IHS - Q2 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to the IHS Holding Limited Q2 2023 earnings results. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press star followed by 1 on your telephone keypad. If you would like to withdraw your question, press the star one again. For operator assistance throughout the call, please press star 0. Finally, I would like to advise all participants that this call is being recorded. I'd now like to welcome Colby Synesael, Executive Vice President of Communications, to begin the conference. Colby, over to you.

Colby Synesael (Executive VP of Communications)

Thank you, operator. Thanks also to everyone for joining the call today. I'm Colby Synesael, the EVP of Communications here at IHS. With me today are Sam Darwish, our Chairman and CEO, and Steve Howden, our CFO. This morning, we published our unaudited financial statements for the 3 month and 6-month periods ended June 30th, 2023, 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 would like to draw your attention to the disclaimer set out at the beginning of the presentation on slide 2, which should be read in full, along with the cautionary statement regarding forward-looking statements set out in our earnings release in 6-K, filed as well today. In particular, the information to be discussed may contain forward-looking statements which, by their 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 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 Form 20-F, filed with the Securities and Exchange Commission and other filings with the SEC.

We'll 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 metrics 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 to our Q2 2023 earnings results call. We remain well positioned to take advantage of the strong secular growth trends across our markets, which we expect to continue for years to come. We are reporting another strong quarter of performance across our KPIs, of course, this is in the context of ongoing macroeconomic change in our largest market, Nigeria. We are encouraged by the recent policy changes implemented in Nigeria that are intended to put the country on a better economic path. In the near term, however, these changes have caused some anticipated friction, including the significant devaluation of the naira that occurred in mid-June.

As a result, we now assume an average rate of 624 naira to the USD for the year, versus 497 previously. Subsequently, we are revising our 2023 guidance for revenue, adjusted EBITDA and RLFCF, while maintaining our CapEx guidance and our target leverage ratio of 3 to 4x. Our expectation for revenue would have otherwise increased by $31 million, had the average Forex rates previously assumed in our guidance remained unchanged, reflecting the strength we continue to see in our fundamental business. The significant net loss position we report for the quarter also resulted from Forex, as the devaluation drove significant non-cash financing costs. For the quarter, the change in Forex rates had a $21 million negative impact versus rates previously assumed in dinars, including a $25 million negative impact from the naira devaluation.

Excluding the Forex impact, results were ahead of our expectations, driven largely by our Nigeria segment, including a pull forward in revenue a quarter earlier than we had anticipated. We will see the full impact of the naira devaluation in our Q3 results and the impact of our Forex resets over Q3 and Q4 of 2023. 93% of our resets are quarterly and 4% are monthly. Separately, our board has exercised its right to move forward from April 2024 to October 2023, the release of lock-up restrictions on the final block of pre-IPO shares that are subject to lock-up under the shareholders' agreement. I'll speak about, more about this in a moment, but this will conclude the lock-up period for our pre-IPO investors and will further move us towards achieving a normalized float.

Additionally, the board has also authorized an up to $50 million stock buyback program. I want to discuss some of our key highlights for the quarter. Starting with Nigeria, as I mentioned earlier, the new administration implemented 3 significant policy changes over the last few months, including 2 from a macro perspective and 1 that impacts companies like IHS that imports diesel. Starting with the macro changes, in mid-June, the naira was permitted to trade freely in order to convert to multiple Forex rates. This was generally expected and positively received by the markets and something we had discussed in previous calls. While it will take time to see the full impact of this change, it improves transparency in the Nigerian Forex market and expected to improve liquidity and the ability for companies to access US dollars. Thus, it is a change that we welcome.

On a related basis, we did upstream $50 million during the quarter, and we may look to upstream later in the year via the official window or through other structured transactions. Another key change that occurred in late May was the elimination of the retail petrol subsidy, which cost the country $ billions annually. Because we purchase diesel and not petrol to power our sites, this change had only had a small impact on the petrol we use to fuel our own vehicles. Nevertheless, we believe this was a significant step forward for the country. Given the dollars the subsidy had required from the government to support, this is now expected to put more dollars back in the federal budget. Lastly, in July, the government initiated a 7.5% Value Added Tax on imported diesel.

Notably, this was not previously factored in our guidance, and we estimate it will add approximately $5 million to our costs over the remaining 6 months of the year. Moving first to Brazil and then to South Africa. In Brazil, macro conditions continue to improve following the smooth governmental transition of power in January. Forex rates have strengthened against the U.S. dollar, while the central bank has recently elected to cut rates, a first among large economies. We are focused on our sizable build-to-suit program and continue to assess a growing number of opportunities. We are excited about Brazil, and like the strategic positioning we have earned in the market as a leading InfraCo provider with both tower and fiber assets. Now to South Africa.

As we stated last quarter, given various dynamics in the market, including an unprecedented level of load shedding that has occurred in the country post deal close, we continue to evaluate our opportunities and will update you as appropriate and if necessary. On stock liquidity, on October 14th, the Block D shares will be unblocked, the registered offering requirement for the Block C shares will end, effectively freeing up over 120 million shares. In addition, the IHS board has exercised its right to move forward from April 2024 to October 2023, the release of lock-up restrictions on the final block of pre-IPO shares that are subject to lock-up under the shareholders' agreement. This means that all 3 blocks become freely tradable at the same time, thereby concluding the lock-up period for our pre-IPO investors.

