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Edited Transcript of AMT earnings conference call or presentation 31-Jul-19 12:30pm GMT

Q2 2019 American Tower Corp Earnings Call

BOSTON Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of American Tower Corp earnings conference call or presentation Wednesday, July 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Igor Khislavsky

American Tower Corporation (REIT) - Senior Director of IR

* James D. Taiclet

American Tower Corporation (REIT) - Chairman, President & CEO

* Thomas A. Bartlett

American Tower Corporation (REIT) - Executive VP & CFO

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Conference Call Participants

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* Batya Levi

UBS Investment Bank, Research Division - Executive Director and Research Analyst

* Brandon Lee Nispel

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Brett Joseph Feldman

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Colby Alexander Synesael

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* David William Barden

BofA Merrill Lynch, Research Division - MD

* Michael Rollins

Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst

* Richard Hamilton Prentiss

Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research

* Simon William Flannery

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Second Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Igor Khislavsky. Please, go ahead.

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Igor Khislavsky, American Tower Corporation (REIT) - Senior Director of IR [2]

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Thank you. Good morning and thank you for joining American Tower's Second Quarter 2019 Earnings Conference Call. We've posted a presentation, which we will refer to throughout our prepared remarks, under the Investor Relations tab of our website, www.americantower.com.

Our agenda for this morning's call will be as follows. First, I'll quickly summarize our financial results for the quarter. Next, Jim Taiclet, our Chairman, President and CEO, will provide a brief update on our international business. And finally, Tom Bartlett, our Executive Vice President and CFO, will discuss our second quarter results and revised 2019 outlook in more detail. After these comments, we will open up the call for your questions.

Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding industry trends as well as our future growth, including 2019 outlook, capital allocation, pending acquisitions and future operating performance; the pacing and magnitude of the Indian Carrier consolidation process and its impacts on American Tower; and any other statements regarding matters that are not historical fact.

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 Form 10-K for the year ended December 31, 2018 and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances.

Now please turn to Slide 4 of our presentation, which highlights our financial results for the second quarter. As expected, these results as well as our year-over-year growth rates were impacted by Indian Carrier consolidation-driven churn.

During the quarter, our property revenue grew 5.7% to $1.8 billion. Our adjusted EBITDA grew over 9% to $1.2 billion, and our consolidated AFFO and consolidated AFFO per share increased by 7.8% and 7.4% to $910 million and $2.04 per share, respectively. Finally, net income attributable to American Tower Corporation common stockholders increased by more than 39% to $429 million or $0.96 per diluted common share.

Additionally, similar to the last few quarters, many of our comments around second quarter results and our updated 2019 outlook will be focused on growth rates normalized for carrier consolidation-driven churn in India. Normalized outlook growth rates also adjust for the nonrecurrence of the impacts of the Tata settlement in Q4 2018. We view these normalized results as important indicators of the underlying trends of our business. Reconciliations of these normalized metrics to our GAAP results are included in the back of our earnings presentation, in our press release and in our supplemental package.

And with that, I'll turn the call over to Jim.

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [3]

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Thanks, Igor, and good morning to everyone on the call.

Consistent with our past practice for second quarter reports, my remarks today will center on American Tower's international business. But first, I do want to make just a few comment on the anticipated merger between T-Mobile U.S.A. and Sprint, which was approved by the U.S. Department of Justice last Friday.

Since then, T-Mobile and Dish have made public statements and filings regarding their agreements and plans for their respective networks. Based on what has been made public to date, we, at American Tower, continue to expect that these developments will likely result in net positive impacts on our U.S. business over the long term. While there may be some decommissioning of sites as the new T-Mobile optimizes its network and rolls out 5G, we would also expect significant demand from the combined company for our extensive U.S. portfolio during that process and well into the future.

Furthermore, Dish is set to acquire Sprint's prepaid business and has made a commitment to deploy facilities-based 5G broadband network capable of serving 70% of the U.S. population by June 2023. As a result, we also expect to secure meaningful new business from Dish as they transition their current narrowband IoT network design into a full fledged 5G mobile architecture over the coming years.

In the near term, we do not expect the recently announced transaction approval to materially impact our 2019 results, and we will provide you with ongoing updates as this situation develops going forward. With that, let's get into our international business.

For the portfolio of approximately 130,000 communication sites in 16 countries outside the U.S., we believe that our global scale, diversity and reach is unmatched. As a result, we are well positioned to work closely with the large multinational tenants, who comprise a significant majority of our international revenues, and, who, together, are on track to spend upwards of $25 billion on network CapEx in our served markets this year.

In the second quarter, our business outside the U.S. accounted for nearly half of our property revenue and about 35% of our property operating profit, generating an aggregate U.S. dollar NOI yield of over 11%.

In our most seasoned vintage of international sites, those built or acquired prior to 2010 is yielding approximately 30% in U.S. dollar terms, illustrating the power of our recurring organic revenue model overseas.

We've been growing this portfolio steadily through a combination of internal newbuild programs and selective acquisitions, the most recent example being the Eaton Towers transaction that we signed and announced in May. The thesis underpinning our international expansion is that rapid growth in mobile daily usage is not just the U.S. but a global phenomenon. And as a result, demand for communications real estate is expected to grow over an extended time horizon.

Under that premise, I'd like to spend a few minutes discussing each of our international segments and their key growth drivers.

I'll begin with Latin America where we've owned and operated towers for over 2 decades in Mexico and Brazil and now have nearly 38,000 sites across 8 countries. Just to give you a comparison, we have about 40,000 sites in the U.S.

