Helios Towers plc (HTWSF) Q1 2024 Earnings Call Transcript

Helios Towers plc (OTCPK:HTWSF) Q1 2024 Earnings Call Transcript May 16, 2024 4:30 AM ET

Company Participants

Tom Greenwood – Chief Executive Officer
Manjit Dhillon – Chief Financial Officer

Conference Call Participants

John Karidis – Numis
Graham Hunt – Jefferies
David Wright – Bank of America
Emmet Kelly – Morgan Stanley
Rohit Modi – Citi

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Helios Towers First Quarter 2024 Results Call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions].

I would now like to hand the conference call over to your host, Tom Greenwood, CEO. Please go ahead.

Tom Greenwood

Thanks, Candy. Hi, everyone, and welcome to the Helios Towers Q1 2024 Global Investor Call. I hope everyone is doing well. Thank you very much, as always, for your time today, and we’re looking forward to providing you with our first quarter trading update of 2024. So on Page 2, we’ve got the usual lineup. Me, Tom, Manjit and Chris will cover the usual business, strategic and financial highlights, and then look forward to the Q&A at the end.

So moving to Page 5. This quarter one effectively marked 15 months since we closed our last large acquisition of Oman in December 2022. And we’ve been laser focused on organic growth, asset utilization and operational efficiency to drive value creation since then. We continue to see significant demand for our services and infrastructure as mobile telephony usage accelerates across our markets in terms of subscriber numbers, usage behavior and incremental technology demand.

Voice and data demand is growing as people use mobile more and more to everything from phone calls to banking, health, education, social media, payments, AI and streaming. As the leading digital infrastructure platform across our markets, we focused 24/7 on our customer service excellence strategic pillar to ensure our customers are getting what they need from us, when they need it, and we are surpassing their expectations.

As part of this, we have an open transparent learning culture and are always keen to hear feedback on how we can improve further. I’m very pleased to report a strong start to 2024, continuing where we left off in 2023. We’ve had our busiest Q1 for new tenancy additions in company history. And year-on-year, our tenancy ratio is up 0.11 times to 1.95 tenants per site, which brings good momentum towards our 2026 target of 2.2 tenants per site. Financial performance continues to be strong with double-digit year-on-year growth, organic revenue growth of 14%, largely driven by tenancy additions flowing through to 21% growth on EBITDA and portfolio free cash flow, showing the strong operational leverage of our platform.

With our organic focused strategy being of lower CapEx intensity, we also see a strong increase in the returns year-on-year of a 3 percentage point increase to 13%. Driving ROIC higher and increasing its surplus above our cost of capital is a key focus for us in creating real long-term investor value. Our strategy continues to be focused on ROIC enhancing investment opportunities, driving up enterprise value and cash flows, reducing leverage, thereby accelerating equity value creation.

We were also pleased to receive upgrades from Moody’s and S&P in the quarter, which clearly demonstrates the increased strength of our business in terms of diversification, performance and cash flow generation. And lastly, on this page, we reiterate our guidance for FY 2024, which as well as strong tenancy and EBITDA growth also focuses on leverage of below 4 times and cash flow neutrality as being our infection year. At this point, we feel very much on plan to achieve these targets, and we’ll continue to provide you with updates on progress through the year in the normal way.

Now turning to Page 6, where you can see this in [indiscernible] format, with Q1 tenancies of 761 being a strong start in achieving our 1,600 to 2,100 guidance range. Additionally, EBITDA and portfolio free cash flow Q1 annualized over last 12 months figures are both in the lower end of our range for the full year. Our focus now is to continue driving the growth and efficiencies of these metrics further up through the year.

And now on to Page 7. where we take a closer look at the ROIC and tenancy evolution through our recent scale expansion and show the trajectory to further equity value creation. As a reminder of our journey over the past few years, in 2020, we were a five market business with 7,000 sites with a strategy to geographically expand. In 2021 and 2022, we completed four large acquisitions, which doubled the business to 14,000 sites in nine markets. Here, we were acquiring underutilized power portfolios from mobile operators, which inherently come with a low tenancy ratio and ROIC on day one, but with embedded demand in the market to drive up utilization in the following years. This consequently diluted our group tenancy ratio and right KPIs in the short term and meant negative free cash flow with around $1 billion invested in the acquisitions. And from the start of 2023, we’ve been focused very much on high returning organic growth, leasing up our sites and driving ROIC upwards.

