Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Hello, everybody. Good evening or late afternoon for Londoners. Still early afternoon here in New York. I'm Andrew Steinerman, the U.S. business services analyst here at JPMorgan. I've researched Iron Mountain and other business services stacks for decades here. Very happy to include Iron Mountain with the London All Stars Conference. They've surely participated in the past as well. With us today is the CFO Barry Hytinen. He's actually relatively new to Iron Mountain. He came to his role to Iron Mountain only in January of this year. Previously, he was CFO of HanesBrands and before that Tempur Sealy. The format of today is a fireside chat. I'm going to start with my questions. Surely, if you have questions towards the end, you're welcome to e-mail me, or I'll continue to interview Barry with the questions that have come up the most from investors. So with that, we're going to start.

So Barry, thank you for joining us. We appreciate it.

Thanks Andrew. Glad to be here.

My first question has to do with an intriguing comment you made on the last conference call, your team did. The view that post COVID, things will be pretty similar in terms of volumes for your core business, business records management. You envisioned about 0.5 point, 50 basis points of volume growth overall. That's a combination of flat to up in records and some additions from the consumer. What gives you the confidence to make a comment like that at this juncture? Do you have visibility? What led you to this statement? And what's your confidence level?

Sure, Andrew, and thanks again for inviting us to participate in the conference, and appreciate all the investor interest. It is a good question. While there are a number of unknowns about what demand will look like in an environment following something like COVID, I think there are quite a few things that we monitor. We're certainly monitoring our customer behavior very closely, and we rely heavily on both customer feedback as well as staying close to things like state and federal and industry-specific regulatory requirements around the world. Based on that, at this point, we haven't seen anything that would fundamentally change the broad behavior of our customers. So we expect volume to recover as economic activity recovers. You know because, as you know, you've covered the company for a long, long time. Economic activity is a good indicator of the general records management business. In addition, as we've talked about, we've seen an uptick in requests as to -- for us to provide new digital services to enable people to work remotely in this current environment. And we've been focused on providing services that facilitate our customers work from home. I think bottom line netted all out is, our view is largely unchanged from a standpoint of within our records management business in our developed markets. Our view is for that to be volume to be flat to probably slightly down our international markets and more growth oriented continue to grow. Obviously, as you point out, the consumer, while it's small in terms of our total business, is a very nice growth adder for us. And so we feel good about where we are positioned. As you know, in the second quarter, we saw -- while our services were down fairly considerably in April and May, they -- while they were still down in June, they took a nice noticeable improvement. And we think that that follows with the economic activity, and we expect that, that will over time show itself through. Thanks for the question there.

Got you. So just one more thing about -- thinking about digitization during the pandemic. Obviously, DocuSign has been a populous stock. And my question is, how much have you spoken to your customers about e-signature? For example, I opened up an account from my sign at JPMorgan, and we used a DocuSign e-signature to open that up. My question is around e-signature, which does seem like it's gotten more acceptance during the pandemic, does that, in any way, connect to physical records management, the types of things that would have went into storage?

Sure, Andrew. I mean I think it's a good question. It is a trend that we've seen, as you know, for some time in the industry, and we really haven't seen that specifically significantly changed the way our customers are using our record management business. Very frequently, things even that are e-signed, they would like to store. Now having said that, we continue to build out our digitization capabilities and offerings, as I mentioned in the prior question, because we do see customers looking for an opportunity to both, in some cases, digitize and store physically. So we're -- we want to be able to deliver whatever customer solutions they need.

Okay. That makes sense. And when thinking about digitalization, you can imagine that digitalization of unstructured documents. Do you feel like Iron Mountain is the right company to really just assess unstructured data as it gets digitized? Like, for example, do you have a staff of computer scientists and data scientists? Do you feel like -- and I know you've partnered with Google. But do you feel like Iron Mountain has the right DNA to go from kind of digitization, unstructured data to structured data?

