Iron Mountain Incorporated (IRM) Presents at 6th Annual Wells Fargo TMT Summit (Transcript)

Iron Mountain Incorporated (NYSE:IRM) 6th Annual Virtual Wells Fargo TMT Summit November 29, 2022 1:40 PM ET

Company Participants

Barry Hytinen – Chief Financial Officer

Conference Call Participants

Eric Luebchow – Wells Fargo Securities

Eric Luebchow

All right. So good morning, everyone. We’re going to kick it off here. Continuing on with our TMT Summit, very pleased this morning. We have the CFO of Iron Mountain, Barry Hytinen.

So Barry, thank you for joining us.

Barry Hytinen

Thank you for having us. It’s great to be here.

Question-and-Answer Session

Q – Eric Luebchow

Thank you. Barry, I wanted to kick off talking about your global RIM business, the progress you’ve made with revenue management. You’ve seen some acceleration this year kind of to about 7% growth, the vast majority coming from some of the revenue management initiatives that you’ve put in place. Maybe you could talk about the sustainability of these greater than 6% price uplifts in the RIM business and whether that could start to come down if we see inflation start to cool off into the new year?

Barry Hytinen

Okay. Well, again, thanks again for having us here. On revenue management, our strategy is very much around going for value, like how much value are we delivering the customer and continuously driving for incremental value that we can deliver to customer and then appropriately pricing for that.

When we look at our revenue management strategy, if you go back five, six years ago, Bill and the team really at that point, embarked on what might have even been considered more of a classic pricing strategy, 1% or 2% per year. And then over time, through testing and learning and driving more value for clients in terms of how we deliver the response time, customer service, et cetera. We have gotten to a place where we are…

[Technical Difficulty]

For those of you on the webcast, having a little technical difficulty here in the conference room.

Okay. For those of you on the webcast, apologies for the technical difficulty we’re experiencing, maybe I’ll start over. Just about five or six years ago, the Company embarked on a strategy around driving for more revenue management. And if you look at it back then, we were getting, say, 1% or 2% and through a testing and learning methodology and driving more value for our customers.

We have systematically proliferated our revenue management strategy across our markets and across the products and services we deliver — so that’s not just the classic box revenue. We generate revenue management off of, but in fact, even our services and the various other offerings we have across the Company. If you look at the way it’s been trending for the last two or three years, it’s been gradually moving higher. I would say, to your point about north of 6% this year, there’s probably a level of extra help, if you will, from the inflationary environment.

But in terms of the sustainability, we think something in the mid-single-digit vicinity is very reasonable. So upper — low to mid-single, something of nature of 4%, 5% is a reasonable target when we look at the relative elasticity. As we’ve talked about before, we do, do a fair amount of analysis around what is the impact pre and post revenue management actions in terms of what is the incoming volume that we see three months, six months, 12 months prior to an action and then what do we see subsequent three months later or six months later, that sort of thing.

We do not generally see much in the way of an impact we think that really comes down to the fact that we are delivering a considerable amount of value for our clients. And when they compare us to others that are out there in market, it’s a very reasonable cost value equation. And so I think the sustainability at that level is certainly something we’re continuing to take.

Eric Luebchow

Okay. That’s good to hear. So maybe if you could talk a little bit about volumes as well in the global RIM business. You’ve been trending in the 50 basis points range or a little bit higher in terms of new growth. Anyway to disaggregate how volumes have trended between new boxes, destruction or removals or any kind of trends to point out geographically as well as you look at kind of the volume at?

Barry Hytinen

Okay. We’ve been very pleased with our volume. As you know, we continue to achieve new record levels of total volume and we’ve been growing at the level of between 50 and 100 basis points pretty consistently. And that’s our expectation going forward. Now that is — you asked me to disaggregate some the most classic disaggregation would be looking at our core record management as well as juxtapose against everything else that we’re storing. So on the — let me start with the core.

On the core side, that’s a business that we’ve been expecting to be slightly down. So it’s anywhere between a 20, 30, 40, 50 basis points and down as much as one point annually. That’s what we’ve been experiencing. In our more mature markets, let’s say, North America and some of the Western European markets they’ve continued to be down of that order, and we’ve got more faster-growing markets and some of our emerging on the core side. But what’s counterbalancing that and driving a tremendous amount of growth for us is all the other areas of volume that we have.