In 2023, we increased tenancy ratio from 1.81 to 1.91% and ROIC from 10.3% to 12%. And you can see in Q1 2024, we’re continuing the upward trend of these metrics and we focus on doing more of this as we move forward. And of course, at the same time, being free cash flow neutral this year and stepping up the bottom line free cash flow thereafter. And as a reminder of our capital allocation policy, as we communicated in March, first priority is high returning organic investments second, being leverage reduction to below four this year and around three by 2026. Third is investor distribution and fourth is accretive M&A. Just as a reminder, as sign posted earlier in the year, we might have a small second closing of around 220 in-building sites from our Oman acquisition, which remains subject to regulatory approval, on which progress is being made, but timing remains unclear for now.

Now moving to Page 8. We further highlight the dynamics of ROIC in early and later stages of portfolio evolution and see our new markets on the right, ticking upwards on tenancy ratio and ROIC and a similar trend to the markets in which we’ve been operating for much longer. All our markets are contributing to upwards return trend, and we aim to deliver 100 bps or more on average per year for the next three years, creating a material surplus between ROIC and WACC and in turn, creating sustainable value for investors.

Finally, on Page 9, we reiterate our commitment to sustainability and the fact that our business and the way we manage it inherently drives digital inclusion, carbon efficiencies, female empowerment amongst others, all underpinned by our core services, ensuring reliable infrastructure and power provisioning to maximize quality of the mobile network for end users. We continue to retain our AAA MSCI rating and the others, which you can see on the top right and continue to progress on our strategic initiatives to drive our business and its environment and communities to a better place and a better quality of life.

And with that, I’ll hand over to Manjit and look forward to talking to everyone at the end for Q&A.

Manjit Dhillon

Thanks, Tom. Hello, everyone. Great to speak to you all again. And starting on Slide 11, I’ll be going through the financial results. Following on from what Tom spoke to earlier, we remain focused and committed to driving organic growth and lease-up on our existing portfolio, which in turn drives capital-efficient returns to the group. And in Q1, we continued the momentum from last year and have seen strong operational and financial performance. On this slide, as usual, you see we’ve summarized our performance in the main KPIs, which I will go through in more detail over the next few slides.

Moving on to Slide 12, our site and tenancy growth. From a site perspective, we saw organic growth of 4% increase year-on-year, equating to an incremental 482 sites. We are very selective in our approach to new site rollouts, and we are confident in our ability to lease these sites up over the coming years, which is evidenced in our strong lease-up rates on new build portfolios, which we presented in previous results presentations. From a tenancy perspective, we had near record organic tenancy additions of 2,566 tenancies year-on-year, a 10% increase, resulting in a 0.1 times expansion in our tenancy ratio to close to 2 times, tracking well in line with our 2.2 tenancy ratio target by 2026. We’re also particularly pleased to see currency ratio expansion driven by both our existing and new markets, in particular, Oman, DRC and Tanzania.

And on to Slide 13, focus on our revenue and EBITDA. We’ve seen 14% revenue growth and 21% EBITDA growth year-on-year, and we’ve seen revenue growth and EBITDA growth in all three of our reporting segments, predominantly driven by tenancy growth, which I’ve just spoken about. The Central and Southern Africa and Middle East and North Africa, both delivering more than 30% EBITDA growth year-on-year. Our EBITDA margin increased by 3 percentage points to 53%. And again, that’s been predominantly driven by colocation lease-up and operational improvements.

Moving on to Slide 14. The usual analysis showing the key drivers of revenue and EBITDA growth in a bit more detail. As with previous results presentation, the key driver of growth has been tenancy additions with the escalators effectively working to offset macro movements to protect our EBITDA on a dollar basis. Now this is clearly shown on both charts.

