AMERICAN-TOWER Earningcall Transcript Of Q2 of 2024
Steve Vondran -- President and Chief Executive Officer Good morning, and thanks to everyone for joining the call today. As you can see in our Q2 results and our revised full year outlook, we continue to build on the strength we saw in the underlying business at the outset of the year, with further validation of our initial expectations for strong activity across our platforms in 2024. I want to start today's remarks by thanking our teams across the world for their commitment to operational excellence and dedication to maximizing sales, bringing down costs, and expanding margins across the portfolio. My comments today will focus on our latest views on our international portfolio and aim to address some of the recurring questions related to our international strategy in both developed and emerging markets that we received from investors in recent months. As we've communicated in the past, our international investment thesis is two-pronged. First, we see that the fundamentals that have driven performance in the U.S. such as ongoing exponential growth in mobile data consumption and a business model that benefits from tremendous operating leverage generally hold true across international markets. Second, by exporting our successful U.S. model to investment in a diversified portfolio of assets that balance various risk and return profiles, we expect to expand and augment our long-term growth potential. Executing on this thesis has resulted in a footprint that includes diverse and sometimes complicated geographies. Entering these markets as a U.S. business involves creating value, while solving for two types of risk: operational and financial. On the operational front, I can confidently tell you that we have the best operating teams in each geography across our portfolio, and we've overcome operational risks on a consistent basis through our shared global expertise and experience. In many cases, we leverage operating challenges to create new business opportunities and enhance existing or introduce new competitive advantages. This capability has been demonstrated through our reliable speed-to-market delivery on new tower builds, a global reputation of sophisticated regulatory approach that has afforded opportunities to effectively assess new markets and assets and the development of innovative power-as-a-service model that provides best-in-class network uptime and supports initiatives about American Tower, our M&M customers, and the communities we serve to deliver clear telecommunications networks. This is one of the key synergies American Tower brings, an unmatched global knowledge and support platform to create value through operational excellence. Our investors benefit from our ability to utilize that platform to realize expanded market share of new business, drive best-in-class margins, and leverage cost of capital advantages derived from our global balance sheet. When you take all these together, these benefits translate to enhanced value of the assets under the American Tower umbrella commanding a premium relative to the market implied some of the parts on a comparable basis. And where this does not hold true, we've taken corrective actions, which I'll touch on a little bit later. As I mentioned in previous remarks, our exposure to financial risk has been more acute in our emerging market portfolio particularly over the past several years as global macroeconomic factors have had an outsized impact on emerging markets. In these cases, those financial risks have, quite frankly, outpaced what we originally underwrote and together with care consolidation that contributed to financial results in certain emerging markets that fall short of our standards. We're taking action to improve those results. We've talked previously about our focus on cost controls, and I'm happy to say that those are paying off. At the midpoint of our guidance this year, we anticipate savings of over $40 million of SG&A, including bad debt relative to 2023. Our emerging market footprint has been a meaningful contributor to our cost efficiency progress to date, where we're shifting our focus from aggressively growing those portfolios to maximizing the return on our investments. We've also previously commented on raising the hurdle rates for the deployment of additional capital in those markets. These proactive actions and our refined strategic focus have corresponded to an expected 2024 reduction of over 40% in discretionary capital across Latin America, Africa, and APAC compared to 2021. Conversely, in parts of our developed market footprint such as Europe and CoreSite or underwriting compelling mid-teens U.S. dollar yields, we're increasing our investments alongside our capital partners. With an expanded developed market platform inclusive of the U.S. and Canada, we've been able to more than double our discretionary capital in those markets over the same period. As a result, as you can see on Slide 6, the allocation toward emerging markets has reduced from around two-thirds of our total in 2021 to less than a third in our 2024 guidance. You'll likely see that number continue to trend down as we satisfy some of our previously contracted obligations in certain markets. Complementing our approach to discretionary capital allocation and supporting our proactive steps to enhance our global portfolio, in 2023, we divested noncore subscale underperforming assets like Mexico fiber and our pole operations. And earlier this year, we announced our pending exit from India. Additionally, over the past several years, we further expanded our developed market exposure through our M&A focus across the U.S. and Europe. All just in a few examples of the key strategic actions we've taken to date. Pro forma for the anticipated sale of our India business, our attributable AFFO exposure to emerging markets will be approximately 25%. As a