The removal of the lock-ups will move us further towards achieving a normalized float. Separately, our board has also authorized an up to $50 million 2-year stock buyback program. Recognizing the importance of maintaining a strong balance sheet, we continue to take a disciplined approach to capital deployment, including near-term M&A, while we keep assessing what's out there. As of the end of the quarter, we had over $960 million of available liquidity, and leverage stood at 3.1x. While this will increase slightly over the next 12 months as a result of the impact of the naira devaluation on our adjusted EBITDA, we expect to remain well within our target range of 3-4x.

We continue to have no meaningful debt maturity until Q4 2025. We continue to monitor the market and evaluate ways to further strengthen our position, as we have done historically. Lastly, I want to comment on statements some of our shareholders have made since last quarter regarding our governance. Our board is committed to ensuring the integrity of the independence of IHS as a neutral digital infrastructure provider, and to maintaining strong corporate governance, supporting our customers, and increasing shareholder value. We remain engaged with these shareholders while maintaining an open and constructive dialogue with all of our shareholders. Turning to Slide 8, you'll see that we published our 2022 sustainability report in May, which is our 5th year of doing so.

The 2022 sustainability report is our first year reporting under the GRI framework, demonstrating our continued evolution in sustainability reporting, and more so, our long-term, our long-term strong commitment to the subject here at IHS. Lastly, before I turn the call over to Steve, I want to announce that Bryce Fort is leaving the IHS board. Bryce is a dear friend and has been on the board since 2013. During this time, he has provided invaluable advice, and I personally want to thank him for the many contributions he has made to IHS. Bryce stepping down is in line with our shareholders' agreement that allowed ECP to designate a board member as long as they maintain greater than 10% ownership in the company. With that, I will turn the call over to Steve.

Steve Howden (EVP and CFO)

Thanks, Sam. Hello, everyone. Turning to Slide 9, as Sam mentioned, we are pleased with our Q2 performance, particularly against the backdrop of the currency devaluation in Nigeria, which I'll reference at various points today. As you see here, towers and tenants are up slightly in Q2 '23 versus Q2 '22, given that the South African acquisition closed in Q2 last year. Lease amendments again increased by double-digit %, we again delivered double-digit growth in revenue and adjusted EBITDA for the quarter. Specifically, in Q2, we delivered 17% growth in revenue, 27% growth in adjusted EBITDA, and 4% growth in RLFCF, in each case on a reported basis and driven primarily by organic activity across our markets, with some inorganic contribution from South Africa.

Our adjusted EBITDA margin improved significantly to 55.6%, a 450 basis point gain on Q2 2022. The results reflect the devaluation of the Nigerian naira versus the US dollar that occurred in mid-June and thus only partially impacted the quarter, as well as some pull forward of anticipated Q3 revenue into Q2, which I'll discuss shortly. As you also see, total CapEx grew by 41% in the quarter, largely due to movements in Nigeria and LATAM, whilst we saw an overall decrease in CapEx in SSA. Finally, our consolidated net leverage ratio was 3.1x at the end of Q2, a slight decrease versus last year and flat on 1 Q2 2023.

Although, as I'll discuss, we do expect our leverage ratio to increase over the next 12 months in light of the devaluation, remaining within our target 3-4x range. Turning to our revenue on a consolidated basis, slide 10 shows the components of our 16.8% reported consolidated revenue growth for the 2Q. Organic revenue growth of 29.7% was driven primarily by CPI escalations, power-related revenue, FX resets, and lease amendments, as well as some pull-forward revenue we had anticipated for 3Q, but actually occurred in 2Q. This is included in other. Additional revenue growth was driven by new colocation, new sites, and fiber deployment as usual.

As you can imagine, the full impact of the naira devaluation towards the end of the quarter is not reflected in the level of escalations and FX resets you see here, nor fully in the negative impact from FX, all of which I will discuss further. The level of power-related revenue continues to reflect the high energy price environment and includes a $24 million increase in diesel-linked revenue. I would also again note that we now include the power pass-through revenue we receive in South Africa within the power segment, which in Q2 increased $2 million. On the right, you can see the organic growth rates of each of our segments for the quarter, with Nigeria delivering 37% organic growth, including the pull-forward revenue.

Inorganic growth for Q2 was 3.9%, reflecting almost entirely the South African acquisition. Inorganic growth will drop further in Q3 as we have now passed the anniversary of the South African acquisition. On Slide 11, you can see our consolidated revenue and adjusted EBITDA and adjusted EBITDA margins for Q2 2023. As I discussed on the prior slide, in the Q2, IHS generated a nearly 17% increase in reported revenue. Organic revenue growth was even higher at nearly 30%, again, demonstrating the continued strong top-line growth trends of the businesses led by Nigeria in particular. However, as a result of the Naira devaluation in mid-June, 2Q23 revenue includes a $21 million headwind versus rates previously assumed in guidance, including a $25 million headwind from the Naira.

Since the FX resets on the US dollar-denominated portion of our Nigerian contracts doesn't kick in until July onwards. In Q2 '23, adjusted EBITDA of $304 million increased 27% versus Q2 '22, and adjusted EBITDA margin was 55.6%, up 450 basis points from the prior year. The year-over-year changes in adjusted EBITDA and margin for the Q2 primarily reflect the increase in revenue we've already discussed and partially offset with year-on-year increases in cost of sales, mainly due to increased maintenance and repair costs on a larger business, as well as increased administrative expenses resulting from employee costs related to the acquisitions.