So you won't be surprised since we talked before about this subject that we truly do feel like we've got the capability and the competency. Obviously, we've been partnering in some of these areas to augment our own solutions. But I think the team has done a phenomenal job in this area. As you mentioned, with respect to Google, we are a partner of the year. And we've seen a considerable amount of activity in terms of digitization and our global digital solutions. We have seen very nice growth in that area. And I think it's one that you will see us continue to build out. We're dedicating investment there as it relates to serving our customer needs. And I feel like in terms of being a trusted partner to our customers, they recognize that we're someone they can count on, both in the physical and the digital side.

Right. And is it as good of a business to Iron Mountain? So let me just give you a comparison. So if there comes a time when a company needs a box, a physical box and you're like, hey, we could deliver that on Friday, they like, no, no, we really need it today. And you image it and you send the image on demand. Is Iron Mountain doing as well in that, let's call it, transaction that you imaged it, maybe it's just one document in the box and sent it to them versus what would have been a normal delivery?

Sure. So Andrew, I think this really comes down to what does the customer want. Oftentimes, in the years before, a customer might have needed something specifically out of a box, but didn't necessarily know what it was. So now we can work with them to find the exact items that they're looking for, looking it through metadata and digitizing specific to their need. Of course, the economics depend on the order size. Large orders would be naturally greater in revenue and where -- and it really depends on what sorts of things they want us to digitize, but it's a business that we really like that we're going to be a bigger -- that's going to be a bigger part of our business. It's growing every year. And we frankly like the economics of it.

Right. And I know it's sort of odd to say who do you compete with because you have the box, right? Nobody else can really digitize that box. But who else do you envision is in that same business of digitalization, serving digital customers -- customers digitally with images?

Yes. So our goal is for all of our customers, and you know that we have that physical records for them. Our goal is to service the customers, however, they need from standpoint of digitization on our own business together with leveraging some partner solutions. So I'd rather not get into talking about who else is out there competitively. But for sure, there are some level of competitors that are doing it before it even comes over to us that would offer an offering at the client site. And then, of course, our competitors in the record side would, in some cases, have offerings. But generally speaking, our view on this is we're the trusted partner to literally hundreds of thousands of customers. And we've got the -- these assets that are incredibly important to them, they've entrusted to us, and we see it as -- we want to capture all of that share of wallet.

Right. And after you digitize something for a customer and you send it to them securely, I know that's another key point of how securely you could send it to them, do you keep that image? Or is that really not part of your archive?

So it depends. And so we can bill. We have an opportunity around which we can give it to them securely, as you point out. And there's offerings that can be made through the cloud in a very secure manner. It really depends on what the customer needs. And as I expect, customer preferences will continue to evolve. We're looking at a variety of different form and function in the area that you're describing. We -- typically, we would be digitizing files, not boxes, just in terms of the earlier point that you're asking about. So the digitization decisions are really made on a file basis. So yes.

Okay. Super. So why don't we switch over to a data center. Obviously, this has been a big point of success and market has done a tremendous job of putting Iron Mountain on the data center math. My first question is -- and I know it's a local business and you leverage a lot of relationships. When you are looking at contracts that you -- or RFPs you're up with it that you win and you lose, are there any specific data center competitors that you frequently come up against? And give us a sense of why you think sometimes you win and why sometimes you don't.

Yes. Thanks, Andrew. I think -- I appreciate the kind words. Frankly, I think our data center team is doing phenomenal job and continuing to build its pipeline. From standpoint of -- we already serve a handful of the top 10 global cloud providers out there with our Iron Mountain data center customers. And we're seeing really strong momentum in both the hyperscale segment and feel good about our pipeline, expanding with existing customers as well as winning new customers. You've seen some of our recent wins that we've announced on the most recent calls and even subsequent to that. In terms of -- it is a market that I think is fairly local is the way we think about it in terms of market by market. We've been very active here recently in Frankfurt, and we've had great success over the years in Phoenix and some of our other Northern Virginia. And in terms of what we see from one of the reasons we think it's such a -- it is synergistic to our records business is there's a good cross-sell opportunity within our customer base. As you know, we -- not only are we dealing with a lot of records management and data management, we're going in and rotating tapes and see the opportunity to when customers are looking for a data center off-prem. We've seen, I would say, from a standpoint of who we compete with, you know the industry very well. We're generally going to be competing with those folks that are naturally in the same geographies that we're in and that have a more balanced approach like we do to both the enterprise colo, retail as well as hyperscale. We think we're winning very, very significantly over the last couple of quarters. I think the second quarter megawatts that we signed up are a testament to that, both in terms of both hyperscale as well as nonhyperscale implementations. So we're -- we feel very, very good about where we're positioned. And -- but -- so that's some key thoughts.