So things such as our fine arts business has been growing quite quickly, albeit one of our smaller lines of business. Our consumer business has been growing quite quickly as well as our other business services storage that both of which the consumer and the other lines of business storage is all in our global RIM business.

And so, when you put it all together, our total volume growing sort of flattish to slightly up is a, we think, a very reasonable target. And I’ll just note that — if you look back over the last two or three years and take our consumer and all other business storage, that’s gone from a business that was about 4 million cubic feet to tripling and quadrupling in fact.

And we see a significant amount of incremental runway there. Importantly, with the exception of fine arts, everything else we’re storing is generally going into the same record centers that we already have. So the team is doing a great job utilizing our existing physical space. And that’s one of the reasons why we say that our core business is quite capital light. We can continue to grow nicely with relatively little incremental investment.

Eric Luebchow

Interesting. That’s good color, Barry. So, I wanted to touch on one of the initiatives that you announced at your Investor Day, which was Project Matterhorn and you’ve talked about how that’s going to be a big driver in your goal to generate kind of a 10% revenue growth CAGR. So maybe you could talk through some of the integration work that needs to be done to deliver on those objectives, including standing up new commercial and operations organization.

Barry Hytinen

Sure. So for those that aren’t as familiar with our Project Matterhorn, it is really about driving a tremendous amount of growth out of the business. When we look at the way the opportunities we have and look at the markets that we’re playing in that are also growing quite quickly. When we look at the relative market shares that we have currently and what we think we can achieve, there’s a lot of growth out there. And so we have designed a operating model through a variety of testing that we’ve done over the last couple of years coming out of our Project Summit.

We made a lot of investments into our commercial area, which we found to be incredibly strong payoffs and through that, we work toward a new operating model that is, as you mentioned, focused on, first and foremost, a global commercial organization, which is singularly focused on showing up in front of our customers and selling to them the rather breadth of products and services we have.

In that organization, we are delineating it through both global vertical industries, so things like banking, financial services, insurance, et cetera, with very deep product specialists that know those industries particularly well and know how to communicate with those industries in a way that demonstrates the value we can bring uniquely by industry and then regional for all other clients, that would be your classic regions of say North America, Latin America, et cetera.

And so with that, we have similarly been moving from a general management structure to that global commercial function. Now with that, we’ve created a global operations function that does all of the things that our clients need as it relates to our services. So when we go out to get a box and bring back to them the destruction you referenced earlier, as well as a host of other services we do for clients as well as shared services for the infrastructure of our company.

So things like our invoicing, billing, IT infrastructure, et cetera. So that global operations function, essentially the backbone of the Company to support everything that we’re doing. Now those both wrap around what is a business unit focus because we have, as we’ve discussed earlier, a storage business, but we also have a data center business IT asset disposition business, which we call asset life cycle management, and we have the fine arts business. So within those distinct business units, those teams are chartered with developing products and services that serve our clients very, very well that give our commercial function the product and services to go sell to our clients.

We have 230,000 clients around the world and one of our biggest opportunities is just going deeper with those clients. And so that’s why we wanted to set up this model. You asked how far along are we in it? Well, we started Matterhorn internally really at the end of last year, early this year. And you’ve seen some of the early wins from it in the fact that the business’s growth has been accelerating meaningfully.

And I think that’s a testament to our team’s very strong performance across the board. And while we are — now in the commercial operating model, I would tell you, we still have a fair amount of work to do there. There’s a lot of opportunity as the team gets deeper into quota setting and knowing their accounts better and really getting out there with the breadth of products and solutions.

But even in our business units around storage and data center in digital solutions, we are continuing to broaden our reach, which will give that commercial function more to sell. So I would — we do see Matterhorn as being a multiyear journey and we are quite gratified with the early wins we’ve been putting up.

Eric Luebchow

And are there any natural fundraising opportunity if you can talk about that you think Iron Mountain maybe hasn’t prosecuted as much in the past across our growing services portfolio across your storage business and then also with your data center business as well, that’s becoming increasingly strategic that are part of Project Matterhorn that you could maybe elaborate on?

Barry Hytinen

Yes. That’s one of the, I think, secrets of our future success is the opportunity to, in fact, do that, both in the form of discrete bundling as well as just making sure that our clients really understand the breadth of what we can do for them. So in the form of extending storage clients into digital solutions, oftentimes our digital solutions start with a scanning and then we can proliferate into using our insights platform or one of the other unit applications we’ve already built, there’s a lot more opportunity there, so bundling within storage and in digital.

