Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us at REITweek virtually at -- my name is Eric Luebchow, Senior Analyst at Wells Fargo covering Iron Mountain, and I'm very pleased today to be joined by Iron Mountain's CEO, Bill Meaney; and CFO, Barry Hytinen. So gentlemen, thank you for joining us today.

Thanks for having us.

So Bill, I thought maybe we could start off with you. Maybe you could provide us with a brief overview of Iron Mountain here and how you're tracking against those objectives year-to-date.

Okay. Well, thanks, Eric. So maybe kind of just start a little bit in the backdrop in terms of where our real assets are as a company. And then how we're utilizing those and how we're tracking against that plan. So if you think about -- for those of you who are less familiar with the company, is we have 3 core assets. One of them wouldn't surprise you. I think most people will say is our people. But internally, we call our people Mountaineers, and I'll come to that in a minute, which I think reinforces the performance that we had during a pretty choppy COVID experience for the world. The second is that we have client relationships with 950 of the Fortune 1000, which go back decades. And that -- the trust of that relationship and the depth of that over those decades are a real asset for the company, especially when we're looking at some of our new product areas. And the third is a mature business where those relationships were originally founded is our records management business that, whilst it's mature and overall, from a revenue growth is -- I think we had organic revenue growth of about 1.7% in the last quarter from that. And that's driven mostly by price. I mean volume is flat to slightly down on that business. Is that's a 75% gross margin business, so it's really a financial beast. So one of the unique things in kind of REIT land is we actually have a mature business that gushes tons of cash that allows us to fund a lot of the growth in the new areas of the business without tapping the equity markets for that growth, right, and pay our big dividend. So it's a useful construct. And by the way, it's the thing that's given us this decades of reliability and connectivity with 950 of the Fortune 1000. So let me, first, talk a little bit about the people because we always talk about that, but -- most companies. But the one thing it really does show, if you think about at one point, at the beginning of COVID, the service side of our business was down 40% as people were trying to figure out what -- how they were going to operate, not working in the office. And yet, our Mountaineers, 25,000 people in 56 countries around the world, because we are considered an essential service, had to continue to go and call on our customers, including some real hot zones that are hospitals that were dealing with record crisis in terms of the front line of COVID. And I couldn't be more proud of those folks. And as I said to the Board at one point, one of the key traits of mountaineers -- I used to climb mountains when I was younger and less responsible, is resiliency, right? There's more reasons not to put another foot in front of you and go back than there is to continue to climb forward. And I have to say I'm super proud of our folks. And that resiliency led to what, quite frankly, is resilient financial results. I mean we had record revenue in Q1 this past year in spite of the fact that Q1 is still a COVID area. A number of the countries that we operate, India, parts of Western Europe, were still in a big -- were in a large part in lockdown in the first quarter of 2021. So our folks were able to, through that resiliency, to continue to move forward. So that's really a check in terms of being able to continue to do great things as we go into the rest of the year. I think the other aspect about it is -- I talked about the importance of these relationships and people, is that during that whole period, we kept recruiting people from Accenture, SAP, HP, IBM. Why are those people coming to Iron Mountain? It's because they understand the power of those relationships that we have with 950 of the Fortune 1000. And they also understand, over the last 5 years, the amount of R&D we've been doing in terms of building new products and solutions for those customers on a broader set of information needs beyond just the document business. So what I mean by that is that 5 years ago, the total addressable market for Iron Mountain's products and services was $10 billion, and it was basically just a little -- very low growth. If you go fast forward to today, the investments that we've made in products and service that include data center, consumer, art, content services platform, secure IT asset disposal, amongst others, is now $80 billion. So the addressable market for our products and services are now 8x bigger than it was 5 years ago. So the likes of those folks that I just mentioned that have also joined the ranks of Mountaineers in the last 1.5 years is because they understand the value of those relationships. So while some of the products 5 years ago were mature, the relationships with those 950 of the Fortune 1000 weren't mature. And during the course of COVID is a lot of the digital transformation tools that we had developed over the last 4 or 5 years have come really to the forefront, allowing people to work in a secure way and collaborate, both from the office and remote from the office, for instance. We -- in Q2 and Q3, we set up 12 Digital Mailrooms around the world. And normally, people wouldn't think of Iron Mountain as being in the Digital Mailroom business. So how are we tracking now on our growth trajectory towards that $80 billion TAM versus the $10 billion 5 years ago? First, in Q1, I think people started to see -- that growth was really starting to come through, is that digital services year-over-year, COVID quarter 2021 versus a non-COVID quarter in 2020 was up over 10%. Secure IT asset disposal, up over 30%, Q1 of 2020 versus Q1 of 2021, albeit up the small base, but actually, the growth was very much there. And in spite of the fact that the service headwinds for the traditional part of the business were still being impacted because of lockdowns and people working remote from the office. So it's really starting to track that this is a business that doesn't just drive profit growth through margin expansion, and Project Summit's a super important part of that. But we're actually driving growth and profits through growth in revenues by expanding our franchise with our customers beyond the mature products that the company was built on. So I think it's early days, but we're really excited about the journey that we're on. We guided to higher revenue growth than this company has ever guided to in terms of organic revenue growth this year. And we actually upped that guidance a little bit in Q1, and we're tracking well. The only other thing I would add to that is, of course, ESG is a big component of this. I think people know that we entered the data center business about 5 years ago, but we also entered it in a different way. Not only do we cross-sell those relationships from the 950 of Fortune 1000, 40% of our leads for data center come from that traditional sales force, but we also do it in a green way. We're the only data center company in the world that -- we're on 3 continents, is that we have 100% green power covering the data center assets. And data center, even our pre-COVID statistic, emit more carbon into the atmosphere than global aviation. So it is a really important thing to do it in the right way, not just to manage the growth. And then, of course, on the S in ESG, we all have more work to do. But fundamental to that growth that I mentioned and being able to create products and services that go from $10 billion TAM to $80 billion, has been embracing a diverse, equitable and inclusive workforce. I mean the only way that you actually create new opportunities with that type of customer base is bring people in who have different perspectives and different ways of thinking about it and -- which means they had a different commute to work. So we still have a lot more work to do on the S component of ESG but we're -- we see it as part and parcel of our -- the creativity around bringing solutions to our customer base.

