Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Good afternoon. I'm Sheila McGrath from Evercore, and I will be moderating the fireside chat today, and I'm pleased to be here with Iron Mountain's CEO, Bill Meaney, and CFO, Barry Hytinen. I would like to start by asking Bill to give us a current high-level overview of Iron Mountain and its primary businesses. I will have other questions, and we may have some time at the end for audience questions, which can be submitted. And with that, I'll turn it over to you, Bill. Thank you.

Okay. Thanks, Sheila, and hello, everyone. So just taking an overall view for some of you that may be less familiar with the company, so Iron Mountain is a little over 70 years old. It has -- it's in the S&P 500 in the RMZ indices, and we're in 50 countries with over 225,000 customers globally. If you look at the assets or the core strength of the company, it really fits into 2 buckets. One is that we have a part of the traditional business which is relatively mature. That's a 75% gross margin business and that's a storage business that is an annuity. So by the time we finish this discussion today, somewhere between 5,000 and 7,000 boxes will come into our facilities around the globe, and they'll stay there on average for 15 years, getting $0.25 per month. So -- and I say that's a 75% gross margin business. And it's an annuity that, on average, lasts for 15 years for each item stored. And even today, during the COVID crisis, 97% of our annual storage revenue is already sitting in our facilities. So on a given year, there's about 3% of storage revenue that we develop or we -- that we deliver in a year. The rest is something that is an annuity that's been there for months or even years. So that's the, what I would call, the financial beast of the business. And because it's relatively mature and such a high gross margin, it also spins off cash that allows us to invest in other areas. The other big part of the asset which comes with that traditional side of the business is our customer base. I mentioned 225,000 customers across 50 countries. But even going down deeper on that is that we serve 950 of the Fortune 1000. And we've been serving them for on average -- well for decades. We have less than 2% churn on that customer base, which the reciprocal is 50 years. So most of our customer relationships have been deep and very long. And as I said prior to that, customer base is 95% of the 1,000 largest, most complicated customers globally. So going back to the importance of the traditional business when we start thinking about new areas and faster-growing areas like data center is that at one level, the traditional part of the business is the financial beast that gives us the cash at which we can harvest and invest in the faster-growing data center business. And the other part is that list of customers when we're looking at co-location or [ retail customers ] give us a great cross-selling opportunity. And what we have found over the years is that, on average, about 40% of our leads for enterprise data center customers going into co-location or retail-type data center space come from our traditional sales force. So that's one area that we're investing is on the data center. The other side is new services in which we can help our customers live more in a hybrid physical/digital world. So no matter what customer we're serving, all of them have to live in this hybrid world. They have some things that are physical, some things that are digital, some things that they want to turn into digital. And at the end of the day, they're trying to create more value out of the documents that you have. So a few years ago, we actually invested with Google to develop a program, which we call InSight. And this sits on top of what is today a $200 million a year digitization business where we digitize hard copy or originally paper documents and turn that into a digital copy. But in addition to that, now with the InSight platform, we can help customers drive more value. One area that we've, quite frankly, didn't foresee with the InSight platform, we've been -- one part of the InSight platform is allowing our customers to use deep analytics to make better and faster lending decisions, for instance. But the thing that we didn't fully appreciate, one of the benefits that our customers are finding in the current environment is the InSight platform being cloud-based, highly secured also allows people to work remotely and collaboratively on the document. So for instance, in our quarter 1 call, we talked about a piece of work that we're doing for a state in the United States on helping them manage through their unemployment claims. In this particular case, they adjudicate it so their unemployment claims have to work remotely. The claims are still coming in mainly physically, in some cases electronically. And they needed a way that they could get those claims to their adjudicators who were working from home and allow them to collaborate, and actually get multiple approvals in some cases, so that those checks could be issued so that people's unemployment benefits could flow. So the great thing about this is we were able to use the InSight platform to do that to allow people to work in a remote fashion and actually allow them to react to or be able to manage the rapid spike in incoming demand in that area. So those are just some of the areas that we're looking at. If we look at in terms of the data center business itself more broadly in terms of how that investment is going, I mentioned the cross-selling aspect. But if you look at it today, we have about 120 megawatts of critical IT load, but our campuses that we already have built or have held for development allow us to expand that to 350 megawatts. And on average, we guide the market that we'll lease about 15 to 20 megawatts per year. As we sit here at the end of Q1, we had leased about a little over 6 megawatts in Q1, puts us well on track for that 15 to 20 megawatts a year. And that business, given its rapid growth, is already contributing a lot to the EBITDA growth of the company. And so what I mean by that is while it's only about 6% of our sales as a corporation, it's delivering almost 1/3 of our growth in EBITDA. So on an average year, like in 2019, we would grow EBITDA organically at about 4%. And already, about a little over 1.2% of that growth on a consolidated basis was coming from the data center as we actually continue to ramp and grow that business. So if I kind of take, again, a step back and we look at the business, it's a business that even in the current COVID environment is that we have virtually 97% of our storage business, which is 80% of our profits, is already in our warehouses and continuing to deliver cash to the business. Some of our service activities have been impacted, whilst at the same time, we're finding that some of our -- the application or development of technology that we've been working on over the past few years has an application in the current environment that's really helping our customers navigate the storm and support their people working remotely, all at the same time while our data center continues to achieve at or, as I say in Q1, slightly above our expectations in terms of continued growth. So as we sit here today that whilst I'd rather not have COVID happen to us, is that the company has the financial strength and is able to continue to invest and grow our data center as we sit here today.