If you look at the left-hand bar bridges, tenancy growth drives 13% growth in revenue year-on-year out of 14% overall revenue growth and 20% growth out of 21% total EBITDA growth year-on-year. As a tower company, this is exactly what we want to have the growth driven by tenancies, which comes down to identifying attractive markets, entering them through buy and build opportunities that then proactively selling and rolling out and operationally performing for our customers. This is exactly what we do and what we focus on. The escalators are present in all of our customer contracts in one form or another.

For example, for power, roughly 50% of our contracts have quarterly power escalators and 50% of annual escalators. And these, as a reminder, escalated in relation to the local pricing for fewer electricity. So if local prices go up, then the escalators go up. And if the prices go down, then the escalators go down.

The CPI, we have annual CPI escalators and they typically kick in between December and February. Our power escalators increased revenues by $3 million. And despite the power price increases in some of our markets, this falls through to flat EBITDA, again, demonstrating that our business model has effectively offset any increased OpEx due to higher power prices to protect our EBITDA on a dollar basis, whilst we also continue to explore areas to save on fuel costs through our investments in power initiatives and reducing reliance on fuel where possible.

And just to focus on CPI and FX, local CPI is over 5% at the moment with the majority of our CP escalators having kicked in earlier in the year and contributed 4% increase from revenue year-on-year. The CP escalators, as you can see in the dotted box, have effectively offset the FX movements on EBITDA. So standing back, there’s little impact to FX or power prices, and we continue to be well protected from macro volatility, again, with the key driver being the great in tenancy additions, both organically and previously inorganically and operational improvements. Again, all of which are within our control and how we want the business to operate.

Moving on to Slide 15. CapEx has and continues to be tightly controlled and focused on opportunities that drive return on invested capital, including colocations, OpEx efficiency projects and highly selected build-to-suits, and this is in line with the capital allocation strategy we set out earlier in the year at our full year results. Looking at what we’ve incurred in the first quarter of 2024, we incurred total CapEx of $45 million, which is mainly made up of growth CapEx, reflecting the strong currency growth we’ve seen so far. And in terms of guidance, there is no change to our 2024 expectation. The CapEx range for 2024 will be between $150 million to $190 million, which consists of $105 million to $145 million of discretionary CapEx and $45 million of nondiscretionary CapEx.

Moving on to Slide 16 and looking at our leverage and debt. Our net leverage at the end of Q1 has decreased by 0.7 times to 4.4% year-on-year but remaining the same quarter-on-quarter. Typically, we do see that Q1 leverage stays consistent from Q4. We saw that last year, for example, but it stayed at 5.1 times, and this is principally due to seasonal cash outflows in Q1. However, we have a clear pathway to delever the business at about 0.5 times per annum on the basis of organic EBITDA growth and keeping rate debt broadly flat, and we continue to target below 4 times net leverage in 2024.

As previously mentioned, we have approximately $380 million of undrawn debt facilities. And together with $90 million of cash on balance sheet, this means we have $470 million of available funds. About 50% of our cash on balance sheet is held at group with the remainder spread amongst the OpCos for CapEx and working capital purposes.

Our debt remains largely affected the more than 80% of drawn debt at fixed rates and have three years of weighted average life remaining on undrawn debt. Over the quarter, we were very pleased to see Moody’s and S&P upgraded our credit rating to B+ equivalent. We’re particularly pleased with our strong financial track record, market diversification, our focus on organic growth towards deleveraging and cash flow generation have been recognized by the rating agencies. With regard to the outstanding bonds, we continue to monitor our options and we’re aim to adjust the notes during the course of the year and remain prepared to move quickly should market conditions attractive.

And finally, moving on to Slide 17. We reiterate our guidance for 2024. We continue to expect 1,600 to 2,100 organic tenancies in the year, and we made a great start to this a far. On adjusted EBITDA, we expect to be in the range of $405 million to $420 million and portfolio cash flow to be in the range of $275 million to $290 million. Due to a favorable mix of colocations versus sites, we expect to deliver lower CapEx in the range of $150 million to $190 million. Combined, we expect these metrics to support reducing our net leverage to below 4 times and to support neutral free cash flow for the first time in the company’s history.

And as Tom mentioned, this does exclude the impact of a small second potential closing in Oman or the timing is uncertain on that closing. But all in all, we’ve had a very strong start to the year, and we’re tracking well towards our full year guidance. And with that, I’ll pass back to Tom to wrap up.

