Iron Mountain Incorporated (NYSE:IRM) J.P. Morgan Ultimate Services Investor Conference Call November 17, 2022 9:10 AM ET
Company Participants
Bill Meaney – President and Chief Executive Officer
Barry Hytinen – Executive Vice President and Chief Financial Officer
Conference Call Participants
Alex Hess – JPMorgan
Alex Hess
Good morning. I’m Q – Alex Hess, an Equity Research Associate on the Business and Information Services Research team, led by Andrew Steinman at JP Morgan. We’re pleased to lead off the business services track of today’s conference with Iron Mountain CEO, A – Barry Hytinen and CFO, Barry Hytinen. Bill has been CEO of Iron Mountain since 2013. And Barry has been the firm’s CFO since January 2020. Good morning, and welcome, gentlemen.
Question-and-Answer Session
Operator
[Operator Instructions]
Alex Hess
So kick us off, maybe to discuss the organic revenue growth in Global RIM. That’s your Global Records and Information Management business, that’s your largest segment and includes your business records management operations, a portfolio of digital services and more. Global RIM organic growth has accelerated from a low single digit pace pre-COVID to 14%, as of last quarter, how should investors drive the — view of the drivers and durability of that accelerations?
Bill Meaney
Well, good morning, and thank you. So I think the, if you look at the last three, four quarters, you see it’s been very consistent growth rates. And how we get that is that we have high single digit growth rates on the organic storage side of the business. But the services have really taken off. And we’ve seen consistent 20% plus growth on some of the fast areas of growth on the services. And when I say the fast area growth in the services, that’s really speaking about the digital services. And we’re in the legacy, if you will, or the part of the ALM business that we’ve had for quite some time, which is more about the IT asset disposal side of the ALM business. So those businesses have consistently over the last four, five, six, eight quarters been growing at 20% plus. And when you blend that, together with high single digits of storage growth, which is driven both from our records business as well as doubled, again, 20% growth on the data center business, which is a big chunk of the data storage, then you blend that and it gives you as you say the 14% organic revenue growth, or 18% total growth.
Alex Hess
Got it. So staying on revenue growth, we’re going to just talk about the Global RIM segment just a little more. The volumes there grew 0.7% organically last quarter, should investors expect sort of that zero to 1% annual growth in organic volumes going forward? And is it still fair to say that’s maybe zero to 1% declines in the business records piece prospectively with maybe your other non-sort of traditional business record volume sources driving modest positive organic revenue growth or volume growth?
Bill Meaney
I think that’s the right way to think about it. And if you think about it, is that we’re getting overall let’s say 0.5% to a full percent of what I call the physical storage, business growth from a volume, but it’s mixed up with the new, slightly negative on the record side of the business. And then obviously, given the value of what we’re providing in the sensitivity of what we store is that we’re able to add price to that from a revenue management standpoint.
Alex Hess
Got it, that’s very helpful. Sort of a brief follow up maybe on some of the adjacent volume sources that you guys have Consumer, Fine Arts, Entertainment, it would be great to hear how the profitability of those non business or non or sort of newer, off storage offerings compares to the business record storage.
Bill Meaney
Thank you, I think the, our traditional record storage business or the tape document business is a very high margin business, but it’s also at very, strong levels of scale around the world. So that leads to very, very good profitability or very high margins. On some of the newer businesses they resemble a lot like when we would enter new countries with our records management businesses has you build scale, you actually increase the margin, I mean, the margins are still very healthy. And mean, if you compare it to other business services, I think most business services would love to have the strong double digit EBITDA margins that we enjoy across our business segments. But what we — what you’ll also notice in those new areas is that, quarter-by-quarter as we continue sequentially to actually grow the margin on that as we build out scale. So it’s very similar as when we were building out our global footprint on records management, as you build scale in those businesses, the margins go up. But already, they all produce very strong return on invested capital. So the ROIC of these businesses is very high. And a number of them, it takes less capital, to actually deploy the storage infrastructure that you need to store their volume. So that , so already, we’re getting good levels of return on invested capital.
Alex Hess
Got, it’s the economics —
Barry Hytinen
Alex, I just add that several of the items you just asked about, perhaps with the notable exception of fine arts, they fit in very well to our existing warehouses. So it makes good use of our assets as we take in other business service volume, we taking the need in the consumer volume that fits in, the team has done a phenomenal job working in our centers to be flexible enough to accommodate that. And those growth areas that you were asking about, we expect to continue to grow for the foreseeable future, because frankly, they’re very large markets that are expanding.
