Iron Mountain Inc (IRM) CEO Bill Meaney Presents at Stifel 2020 Virtual Cross Sector Insight Conference (Transcript)

Iron Mountain Inc (NYSE:IRM) Stifel 2020 Virtual Cross Sector Insight Conference Call June 8, 2020 11:20 AM ET

Company Participants

Bill Meaney - President and Chief Executive Officer

Conference Call Participants

Shlomo Rosenbaum - Stifel

Shlomo Rosenbaum

[Abrupt Start] for making himself available to answer our questions, join the chat, talk to investors. What I am going to do is I am going to open it up for Bill just to give us a quick overview of Iron Mountain literally a minute or two and then jump into some questions. I want to let the investors know that you can submit questions via the webcast through the site and I will present those questions to Bill Meaney. So, if you submit them, they come up, I see them, I will read them and we will put them out there. So with that, I am just going to open up. Bill, if you don’t mind, just giving us the really quick lowdown on Iron Mountain?

Bill Meaney

Okay. Thanks, Shlomo. Okay, So, again, those of you are new to the story. So we are approaching 70 years old. We are in the S&P 500 and the [indiscernible] or the REIT Index. I mean, we are in about 50 countries and have 225,000 customers around the world. The other thing I would say in terms of the customers, we have about 2% churn, so that means that our customers have been customers of ours for decades. So, if you take a step back, how do we think about the assets that we have are the major assets we have in the company. I would say that we really have three major assets. One, first and foremost is our people what we call mountaineers and you will leave and see that during the current thing I would say is when the crisis or our customers are in crisis is you see the resiliency of the folks and I just want to say I couldn’t be more proud of my colleagues at Iron Mountain in terms of the way that they have actually managed themselves and kept each other safe during it, whilst we have been impacted by the virus much lower levels than the 25,000 people spread around the globe that you would expect.

The other asset that we have is really the traditional part of the business, which is the records management business. So we start the month of January with 97% of our storage revenue already in-house when we start at the beginning of the year. So, this is on average a box comes with us and stays with us for 15 years and as I say that is it any year where we are topping that off up by about 3%. So that’s a – and it’s a 75% gross margin business. So, it’s just what we call internally the financial beast. It just drives so much profitability and cash that we both used to pay our dividend and invest in the growth of the business. So, every morning I - say I get up in the morning to take a pile of orders next to my bed and I didn’t do anything for it except snore, right. So it’s really a great business and a great annuity.

The other part of it that comes with that is the customer relationship. So, I talked about 225,000 customers and 2% churn, but even more specifically, we have relationships that go on for decades with 950 of the Fortune 1000. So, 950 of the largest global companies are our customers and we have built that on a level of trust. So, if you then take a step back and you say think about data center, I mean, today that we sold 27 megawatts of pre-leased – 27 megawatts of total capacity of our Frankfurt data center on a 10-year lease is that with renewable options, that’s really where our – how we explained the data center business is the relationships that we have been able to build in decades, especially around customers that are sensitive around high levels of security and safety, which is an area where we played in our traditional business and now more and more in the new data center business.

Additionally and we have seen that actually come into form in the current environment is for our traditional business, we help them navigate in their hybrid digital physical world and we have developed an inside platform with Google a few years ago where we were their artificial intelligence and machine learning partner of the year. And we have seen in the current environment is although we didn’t foresee this, but it’s really helped our customers working remotely. So, we highlighted our earnings call in Q1, for instance, a state that was dealing with a massive spike in unemployment claims plus their inspectors or adjudicators were working remotely both from the office and from each other and we were able to go into their facility, upload both digital and physical content on to our InSight platform and allow those folks to both scale for the influx of demand that they were seeing on sadly because of the unemployment associated with COVID and at the same time be able to quickly adjudicate and get people their checks, all because we have been able to build these interfaces that allow people to work in a hybrid physical digital world and now more and more also be able to work remotely. So we are again very proud of our team in terms of how they quickly adjusted to the crisis. So, that’s probably our biggest asset, because it’s not just the product and capabilities they have that they have been able to actually customize those [indiscernible] help a number of our customers during COVID.

