Iron Mountain Inc. (NYSE:IRM) Citi 2019 Global Property CEO Conference March 6, 2019 11:00 AM ET
Bill Meaney - CEO
Stuart Brown - Chief Technology Officer
Greer Aviv - Investor Relations
Conference Call Participants
Mike Rollins - Citi Research
[Call Started Abruptly] Citi's 2019 Global Property CEO Conference. I'm Mike Rollins with Citi Research. I cover the telecom and communications infrastructure category. And we are pleased to have with us Iron Mountain and CEO, Bill Meaney. Bill thanks for joining us today.
Thanks for having me. So maybe what I'll do is that I'll start just with a general introduction of the company. I'll try not to go down to the basic numbers you are familiar with the story. And then just ask my colleagues to fill any blanks whilst that they think could be useful and then turn up to a dialog in terms of the question-and-answer, if that’s okay.
Great. Let me just get through a couple of quick housekeeping items. So, the session is for investing clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available at the registration desk, as well as on the webcast on the disclosures tab. For those in the room or the webcast, you can sign onto liveqa.com and enter code Citi 2019 to submit any questions if you do not want to raise your hand. So now, happy to turn it over to you and please introduce team and we will then jump into the Q&A from there. Thank you very much.
Okay, thank you. So I'm with our CFO, Stuart Brown and Greer Aviv, who is our Head of Investor Relations. So let me just -- again, I'll just start off with a basic overview. The company is a little over 50 years old. It's both in the S&P 500 and the RMZ indices. If you think about just backing up in terms of the two big assets of the company that it’s amassed over that 50 years. One is what I'd call like the financial beast, which is the record management business, which is where it's really at the forefront and we are the only global platform in over 50 countries with over 225,000 customers around the globe. And that’s the reason why I called the financial beast is that’s a 75% gross margin business, and its approaching almost over 600 million cubic feet of records or approaching 700 million cubic feet records around the globe.
And just to give you a physical view of that, that’s about 600 million of those Xerox boxes that you see or if you -- for those who saw the Big Short, we didn’t pay for the placement, but you have seen someone walking out of Lehman with a Iron Mountain logo on their box. So maybe we have 599 million, 999 million now, because one of them was on the TV shows…
Did you have to pay for that?
No, we didn’t pay for it. It just tells you how ubiquitous our boxes are. I mean, there is virtually almost nobody in the financial service industry that doesn’t know Iron Mountain. So that is a really core part and each of those boxes on average is $0.25 a month. And you multiply that by 700 million boxes and it’s a 75% gross margin business. So it's why I call it the financial beast. And even in the course of today's -- this 30 minutes that we have together, there is about 5,000 boxes that will flow into our facilities around the world. And when a box comes into our facility, half of those, so 50 years from now, still 2,500 of those boxes will be in our facility is getting $0.25 a month. So it’s a very sticky business and very consistent business. So that's one what I would call the one part of the asset.
The other asset, which is what is built on that, is the -- or provides that is that customer, I mentioned 225,000 customers. But even more specifically, 950 of the Fortune 1000 are our customers and they have been our customers for decades. So those are really the two big assets that we have as a company. So where is the company going forward on that? So five or six years ago when we started the current strategic journey is 90% of our business was in mature business model in mature market, so it's an record management business. Whilst it's still growing organically, it's obviously not growing -- it's growing low single digits. So 90% our business was in that category. 10% of our business was same business model but faster growing emerging market. So emerging markets for us are Eastern Europe, Asia, Latin America. Now the reason why those market -- and those markets are growing high single digits organic growth rate. So the reason why those markets are growing faster is the obvious reasons, higher GDP growth, but also earlier in the outsourcing game. And I can give you a few examples on that.
So just to give you one very specific example. We have a customer in India who is starting to outsource their record, so it's a state owned bank. When we first approached them, we had to explain to them not how we differentiated versus our competitor, because 100% of their inventory is in-house but what records management really is and what good records management really looks like. In-house, they have 35 million cubic feet, 35 million cubic. Our total volume in North America as a company is 400 million cubic feet. So obviously GDP growth in India is really interesting. But the other thing that’s really interesting is people are still doing something in-house that's almost 10% of the size of the United States that’s just one customer. So that's the second part of it is how do we actually go from 90-10, five years ago and how is that those places like India, etcetera, be a bigger part of the story.