Alex Hess
That’s really great. So maybe the highlight some of the pricing initiatives, you guys speak to this as revenue management. So Global RIM storage revenues grew 7% organically last quarter. We suggest, Barry suggested on the call that the majority of that is going to be from pricing contribution. How much of Iron Mountain’s pricing is CPI linked? And is there sort of a minimum price floor you can take as far as price increases you can take, if inflation subsides.
Barry Hytinen
Yes, Alex, when we look at revenue management, we’re really focused on what is the value of driving for our customers. And both in terms of the absolute value we’re delivering in the services that we provide as well as the comparable value that’s out in the marketplace. And I think what we’ve seen over many years, with the long-standing relationships with which we have with clients, many of which that are measured in decades, is they see that. In terms of the opportunity for revenue management, maybe just a bit of historical context. Several years ago, the team embarked on testing a revenue management program, and started with some of our most mature businesses and then over time continue to expand that throughout our global enterprise.
At this point, I think we have a well in place revenue management program really across our products and solutions across the world. We see something on the order of mid-single being very reasonable, perhaps in this kind of current environment in light of everything that everyone in the world is dealing with. It’s been a touch beyond that this year. But we think when we look at relative elasticity, in terms of our revenue and our product sales, that’s something of that order, especially in light of the comparables that I was pointing to earlier is, is quite reasonable in nature. And it, to state perhaps the obvious we too, are dealing with inflation. Last quarter, for example, our service labor was up 5% year-on-year, obviously, our service revenue was a lot more than that. So the team drove a lot of operating leverage, but I think it’s a, the sorts of actions that we’re taking are not inconsistent with what is going on out there.
Alex Hess
Got it. And then Bill, earlier, you highlighted the services side of that Global RIM portfolio of businesses, so that portion of the business grew nearly 26% organically that is the services businesses. So can you maybe give us the mix sort of percentage wise of digital services within that versus maybe more legacy or heritage services like box, logistic, shredding, or how to think about that?
Bill Meaney
Sure, I think the, if you look at the retrieval sides of the logistics side of the service revenue, that’s also growing and kind of what I would say, mid-single digit growth, right, which is consistent, a little bit slower than the growth in storage revenue, which has been very consistent over the last several years, because the nature of the document, part of the business where most of the logistics is associated with is more about proof rather than you. So it’s more about incoming service revenue, rather than outgoing service revenue. So I think that’s very consistent. So where’s this the 25 plus percent growth that you’re getting? It is because we’re getting well north of 20% growth on really the fast-growing areas in the fast-growing areas, exactly, as you highlighted is our digital businesses really on fire now. I mean, it’s the businesses just going from strength to strength. And that’s a combination of scanning, which we’ve been doing for a number of years, is coupled with our insight platform, which is really allowing our customers, not only once they digitize something is to really get superior use in governance out of that document. So it’s really what we call intelligent document processing, which is in and of itself, a value added for our customers, because it automatically generates a rich set of metadata.
But once they have that metadata it naturally goes into different workflow scenarios, whether it’s consumer lending in terms of collapsing, the time to give a car loan from 10 days to a day and a half with better credit outcomes. Or if it’s to look at for a government to be able to issue unemployment claim checks during the middle of COVID at record volumes, when 850 staff couldn’t get to the office, they had to do it remotely. Coupled with that, in terms of the trend that virtually, you see around the world right now about hybrid working, is that kind of digital platform that’s cloud based, that allows people in a very secure way to actually access the information that they need, but also to do work on it in a way that is secure from an IT standpoint is not downloading the information onto their device, but rather operating in the cloud in a virtual environment is I think it’s timing is everything. But we see that going from strength to strength. More recently the acquisition that we did on the asset lifecycle management side on ITRenew is well strike now and the ITRenew, we see good incoming volume from our customers, in terms of recycling some of their components, as they refresh some of their big data centers, is the sell-through has been slower. But if you look at the legacy side of the business, the business that Iron Mountain has been operating for a number of years now, which is really more about the secure logistics and asset disposal of IT assets, that also is growing at double digits, which is the other part of that’s driving that service revenue growth, yes, again at north of 20%, year-over-year growth that we’re getting from the what I would call the traditional side of IT asset disposal, which is really the making sure that you put a strong chain of custody around that, and then you cleanse the assets and destroy them in a responsible way.
Alex Hess
Got it, that’s helpful.
Barry Hytinen
Alex, I just like to add a little bit more on to the digitization and the digital solution.
