Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Good afternoon. I'm Alex Hess, a member of the business and information services equity research team led by Andrew Steinerman here at JPMorgan. We are pleased to be joined today by Iron Mountain's Barry Hytinen. Barry has been the firm's CFO since January 2020. Welcome back to Ultimate Services, Barry.

Thank you, Alex. It's great to be here.

Barry, just to start off, you've had an initiative called Project Matterhorn announced in September 2022. Since Matterhorn inception, Iron Mountain has spent about $340-odd million on this transformation initiative, with aims to spend about $150 million per year through next year. Can you remind investors about the thesis behind Matterhorn, the most concrete changes you've made? And how should we benchmark Matterhorn's success?

Yes. I think fundamentally, Alex, Project Matterhorn is all about driving the company's growth and going after what is a very large total addressable market. And the reason that these last couple of years and going forward, there's the right time to put in place Project Matterhorn because, if you look at the company's history, it became the kind of undisputed market leader in records management over multiple decades. And then Bill, our CEO and the team started investing in several potential growth engines. And as we moved through the last several years, what we found is those growth engines were really starting to drive a lot of opportunity for us and going after very large TAMs. And so the focus on growth for Matterhorn is on our 3 core growth businesses, which is our digital solutions business, our data center business and our Asset Lifecycle Management business. In addition, Matterhorn was about driving the company's commercial engine. We had been historically a very operationally oriented business, having honed our skills and capabilities around the records management and box servicing our clients. And as an operational-oriented company, we were -- we actually didn't even have a formal sales force. And so as part of Matterhorn, we had been testing and have now developed a fully functioning commercial organization that is essentially selling our entire range of products. With Matterhorn, we set what I think most people would agree at that time were very ambitious goals for driving much higher sustainable growth. Historically, if you look at this business, on an organic basis -- and Alex, you and Andrew have covered the company for a long time, so you know historically, prior to a few years ago, this was a business that was growing for about a decade at a 0% to 2% organic growth basis. And we set targets for a 5-year CAGR beginning in '21 of 10% for revenue, 10% for adjusted EBITDA. And here we are a few year in, and we're well ahead of that. So I would say, Matterhorn is principally about driving the company's growth, increasing the company's EBITDA and really capturing a considerable amount of market share in what are very large addressable markets.

Do you think if you had gone out and said that you were a Fortune 500 company that was instituting a sales force for the first time in its history when your stock was trading at a low double-digit AFFO multiple, you might have seen a pick up pretty bit sooner?

Yes, yes. So it -- look, it was -- the business has performed really, really well. And I'm very lucky to be at the company -- and the people that have been leading this company and working for it for so long and really built a really very substantial business, and they also planted seeds for that growth. So it's great to be part of the company and driving Matterhorn with our growth agenda.

Awesome. Can you just walk through what work streams from Matterhorn are complete and which still have to be done?

Yes. I would say, on the -- starting with the commercial engine. I would say that is nearing completion, in that we have our regional organization setup. We have our global industry set up. We still are doing some level of continuation of building out the global industries portion of our commercial engine. However, I would say, largely, the commercial engine is nearing completion. From a -- if I go to the 3 businesses that are driving the growth, our digital solutions business, I would say, is in the early innings. That is a business that has been comping very, very well, I think, like 20-plus percent compound growth for years now. And we're kind of on a run rate of being about $500 million of revenue exiting the year. The team just launched our Digital Experience Platform, DXP is the acronym we use. And that platform is proving to be really beneficial to our clients. They are finding it to be very user-friendly. And as Bill mentioned on our most recent earnings call, we've already signed up 24 deals on the DXP platform, and I'd say, just in a couple of months of having it out there. So there's a lot more to come from our digital business, and that is an area that we're investing considerably in. And naturally, that cross-sells off of our core business very easily because it usually starts with some level of content that we're storing on behalf of the clients. Our Asset Lifecycle Management business, it addresses a very, very large market. And we want to be the undisputed market leader in that space, Alex. So we've been investing in that area as well. We've seen revenue accelerating meaningfully over the last several quarters. And I would say, we're got a long way to go on ALM. There's a tremendous amount of opportunity. The other area would be data center, where our team continues to lease up a lot of new megawatts each year. It wasn't that long ago that we were doing like 5 to 10 megawatts a year. This year, our guidance is 130 megawatts. We've been over 100 megawatts the last couple of years before this as well. And so there's a lot of growth. The interesting thing about our data center business is we're only operating about 1/3 of our total capacity. And we're going to continue to grow that capacity as we are looking for additional powered land. And thanks to our very strong client relationships with major hyperscalers, I think we've got a tremendous amount of future growth to go, Alex. And then lastly, I would point out, it's not just about top line, it's also about being more efficient and driving productivity. And within our infrastructure, our shared services organization, which includes things like our order-to-cash cycle. It includes our customer care, et cetera. That is an area where we are continuing to scale and drive a tremendous amount of efficiency, and we will be doing that for the next year or 2 as we kind of create the structure to fully support what is going to be a much larger business.