The third aspect was saying, okay, beyond that, can we actually build our footprint in adjacent businesses where our customers want us to continue to provide services, because that relationship with the customers is built on trust, why do they give us the box is because they trust us. And the number of customers that would continue to come to us and say can you help us with outsourcing our datacenter? Can you help us on our digitization? Can you help us in terms of the way we control our electronic content, as well as our physical content? So we looked all that and we have the three pillar strategy.
First pillar again is don't mess up the goose. There is that developed market, 75% gross margin business, which is Western, Europe and the United States, and the goose keeps dropping these golden eggs, which are very durable, very valuable and requires very little reinvestment. So that's -- so if you think about this is that we have a new business area with a piggy bank sitting alongside. The second part of this thing, okay, how do we continue to grow that footprint in same business model in the emerging markets? So I said we were about 10% of our sales five or six years ago, as we sit here today, we're about 19% of our sales approaching 20% of our sales. So obviously now 20% of our sales are growing high single-digit whereas before it was only 10%. And we still have the golden goose, it hasn't gotten smaller it's just the other part of the businesses is growing faster. And then the third area was, okay, what about those new services. And the new services are really broken up into two different categories. One is datacenter, and we can talk about that would may some over the 18 months we've invested, approaching $3 billion in data sciences and we can you talk about the importance of the data center business.
The other part is how do we actually provide more services around our customers, around digital transformation. And that digital transformation is important. It keeps the relevance of those customer relationships I was talking about, especially with 950 to Fortune 5000 the largest companies that are struggling, living in this hybrid physical digital world. And it provides not only more opportunity to services like the joint venture that we have with Google and the Google Cloud, but -- around machine learning, but it also those conversations make their box business even stickier, more relevant to them. And then the other aspect is the data center business today. So we were very pleased in terms of what we've been able to do in the data center. We've been very deliberate in our pace. We've been talking about data center to investors for almost five years now. We had a data center business long before that, but it was more happenstance. What I meant by that is that, we had people like Marriott, the Social Security Administration, U.S. Patent Office that approached us and asked for third party data center capacity. And we provided that for mainly in our underground facilities in outside Pittsburgh and outside Kansas City, and the small above ground facility and more recently in Boston.
And before we were going to put large amounts of capital behind that, we wanted to make sure it made sense from an investor. And what I meant by that is the synergy between that customer relationships that we have. Because quite frankly, all of you can invest in data center, you don't need Iron Mountain as a pathway to invest in data center. So we wanted to make sure that if we were going to spend billions of dollars of capital to go into data center, it was the one plus one equals three, at least in certain segments of the market. So we spent about four years proving that out to ourselves that is specifically enterprise customers is that we would actually punch above our weight in that if someone invested in data center through Iron Mountain, they would see a benefit. And the benefit that we found was not we don't get better returns but we get better fill rates around the enterprise, specifically around the enterprise customers. And we can explore that further if you want in terms of the Q&A. So we're very pleased by the progress of our data center business. So as we sit here today, about 7% of our EBITDA is in data center. We said by 2020 that will evolve to about 10%, so you say we're still relatively small, yes and no.
If you think about right now we on our Q4 call, we highlighted that that shift in mix that I talked about that used to be 90-10 is now 75-25, 75% is in that that mature financial beast and 25% is in the fast growing segments, which is a combination of emerging markets data center primarily, so already at data center time. And what happens is if you look at that split that gives us a little over 3.5% organic revenue growth as we sit here today. So without doing any acquisitions, the company is powering along at about 3.5% organic revenue growth on a constant dollar basis. That translates into about 4% EBITDA growth organically.
So you say, okay, but how important is data center? Data center is already providing 1.5 to 1.7 points on a consolidated basis of that EBITDA growth, because whilst it's only about 7% of the EBITDA and it will be 10% of EBITDA by the end of 2020, it's a 50% gross margin business growing at low double digits. So the impact in terms of on the business already on financial growth is already quite impactful and well on track that by the end of 2020 we will have 5% organic EBITDA growth. So the last thing I just want to say that I'll just check with my colleagues if I've missed any of the key points is that then you can put that into an evaluation, how do you think about the value that we're delivering, and how do we give that back to the shareholders. So we're sitting here today we're about a 7% dividend yield. We have been consistently increasing the dividend beyond higher bumps when we first did the recall, is we consistently guide the market and delivering 4% growth in dividends.