Right. Barry, add to the tail of that question. When you don't win a data center, what do you think that happens, on a specific contract? Not say specific contract's name, but just give examples when Iron Mountain data set was going after something, and in your mind, what would be a reason why a competitor somehow was able to win?

Yes. So Andrew, oftentimes, on the data center side, it's about do you have the space available at the right -- at the exact right time. And so as you know, in some cases, they're looking for availability that as we continue to build out our land bank, it's about sequencing, so what's available. Of course, price always is a factor in any sort of competitive sale. So I mean I think it's -- market by market, it's going to depend on who's got availability, where the connectivity and really timing and price.

Right. Right. And do you feel like when Iron Mountain has the space available and has, let's just call it, general availability for a proposal that in the data center world that Iron Mountain is able to command any pricing power in data center versus peers? Like again, you said it's about availability. And if you have that right availability in the right market and the right connectivity, are you getting your price? Or is it still competitive?

Look, I mean, I would never say that business isn't competitive. It is naturally competitive. I think some markets are generally a little more competitive than others naturally, as you know. But that said, I would say, in terms of -- it is a -- it has been a unique situation in some of the recent deals that we won. Like take Frankfurt, I mean, we had 100% leased up with a single customer for a decade, Andrew. So I mean it's a very unique set of circumstances in a contract like that. And frankly, some of the larger implementations that we've recently had in wins like we leased up a lot to a customer in Singapore that we noted, I mean, these are -- they are unique sets of circumstances. I'd say on the more enterprise side and colo, it's -- it can be a little bit more of a competitive pricing item. But I wouldn't say that we have extracted specific pricing power, but we've been working with our clients because we don't -- we want to make sure that we're getting the right deal, especially on these longer-term deals for hyperscale players that might be of a multiyear implementation, it's a balance.

Right. I remember -- and this might be an old philosophy about the data center business that Iron Mountain data set doesn't want to be roll things to all people that -- particularly that you guys like regulated industries that really value security, physical security of the facilities which you're known for, obviously, in records management world. And at that time, at least, and this might be a couple of years ago, you thought that kind of distinction of focusing on these types of customers would give some, let's say, pricing advantage? Did you discover that, that was the case? Or was it the case? And is that still kind of a key focus for what type of customers we're looking for in data center?

So I think, Andrew, over the years, certainly, the customer base has broadened, right? So we have an enterprise customer base. Federal is a relatively small subset, particularly in Northern Virginia. We've brought on more hyperscale, and we've got a good pipeline continuing to build. And I would say that we feel very good about the returns we're continuing to see. You look at hyperscale opportunities in the industry and what we've seen market by market, it's kind of high single to 10% kind of unlevered cash-on-cash returns, and you get a blended with our balanced approach that are nice low double-digit kind of returns. We feel good about where we are, and I think it largely comes down to having -- the fact is we have good network connectivity in many markets, and that gives us opportunity to serve our customers well in the geographies that we serve them in.

Right. And have you been in the hyperscale business long enough to know that you're getting your target returns?

So I mean when you look at the level of the length of some of these contracts, Andrew, you have good line of sight in terms of what we're going to get paid. And from a standpoint of the cost to build-out, I think we've got enough experience at this stage to be able to have a very good sense of what the development of the data centers looks like. So I feel that is an area that we've done a fair amount of diligence on and feel very good about what the returns are looking like at this stage.