Power generation cost of sales decreased by $6 million, driven by a $12 million diesel cost decrease, primarily from a 13.1% decrease in diesel price and a 5.5% decrease in consumption, all offset by a $6 million increase in electricity costs, including as a result of Project Green, and all of these movements coming from Nigeria. As previously highlighted, through Project Green, we continue to prioritize alternative sources of power to reduce our dependency on diesel. On Slide 12, we first review our recurring levered free cash flow. We generated RLFCF of $91 million in Q2 2023, a 4% increase versus Q2 2022, due to a combination of factors, including the increased revenue and adjusted EBITDA discussed already and decreases in income taxes paid.

These factors were offset in part by increases in net interest paid, lease payments made mostly due to the South African acquisition, maintenance CapEx, and withholding tax. Our RLFCF conversion rate was 30%. Turning to CapEx, in Q2 2023, CapEx of $207 million increased 41% year-on-year. This increase was largely due to movements in Nigeria and LATAM. Increased investment in Nigeria and Project Green, maintenance CapEx and fiber deployment was offset in part by decreases in new site CapEx there. In LATAM, we saw growth in new site CapEx and iSystems fiber rollout, whilst we also saw an overall decrease in CapEx in Sub-Saharan Africa. Onto the segment review on Slide 13, our first walk through our Nigerian business. The Nigerian macro remains complex, as we discussed previously and on our earlier earnings call this year.

We are encouraged by the swift actions taken by the new government, including the removal of the fuel subsidy and the liberalization of the Forex regime that resulted in the devaluation of the naira that took place in mid-June. We remain in close contact with our key customers, 2 of which have again recently published healthy top-line results in their businesses. We continue to work closely with various regulators, our vendors, and our local banking partners to continue to best position IHS. While we are cautiously optimistic, U.S. dollars continue to be difficult to source, although remain available.

FX reserves in the country have decreased to $34.1 billion at the end of June 2023, from $35.5 billion at the end of March 2023. Market participants believe that the CBN will need to step in at some point to inject liquidity into the system and clear the backlog of FX transactions. That being said, the price of both oil and ICE Gasoil have decreased quarter-on-quarter. If we look at ICE Gasoil, it was $687 per ton in Q2 2023, down from $819 per ton in Q1 2023. Moving to real GDP growth, it expanded by 2.3% in Q1 2023, with a projected full year 2023 growth rate of 3.2%.

Inflation increased to 22.8% this June, versus 18.6% in June 2022. Overall, we continue to believe the business remains well-positioned for long-term success and to endure these near-term macroeconomic challenges. To this point, our Nigerian business once again delivered strong results in the Q2, tracking well on our key metrics. Q2 '23 revenue of $365 million increased 13.5% year-on-year on a reported basis, and 37% on an organic basis. In each case, reflecting the devaluation over a small portion of the quarter and the pull forward of revenue discussed. Top-line growth was driven primarily by the usual group of escalations, power-related revenue, as well as FX resets and lease amendments. The negative FX impact was $74.5 million, or 23%, due to the Naira devaluation.

Our tower count decreased by 2%, and total tenant count increased by 0.4%, each versus Q2 2022, largely reflecting the planned decommissioning previously discussed, which does not impact revenue. Our colocation rate consequently improved to 1.57x , up from 1.53x in Q2 2022. Lease amendments continue to be a strong driver of growth, with these increasing by 9.8% quarter-on-quarter as our customers added additional equipment to our sites, particularly 4G upgrades. Q2 2023 segment adjusted EBITDA in Nigeria was $238 million, a 30% increase from a year ago, and segment-adjusted EBITDA margin was up 820 basis points to 65.4%. Let me now briefly summarize the results in our other segments.

As our Sub-Saharan African segment includes our South African business since Q2 2022, towers and tenants increased by 1.5% and 2.6% respectively versus Q2 last year. Revenue increased by 30%, of which organic revenue grew 15%, driven primarily by escalations, new sites, colocations and FX resets, whereas inorganic revenue grew 19%, driven by that South African acquisition, and FX was a 4.3% headwind. Segment-adjusted EBITDA increased by 19%, driven primarily by the increased revenue and partially offset by increases in power generation costs, maintenance security costs, and administrative expenses. Segment-adjusted EBITDA margin decreased to 51% from 55.8% in Q2 last year. We continue to monitor the macro environment in South Africa, particularly the ongoing power load shedding by the national utility.

As previously discussed, we continue to evaluate our managed services opportunity. In our LATAM segment, towers and tenants grew by 4% and 3.2%, respectively, whereas revenue and segment-adjusted EBITDA increased by 13% and 14%, respectively, in all cases versus Q2 last year. In Brazil, our second-largest market with 7,139 towers, macro conditions were largely stable as GDP growth decelerated, Forex rates marginally strengthened, interest rates held steady in the quarter, and inflation decreased. In our LATAM segment overall, Q2 2023 organic revenue increased 14%, driven primarily by an increase from iSystems fiber deployment and escalations. Segment-adjusted EBITDA grew by 14% also in the quarter, with a segment-adjusted EBITDA margin of 73.1%.

In MENA, towers and tenants each grew by 6.8% in Q2 '23. Revenue grew by 11%, including 8.4% organic revenue growth. Segment-adjusted EBITDA grew by 29% in the quarter, with a segment-adjusted EBITDA margin of 54.5%, reflecting the increased revenue and a decrease in admin expenses. On to Slide 14, I'll briefly highlight our KPIs. As of June 30, our tower count was 39,298, up 0.6% from the same period last year, driven by ongoing new sites in LATAM, SSA, and MENA. As you can see in the chart on the top right, collectively, we built nearly 300 towers during the Q2 of 2023. Total tenants grew 1.9%, with the colocation rate at 1.49x up slightly versus last year.