Question-and-Answer Session

Q - Shlomo Rosenbaum

Okay, great. And maybe you can just to segue from there, can you talk about how the COVID-19 pandemic is impacting the business, just as a unit level and can you talk about the physical storage and then the data center business and what kind of the businesses that are around those?

Bill Meaney

Okay. So, let me kind of start from the worst to the best, right. So, in terms of our service business which is 40% of our sales and 20% of our profit that’s where it’s been the most heavily impacted. Whilst 96% of our facilities around the world have stayed open, as you can imagine both the combination of people not being in the offices as well as lower economic activity means that there is less demand to either pickup or drop off boxes or to pickup paper for shredding. So, if you look at that, then about 40% to 50% - and we talked about this in our Q1 call, for instance, in the month of April, we saw our 40% to 50% decline in 75% of our service portfolio. And again, that represents about 20% of our profit. So, it’s a small part of our profit pool, but it’s still impactful and we have taken out about $350 million worth of cost, mainly through furloughs as a way to try to curtail or to match as best we can, can do a 100% matching, but our cost with the lower activity levels. I mean, we have seen some positive ones like I just mentioned in terms of unemployment or digitizing and handling mailrooms so that people can continue to work remotely. But overall, we have seen because of the size of our normal records management business, we have seen an impact in that area.

On the storage side as I said at the beginning in my introductory remarks, 97% of our sales of our storage volume is already in our facilities on January 1 from this year. So, the thing that we have seen impacted is a slowdown in some of our new sales activity, but we are able to more than offset that we are still getting some new sales. We are still getting new volume coming into our facilities. And then we are more than to be able to offset that in terms of pricing. So what does that mean is that while we do expect negative volume for the year on an organic basis we still expect storage revenue growth to be positive for the year on an organic basis, because we can offset the volume headwinds more easily by the pricing.

The other thing I also put in context is when I talk about the volume is I am just talking about the record size of the volume. Additionally, as we further offset any headwinds that we have in the records management side with other areas of service or other areas of storage, versus again in Q1, I think we highlighted that we had negative 600,000 cubic feet in terms of volume impact on our records management business on a total of 700 – over 700 million cubic feet globally. But at the same time that 600,000 negative was more than offset by 700,000 cubic feet of additional consumer storage that we took in during that period. In our consumer business where we provide the back end storage and logistics for make space, continues to do quite well during the pandemic. And then the last aspect the part that we continue to see a lot of buoyancy is in our data center business. So, we guided the year that we would do 15 to 20 megawatts of new leasing activity in our data center business in 2020. I mean, the first quarter we had already signed a little over 6 megawatts. So, on an annualized basis we were already tracking ahead of our 15 to 20 megawatt guidance. And then this morning, we announced the 27 megawatts of pre-leasing activity or the lease that we signed for our Frankfurt facility, which we have started construction on the end of last year. So we will update our guidance for data center of the year, but clearly, we are already well ahead of what we guided for the year and we are only in June.

Shlomo Rosenbaum

Great, thanks. Just to stop just for a minute just on that announcement from Frankfurt, you guys had been talking for a while about looking for a build partner over there just for the capital. And then when we went into recently I saw that the Frankfurt facility was due to – the assumption was that you guys are going to pay for the build all your – on your own, was that because you already saw that this large contract was coming and you figured it’s better off looking for a partner after you have already got a contracted customer in there, so that would happen?

Bill Meaney

Yes. So it’s exactly that. As we – you get – we can make a much better deal for Iron Mountain shareholders if we are bringing in a capital partner on a stabilized asset and now obviously it’s a fully stabilized asset. So we wanted to make sure that we kept it moving forward and our expectation is still that we are going to bring in a third-party provider, which allows us to recycle capital from the stabilized asset to put more of our money to work on development assets and because we control – we have the whole commercial engine is on a when we look through on the commercialization risk, it’s obviously much lower risk to us as an operator. So we like to put as much of our capital on developing sites rather than on stabilized sites. So that’s our intention is still to recycle the capital, but obviously now at a different rate.