Today, carriers across Latin America are focused on 4G network deployments. Fueling this trend are a series of recent and upcoming spectrum auctions, primarily in low and mid-bands in our 2 largest markets, Brazil and Mexico, and in many other countries in the region as well. Moreover, our long-time presence and scale in Latin America has resulted in substantial business relationships with the key operators in the region, including AT&T, Telefónica, América Móvil and others.

Consequently, over the last 5 years, we've averaged double-digit organic tenant billings growth in Latin America, backed by strong levels of new business activity and the continuing appetite for mobile data in the region. In addition to continuing organic growth opportunities, we're now seeing solid momentum from newbuild towers with our outlook for new tower construction in Latin America in 2019 up significantly versus last year. And with regional 4G penetration still well below 50%, we expect solid demand for co-locations, amendments and newbuilds in Latin America to continue for some time.

Moving on to EMEA. We currently have a portfolio of nearly 17,000 sites, building over 11% on a U.S. dollar basis, and another 5,500-or-so sites coming with the Eaton Towers transaction. Since entering the region in 2011, we helped bring greatly improved connectivity to hundreds of millions of subscribers while partnering with many of the key telecom operators across Africa and Europe, including Vodafone, MTN, Airtel and others.

And while our German and French markets are well into the 4G transition with stable carrier investments and relatively consistent growth prospects going forward, most of our African markets are much earlier in terms of technology evolution, network capacity and mobile data usage.

We see a tremendous opportunity in the region as a result, particularly given that there's limited fixed line infrastructure in place in Africa, and wireless broadband has been recognized by African governments as one of the key aspects of their economic monetization plan.

At the current time, 4G penetration on average is still under 10% in our African markets, and mobile data usage is a fraction of what we see in the U.S. and other more advanced countries. As smartphone prices continue to come down and as more Africans begin using advanced handsets, we expect to see significant incremental mobile data usage and, consequently, demand for towers, both for existing sites as well as for newbuilds.

We spent the better part of the last decade positioning American Tower to benefit from this upcoming wave of demand by acquiring more than 10,000 sites in Africa and constructing another 1,700. This macro and tower-oriented portfolio has performed well to date with significant future upside expected.

In addition to the Eaton Towers acquisition, we've also started to ramp our build program in the region with 2019 newbuilds expected to be roughly double 2018 levels. We're also making great progress increasing our operational efficiency while reducing the mobile industry's carbon footprint through our innovative power and fuel program.

In Africa where grid power in many areas tends to be unreliable, we are actively deploying next-generation, greener technologies, including lithium-ion batteries and solar solutions. We expect to invest more than $50 million in 2019 to enhance the uptime performance of our sites in the region, while, at the same time, significantly reducing greenhouse gas emissions.

Finally, moving to India. The mobile communications industry is completing a much-needed consolidation to support the funding of 4G technology throughout the country. There are now 4 large and capable wireless carriers, Vodafone Idea, Airtel, Reliance Jio and BSNL. In our view, each has sufficient spectrum assets and customer bases to credibly deploy 4G in the coming years.

Although only a relatively small proportion of subscribers in India are on a 4G network today, their usage pattern indicates a bright future for adoption and network demand in India. Incredibly, those people with smartphone access are using an average of upwards of 10 gigabits per month already, more than the current average for U.S. smartphone subscribers. We believe that a significant buildout will be needed in India to meet 4G-driven demand and that our portfolio of approximately 75,000 sites is well positioned to garner solid organic growth for years to come.

Beginning at some point in 2020, as we've said previously, we would expect to see the leading edge of more normalized levels of organic growth as Indian Carrier consolidation churn subsides, enabling organic tenant billings growth to resume an upward trajectory. Newbuild demand in India is also robust, and we anticipate constructing more than 2,000 sites this year as 4G deployments ramp up there.

To summarize, Indian macro trends are stable, the telecom industry seems to be on the right track, and we think that our portfolio, coupled with our relationships with the major carriers now in the marketplace, positions us to be successful over a long period of time in that region.

At the consolidated international level of American Tower, we are confident about the prospects for strong, long-term growth as the global migration to 4G continues to progress in Latin America, EMEA and India. We view our international business as tremendously complementary and additive to our core U.S. tower business, which continues to drive the majority of our AFFO.

So with that, let me hand it over to Tom to go through the details of our results and our updated outlook.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [4]

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Thanks, Jim. Good morning, everyone.

As Igor highlighted earlier, we posted another quarter of strong results with U.S. organic tenant billings growth of 7.5%, improved organic growth in EMEA and the construction of more than 1,100 sites globally. We also announced the Eaton Towers transaction, which will build in our presence in Africa while further aligning us with key multinational tenants. Also, together with our other completed and signed acquisition agreements, we now expect to acquire more than 6,000 sites globally in 2019.

With that, let's take an in-depth look at our second quarter results and our revised outlook for the full year.

So if you'd please turn to Slide 6. During the quarter, we generated consolidated organic tenant billings growth, normalized for the impacts of Indian Carrier consolidation-driven churn, of nearly 8%. Volume growth from co-locations and amendments contributed about 6% of this growth, driven by carrier network investments across our footprint.

Our U.S. business property revenue grew over 5% to just over $1 billion this quarter with organic tenant billings growth of 7.5%. Volume growth from co-locations and amendments drove around 6% of this growth, and escalators contributed just over 3%. This was partially offset by nearly 2% of negative impact of lower noncash straight-line revenue as well as churn of roughly 1.3%. All 4 major carriers in the market contributed to our results, and roughly 80% of the new business activity generated was in the form of amendments.