Thanks, Bill. Another important thing about Iron Mountain is Project Summit, which you announced late in 2019. I was wondering if you could describe what the project is, how it's recently expanded and its updated status?

Okay. Well thanks, Sheila. So about 1.5 years ago, we started thinking about how -- a couple of things, how we could simplify the business and how we could free up more capital so that we could accelerate our investment in the fast-growing data center space. So when we took a step back, at that point 2 years ago, one of our largest business units, obviously, our traditional records management business, was a single business line split over to the business units. We had someone who ran Western Europe and North America. Another person ran the rest of the world. We realized that actually by simplifying the business and consolidating that into a single business unit to a single business line, we could actually reduce a lot of complexity and a lot of internal negotiation inside of Iron Mountain and really change the cost structure of the business and accelerate our speed of delivery to our customers. So when we first developed those plans and took -- and launched that program, which was in the third and fourth quarter of last year, is that we expected to deliver about $200 million worth of savings due to Project Summit and that we would -- it would take us a couple of years to actually do that. As we got into Project Summit and started seeing the -- both the impact, but also the opportunity that COVID-19 gave us in certain areas, we were able to upsize that, which we announced in Q1, to take it from a $200 million worth of cost savings up to $375 million worth of cost savings, again, in about a 2-year time frame. And part of that was, as I say, the opportunity of -- that COVID-19 gave us in certain -- to restructure some certain cost areas, which, quite frankly, we weren't sure that we actually had the latitude to attack. But the other part was the Summit teams had been spun up for a number of months at that point, and we had gotten to get better insight in terms of what was possible in some of the cost restructuring. So if you sit here even in the first quarter is we had already delivered in the order of about $25 million worth of cost savings in quarter for the first quarter of 2020, which says by the end of this year, we will have had $100 million of benefit from the Summit program. And by the end of 2021, we will have delivered virtually the whole Summit [ One ] project of $200 million. So the incremental $175 million is mainly coming from what we call cost of sales or the way we operate our warehouses and our logistics network, which was part of our insight through when we got into COVID-19 as we realized that we could change our service delivery model to our customers by going from a 24-hour service delivery to a once-a-week service delivery and then using technology to give them 24 hours if and when they need it. And being able to do that for most of our largest customers in the major geographies around the world is we're able to radically change the way our logistics network moves or works. So if we take one step back, this is not only important because it's a major cost restructuring program, let's say, delivering $375 million over the next 2, 2.5 years. But the other part is, if you come back to our financial model, the financial model we've always stated is to get into kind of the mid-60s to low 70s of dividend as a payout ratio of AFFO and get our leverage down somewhere between 4.5 and 5.5, say 5 at the midpoint. If you think about the ability, even with COVID-19 ramping out there, the fact that this program now is worth about 6 years of organic EBITDA growth, and we're going to deliver that over the next 2 and a bit years, is that allows us to accelerate our glide path to get to our sweet spot of our financial model, given our current dividend payout. So we feel that beyond the -- just the pure cost saving and the magnitude of this, beyond the simplification of our business so that it allows us to react quicker to our customers, it also allows us to get to the sweet spot of our financial model, which we think is important for the long-term growth of the business, especially as we build out data center.