That's a great overview. Maybe I could switch specifically to your record management storage business, still the largest part of Iron Mountain today. It's been remarkably resilient throughout the pandemic. But perhaps you could talk about any change you're seeing as economies are starting to reopen on either incoming boxes or destructions as business activity is starting to pick up. And then perhaps any regional differences you could talk about between the different geographies, including the U.S., Western Europe and some of the emerging markets you serve.

Yes. It's a good question. Let me deal with the last part of your question about different geographies, et cetera. So I just came back, I was in Europe last week. Week before that, I was in the Middle East and Dubai, and I'm in Brazil next week. And you do see various -- you don't see various differences in the fundamentals in terms of how people think about records management, hard copy versus digital transformation. There, I see a very consistent theme. I mean you could argue -- when I was in Dubai a couple of weeks ago, I actually think they're probably even more -- putting more behind digital transformation, which you would expect in that region. I mean they have less embedded infrastructure. But I think generally, you see kind of the same trends around the globe. What you do see variations is the level of lockdown, right? France was still a little bit more locked down last week. And for those who watch the French Open, you could see that. 9 o'clock curfew comes in, and it's crickets in the stadium when the players are playing, right? So you do see more -- and that translates into the office environment as well. In Switzerland, a little bit less; Germany, a little bit more; in Brazil, obviously, next week, I'm expecting to find still quite a bit of people working remotely and not into the office. So what I see in terms of geographical change is not so much the underlying fundamental changes in terms of the business, but more in terms of stages of reopening. In terms of the stages, as you pointed out, I think a lot of people were saying, well, we're going to see bigger digital transformation. And that's going to be an acceleration of less physical storage. And you look at our Q1 results, that just didn't happen, right? And the reason for that is that, first of all, every single one of our customers continues to send us new boxes in every year. The thing that's been driving the slightly -- the flat to slightly negative volume growth, which we more than make up from a pricing standpoint to drive positive revenue growth, is that it's really what we call the second derivative action. And we haven't seen an increase in that second derivative action. What I mean by that is some of our fastest-growing verticals might have been sending us 10% new boxes every year, and they're now down to 6. And what that affects is it doesn't affect the fact that we're still getting new boxes in. But it says the average age of the profile of the box that we're holding is going up. So you get a disproportionate amount that are hitting the end of their life, which has been rock steady at 15 years is when boxes on average get destroyed in our inventory. And that hasn't moved in the last decades, right? So it's just been very steady. And until that actually gets into sync, then you're always going to have a disproportionate that's aging out and getting destroyed. So our slowest growing vertical, for instance, is legal, and it's actually net positive volume growth. Because it's been stable at a low growth rate for a very long period of time. So we haven't seen any change in that trend. What we have seen though is an appetite for new services. So instead of having the box brought back to them physically, is they're interested in Image on Demand. And that allows them to actually ingest that information or see that document anywhere. And people are much more interested in how Iron Mountain can facilitate their work-from-anywhere-type model. And we think that's going to -- and so that's been a big part of that digital growth that I said in Q1, the 10% uptick in terms of year-on-year digital products, and we see that accelerating. As we said, we expect digital services to grow about $50 million in revenue this year. Because we see that accelerating, where people are really looking for a content services platform that allows people to actually see and work from anywhere and collaborate from anywhere. And we do that with a secure, cloud-based-type platform. And we think even going forward is -- most of our customers are telling us that they're going to work in a hybrid model, sometimes at home, sometimes in the office. So that's where we really see the change in the business, not a big fundamental change in what people are storing, not a big fundamental change in the rates coming in. We do see some drags on some of the services that are purely tied to when people are in the office just because of lockdowns, continued lockdowns. But overall, the trends are moving in the right direction.

