Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Thank you. Good morning, everybody. This is Shlomo Rosenbaum. I'm the business services analyst at Stifel. I want to thank you all for joining Stifel CSI Conference. This is our -- I believe our third CSI Conference, but our first and hopefully last virtual conference. And I want to thank you all for joining over the webcast. I also want to thank Bill Meaney, the President and CEO of Iron Mountain, for joining us today and for making himself available to answer our questions, join the chat, talk to investors. What I'm going to do is I'm going to open it up for Bill, just to give us a quick overview of Iron Mountain, literally, 1 minute or 2. And then jump into some questions. I want to let the investors know that the -- you can submit questions via the webcast through the site, and I will present those questions to Bill Meaney. So if you submit them, they come up. I see them. I will read them, and we'll put them out there. So with that, I'm just going to open it up. Bill, if you don't mind just giving us the really quick lowdown on Iron Mountain.

Okay. Thanks, Shlomo. Okay. So again, for those of you new to the story, so we're approaching 70 years old. We're in the S&P 500 and the RMZ or the REIT Index. And we're in about 50 countries and have 225,000 customers around the world. The other thing I would say in terms of the customers, we have about 2% churn. So that means that our customers have been customers of ours for decades. So if you take a step back, how do we think about the assets that we have or the major assets we have as a company? I would say that we really have 3 major assets. One, first and foremost, is our people, what we call Mountaineers. And you'll even see that during the current -- the thing I always say is when there is a crisis or our customers are in crisis is you just see the resiliency of the folks. And I just want to say I couldn't be more proud of my colleagues at Iron Mountain in terms of the way that they've actually managed themselves and kept each other safe during it, whilst we've been impacted by the virus much lower levels than the 25,000 people spread around the globe that you would expect. The other asset that we have is really the traditional part of the business, which is the records management business. So we start the month of January with 97% of our storage revenue already in-house when we start the beginning of the year. So this is, on average, a box comes with us and stays with us for 15 years. And it's stayed -- and as I say that any year, we're topping that up by about 3%. So that's -- and it's a 75% gross margin business. So it's just what we call internally the financial beast. It's just drives so much profitability and cash that we both use to pay our dividend and invest in the growth of the business. So every morning, I like to say, I get up in the morning, there's just a pile of quarters next to my bed. And I didn't do anything for it except snore, right? So it's really a great business and a great annuity. The other part of it that comes with that is the customer relationship. So I talked about 225,000 customers and 2% churn. But even more specifically, we have relationships to go on for decades with 950 of the Fortune 1000. So 950 of the largest global companies are our customers, and we built that on a level of trust. So if you then take a step back and you say, you think about data center and we announced today that we sold 27 megawatts of pre-leased -- 27 megawatts total capacity of our Frankfurt data center on a 10-year lease is that -- with the renewable options. Is -- that's really where or how we play in the data center business is the relationships that we've been able to build in decades, especially around customers that are sensitive around high levels of security and safety, which is an area where we played in our traditional business and now more and more in the new data center business. Additionally, and we've seen that actually come into form in the current environment, is for our traditional business, we help them navigate in their hybrid digital/physical world. And we've developed an InSight platform with Google a few years ago where we were their artificial intelligence and machine learning partner of the year. And we've seen in the current environment is -- although we didn't foresee this, but it's really helped our customers working remotely. So we highlighted on our earnings call in Q1, for instance, a state that was dealing with a massive spike in unemployment claims, plus their inspectors or adjudicators were working remotely, both from the office and from each other. And we were able to go into their facilities, upload both digital and physical content onto our InSight platform and allow those folks to both scale for the influx of demand that they were seeing on sadly because of the unemployment associated with COVID and at the same time be able to quickly adjudicate and get people their checks, all because we've been able to build these interfaces that allow people to work in a hybrid physical/digital world and now more and more be -- also be able to work remotely. So we're, again, very proud of our team in terms of how they quickly adjusted to the crisis. So that's probably our biggest asset because it's not just the products and capabilities they have that they've been able to actually customize those or deliver them in a way that's even helped a number of our customers during COVID.