Our reported international property revenue growth during the period was over 6%, including a negative impact of over 5% due to Indian Carrier consolidation-driven churn. Underpinning our international revenue growth this quarter was a normalized organic tenant billings growth rate of about 8%. Solid demand trends throughout our key markets like Brazil and South Africa continue to drive this strong normalized growth, as our tenants deploy capital to support their network buildouts.

New business revenue from co-locations and amendments was about 6% of this growth while escalators contributed nearly 4%. Other run rate items added nearly 1% with normal course churn offsetting these items by just over 2%. As expected, the financial impacts of India carrier consolidation-driven churn were slightly lower sequentially, and we continue to expect these impacts to decline throughout the remainder of the year.

In addition, Q2 included higher-than-typical contributions from several non-run rate revenue categories, which positively impacted our results. These items, which included some increased pass-through revenue, the benefit of some tenant settlements in India and elevated levels of backfilling, totaled roughly $45 million in the quarter.

Finally, the day 1 revenue associated with the nearly 16,000 sites we've added over the course of the last year contributed just over 2% to our global tenant billings growth. These new assets include our acquisition around 10,000 sites from Idea in India as well as the nearly 4,000 newly constructed sites over the last year.

Demand for new towers continue to accelerate, and, as a result, we've built nearly 1,100 towers across our international markets in the quarter, more than doubling our pace from a year ago. Newbuilds continue to be an integral part of our capital deployment program driving attractive day 1 returns. In fact, initial NOI yield for these builds averaged about 12% in Q2, and we expect additional lease-up opportunities to raise yields further.

Our newbuild program remains focused primarily on macro towers, given their strong recurring revenue, exclusive franchise real estate characteristics and superior return profile. Importantly, we believe that we're still in the early stages of a long period of newbuild demand as 4G technology reaches more and more subscribers, particularly in less mature markets.

Turning to Slide 7, we also generated solid adjusted EBITDA and consolidated AFFO growth during the quarter. Adjusted EBITDA grew by over 9% with our adjusted EBITDA margin increasing to 62.6%. Normalized adjusted EBITDA growth was more than 12%, and our normalized adjusted EBITDA margin, excluding the negative impact of noncash straight-line revenue, was over 63%.

We continue to effectively manage our SG&A during the quarter and continue to realize operating expense benefits from recent investments in power and fuel. This was particularly impactful in our African markets, where we continue to optimize our processes and invest in lithium-ion batteries and solar power to enhance the efficiency of our sites and reduce our emissions. As a result, our Q2 generated run hours were down nearly 20% as compared to the prior year period, and we're on track to hit our green energy deployment goals for the year.

We also generated strong consolidated AFFO and AFFO per share growth with consolidated AFFO growing nearly 8% and consolidated AFFO per share up over 7% to $2.04. Meanwhile, AFFO attributable to common stockholders grew over 15% or nearly 16% per share, which is partly attributable to our increased ownership interest in India. On a normalized basis, consolidated AFFO and consolidated AFFO per share grew nearly 11%.

Turning to Slide 8. Let's now take a look at our updated expectations for 2019. We are raising our organic tenant billings outlook for our U.S. segment and now expect growth of at least 7% for the year. New business activity is running ahead of our prior assumptions, backed by strong carrier investments to support continued growth of their customers' mobile data usage.

In EMEA, we were seeing lower churn than we anticipated, and, as a result, are raising our organic tenant billings outlook to about 7% for the year. Meanwhile, France and Latin America and India are consistent with our prior assumptions, and we are reiterating organic tenant billings growth expectations of 7% to 8% in Latin America and 8% to 9% in India on a normalized basis.

Taking international as a whole, we now anticipate normalized organic tenant billings growth will be nearly 100 basis points higher than the U.S., driven by a record year of contributions from co-locations and amendments. With our revised 2019 outlook, we also continue to expect to return to positive organic tenant billings growth in our international business by Q4 when the impact of Indian Carrier consolidation-driven churn begins to subside.

Looking at Slide 9, we are raising our expectations for 2019 consolidated property revenue by $60 million or nearly 1%. This reflects our organic tenant billings outperformance as well as the benefit of the Q2 items I discussed earlier. Our revised outlook also includes about $6 million of additional straight-line revenue, partially offset by $2 million of negative translational FX impacts.

Flipping to Slide 10, we're also raising our expectations for adjusted EBITDA by 1.3% or $60 million. This reflects the strong conversion of the incremental property revenue I just mentioned as well as roughly $11 million in additional adjusted EBITDA from our Services segment, which set a new record for both revenue and adjusted EBITDA in the quarter.

Lastly, we're increasing our expectations for consolidated AFFO for the year by $70 million or approximately 2%. This is primarily being driven by our higher outlook for adjusted EBITDA and the benefit of lower projected financing cost, and includes assumptions of slightly higher maintenance CapEx spending in the back half of the year. On a per share basis, we expect normalized consolidated AFFO growth of nearly 11% at the midpoint, reflecting the strong operating leverage embedded in our business.

Finally, I do want to note that holding the current spot FX rates steady for the rest of the year would result in approximately $8 million or $0.02 per share, an incremental consolidated AFFO as compared to our outlook.