Tom Greenwood

Thanks very much, Manjit. Yes, just really to wrap up on Page 18. Yes, very pleased with the start to the year with very strong tenancy additions in Q1. That’s obviously fed through to the financial metrics. There’s a 21% increase EBITDA and 3 percentage point increase in ROIC year-over-year and confidently reiterating our 2024 guidance across all the metrics that Manjit just went through.

So thank you very much for listening, and I think we’re now open for some Q&A.

Question-and-Answer Session

Operator

Thank you, Tom. [Operator Instructions]. So the first question comes from John Karidis of Deutsche Numis. Your line is now open. Please go ahead.

John Karidis

Thank you. Good morning, everyone and congratulations to the team for another good quarter. Can you talk about tenancy growth in the quarter so far and prospects over the sort of short term, perhaps touching on a few notable markets and what’s happening there on the ground? Thank you.

Tom Greenwood

Hi, John, Tom here. Thanks for the question. Yes, look, tenancy growth continues a strong momentum already in Q2. So we feel confident of achieving the full year guidance. We’re already above 1,000 year-to-date quite comfortably. So yes, I think we’re well on track on that. And we’re seeing strong demand across sort of all markets, really. And I’m actually currently in Oman. I’m doing the call from Oman meeting some of our customers and teams today. And Oman is market with a lot of demand both for standard tenancies, but also 5G here has really been rolled out strongly, which brings with a significant amendment revenue. So yes, I think we’ve got good cause to be quite excited really about the tenancy pipeline and the rollout that’s going on at the moment.

John Karidis

Thanks, Tom. Good luck with the temperature in the man just now.

Tom Greenwood

It’s getting hot. Thanks, John.

Operator

The next question comes from Graham Hunt of Jefferies. Your line is now open. Please go ahead.

Graham Hunt

Yes. Thanks very much for the question. Just two from me, please. First one, I just love to hear what you’re seeing on the ground from your competitors given the opportunities in front of you, both in terms of local competitors, but also your global peers would be interesting. And then second question, just on FX. Would you be able to speak to sort of the sourcing environment year-to-date for USD in Tanzania and generally, the hard currency availability across your markets that you’ve seen both in Q1 and anything you can comment on Q2 today would be helpful. Thank you.

Tom Greenwood

Yes. Thanks very much, Graham. So maybe I’ll take the first one on competitors and Manjit, you can take the FX one. Yes, look, I mean, the competitive landscape across the region is really as follows. There’s a couple of large competitors that probably everyone on the call will have heard of who we’ve competed against for years, those being American Tower and albeit we don’t actually overlap in many markets with them. So the competition is more so from an M&A deal context, which obviously, we’re not really doing at the moment. So we overlap with both in South Africa, which is our smallest market, and we overlap with American Tower also in Ghana, which is one of our smaller markets as well, albeit both of those markets are growing well at the moment.

And in other markets, really in seven of our nine markets, excluding Ghana, South Africa, in seven of our nine markets, we are the leading largest tower company, and in some cases, actually the only independent power company and we typically have between 30% to 60% of the tower market share across those seven markets, which got us in a good position for having a large fleet of towers to sell colocation on and obviously, it builds confidence and trust in all of our customers in those markets. So we look to really always compete on operational performance.

So our number one pillar in our current strategy is customer service excellence, which we focus on day in, day out. And this means a multitude of things to our customers. But two of the main items are power uptime and speed of new rollouts. And we aim to be market leader on those and to give our customers the best-in-class service, and that very much helps in securing new business from all the major mobile operators, which you can see in the numbers.

Now obviously, in markets where we have smaller competitors, they’re also doing a fantastic job and also during the rollout. The reality is the demand for rollout is huge. But we’re very confident of winning our fair share of it as can be seen in our numbers, and we’re very confident of continuing to do that as we move forward.

Manjit, do you want to take the FX one.