Okay. Great. And maybe you can just to seg from there, could you talk about how the COVID-19 pandemic is impacting the business? Just as a unit level, you can talk about the physical storage and then the data center business and what kind of the businesses that are around those.

Okay. So let me kind of start from the worst to the best, right? So in terms of our service business, which is 40% of our sales and 20% of our profit, that's where it's been the most heavily impacted. While 96% of our facilities around the world have stayed open, as you can imagine, both a combination of people not being in the office as well as lower economic activity means that there's less demand to either pick up or drop off boxes or to pick up paper for shredding. So if you look at that, then about 40 to 50 -- and we talked about this in our Q1 call. For instance, in the month of April, we saw a 40% to 50% decline in 75% of our service portfolio. And again, that represents about 20% of our profit. So it's a small part of our profit pool, but it's still impactful. And we've taken out about $350 million worth of cost, mainly through furloughs, as a way to try to curtail or to match as best we can. We can do 100% matching, but our cost with the lower activity levels. I mean we have seen some positive ones, like I just mentioned in terms of unemployment or digitizing and handling mailroom, so that people can continue to work remotely. But overall, we've seen -- because of the size of our normal records management business, we've seen an impact in that area. On the storage side, as I said at the beginning in my introductory remarks, 97% of our sales, our storage volume, is already in our facilities on January 1 for this year. So the thing that we've seen impacted is the slowdown in some of our new sales activity, but we were able to more than offset that. We're still getting some new sales. We're still getting some new volume coming into our facilities. And then we're more than be able to offset that in terms of pricing. So what does that mean is that whilst we do expect negative volume for the year in terms -- on an organic basis, we still expect storage revenue growth to be positive for the year on an organic basis because we can offset the volume headwinds more easily by the pricing. The other thing I also put in context is when I talk about volume is I'm just talking about the record side of the volume. Additionally, as we further offset any headwinds that we have on the records management side with other areas of service or other areas of storage. So for instance, again, in Q1, I think we highlighted that we had negative 600,000 cubic feet in terms of volume impact on our records management business on a total of 700 -- over 700 million cubic feet globally. But at the same time, that 600,000 negative was more than offset by 700,000 cubic feet of additional consumer storage that we took in during that period. And our consumer business, where we provide the back-end storage and logistics for MakeSpace, continues to do quite well during the pandemic. And then the last aspect, the part that we continue to see a lot of buoyancy, is in our data center business. So we guided the year that we would do 15 to 20 megawatts of new leasing activity in our data center business in 2020. In the first quarter, we had already signed a little over 6 megawatts. So on an annualized basis, we were already tracking ahead of our 15- to 20-megawatt guidance. And then this morning, we announced the 27 megawatts of pre-leasing activity or lease that we signed for our Frankfurt facility, which we started construction on the end of last year. So we'll update our guidance for data center for the year. But clearly, we're already well ahead of what we guided for the year, and we're only in June.

Great. Just to again stop just for a minute just on that announcement from Frankfurt. You guys had been talking for a while about looking for a build partner over there just for the capital. And then when we went into -- recently, I saw that the Frankfurt facility was -- the assumption was that you guys are going to pay for the build all on your own. Is that because you were -- you already saw that this large contract was coming and you figured it's better off looking for a partner after you've already got a contracted customer in there? Is that what happened?

You know me well, Shlomo. Yes. So it's exactly that. We -- you get -- we can make a much better deal for our Iron Mountain shareholders if we're bringing in a capital partner on a stabilized asset. And now obviously, it's a fully stabilized asset. So we wanted to make sure that we kept it moving forward. And our expectation is still that we're going to bring in a third-party provider, which allows us to recycle capital from a stabilized asset to put more of our money to work on development assets. And because we control -- we have the whole commercial engine is on a -- when we look through on the commercialization risk, it's obviously much -- it's much lower risk to us as an operator. So we like to put as much of our capital on developing sites rather than on stabilized sites. So that's -- our intention is still to recycle the capital, but obviously, now at a different rate.