There is cross-sell opportunity. As you know, you’ve followed the Company for some time on a — from our storage business into our data center business, where we’re seeing a unique opportunity now that I don’t fully appreciated a year ago is between our data center business and our asset life cycle management business, where we’re already, we believe, the largest player in decommissioning the hyperscale data centers there is an opportunity over time to do a lot more between the two businesses between data center and asset life cycle management, that community in the form of discrete services, that can be in the form of bundling services over time, where we could do decommissioning for clients that might be within our own data centers or that we’re servicing as part of our existing data center clients.

There’s a lot of cross-sell opportunity between the logos that are in both businesses as well because we service some hyperscalers in IT asset disposition that we don’t get service in our data center business and vice versa. So we are showing up well there and continuing to, I think, extrapolate the opportunity that is right here in front of us.

Eric Luebchow

And on the digital solutions side, I think there’s been this perception over many years that as customers adopt more of these digital solutions that could cannibalize some of your storage business. And I guess maybe you could talk about in that business, are the volumes coming from existing inventory? Or are you getting new customers or new selling new products to them and whether you think there really is any correlation at all between, say, digital solutions growth, say, box destructions in your facilities?

Barry Hytinen

Yes. And maybe just to frame out the deal solutions for us for a moment. It is an area that the Company has been investing in for several years and we’ve been growing in that area in the, call it, 20% kind of compound growth rate for several years now as we continue to win more and more business.

Importantly, we’re winning business that usually starts, as I said earlier, as a scanning operation, and then we ingest that into our insights platform. That helps with auto classification using machine learning and AI tools that enable our clients to then take information that they have essentially no access to and ingest it into workflow into other applications, whether it be the ERP, CRM or otherwise to use to do analysis on. And it really creates an opportunity for clients to create value from things that we’ve been storing that they’ve in story.

It’s interesting to note, we talked about this on a couple of the earnings calls over the last year that we are now seeing a trend where we’re winning digitization deals of both inventory historically with priority store, but we’ve been winning [Technical Difficulty] we gave an inventory level largely multiyear permit that we signed a couple of years ago [Technical Difficulty] in that case, we’re taking that inventory from the client. We’re digitizing and we’re putting it into insights platform for them to use to workflow. And then most of that inventory is going back to them for storage, some of it’s going into our storage.

I will tell you that as it relates to the specific question around what happens end of life, we very, very rarely see digitization deals turn into a destruction. It is just not commonplace at all. What we generally are seeing is clients looking for us to help them digitize specific files within boxes or a discrete project. It is not a digitized and then removed. The vast, vast majority of what we’re digitizing is going right back on the shelf, which I think is a testament to the fact that the client is looking to mine that inventory to get incremental value from it and still has a distinct need to store it for a variety of reasons.

Eric Luebchow

That’s good color. So I wanted to touch on one of the other newer businesses, your IT renew business and your hyperscale ALM business. So as you’ve talked about this year, the downstream side has been heavily impacted by China’s zero COVID policies. I imagine that you’re probably reticent to exactly forecast what that will change. Are there really any other alternatives for selling through inventory outside of China that you might have to explore? Or do you think this is just a matter of time? And then maybe if you could talk as well about how the upstream side is performing in terms of new consigned inventory into your backlog and what the outlook looks like?

Barry Hytinen

Okay. So this is a question specifically on our hyperscale decommissioning side of our asset life cycle management business, where we have upstream clients, think of those as the large hyperscalers where we decommissioned servers in years that are in their data centers when it comes to a point of refreshment for them. Usually, the vast majority of them would be refreshing on a schedule of, say, four, five, six years — and what’s interesting about that is that year still has considerable value to others, but the hyperscalers want to refresh it for reasons related to they want to keep up with next generations, improve compute and maybe improve power draw things of that nature.

So where we come in is we offer services to completely wipe that year and then physically decommission it and sell it down into downstream, as you mentioned. Now the upstream portion of our business has been quite good. We continue to win new business. We have a large committed backlog, some of which is — which we’ve already received and some of which is in storage at the hyperscaler side incidentally, that’s a generally a vastly consigned inventory situation.

