over 760 million people. Not only are we the largest multinational tower product solely targeting emerging markets on a global level, IHS will be pro forma the market leading independent TowerCo in 8 out of our 11 countries, and then the third largest in Brazil. Our commitment to Africa is as strong as ever, as you can see from the South African deal, but we are also excited to be further building upon our successful 2020 entry into LatAm and MENA as demonstrated by the Skysites, Centennial I-Systems, and GTS transactions in LatAm and our entry into Egypt, of course. The markets in which we operate have attractive population growth and rely on wireless for connectivity, but are behind the developed world in terms of wireless technology. The majority of our markets are still rolling out 4G, although 5G is now out there on the horizon in several key markets for us, which is exciting news for us in terms of future organic growth opportunities. Nigeria today, for example, is only 41% 3G, 4G penetrated. Although in December, the country conducted its first auction of 5G spectrum to enable the winning carriers to begin to develop the technology locally. We expect to see proof-of-concept type rollouts in 2022, which we already have orders for, with commercial rollouts beginning in 2023 and onwards. In Brazil, we also saw 5G spectrum allocation take place in November, where the three key carriers, TIM, Vivo, and Claro each secured 5G spectrum. As people will have seen more recently, the old mobile breakup has now received regulatory and competition approval and has enhanced the way for the three carriers to integrate that carrier consolidation. We believe this will provide further momentum in the communications infrastructure landscape in Brazil. And while we have minimal mobile exposure, we believe the old mobile breakout will pave the way for the remaining carriers to reinvigorate the rollout plans now that they know the shape of the respective networks. These wireless technology trends drive our organic growth prospects as we provide colocation lease amendments and new sites to carriers. On Slide 6, I wanted to highlight our historical growth and summarize our strategy. As you can see, our long-term revenue CAGR through 2021 is nearly 12% in dollar terms, and our EBITDA CAGR is over 19%, reflecting the attractive growth drivers in our markets I mentioned earlier, as well as our diversification program starting in 2020. As I have noted before, our business model is very similar to the U.S. TowerCo model, while our emerging markets footprint provides us access to attractive secular growth going forward. There are two critical elements of our strategy. First, we will continue to grow organically, focusing on leasing up our existing towers through colocation and improving margins through lease amendments, as our customers add new technologies to support the offerings. We are fundamentally a towers business, but we plan to continue to enhance our revenue through other services such as fiber, data centers, small cells, DAS, and rural. In other words, ancillary telecom infrastructure that fits our business model and our return expectations and helps us further embed in with the customers by providing solutions they need. Second, we continue to look to diversify our asset base by adding new portfolios of towers, as our diversification strategy is aimed at growth but also lowering our group cost of capital. We understand that investors would prefer to see Nigeria as a smaller portion of our overall business, but this won't happen overnight. As Nigeria has its own very strong growth characteristics which we love, and we are and will be disciplined in executing our inorganic growth strategy. Broadly, we look to acquire towers from the carriers as we have done successfully in the past or to buy existing TowerCos as we have also done several times, or to enter new markets by focusing on BTS for carriers as we are doing in Egypt at the moment. Communications infrastructure is a huge landscape of opportunity, and we believe that there are very few other companies that are focused on emerging markets globally, like we are. Finally, for me on Slide 7, I mentioned that our focus is not just on financial performance, but also on sustainability, which is at the core of our business. First and foremost, we believe that our business model is inherently sustainable and that we deliver shared infrastructure solutions that promote digital connectivity and inclusion and improve the lives of the communities we serve. This encourages greater access to education, healthcare, and financial and government services, while the infrastructure sharing reduces the environmental footprint of the telecom landscape in our geographies. Imagine the potential differences in the lives of the inhabitants of a small village in Nigeria, after gaining access to the internet, and what that could mean for improving their wellbeing as they access such services. Not to mention the potential positive environmental impact from increased telecommunications and less driving. It can feel that sometimes the S in ESG doesn't receive as much attention from others compared to the E, for example, but it's a crucial focus of ours, and a benefit delivered by our business model. In 2021 and Q4, we continued to advance our ESG efforts on multiple fronts across our markets, delivering numerous initiatives devoted to education, healthcare, infrastructure, and combating COVID-19, as we have been doing for many years. We are also gratified to have been recognized on multiple occasions for this work in our communities. Importantly, in September, we launched the Frontline Workers Initiative, the program through which we will pay for the entirety of a college education at the top school for the qualifying children of those of our employees who have worked so hard during the pandemic to maintain the towers and network performance in such a difficult period. We recognize their efforts. We already have students enrolled in the program across 7 universities at the moment, and I believe that education is empowering and life-changing. Through this initiative, we are creating opportunities that simply do not exist for many children in our markets. I'm very, very proud of this project in particular. Furthermore, I am pleased to highlight that in January 2022, we expanded our partnership with UNICEF to the group level, announcing a 3-year international partnership to support the Giga initiative objective to map the internet connectivity of all schools worldwide. Through this 3-year partnership with UNICEF, which also includes a contribution of $4.5 million, the IHS team will work closely with Giga to help strengthen its work mapping schools and their connectivity levels on an open-source map using machine learning and satellite imagery. Importantly, on the environmental front, we have continued evolving the analysis of our Scope 1 and Scope 2 greenhouse gas emissions in connection with developing a carbon emissions reduction strategy that we anticipate announcing in 2022, investing further to replace diesel generation where we can with the latest renewable technology not only makes environmental sense to reduce direct CO2 emissions, but it also makes smart business sense in terms of our desire to drive OpEx and CapEx out of the business. We look forward to sharing our progress on this topic with you later this year. As I believe strongly, and I have said repeatedly, in emerging markets, there is no way you can become a scale unless you operate as a long-term sustainable business. You need to be accretive to your environment as the resources around are limited. This is not just a box-ticking exercise for us, but it's something that I'm very passionate about. I look forward to sharing our fourth annual sustainability report with you in Q2 and to future announcements in this area. And with that, I will turn the presentation over to Adam and Steve to walk you through the results.