Alex Hess
Yes, please.
Barry Hytinen
Portion of the answer. I think it’s important for investors to understand that. Well, as Bill said, a lot of those projects, start with scanning and go to digitization and using the AI technology and the insights platform that he was referring to. Many of those are naturally coming out of our existing inventory clients having us digitize things that are in our inventory. But importantly, and I think this is a testament to the fact that our solutions are really taking hold. And our team is doing a great job representing them. We’re increasingly seeing more and more projects of inventory that we’re not storing. So that can be examples of clients that are having us take inventory that they may have on their own premises and help them with digitization and putting the insights platform. In other cases, that might be from even a competitive source. And so I think that’s an example of the opportunity we have going forward to really expand our digital solutions offering because it’s a very big market. And this is an area that I think enterprises are increasingly looking for support with.
And then the second thing I’d add because I know a lot of investors frequently asked me this question, we, the vast, vast majority of those projects where it starts with the digitization. It goes right back into storage after it’s done being scanned. So this is not a situation where we’re seeing any sort of accelerated destruction or anything of that nature is really based on our clients looking for the ability to mine data out of the physical volume that we and others store for them. And I think that’s another great example of how this is a sort of business that I think has a lot of legs for future growth to Bill’s point. We expect it to continue to grow over the next several years at rates similar to what it’s been growing at.
Alex Hess
Great, that’s very helpful. And for anybody who isn’t familiar with the Iron Mountain insight platform, I highly recommend you check it out on their website. It’s basically a little SaaS business embedded in it, not a little SaaS business, but a notable SaaS business embedded in your overall portfolio.
Barry Hytinen
A growing SaaS business. Yes, Alex, yes, we are, the team is doing a great job with it.
Alex Hess
Okay. So let’s pivot to another source of growth for you guys, which is the data center business. So one of the big numbers highlighted at your September Investor event was the $4 billion and expected growth capital investments between 2023 and 2026, a large share, which will presumably go towards data center build outs, we’ve only come back to that event, maybe ask why is now the right time to expand Iron Mountain’s data center footprint so aggressively.
Bill Meaney
It’s trying to keep up with the demand, actually, I mean the, if you look at you, and that’s another business that’s growing north of 20%, year-over-year, and if anything, we’re, we could be growing even faster, with our ability to build even quicker, and we’re not really constrained, I wouldn’t say by capitals more, I would say supply chain and logistics, right. So we have a really good land bank. But I just came back from Asia and also swing through Washington, DC, where I spoke to a number of our customers in the Asia Pacific region. We’re looking to expand our Singapore site, so that we can actually bring in more customers into that hub, but also across the Asia, the Asian footprint. And then in Washington, DC is that we have a very large campus in Manassas, Virginia, but again with a number of customers on Monday and Tuesday, and they’re all of them are looking for more capacity. So we’re constantly trying to make sure that we have a good supply, robust supply chain to keep up with it.
So it’s the cloud continues to grow somewhere between any of the big cloud producers anywhere between 30% to 40% a year, they generally outsource about half of their growth to third parties, like Iron Mountain and others. And we’ve been event big beneficiary of that. And then as people start putting more load to the cloud, large corporations and publicly, we are able to acknowledge that the likes of Credit Suisse and Goldman Sachs and the Boeing Company are all customers for us on the colocation side. But as they start putting more load into the public cloud, is they’re left with thinking about what their options are to put their own applications that they host themselves in house into what type of facility. So those two dynamics together, we don’t see any slowdown into the 20% plus growth rates. And as I said that 20% plus growth rates is more constrained by how quickly we can secure the supply chain and build out our sites.
Barry Hytinen
Just to add on to that a little bit, Alex, we have a portfolio in data center today where we’re operating on 190 megawatts, and we’re well over 90% leased in that portion of the portfolio, the total platform that we currently have, and obviously this will continue to expand over time as we continue to be looking for land is would support nearly 700 megawatts over time of which we’re under construction now for about 175 megawatts, the important thing that goes to your question is, and to Bill’s point, the high class problems we are already leased well over 80% on what we are under construction for. So we are literally just trying to construct to keep up with the level of orders we and contracts we are already signed, together with as we’ve pointed out on the call. So we’ve got a large pipeline, it continues to expand, even as we speak to you today. We’re very pleased with the development that we see in our sales team and within data center. I think it speaks volumes to the fact that we started several years ago, winning business, even in the hyperscale aera as you covered the company for a long time, we’ve historically been a colo retail-oriented business earlier and gotten started getting some new contracts with hyperscale that has continued to build on itself and the first contract leads to another which has led to another with multiple examples. So you’re right in the early part of your question that over the next several years we will deploy approximately $4 billion of growth cash capital I would estimate two thirds maybe even three quarters of that will go to data center as you know the rest of our business is fairly capital light.