So, we don’t have like markdown risk on the inventory. While we await the downstream opening up more, which is what you were asking about, the vast majority of that inventory for us has historically gone into China, specifically in the Shenzhen but not only exclusively Shenzhen. And as you alluded to, China has been quite challenging basically for any market participant that’s playing there. And I agree with you, I will not conjecture today on when China is going to open up. But I would say it will eventually as it relates to are there other avenues or locations where we can diversify into in terms of downstream. The team is actively working on that.

That is something that I spend time with our team on a weekly basis as it relates to how we’re doing in that regard. And while China is definitely the — by far the vast largest market for that year today, we do see opportunities for — and we are taking advantage of some smaller opportunities where we can downstream go into. But I would say that we do need China to open back up. That has been an area which has been a challenge for us, and I think it’s a testament to the rest of the team’s business and what we’ve been able to put up that we’ve been able to more than offset the impact of China on our business this year.

Eric Luebchow

Yes, absolutely. Not to mention some tougher FX comps as well. So we talked a little bit or alluded to your data center business, so I wanted to touch on that as well. You had record demand this year in your data center business. It’s been a strong year for the whole industry. Anything when you look at your pipeline that would suggest we’ll see any type of moderation from either hyperscalers or general enterprise? Or do you expect that this is kind of the new normal where hyperscalers are outsourcing more material part of their requirements to the third-party market and there’s just more demand than the supply could absorb for some time.

Barry Hytinen

Yes. The short answer is, yes, we see the trend continuing. When we talk to clients, when we talk to our hyperscale clients, which are increasingly using us, we see a very distinct trend toward continuing outsourcing as you know, those players, many of them do a fair amount on their own books. They put together and set up their own data centers. But for a variety of reasons, whether it’d be distinct project, a specific market to a size that they need a requirement. They’re using third parties. And what we’re increasingly seeing them do is wanting to have relatively fewer vendors.

And it makes sense because large businesses naturally want to know the vendors very well that they’re working with and especially in parts of their business that are so critical to their infrastructure such as data centers. And we, I would say, at this point, several years in now, have become a trusted partner to several of the largest data center players out there in terms of the hyperscalers.

And so, when you look at the sorts of opportunities we’ve been winning, I would say we’ve been winning with winners. And it started several years ago. The team here has done a phenomenal job starting with like a 1-megawatt deal and then winning a 3-megawatt deal with a client and then turning that into a 5-megawatt really mushrooming. And at this point, we’re continuously working on an increasing pipeline of hyperscale opportunities, large and small deals. We’ve signed some very large deals earlier this year.

And I would say our pipeline continues to be quite robust. I don’t see anything that would suggest that there is going to be a change as it relates to the relative amount of outsourcing that they’ve been doing.

Eric Luebchow

And I think one of the other themes we’ve seen in the data center landscape this year has been movement on pricing and tightening supply globally, but particularly in certain markets. So maybe you could talk a little bit about what you’ve seen on pricing these deals this year versus the past couple of years, whether this tighter supply has given you the opportunity to move rents higher both for new deals in addition to renewals?

And then related to that, does that create any upward movement on the type of returns that you would underwrite when you’re doing particularly some of these larger hyperscale transactions?

Barry Hytinen

So, I would say that the relative pricing environment out there, at least in the markets that we have exposure to places like Phoenix, Northern Virginia, Frankfurt, London, we’ve got a large data center in Amsterdam. We’ve got exposure to Singapore, India.

In the markets that we’re principally playing in pricing has been good. And you’ve seen that in our trends, our mark-to-market has been improving almost every quarter for the last, I don’t know, six or seven quarters. It hit 4.5%, I believe, in the most recent quarter. And as we talked about before, that’s a little bit of a lagging indicator in terms of when we renewed. So as I’ve been saying on the calls the last year, you’d see that continuing to trend higher.

So, we feel good about the pricing environment out there as it relates to returns, look, construction costs are up and supply chain costs are up as well. So, in some respect, the pricing has to come up to offset the relative construction, but I would say that our team is doing a very good job balancing. You’ve seen our margins be, think, quite good, especially in light of the fact that power is been a big move this year, and that has an impact on lowering margin rate as power goes up, it doesn’t change in EBITDA since it’s a pass-through. So all things considered, I feel the team is doing very well on pricing and relative demand generation.

Eric Luebchow

And as we think about Iron Mountain’s consolidated margins, the long-term guide you gave us in September, which would suggest they stay relatively consistent over the forecast horizon. I know there are some moving parts in there. You have some very fast-growing but lower margin segments of your services portfolio. Maybe you could talk about any cost-saving opportunities as you scale the platforms over the years that maybe could provide some upside to where your current margins are?