We continue to point out that lease amendments are a significant factor for us, particularly in our Nigerian segment, given the ongoing 4G upgrades by our customers there and the initial 5G activity we are seeing. While lease amendments increased by almost 12% year-on-year, they are not included in our colocation rate calculation. We continue to see no reason why we can't get to 2x or greater on our overall portfolio over the long term, and our more mature portfolios of towers are at or above that rate. On Slide 15, we look at our capital structure and related items. At thirty June 2023, we had approximately $4.06 billion of external debt and IFRS 16 lease liabilities.

Of the $4.06 billion of debt, $1.94 billion represent our bond financings, and other indebtedness includes $370 million that we drew down last year from the $600 million 3-year bullet term loan facility at the IHS Holding Limited level. Additionally, as previously discussed, in January 2023, we entered into an up to NGN 165 billion 5-year term loan facility, the commitments under which we further increased by another NGN 11.5 billion during the quarter, while also drawing down an additional NGN 15 billion, for a total of the NGN 165 billion drawn under this facility as of August 14, 2023, effectively concluding the capacity of this facility.

During the quarter, we also increased capacity under the group RCF to $300 million. There are currently no amounts drawn or outstanding under either the group RCF or the Nigerian RCF. As we previously stated, we were very pleased to have completed the Nigeria refinancings, which further de-risked the balance sheet and increased our financial flexibility, particularly in front of the recent naira devaluation. Cash and cash equivalents decreased to $433 million at June 30. In terms of where that cash is held, approximately 7% of the total cash was held in naira at our Nigeria business, as we have been using excess cash to support Project Green and for upstreaming. The majority of the remaining cash was held in US dollars at the group level.

Moreover, as we previously highlighted on our May call, we upstreamed an additional $50 million from Nigeria in Q2 2023, on top of the $15 million done in Q1. Consequently, from all these moving elements, at the end of Q2 2023, our consolidated net debt was approximately $3.6 billion, and our consolidated net leverage ratio was 3.1x flat with March, and at the low end of our net leverage target range of 3-4x, further demonstrating our strong balance sheet. However, I would note that because the devaluation occurred late in the quarter, we do expect leverage to tick up slightly in the H2 of 2023, when adjusting for a full quarterly impact of the devaluation, as I'll discuss shortly regarding our guidance.

Finally, as it further relates to the devaluation, I wanted to point out that Q2 shows an unusually large net loss of approximately $1.2 billion, which is driven primarily by $1.4 billion in finance costs, the vast majority of which is unrealized FX losses. The components of finance costs include net FX losses from financing, both realized and unrealized, net FX losses on derivative instruments, both realized and unrealized, as well as interest expenses. As is typical each quarter, these costs arise principally due to our bonds, given the embedded options they're in, and because of the intercompany shareholder loan structure we have used historically to fund the business. These costs, which are very largely non-cash, can vary significantly and typically increase in the context of a devaluation of the Naira, which is the primary reason why they increased dramatically in Q2.

We've added slide 21 to the appendix to help further explain this dynamic and highlight the large delta this past quarter. Moving to slide 16, As a result of the naira devaluation, we're revising 2023 guidance for revenue to $2.08 billion-$2.11 billion, adjusted EBITDA to $1.13 billion-$1.15 billion, and RLFCF to $385 million-$405 million, and maintaining our total CapEx guidance of $610 million-$650 million. As Sam mentioned at the beginning, for the year, as highlighted on slide 17, we now assume an FX rate for the naira of 624, which includes 775 naira to the dollar in Q3 2023, and 750 naira to the dollar in Q4 2023.

Our expectation for revenue would have otherwise increased by $31 million, had the average FX rates previously assumed in our guidance remained unchanged, reflecting the strength we continue to see in our fundamental business. Guidance also continues to include approximately $25 million in power pass-through revenue in South Africa, of which we have recognized $4 million through the first half of the year. I do want to again caution that timing of such moves is difficult to predict and could be delayed relative to what we've assumed, although this would have no impact on adjusted EBITDA or RLFCF. Guidance also continues to exclude any revenue from Egypt, although we continue to evaluate opportunities in the market that we believe could align with our financial and strategic objectives.

For the year, we continue to expect to build approximately 1,200 towers, which is slightly more than the amount we built in 2022. This includes a notable drop in Nigeria as we pull back on new site builds, as we shift more of our focus to Project Green, but also includes a tripling of tower builds in Brazil that we backloaded in 2023. On slide 17, on the top, you can see revenue by reporting currency for Q2 2023, whereas on the bottom, we provide the breakout of revenue based on contract split. The right side shows the average annual FX rate assumptions used now in our 2023 guidance and has been updated since last quarter.

This equates to a $141 million downside for the year versus rates assumed last quarter, of which over 100% is as a result of the devaluation of the Naira. This now brings us to the end of our formal presentation. We thank you for your time today, and operator, please now open the line for questions. $150 million. As Sam mentioned at the beginning, for the year, and as highlighted on slide 17, we now assume an FX rate for the Naira of 624, which includes 775 Naira to the dollar in Q3 2023, and 750 Naira to the dollar in Q4 2023.