So, on a constant multiple basis means as the company sitting here right now is we are delivering 11% TSR. And we have also already gotten the market that we will continue to grow dividends around 4%. So that’s how we are doing this and that’s where an income oriented stock and that’s how we are giving returns. So right now, it’s a combination of -- obviously, it’s a pretty high dividend yield and that we continue to grow the dividends over time. So let me stop there and just check with Greer or Stewart if I missed any.
I think you know the key points.
Great. So one question that we are asking all of our companies that are here this week is what is the biggest potential disruption to your business and what are you doing, you take advantage of it or mitigate the risk of it? You just described a lot of what you're doing strategically, but maybe talk about how you perceive what the biggest potential disruption for you.
So one of the things -- it's kind of interesting is twice the year, we get our top 120 leaders from around the world together in a single place. So we have 24,000 employees but the 500 that are leadership. So our view is to get 120 people moving in the right direction, you could move. And so the theme at the last meeting was, be a disruptor, don’t be a disruptee, right. And the disruption is actually a positive force if you are on the front foot of it. And I was with our colleague who runs the western part of the United States, recently visiting some customers in Arizona. And he showed me a chip that he used with his team and he said I'm a disrupter. So they had done a thing in Las Vegas. So we are all about -- it is a very good question. And I think the area that doesn’t -- that comes in sharpest focus. If you think about why we did -- why we are pursuing the partnership with Google and Google is pursuing the partnership with us and why we are pursuing data center is because we saw this as an opportunity to disrupt.
So if you look at on the data center spaces, because we are in about -- we rotate the tapes for most of the Fortune 1000 in terms of paid backup in their data centers. So we are in just the United States alone over 33,000 data centers a month. And through that as we started seeing where data center business is going using alternative means of backup. They are using more efficient tapes. So that’s the negative of disruption. So you can see that in our tape lines, it's not that they are not backing up the tape but they are putting the tape that’s becoming more and more dense, right?
By the way, that’s still physical to tape or is that code for hard drives that you are putting out…
No, it's physical tape. Actually physical tape is still, if you talk to people in the -- I see that our single largest customer now it's our number two customer globally is a very large IT company, and virtually, all that we do for them is take backup. So it limits to how many IT companies, but you can say they are pretty sophisticated. And the reason for that is tape is both durable and cheaper. The issue for us is we are being disruptive on the tape side quite frankly, because we charge by the slot, we should charge by the byte, but anyway, my predecessor, I blame for that not me. But now the tapes are becoming more efficient and they are virtually doubling the amount that they could put on the tape. So whilst we see the tapes going down a little bit like this, the volume that we are storing on tape is still quoting up like this.
But we are seeing how people are doing that, so that was where disruption was coming at us. But during that process, we started to seeing what people are doing in terms of moving their IT loads. That virtually all our customers are living in a multi cloud environment. They are going to have some private cloud and they are going to have some public cloud. And even the public cloud is going to be spread across two or three different cloud providers, because each of the cloud providers have a strong -- have different strengths. And that’s when we really started thinking this datacenter business, which was finding us before maybe we should find the datacenter business, because it gives us a real advantage to see when somebody -- because we're going into their datacenters, we can see when their datacenters are actually getting long in tooth or getting updated and we can also see when you are starting to create vacancy in their data centers because they are moving loads to the cloud and we could help them on that. And that’s what we've seen in the datacenter business that by being a disrupter and taking that information and seeing where they are going is we've been able to achieve higher market share and shoot outs for the enterprise customer; A, because we're actually keying it up to begin with; and B, because we already have the relationships with them. So that’s one area.
The second area is that we have a digital service business, which we call IGDS, which is partly information governance, partly business process optimization and partly scanning. And the business has doubled in the last three years. It's still a relatively small base. And globally we do about $200 million worth of scanning. And we said, why are people -- we never ask, why are people scanning. And when you start asking why people are scanning, you realize that first and foremost they are saying what we want is better access. Problem with better access is we can store a box of documents for 80 years, eight zero years for what it cost you to scan that box of documents. So believe it or not, it's not just jumping in into a Xerox machine, it's quite expensive to actually scan it. So then we said that people are still scanning more, so why they are doing that? And we realized they were on a pursuit to try to get more value out of those documents. And that's when we said, well, if we can do a better job at putting, extracting -- scanning to a higher resolution, so that we can extract more metadata from that and then put that into a machine learning cloud, then could we accelerate the growth of that business and hence the partnership with Google.