Adam Walker, CFO

Thanks, Sam, and hello, everyone. Today, I will cover our key tower, tenant, and lease amendment KPIs and discuss our revenue EBITDA and RLFCF results for the year just ended. Turning to Slide 8, as mentioned, the business performed really well in 2021. And you can see our towers, tenants, and lease amendments have all increased versus the prior year. Moreover, IHS delivered double-digit growth in both consolidated revenue and adjusted EBITDA in 2021 versus 2020, whilst expanding our EBITDA margins, and our recurring levered free cash flow grew by 8% versus the prior year. Our level of investment to CapEx to grow the business organically increased by over 75%, and given our high levels of cash generation, our consolidated net leverage ratio has decreased versus the prior year, despite the inorganic activity. Turning to Slide 9, our tower count is now over 31,000, up by over 3,000. This was driven largely by our acquisitions in LatAm and the ongoing new site programs there, as well as the new site activity in Nigeria, with both new build programs accounting for most of the more than 1,300 towers that we built during the year, 597 of which in Nigeria, and 600 in LatAm. Please note that, unlike the U.S., our markets have characteristically minimal churn. Total tenants grew 8.3% year-on-year to 46,414, with a colocation rate of 1.5. Two things to remember in relation to the colocation rates, which we define as the total number of tenants divided by the total number of towers. First, lease amendments, which are a significant factor in the growth in our Nigerian segment are not included. Second, when you are a significant acquirer and builder of towers, as we are, then you are typically adding to the denominator period-on-period even as we continue to lease up the more mature parts of our portfolio. We see no reason why we can't get to 2x or greater on our overall portfolio over the long-term as our more mature portfolios of towers currently are. Lease amendments increased by over 50% year-on-year as our customers added equipment to their sites, particularly 3G and 4G upgrades in Nigeria. On Slide 10, you can see our consolidated revenue for both Q4 and full year '21. In the full year and in Q4, IHS delivered both double-digit reported and organic revenue growth. For the year '21, reported revenue of almost $1.6 billion grew by 12.6% and full year organic revenue growth was 16.1%. It has been another strong year for top line growth led by Nigeria and LatAm. As a reminder, in the chart, we've called out the $24 million of revenue recognized in Q2 '21, which although normal course of business, as previously discussed, nevertheless conflated the usual quarterly run rate. Overall, we continue to grow well in line with our stated objective of seeking double-digit revenue growth on an annual basis in dollar terms. And Steve will shortly discuss our guidance on this metric and others for 2022.