Manjit Dhillon

Yes, sure. I’ll pick up FX. So just as a broader backdrop. So just a reminder, we do operate in a number of hard currency markets. So DRC is dollarized, Oman is dollar pegged, Senegal and Congo are Euro pegged. So the ability of getting your hands on FX there is clearly de minimis or minimal. In markets where you have more of a prevalent local currency like US and Tanzania, you do sometimes find seasonal inflows and outflows of FX. But taking Tanzania as a specific example, we do normally see more dollars come into the market following the cash you harvest. But outside of that, we’re able to get our hands on a number of different currencies. So we’ve been finding using liquid currencies such as rand and getting our hands on dollars as well.

So in general, we would to source it all very, very well, and we’ve been able to upstream money up until to group. And that’s why we have 50% of cash on balance sheet at the group today and 50% in the local markets. But outside that as well, we’ve also gone through a strategy of looking to try and currency match in terms of CapEx as well. So for example, in Tanzania, previously, we may have been sourcing some component parts of CapEx in dollars. We’re now looking to bring that in local currency as well. So all of that helps the overall mix. But all in all, nothing to call out in terms of anything negative there. In fact, FX is probably one of our big positives from a credit perspective.

Graham Hunt

Super helpful, guys, and congrats on the great result. Thank you.

Tom Greenwood

Thanks, Graham.

Operator

[Operator Instructions]. The next question comes from the line of David Wright of Bank of America. Your line is now open. Please go ahead.

David Wright

Hello, guys and thanks for the question. I apologize I’ve had some terrible reception here if I’ve missed any of this, but just on your credit rating upgrade, do you see that feeding through to your debt refinance? Have the agencies specified exactly where they’d prefer your leverage to stay? And does that change at all any of your ability to allocate capital?

Manjit Dhillon

Yes, I can pick this one David. So in terms of how it impacts the debt, the rating is a great validation of the company. I think there’s probably been a little bit of a decoupling of the rating, at least at the previous rating level versus where we saw the bonds trading. So certainly, the move is positive from a validation perspective, from a pricing perspective, we’ll have to see.

From our perspective, we would hope to see some pricing tightening, so that would be, hopefully, a positive thing that we do see. In terms of leverage, we do see that they want to see — well, firstly, cash flow generation, which is one of the things that we’ve been guiding towards as well as a reduction in leverage, and we can set those out in the next presentation, but we’re broadly in line with where we are today. So it will effectively be keeping in line with where we are now.

And in terms of the refi, we are continuing to monitor our options and sit and see what is out there, but nothing to announce on that so far.

David Wright

Okay. Thank you so much.

Manjit Dhillon

Thank you.

Operator

The next question comes from the line of Emmet Kelly of Morgan Stanley. Your line is now open. Please go ahead.

Emmet Kelly

Yes, good morning, everybody and thank you for taking my questions. Just two questions, please. Firstly, Manjit, during the presentation, I just remember you said you were very selective still on new site rollout and building new sites. I’m just wondering, as your leverage comes down into the high 3s by the end of the year, and you probably become open to building sites. Have you noted and should we expect significant pent-up demand there from your clients to build these new sites? So as you maybe turn the corner there, could there be a lot of pent-up demand?

And the second question is for Tom. Tom, you mentioned you’re in a man at the moment. Obviously, this was your first acquisition in the Middle East. It’s been a great success. Could you say a few words about how you see the towers market in the broader Middle East and whether we can expect many opportunities to emerge potentially in the future? Thank you.

Manjit Dhillon

Thanks for that. I’ll take the first one and pass it over to Tom. So yes, so just remind me under 4 times net leverage by the end of this year, not three. Our guide is to try and get towards three by the end of 2026. And ultimately, our focus and our capital allocation strategy is quality over quantity. So really looking at trying to find those right build-to-suits, but we think there’s a high likelihood of success in terms of lease-up. That’s where you start to get really the benefits of the talent car model, both from a financial perspective but also a sustainability perspective. So we’ll continue to do that. In terms of pent-up demand, potentially they’re very well could be, but actually, that pent-up demand will most likely have further MNOs ticking at the same site.

So we would hope that, that pent-up demand also actually is quite compelling in terms of rollout. But we’re not necessarily saying no to lots and lots of demand. We’re just trying to I guess one a better road show that potentially better locations might be or more suitable for us to be able to roll out. But we do try and partner with the M&As that possible. Our job is to build sites and so these days up, so we do try and make sure we don’t need anything or too much on the table. And Tom, for the second part.