I think about cost of capital, cost of capital in the data center business. I would assume that some of the REITs that focus just on data centers might have a lower cost of capital. And again, Barry, you could correct me, but is cost of capital ever a challenge when competing for data center deals for Iron Mountain?

So I would say, Andrew, that you've got a few of the players in the market that have been using equity naturally, and that comes at a -- they can make their own determination for what their relative cost of equity is and in terms of where some of them are placing debt. But I would say this is one of the reasons why when we look at the opportunity, and we've talked about this publicly a couple of times to use alternative sources of financing, whether that be third-party capital, joint ventures and partnerships, which -- with some of the hyperscale opportunities that we have, that is a very attractive investment for those alternative sources of capital. And with that, together with the types of clients we're talking about, it creates an opportunity to bringing in some capital that maybe has a lower return expectation, together with potentially use leverage at very, very attractive interest rates. So I see this as -- while there are some headlines out there for other players that maybe are using equity and floating debt at relatively very low rates, I feel very good about our cost of capital and within the Iron Mountain data center, the opportunity to drive very effective returns regardless.

Okay. Talk about your leverage target. I believe, it's 4.5 to 5.5x. What time period do you think you could get to that leverage target?

Yes. So from a capital structure standpoint and our expectations around leverage, Andrew, you're right. Our target is 4.5 to 5.5x over time. Over the last couple of years, we've been a little on the outside of that, and that's thanks to some very good reasons, right? The company saw the opportunity to use leverage to enter data center in an even more comprehensive way more rapidly. I think that's shown to be a very good investment, frankly, and help us build our platform and get scale. With that, though, we have a strong commitment to return back into our leverage range. And with the benefit of Project Summit, which you know very well, will drive a tremendous amount and is driving a tremendous amount of EBITDA benefit together with coming out of the COVID period over time, I expect that with growth of EBITDA and a balanced approach as it relates to capital allocation, you will see us return into that leverage range over the next, let's call it, 2 to 3 years. None of us know exactly how long COVID is going to be in the marketplace. The way we're kind of thinking about it as a business is in a way we're asking the team to think about it is to say, okay, let's assume that it's still a big factor next year just as a planning posture and that it hopefully is in the rearview mirror by 2022. And if you play that out together with our Summit benefits and a balanced approach as it relates to capital allocation, I think you'll work your model right down into that leverage range at that point '22, '23 right in there.

Right. And you mean solidly into the range? You don't mean just 5.5. It's a range, right?

Yes. So I mean the range is deliberately a little bit wide to give us some flexibility as we're inside that range should we see other attractive opportunity, Andrew. But yes, I'm not suggesting that we're going to hang out at 5.5x.

Right. And that's what I was just going to jump on. When you say some other opportunities, we'll have some flexibility to get into the range and for leverage and think of other opportunities. What do you mean by that other opportunities? Are we talking about more data center M&A? Like what are we talking about when we think about what other opportunities of, let's call, the medium-size should we consider over the next 2 years?

Yes. And as -- I appreciate the question. As a general rule, I never like to comment too far out into the future because, frankly, I think our first job on this question is to get ourselves back into the range, and that's the commitment. And then as we work through that, we'll see where we see opportunities. But look, at this stage, sometimes people ask me, are you going to make another large acquisition in data center. I would say we've got a very nice platform at this stage on which to build. And we've -- as you know, we have over 200 megawatts that's still held for development. So we've got a considerable amount of opportunity just with our existing plans of investing, say, $250 million, $300 million a year into data center development to build out that land bank. And so we don't need a large acquisition to supplement that. We've got a very good platform at this stage. So I view the leverage range as being one that gives us flexibility. It allows us to have flexibility. So for example, even potentially in a future for share repurchase in terms of -- again, that will be a fact and circumstances-driven decision. But in terms of how we maximize return for shareholders could be a variety of different ways, Andrew.