Our expectation for revenue would have otherwise increased by $31 million, had the average FX rates previously assumed in our guidance remained unchanged, reflecting the strength we continue to see in our fundamental business. Guidance also continues to include approximately $25 million in power pass-through revenue in South Africa, of which we have recognized $4 million through the first half of the year. I do want to again caution that timing of such moves is difficult to predict and could be delayed relative to what we've assumed, although this would have no impact on adjusted EBITDA or RLFCF. Guidance also continues to exclude any revenue from Egypt, although we continue to evaluate opportunities in the market that we believe could align with our financial and strategic objectives.

For the year, we continue to expect to build approximately 1,200 towers, which is slightly more than the amount we built in 2022.

... This includes a notable drop in Nigeria as we pull back on new site builds as we shift more of our focus to Project Green, but also includes a tripling of tower builds in Brazil that we back-loaded in 2023. On slide 17, on the top, you can see revenue by reporting currency for Q2 '23, whereas on the bottom we provide the breakout of revenue based on contract split. The right side shows the average annual FX rate assumptions used now in our 2023 guidance and has been updated since last quarter. This equates to a $141 million downside for the year versus rates assumed last quarter, of which over 100% is as a result of the devaluation of the Naira. This now brings us to the end of our formal presentation.

We thank you for your time today, operator, please now open the line for questions.

Operator (participant)

Thank you. As a reminder to those on the phones, press star 1 to raise your hand. We will now pause briefly while we register questions in the Q&A roster. Your 1st question comes from the line of Jonathan Atkin from RBC Capital Markets. Your line is open.

Bora Lee (Vice President and Equity Research Analyst)

Good morning. This is Bora in for John. So I guess the first question is, one of your largest customers recently noted that while they're optimistic about the medium and long term, expect policy reforms to pressure phone customers and hence carriers in the shorter term. Can you just update us on the leasing activity that you've been seeing and the tone of customer conversations you've had about future activity? I have a follow-up.

Steve Howden (EVP and CFO)

Hey, Bora. So firstly, we haven't seen any form of slowdown in carrier leasing activity at this point in time. In fact, in Q2, we posted more pretty strong numbers in terms of close to 300, about 278 build-to-suit across the business. But probably more relevant to your question was about 1,100 lease amendments, and another 270 odd colocations in the quarter as well. We, we haven't seen anything. We're not hearing anything from our customers. Customers are still talking to us about technology trends and looking to the longer term around 5-year rollout, et cetera. At this point in time, no, no reason to, to think that.

If you look at the results of particularly our African carriers, people like MTN Nigeria, MTN Algeria, et cetera, you'll, you'll see that they continue to post really strong growth numbers as they drive data and fintech through their business as well. They both just posted 23%-25% revenue growth and EBITDA margins increasing. At this point in time, we feel pretty good about the rest of the year, and you know, into next year.

Bora Lee (Vice President and Equity Research Analyst)

Okay, great. Then, just for a follow-up, Dangote, Dangote Oil Refinery was reportedly going to start operations before the end of July. Can you provide an update as to if that's occurred and any sort of early indications of any impact on the supply of domestic diesel? Just somewhat related to that, the 7.5% VAT on imported diesel, can you provide some guidance on how we should be thinking about sizing the financial impact of that go forward?

Steve Howden (EVP and CFO)

Yeah. A couple of things in there. Firstly, on the Dangote Oil Refinery, we haven't seen anything come through in terms of production yet. That's really a, a wait and, and watch. Although it the facility was officially opened back in May, it wasn't expected to immediately start, start pumping. We're just, you know, waiting to see when that, when that occurs. In terms of what else has been going on, you will see in our disclosure material once you've had a chance to look through, we do comment on things including the, the VAT rise. That's the new 7.5% on imported diesel. Given Nigeria doesn't have a straight input input/output VAT system, that is an absolute cost for us.

It's about $4 million-$5 million, about $5 million approximately for us in the H2 of the year. That's the type of impact that we're seeing, and that's obviously implicit within our revised guidance that we've put out to you all.

Bora Lee (Vice President and Equity Research Analyst)

We should be thinking about that as sort of a general run rate, for a half year, correct?

Steve Howden (EVP and CFO)

Yes.

Bora Lee (Vice President and Equity Research Analyst)

Okay. Thank you.

Steve Howden (EVP and CFO)

Sorry, Bora. You know what I mean? Sorry. Yeah. Yes, I said yes.

Operator (participant)

Your next question comes from the line of Phil Cusick from J.P. Morgan. Your line is open.

Phil Cusick (Managing Director and Senior Equity Research Analyst)

Hi, guys. Thanks. Sam, we've been talking about potentially a buyback for quite a long time. We've talked about the, the math between the liquidity and the stock and any accretion on the buyback. How, how did that math go in for the $50 million authorized today? Was that any kind of compromise with Wendel and MTN? Then talk maybe about the relationship with those 2 companies. Thanks.

Sam Darwish (Chairman and CEO)

Thanks, Phil. Maybe I'll start with the buyback. Steve can start with the buyback, and I can talk about the second aspect.

Steve Howden (EVP and CFO)

Phil, you're obviously right in terms of the, the 2 items that, that you comment on. We've obviously been thinking through a buyback for a little while. As most people know, we've commented on that before. We have also been thinking through for a long time how to try and promote liquidity into the IHS free float, which is obviously of, of paramount importance to us as well. Those are kind of the 2 key variables in a few of our actions that we've taken this quarter. Firstly, announcing the buyback, but secondly, unblocking the rest of the pre-IPO shareholder lock-up arrangements, which will come forward to October, mid-October this year. That will remove all the restrictions from the pre-IPO shareholders to be able to trade freely.