Now turning to Slide 11, our capital allocation plans for the year reflect our disciplined investment evaluation process and diversity of our global portfolio. We expect our dividend in 2019 to grow by around 20% to a total of $1.7 billion, subject to Board discretion. In addition, at the midpoint of our outlook, we plan to deploy just over $1 billion of CapEx, over 80% of which is discretionary, focused on augmenting the capacity of existing macro sites and building new ones. This is up $50 million as compared to our prior expectations, in part driven by a 250-site increase in our newbuild expectations to 3,500 sites at the midpoint for the year.

By the way, building 3,500 sites would be a new record for American Tower.

We also plan to enhance our global scale through attractive M&A, as we've done in the past. Year-to-date, we've committed approximately $3.3 billion, including $1.85 billion for our recently announced acquisition of Eaton Towers, which we expect to close by the end of 2019. This transaction will enhance our scale in markets like Ghana and Kenya and Uganda and further solidify our presence in Africa as a key partner of the major wireless carriers in the continent, many of which are existing tenants.

We've also acquired and closed 363 other sites year-to-date for a total of $150 million primarily in Latin America, and expect to close on around 400 additional sites in other related property interests in the United States during the third quarter for around $500 million. Like the Eaton Towers transaction, we've not included any impact from these U.S. assets in our current outlook.

Finally, included in the $3.3 billion I just mentioned is the $426 million that we paid for the first set of Indian puts in April and around $360 million for the second set that we expect to pay for in the third quarter, subject to regulatory approval. In total, we expect to deploy approximately $6 billion of capital during 2019, primarily to enhance our global scale and expand the future cash flow generation of our business.

Turning to Slide 12, you can see that our capital allocation strategy has driven strong financial performance. Since 2007, we've increased our global site count more than sevenfold by acquiring and constructing high-quality communication sites with strong growth characteristics and attractive recurring revenue profiles. As a result, across this time period, we've generated a 15% consolidated AFFO per share CAGR while increasing our return on invested capital by more than 200 basis points.

Looking forward, we believe we're well positioned to continue to selectively grow our portfolio as we build on our history of delivering strong organic growth.

Now looking at Slide 13, our build program continues to be a critical component of our capital allocation program. And as I mentioned earlier, we expect a record year of newbuild activity in 2019 throughout our international markets. Importantly, the initial NOI yields of these international newbuilds continue to average double digits with Asia and EMEA approaching the mid-teens. These returns further improve over time as we lease up the assets, and, in fact, many of the top-performing sites in our portfolio are sites that we have built ourselves. International sites built before 2010, for example, now yield approximately 45% on a U.S. dollar basis. And even sites constructed since 2014 are generating an average NOI yield of 20%.

Given this favorable return profile, we remain committed to helping our multinational carrier tenants improve their networks through the construction of new sites. Of all the ways we can add scale to our business, our newbuild program, again, primarily focused on adding new macro tower sites, remains one of the most accretive.

Turning to Slide 14 and in summary, our second quarter results were strong with solid organic trends across our global footprint. Our U.S. business generated organic tenant billings growth of 7.5% in the quarter, enabling us to raise our full year U.S. organic tenant billings outlook to at least 7%. Meanwhile, organic growth in EMEA and Asia continue to improve, and Latin America trends remain solid. We also increased assumptions for new site builds for the second consecutive quarter, driven primarily by elevated demand from carriers in India, Nigeria and Brazil, which speaks to the tremendous need for incremental network density to support their continuing deployment of 4G. Combined with our 2019 M&A activity, including closed and signed transactions, we expect to add approximately 10,000 towers to our portfolio this year.

Finally, we converted our strong top line results into solid growth in adjusted EBITDA and consolidated AFFO per share in the second quarter, and now expect to grow consolidated AFFO per share on a normalized basis by nearly 11% for the full year. Furthermore, we remain firmly committed to growing our common stock dividend as a key component of our total return profile, subject to the Board's discretion, while maintaining our long-held financial policies and investment-grade credit rating.

Overall, 2019 is shaping up to be another great year for American Tower, and we're focus on finishing the year strong to position us for continued success.

With that, I'll turn the call over to the operator, so we can jump into some Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Simon Flannery.

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Simon William Flannery, Morgan Stanley, Research Division - MD [2]

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Jim, thanks for the overview on international, just doing a lot of activity in Europe recently from Vodafone and others. Can you just comment on that market? Is that something we're likely to see American Tower in? Or does it just not to give you the growth and value equations?

And maybe back to this 35% of operating profit, where is that likely to be over time? Might that get to 50-50?

And then just on the merger. If we assume that Sprint and T-Mobile goes through, how would we expect the transition to go in terms of activity? And would you expect to try to negotiate a master lease agreement to minimize the churn and decommissioning?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [3]

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Sure. Yes, I'll start with the international piece. I mean, Europe's always been a major target of American Tower's international strategy since we really accelerated it in 2007. But as you pointed out, Simon, the growth and costs of asset equation hasn't, in the larger deals that have traded so far, met our investment criteria. We're actively there. We've got a great stand-alone team in Europe that is only doing 2 things, looking at new opportunities for asset growth and operating our current German and French businesses to their maximum potential. So we are going to be in the haunt continually here. And as far as the overall operating profit as a percentage of the company's, international is designed here to naturally grow up to 50%, I should say, over a long period of time because we have more towers, they grow faster, and we think the deployment time lines are longer because many of these countries, as I've talked about, are in earlier phases of their technology life cycle from 2 to 3 to 4 to 5G. So yes, someday, we'll have 50% of our operating profit coming from international, but that's going to depend on the M&A flow, the U.S. growth rate and a few other factors. But we'll get there someday, and the whole system, if you will, is designed to do that.