Tom Greenwood

Yes. No, sure. Thanks, Emmet, for the question. Oman, today, we’ve been operating here now almost 1.5 years, we’ve been really, really pleased actually with the business operations and the team and the take-up of new tenancies. We’re super busy here right now. And yes, I think from a regional perspective, there’s been some interesting developments over the past couple of years. We’ve seen the likes of [indiscernible] come out and so fully established themselves as an independent power company and they’ve been looking for expansion, obviously, not just in the Middle East indeed in Europe as we’ve seen. And we’ve seen the a redo zone transaction, which was announced, which covers five markets in the region, which I believe is ongoing in terms of closing and establishing that business.

So from our perspective, our strategy is, first and foremost, to maximize value on the tower portfolio, which we have acquired, and that’s very much in full swing at the moment. That means are driving organic lease-up amendments and identifying attractive build-to-suit opportunities to manage this point. And then we’ll continue to monitor both Oman and the made region as we move forward for other opportunities, but we’re very much focused on the organic growth here for now and the significant demand and capturing as much as possible. So that’s in line with our stated capital allocation policy. That’s very much our priority here for now. And it’s very much going to plan probably a little bit ahead of plan actually in terms of the performance so far in Oman and the pipeline that we’re seeing this year.

Emmet Kelly

Super. Thanks very much both.

Tom Greenwood

Thanks, Emmet.

Operator

The next question comes from the line of Rohit Modi of [CIBI] (ph). Your line is now open. Please go ahead.

Rohit Modi

Hi. Thank you for the opportunity. Most of the questions have been answered, just a couple of follow-ups. Firstly, on the competition side, the markets where you do have either [indiscernible] in Tanzania and data transaction recently. Are you facing any kind of pricing issue when you’re recontracting any of the sites?

Secondly, on your credit rating. Can you confirm apart from your bond maturing next year, are there any other debt that you could take an opportunity and refinance based on your credit rating and getting lower interest rates. Lastly, just on coming on the Oman on the sites, I think long stop date was around May 2024. Is there an extension there? Thank you.

Manjit Dhillon

Thanks, Rohit. I’ll take the second question, which I think was on the debt. So just on that point, in terms of the bonds coming up for renewal next year and potentially can see refi anything else, we did do a good partial tender last year. Where we basically partially tend to some of our bonds for term loans with some of our relationship banks. That was done at a very competitive rate, and you saw that further through the fact that the actual blended cost of debt barely moved. So when we do look to try and refinance the bonds, we’ll keep an eye in terms of that fee is the pricing — something where it means actually you may want to loop in other forms of capital in there. So do you want to refinance some of the term loan or any of the local debt options. But base case for the moment is just going to be a straight conversion is the general sense of things at the moment.

Tom, do you wish to take the other one? Otherwise, I can answer those.

Operator

Tom’s line has been disconnected. We are just reconnecting him now.

Manjit Dhillon

Okay. So I think just in the first question, was this just on the competition in Tanzania. And I think the third one was Oman. So on Tanzania, we do have a competitor now with [indiscernible] having sold their towers to the SBA joint venture.

What does that mean? We still hold a very majority position in Tanzania. And we do see good amounts of volume coming through. We’re still getting a good proportion of that? I mean you’ve seen that through our numbers this year as well. What it does mean is that you just got to sharpen your pencils and make sure that you’re being as efficient in your proposition as possible to the M&As. But we do that everywhere that we operate. So I wouldn’t call out anything in that market, there’s any difference to what we do in others. And with regards to Oman, we’re working on contract extensions and moving that forward, but I think nothing to really mention on that for the time being. Thanks.

Operator

As of the moment, there’s no additional questions waiting at this time, I’d like to hand the conference back over to Tom Greenwood for closing remarks.

Tom Greenwood

Thank you very much, Candy. And thank you, everyone, for dialing in. Great questions, as always, and I very much look forward to seeing or speaking with all of you very, very soon. So take care, and have a great day and look forward to catching up soon. Thank you.

Operator

Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.