And with that, that will support building out the portfolio that we have. And with that, that supports the growth rates that we’ve been talking about for data center, which is kind of low to mid 20s, consistently on a CAGR basis. So we feel really good. I will note that capital will be deployed naturally in a fairly measured way, right? This year, we’re spending on the order of $800 million of growth capital. So it’s, if you just, it won’t be this way, because it’ll be more gradual. But when you think about that on, if you take that $4 billion over four years, it’s not that much of a relative increase as compared to the revenue CAGR that we’re looking at which is 10% compounded. So I just echo Bill’s point, we feel really, really good about where we’re positioned with data center. And there’s some really good dynamics in there that we can talk about further around. Pricing is continuing to lift and churn is low. And yes, so we feel good about data center.
Alex Hess
That’s awesome. So staying on that data center business, you speaking to maybe those dynamics, if you will, how should investors think about the stabilized cash on cash returns? You guys are earning from data center development?
Barry Hytinen
So yes, so Alex, we generally are writing deal, we target and we’ve been writing deals, I’ll break it into two parts, and then bring together so on the colo retail business, that’s kind of think about it, like low doubles, kind of so 11,12, 13, cash on cash unlevered. And on hyperscale, as we’ve discussed before, where that is pretty much an open book, everybody kind of knows what the relative cost is to construct. We’d be talking, as I think most in the industry are in seven to eight kinds of vicinity, maybe even nines on occasion, you have the ability to look through our SRP and see that even on our largest deal, which we signed earlier this over the summer, it was well within that kind of in that eight vicinity, because it’s such a unique deal, you can, we broke it out for you. So I think we see returns in a blended basis, being kind of in that 10,11 vicinity, of course, there’s a relative to how much hyperscale you have versus how much colo, the important thing I guess I would tell you is mark-to-market pricing is continuing to lift across, at least the markets we play in and from what I can see, I think across data center, because some fairly good supply demand dynamics at work here in that — in many markets supply is constrained that can be constrained in the form of actual physical infrastructure, because construction times that can be constrained because of the need for power and permits, as well as supply chain.
And demand continues to I would say at least outstrip what we’ve been expecting, consistently. And there’s lot of markets where that I can say that about and we’re lucky to be exposed to some particularly good markets, Northern Virginia, Phoenix, some of our key markets in Europe, like Frankfurt, London, Amsterdam, these are all doing quite well, we just recently acquired a small data center in Madrid, where we think that is a particularly unique opportunity, which we will build out over time, we’re already building the pipeline for it. And we recently acquired some more land in Phoenix, it’s very legit, it’s right adjacent to our existing sites, where as you know, we’ve, the team has done a phenomenal job leasing up those first two buildings quickly. So we feel quite good about where things are.
Alex Hess
Awesome. So one point to the Asset Lifecycle Management business ALM, you guys did acquire ITRenew about one year ago, expanded that business in a pretty major way. You had sort of a legacy, legacy was called an existing SITAD business, you call it SITAD? How does Asset Lifecycle Management complement the data center offering and just the potential to cross sell data center and ALM? Does that factor into your development plans and your expansion plans?
Bill Meaney
Yes, I mean, the businesses continue to build or build upon the synergies across that I mean, and even broadly, not just the ALM, you’ll recall in the just the earnings call that we had a few weeks ago that we highlighted a major data center win on the colo side that actually came through the records management sales team. So because again, they had the relationship, they had the insight in terms of what the healthcare customer needed to do with their data center. And so we’re able to bring that on the asset lifecycle management is that we find the synergies in both directions. So when I say both directions are that you mentioned that the traditional side type business that business has been growing 20% year-over-year for quite some time. And that’s been driven mainly through corporate, our global industries, staff and our regional staff calling on corporate end users of devices, where we’ve been helping them dispose of their assets.