When it comes to Sprint and T-Mobile, at the highest level, the way at least that we're looking at this situation is that the agreement that's been announced between the Justice Department, T-Mobile and Dish really positions the U.S. to accelerate its achievement of global leadership in 5G technology while, at the same time, retaining a competitive industry structure that benefits consumers. So to answer to your question, I believe this will be an excellent environment for American Tower, especially with the increasing focus that you've heard about recently on low- and mid-band spectrum for 5G, especially from the Sprint, T-Mobile sides of the equation, not to mention Dish. Just last week, Verizon and, of course, AT&T has been talking about this already. So that's really coalescing to what we think's a great environment for us long term in the U.S.

As far as the transition, of course, we are going to, and one could imagine, already started talking about the contours of what a new MLA might mean for some of these industry participants of the transactions that we're talking about. So that's part and parcel of what we do. What we're going to try to accomplish in that transition period with the MLA is to retain as much of our current business as we can while making it more efficient, not just for American Tower, but for the industry, to make that 4 to 5G transition. And because we've got those 40,000 really well-positioned, high-capacity macro sites in the U.S., we're in a really good place to work with each of our customers to do that. So the transition will be much like you've seen us do it before as far as trying to work within the situation that we're facing to minimize our churn and optimize our growth trajectory going forward over a long period of time.

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Operator [4]

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Our next question comes from the line of Colby Synesael.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [5]

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Two questions, if I may. First off, your -- just want to talk about your U.S. organic growth. So it's 8.2% in the first quarter, 7.5%. In the second quarter, and you just raised guidance from approximately 7% to just over 7%, which would imply then a pretty notable step-down in the back half of the year. Just curious if you think you'll be able to give little bit more specifics on what you would expect to be exiting the year in terms of growth rate, and what's really driving that deceleration?

And then secondly, as it relates to India, I know you slightly adjusted the guidance for some payments and I think some other things that weren't previously anticipated. I'm just curious, what's the risk to your forecast in India right now? That market seems still pretty fluid, still pretty dynamic, chance for incremental consolidation beyond what's already been announced. How confident are you that you'll really get back up to that high single-digit, low double-digit growth rate, I guess, over the next, call it, 12 months?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [6]

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Yes. Colby, with regards to the growth rate, keep in mind that in 2019, we're going to be generating more new business coming into organic growth than we actually did in 2018. So it's a very, very strong year. In terms of the timing of the growth rates on a quarter-by-quarter basis, a lot of it is a function of the growth in the prior quarters -- in the prior year. And so you look at kind of the third and fourth quarter of 2018, they were very, very strong quarters for us. And so as a result, it's having an impact in terms of the overall organic growth going into the second half. So the first half is stronger than expected, tougher comps in the second half. We do have also a slight increase in churn, I believe, in the fourth quarter, still well within the 1% to 2% but that's also impacting the overall growth. So we're going into 2020. We'll be back in the next 6 to 9 months to talk about what those growth rates look like going into 2019. But I think the leading growth rates that we've got in our core organic growth are very, very strong, and we'll continue to update them as the carriers continue to process more search rings and applications with us.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [7]

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And as far as India goes, Colby, we don't see any risk to the forecast for 2019 that's material. We've got a really good pipeline of actually organic growth as it is. In fact, we're already above 9% organic tenant billings growth in India ex the consolidation churn. So we're already kind of at the gross run rate minus normal churn that we would expect in that market, and then it's just a matter of what's the timing of the roll-off of the consolidation churn. It could be just a couple of quarters, and it's going to go down through the rest of the year anyway. So we're quite confident in achieving not only our short-term 2019 objectives in India, but really confident in achieving our target IRR over the planning period for the investments we're making in India. We used 10-year models IRR for that market for us. Its target is above 10%, and we're very confident that we're going to achieve that over the planning period. So as you know, it's a long-term business. There will be some industry changes. There's one happening in the U.S. as well. We're confident there, too, that there's a path through consolidation that actually could be stronger for our company than pre-consolidation, I'd say, both in the U.S. and India. And it takes time to get there, but we're confident we will.

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [8]

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Yes. And Colby, on that, we continue to underpin and see that growth as a function of just the growth in pure leases. Right now, with the churn that's occurred over the last 2 years roughly, again, from the industry perspective, 600,000 and 700,000 leases, we continue to believe and see and reexamine this on a current basis that the leases are going to be well over 1 million leases over the next 3 to 5 years. So very strong growth in the market.

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Operator [9]

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Our next question comes from the line of Brandon Nispel.

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Brandon Lee Nispel, KeyBanc Capital Markets Inc., Research Division - Research Analyst [10]

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One question in the U.S. market and one sort of housekeeping item, if I could. One of the things you guys have always pointed to in terms of the demand to your tower sites is mobile data usage, but the other thing you also point to is capital spend in the U.S. from the wireless carriers. So I was hoping you could just share some thoughts in terms of what 5G means from a capital spending perspective, particularly around some of the M&A that's going on.