result of these actions, and those I'll touch on later, we believe our emerging market operations and our business as a whole are in a better position to deliver the higher quality, sustainable earnings' growth that makes investing in communications infrastructure is so compelling. However, given the impacts of the financial risk and the stability and quality of earnings our investors rightfully demand from the tower and communications infrastructure models, we expect to further reduce our relative exposure to emerging markets over time as we continue to focus on incremental investments in developed economies. Now that doesn't mean that you should assume that we plan on divesting in particular markets. For our full management team and our board regularly assess all options, including divestitures and we're going to remain opportunistic as we continue to actively manage our portfolio, we believe today that more long-term value is created by continuing to operate these portfolios, expand our gross margins, and reduce capital intensity, while repatriating cash flows to fund other global priorities such as deleveraging, paying our dividend, developed market investments with the highest quality return profiles, and looking ahead, the potential for share buybacks. Meanwhile, continued operation of these portfolios means that we retain the optionality to reinvest into those markets if economic conditions and growth outlooks evolve. With that in mind, here's what we're focused on in our international segment going forward. First, just in the U.S., owning and operating the highest quality assets and partner with leading carriers in each market helps provide more stable growth and reduce long-term earning volatility resulting from consolidation. This is a critical lesson learned from our experience in India where consolidation post significant headwinds to growth over a multiyear period. Today, the vast majority of our revenues in Europe, Africa, and Latin America carefully leading customers with competitive end market scale. Meaningful enhancements to our counterparty profile over the past several years have come in part due to carrier consolidation, but also as a result of proactively aligning growth initiatives and capital allocation, both through development or M&A to our doing business with market leaders, and we remain committed to growing in Tier 1 global MNOs across our footprint. In some cases, particularly where growth capital is not required, we may also support network rollouts of new entrants or smaller operators. However, any time we assess expansion capex from carriers that fit this profile, the underwriting standards will be adjusted to account for potential incremental risk on a case-by-case basis. Next, scale is perhaps the most critical component of the international value creation flywheel. At a high level, our scale allows us to operate more profitably by leveraging shared overhead and a global balance sheet that creates cost of capital advantages. Importantly, scale also enables us to develop nationwide agreements that present a differentiated go-to-market solution for leading MNOs that contract terms that we view as critical. In particular, securing full lease-up rights on the assets we acquire, including the ability to monetize by co-location limit activity is crucial to our ability to drive long-term organic growth. Over the past decade, we had counter sale-leaseback opportunities with restrictive contract terms that limit the lease-up monetization. These terms are nonstarters for us. Similarly, while recent currency devaluation in certain markets has exceeded our initial underwriting expectations, CPI escalators have proven to be a critical tool to help mitigate long-term currency risk over the last decade. As we look forward to the balance of 2024 in the next several years, we believe we're uniquely positioned to create differentiated value for our customers. To maximize the benefits of the scale portfolio we have in place, we're reinforcing a customer service-driven approach to everything we do. At our internal departments in each region are focused on supporting our sales team's ability to find new business with market leaders and deliver strong organic growth. Further, our global model allows our best-in-class operating team to remain flexible in addressing the ebbs and flows in demand through cross-border share resources, allowing for sustained speed-to-market delivery for our customers, while also supporting our focus on cost management. To that end, we remain committed to extending the global efficiency and cost management achievements we made to date. For 2018 and at the midpoint of our 2024 outlook, we expect to reduce cash SG&A, excluding bad debt as a percentage of revenue by roughly 210 basis points in Europe, Africa, and LatAm in aggregate. We're now in the process of further globalizing our business functions to identify additional areas where we can leverage scale and technology to perform continued growth in customer service in the most cost-efficient manner. In closing, we believe we have an opportunity to leverage our learnings for the last two-plus decades of global operations to continue managing and developing a best-in-class business that's capable of delivering high-quality, long-term earnings growth. We're going to continue actively managing our portfolio to ensure a compelling mix of geographies and assets that are well positioned to support and monetize growing data demand and our operating capabilities to continue to serve a sustained competitive advantage. As our actions have demonstrated over the past year, we're prepared to make appropriate strategic decisions to ensure that we have a portfolio of the highest quality. Going forward, we believe that through our focus on maximizing organic growth, disciplined and flexible reinvestment of cash flows and their growth opportunities, and further