We wanted to do that to obviously encourage and finalize the encouragement of that free float, so that that gets done. Then in terms of the share buyback, look, we continue to, to, to want to drive value into the IHS stock. Although this is a kind of more limited in size and it's a 24-month program, so $50 million over 24 months, it's incremental, but we do think it's the right thing to be doing in terms of allocating that capital to something that, you know, we feel is important given the continued undervalue of the IHS stock. It's a combination of factors, but yes, very focused on driving up liquidity in the free float, and then a an incremental and, and, and we think positive buyback given the undervalue of the stock.

Phil Cusick (Managing Director and Senior Equity Research Analyst)

Thanks, Steve.

Sam Darwish (Chairman and CEO)

On, on the second part, Phil, yeah, look, shareholders, notably the ones you've mentioned, have made statements in public, and I, I prefer not to comment on such. Having said that, we, we have a duty to engage, to listen, to consult, to analyze, and, where we think good ideas are worth implementing, we implement, just simple as that.

Phil Cusick (Managing Director and Senior Equity Research Analyst)

Okay, maybe if I can one more. Any update on backlog of payments from smaller customers in Nigeria?

Steve Howden (EVP and CFO)

No, nothing. Nothing to report there.

Phil Cusick (Managing Director and Senior Equity Research Analyst)

Okay. Thanks, guys.

Sam Darwish (Chairman and CEO)

Okay, Phil.

Operator (participant)

Your next question comes from the line of Greg Williams from TD Cowen. Your line is open.

Greg Williams (Director and Senior Equity Research Analyst)

Great, thanks for taking my questions. Just a follow-up on the buyback. Can you help us with the cadence? Would it be a little more upfront to help assuage the influx of shares in October, or would it be maybe smoothed out over the 2025 time period? Also, you locked in diesel until September with forward contracts. Is there an appetite to lock that again or, or float from here? Thanks.

Steve Howden (EVP and CFO)

Sure. Hey, Greg, so on the cadence of the, of the buyback, look, we're gonna, we're gonna monitor the market and see, see how things unfold. What we've put out there right now, $50 million, up to $50 million over 24 months. Obviously, we might not use all of that, depends a little bit on, on market conditions, and as you said, things like the unlock, coming in October, where historically we've seen a bit of volatility. We will monitor the market and update people as and when appropriate. Then on the second part of your question, locking in diesel, that's something that we continue to look to do.

No real update for you on that in terms of where we are other than we're priced through into the beginning of Q4 now. We continue to look at the best way to procure diesel. As you guys all know, we're obviously been investing significantly in Project Green to try and reduce the consumption of diesel as well. That project remains on track. That's a positive as well. In terms of procurement, yeah, we keep monitoring the prices and look at how far forward to lock in, keep assessing that pretty regularly.

Greg Williams (Director and Senior Equity Research Analyst)

All right. Thank you.

Operator (participant)

Your next question comes from the line of Eric Luebchow from Wells Fargo. Your line is open.

Eric Luebchow (Senior Equity Research Analyst)

Great, thanks for taking the questions. Could you talk about the build-to-suit program a little bit? It sounds like perhaps you're deprioritizing some of the builds in Nigeria, and just wondering if that has come from higher hurdle rates and the more material increases in cost to capital you've seen in that market.

Steve Howden (EVP and CFO)

Hi, Eric. Simple answer is yes. To the points you raised, we, you know, earlier, at the beginning of the year, to be honest, we, we said to, to people that, you know, Nigeria, whilst has a phenomenal amount of growth left in it, as it comes to allocating capital, by ourselves, we wanted to allocate capital into Project Green, which was a key initiative, a key project for us, which, comes with the benefits of reducing, greenhouse gas emissions and, and reducing our, our scope 2 emissions over time, but also happens to have a very good financial return profile as well. Remember, we'd been saying that it would be a 30% IRR project. So yes, we diverted capital from Nigeria BTS into Project Green.

The BTS in Nigeria will be lower this year for sure. Where we are spending capital and, and, and growing the business from a tower count point of view is in Brazil, where we continue to forecast approximately 750 new build sites this year. That program is ramping nicely. It ramped at the end of Q1 and then really has been ramping up through Q2 and onwards, so that remains on track, and, you know, that's a part of the business where we want to continue adding to the tower count through building.

Eric Luebchow (Senior Equity Research Analyst)

Okay, great. Thanks. Then just, just one more question. You talked earlier about evaluating some other balance sheet initiatives. Maybe you could give us some color on what you're looking at, whether that's, you know, raising additional naira-denominated debt, pushing out maturities beyond 2025, kind of what, what, what are you evaluating currently?

Steve Howden (EVP and CFO)

Yeah. We're no different to a lot of companies around the world right now. We continue to monitor very closely our maturity profiles. We have a fair bit of time before, you know, any meaningful maturities, but that doesn't mean that we don't kind of look around and see what's available, strategize as to whether we can achieve some of our capital structure objectives, which include terming out maturities, but also include can we take advantage of cheaper local currency debt where possible. things like that. It's a moving target and something that we actually are always assessing. You'll have seen over the last few quarters, we've done a few incremental bits and pieces, whether that's at the holding level or in Nigeria or elsewhere.

We keep that under constant review. We'll keep people updated as and when anything happens. You know, continuing to monitor all of that and take advantage of things where we can.

Sam Darwish (Chairman and CEO)

Great. Thank you.

Operator (participant)

The next question comes from the line of Michael Rollins from Citi. Your line is open.