Then two, on just housekeeping. Maybe can you update us on the exact dollar amount of property revenue churn you expect throughout the rest of the year in India and potentially anything that's remaining into 2020?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [11]

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Brandon, it's Jim. I can speak to the U.S. kind of main parameters of what drives our demand. The data usage continues to go up 30-plus percent per year in the U.S. even as we're well into the 4G transition. What's interesting to me about that is that every 3 or 4 years, people go, how can it keep going up? And one of the reasons it keeps going up is every app you put on your phone actually refreshes in the background when you're not even using it. So there are data draws on people's phones that occur when they're not even using the app or watching a video or whatever. So these are going to continue to drive usage in addition to the video uptake, both in social media and in branded media that's coming on mobile devices. So we're really quite confident that 30-plus percent data growth in the U.S. is something that will continue for some time. And actually, for the next 5 to 10 years, most of that is going to have to be dealt with by the 4G network and the technology that we're using today while we transition to 5G. So as you go from -- look at capital spending, it's $30-plus billion, and it has been roughly for many years in the U.S., that's the industry spend rate for 4G. We can't really see a scenario where the industry -- the U.S. wireless industry would spend less than that transitioning to 5G because they're going to have 2 things going on at the same time. One is managing 30%-plus growth on the existing network and laying the groundwork and introducing the 5G network. So there's -- we think there's going to be plenty of opportunity and really need for the industry to continue to spend that $30-plus billion a year run rate of CapEx. And again, the transaction that's been announced might actually bolster that going forward based on the competitive dynamic between the 3 largest of the expected industry competitors in the U.S., plus the disruptives from entrepreneurism of Dish in there as well. So we feel good that capital spending is going to stay at the same level or better as we move from 4 to 5G.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [12]

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And then on the churn question, in Q2, we generated about $66 million, of which about $63 million was actually the Indian Carrier consolidated churn. In Q3, again, as we've said, we expect that to wind down. In Q3, we would expect it to be in the $55 million to $60 million range, in Q4 down into the $20 million and $25 million range. So again, a significant fall-off, as you would expect, of that churn that occurred from the consolidations over the last couple of years. And we -- again, we expected the ongoing churn rates to get back down into kind of that -- on a run rate basis kind of in that 1%, 1.5% kind of rate.

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Operator [13]

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Our next question comes from the line of David Barden.

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David William Barden, BofA Merrill Lynch, Research Division - MD [14]

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I just want to go back to the merger a little bit. I mean, it's been a long time since we had one of these. Jim, could you kind of walk us through kind of when you think American Tower will know what the game plan is? Would you know that ahead of time, before the close because they're trying to get ready? Or will you not know it until afterwards, and then you kind of have a 6-month period where you're trying to figure out the details?

And then the second question is just related to the Dish option to kind of take over decommissioned sites. What would that look like? Can that really happen that way? Or does Dish have to have their own agreement with you before that could happen?

And then the third, I guess, question would be just the 400 tower acquisition in the U.S. That's a big number of towers. It looks like it was 1 million in the quarter, so it looks they were pretty well-loaded towers. Where did those come from?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [15]

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So David, let me start with the T-Mobile, Sprint merger. The timing of when information is going to be available for us to model and forecast the results to our company is going to evolve over time, as you saw over the past couple weeks that this agreement has come together very quickly. It's multiparty. There's still another circuit of legal challenges that needs to be resolved with a set of states out there. So we will learn incremental information probably over the next number of months, and not all before the closing will be available. So we will continue to be very close, as we have been, with the, I mean, frankly, outstanding management teams across our industry, right? Whether it's T-Mobile, Sprint, Dish, AT&T, Verizon, these are very well-organized, incredibly capable management teams, and I can tell you highly competitive with each other. We work with each of them closely. Remember there's only 4 of us on the wireless side and 3 of us of size on the tower side. We will be with each of these players every step of the way. And as this information comes to light and they feel that they either are disclosing it or providing it to us in a confidential manner and negotiations, we'll work with that as it comes. But there's no way to predict right now when we are going to know enough material information for us to understand what the rollout's going to look like.

The other side of it is that we will be endeavoring to give offers out there to help accentuate and benefit each of these carriers based on how they tell us that their strategy is coming to life. So this is a very interactive process. It's going to take a lot of time. And it gets down literally the way we forecast is applications coming in, the timing of those, the bill of materials that comes along with it on each application and whatever set of rights that we all agree to. So it's going to take time, frankly. There's no other way to describe it.

The Dish option to take on leases, we'll have to dig in to the contracts on all sides. We have MLAs with Dish. We have them with Sprint. We have them with T-Mobile. And there are also contractual obligations that we don't have access to yet between those parties. So once we get all, again, the information we need, we'll understand how the contracts need to look or be revised or created between us and Dish to do all the assignments or new leases on towers as the case may be.

And then finally, we do put our money where our mouth is. The U.S. is an important growth region for us still. Again, as most of the AFFO that comes from the company today, international will catch up over some long period of time. But we're still invested heavily in the U.S., and we just demonstrated that with the announcement of this sort of mid-sized acquisition, if you will. And it's a private transaction, so we really can't disclose too much more about it than we already have, but it will be a great a tuck-in. And it will add 1% or so to our portfolio, which we think will be high growth, which is where the real value is on these sites, along with some really solid Big 4 rent roll that will come with it.

So again, it's just the normal course of business with us. We're able to meet our investment criteria with this particular counter-party. The fact that our financial position allows us to move quickly and with surety allows sellers to feel good about making agreements to purchase towers and to scale with us. So this is normal course for ATC.

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Operator [16]

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Our next question comes from the line of Brett Feldman.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [17]

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Just 2, if you don't mind. Your other revenues in the quarter were particularly strong, in fact, include a lot of things, including settlements, but I think your fiber solutions revenues are embedded in there. So if you could give us a little insight as to whether there was any one-time strength and maybe just the extent to which there was recurring strength in that line item.