Shlomo Rosenbaum

Got it. Okay, very good. Then I just want to put some of the questions to you that COVID-19 related that I have been getting recently just in terms of thinking about the business of longer term and I think one of the questions that comes up again and again is that with his work-at-home environment, there is – people are getting more accustomed to working at home and I talked to the companies that I cover and all of them are saying, yes, we are going to be more flexible in terms of having people work from home. Do you envision this becoming a kind of a somewhat of a changing of the work environment that would impact the physical storage business that you have had had for like said like 70 years now, will this change the incoming volumes, because people will literally just not be in the office to the same way or how are you thinking about that?

Bill Meaney

Yes, I don’t think the – so let me kind of answer in a couple of different ways. So I do think to your point I think the office is going to become more and more about meeting rather than working right. So and when we spoke to our customer advisory board which is our largest global financial service customers, this is back in April they were saying that they really intend to come back to the office. I personally think that mix will change a little bit, because I think we have all been surprised by how much productivity we get from the tools that we are using now. And that’s really forced us to learn how to use them and use them effectively. But I do think there is some social aspect and certain things around meeting that’s still going to be important. So that’s kind of on that level. Now, how is it going to affect our business? I think that the drag on our business over the next 2 years will be more about what I would call economic activity led and not about digital transformation or the fact that people maybe working remotely or at home. So why do I say that is the investments that people have been asking us to help them with and others is on digital transformation is more what I would call putting a layer on top that facilitates remote working. So we have actually pretty excited about some of the things that we put in place using InSight as the base layer or the backbone to allow people to work remotely, but we haven’t seen an uptick in terms of trying to accelerate. I am not saying they decelerate and although there are some areas like law firms, which I would even say are decelerating some of their digital transformation because of budget concerns. But for the most part, they are not accelerating what I would call digital transformation that’s removing large amounts of paper.

So, what it does mean though is that there are cases where we want a couple of mailrooms recently, because they are asking us to go in and actually manage more and more of the paper inside the operation, need to digitize that or bring it back to our facilities or storage or the unemployment example I gave. It was the same thing in this particular case these were documents that we wouldn’t have probably even had for storage because these are kind of temporary paper records for applications which they have asked us to digitize and store for a period of time. So, there is some – we do think we will pickup some what I would call temporary records for physical storage that normally we wouldn’t be asked to do, because people are working remotely and they need us to help manage some of that upfront information flow, but we don’t – we still think that you think about a mortgage document, we don’t – today, very seldom do we store the originating sheet, but we – you are still going to be – we are still going to be storing the collateral for very long time, because the collateral still needs to be in physical form. So long way to answer your question is that I think that the remote working provides us a little bit more opportunity on the temporary side. I don’t see it as also on putting a tailwind behind us in terms of physical storage, but I don’t see the breeze that’s facing us increasing a lot either.

Shlomo Rosenbaum

And then to say specifically, because you work on the digital transformation and you are not seeing uptick in digital transformation projects despite what’s going on that’s what’s you pointed?

Bill Meaney

Yes. And the stuff that they are asking us to work on is much more what I would call putting a digital layer on their current process to help them work remotely.

Shlomo Rosenbaum

Got it, okay. Just to remind the people on the webcast that you can submit questions through the webcast and I am happy to ask them, Bill. One other thing I want to ask as we are jumping through this is that, has there been any change in the document destruction or shredding business, I know that there is obviously the ability for you to get some of the bins and stuff like that has been more challenged because of the two items right, people are not working in the offices so there is not as much paper and then number two just the accessibility of the offices, but there has also been an aspect of paper prices that have really skyrocketed and are you – can you talk about how much of an offset that’s been for your business in terms of the shredding side and do you view this as kind of temporary for a few months, I mean how long does that take to kind of normalize in the business?