Michael Rollins (Managing Director and Senior Equity Research Analyst)

Thanks, and good morning. I just want to go back to, the question about, questions about corporate strategy, capital allocation. Can you share just where maybe some of the tension has come from, you know, from major shareholders and at the board? Is it a, a question of whether or not being a public company, markets you serve, and, you know, currency impacts of that and the low float? Is it kind of raising the question of whether being public is the right solution for the company, or is it other more maybe tactical decisions or ideas that, are the source of the tension?

Sam Darwish (Chairman and CEO)

Hi, Michael Rollins. This is Sam Darwish. Look, I, I, I can't comment on intentions, on things we can't see or feel. Again, look, it's important for us to reiterate that this company is open, it's flexible. We understand we have a float problem. We understand our share price is undervalued. We believe that fundamentally, and I think our shareholders do also believe that. I, I think we mostly agree on the fact that we need to find solutions and hopefully kind of like trend the market or trend our value in the right direction as, and when appropriate. We are open to ideas. We are open to ideas, we're open to suggestions, and we continue to analyze, evaluate, and see whatever works to move us into that direction.

Michael Rollins (Managing Director and Senior Equity Research Analyst)

Are there, as you've thought about these issues for some time, are there examples or, kind of case studies that you found of other companies that have might dealt with some of the same or similar types of issues, and maybe the timing and the mechanisms they use to, you know, resolve it, you know, to improve value proposition for shareholders?

Steve Howden (EVP and CFO)

Mike, I think, you know, there, there's, there's lots of case studies about different elements of what all companies face. I think, you know, we've got a number of things which we believe can be improved over time to help drive shareholder value. I would stress, you know, these things don't happen overnight. We, you know, we look around and try to learn the best of everything out there, including our own ideas, right? You know, first and foremost, keep delivering on the operations of the business and execute on the business itself. Then, add on top, what else can we do to try and unlock value? You know, we've spoken on this call and over the last 12, 18 months around the free float.

That-that's obviously critical in our, in our minds. Again, we've tried to address some actions, by announcing, you know, bring forward the unlock, which isn't going to solve everything, but, you know, is in our gift to, to try and promote, you know, additional trading and, and additional free float to come into the market, but ultimately not in our hands, right. It's up to, it's up to shareholders. You know, we will keep looking around, at what others have done in the past. We'll keep adding our own ideas. It's a big focus of ours, big focus of ours right now. We will work-- we will keep working hard.

Michael Rollins (Managing Director and Senior Equity Research Analyst)

Just on the business, is there any-

Sam Darwish (Chairman and CEO)

Mike, without... Sorry, Mike, Michael, just to add, we continue our diversification. I mean, Nigeria is a fast-growing market, and, and we love the growth profile, but we do understand that we are somehow concentrated in that market, and we continue to kind of to try and diversify our, ourselves there. The final thing I, I wanted to note here, and I don't want to be defensive in any way or form, but since going public in late 2021, the, the capital markets have changed meaningfully as a result of, among other factors, the rising interest rate environment, the elevated inflation, the Russia-Ukraine war, the high-end energy costs, et cetera, et cetera. Of course, we at IHS have had also to overcome changes in Nigeria, including the, the recent devaluation of its currency.

Despite all of this, our stock is up 28% year to date as of a few days ago, and has meaningfully outperformed all our peers, as well as MTN Group and Airtel Africa, all of whom wish very well. Even over the last 2 months, basically, as most of our peer companies and customers have traded down, IHS has performed broadly in line with the market, despite having to absorb the impact of the naira devaluation, a reduction in sell-side estimates, and again, we've outperformed nearly all of our peers and customers year to date. We feel good about the proposition. We feel good that the steps we are implementing are hopefully going to trend us into the right direction.

Rome wasn't built in a day, especially with the, with the massive headwinds we face from the global, macro and from some of our, markets. Thanks. Just on, on the business, on the organic performance, is there anything that, that we should be mindful of just in terms of any, churn events over the coming, you know, 12 to 18 months that you have visibility in?

Steve Howden (EVP and CFO)

Mike, nothing, nothing that sort of, nothing that would be unusual, nothing significant that we're aware of at this point in time. I think it goes without saying that, you know, the shape of our quarters will be impacted by the devaluation in Nigeria. Just to remind, you all, and you'll see this in the materials that we've, that we've published today. Although the de- devaluation in Nigeria happened in the middle of June, so only 2 weeks impact in the quarter that we've just reported, hence, not hugely visible in the numbers that we report from a KPI perspective. Obviously, balance sheet and, and, and financing costs, yes, but revenue, EBITDA, RLCF, et cetera, not impacted.

You'll see the, the, the fuller impact of that come through in Q3, and obviously resets from contracts starting to happen in Q3 and Q4. Then escalations, coming through, typically in Q1, as we've, as we've told people in the past. It was just bear in mind that, that shape of, of earnings to come, obviously all embedded within the guidance that we have updated today.

Sam Darwish (Chairman and CEO)

Thank you.

Operator (participant)

The next question comes from the line-

Steve Howden (EVP and CFO)

Thanks, Michael.

Operator (participant)

Brett Feldman from Goldman Sachs. Your line is open.