Our view is that Google has some -- amongst the best machine learning and artificial intelligence experts. Our people have the B2B -- Google will tell you, our people have the B2B relationships. They are not really a B2B company, per se, they are becoming -- obviously, that's where they are going with G Suite et cetera. They wanted to be more and more with corporations. And it's a combination when you start doing that is you want to ingest both physical and digital content. So in the short time since we announced the partnership with Google at the Google Next in July last year, we've done proof of concepts. We've done another Google Next exhibit in or events in London where we were the most visited booth. And we're on stage again with Google Next in April in San Francisco. And Google reps are carrying quota for product. And the types of proof of concept that we're doing, which is again to see can we actually even disrupt the digitization more or accelerate the digitization -- the push to the digitization more are things like integrated oil and gas companies, bringing information that we have physical, cracking case that they have digitally, downloading information that they have in their cloud and then taking resource satellite data and putting that in a way that a geologist can see that if one workstation simultaneously and then ask questions what other oil oilfields in the world have similar characteristics and it would take [indiscernible] that particular location. That's just one proof of concept where we're trying to within partnership with Google disrupt the whole digitization market.
Q - Mike Rollins
So we have a few questions that have already polled in. And I'll just remind people if you have a question in the room, you can push the button on your microphone. Let's go up to the right here for the question please.
I understand you have strong relationship with your clients on the storage side and the scanning side. What I don’t get is, how did you made the leap to go into data center? I mean, I’ve gone to many data center meetings year-to-date and they made it sound like a very complex business and its high level and you guys are coming from a paper world and just doing it. Somehow I don't understand that leap that you were able to make, could you elaborate on that?
That’s a great question. I think people always try to make things more complicated because we feel like if we make it sound complicated we can get more economic rents for it, right? But anyway. So first of all we were in the data center business for a very long time, actually operating probably in a more complicated environment in underground facility. So it started in mainly our underground line in -- where there’s over 2,000 people that go to work every day outside of Pittsburgh, mostly government employees because we rent -- sub rent a lot of space to the United States Government for various functions and then also an underground facility in Kansas City. In the complexity of operating in data center underground, there is a big advantage we have an underground lake that helps cool the data centers, that’s really a big advantage. But the complexity of doing anything underground in a mine is really complicated and we literately have fire trucks that run around in the hallway. So we’re doing best to tourists down there, if someone wants to see that, I am sure Greer will help accommodate it.
So we’ve been operating data centers for very long time in a very complex environment. But at the end of the day there is -- I mean there is complexity in building office towers, there is complexity in building data centers. It is a real estate business, right? If you think about where -- there are three things that customers are interested in, and if it’s an enterprise customer it’s four things they are interested in data center. It’s access to power and power costs, access to telecommunications and it’s can you actually construct the amount of capacity that they're looking for it and have it on time, right? And that’s the last one to say it’s very complex. It is but I think if I was talking to Boston Properties, I think they’d say putting up the sales force towers probably is complex, probably more complex. And this is the business that we've been doing for -- the last part we’ve been doing probably for I don’t know 10 or 15 years, but actually selling it as a commercial product is where it’s kind of new for Iron Mountain. If I add enterprise, enterprise typically wants the location to be within 100 kilometers or 100 miles depending on European or American of where there IT staff is, they don’t want their IT staff to have to fly half way across the county to get access to the equipment. So that’s kind of the probably fourth category.
And as a result what you see is to give you a couple of proof points of why us that we asked exactly the same question because it doesn’t makes sense of us -- it wasn’t because of the complexity, these things are -- I mean they are not that complex, I mean to give you an idea just one thing on complexity, is one thing that differentiates us in the market, I was talking to a large hyperscale player and the person is running the hyperscale business there now came from the oil and gas, and she's very focused on safety. And one of things that resonates with her is Iron Mountain is very focused on safety. A very few of our competitors are. And that’s not because they are unsafe company, is because we have 24,000 people around the world that operate from height. So we’re really focused on occupational health and safety. We’re really worried about people getting electrocuted on the site. We’re really worried when people come into our facility, they are on a tour, not only do they sign in properly but people wear different color vests, whether they are from the facility or not because we want to make sure if there is a fire, there is emergency, people know who they have to follow to get out of the building.