Got it. Okay. Very good. And I just want to put some of the questions to that COVID-19-related debt. I've been getting recently -- just in terms of thinking about the business on a longer term. And like one of the questions that comes up again and again is that with this work at home environment, there's -- people are getting more accustomed to working at home, and I talk to the companies that I cover. And all of them are saying, yes, we are going to be more flexible in terms of having people work from home. Do you envision this becoming a kind of somewhat of a changing of the work environment that would impact the physical storage business that you've had for, like you said, like 70 years now? Will this change the incoming volumes because people will literally just not be in the office to the same way? Or how are you thinking about that?

Yes. So I don't think the -- so let me kind of answer it in a couple of different ways. So I do think, to your point, I think the office is going to become more and more about meeting rather than working, right? So -- and when we spoke to our customer advisory board, which is our largest global financial service customers, this was back in April, they were saying that they really tend to come back to the office. I personally think that mix will change a little bit because I think we've all been surprised about how much productivity we get from the tools that we're using now, and this really forced us to learn how to use them and use them effectively. But I do think there's some social aspects and certain things around meeting that's still going to be important. So that's kind of on that level. Now how is it going to affect our business? I think that the drag on our business over the next 2 years will be more about what I would call economic activity led and not about digital transformation or the fact that people may be working remotely or at home. So why do I say that? Is the investments that people have been asking us to help them with and others is -- on digital transformation is more of what I'd call putting a layer on top that facilitates remote working. So we've actually -- are pretty excited about some of the things that we put in place using InSight as the base layer or the backbone to allow people to work remotely, but we haven't seen an uptick in terms of trying to accelerate. I'm not saying they're decelerating, although there are some areas like law firms, which I would even say are decelerating some of the digital transformation because of budget concerns. But for the most part, they're not accelerating, what I would call, digital transformation that's removing large amounts of paper. So what it does mean though is that there are cases where we've won a couple of mailrooms recently because they're asking us to go in and actually manage more and more of the paper inside the operation, need to digitize that, bring it back to our facilities for storage or the unemployment example I gave. It was the same thing. In this particular case, these were documents that we wouldn't have probably even had for storage because these are kind of temporary paper records for applications, which they've asked us to digitize and store for a period of time. So there's some -- we do think we'll pick up some, what I would call, temporary records for physical storage that normally we wouldn't be asked to do because people are working remotely. And they need us to help manage some of that upfront information flow. But we don't -- we still think that if you think about a mortgage document, we don't -- today, very seldom do we store the originating sheet. But we -- you're still going to be -- we're still going to be storing the collateral for a very long time because the collateral still needs to be in physical form. So long way of answering your question is that I think that the remote working provides us a little bit more opportunity on the temporary side. I don't see it as also putting a tailwind behind us in terms of physical storage, but I don't see the breeze that's facing us increasing a lot either.

And then to say specifically because you work on the digital transformation and you're not seeing uptick in digital transformation projects despite what's going on, that's what you point to?

Yes. And the stuff that they're asking us to work on is much more, what I would call, putting a digital layer on their current process to help them work remotely.

Got it. Okay. And just to remind people on the webcast that you can submit questions through the webcast, and I'm happy to ask them, Bill. One other thing I want to ask is we're jumping through this is that, has there been any change in the document destruction or shredding business? I know that there's, obviously, the ability for you to get some of the bins and stuff like that has been more challenged because of -- there's 2 items, right? People not working in the office, there's not as much paper. And then number two, just the accessibility of the offices. But there's also been an aspect of paper prices that have really skyrocketed. And are you -- can you talk about how much of an offset that's been for your business in terms of the shredding side? And do you view this as kind of temporary for a few months? I mean, how long does that take to kind of normalize in the business?