Great. That's a good transition into your services business, which obviously, as you mentioned, was heavily impacted by COVID, particularly last year. It has seen a nice recovery since the trough in Q2 last year. So you mentioned that March was the first month where you've seen year-over-year growth since the pandemic started. Maybe you could update us on how you see the trajectory of services activity through this year and into next?

Barry?

Yes. Eric, thanks. It's a good question. And just for a little bit of context. As Bill was mentioning, last year in the second quarter, we saw activity levels down 45% kind of across the board, even 50% decline in some of our areas. Now that resulted in, over the next couple of quarters, a significant improvement, still down a lot, but less bad. And we saw that continue to be a recovery with a notable step-up in terms of performance in the first quarter of this year. You'll recall, our total services revenue were down 4.8% in the first quarter, which was a real marked improvement from the levels that we're even seeing in the back half of last year. And we did disaggregate that a little bit. The -- our traditional services offerings were down kind of high single digit, 7-ish percent, and then that was offset some by the strong performance we've seen from some of the items that Bill mentioned a couple of moments ago, like our IT asset disposal and our digital solutions. We expect both of those will continue to comp very well through the year. And we expect our traditional services -- and we embedded this in the guidance, Eric, it was just a very gradual recovery across the year. I would say, without going into a lot of detail intra-quarter, that was our expectation for the quarter. And it's kind of continuing to play out largely in line with our expectations. As Bill mentioned, there is some natural geographic differences with the relative amount of lockdown. But the thing I'll point out, across the last year, I think what you've seen is our performance on the services side has recovered much faster than return to office. If you think about where we were in the second quarter of last year to where the team delivered in the first quarter, that is a marked improvement and much faster than any of our clients coming back to office. So I view that as another testament to the fact that our clients really got organized around how they were going to make use of our services because they need the services, whether they're in office or whether they're remote. So we feel good about the rate of recovery we're seeing, and the year is playing out largely as we expected.

Great to hear. So I wanted to turn to the data center segment, one that I'm personally very interested in it as well. So your business performed at a very high level. You had a record year last year. We saw a ton of hyperscale absorption, particularly in 2020. So maybe you can talk about what demand looks like in terms of both hyperscale and then your core enterprise customers. And if you're seeing any improvement in activity levels as a result of the economic reopenings from COVID that could potentially accelerate your colo business on the enterprise side.

So no, it's a good question, Eric. So thanks for that. So I think, as you said, last year, we really hit it out of the park. And that -- partly helped by the 27 megawatts from a single customer, which is a hyperscaler in Frankfurt. It's a good problem to have. Now we need to find more capacity in Frankfurt. Because you can imagine, when we made the decision to build that data center in Frankfurt, we have built a pipeline that was mainly colo, right, aimed at that 27 megawatts. And then one customer felt -- so now we have -- it's a high-quality problem so we're not complaining about it. And if you look at this year, we guided 25 to 30 megawatts. Because obviously, you don't expect that you're always going to sign up 27 megawatts in a single go in terms of guidance this year, which is still kind of mid-teens organic growth rate in terms of new leasing activity. And we start off the first quarter with 9 megawatts. And of that 9 megawatts, as we said on the call, 6 were SaaS, major SaaS, global SaaS player or what we would consider a hyperscale deployment. And so that's kind of the 40-60 split. We basically see the kind of the sweet spot between colo and hyperscale somewhere between 40-60 and 60-40. It's just kind of -- and it's going to move a little bit because, obviously, the hyperscale deployments are fairly lumpy. So we actually see pretty good line of sight continue this year. We'll see it, as the year progresses in terms of our overall goals this year. I mean obviously, it's really helped a lot by a very strong first quarter. So we feel really good that the momentum going into Q2 is similar. That will take us through the year in that 25 to 30-megawatt range. I think if you look more broadly, to your point, do we see an increase in RFPs and RFIs associated with COVID? We are starting to see an uptick on that in both hyperscale and colocation, and they're linked, right. Because as companies are going through their own digital transformations, as they say, they're moving more load to the cloud as they're trying to actually work in a hybrid fashion. Almost, the work in a hybrid fashion, is going to be facilitated by putting in more and more things in secure cloud-based platform that allows people to work from anywhere. As they do that, they start questioning their reliance on their own infrastructure and should they actually go into a third party. So we do see growth associated with the COVID experience last year in terms of -- and I can say it's probably more of an RFI level at this point than RFP. But it's -- we don't see it slowing down, let me put it that way, the digital transformation -- transformation story.