That's helpful. One thing that investors often ask about is the volumes in the records information management business. How should investors think about how Iron Mountain is positioning for the changing landscape of paper and digital? If you could just dig in a little more on detail so investors understand that, that would be great.

Okay. Well I think one thing -- and we talked a little bit on this on our Q4 call if people are interested in more detail. But I think the first thing to step back is that it is fair to say in our developed markets, which is kind of mainly North America and a bit in Western Europe, is that we have effectively negative headwinds in terms of our volume growth. We deliver organically positive storage revenue growth in those markets, the delta being the price increases that we push through every year. So it's a marginal negative decline in terms of volume, more than made up in terms of pricing. The rest of the world, it's still positive, kind of mid-single-digit positive volume growth that we're getting out of those markets due to their faster GDP growth and also earlier in the adoption of outsourcing for records management. If we look at the -- where the headwinds are coming is the main thing that's driving those headwinds are what we call a second derivative effect. And that what I mean by that is it's not that a customer stopped sending us new boxes, it's they're sending us new boxes at a slower rate. So recall in my introductory remarks that I said, on average, a box stays in one of our facilities for 15 years. That has been rocksteady. It hasn't changed, hasn't changed in the last 2 years, hasn't changed in the last 15 years. Very, very steady. The thing that changes is the average age of inventory. So if people start sending us boxes in at a slower rate, then the average age of their inventory ticks up. So you get a higher proportion that's hitting that 15-year cutoff date than that's coming in. And when you're going through that transition, you have more outflow than you do inflow. So the odd thing about the way this works is one of our faster-growing verticals is one that we see the negative trend in. One of our slowest-growing verticals, like legal for instance, is one where we see a net positive inflow of boxes. And that's because it's already gone through and stabilized at a lower incoming growth rate and has for years. And so that those 2 outgoing and incoming have come into balance. So again, whilst it's annoying that we see, let's say on average, a minus 7 million cubic feet roughly last year in North America going out on a 500,000 -- 500 million cubic foot business, so it's a relatively small percentage, the thing that's driving it is not that people are stopping sending us in boxes, it's coming in at a slower rate. And as I said, we can actually offset that with price increase. If you look specifically at Q1, we had roughly minus 600,000 cubic feet negative volume growth, positive revenue storage growth because pricing, again, more than made up for that and in -- on a global basis. But countering that, we had 700,000 cubic feet of new storage growth coming in from consumer, which again more than offset the amount that we had going out. So you can see from a financial model, it actually doesn't impact the way we think about financially being able to invest in the future or pay our dividends or pay down debt. And it's a -- and it's more to do with change in rates than anything else. If you look in the current COVID environment, we have -- we thought that we would be negative volume growth for the first 2 quarters this year as we were lapping some customer acquisitions, and then be positive for the rest of the year. Now with the COVID impact, we do sadly see the lower economic activity is a drop-off in boxes coming in during this period, but that's driven by lower GDP growth and not a change in digital transformation. In fact, the -- when people are asking us to use digital technology right now, it's much more to facilitate remote working than anything else because they're not at the office to actually receive a document. And we haven't seen an uptick. And in some cases, we've seen a reduction in investment on some digital transformation projects as people are kind of trying to redeploy their capital given the recessionary nature of the environment that we're operating in.

Okay. And then, Bill, I was hoping we can touch a little bit more on data center strategy and where that fits into the business going forward. I think one interesting aspect is how you've been able to differentiate your data center initiative with the Green Power Pass and your ESG efforts. So if you could touch on data centers, how big of a piece of the business, and also the advantages of your ESG and data centers.

