Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Good morning, everybody. I want to welcome you to the first day of Stifel's Cross sector Insight conference. My name is Shlomo Rosenbaum. I'm the business services analyst here at Stifel. And I thank you very much for your participation. I want to welcome the Iron Mountain team this morning coming to present or actually participate in the fireside chat. It's not really going to be a regular presentation. So we have Bill Meaney, the CEO; Barry Hytinen, CFO; and Greer from Investor Relations as well. And I want to welcome you all for -- and thank you for making the time this morning. For the investors watching, I just want to say we're I have a list of questions that I'm going to touch on, but I want to encourage participation from the investors. And you can go ahead and type in any questions you might have, and they will come to me, and I will read the questions and pose them to Bill and Barry. And kind of get that out there for you to get your question addressed.

So thank you very much, and if you don't mind, Bill, again, thank you very much, Bill and Barry, for joining, and I thought I would just kind of lead off the Iron Mountain fireside chat over here. It seems like I covered iron Mountain for a long time. It's been interesting to watch the journey. And what's interesting to me at this particular juncture is that I'm starting to see some improving items in areas that I had not seen them for years in the past. And I thought maybe we could talk a little bit about that. Like if you look in some of the physical storage trends, which -- I'm going to start off with physical storage, and then we'll move out to some of the other things as well. But the records in information management where we had seen declines beforehand. It really was a very modest decline in 1Q '21. And the adjacent businesses in consumer and other had really strong volume growth, and I thought maybe you guys can talk about what's driving these items? And how sustainable are they in the factors that are there behind them?

Okay. Well, thanks, Shlomo, and thanks for having us. I always enjoy these although I enjoyed a little bit more, we're on the stage together. So hopefully, next year, that will work out.

Yes. Next year, in Boston, right near where you guys are located, how is that?

Okay. That sounds like a plan. So anyway, so coming to your point in terms about the physical storage volume. It is, as you say, many different pieces. So first of all, if you think about the core or the traditional part of the physical storage business of being the paper records is that -- whilst there's headwinds on that is that every single one of our customers continues to send us new records to store every year. Albeit at slower rates. And the other thing that's interesting, the stability of that business is still the average length of a record in one of our facilities has been rock steady at 15 years, both pre-pandemic for decades of both now post -- through and post pandemic. So the -- when they send us something, how long they retain it has been absolutely steady. So the only reason why there's really headwinds in that business is what we call kind of the second derivative effect. In other words, is that, yes, they're sending us new records in every year. Yes, they're keeping those records for 15 years. But the rate of growth of incoming records has gone down in a number of -- especially some of the larger verticals. So they're still sending us new records, but not at the same growth rate. So the result of that is, is that you have an increase in the average age of the profile, which means that you have more going out than you do coming in until those things stabilize. And the others want to kind of go through the math of it gives you some sense on, well, it appears to have headwinds and it does. It's actually a very gradual impact when you look at the net volume because there are still people sending -- virtually every vertical is still sending us new records. If you then combine that with some of the new physical -- areas of storage, like you mentioned, consumer other logistics support and storage and art storage, is then you come to a situation where we said for the year is that we'll be flat to slightly up in terms of overall physical volume for the company. And then if you then add our normal price increase in this case, even inflation is our friend because that's a 75% gross margin business. So anything we push on price actually has a natural margin expansion component to it. But if you think about the 3 points of price that we on average debt receive, as you look at the Q1, is that we grew organic storage rental revenue growth just shy of 2%. I think it was 1.7%.

And when you think about the adjacent businesses in consumer and other that were particularly strong, can you talk about some of the trends that are like behind them and how sustainable you think those trends are because they were really nice in the last quarter.

Yes. So I think on consumer, look, for sure, some of the things, we still all the trends we see in those areas, as I say, when we look at total physical storage volume, we expect it to be in terms of volume flat to slightly up organically. And then obviously, you had price on top of that. If we look at the particular pieces, consumer, I think that we will pass some pretty good comps, I think, in Q2 and Q3 because we did see an uptick in volume during that period as people were vacating their city residencies or apartments moving temporarily to the outskirts. So we don't expect that, and we don't -- we haven't guided that in terms of our thinking in terms of total volume this year. We could get surprised but we don't think -- we do think that there was a COVID component around the consumer piece and that was specific to 2020. That being said, though, we do see continued growth in the valet storage area. So counteracting that great comp that we're going to be compared to against last year is the fundamental adoption of what I'd call valet or white glove consumer storage, if we see that trend continuing to build and to grow. I mean you can see some of our competitors have actually raised money at record levels based on the disruptive component of a valet storage offering as it stands against a self-storage. So I think 2021, there will be some interesting comps because of people vacating city sectors that are very fast-rate for all the consumer storage franchises, quite frankly. But especially valet because that's where valet is strongest in these kind of dense, urban areas. But I think if you look at the overall trend in valet consumer storage and how its taken share from what I would call, the only valet consumer storage option before, which was a self-storage unit is we continue -- it's not going to replace self-storage, just to be clear, but we do think that there was a lack of full product offerings in the consumer storage space that valet is coming into its own with.