And then are you seeing anything, even though it's early days, around the deployment of millimeter wave spectrum in the U.S.? I think we all just sort of assumed that's going to be predominantly on small cells. But if you're seeing it on towers, that would be interesting.

And maybe just even higher level, do you see new emerging franchise real estate opportunities around 5G deployments in the U.S. as something beyond the scope of towers that maybe historically would not have been interesting to you?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [18]

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Brett, on the other revenue, on the nonrun rate, we generally run in kind of that 4% of revenue range. Again, they're difficult to forecast. There, as I said, things like the straight line and backfilling. These are things that our teams are doing every day of the year, and it's difficult to determine exactly the timing of when these types of things will hit. And so we'll have a quarter that's a bit outsized and another quarter that's a bit undersized, but averaging in that kind of that 4% range. This particular quarter, we're just over 6%. And again, it's a function of a little bit higher backfilling, some small settlements in Latin America -- markets like Latin America and in India as well as some additional work that we've done on pass-through. So very difficult things to forecast, definitely contribute to our overall growth. Don't know, candidly, in Q3, Q4 if there will be other items like these, but what we've included in our outlook is the impact of what we did realize in Q2.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

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Is there anything that's generally recurring in there? I just saw on the footnote, you mentioned fiber solutions. I'm wondering if we're underappreciating that?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [20]

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No. I mean, I think backfilling is something that we do every day. Settlements, we've got 2,500 customers plus around the globe, and so there are constantly going to be settlements going on, renegotiations on certain terms and certain contracts and things like that. And those types of events are, in fact, recurring. It's not driven by fiber. This is really largely driven just by our pure macro business.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [21]

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Yes. And Brett, when it comes to millimeter wave spectrum, we've seen some, but not significant business on our macro towers around those kind of deployments. But there are going to be some potentially significant opportunities for our adjacent asset classes to our macro towers for 5G, and many of them are starting already today. So one of the largest ones outside the U.S., frankly, that will continue and accelerate from 4 to 5G is the need to fiberize, as they say, in India towers or to bring fiber-to-the-tower in Latin America, Africa, other places, in countries where there's not a large capital commitment or large industry commitment to fiber deployments, and these are places we've made those investments because we need to fiber-to-the-tower and we can charge for that last mile. And then when we make those investments, we then can go to our customers and allow them to use those right-of-ways and some of that fiber because we're passing homes or passing businesses. We don't do that retail side, we wholesale some of that fiber capacity that we need for the tower anyway along the route, if you will, to some of our telco customers to do retail business on there that they will manage. So that is one opportunity that will go from 4 to 5G.

Another one, which I think is quite interesting or still in its evolution, is applying in the U.S. CBRS spectrum to a much more efficient and low-cost indoor small cell solution. Again, early days there. It would apply to 4 and 5G. It doesn't necessarily have to be 3.5 spectrum, but in the U.S., that type of spectrum is being deployed with both a licensed prioritization and an unlicensed of general access bands. And that's exactly the kind of thing that you can use in buildings at very low cost, that general access band to service a specific need. So CBRS on the indoor side, fibers outside the U.S. and other developed markets to towers are both going to be needed. And we also see kind of an interesting innovation initiative around edge compute, and that will be more of a 5G program. So a little bit longer time horizon to get there, but we're already finding that distributed compute and storage is relevant even today. And we're trying to figure out exactly what that capillary system needs to look like, what the customer bases are and who the customers will be. And I think that will really be part and parcel of 5G, but again, we could get started on it even now.

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Operator [22]

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Our next question comes from the line of Ric Prentiss.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [23]

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I want to follow up on some of Brett's questions there. As you think about maybe doing more fiber to improve the leasability of your towers, but wholesaling along the route, can you envision a day where you would report fiber separately from the tower property rent?

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [24]

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Yes, Ric, depending upon the size and things like that, the decision making. I mean, there's a whole array of the areas and decisions that would go in to being able to need to disclose that. I mean, we're clearly -- and to the extent that people are interested in it in terms of what we're doing around the globe, clearly willing to talk about that and be transparent about it. But candidly, it needs to be a lot bigger from where it is. I mean, we've invested probably upwards of $1 billion on some of the innovation types of programs, including fiber, but it only represents about 2% of our revenue. So it's quite small right now and by design because it's part of our overall innovation strategy that we've got within the business.

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [25]

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Right. And I would say it would be either a long-time run likely, Ric, that we'd ever split this out. Because the whole innovation program that Tom just referred to including the fiber investments is really designed to enhance the macro tower portfolio that we have. So whether it's shared generators, what you have for a long time as an offering, whether it's ground space or edge compute on our tower sites for American Tower or it's fiber that makes it a more valuable and more sticky site for customers to want to be on and stay on, it's really part of the macro tower property business, and that's probably where you'll see it embedded for quite some time.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [26]

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That makes sense. And one of the reasons for the questions, you've got a lot of questions from investors, and it comes up in industry shows like NAREIT and the tower infrastructure show, where people are just a multiple -- American Tower's trading at on an AFFO multiple basis versus some of the peers out there. And then I think you guys know we prefer funds available for distribution. You get the real cash, but is there a debate out there about your multiple versus some of your peers? Thus, it seems maybe more likely that the tower business is maybe worth more and you need to look at cash? Any thoughts when you get those questions on kind of multiple disparity?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [27]