Yes. So it's a really good question. So still, if you look at the puts and takes on the activities of the shred business, we picked up some health care folks during the crisis. But obviously, a lot of the people who are working in the office decreased. So we definitely -- when I talked about the 40% to 50% decline in our service activity for 75% of our service activity, that 75% includes shred. So we have seen similar kind of order of magnitude drop in activity, and that's the amount of paper that's coming in, right? The 45% -- 40% to 50% less activity is 40% to 50% lower tonnage in terms of paper for recycle. But to your point, we have seen a spike because a lot of our paper goes to recycling fine tissue, which is a nice way to say toilet paper. So I still don't fully understand the connection between COVID and toilet paper, but some -- I'm sure some will medically describe that to me at some point. But it's -- it has been -- we have seen an offset, as you say, in terms of the increase, both in April and in May, and you can see that in the RESI Index that -- in terms of what's happened on pricing. We expect that to start coming back. I personally use kind of the Costco test. You can get Charmin again in Costco. So I think that will start normalizing. So it has been impacted. I mean, it's still a very profitable business. But the pricing has improved versus what we started the year, but it's still a long ways off from where it was a year ago.

And is that a business that also, like over time, as people, like you said -- if the way that people work becomes more of the office as a meeting place as opposed to a workplace, does that -- what are the implications for the shred business on a longer-term basis?

No, it's a really good question. So we've had a number of our -- and I don't know what the puts and takes on this will be, Shlomo. But we've had a number of our customers that asked if we could figure out a residential shred program, because they do have a number of workers. Now as you know, a number of financial service folks are not allowed to print at home, but believe it or not, some are. And we've had a number of them approach us to see if there's a solution. I don't -- at this point, I don't see a way that that's going to be a one-for-one offset, right? And it's hard until we get more -- things stabilize a bit to see where that's all going to shake out. But the way I kind of look at shred is we spent a lot of time talking about because last year, it was a fairly big drag on -- I should say, it was a fairly big drag. It was a noticeable drag on EBITDA. But if you look at from a valuation of the business, I kind of -- I see that as a business that we just make sure we maintain our margins, our return on capital. And I kind of take what comes to us because there is a cyclicality, both in terms of what we get to the paper as well as activity in that level. So it still is something that drives a lot of profitability. But I think when you and others actually put a value on the business, it's not something -- even with the volatility we saw last year is not something that changes the valuation of the business. But it does add noise to the EBITDA line, which is kind of too bad because last year, I spent -- I remember I was in some investor conferences. I spent a lot of time talking about it because they noticed what happened to paper prices. And it obviously impacted -- it was kind of like the -- you're talking about $10 million, $15 million, maybe $20 million impact on EBITDA. And -- but then you kind of say at the end, well, does that change your valuation of our involvement? No, right? It doesn't really change the underlying value of the business, but the problem is it's a distraction in both directions.

Right. Just some of the more longer-term questions. You announced in the last call incremental $175 million in permanent cost savings related to the Project Summit efforts. And this is besides the temporary COVID-19 cost activities. It's a significant amount of cost. And can you talk about what you did structurally within the company that -- and what's happening in terms of your collapsing of internal infrastructure to kind of give those cost savings in terms of the contracting stuff that you're doing as well?