Great. And is there any change -- as we're coming out of the pandemic, is there any change in the trends in the business from what you had beforehand. In other words, people -- the biggest fear people had initially was, all this work from home and everything is going to. Accelerate the secular headwinds on the paper side. It doesn't look like it from -- at least from the numbers that I could tell, but I thought if you could just comment, did anything change secularly either speeding up or slowing down from your vantage point?

Yes. No. I think, first of all, I would say, exactly to your point at the beginning, is we just haven't seen. I think a lot of people were saying going into COVID, digital transformation. I is going to accelerate. It's going to create more headwinds on the paper storage side of the business. And as you pointed out, just hasn't happened. On the flip side, what's been interesting is, if you think about one of the things that's driving the revenue growth of the company right now is the expanded product portfolio that we have. So I think we said on the Q4 call, we pointed out that 5 years ago, the products that Iron Mountain had in its quiver were focused at about $10 billion total addressable market, right? And the R&D that we've been doing purposely and steadily over the last 5 or 6 years has increased the total addressable market for the products in our portfolio from that $10 billion to over $80 billion. And that $80 billion is growing kind of low teens, right? So this is a -- both a much larger market, but a growing market. Part of that when you saw that in our Q1 numbers, is we've seen an acceleration coming out of COVID on products that are actually helping drive those areas of digital transformation where our customers are focused on. And where they're focused on not surprisingly, is partly products and services, especially around digital products and services that allow people to work remotely from the office. And in the future, we think that's going to be a hybrid model. In other words, all our customers that virtually every customer we speak to, none of them are going to come back to the office 5 days a week. They're saying somewhere between two, 3 or 4 days a week, but there's clearly going to be a situation where they want their workforce to be productive in working both at-home and in the office. And some of the products that we've developed to do that, whether it's a more aggressive and better product around digital on demand or scan on demand as well as our content services platform that we've stood up with the help of Google that allows people to actually access and collaborate on their documents or their information, remote from the office and remote from their team members, right? So those types of products are really driving growth. So if you look at, for instance, Q1 is our digital portfolio of products grew 10% year-on-year. And if you think about it, Q1 in 2021, it's still a COVID quarter. Whereas Q1 in 2020 was pretty much a no-COVID quarter. So even with that drag of still being in a COVID environment, we're seeing those services actually taking off. The one thing I would say also is interesting is we -- as you know, we stood up a global strategic account sales force, I guess, about 18 months ago. And these are people who come from Accenture, they come from SAP, HP, IBM, et cetera. And one of the things is, whilst they're actually talking to people about their digital transformation journey. Many times, they uncover more box or more paper documents because part of that transformation is clean sweep, smart sort. These are products that we developed that help people to actually shrink their real estate footprint even further and documents that they still need to keep and they want them in paper or they need them to be maintained in paper, but we're actually able to get more of that out. So oddly enough, sometimes going in and having a digital conversation leads to more physical services as well.

Interesting. I want to bring one from the investor audience. The question is, you noted volumes are slowing in the core record storage. You did a really great job continuing to grow on the pricing side. What gives you the confidence this can continue? And are we seeing any indication of smaller competitors competing more on price to get volumes?

That's a really good question. I'm going to turn that over to Barry just because Barry, pricing is one of the things that, as you can imagine, our CFO watches like a hawk. And I should say that, I think, hope -- on a personal basis, I'm not wishing for inflation, but from a business standpoint, a little bit inflation gives us even more room. But Barry?