So we’re used to kind of operating in very rigorous environments. And that resonates with our customers. So one of the proof point we want -- one of the proof points that we had is regarding this journey is, can we actually punch above our weight on enterprise, came with the Credit Suisse acquisition. So Credit Suisse was looking to sell their two data centers in Singapore and London, and JAL was the broker. We didn’t enter the process, JAL didn’t ask us to go into the process and all of a sudden we get a call from Credit Suisse and they said we would like you to be in this process. And there were -- I think there were dozen people in the process at this point and they said we would like you to be part of the process. So our guys went into the process.
And then we looked at and said we are not going to offer that much for it, again call came, said no we really want you to bid for the process because of the relationship we have with Credit Suisse on the data management and on their records business. We won that business and we weren’t the highest bidder, far from being the highest bidder. And one of the reasons why we won the business was because of the comfort that Credit Suisse had with us corporately. And one of the things that they weren’t required that they felt that they needed to was ask approval from the Monetary Authority of Singapore. And we already have a large presence in Singapore. We work for both Singapore and international banks in Singapore. So those are kind of the some of the touch points. That’s real complexity. If you are a heavily regulated industry you really need to make sure your data center partner understands what it means to be in a heavily regulated industry where things go wrong, there is a high level scrutiny. That’s where we punch above our weight.
Just one follow up. So when I described your business to them, they won't say that you do data center, like, we do the real thing. When I talk to the other companies -- other data center companies and I’d say you are doing it, they won't say you’re doing some sort of different data center business, you’re competing head-to-head.
Yes, yes. Greer comes from CoreSite, ask Greer.
I don’t – they -- I think we compete head-to-head. The one area where they are stronger than we are typically our competitors is on the hyperscale. They’ve cultivated relationships with the large cloud people for half a dozen to a dozen years. So that in terms of what we basically provide and how we deliver it to the market, there is no difference. We all use the same general contractors and I wish I could say that we build the better data center than our competitors or vice versa they do the same. One thing that does differentiate us is on the green power side is that I think we are now 25 in the United States, that’s the 25th largest corporation in the United States in terms of buying green power. So we have actually bought three or four winds farms now, forward 15 years of wind power, also some solar but mostly wind. So that it differentiates ourselves in terms of sourcing the power. And virtually all our data centers also in Europe are now supplied by renewable power.
We have a few questions that have polled in. So the first one is, is the data center growth that you were describing earlier, organic or how much of that is from putting the capital to work?
That’s a good question. So the -- it’s organic, is what I am talking about is that kind of low teens organic growth rate but it is putting capital to work as we’ve guided market this year we will put about $250 million of building out. But as we sit here today sort of the acquisitions that we have done and also the land that we have recently bought in Chicago and in Frankfurt, so which are both fully permitted and have access to power is that we are on a little over 100 megawatts today of built out IT critical load and we have capacity to take that up to about 300 megawatts -- just under 350 megawatts. So the -- it is -- obviously it’s not free, that organic growth. And as we will put capital to work and depending on the deployment and the location that can be anywhere from let's say at the low end $5 million but more probably on a blended basis $8 million to $9 million per megawatt and that’s -- but it’s organic build out I would say but it takes capital to do that and right now we're estimating $250 million a year.
And how many of your additional document storage customers are customers in tape backup and datacenters?
It's -- well let me answer the question in three different ways. So before we did the IO acquisition it was about 65 -- if I remember right, it went a little bit below 50% with the IO acquisition because they had which was both good -- which was a good thing as they had a more -- we got new logos that way. But if you look at the recent Q4 call or our end of year call, in the course of 2018 a little less than 35%, 34% of our customers were new logos in the data -- for datacenter, about 45% of those or so were existing customers of Iron Mountain. So again it shows you the connection between the two. They were both new logos through our datacenter business, but almost half of those were existing Iron Mountain customers.
