Iron Mountain Incorporated (NYSE:IRM) Stifel 2022 Cross Sector Insight Conference June 7, 2022 8:00 AM ET
William Meaney - CEO
Barry Hytinen - CFO
Conference Call Participants
Shlomo Rosenbaum - Stifel
Good morning, everybody. Thank you very much. I'm Shlomo Rosenbaum, the business services analyst for Stifel. And I want to welcome you all to Cross Sector Insight Conference, 2022, our first Cross Sector Insight Conference that is in-person in three years, and we're very happy and grateful for that. Thank you all for coming.
I want to welcome Bill Meaney and Barry Hytinen from Iron Mountain, CEO and CFO. Appreciate your attendance. I think that the -- of all the companies I cover, had the shortest commute this morning being about five minutes away from here. And I've covered. Yes. Only way I could have made it more convenient just to host it in their building. So I thank them for coming. I've covered Iron Mountain for -- I think it's about a decade, if not more now. And the story, I think, has really evolved. And I'd say more recently has -- at least within the numbers, the change in the business is starting to show up more in the financials. And I thought I'd just ask Bill to give us maybe a one to two-minute, just quick synopsis of what's going on right now, and then we're going to -- I'll open it up. I'll start a couple of questions, then we'll open it up for questions from the investors. So Bill?
Thanks, Shlomo, and thanks for those both listening on the webcast and in the room for your interest. Yes. So it has been -- the company has been on a journey. I think you were covering a little -- I've been almost 10 years and you initiated coverage before I came, so you've kind of watched the transformation at least over the last 10 years with me. And I think probably a couple of things that have really changed and accelerated the company and it's showing up in the financials that you said is that, we've been purposeful in terms of understanding what our strengths are as a company, and then figuring out where the business models need to evolve based on those strengths.
And there's really kind of, I would say, three fundamental strengths of Iron Mountain. One is 950 of the Fortune 1000 have been our customers for decades and decades and that relationship is pretty deep and it's built on trust because historically, they gave us things, which, quite frankly, most of the time, we don't know what we're storing for them, but it's something that is like storing cash as far as they are concerned. These are critical documents or information that they need to be able to run and operate their business or enforce force contracts, et cetera.
The second is that the -- it gushes cash, right? So it gave us a very, very strong financial situation. which actually made the conversion to REIT quite straightforward for us because it is an income-oriented stock, whether you're a C Corp investor or a REIT investor. And that's just because the business model was just very, very profitable in terms of the way that the business is designed.
And then the third aspect is the people, which I guess is everybody says that about their company. But I've worked in a lot of companies around the globe. And I think that trust that we have with the customers is founded on really a kind of unique spirit in the company, which we call Mountaineer. So the people really do go that last mile, whether it's Hurricane Sandy, disaster or an earthquake in Chile is that our folks really go that last mile.
So those were kind of the three ingredients that we started saying and recognizing that no business model lasts forever. So we said, okay, where should we go and obviously listening to the customers along the way. And what that's resulted is that if you think 10 years ago, if you looked at Iron Mountain, our total addressable market of our products and services was about $10 billion. And it was kind of flattish in terms of growth. I mean if you took volume plus pricing, it was positive, but it was low single digits in terms of revenue growth and profitability growing a little bit faster than that because we were able to expand margins a bit.
With the new products and services, first data center, then some of our digital services that we've built with the help of the likes of Google and now more recently, the asset life cycle management or the whole recycling of IT assets, we've seen our total addressable market go from $10 billion. And first, when we started talking about the new products was $80 billion. And actually, in the last year, that's expanded to about $120 billion in terms of total addressable market.
The $80 billion to $120 billion in the last year is mainly because the things that we've chosen to go into and our customers have given us a mandate to go into are faster growing. So these are businesses that are typically -- or segments of the economy that are typically growing double-digit.
So what does this all mean financially? If you take a step back and you're starting to see that in the financials is we now have a business model that pays a real dividend, and we're set up for the foreseeable future. And when I'm saying foreseeable future, I worked in China before. So I kind of think in 10 years, in decades in terms of elections. So over the next decades, we're really well set up for a business that grows EBITDA on a per share basis.