So it's a very good question. Thanks for that, and thanks for inviting us to participate. No private pricing, our revenue management program is something the company has been very focused on for several years, as you know, you've covered us for a really long time. And we continue to see very good trajectory there. Our strategy is to price at something at parity to or maybe even a little bit underneath logistics or other couriers that would be a reasonable comparison for some of our customer base as it relates to other services that they procure. And we've seen no substantial change either during COVID or before as it relates to that program. In fact, as we've said this year, we're highly confident in our ability to generate the revenue growth that we talked about on the storage side because we have all the pricing actions that we embedded in the guidance already done as of the end of the first quarter. And the -- when we look at the relative value we're providing the customer together with the installed base and the dynamics of, frankly, a lot of our global customers, in particular, are looking for a supplier that can do the service wherever they operate around the world. And we have that capability, as you know, for them, that it's -- we see the opportunity for revenue management to be a very consistent contribution to the company going forward. And while we're obviously still aggregating new volume from our clients, we think that adjusting price annually is a very appropriate thing to do. And to Bill's point, in light of the leverage in the model, it gives us a nice opportunity to drive profitability. So we haven't seen anything in the numbers or in the way customers are reacting to suggest otherwise. And I generally look at leaders as leading. And so that gives an umbrella for others to take some level of pricing, especially in this inflationary environment, probably a lot of smaller players aren't as well-positioned from a scale advantage as we are.

What about the investors question about any -- are any of the competitors, obviously, these would be more regional competitors because on a global basis, this doesn't apply. But any of the regional players trying to compete more on price in order to get volumes?

I don't think that we've seen any substantial change in the way competitors are playing. Obviously, from time to time, you'll see point player compete in various ways. They may have some incremental capacity that they need to fill because of other lost volume, whether it be a competitive loss or otherwise, I don't speak to why they make various decisions. But I wouldn't say that the operating environment that we see ourselves in as meaningfully changed.

And the other thing I would just underline is something Barry mentioned, is the smaller plays, if anything, we see that they tend to follow us pretty quickly because their economics are -- they just don't have the scale to absorb, for instance, the fuel increases that we're seeing right now. So they're -- and these are highly profitable businesses even at a smaller scale, but they're definitely feeling the headwinds of inflation. So yes, so we haven't seen that.

Okay. Great. And maybe turning a little bit to the services business. I think the comment was that debt business turned positive in March year-over-year. And I was just wondering if you could talk a little bit about the components of that, which areas are doing better versus the other ones? I would assume that the kind of the rotation kind of the box and paper retrievals are still probably below last year levels, but the other areas like hybrid, image and demand, the secure it asset disposal, those other ones are probably doing better. But correct me if I'm wrong, maybe you can delve into that a little bit.

So I think the -- and I think we talked about this a little bit on the -- you have a good memory on the last quarter earnings. But -- so first of all, we were down about 7% in terms of the traditional side of the service revenue aspects of the business in Q1, right, which is still a COVID quarter. And as you know, that was down over 20 percentage points, right, even 40% at the very beginning of COVID. So that was -- which you would expect. People are not in the office, so they're not asking for a lot of retrievals, right? So even when we were receiving boxes, they weren't asking for a lot of things back. So we are still -- parts of Europe or -- I just got back from Europe at the end of last week. Parts of Europe are still in lockdown, believe it or not there, is starting to change. Obviously, India is still heavily locked down. So a number of -- in the 56 countries that we operate around the world, a number of them are still experiencing various stages of lockdown. So the 7% drag is not something that you would have been surprised. So then you say, okay, how do we turn positive in March. So first of all, I mean, as you've been watching the story for a long time is we would normally expect a kind of a low single digit, 1% or 2% decline in services anyway just because the business is becoming more about proof rather than use. So what we see is that people have been opting for image on demand or that they're saying, okay, we're storing stuff that is for proof, but we retain a digital copy. So that's a trend that we've seen for years. And so to sit there and say, we never go into a year expecting that, what I would call, service revenue that is associated with retrievals of the paper document business to be a growth business. So the growth that we saw in March, at the end of Q1 is exactly what you're saying is that we're still seeing effects of COVID. So it's more than just the normal substitution effect on the service revenue in the traditional side. So we're still seeing a little bit of that, but that's being more than offset on things like site. So in Q1, we saw a 33% increase in ciTad year-over-year. We saw over a 10% increase in digital services. So as those new service areas, exactly to your point, that are offsetting, what I would say, the noraml substitution effect in our traditional service of the business as well as continued lag due to office shutdowns associated with COVID.