Moving on in terms of the data center side, you’re right to say is like, a big part of the volume of ITRenew is coming from hyperscalers. We mentioned that about 60%, sometimes 70% of our sales on any given quarter on the data center side is with the hyperscalers. And generally, when they’re building out new capacity, they’re also refreshing some of their equipment, and there’s clearly an opportunity to actually recycle some of that. So we are seeing a lot of traction is usually, it’s not the same buyer, it’s the same department that’s actually making those decisions. So we really have found great collaboration, I’d say, between our specialists in the data center side and our specialists on the hyperscale ALM side, and they continue to drive revenue. If you think about when I say drive revenue is right now, I think it is fair to say we’re seeing an uptick in the volume of what’s coming to us from those hyperscale relationships and cross selling, that we hold on consignment, the sell-through is still continued to be suppressed because the sell-through is primarily focused on in southern China Shenzhen and with zero COVID policy that China’s still enforcing is we see a constant kind of shutdown, reopening for a short period shutdown. And that affects both the people who are reusing the components as well as the demand within Greater China in terms of the people who are also being shut down, off and on as they go through COVID. But what we do see is the incoming volumes are those synergy relationships that we’re getting from hyperscale customers to hold their inventory on consignment is building, which means that when things normalize downstream, we feel we’re in good position to sell through.
Alex Hess
Got it. And Bill, you probably have as good a sense of that as anybody because you’ve spent so much time in China professionally. Any thoughts on sort of that business could, how fast the business can recover when the shutdowns seize, if that happen.
Bill Meaney
Well, I think you’re, I’ve spent enough time in China, I actually just got back from Hong Kong a couple of days ago, that I know that I don’t know that every time I, the more time I spend in China, the less I know about China, so to speak. So I think it is not a place that’s totally predictable. That being said, I do think there’s pressure building, economic pressure building in China, to actually pivot their policy, and I said I was in Hong Kong, Hong Kong has actually reduced their policy a lot. So it’s actually, it’s feasible to do business now in Hong Kong again, and I think that I think China will, I think the other thing that helps us is that, obviously, we’re selling most of our components to the smaller system builders, but when the likes of Foxconn, have major shutdowns of their facilities in the world can’t get their iPhones or their smartphones, then that builds more pressure on the Chinese government to pivot or rethink their COVID policy. So I am optimistic that they will make a change, because I think the laws of gravity are pretty strong. And I think even China, if you look at their GDP current recently, they’re starting to feel that, but to predict how the Chinese leadership when they will react, as I say, the more time I spend in China, the less I understand that so.
Alex Hess
Yeah, I got you. It’s certainly dynamic over there. So I want to conclude with a discussion of Iron Mountain’s debt levels and dividend. So the firm’s net leverage ratio is now 5.2x versus a target of 4.5x to 5.5x, you’re within the target range. The last 12- month payout ratio is 66%. Iron Mountain are targeting a mid to low 60s percent ratio before expanding the dividend. How should investors think about how you’ll manage leverage while pacing investments and growing the dividend? Maybe which of those three aspects are you going to be prioritizing? And what’s the timeline, especially for the equity investors on returning to dividend growth?
Barry Hytinen
Okay. Alex, I’d say we’ve been trying to take a very balanced approach to things, if you look back, even prior to the start of the pandemic, when our leverage was pushing closer to 6x, we said that time that we were going to get back in our range of 4.5x to 5.5x. There were some good reasons why we went outside the range, very strategic that are now I think, people have seen the benefits of that with our data center business continuing to fuel growth and profits. And we also said that we have put in place our long term AFFO payout ratio as you noted it low to mid 60s, and that we would grow into that. At that time we were cresting over 80%, I believe as a payout ratio. And through the team’s strong performance of EBITDA growth and strong cash generation, we are, as you know, approaching that AFFO payout ratio now, and we have also successfully brought the leverage down to 5.2x, which is the lowest leverage the company has had since 2017, I might add.
So going forward, when you think about our next several years and our [inaudible] plan, you should be expecting us to operate inside our leverage range. You should be expecting us to pace that investment dollars, as I talked about earlier, in light of the construction that we have in the plans, but it will pace with expanding EBITDA. So as EBITDA grows, that gives us a little bit more leverage, sorry debt capacity within our leverage target range. And as we get into the AFFO payout ratio, just to mechanically just to stay within the payout ratio, you would be expecting the dividend to rise in time in likely, largely in line with the growth in AFFO just to kind of maintain the payout ratio that we endeavor to have. So it has been a few years since the company raised its dividend. And I’d say we are getting closer and closer to those days of it beginning to rise again, that is correct. But I want you to take away very clearly that we are very focused on being balanced and maintaining those commitments of operating inside our range pacing investment. And, yes, eventually growing the dividend.
Alex Hess
Thank you so much for your time, gentlemen.
Barry Hytinen
Thank you.
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