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Well, let me just say, to address it this way, Ric, our fiber investments outside the U.S. have to meet the same investment criteria that tower acquisitions have to meet outside the U.S. And that would apply in the United States, too. And that's why it's never seen as a -- make a fiber acquisition in the U.S. The return criteria, we cannot figure out how to achieve at the level of macro towers in the U.S. But when it comes to these, really as Tom referred to, relatively small acquisitions or investments in South Africa, Brazil, Argentina, et cetera, those have met or exceeded our investment criteria for macro towers in those countries. And that's the only time you're going to see us act. So frankly, we view a fiber investment at ATC that's just as valuable, just as high growth and higher return as the macro tower or we won't put the money into. So we will be different than someone -- a company that may have decided to go all in on a fiber business, whether it's inside or outside the U.S. because if you're not discriminating about this, we haven't been able to find ways to match macro tower returns and growth rates outside the investments we've made, where we've made them.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [28]

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And Ric, we're able to do that because of our international opportunities. Being in the 16 markets, as Jim talked about, $25 billion of capital is being invested by our customers in those markets. And so on top of that $30-plus billion that are being invested in the U.S., we're contributing in a total opportunity, if you will, from a market perspective, of over $50 billion. And so that is where we believe that we'll be able to drive those tower-like returns that Jim referred to.

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Operator [29]

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Our next question comes from the line of Batya Levi.

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Batya Levi, UBS Investment Bank, Research Division - Executive Director and Research Analyst [30]

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In the past, you had a target for international growth to be 200 to 300 basis points faster than the U.S. Now with the disruption in India behind us this year and accelerated build program, I was wondering if you still think that you can get back to that kind of growth internationally.

And second question, can you provide an update on pricing, maybe the revenue profile on new business in Lat Am? It looks like new buildings is not really ramping as much as the new towers added, and just wanted to see if that's due to timing.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [31]

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I think on that one particularly, Batya, I think it is just the timing of it. The new business, from a function of the builds down and the program as well is that you also have some contractual year-over-year going on. But the new business is stable. I mean, you saw even in our updated guidance, it still remains very, very strong. From an organic perspective, we do have a lower inflation in some of those markets. And so on a year-over-year basis, I want to say that's an 80 to 100 basis point impact to the overall organic growth just because the inflation is lower. But new business is very strong in those markets, and the build program is very strong. We do have slightly higher churn in Brazil as a function of some of the item churn kind of coming off from Nextel, but very solid and stable growth rates in the region.

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [32]

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And Batya, in Latin America, we do have a more aggressive build plan, and I think it's showing up in some of the tables at this point in the second quarter report. That's timing. So there is a ramp-up in actual build volume in Latin America this year for American Tower.

And then on the broadest level of your question, over a long period of time, we still think that international will grow a couple hundred basis points higher than the U.S. because of, again, earlier in the cycle, some CPI-based inflation, which has actually declined recently in some markets. When all of those things normalize over a long period of time, we still think there's outsized growth in the international markets that we've chosen to go into. But that's going to fluctuate, as Tom said earlier, year-to-year based on a number of factors, including the U.S. growth rate at the time that delta's going to be a little smaller.

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Operator [33]

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Our next question comes from Michael Rollins.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [34]

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Just had 2. First, you mentioned that in the U.S. activity, about 80% was amendments, 20% was co-lo. For the co-lo, is there a common narrative as to where they're going? Could be more rural coverage, identification in suburbias? Just kind of curious If there's a common narrative of where the site plays means you're going, and then what your view may be in the future of how the deployment strategies could evolve over the next few years, given some of the comments you made about 5G and your anticipations.

And then second, as you look at the return on capital in the international business, is that denominator on a -- adjusted for current currency rates? And do you also look at it as returns based on the initial dollars that were put in at those historical currency rates?

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [35]

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Mike, it's Jim. I'll talk to the U.S. piece, and turn it over to Tom for the ROIC calculations. The 80-20 amendment to co-location is normal course for us. There's really no unusual theme as to where the co-locations are happening. The breadth and the scope of our portfolio allows us to have pretty consistent co-location business, and it's along all those lines that you kind of touched on. There's suburban fill-in, whether that's just for cell-splitting capacity or adding maybe a higher spectrum band that then requires a tighter array in a suburban environment. There's also, as you said, the rural coverage piece that kind of continues to go on, whether it's the cap rate programs or others that are driving these brand-new greenfields out in places to reach more people. We have the Verizon towers that are still leasing up with co-locations from some of the other carriers as we go. So there's just a set of initiatives and sources of where the co-los come from. And in the 5G environment, that fill-in, because there will be higher band spectrum coming in, 2.5, as you've probably read and heard about, perhaps 3.5 outdoors as well as indoors, and you're also going to have C band spectrum in the plus or minus 4.0 gigahertz coming in. It'll be that higher frequency, shorter-transmission radii bands coming in over the next few years. They're going to require a denser network nationwide at some proportion. And so that's where you'll see the future of 5G co-locations. We'll be a big part of that.

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Thomas A. Bartlett, American Tower Corporation (REIT) - Executive VP & CFO [36]

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And Mike, on the ROIC, I mean, it comes right out of the current financials, so both the numerator and the denominator, but adjusted for FX current rates.

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Operator [37]

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There are no questions in the queue. Please continue.

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Igor Khislavsky, American Tower Corporation (REIT) - Senior Director of IR [38]

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Great. Thank you, everyone, for joining, and have a good day.

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James D. Taiclet, American Tower Corporation (REIT) - Chairman, President & CEO [39]

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Yes. Have a great rest of the summer, everybody. Bye now.

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Operator [40]

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Ladies and gentlemen, that does conclude your conference for today. We thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.