leveraging our global scale and maximize profitability and returns, we can provide a value proposition that can be replicated elsewhere, translating into expanded returns on capital over time. With that, I'll hand it over to Rod to discuss Q2 results and our revised outlook. Rod Smith -- Executive Vice President, Chief Financial Officer, and Treasurer Thanks, Steve. Good morning, and thank you for joining today's call. As highlighted in this morning's press release, we had a strong second quarter driven by the resilient demand for our assets and resulting in robust performance across several key areas. Given the critical nature of our global portfolio and the growth trends in mobile data consumption, we head into the back half of the year confident in our ability to drive strong growth, execute on our cost management initiatives, enhance our quality of earnings and deliver compelling total shareholder returns. Before I discuss the specifics of our Q2 results and revised full year outlook, I'll summarize a few of the highlights. First, activity levels on our tower assets remain strong. Our consolidated organic tenant billings growth of 5.3% continues to demonstrate the strength of the fundamentals that fuel our business. In our U.S. services segment performed in line with our expectations for accelerating tower activity in 2024 with revenues and gross profit each increasing over 50% versus Q1 and more than double that of Q4 of 2023. Next, CoreSite executed another exceptionally strong quarter with double-digit revenue growth. Their second highest quarter of signed new leasing in the company's history and record cash backlog. Additionally, our data center projects currently under development are roughly 60% pre-leased, four times the historical average providing confidence in visibility to an accelerated pathway to realizing CoreSite's best-in-class returns on invested capital. Furthermore, in India, the positive collection trends we saw over the last several quarters continued in Q2 allowing us to reverse approximately $67 million of previously reserved revenue in clearing the majority of the outstanding AR we have with a key customer. Separately, we made further progress in accelerating certain payments included and the approximately $2.5 billion of potential total proceeds associating with our pending sale of ATC India. In the quarter, we repay traded more than $210 million back to the U.S., and we're in the process of repay trading in additional approximately $20 million largely associated with the monetization of the VIL OCDs net of fees. Today, total accelerated proceeds stands at approximately $345 million inclusive of funds received in Q1 and we expect the remaining proceeds potentially of approximately $2.1 billion to be received at closing. As we make progress to its closing, which we continue to target the second half of 2024, we anticipate incurring incremental costs within the business between SG&A and maintenance capex. A modest offset to the upside realized through strong collections. I will touch on these items and how they impact our outlook later. Finally, we continue to effectively execute on our balance sheet initiatives, highlighted in the quarter by the issuance of 1 billion euro denominated senior unsecured notes and awaited average cost of 4%. The proceeds we used to pay down floating rate debt, lowering our ratio back to 89% fixed to 11% floating. Turning to second quarter property revenue and organic tenant billings growth on Slide 8. Consolidated property revenue growth was 4.6% or over 6.5% excluding non-cash straight line revenue while absorbing roughly 230 basis points of FX headwinds. U.S. and Canada property revenue growth was approximately 1% or over 4% excluding straight line and includes an approximately 1% negative impact from Sprint churn. International revenue growth was approximately 7% or over 12% excluding the impacts of currency fluctuations which includes an over 8% benefit associated with improved collections in India. Finally, data center revenues increased over 12% as demand for hybrid and multi-cloud IT architecture continues unabated. AI-driven demand picks up in the backlog of record new business found over the last two years continues to commence. Moving to the right side of the slide. Consolidated organic tenant billings were 5.3% supported by strong demand for our assets across our global portfolio. In our U.S. and Canada segment, organic tenant billings growth was 5.1% and over 6% absent Sprint-related churn. We expect a relatively similar growth rate in Q3 before a step-down in Q4 as we commence the final tranche of contracted Sprint churn, all supportive of our 2024 outlook expectation of approximately 4.7%. Our international segment grow 5.5% in organic tenant billings growth reflecting additional moderation in CPI went escalated as expected, any sequential step-down in co-location and amendment contributions, most notably, in APAC. However, in Europe, we saw another quarter of accelerating new business moving organic tenant billings growth in the region to 5.7% and giving us confidence to modestly raise our full year outlook for the segment which I'll touch on shortly. Turning to Slide 9. Adjusted EBITDA grew 8.1% or nearly 12%, excluding the impacts of noncash straight line, while absorbing approximately 210 basis points in FX headwinds. Cash, adjusted EBITDA margins improved approximately 300 basis points year-over-year to 64.7%, which includes a roughly 80 basis point benefit in the quarter associated with the India reserve reversals as compared to a drag of nearly 50 basis points in the year ago period. Absent these onetime items, we're continuing to demonstrate meaningful cash margin improvements supported by the inherent operating leverage in the tower model and continued cost management throughout the business. In fact, cash, SG&A, excluding bad debt, declined approximately 