Bill Meaney

Yes. It’s a really good question. So, still if you look at the puts and takes on the activities of the shred business, we picked up some healthcare both during the crisis, but obviously, a lot of people work in the office decrease. So, we definitely when I talked about the 40% to 50% decline in our service activity for 75% of our service activity, that 75% includes shred. So, we have seen similar kind of order of magnitude drop in activity and that’s the amount of paper that’s coming in, right, the 40% to 50% less activity is 40% to 50% lower tonnage in terms of paper for recycle. But to your point, we have see a spike, because a lot of our paper both for recycling fine tissue, which is a nice way to say toilet paper. So I still don’t fully understand the connection between COVID and toilet paper, but some – I am sure some of them will medically describe that to me at some point, but it’s – it has been we have seen an offset as you say in terms of the increase both in April and in May and you can see that in the [indiscernible] Index that in terms of what’s happened on pricing. I mean, we expect that to start coming back. I personally use kind of the Costco test. You can get charm and again in Costco. So I think that will start normalizing. So it has been impacted, I mean, it’s still a very profitable business, but the pricing has improved versus what we started the year, but it’s still a long ways off from where it was a year ago.

Shlomo Rosenbaum

And is that a business that also like over time is people like you said it’s the way that people work becomes more of the offices and meeting place as opposed to a work place, does that – what are the implications for the shred business in a longer term basis?

Bill Meaney

Yes, it’s a really good question. So we have had a number of our – and I don’t know what the puts and takes on this will be, Shlomo, but we have had a number of our customers that asked if we could figure out a residential shred program, because they could have a number of workers. Now, as you know a number of financial service folks are not allowed to print at home, but believe it or not, some are and we had a number of them approach us to see if there is a solution. I don’t – at this point, I don’t see a way that that’s going to be a one for one offset, right and it’s hard until we get more things stabilize a bit to see where that’s all going to shake out. The way I kind of look at shred is we spent a lot of time talking about, because last year was it was a fairly big drag on – I should say it was a fairly big drag. It was a noticeable drag on EBITDA, but if you look at from a valuation or the business, I kind of – I see that as a business that we just make sure we maintain our margins, our return on capital and I kind of take what comes to us, because there is a cyclicality both in terms of what we get to the paper as well as activity in that level. So it still is something that drives a lot of profitability. But I think when you and others actually put a value on the business, it’s not something even with the volatility we saw last year is not something that changes the valuation of the business, but it does add noise to the EBITDA line, which is kind of too bad, because last year, I spent I remember I was in some investor conferences, I spent a lot of time talking about it, because they noticed what happens on paper prices and it obviously impacted – it was kind of like the – yes, you are talk about $10 million, $15 million maybe $20 million impact on EBITDA and – but then you kind of saved the animal, does that change your valuation of Iron Mountain, no, right, it doesn’t really change the underlying value of the business, but the problem is it’s a distraction in both directions.

Shlomo Rosenbaum

Right. Just some of the more, longer term questions, you announced in the last call incremental $175 million in permanent cost savings related to the Project Summit efforts. And this is besides of the temporary COVID-19 cost activities, it’s a significant amount of cost and can you talk about what you did structurally within the company that in what’s happening in terms of your collapsing of internal infrastructure to kind of give those cost savings and in terms of the contracting stuff that you are doing as well?

Bill Meaney

Yes. So a couple of things happened. One is that when we sign up the summit teams we have found much more opportunity than we originally expected right and also a factor. If you kind of see that we have printed in our Q1 print we delivered $25 million of summit benefit already in Q1 which is on an annualized basis is $100 million plus what we get the rest of the year, which is already well ahead what we guided for the full year when we announced Summit at the beginning. In addition to that, in the cost of sales base which for us is trucking in running our record centers, we were starting to find more and more opportunity there. So then we got into COVID and for a long time we have been questioning about the service levels in terms of offering people 24-hour retrieval of physical document, right, especially now, we can give it back to the digitally and the other thing is – and my predecessor, Richard Reese just mean when I came in, he said it’s much more about proof than use these days and that was true before I came in and it’s probably been true probably for 15 years. Now, when we started 24 hours late was super important, we started our way back when decades ago because it was the only way people could see a document right. There wasn’t – they didn’t have an electronic copy back in the office and it was the easiest way for them to operate. Now, that’s changed a lot, yet we had never like most companies we are very good at adding features or products that were very poor at actually removing cost associated with product and features that are no longer relevant or less relevant. This was one of those cases and COVID gave us the opportunity – the courage as you say to address that. So then you take a step back and you say well, we are already starting to get more on cost of sales, but now we are going to relax the SLA. So we are going to say that we are only going to serve a customer once a week, but it’s even more impactful than that, because the way our engineers describe it is the pizza slice model. And what they mean by that is they are going to a neighbourhood or a area in a city once a week and all the customers that are in that catchment scenario. So, you are really able to – it’s like pulling on a ball of string, you are really able to unravel a lot of complexity and cost associated with that.