Thanks. It's a great point. So if I look at data centers, so at one point, as I said again, it's roughly 6% of the sales and about 8% of the profit or EBITDA of the company. But already, because of the margin that, that comes in at and the growth that we're getting, it's on a consolidated basis delivering about 1.2%, 1.3% of organic EBITDA growth versus the 4% of organic EBITDA growth that we delivered, say, in 2019. So it's already -- it has a major impact in terms of the growth profile of the company whilst it's a relatively small portion of the total. I think if you look at the part that we're super excited, we've always been excited about the cross-selling of our customers. As I said, 40% of our leads come from our traditional sales force. And that's kind of important for a couple of reasons. One is they see a lot of the early intelligence when people are starting to think about moving load into a third-party data center environment. So -- And there are many cases, we get like an early indication before they go out to actually tender or for request for information on people who could provide that. So that helps. The second thing, to your point, is that we actually have the ability and we were effectively the catalyst there. There are other people now that have joined the group on the Green Power Pass, which allows us to actually pass on our green power to our end customer. And when I say green power is more than 100% of our data center capacity worldwide is powered by wind. In other words, we actually buy more than what we use in our data centers globally. We buy forward on long-term wind contracts across the globe. So we're more than able to offset that. And as I say, with customers, we can pass that through. So some of the customers we can mention that have taken advantage of that, for instance, are the Boeing Company, Crédit Suisse, Goldman Sachs, just to mention 3. And that's been a major impact for them in terms of meeting their own ESG goals. The other part I would say is because of the nature of our brand and security and sensitivity around chain of custody and the way we operate our facilities from a safety standpoint as well is we do punch about our weight on, what I would say, highly regulated or tightly scrutinized industry verticals like financial services, health care and government. So those are probably 3 areas we just naturally punch our weight. That, combined with the fact that we have a lot of intelligence around people before they move it, they are getting ready to move load out of their own data center because of our heavy penetration with 95% of the Fortune 1000. And then the last aspect, as you point out, is the Green Power Pass has been a major differentiator. And we are the one that has the most green power as a percentage of their data center capacity in the world.

Okay. And Barry, I was wondering if you could discuss the capital allocation priorities for Iron Mountain and how those may have shifted at all from COVID, and if you could include your thoughts on dividend and leverage. I know that Iron Mountain's yielding over 9%, which is attractive for an S&P 500 company. So touch on that, that would be helpful.

Okay. Thank you, Sheila. Thanks for hosting us today. I appreciate the question. From a long-term perspective, our priorities are to have a sustainable dividend. So over the next few years, I think you should read that as being sustainable and flat in this environment. From a long-term standpoint, we have a target leverage ratio range of being between the levels of 4.5 to 5.5x. And we've indicated that we'd like to be in that 4.5 to 5x level over the next few years as we work through COVID, but we've got a focus on delevering that will be significantly assisted by things like Project Summit, as Bill mentioned. And just to note, we're off to a very good start here in 2020 with Summit, $25 million of benefit in the first quarter alone and significantly ramp the expectations and see -- have a good visibility as it relates to Project Summit benefits. And then we'll certainly continue to reinvest in the business through growth capital whether it be in data center as well as some of our other businesses. And Bill has just spoken about data centers, so I won't belabor it. And then our expectation would be, over time, to be investing in accretive M&A. And of course you know, Sheila, as we talked about before, we have a focus on continuing to recycle capital as we see cap rates in industrial assets continue to be good. And in fact, our pipeline for recycling industrial assets has actually increased during this recent time. Now you also mentioned how COVID in the current situation and backdrop affects our view as it relates to capital allocation. I think like a lot of companies, our focus this year is on ensuring that we've got a strong business and -- we have a durable business model. So we've been focused on ensuring that we have capital preservation. Obviously, we maintain the dividend. We're managing our leverage ratio to ensure we have plenty of headroom from our most restrictive debt covenants. And we feel very good about where we are there. We've deferred some discretionary CapEx, and we just deferred some M&A, but we've also increased our investment behind data center. As Bill was mentioning, that's a view from a standpoint of we know that business is performing really well. We've got very good visibility, and our pipeline continues to build on the pre-leasing side, for example, our Frankfurt assets. So we've invested behind that. And we'll continue to maintain our capital recycling program, as I mentioned, even in this environment, we've seen a lot of activity there. So we feel very good about where we are at this stage, Sheila, navigating a difficult time for everyone. And we think the long term looks quite good.