I'd say, 10% plus or minus 1%, let's say, it's probably more plus than minus, but kind of 10 to low-teen percentage on a per share EBITDA growth year-over-year. And with a balance sheet that's gradually strengthening over that time. I mean, in other words, that we'll see continued deleveraging because the speed of EBITDA growth far exceeds any of our capital requirements, whether that's for M&A or for capital investment in the business.
So that's a pretty big transformation for the company. And I think we're just starting to get recognized in the capital markets and the equity markets for that, that that we really do have a different financial model. But it's really built on that transformation of taking our customer base, being able to invest cash because it was a very cash-generative business and going to where our customers gave us a mandate to provide more business services in the future.
Q - Shlomo Rosenbaum
Okay, great. So I'm going to ask you just a couple of questions before we poll. First, I always start out with because this is kind of the annuity part of the business. Can you give us the trends of what's going on in the physical storage business. So these are the boxes and the tapes and whatever else you might be storing over there. So if we can just start out with how -- and what is that -- what's the outlook for that over the next, your thinking, in decades and let us know.
Yes. Okay. All right. Thanks. No, so thanks for that. And look, that's really -- when I said that the original business model was kind of low single-digit in terms of both revenue growth and a little bit faster in terms of profitability growth that business continues to do that. It's just very, very rock solid. In other words, people have predicted kind of a drop off in that business.
And it's -- I think the record storage business in the developed world is slightly negative, flat to slightly negative in terms of volume, but revenue pricing more than makes that positive. And we haven't seen a change in that trend. It's just very, very gradual. And in fact, some of the segments that were the first to kind of, I would say, mature are actually in positive growth because sorry to be a little bit technical, but it's kind of a second derivative effect.
It's more the change in the volume is more driven by the rate of change of growth than it is -- every customer we have around the world is still sending us new physical documents. I just came back from a trip to Manila, in India last week. And those markets are growing. I mean some of the most bureaucratic countries in the world, and we're happy to have them. On top of that is what we have done is also is we've added to physical storage.
So we're doing much more storage of other things for the same customer base and also for consumers. So If you put that all together, then globally in virtually every market, we're growing volume as well as price. So that business continues to be very rock solid. It's a very, very high-margin business, low CapEx at this point because we've built out the facilities around the world, about 90 million square feet of industrial real estate around the world that's built out to store.
And so between the new areas of physical storage, I would say, a very stable outlook in terms of what people thought of us as document and tape storage going forward and strong pricing power.
That's really kind of a foundation that gives us, quite frankly, the confidence to both pay a dividend and cash to invest in the future.
Great. And then you have what I would think of as two other major pillars of the business. One is that that are going to become bigger pillars over time. One is the data center business -- and the other one is this asset-life cycle management business that you've gotten much bigger into more recently. Maybe you could talk about the trends in those businesses, and then we're going to poll.
Okay. Yes. So the -- on the data center business, that was a business again that our customers came to us first. We started off with the likes of the Social Security Administration, Marriott's reservation system, and they actually came to our underground facility outside of Pittsburgh, where we have and continue to operate and build out data centers in the underground facility.
And people kept knocking on our door, asking for more data center capacity. So about seven years ago, we decided to set that up as a stand-alone business. And as we expected right away, our colocation or retail side of that business grew very quickly because that was where we had the customer relationships with the S&P 500 around the world. And we also had the Intel.
We basically -- because we did all their tape business. We generally knew almost before they did when they were thinking about moving loads to the public cloud. And that's usually a trigger event for most of our customers when they go into private cloud or a colocation arrangement with someone like ourselves or one of our competitors.
And so that business really started ramping and gave us the confidence to do the IO Data Center acquisition, which was a large acquisition that we did about three or four years ago. And since then, the business just continues to ramp. And now we're actually well known in virtually in all the RFPs for also the hyperscale of the big public cloud providers who generally outsource about 50% of their data center infrastructure to ourselves and our competitors is really starting to ramp.