So you're still building out the billings function, still building out?

It's driving efficiencies. It's not like we don't have a billing function, but we're getting a lot more efficient in terms of how we bill, how we invoice, how we collect and, frankly, how we handle customer support. Because we still do get naturally in the light of the way we transact with clients, we get a lot of calls. And as the businesses continue to grow rapidly, that just is going to result in that much more touch point with clients. And frankly, those are turning into opportunities to sell more.

So with this growth portfolio you guys now have data center where you guys give loads of color, digital solutions where we take what we can get. But it's getting more full. And then Asset Lifecycle Management. Your expectation is to grow these businesses collectively in excess of 20% for a very long period of time. Is there a unifying thesis or theme behind why Iron Mountain is the natural owner for all these businesses and behind the 20% projection?

Okay. Well, the thing that they have in common is that they are each operating in very large markets, number one. Number two, each of those markets are growing very quickly and are likely to continue to grow on a long-term secular basis at a high rate. And thirdly, they generally share client relationships that benefit from -- are selling those clients that we've been dealing with for literally decades. We have 200 -- nearly 250,000 B2B clients, many of them have been measured in duration of decades. Our retention rates are very high. And what we've been focused on is investing in areas that we think cross-sell fairly relatively easier than other things and things that are relatively adjacent. So if you think about digital, what are the secular tailwinds that are driving digital? I mean things like AI and machine learning, where clients can now and are beginning to be able to use information and assets that we've been storing for them for a long period of time, to monetize those or to become more efficient or to become more productive in their own businesses. I think that we're only in the very early stages of the growth of our digital solutions business. On the data center business, that is a portion of our company that is right at the center of the growth in digital infrastructure. AI is obviously driving a fair bit of that, and we'll continue to power massive growth going forward. And we've got really solid client relationships. As you know, Alex, we're a top 10 global data center company in terms of new sales every year, and we're continuing to grow and take market share. And on the ALM side, that's a very circular, sustainable area, where clients are going to need more assistance over time as recycle, reuse and decommissioning of data centers becomes that much more required going forward.

Got it. That's all really, really helpful. When you said cross-sell easier, did you mean amongst each other or also with the global records business?

Yes. So generally speaking, we focus on cross-sell from the records business, that client base, because that's the largest. However, there's cross-sell across the growth businesses as well. So for example, we are talking to large clients of our data center business about doing their ALM work, and we've seen some wins there. We're also looking -- we have some ALM clients that haven't historically been data center clients, and we're working on potential opportunities with those. So there is definitely cross-sell across the growth businesses.

Got it. That's super helpful. And then -- and I think we've asked this to you a couple of times. So apologies, but I've got to ask it again. As you sit there with this cash cow, global RIM business, and these 3 businesses that are in focus for you but kind of sometimes buried in certain financial statements. Is there an opportunity to simplify by taking the rest and saying, it's good, it might not be for us?

Yes. So I would say, Alex, we're -- like all managers of businesses and stewards of capital, we're always looking at our business in terms of how can it become either more effective, more efficient, more productive, grow faster et cetera. At this point, I would tell you, we feel very good about the business that we're operating and the primary growth engines, that being those 3 I've mentioned. And frankly, I'm not giving enough airplay here to our core. Our records business has been doing extraordinarily well. And we have considerable -- we have delivered considerable revenue management benefits off of that business over the last several years, and I don't see that changing. We feel very strongly about our ability to continue to drive growth and revenue management in our core.

Right. So maybe we'll spend a few minutes on the core.

All right.