So, that’s really with the game changer. We were gaining more, especially as we started with taking on best practices and going across all 50 countries. So our engineers were already finding more opportunity in cost for sales than we originally thought on Summit. But then when we relaxed that constraint it may made a big difference. So what’s the reaction? So, we have already implemented this in the United States, Canada, Ireland, the United Kingdom, Australia and New Zealand. And we had very little push back on a – and actually high level of understanding and I think it helps, because we have actually created a bigger moat around Iron Mountain’s business by launching even a better, more secure, more flexible image on demand service using again InSight has a foundation or backbone of that service. And then at the same time, people understand – they understand that kind of service model. And they are very, very comfortable with that. Now, people usually ask, well, are you going to have to get that price, we don’t expect to, we haven’t had any pushback on price at this point. It doesn’t mean that when we get to renewals, which typically a 3, 5 or 10 years to these large customers that procurement is going to try to remind us of the productivity that we gain from this. But we feel pretty comfortable that just like we always do that we can manage through that.

Shlomo Rosenbaum

Great. That’s good description. One thing I want to just hit on which is kind of the investors are struggling with this is just what is your confidence in Iron Mountain’s ability to continue paying which is a very healthy dividend. But at the same time, there is capital needs in the data center business. There is certain leverage levels that you want to bring down, how are you going to able to do all this together keeping the dividend, invest in the data center business to reduce leverage, what’s your confident in the company being able to do all of those simultaneously and just can you walk through why?

Bill Meaney

Yes. So, look – so I am extremely confident that we will do this. I was hoping to do it probably a year as soon as we are going to. So as Barry said in the call on Q1, our target now has been 2 to 3 years to get down to our target range both on AFFO pay-out ratio as well as leverage ratio and the delay is really the COVID impact. So, the feel for us it always gave us the confidence and now we actually even have more that we have up-scaled Summit was the Summit was the accelerator, it was $200 million, now it’s $375 million. In addition to that is that we are clear is that well, as we allocated more capital to data center this year on the back of the pre-leasing activity we saw in Frankfurt is we still see that we are putting about $250 million to $300 million into data center year absent bringing in third-party capital. So, we feel very comfortable that, that’s a reasonable rate. If you put that all into our financial model as I say, you will see in 2 to 3 years, we will get to what we think is the sweet spot of payout as a percentage of AFFO, which by the way is around you are approaching the minimum level we have to distribute as a REIT. And then that gets your leverage down into kind of in that 4.5x to 5.5x kind of towards the low 5 rage when you put that all together. And in the meantime, yes, we are going to constrained you could say by putting $250 million to $300 million in data center year, but that’s still like 30 to 40 megawatts each year that we can add to our data center portfolio. So if you put that in the context of the $350 million if you look at all the land that we have to see that are under development or held for development that allows us to go from the 120 megawatts that we had at the end of ‘19 to 350 megawatts. So it still stays 5 to 7 years. We will have built out – we continue to deliver the kind of results we have commercially with our own capital providing into those kinds of leverage in AFFO payout ratio, a 350 megawatt portfolio of data center and we may do – we may very well do a bit better than that depending on our access to third-party capital.

Shlomo Rosenbaum

Okay. So, that sounds like there is a pretty high confidence level on your side just from what you see internally in the runway in front of you?

