American Tower Corporation (REIT)

Ladies and gentlemen, thank you for standing by. Welcome to the American Tower second quarter 2024 earnings conference call. As a reminder, today's conference call is being recorded. Following the prepared remarks, we will open the call for questions. If you'd like to ask a question, please press 1 then 0 now. I would now like to turn the call over to your host, Adam Smith, Senior Vice President of Investor Relations and FP&A.

Please go ahead, sir. Good morning, and thank you for joining American Tower's second quarter earnings conference call. We have posted a presentation which we will refer to throughout our prepared remarks under the investor relations tab of our website, www.americantower.com. I'm joined on the call today by Steve Vondran, our President and CEO, and Rob Smith, our Executive Vice President, CFO, and Treasurer. Following our prepared remarks, we will open up the call for your questions. Before we begin, I'll remind you that our comments will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include, our expectations regarding future growth, including our 2024 outlook, capital allocation, and future operating performance, our expectations for the closing of the sale of our India business, and the expected impacts of such sale on our business, our collections expectations in India, and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our most recent annual report on Form 10-K, and other risks described in documents we subsequently file from time to time with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. With that, I'll turn the call over to Steve.

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 globe 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've 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 of their 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 through investments 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 and sophisticated regulatory approach that has afforded opportunities to effectively assess new markets and assets, and the development of innovative powers of service model that provides best-in-class network uptime and supports initiatives among American Tower, our M&O customers, and the communities we serve to deliver cleaner 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-to-capital advantages derived from our global balance sheet. When you take all these together, these benefits translate to an enhanced value of the assets under the American Tower umbrella, commanding a premium relative to the market-implied sum of the parts on a comparable basis. And where this has not held 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 many cases, those financial risks have, quite frankly, outpaced what we originally underwrote, and together with care and consolidation, have 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 in 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 a 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 now Porsche, who are underwriting compelling mid-teen 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 six, 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 non-core, subscale, or underperforming assets like Mexico Fiber and our Poland operations. And earlier this year, we announced our pending exit from India. Additionally, over the past several years, we've further expanded our developed market exposure through our M&A focus across the U.S. and Europe, all just to name 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 AFSO 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 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 to divest in any particular markets. 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, develop market investments with the highest quality return profiles, and looking ahead to 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 as in the U.S., owning and operating the highest quality assets and partnering 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 posed significant headwinds to growth over a multi-year period. Today, the vast majority of our revenues in Europe, Africa, and Latin America come from leading customers with competitive in-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, whether through development or M&A, toward doing business with market leaders. And we remain committed to growing with Tier 1 global M&Os 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 for carriers that fit this profile, the underwriting standards will be adjusted to account for potential incremental risks 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-to-capital advantages. Importantly, scale also enables us to develop nationwide agreements that present a differentiated go-to-market solution for leading MNOs at contract terms that we view as critical. In particular, securing full lease-up rights on the assets we acquire, including the ability to monetize both publication and amendment activity, is crucial to our ability to drive long-term organic growth. Over the past decade, we've encountered sale leaseback opportunities with restrictive contract terms that limit the leaseup monetization. These terms are non-starters for us. Similarly, while recent currency devaluations in certain markets have exceeded our initial underwriting expectations, CPI-linked 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. And 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 teams to remain flexible and in addressing the ebbs and flows of demand through cross-border shared 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've made to date. From 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 support continued growth and customer service in the most cost-efficient manner. In closing, we believe we have an opportunity to leverage our learnings from 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 where our operating capabilities can continue to serve as 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 a focus on maximizing organic growth and disciplined and flexible reinvestment of cash flows and their growth opportunities, and further leveraging our global scale to maximize profitability and returns, we can provide a value proposition that can't be replicated elsewhere, translating into expanded returns on capital over time. With that, I'll hand it over to Rod to discuss future results and a revised outlook.