Sorry, but I can't start every time we speak with how are volumes in the quarter. So on the core, maybe the 727 million cubic feet, mostly business records in Global RIM, can you dimension or provide any granularity around these volumes? What percentage are U.S. versus Europe versus Asia, to emerging markets versus developed markets? Maybe we'll start there.

Yes. So you all have followed the company for a long time so you know that the U.S. is our largest market on records, and that has been the case for some time. Our next largest markets are Canada, U.K., Australia. And those markets are -- have been and continue to be the largest businesses on the record side. Interestingly, I would say, we are seeing considerable relative growth in some of our core emerging markets like India, where we've been investing more. And our team there has been driving a tremendous amount of growth and see a lot of additional upside, Alex. In fact, I'll be there in a couple of weeks. But I was just meeting with our head of all of India, and Arvind was telling me that -- about the growth agenda and what we've been pulling off. And we were winning both competitive cube, but also, and very importantly in that market, we're seeing a lot of unvended cube come over. And I think that's because our team has gotten to a point where we've got very cost conscious in that market so that we can offer a very good value to clients, make a very good margin on our behalf and serve clients in ways that perpetuates more of an outsourced model, like we've seen in many other countries where we've become quite the market leader. So principally, the volume is in the U.S. and those other markets I mentioned. But of course, we have operations across 60 countries, so it's quite spread out as well.

That's RIM operations?

Yes, that's right.

And then if you were to cut up RIM by -- or let's say, break records management within RIM just by end market. What are your top end market exposure?

Yes. So we -- a couple of things. One, it's -- with 248,000 client relationships, it's a very long tail. We have really no customer concentration to speak of. Just to put it out there, less than 1% -- we have no client who is even 1% of revenue, okay? So it's a very diversified portfolio of clients. And in terms of industry-specific, our largest verticals would be those that you would expect from a B2B company that's broadly addressing most the entire economy. So financial services, health care, manufacturing, government. Certainly, legal punches a little bit above its weight on average because of the nature of some of the materials that we store. But again, our biggest verticals would be the first ones I mentioned.

So let's say, maybe a little bit of a tilt towards financial services, health care, manufacturing, government, legal, but we're -- probably tracking GDP?

Yes, it's very spread out. That's correct.

Got it. And then one last one here. Everybody thinks of that cubic footage it's very -- can you say that cubic footage, as a very paper, but there are other forms of media in that cubic footage. Can you maybe dimension, rough order of magnitude, how much is paper versus everything else?

Yes. The vast majority is paper. So think in the vicinity of well over 90% would be documents that we are storing on behalf of clients. But beyond that, you'd be thinking about other business services. So we do rotate a lot of tapes for on-prem data centers. We do a variety of data management solutions for clients. We offer other business services storage that can be things like -- even on occasionally like pallet-type storage. We do store and we continue to store personal protective gear for the -- hopefully, the -- it will be a long way off, but the next pandemic. We do store that for certain clients, including governments. And then we've got a small fine art storage business, where we have about 5 million cube of fine arts around the world.

And how many -- what's your sort of, rough dimension, size cubic feet in consumer these days?

It would be tiny. Think like, call it, less than 2% of total, maybe even less than 1%.

Got it. That's very, very helpful. So as you sort of think about these additional growth businesses and then the records management customer base, one question we get a lot is, why don't they churn more often? Why are they so sticky? And our thesis is that maybe there's your global scale plus your ability to cross-sell makes you more embedded with that same customer. Am I missing something there? Is there some other reason that sort of keeps you in the door with them for so long and so effectively?

Yes. So I think for a lot of our medium to larger-sized clients, Alex, especially those that might have more than one geography where they're present in. And by geography, in this case, I mean even like, say, a state. We offer a product offering that is pretty hard to replicate in that most clients do not want to spend a lot of time managing this portion of their business. They -- if you go back, but 30, 40, 50 years ago, most companies, in fact, had a records management organization of their own. At this point, though, most of those have outsourced that, and largely, to us. That doesn't mean that clients don't have some small internal records management function. But as compared to where they were decades ago, they've seen this as an opportunity to drive productivity and efficiency and, frankly, get more optimization of their own real estate footprint. Because we store on behalf of 248,000 clients in a warehouse, whereas they would only obviously be storing on behalf of themselves. So if you look at the competitive market set out there, we're really the only player that can take a client beyond, say, 1 or 2 markets. And that is a pretty compelling offering in and of itself. But beyond that, I mean, sometimes people say, "Oh, it's paper." It's an asset to those clients because they're storing it for a reason. It's because they need it, and it may be vital to their business in the future. And so we are storing very valuable assets. And over time, we've built up the credibility around trust, consistency, quality of service, chain of custody and driving value that clients really, really benefit from. And so I think they see that, and we've been a very trusted partner to so many of them for such a long time. On top of that would be some of the elements that you were just alluding to, which is that we offer, and continue to drive, new features and functionality that make our, if you will, stickiness with the client that much stronger. So things like digital on-demand or ALM services or Smart Sort, a host of other product and service offerings that we can provide them.