Bill Meaney

Yes, look the reason why I am super confident is Summit is primarily a cost driven program, right. And if you look at the track record of Iron Mountain and just as a manager myself I am always very confident – you can appreciate, I have a lot of visibility on cost. So if you are sitting there saying just – if you just do the math that I gave you and you are taking out $375 million over the next couple of years through Summit, I feel really – yes, I feel really good.

Shlomo Rosenbaum

Okay, great. And then when you look at I am just going to kind of slipping another data center one, it just – is there – what capabilities do you have in the data center business, is there any cost advantages that you can bring to the table. There are pure-play competitors that are out there you got into this business you are kind of I would call dabbling in it for a while before you got into it more seriously. Is there something that you guys have that’s a little bit more magic than someone else does? Is there something in the relationships or anything that you could point to which is can tell investors that you have the ability to really succeed over here because of XYZ?

Bill Meaney

It’s a really good question and it kind of goes through your dabbling comment. I won’t tell the board you accuse me of dabbling, but as part of the dabbling was that we wanted to make sure that it makes sense for an investor to be exposed to the data center business through Iron Mountain rather than a pure-play data center. And the thing that we wanted to check is that, as I said one of the big assets, we have is 950 of the Fortune 1,000 have been customers for us for decades. And we just wanted to make sure that that together with some of our expertise around safety and security was the game changer. And what we found is we slowly tested the water with couple of underground, one above ground facilities is we started finding that our down selecting win rates were higher than what our local market share in a specific market should have delivered. We weren’t getting better pricing, but we are getting better fill rates for a similar asset into similar market. And when we started unpacking that, we saw that first of all there are a few things that led to that. And probably in this order one is we had better intelligence, because we do over 30,000 data center visits just in North America alone every month, which gave our folks intel on when people were kind of thinking about using third-party data center for some of their IT loads. And usually one of the trigger events for that is when they start moving more and more of their load into a public cloud whether it’s a SaaS provider like a Salesforce or if it’s a data storage provider like an AWS, Google or Microsoft. So when we start seeing that load, all of a sudden, a lot of the customers started thinking about how much do they want to be running inside their own walls. So we use that as a way to actually start the conversation early.

The second thing what we found was especially customers that are highly sensitive around security, they were highly attracted to the Iron Mountain brand and our approach to things and that’s people like banking financial services, which is banking and financial services, healthcare and government and you can kind of see that in some of the customers that we can talk about publicly, the Boeing Company, Goldman Sachs, Credit Suisse, you can see and then we have previously have the social – we still do, but with a long-time we have had the social security administration, you can see that the Iron Mountain brand resonated. When we spoke to them why? It’s when they came to our facilities, the level of security, the way that we have scrutinized visitors, the way that we ran from a safety standpoint. So, our Chief Risk Officer is a retired Marine Corps General. The Head of Investigations is retired Secret Service agent who was in charge of cybersecurity for the President and Vice President. So we have certain expertise that for those people it’s really important.

And then the last thing is that because we have been working for a long-time in 50 countries trying to offset our carbon footprint, we actually have a pretty robust probably I would say we all make it to better around CSG, but we have a pretty active CSG program. And one part of that is offsetting carbon, data centers actually emit more carbon in global aviation even pre-COVID and for our customers it’s really important if we can help them do that. So, our Head of Environmental Affairs has been able – and we were the leader and initiator off what they call the green power path is we are able to actually have green credit and renewable credits across to our customers and Iron Mountain is the only data center company in the world that more than 100% of the power that we consume in data centers is offset by renewable power that we buy on very long contract. So we are able to task those credits to people who are operating in our data centers so that they also get the benefit the fact that we are a green power supplier of data center capacity.

Shlomo Rosenbaum

Great. Thank you very much, Bill. I really appreciate your spending time with us today. I am really hoping that next year when we do this again, we are going to be able to see you in person and have you out there hit the live of CSI Conference next year in Boston. Thank you so much.

Bill Meaney

Okay. Thanks, Shlomo. Have a good afternoon. Okay. Bye everyone.