So if you fast forward to where we are today, we guided to have -- to lease up 50 megawatts of new capacity this year. We measure that in mega power rather than square feet or square meters. And we already taken that guidance and more than doubled that guidance this year after the first quarter. And that's really on the back of 72 megawatts in Northern Virginia to a single customer, 27 megawatts in London to a single customer.
So we're really actually not even getting -- just getting invited into the tenders for the hyperscale folks, but we're actually winning those contracts. So as we sit here now, we really like the business. It's on an unleveraged basis on cash returns for the hyperscalers, which are -- have us build virtually the most efficient, cost-efficient data centers in the world is it's kind of high single-digit cash on cash return before we add leverage.
And for the colocation, as you would expect, these are smaller deployments where they are taking portion of a data center. And those typically are low teens. And then the last aspect, I'm also very proud of our team. It comes back to that Mountaineer Spirit. We've done that in a sustainable way. And what I mean is that we were -- we are the only data center third-party provider of data center capacity that is 100% renewable.
And when I say renewable, it's not buying carbon credits. We actually buy through PPAs or power purchasing agreements 15 to 17 years out, we buy renewables, whether it's wind or solar, power that more than offsets our data centers. And then we were the second signature to the 24/7 after Google which is saying that we've committed to over time to make sure that we match the renewables to the grid that we actually have the data center in.
So it's not good enough just to have wind mills in north of South Dakota, where you can't actually match it on the same grid to data centers. And we've already done that in the Northeast of the United States. So both from a financial standpoint, a growth standpoint, return standpoint, and then also a sustainability standpoint because data centers -- if you take data centers and IT together or telecommunications, it already would contribute more carbon to the atmosphere than global aviation, if we didn't do that.
And then switching to ALM, it was kind of a natural fit because we've really built this very strong relationship with the hyperscale. And hyperscale -- our hyperscale customers are growing 40% to 50% a year. And as they're growing, also their IT equipment ages and typically three to six years as they rip it out and they go to the next generation. So we have that relationship.
We were already doing IT asset destruction for the largest corporations in the world on a global basis. And on a small base, that was actually growing strong double digits, which was more of a pure destruction play. But we knew that we needed to -- if this was going to go more like the waste management business, where it was going to be much more circular than it was just going to be destroyed, get all the data off of it and then put it in the landfill.
And when we started looking around that, we found ITRenew, which was the market leader in both the circular aspect and also had a very strong relationship with a number of the hyperscale customers. So as you can imagine, over time, that business will evolve. The money that you're making is much more in the recycling. And actually, we just saw in the last month that France has announced that they're putting legislation in place where they're going to require new IT equipment to have a certain portion of recycled components in it.
So we've got in kind of on the ground floor. It's a relatively new area. As you can imagine, this -- the industry is, what I would say, evolving and growing because right now most of the recycled components are sold in Shenzhen to a handful of system builders that reuse those components for gaming and mining for cryptocurrency.
But over time, with the likes of the legislation that we see in France, that base will broaden. And for sure, the components that will be coming from the likes of the big hyperscalers as they actually decommission a number of their older data centers to put in new IT equipment will continue to grow.
Great. Thank you. I want to just poll and see if anyone has questions, we could take from the audience. Anyone? Obviously, I can keep this going. Go ahead. Do you want to repeat the question?
Yes. The -- so on the ALM side, you're talking about, yes. So I think -- look, I think it's a really good question. I think that on the macro -- if I get my 10-year horizon, this is going to be a fantastic business. And it's not because of wokeness, right? It's just because of requirements. I said I was just in India last week. And I guess I should have known this, but I didn't really. There's not a single fab in India, right?
I mean, which is you kind of think -- we've completely messed up our supply chains, right? We're even more concentrated in China right now than we were before because -- we are all very grateful with the zero-COVID policy that China had at the beginning of COVID because they actually increased their share of exports to the United States from 60% to 80% during COVID because they were able to keep their factories running with the zero-COVID policy.
Now the problem is with that zero-COVID policy and not very good vaccination, we see what's happened is the world supply chains. And as I say, our system builders further downstream are all in China, right? And a lot of the customers for those rebuilt components or reuse components is in China, right?