Brett Feldman (Managing Director and Senior Equity Research Analyst)

Thanks, guys. 2, I guess, sort of modeling oriented and then a bigger picture question. Just first of the, of $31 million improvement to your outlook this year, unrelated to the currency movements, how much of that was, was captured in the Q2, and how much of it is going to flow through in the H2? The second one is, on Project Green, you sort of reiterated the savings you expect by the end of the project. Is that updated for the avoidance of the VAT, or could that be incremental, or am I just thinking about that wrong? The, the higher level question is, it gets back to capital allocation. You know, you're, you're operating closer to the low end of your, your leverage range right now.

I know it drifts up a little bit, but you're in a pretty good liquidity position. It doesn't seem like the conditions are supportive of M&A right now for a range of reasons. As much as you'd like to buy back a lot of your stock, you've noted you want to be mindful of float. So the big picture question is, in light of all of that, you know, how are you likely going to prioritize excess capital over the next year or so? Is this mostly about just building liquidity and paying down debt, or do you think that there's other opportunities right now that you think it could be even more accretive? Thank you.

Steve Howden (EVP and CFO)

Okay, Brett, I'll just scribble down a few things. You might have to remind me the first one. I'll take the, the VAT one, first, in relation to Project Green. That won't impact the, the rollout of Project Green, that, that VAT is on a diesel import, so not related to the actual project, bringing new equipment, deploying new equipment-

Brett Feldman (Managing Director and Senior Equity Research Analyst)

Would you, but would you save more money now?

Steve Howden (EVP and CFO)

Where you could see it... Yeah, exactly. I was just going to say, where you could see some potential positive impact, all else being equal, is that a saving from diesel on a unit basis would now be 7.5% higher. Yes, we, we could see some potential benefit from that, all else being equal. On the capital allocation point, sorry, Brett, do you want, do you want to jump in? What was your first question again? Can you just remind me? Sorry.

Brett Feldman (Managing Director and Senior Equity Research Analyst)

The, I, I was going to remind you, the, the $31 million improvement to the outlook...

Steve Howden (EVP and CFO)

$31 million, yeah.

Brett Feldman (Managing Director and Senior Equity Research Analyst)

How much of that was in the quarter versus in the H2?

Steve Howden (EVP and CFO)

Yeah. Majority of it was in the first half of the year. Probably about 2/3 of it was in the first half of the year, a 3rd of it coming in the H2 of the year. Then on capital allocation-

Brett Feldman (Managing Director and Senior Equity Research Analyst)

And, uh-

Steve Howden (EVP and CFO)

Sam, do you want to jump in?

Sam Darwish (Chairman and CEO)

Yeah, yeah, sure. Look, look, Brett, our, our priority at the moment is our, our balance sheet. We need to make sure that. While we, we are comfortable at the moment, we need to make sure that we, we keep it tight, especially with the headwinds that we're facing from, from, again, global macro and in particular, the Nigeria devaluation situation. We, we also feel somehow okay about our, our, our leverage zone, even with an impending devaluation, if it stays within reason, and we continue to assess and evaluate opportunities out there. If we feel there are great deals that makes strategic sense to us and could provide enhanced value to our shareholders, we will probably consider. Again, the priority at the moment is our balance sheet.

Brett Feldman (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

The next question comes from the line of Stella Cridge from Barclays. Your line is open.

Stella Cridge (Managing Director)

Hi there. Afternoon, everyone. Many thanks for all the updates. There was 2 things I wanted to ask about. The first is, could you just let us know what power contracts will be maturing in the near term? You know, given that share-- some of the customers seem sensitive around, you know, the devaluation, the dollar component, you know, what do you think might be similar or different in future tower contracts as you go through those negotiations? That was the first one. The second one, I know you were previously asked about capital structure and optimization, but I wanted to ask it a slightly different way, more in terms of, do you see any funding needs in the next, you know, 3-6 months, either at the OpCo levels or at the HoldCo level?

Obviously, just noting that you did do some small borrowing in, say, South Africa, increased the HoldCo, RCF, et cetera, in the last few months. That would be the second one. Thanks.

Steve Howden (EVP and CFO)

Sure. Hi, Stella. Steve, I'll go in reverse order. Funding needs, we've got small incremental things that we're doing, as I sort of alluded to, on a prior question that was asked. We've got small incremental things we're doing at, at OpCo. LATAM, for example, we're looking at things, and we may look to do other things in relation to the wider capital structure, but those are, you know, we'll, we'll see how we go on those bits and pieces. That's on the capital structure. We'll, we'll obviously announce things as and when things get done. From a maturity perspective, we've got some smaller contracts across Sub-Saharan Africa in the next 18 months.

We've got 1 in Nigeria at the very end of 2024. Well, yeah, 31st December, 1st of January 2025, in terms of the key contracts that are coming up for renewal. Otherwise, everything else is longer term. In terms of future tower contracts, that's very difficult to comment on. Everybody has wish lists, customers have wish lists, we have wish lists. Keep in mind, we also have a blend of different contracts across our, particularly our African portfolio, where some include power, some don't, some have higher dollarization, some have lower dollarization. There's a whole raft of things. Some have lease amendments captured within them, some don't. There's a whole raft of different items that, that typically both sides want to, to optimize.

The reality is, given the growth nature of our markets and given, you know, significant rollouts that continue in those markets, there usually ends up being some form of win-win within, within those negotiations. You know, let's, we can't, we can't crystal ball gaze at, at this point in time.

Sam Darwish (Chairman and CEO)

Super. Thanks a lot.

Operator (participant)

That brings us to the end of the IHS Holding Limited Q2 2023 earnings results call. Should you have any questions, please contact the investor relations team via the email address, [email protected]. Management team, thank you for your participation today, and wish you a good day. Thank you.