Shlomo, I'd just add and connecting to one of your earlier questions about return to office and the need for services is if you look back to the second quarter of last year, we mentioned that our activity levels were down 45 ish percent, that sort of quarter. And to Bill's point, that came back was less down, but still down a lot in the third quarter and down less still in the fourth quarter and recovering further in the first quarter. And I would say when you look at the activity levels that we've seen, that's obviously come back much faster than return to office, right? We have a lot of clients that are just now even starting to talk about getting back into office, which I think sort of bolsters the point that our customers in those early days were just scrambling to figure out how to work from home, but eventually and quite quickly, really they needed our services and they found ways to use it, even when they were outside of office and I think that sort of speaks to some of the durability and stability of our business model and the fact that customers really rely on us.

Yes, okay. Very fair. The company is obviously investing significantly in the data center business. And data center is probably the most exciting part of the company, at least when I look at it. But its still -- in terms of the numbers is not that big, 7% to 8% when you talk about between revenue and EBITDA. And I was wondering, in order -- when you guys jumped into this, let's say, 3.5 years ago or so, you made several -- a number of large acquisitions and really kind of jumped in. And what are your thoughts on doing something like that again? And just kind of jumping back in saying, "Hey, we -- maybe there's other assets that are for sale, and we can really bulk up on this a lot more. What are the limiting factors? Is it somewhat an issue in terms of like the stock price, the stock price has really started to move so there's less -- I guess, there's less of a difference between what you'd be buying in the Iron Mountain stock price. But maybe you could talk about that a little bit in terms of -- does it make sense to continue on the self-funded strategy? Or are there opportunities for you to go ahead a year and change ago, when I talked to you about it, I rephrased it as kind of rip off the band-aid, just go in and try and really go into data center in a much heavier way.

Yes. No. Well, it's a great question. Look, the way that we kind of think of it from a capital allocation standpoint on anything, as we say, what's the return, right? And so if you think about we did -- so 3 months ago, 4 months ago, we'd be sitting here and saying, we have 350 megawatts of capacity held for development, right, with about 130 operating and leased up. And we made an investment mainly around our campus in Northern Virginia that we'll be able to expand that both in terms of power access as well as real estate. And we've taken that up now to 445 megawatts. So that was -- that's to me, high returns, right, because this is going to -- this is effectively green incremental green field kind of returns and we love those kind of returns, right. And so we're thinking a 130 leased up, we can develop 445 megawats. Already today, its delivering about 1.5% of consolidated EBITDA growth, in terms of -- even before you add Summit on top of it, we're growing EBITDA organically between 4% and 5%. And so it's already providing 1.5% of that as you go along the way. Then of course, you had Summit on top of that. You as some of the new growth initiatives in terms of revenue. I think in terms of the way we think about it -- and I would say that we have a pretty interesting international portfolio. We're by far the most international of the data center players. And you'll see that we'll do -- we'll continue to do acquisitions where it makes sense, where we think that -- where the market access is compelling. So the Webworks acquisition in India, we're super excited about. So we bought in a large minority stake for $50 million with a commitment to put in another $100 million of expansion CapEx. And when we do the $100 million is we'll go from a large minority stake to owning somewhere around 70% of that vehicle in one of the most compelling and fastest-growing data center markets in the world. We think those things make really accretive sense. But for us just to buy a large data center player that also has a campus in Northern Virginia, also has a campus in Northern New Jersey, also has a campus in Frankfurt, also has a campus in Amsterdam. We don't think that really buys us a lot. So we'd rather invest in kind of these brownfield webwork type things or like what we did with Evoswitch a few years ago that gave us really strong access with one of the most highly connected data centers in the Amsterdam market. Those are the acquisitions to us to make sense that we can grow. The additional thing in terms of -- it's early days, but we're having a number of conversations with customers. I should say, it's a couple of customers on a number of different locations about Edge deployment. And the Edge deployment goes beyond the 445 megawatts that we have held for development. This is looking at industrial sites that we have in Latin America, in Western Europe. And in some cases, in Asia and the Middle East, where they're saying, we were looking for 500 -- to 500 kilowatts to 5 megawatts and they're looking at some of our industrial locations that could get repurposed because of access to power and fiber and locations. So we think that's a much more interesting, higher return place to grow and just being big for the sake of being big. Is we just don't see the returns in that.

Got it. Makes sense. So if I look at it and say 2 to 3 years from now, should I look at it and expect that the data center business for that amount, what is it going to look like? Is it going to be similar to what it is today, just more of the capacity is going to be built out. Should I think about you expanding to other global locations, like how do you envision it? We come here and we're at CSI 2024, what are you going to be telling you then?