Steve Howden, Deputy CFO

Thanks, Adam. Onto Slide 14, you see the CapEx was $402 million for FY '21, a 76% increase versus last year, primarily due to us investing in the business for growth. Driving the increase was increased augmentation in new site CapEx in Nigeria, in connection with lease amendments delivered for our customers and for our rural solution, as well as the increased new site CapEx in LatAm. CapEx was $151 million in Q4, a 131% increase versus last year's period, in light of the same drivers just mentioned. However, as we discussed in our Q3 call, we did underspend in terms of CapEx during the year as a result of the global supply chain issues rippling across our markets. Similar to companies around the world, we are seeing a slowdown in the supply chain continue into 2022, which we are trying to mitigate by ordering equipment earlier, in some cases, 1 to 3 months earlier. Financially speaking, this impact is small and has been factored into our guidance for FY '22. But noting the continued uncertain macroeconomic world, in which we live at the moment.

Phil Cusick, Analyst

Okay. Hi, thank you. Thanks for the detail on the oil impacts. Margins in '22 are much better than we would have thought given that, which is great to see. For that $7 million adjusted EBITDA impact for a $5 increase in oil prices, how is that split between Nigeria and the rest of the business?

Sam Darwish, Chairman and CEO

Nearly all of it is Nigeria, Phil. So, in terms of how people think about the oil environment around IHS stock, it is almost entirely not totally, but almost entirely a Nigeria facet. If people remember that our MENA segment and our LatAm segment are effectively clear of energy, but given the power pass-through mechanisms that we have in place in those particular segments. And then our Sub-Saharan African business, there is some diesel in that particular segment, but there is also significant grid connectivity. So really, we're talking about Nigeria when we're talking about oil. So that $7 million is almost all Nigeria.

Steve Howden, Deputy CFO

Yes, so obviously the quarter-on-quarter cash balance in Nigeria is dependent on where we are in the collection cycle. So Q3 was a significantly higher balance, it's more like $200 million. I can get the exact number for you, but that was because of when we had collected from our customers. As we went through the course of Q4, we then obviously deployed capital into the business and upstream some as well and hence the $81 million cash equivalent balance in Nigeria at the end of the year. And that’s something that we spoke about before that we continue to look to do as we collect from customers, we will ultimately look to service the needs of the business and then with excess cash have to upstream that and get it offshore.

Bora Lee, Analyst

Hi. This is Bora Lee on for Jon. Thank you for taking the questions. You note on Slide 22 that other key components of diesel in your cost structure includes the percentage mix at imports versus locally sourced diesel and which we buy it in the spot market or futures. To do a bit of a deeper dive into what that sourcing that’s currently, and what are the factors that would impact the mix of imports versus local and spot versus futures purchases.

Steve Howden, Deputy CFO

Hi, Bora. Steve here. So, a variety of different items go into that sourcing strategy. We don't sort of disclose minutiae detail around that, but we look at what is the price of the local market, what is the price of the import market. What is the availability at the right times in terms of delivery for what we need, and how much of that availability can we afford to purchase. And all of that sort of supply together with pricing combines to give us a constantly moving mix between whether we're sourcing locally or importing. So, it's a complete balance, and it's dynamic; it keeps moving. That's sort of a key way we can control supply and price.

Greg Williams, Analyst

Great. Thanks for taking my questions. Just on the guidance for revenue, what level of organic growth is factored in the other regions. You noted Nigeria has some strong leasing activity, but hoping you could provide some color on organic growth in the other regions? Second question is just on Egypt. I realize it’s not in guidance, but what’s your expectations on the cadence of signing new carriers? Is it a first-half story or is it back half loaded?

Sam Darwish, Chairman and CEO

Hi, Greg. Look, the strategy remains what we’ve discussed. We want to diversify. We see ourselves as a global emerging market infrastructure company, that’s how we see ourselves. We will continue to look beyond where our market are. Now having said that, we recently made moves into large markets. We made a move into Egypt; we made a move into South Africa. While we continue looking outside these markets, I would say the focus this year would be largely on these, like Brazil, of course. Now if something comes out that is so transformational and so strategic for us that is outside these markets, we will definitely consider. The share price is definitely not helping. But again, I see that as just a point in time. Other alternative funding could be available if something needs to happen quickly. But to be honest, at the moment, I think we would largely focus on our existing markets, especially given the uncertainties around the globe and where things are, well Ukraine, Russia, China yesterday now starting the massive lockdowns again, etc.

Colby Synesael, SVP of Communications

Great. Well, this concludes our call. Thank you...