Yes. So a couple of things happened. One is that when we spun up Summit teams, we found much more opportunity than we originally expected, right, and also faster. And you can kind of see that we printed in our Q1 print, we delivered $25 million of Summit benefit already in Q1, which is, on an annualized basis, is $100 million plus what we get the rest of the year, which is already well ahead what we guided for the full year when we announced Summit at the beginning. In addition to that, in the cost of sales space, which for us is trucking and running our record centers, we were starting to find more and more opportunity there. So then we got into COVID. And for a long time, we've been questioning about the service levels in terms of offering people 24-hour retrieval of physical document, right, especially now we can give it back to them digitally. And the other thing is -- and my predecessor, Richard Reese, said this to me, when I came in. He said, it's much more about proof than use these days. And that was true before I came in and it's probably been true probably for 15 years. Now when we started -- the 24-hour SLA was super important when we started way back when decades ago, because it was the only way people could see a document, right? There wasn't -- they didn't have an electronic copy back in the office, and it was the easiest way for them to operate. Now that's changed a lot. Yet we had never -- like most companies, we're very good at adding features of products, but we're very poor at actually removing costs associated with products and features that are no longer relevant or less relevant. This was one of those cases and COVID gave us the courage, I would say, to address that. So then you take a step back and you say, well, we are already starting to get more on cost of sales, but now we're going to relax the SLA. So we're going to say that we're only going to serve a customer once a week, but it's even more impactful than that because the way our engineers describe it is the pizza slice model. And what they mean by that is they're going to a neighborhood or an area in a city once a week and all the customers that are in that catchment area. So you're really able to -- it's like pulling on a ball of string, you're really able to unravel a lot of complexity and costs associated with that. So that's really was the game danger. We were getting more, especially as we started taking on best practices in going across all 50 countries. So our engineers were already finding more opportunity in cost of sales than we originally thought on Summit. But then when we relaxed that constraint, it made a big difference. So what's the reaction? So we've already implemented this in the United States, Canada, Ireland, the United Kingdom, Australia and New Zealand, and we've had very little pushback on it and actually a high level of understanding. And I think it's helped because we've actually created a bigger moat around Iron Mountain's business by launching even a better, more secure, more flexible image on-demand service using, again, InSight as a foundation or backbone of that service. And then at the same time people understand -- they understand that kind of service model. And that -- and they're very, very comfortable with that. Now people usually ask, well, are you going to have to give up price? We don't expect to. We haven't had any pushback on price at this point. It doesn't mean that when we get to renewals, which typically a 3, 5 or 10 years for these large customers, that procurement is going to try to remind us of the productivity that we gained from this. But we feel pretty comfortable that just like we always do that we can manage through that.

Great. That's a good description. One thing I want to just hit on, which is kind of the investors often are struggling with this is just what is your confidence in Iron Mountain's ability to continue paying, which is a very healthy dividend? But at the same time, there's capital needs within the data center business. There's certain leverage levels that you want to bring down. How are you going to be able to do all this together, keeping the dividend, invest in the data center business, reduce leverage? What's your confidence in the company being able to do all of those simultaneously? And just can you walk through why?

Yes. So look, so I'm extremely confident that we will do this. I was hoping to do it probably a year sooner than we're going to. So as Barry said on the call on Q1, our target now has been 2 to 3 years to get down to our target range, both on AFFO payout ratio as well as leverage ratio. And the delay is really the COVID impact. So the fuel for us, it always gave us the confidence. And now we actually even have more that we've upscaled Summit -- was the Summit was the accelerator. It was $200 million. Now it's $375 million. In addition to that is that we are clear is that -- well, as we allocated more capital to data center this year on the back of the pre-leasing activity we saw in Frankfurt is we still see that we're putting about $250 million to $300 million in today than a year, absent bringing in third-party capital. So we feel very comfortable that that's a reasonable rate. If you put that all into our financial model, as I say, you'll see in 2 to 3 years, we'll get to what we think is the sweet spot of payout as a percentage of AFFO, which, by the way, is around -- you're approaching the minimum level we have to distribute as a REIT. And then that gets your leverage down into the -- kind of in that 4.5 to 5.5 or is kind of towards the low 5 range when you put that all together. And in the meantime, yes, we're going to be constrained, you could say, by putting $250 million to $300 million in data center a year, but that's still like 30 to 40 megawatts each year that we can add to our data center portfolio. So if you put that in the context of the 350 -- if you look at all the land that we have to see that are the under development or held for development, that allows us to go from the 120 megawatts that we had at the end of '19 to 350 megawatts. So it still says in 5 to 7 years, we will have built out -- assuming, we continue to deliver the kind of results we have commercially with our own capital, gliding into those kinds of leverage and AFFO payout ratio, a 350-megawatt portfolio of data center. And we may do -- we may very well do a bit better than that, depending on our access to third-party capital.

Okay. So that sounds like that's a pretty high confidence level on your side just from what you see internally in the runway in front of you.