And may be another question about how you think about the expansion of the datacenter business over time with M&A, development, how do you fund it? And I guess maybe the question -- if we take this question and just expand it a little bit further and just say, as a company how are you managing change? So how do you figure out what the appropriate pace of expansion is? Like you have you have a goal for the end of 2020 10% of EBITDA, how do you think about that going faster, being more measured? And we have a couple of minutes to unpack that and then we will get to our rapid-fire questions?
Okay, so I'm going to -- I'll spend -- I am looking at the clock, I’m going to try to spend 45 seconds answering part of that question, I'm going to ask Stuart to answer kind of the capital -- the financial capital aspect of it. So first of all, at a high level, we are -- from a capital allocation is that, we think we can walk and chew gum at the same time in the sense that our view is measured investment in emerging markets and datacenter makes sense because that diversifies the growth portfolio of the business which delivers about 5% organic EBITDA growth and we're on track for that. So that's kind of one stake in the ground.
Second stake in the ground is we think it's important to continue to return cash to our shareholders with a 4% dividend growth which is slower than our AFFO growth and slower than our EBITDA growth. So what that allows us to do is both delever and naturally our payout ratio will come down over time and we think that that's the right balance because we think it definitely means if you are an income oriented investor, we are more than offsetting inflation, right? So we think those are the two things.
The other pacing factor is people, right? And then I'll turn it over but I do want to talk about the people briefly. So last week I was in Bentonville, Arkansas seeing a customer and then I spent some time doing a town hall with our folks in Bentonville. Now these people in Bentonville, this was our record -- the people who work in our record centers, the people who drive our trucks, so it was really the frontline staff. The thing was really interesting. The questions they all asked was -- and the excitement was about the new businesses and things like what new business -- what are the businesses we are going to add in the future, how was datacenter doing, what are we doing with Google? Huge level of excitement. That's really important to manage because again those are the people that are actually running the piggybank, the financial piece. You want them not to feel like they are second class citizens and the only thing the top management is interested in is the shiny new object. They are actually excited about it.
So for a company like ours it’s really important to measure their culture. They were also interested about the customer I was meeting that day. But the reason I was meeting the CEO of that customer that day was to talk about the digital offering. But the reason why I was able to have that meeting is we were doing a $5 million scanning project of HR files that we had in-house. So again they understand it because they have those HR files in-house and colleagues had to scan those that I was able to have a conversation with the CEO and they're excited about the direction.
And so touch quickly on the capital allocation side of the balance sheet. We’ve got a solid balance sheet. Our least adjusted leverage, it’s in mid 5 to straight in line relative to the rest of the REIT industry. Over time that will come down as it will sort of naturally delever as the cash flow continues to grow faster than deployment. As Bill mentioned, we're putting capital to work in the faster growing parts of the business, right? So and the international side on records management, we continue to do really essentially tuck-in acquisitions there. We're not adding too many new markets in that area. Those returns are mid teens IRRs, very low risk, we're doing acquisitions on top of infrastructure and management teams that already exist.
The biggest capital -- again going back to work on the datacenter side where we’re putting $250 million of development capital work, again on a total market cap of Iron Mountain that was equity of $18 billion. So it's not like a huge development pipeline relative to very manageable development pipeline. But building out those capacity in Arizona, in Virginia, in Frankfurt, Chicago, meeting those needs and the data center business this year is generating EBITDA over $100 million, right? So some of that will be self funding out of the -- at least out of the data center business as well as in the cash available for distribution after we pay dividends and things like that. We’re generating about another $100 million of capital available for growth.
In addition, we’re continuing to recycle capital as well, so last year we sold over $50 million of industrial real estate that we owned. We own about $2.5 billion of industrial real estate excluding the racking which is essentially infrastructure inside the buildings. So as some of our locations have higher and better uses, we are in active program to determine which locations are the right ones to just sell out, especially where industrial cap rates are today and put that capital back into the datacenter business. So feel very comfortable to fund the plan.
And so just to get to the rapid-fire, we’re just going to go into the music for a second.
Will your property sector have more or fewer public companies a year from now?
We will probably have more because it’s a private equity company in our sector.
What will the same-store NOI growth be for your property sector in 2020?
Our same-store organic growth in terms of profit, 5%.
5%. Treasury yield, one year from today? 10 year?
And finally what year will the US enter a recession?