2.5% year-over-year in the quarter. Moving to the right side of the slide. Attributable AFFO and attributable AFFO per share grew by 13.5% and 13.4%, respectively, supported by a high conversion of cash adjusted EBITDA growth to attributable AFFO. Now shifting to our revised full year outlook, I'll start with a few key updates. First, as I mentioned earlier, we've had a strong start to the year. Core performance remains solid, and our continued focus on driving cost discipline and margin expansion across the business is paying off through exceptional conversion rates of top line results through adjusted EBITDA and AFFO. As you'll see in the next several slides, our core results to date and expectations for the remainder of the year are contributing to outperformance across key metrics for 2024 as compared to our prior expectations. Next, having now come off several consecutive quarters of solid collections in India, we've reassessed expectations for the year in our prior outlook, we have assumed nearly $50 million in revenue reserves from Q2 to Q4 or just over $16 million per quarter. As I mentioned earlier, through positive collections in Q2, we reversed $67 million of previously reserved revenue translating to an upside of $84 million as compared to our prior outlook assumptions for the quarter. We now have confidence to fully remove our previous reserve assumption for the second half of the year representing an incremental $32 million in upside, which, together with Q2 results is driving an outlook to outlook increase of around $116 million across property revenue, adjusted EBITDA, and attributable AFFO. Finally, we have revised our FX assumptions, providing an incremental headwind of $51 million, $33 million, and $28 million to property revenue, adjusted EBITDA, and attributable AFFO, respectively. Turning to Slide 10. We are increasing our expectations for property revenue by approximately $20 million compared to prior outlook. Outperformance includes $116 million associated with positive collection trends in India partially offset by a decrease of $45 million, which consists of a decrease of $58 million in pass-through primarily due to fuel costs, net of an increase of $13 million in straight-line revenue. Consolidated core property revenue remains unchanged with certain offsetting movements between segments. Growth was partially also offset by $51 million associated with negative FX impacts. Moving to Slide 11. Expectations for consolidated U.S. and Canada, total international and APAC organic tenant billings growth remain unchanged. However, we have raised expectations for Africa to greater than 12% and Europe to approximately 6%, up from 11% to 12% and 5% to 6%, respectively. In addition, we have lowered our expectations for Latin America to greater than 1.5%, down from approximately 2%. Turning to Slide 12. We are increasing our adjusted EBITDA outlook by $130 million as compared to the prior outlook. Outperformance is driven by the flow-through of FX-neutral property revenue upside and direct expense savings partially offset by additional SG&A costs in India and $33 million of FX headwinds. Moving to Slide 13. We are raising our expectations for AFFO attributable to common stockholders by $85 million at the midpoint and $0.18 on a per share basis, moving the midpoint to $10.60. Cash, adjusted EBITDA outperformance was partially offset by incremental maintenance capex split between the U.S. and Canada, where we're prioritizing certain incremental projects and India. Growth is partially offset by $28 million in FX headwinds. Excluding India, outperformance on an FX-neutral basis was $27 million as compared to prior outlook. Turning to Slide 14. You'll see our capital allocation plans remain relatively consistent, including unchanged expectations for our 2024 dividend distribution, which is subject to board approval. On the capital program side, we are increasing our plan for 2024 by $55 million, which includes $30 million associated with maintenance capex, as I previously mentioned, and additional success-based development investments in our U.S. data center business to maximize sellable capacity on the back of ongoing record demand. Additionally, we have reallocated certain discretionary capital buckets, including an increase toward our strategically important U.S. land acquisition program, partially offset by savings in redevelopment. Moving to the right side of the slide. We remain focused on strengthening our balance sheet and accelerating our pathway to additional financial flexibility. This commitment is demonstrated through our successful execution in the capital markets including the issuance of over $2 billion in fixed rate debt since the start of the year, a strategic and disciplined approach toward our capital deployment priorities, highlighted for reductions in discretionary capital spend in each of the last several years, together with a rebalancing of strategic priorities between geographies and risk profiles and a continued cost focus across the business. These strategic actions have translated into meaningful progress toward achieving our net leverage target and an improved fixed-to-floating rate debt profile over the past 24 months. Turning to Slide 15. And in summary, we are pleased with our execution through the first half of the year, demonstrating the strength of the fundamentals that underpin our business through solid organic growth and a diligent focus on cost management throughout our company, combined with our prudent approach to capital allocation, while reinforcing and enhancing our balance sheet strength and financial flexibility. We believe we are well positioned to drive strong sustainable growth and long-term shareholder value while being a best-in-class operation for our stakeholders across the globe. With that, operator, we can open the line for questions. Operator Questions & Answers: |
American-tower