Sure. That makes sense. And related to that, Bill, you've noted in the past that you are looking at some additional markets for your data center business, including in Europe, Asia, LatAm. So which markets are the highest up on your priority list today? And repurposing of industrial assets or M&A., we just saw some M&A in the data center space earlier this week. Just curious your thoughts there.

Okay. Well, thanks, for that. So I think -- let me deal with the M&A question first. So we don't see any big advantage with what I call, large-scale platform play M&A. Because quite frankly, we don't think we need -- we can grow our own capacity that we need on existing campuses. So buying somebody else that happens to be in the same location or the big overlap in the same locations, that really doesn't help us. Brownfield-type acquisitions, like what we did with Web Werks, where we actually bought a large majority stake for that initial $50 million, but actually end up in a majority position as we actually build out both existing campuses and new campuses in India. Those types of plays continue to make sense, just like we did with EvoSwitch in Amsterdam a few years ago. We basically -- it was a brownfield asset. It had existing capacity, but it had land and power to expand, right? So we think that's pretty interesting. In terms of the next stage, if you think about it, is more of development of what I would call the standard colo and hyperscale deployment-type campuses is -- yes, we continue to see growth in that area. I mean London, saw the announcement about us adding even more capacity to London. And we're watching that market, and it wouldn't surprise me if we even need more capacity in London. Frankfurt, as I mentioned, we sold out 27 megawatts. But we had add a pipeline already built to that place. So you can imagine that Frankfurt is a market that we would like to have more capacity at some point. I mentioned India. Singapore, you will notice in our supplemental. We're 100% sold out on that facility we bought from Crédit Suisse a few -- just like 2 years ago, I think it was. So we need more capacity in the Singapore market. And there's some markets in Southeast Asia that are really interesting. And in the United States, you saw that we had basically almost doubled, I guess, about doubled the capacity on our Northern Virginia campus through buying an adjacent parcel of land and bringing more power into that site. So those remain to be interesting. And of course, our expansion on the Phoenix campus is going extremely well, and I wouldn't be surprised that we'll add more capacity in Phoenix before too long. So there's -- a lot of our capital allocation is towards, I would say, expanding development of existing assets. And we really like that, Barry and myself, because as you can imagine, those are kind of like mid-teens IRRs, and they stabilize relatively quickly. So those are those are actually really nice returning assets, and it really builds our franchise. And we think that we're in a lot of, what I would call the waterfront properties, the key places, Northern Virginia, Phoenix, Frankfurt, London, Singapore, et cetera. These are key markets globally. And we're probably -- well, we are the most global of the data centers, and we're super excited about India. The next aspect, you mentioned industrial real estate. So the 445 megawatts of capacity that we have held for development, 130 that's leased up and running, on top of that, we have 90 million square feet of industrial real estate around the globe. And we are actually having conversations with 2 customers right now on repurposing some of those assets for edge deployment. We're super excited about it. It's early days, but we really think that's going to be a really big growth platform for the industry and specifically for Iron Mountain given our large real estate footprint of industrial assets that can easily -- they're not all suitable, but the ones that are easily transferred or transported into a data center, edge-type deployment. And for us is that we're thinking of kind of anywhere from, say, 500 kilowatts to 5 megawatts. And our engineering and development teams have actually come up with some technology or approach, which is, I think, fairly proprietary in terms of how we can do that, not only from an efficient PUE basis, but also from an environmentally friendly basis. So -- and I think with the Internet of Things, the latency or the reduced latency of 5G from the antenna to the device is going to put more emphasis on the backhaul and the latency of that portion. So we're really encouraged. And some of the areas that we're looking at, you mentioned Latin America include Latin America on those edge deployments. So more to come. But I think in the next 5 years, I think there's going to be a lot of opportunities that we haven't even seen yet in the data center space because of these edge deployments.