Barry Hytinen

Well and you’re right that we have been, I would say, prudent with our expectations around margin over the long term because, as you note, some of the fastest-growing areas of our business like IT asset disposition, hyperscale decommissioning, digital solutions, those are generally lower margins today. But I think over time, they can all directionally go higher and that helps, but they’ll become a larger percentage of our business.

Our data center business, which is in the kind of 40s of EBITDA margin, I think over time that can also rise as we get more toward a more stabilized platform. But frankly, I’m not in a big hurry to do that because we’ve got a lot of development to do. And then in our core storage business, that business has been rock solid. Our team has done a phenomenal job with services margins general, but particularly in the core.

You’ve seen that through Project Summit, and we continue to see opportunity for additional operating leverage. Obviously, our revenue management has helped with margins as well. So I would say that I feel very confident on our ability to deliver on our commitments, including the margin. And you are right that inherently, there are incremental opportunities going forward, whether it’d be in operating leverage and scale in asset life cycle management, potentially incremental benefit from favorable mix over time as we diversify that end of the business.

As you know, it’s a little bit concentrated today. And in time, I think we will see improved profitability in our digital solutions business and just generally better mix over time. So, I do think that there’s opportunity, but we were we just wanted to be prudent with respect to expectations around long term.

Eric Luebchow

Totally understood especially in this environment. So one other topic before we close out would be just on general cost of capital, obviously, we’ve seen some pretty material volatility this year in the fixed income market. You’re your plan over the forecast horizon is entirely debt financed. So, as we think about sources and uses, maybe you could talk about how you’re thinking about fixed versus floating rate debt using secured versus unsecured and perhaps you can allude to some other sources of capital that you have such as asset recycling.

Barry Hytinen

Okay, sure. So as of last quarter, we were about 80% fixed, 20% variable round numbers. And we don’t have any maturities for a couple of years or a few years, actually, because we’ve done a nice job refinancing during — over the last couple of years when the market good. I agree with you that the — obviously, the bond market has been a little bit more volatile over the last year. It’s gotten a little bit better in the last few weeks. But we’re not in a position where we need to do anything at all.

At the end of last quarter, we had about $1.5 billion of liquidity between our revolver and cash and as you know, the business is very cash generative through its core, which is quite capital light. The vast majority of our capital for growth will go into data center as we build out the platform. And just as a side note, I’ll just say, today, we’re operating a platform that we think over time can build out to about 750 megawatts.

Of that, we’re operating 190 megawatts round numbers. We’re about 95% leased on that. Interestingly, we’re under construction on about 175 megawatts, and that’s about 85% leased. So we kind of have this “high-class problem” we just need to keep building just to fulfill the leases we’ve already signed, and the team continues to build that pipeline. So you’re right that we will be continuing to invest, particularly in data center, fully measured with that.

And as EBITDA continues to grow, we’ll relatively increase our capital investment into data center, and that EBITDA growth results in incremental debt capacity staying within our leverage target range that we’re at. I would just note that we achieved the lowest leverage we’ve had since 2017 on the last quarter. Going forward, we obviously can continue to finance through our existing facilities in time. Just the math of it is that we will issue again in the volume market, but again, nothing to — no need to do that currently.

And we have the opportunity to do — continue to do a level of industrial recycling. As you know, that’s been a small component of our total capital plan over the last year or so, we’ve done a little over $100 million. And we have done on occasion, a couple of times, some, what I’ll call, asset-level financing. On the data center side, we did the joint venture in Frankfurt.

We recently did a joint venture in our Northern Virginia VA-45 site, where we were able to essentially contribute the contract and the land into a JV. We sold a 45% interest at a sub-4.5 cap. And through that, through the equity partners contribution as well as third-party debt will basically build out that facility and not put any more cash into it.

So it’s a really — I think there are — those are one-off scenarios where we could use in the future potentially to do some level of essentially, I think it has stabilized recycling. So, I feel very good about the way we’ve lined up the plan, Eric, and with the growth in EBITDA and our leverage target range, we feel very well capitalized to fulfill the growth plan.

Eric Luebchow

That’s great. I think we’re out of time. So Barry, thank you for joining us today, and we look forward to talking to you again soon.

Barry Hytinen

Okay. Thanks for having us.

Eric Luebchow

Thank you.

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