Right. And I presume that also is one of the reasons that you have the envelope to take mid- to high single-digit price increases in the core?

Yes. So we think about it as making sure we're pricing to value, right? So we feel, and I think our clients reactions, if you will, over time and the fact that our retention rates are pretty high and our churn is very low, is a strong indicator that the clients see the value that we're delivering.

That's super helpful. I want to maybe pivot to how you use this free cash flow that this great business generates. Barry, on the last earnings call, you disclosed that [ 2023 ] CapEx will be probably approaching $1.8 billion this year. That's well above where our model was. And you also indicated something of that order might be the annual budget going forward. Can you elaborate as to how Iron Mountain's internal plans have evolved that led to that uplift?

Yes. So a couple of things. One, our data center new bookings continue to run ahead of where we had expected them to be. Secondly, we are seeing clients wanting those sites constructed as quickly as possible because this infrastructure is so critical to their companies. And what I would say is, if you look at -- if I go back, say, 6 months ago, we brought forward some of those data center construction projects, thanks to good relations with our GCs and getting permits up and running. And we've rebalanced because I was expecting a little bit more, relatively speaking, next year. We brought some of that in, and that's why I said it's probably in approaching $1.8 billion, in that vicinity or so, next year. I don't anticipate next year being meaningfully different, certainly not higher than this year. As you know, we're commencing a tremendous amount of megawatts here in the second half. We did nearly 100 megawatts, I believe, of commencements in the third quarter. And we'll commence at least probably in the vicinity of 50 more megawatts here in the fourth quarter. And then we've got a bunch of commencements next year. So -- and importantly, I'll tell you, though, the returns we've been seeing on new leases has -- continue to be rising. And so the things that we're commencing over the next 6 months generally have a superior return to similarly like-for-like projects that would have commenced, say, a year ago, which is part of the reason why our data center margins have been expanding in the most recent quarter and going forward.

Excellent. The -- you touched on sort of expediting a couple of data center deliveries. I believe those were the 2 in Virginia. And it's become apparent to us that you guys have really developed a track record as a strong data center developer, building and operating these facilities. Can you elaborate on the Virginia asset. What led to the expedited delivery?

Yes. Thank you for those kind words, Alex. In that one, what -- that is a 72-megawatt facility that you're asking about. And it was the deal that we announced back in 2022, about, I think, third quarter or so, that it was our first and probably really our only kind of quasi-build-to-suit where the client is doing a fair amount of the MEP inside. And so we were doing the, if you will, the four walls, some, of course, bringing in the power and some other, but not nearly as much infrastructure as we normally, if you will, would do. And that's part of the reason why the price per kilowatt on that deal is so much lower than our average. That's what we disclosed back in 2022, and you saw in the most recent supplemental. But I'll just reiterate what I mentioned back when we first announced that deal, and you could calc it based on the expectations. The return on that deal is quite good.

So yes, a good point on the price per kilowatt hour. Was that in any way reflective of the fact that it closed right at the end of the quarter, or what you guys put in the...

No, the terms of the pricing haven't changed since when we signed the initial lease. I just want to put...

No, I'm just saying was the disclosed amount pressured down by the fact you only had it in the financials for days?

No.

Okay.

Yes, I mean, it has less benefit in the P&L but not in the supplemental table that you're asking about on a price per kilowatt.