That's a helpful overview. So Barry, I'll switch to you. Obviously, you guys will need to fund all of this growth that you have ahead of you. So one area that you've been very active in is in capital recycling, your industrial real estate portfolio. So how much left do you think you have to do on the capital recycling front? And perhaps you could talk about both the industrial real estate sales. And then also any other sales of noncore solutions or products, such as what you did recently with your intellectual property management business?

Okay. Sure, Eric. So we certainly view the opportunity to continue to recycle on the industrial asset side as a lever. You know that we embedded about $125 million of industrial asset recycling in our guidance. And we've been kind of running over the last several years at that clip rate. You know that we did a somewhat larger transaction later part of last year. And let me explain our thought process there. We view the cap rates, kind of think, 4s, mid-4s or lower, on industrial assets as being highly attractive, especially against that development pipeline that Bill just spoke about. Because we're going -- what we can do is we can go monetize those assets. Importantly, since the vast majority of cases, we're staying in them, we can do that on very favorable terms, right? The market for it, not only are the cap rates very good from our perspective, so are the terms. So our real estate team basically goes out with our form lease. These are the terms we're interested in as it relates to option for renewal on our side, relatively low escalators. Really, we get ownership-like participation in the facilities for a long, long period of time, but monetize the capital -- the asset today, take that money and put it to work on things like the data center returns that bill just spoke about. So we could see that as a very highly attractive trade, and you should expect us to continue to do that. When you think about our own portfolio, you'd be thinking about well over $2 billion, pushing maybe $2.5 billion even after the recent sales. So there's a lot of -- there's a lot there. I don't see this as being something that you should expect us to be doing a dramatic amount for, but to continue to monetize a small portion relatively consistently as we build out that development pipeline that Bill mentioned. That's the plan. As it relates to the IPM business, that -- for those that aren't close to it, it's been a relatively small portion of the company for some time. That was software escrow. In fact, that deal just closed earlier this week. And our view of that was it is good business. It was kind of noncore. And when we think about software escrow, that's not really a space that we were necessarily investing in, in the future. And we like the market dynamics around the sorts of the portfolio that Bill mentioned earlier in his responses to you. And so we saw that as just another example of something that we could monetize and take those proceeds and put them back into our core growth strategy. I will say, as a broad stroke, from a recycling standpoint, you should be expecting it from the industrial assets going forward as opposed to other parts of the business. Because we feel real comfortable with the portfolio we have.

Okay. Great. And only have one more question, and then think we need to wrap. So Barry, from a more macro perspective, obviously, there's some concern in the future about inflation and higher interest rates as we digest additional stimulus into the economy. So how -- maybe you could talk about how Iron Mountain's positioned in an inflationary environment. And does this have any impact on how you manage the balance sheet and leverage going forward?

Okay. Sure. Yes, it's a topical question in light of everything going on. I will say, Eric, we were fairly prudent, and I'd say, conservative with respect to our guidance this year on inflation. You'll recall, even back in the -- when we initiated the guidance, I noted that we had baked in a fair amount of inflation in -- for normal, customary merit and rent, et cetera. Now the company has done a phenomenal job over the years of offsetting inflation and driving productivity. We're certainly continuing to do that and expect to be able to do that for the foreseeable future. And obviously, we have an ongoing revenue management program, where we've been taking price quite consistently. It might be a little strange to say, but I actually view a little bit of inflation in the economy as further helping us with respect to the opportunity to price. Because, as you know, we generally price in line with other similar players like logistics and couriers. And I think that gives us some incremental potential opportunity to price. And with our very strong margins in our storage business, think like 75% gross margins, there's a lot of flow through on incremental pricing. So we feel good about where we are with respect to our view on inflation. I haven't seen anything that is out of the expectations that we set at the beginning of the year. I know it's getting a lot in the popular press, but I think we were prudent with respect to our expectations. And then as it relates to interest rates, look, the team here has done -- we've been very thoughtful last year with respect to multiple refinancings. And so our -- if you look at our skyline, we don't have any significant maturities for years. We're very fixed. We've been able to issue at very attractive rates. And so I feel very good about where we are. As it relates to our leverage, we're already back inside our long-term leverage target range of 4.5 to 5.5x. And for the foreseeable future, I expect that to just sort of drift lower. That's our intent.

Great. I think we're out of time. So gentlemen, thank you both for speaking with us today and giving us some details on the Iron Mountain story. We look forward to staying in touch. Stay safe and healthy.

Thanks, Eric.

Thanks, Eric. Thanks, everyone.