Bill, I was wondering -- you touched on first quarter's conference call discussing service delivery model changes. I thought that was an interesting way to implement big savings for Iron Mountain. Just wondering how customers are reacting so far and how that rollout is going.

Yes. No, thanks, Sheila. So the rollout is going quite well. We went to full implementation in the key markets. So that's the U.S., Canada, Ireland, the United Kingdom, Australia and New Zealand, early May. And we've had very little pushback from customers. The ones that are excluded from that, just to be clear, are government and health care because we have a number of health care customers where we actually have 2-hour SLAs because we're actually delivering medical records for them. So obviously, that stays. But the cost savings were based on excluding those groups. And people, a, understand it; b, a lot of people -- we -- at the same time, we offered them to get it back digitally within 24 hours. So with our Image on Demand services, they're growing actually very nicely as a result of that. And by loading it up on the InSight platform, as I was saying earlier, so that we can give them a secure cloud-based platform where we can allow them to access that from anywhere in the world that they are working and allows them to collaborate on a document simultaneously with a colleague if that's necessary, so we're actually giving them more features, if you will, by offering [ that as ] a service. And then if they really do need it back physically, they can get it back, as I say, in 5 business days. Or if they need it sooner, we can use a third-party carrier. It's been extremely positive. And you can imagine, again, reducing complexity of our business because when we say it's like once every business week for delivery is even then we're focusing customers in a certain geographical space or even city block, so that what we're doing is concentrating our service around customers so that we can maximize the utilization in our truck and actually reduce the green footprint as well. You have less emissions as a result of that route density. So it's going extremely well. Very few customers have pushed back. The reaction of all our major customers was they absolutely understood that. They like the optionality of being able to provide them digitally. And we haven't had any pricing discussions that at least that have come to my level at this stage as a result of that. That doesn't mean that when it comes to contract renewal, people -- procurement officers have a long memory. And they usually like to point out the things that -- productivity gains that you've had since the last time they did a contract. But we feel really good about the features that we've added, that we can maintain both the change in service levels as well as the pricing associated with it.

Great. And when you announced Project Summit, one of the things that you highlighted was retargeting the sales force, maybe having some senior client representatives that would be selling more of Iron Mountain services, including data center and the adjacent businesses. Just wondering how hiring on those salespeople is going and how that -- implementing that cross-selling endeavor is going.

Thank you. So I think, first of all on the hiring side, it's gone extremely well, actually better than I thought. In other words, our -- I think people, when we're hiring people, is they probably appreciate even more than sometimes we do internally about our customer list. When they start interview and they see that we have a -- not just do we serve 950 of the Fortune 1000, we've been serving them decades and have a relationship at many different levels within that company built on trust is I think that actually got people quite excited. So we've hired people who are ex-Accenture, ex-SAP, ex-IBM, really the types of people that you would want that are either at -- from large system integrators or sold large systems into these types of companies. Because when you think about strategic accounts, we're focusing our strategic account executives on the customers. Not necessarily always the largest customers, but the customers that are prone to be in need and would be receptive to some of the solutions that we have that are truly integrated solutions, that move the needle to change the way we can add value for them. So on the hiring side, extremely happy with the talent that we've been able to attract. And we also had some internal talent that also moved across into that group, who quite frankly, it frees up. We have one sales rep, and she made the comment to Greg McIntosh, who is our Chief Commercial Officer, that the thing she's so excited now, she has time to really strategize and do even more for the -- for her customer. So it's been -- it's really successful. In terms of getting wins on the board, this may be more that I didn't set Greg's targets high enough, is he's tracking significantly higher than when he told me he was going to do this year, even with COVID and having to sell remotely. So I wish I could say that's because we're doing extremely -- we are doing really well but it was probably me giving him too soft a target. So I'll make sure he sees this transcript, so he gets prepared for next year's budget discussion.

I'll e-mail him and tell him right now.

Well, thank you, Bill and Barry and Iron Mountain team. I think that investors should go to your Investor Relations website. It's a lot more detail there, it's a lot to cover in 30 minutes. So I thank you very much.

No, thank you, Sheila. And thank you, everyone. Stay well.