Yes. Look, the reason why I'm super confident is Summit is primarily a cost-driven program, right? And if you look at the track record of Iron Mountain, and just as a manager myself, I'm always very comfortable. You can appreciate, I have a lot of visibility on cost. So if you're sitting there saying, if you just do the math that I gave you, and you're taking out $375 million over the next couple of years through Summit, I feel really good.

Okay. Great. And then when you look at -- I'm just going to -- kind of slipping another data center one. It's just -- is there -- what capabilities do you have in the data center business? Is there any cost advantages that you can bring to the table? There are pure-play competitors that are out there. You got into this business. You were kind of, I would call, dabbling in it for a while before you got into it more seriously. Is there something that you guys have that's a little bit more magic than someone else does? Is there something in the relationships or anything that you can point to, which is -- can tell investors that you have the ability to really succeed over here because of XYZ?

No. It's a really good question, and it kind of goes to your dabbling comment. I won't tell the Board you accused me of dabbling. But part of the dabbling was that we wanted to make sure that it made sense for an investor to be exposed to the data center business through Iron Mountain rather than a pure-play data center. And the thing that we wanted to check is that we -- as I said, one of the big assets we have is 950 of the Fortune 1000 have been customers for us for decades. And we just wanted to make sure that, that together with some of our expertise around safety and security was a game changer. And what we found, we slowly tested the water with a couple underground, one above ground facilities is we started finding that our down selecting win rates were higher than what our local market share in a specific market should have delivered. We weren't getting better pricing, but we were getting better fill rates for a similar asset in a similar market. And when we started unpacking that, we saw that, first of all, there were a few things that led to that. And probably in this order. One is we had better intelligence because we do over 30,000 data center visits just in North America alone every month, which gave our folks intel on when people were kind of thinking about using third-party data center for some of their IT loads. And usually one of the trigger events for that is when they start moving more and more of their load into a public cloud, whether it's a SaaS provider like a Salesforce or if it's a data storage provider like an AWS, Google or Microsoft. So when we start seeing that load, all of a sudden, a lot of the customers start thinking about how much do they want to be running inside their own walls. So we use that as a way to actually start the conversation early. The second thing what we found was especially customers that are highly sensitive around security, they were highly attracted to the Iron Mountain brand and our approach to things. And that's people like banking, financial services -- or I should say banking and financial services, health care and government. And you can kind of see that in some of the customers that we can talk about publicly, the Boeing Company, Goldman Sachs, Crédit Suisse, you can see -- and then we previously had the -- we still do, but for a long time, we've had the Social Security Administration, you can see that the Iron Mountain brand resonated. When we spoke to them why, it's -- when they came to our facilities, the level of security, the way that we scrutinize visitors, the way that we ran from a safety standpoint. So our Chief Risk Officer is a retired Marine Corps General. The Head of Investigations is a retired Secret Service Agent who was in charge of cybersecurity for the President and Vice President. So we have certain expertise that for those people, it's really important. And then the last thing is, is that because we've been working for a long time in 50 countries trying to offset our carbon footprint, we actually have a pretty -- robust is probably -- I would say, we all need to do better around CSG, but we have a pretty active CSG program. And one part of that is offsetting carbon. Data centers actually emit more carbon than global aviation, even pre-COVID. And for our customers, it's really important if we can help them do that. So our Head of Environmental Affairs has been able -- and we were the leader and initiator of, what they call, the Green Power Pass, is we're able to actually pass green credit and renewable credits across to our customers. And Iron Mountain is the only data center company in the world that more than 100% of the power that we consume in data centers is offset by renewable power that we buy on very long contract. So we're able to pass those credit to people who are operating in our data centers so that they also get the benefit of the fact that we're a green power supplier of data center capacity.

Great. Thank you very much, Bill. I really appreciate your spending time with us today. Really hoping that next year, when we do this again, we're going to be able to see you in person and have you out there in -- at the live CSI Conference next year in Boston. Thank you so much.

Okay. Thanks, Shlomo. Have a good afternoon. Okay. Bye, everyone.

Bye.