I got you. So on capital allocation, just generally, Iron Mountain generate a lot of EBITDA and spend a lot of CapEx. We think of this as -- you can easily cover the must-covers at this juncture. And so your capital outlays are very growth-oriented and discretionary, but do require incremental borrowing. That's sort of the framework to keep that leverage ratio intact to borrow against the growing EBITDA. What happens if the EBITDA base just doesn't grow? If something happens, one of your businesses, the structure changed. Do you have a fallback or contingency plan for how to reorient your balance sheet and your structure, in the event there is some broad-based pullback in one of your business systems?

Yes. So let me try to break that down a little bit. When you think about the 3 growth businesses we've been talking about in terms of where they are currently kind of run rating, they'd be about 25% of the company's revenue. And as they're still relatively smaller and, structurally, they don't have the level of core gross margin that our storage business does, they have a relatively lower margin than the box storage business. So I don't think the "problem", if you will, would come in one of those ones because they're frankly growing. We've got very good visibility on the data center business. I mean, not only do we have a really strong pipeline for going into next year, but we've got very clear line of sight on all the commencements that we're going to have. And then on the ALM business, you've seen the trajectory we've been on. I mean we did 50-something percent organic growth in the most recent quarter. That was up from 25% in the first and 30-something in the second. And obviously, we've continued to inorganically grow that business as well. So the business more than doubled in the most recent quarter. And then in our digital business, it's been growing and continued strength to strength, and we're driving more and more recurring revenue in that business. Alex, I should point out that it's a business that, a few years ago, had almost no recurring revenue. And we probably are going to finish this year to, say, 30% recurring. And next year, I think we're going to target something in the vicinity of 40% recurring. I think if you go out a few years, that business should be close to 50% recurring and still growing. So those 3 businesses, I think, have got a lot of positive dynamics that you can see the businesses developing over time. And then -- so that brings you to the core. And as you guys know, because you've covered us for such a long time, that business is pretty stable, right? I mean, through good times and bad times, look at how we performed even during COVID, when we had initial kind of shock on the services side when everybody was going home and didn't know how to work from home yet. But even after that, it kind of -- the services came back and the core, the storage business was rock solid. And we have, if anything, continue to bolster, I think, people's understanding of our revenue management capabilities. So not to kind of dismiss the question. I would never -- I always, as a CFO, I'm always modeling various scenarios of what we would do. But I don't think it's the way you framed it. Now if we did, we're stewards of capital, we would naturally look at what else we need to slow down on. We would just react as necessary because, I will note, we are committed to our leverage target range. So our leverage target range is 4.5 to 5.5x. It wasn't that many years ago that we were requesting 6x, and we brought it back to 5.0. It's the lowest level it's been in well over a decade, and we aim to operate in that range.

Excellent, excellent. So I think we've got time for one more question, and I'm just going to ask you about the inorganic opportunities ahead. And there, obviously, you've got these 3 growthy businesses. You did the Recall acquisition back in 2016, which -- tremendously successful, and I think really made you the global guys. As you sort of think about where you might want to deploy funds inorganically, keeping in mind that data center we can treat is inorganic for this question, just even though it's very much organic. How do you think about prioritizing those asset classes? And where you might look to do a deal or look to buy stuff?

Well, where we've been acquisitive over the last year or so, a couple of years, has been in the ALM space. And -- so my expectations are in light of what we're kind of looking at. We survey all our aspects of our business. But ALM is probably the most likely, Alex. And I'll just say that there's -- in light of the structure of that industry in that there are many, many vendors servicing clients, and we're already the largest. There are not really large-scale deals in that space. They are mostly of the size of things of what we've recently purchased. So that would be sort of like $50 million to $100 million revenue businesses that might have like 20s kind of EBITDA margin, plus or minus. And generally, we've seen those trade for something in the mid- to high single-digit multiples of EBITDA. So it creates a significant opportunity for us to synergize that multiple down and service our clients that much better. You mentioned data center. You should not expect us to be acquiring data centers because we view ourselves as a developer, and we're going after that development return. We have a capability of design, construction, and we have very good client relationships. So whereas years ago, the company acquired a data center to get a portfolio and get a platform, we have that now. We're one of the top 10 global players. And so what we, of course, will do is acquire more land. As I mentioned on our last call, we just bought a site in Richmond that will take us to over that -- that will increase our megawatts opportunity by over 200 megawatts as we build that out over the next few years. So that's what you should be expecting.

Excellent. With that, we'll call it for the day. Thank you so much for your time, Barry.

Thanks, Alex. Always good to be here.