Okay. So my expectation is we'll -- if you think -- I think it's the growth projectile profile on 2 different levels, right? So from your modeling standpoint, and our buy-side kind of expectation, sell-side buy side expectation is you should continue to think of that 15% growth, which is gaining some share because the data center market, as you know, has 2 different components. It has kind of the co-location component or large enterprises outsourcing to private cloud, which is somewhere between 9% and 12% growth a year. And then you have the hyperscalers that outsource about half of their growth to third parties like ourselves, and they're growing at 40% a year. So -- and half of that is outsourced. So we continue to expect that we're going to grow in the mid-teens and the success we did better last year. We're off to a really good start this year. We guided 25 to 30 megawatts. This year, we signed up 9 megawatts in the first quarter. 6 megawatts of that were to a hyperscale major SaaS provider. So we can continue to see that growth. In addition to that, and so -- and we'll add to the 445 megawatts of development capacity as we build out our platform in India and other parts of Europe, et cetera. In addition to that, which is the part where obviously, we're not going to guide to today, but if you say, what's my vision or expectation of what we're going to be talking about 4 years from now or 3 years from now, is I do think some of these conversations we're having on Edge will be on top will be added to that and super interesting, right? We're working on some things that, quite frankly, I think we'll end up being nearly proprietary to Iron Mountain in terms of the way we deploy hardware in terms of the way we have kind of a packaged data center that can be quickly and efficiently deployed to some of these applications. In existing facilities. And I think that allows us to build a different level of connectivity as people are trying to support Internet of Things, whether it's mobile driving or indeed, to support the increased data loads that 5G is going to facilitate, right? So we think that, that's the vision. That's my expectation based on the conversations we're having now, but obviously, I'm not guiding to that today. But I think that's super interesting because if you take a step back, we have 80 million -- actually 90 million square feet of industrial real estate. On top of what we're holding for development in data center that is either real estate that we own or we control on very long leases, and I'm not saying all of that 90 million square feet of industrial real estate around the world is appropriate for Edge, but a sizable portion of it is. And so I think that, that could be really a game changer in a real unique opportunity for Iron Mountain, given our global presence in real estate footprint.

Great. I think we only got about 2 minutes left. I want to make sure poll, again, just in case any of the investors want to ask anything. Just pause for one moment in case there's anything else that comes in, and then I'm going to -- got another question or two to try and squeeze in before the end. It doesn't look like there's anything else. So just maybe you could talk just a little bit more about the efforts to recycle capital in support of some of the data center business. I believe that the intellectual property management business, I think that sale closed either today or yesterday, I couldn't tell me based on the timing of when that came out. I mean are there a decent amount of assets within Iron Mountain where Iron Mountain has the ability to really not take a lot out of your EBITDA, but actually get a big slug of cash that you can reinvest into the data center business? And are there other opportunities like this?

Barry?

Sure. Shlomo, you're right, that deal did just close yesterday. And that was -- for those that don't follow real closely, that was our software escrow business, which was it's a good business. From a secular standpoint in terms of where that business growth profile of that market, we like the idea of monetizing that today and then being able to reinvest those proceeds in higher growth elements, some of which you've just spoken to Bill about. I would say that our primary view on capital recycling is off the industrial asset base. We own a large amount of industrial assets. We've watched cap rates, as we talked about before on some of our recent calls, they have become more and more interesting to us. And it's important to note that we -- when we do those industrial asset recycling, we're doing sale leasebacks on very favorable terms. I look at the market, our team has done a phenomenal job in the real estate group, finding opportunities for us to recycle warehouses, which we've been entering to those leases that are in very favorable terms, essentially if our lease terms with very long renewal periods and options that are on our side with low escalators, where essentially we can monetize the value really nice cap rates, take that and put that into other growth engines like our data center. So we've kind of guided, and we've been running a little over $100 million. This year, we said $125 million of capital recycling from industrial assets. We did a larger transaction late last year. I've mentioned before that facts and circumstances driven, we would consider doing even more. But to be clear, that's to fund our development pipeline. So as we are building out that, for example, that capacity that Bill spoke about, you'll probably see us be opportunistic in the market where we see the timing to do so to fund that growth.

Thanks for the question, and thanks for having us.

Great. Yes, thank you very much for coming up at the end. I really appreciate you both taking the time to be here. It's always a pleasure to talk to you. And hopefully, next year, we're going to be doing this in-person, and I look forward to greeting you in person at that time. Thank you, everyone, for joining.

Okay. Thanks, Shlomo.

Thank you, Shlomo.