So we do -- we're getting into the industry on the ground floor. And France has just announced the legislation. We don't see FoxCom doing a lot of recycling yet because the likes of Dell and Apple haven't started incorporating recycled components. But the great thing about electronics is we all know that electronics typically fail at the beginning of their life, not at the end of their life, right? So the -- I'm absolutely convinced because this is not kind of a moment in time about -- driven by work politics or whatever that we're going to start using more recycled components in our electronics going forward is we absolutely will.
And in some cases, have to because, as I say, when India realizes that they're totally dependent on China. And long before the current geopolitical risks, they're not necessarily always the best friends, right? So I do think that we're going to find that we're going to be much more sensible in terms of how we reuse things. And electronics are going to play a big part of it.
But I mean, to your point, with the disruptions we see in the supply chains right now, it's -- we're going through some teething pains on a number of different levels, right? I mean a lot of us basically have been operating our businesses if we're manufacturing on just in time. Now people are talking about just in case.
And so it's going to sort itself out. But I don't think this is just a fad in terms of what we're going through in terms of reusing components. And for sure, people have to be able to have -- if you think about how we got into this business, it starts with a secure chain of custody, which is what Iron Mountain is known for. So that's why we do it for the likes of the largest global banks.
They aren't even thinking about the recycling of their components. They just want to come to Iron Mountain because they know it won't end up in a parking lot, right, with printers, devices, servers, et cetera. But I do think what we'll find is that business will actually have a multiplicative effect as more and more of those components don't go into a landfill they get reused.
Other questions? One thing -- I don't see anyone here. I just want to focus back on something that you started out with, especially since Barry is here to confirm any financial comments that you have made. You made some comment about seeing around double-digit EBITDA growth year-over-year for well into the future. What's going to drive that growth? And when I think of EBITDA growth somewhere around that 10%, will that translate similarly to AFFO growth in the same way?
So when we look at the business, Shlomo, the building on something Bill started with is the pricing power in the business is very strong. And on our core records business with volume being in total kind of flat to slightly up, and that's benefited by the other lines of business that Bill was speaking about, together with you've seen recently pricing has continued to improve over the last, say, several quarters.
You've been seeing our organic growth step up nicely. And we see between the strength of what our team is building in terms of in our core within pipeline build, the digital solutions that we're selling, which are growing very fast. And we think on a secular basis, that can continue to grow for a long period of time. Together with the dynamics in some of the faster growth areas that Bill was just speaking about, whether it be data center or asset life cycle management, we think we're on to something very large. And that data center and asset life cycle management can go from being a relatively small slice of the pie to a much larger slice of the pie over time.
And all of those businesses are -- have got very nice margins. We feel very good about where we are. Further, the business continues to drive a lot of productivity. And if you look at our -- what our team accomplished last year, just as one metric, our service revenues, as you know, about one-third of our business is services.
If you look at our service revenue last year, we grew that about 16% year-on-year, but our service labor was only up about 4%. And that's not just -- of course, we're absorbing a level of labor inflation like everyone in the economy, but it speaks to the fact that the team has done a phenomenal job in terms of improving routing, getting more efficient in our warehouses, and we see more opportunity for productivity going forward, together with, of course, leveraging fixed costs in the corporate areas and things of that nature.
So I feel very good about our EBITDA growth as Bill mentioned. And from an AFFO standpoint that you mentioned, the thought process is our maintenance CapEx is relatively stable, slightly increasing year-to-year like most companies. But when you look at some of the areas that we've been investing in like asset life cycle management, that is a very asset-light kind of business.
So the amount of incremental capital, whether it be recurring or even growth is relatively low. And so we feel good about that. Now it is -- as we grow our services business, we'll have a little bit more cash taxes, of course. So that's a little bit of a governor. But we feel very good about the forward look on both revenue EBITDA and AFFO. And in fact, this year, we're currently, as you've seen, the business is performing well. We feel good about our pipeline and where we are for the -- in fact, notwithstanding the U.S. dollar and some of those supply chain issues that Bill mentioned, we're probably aiming toward the upper end of our guidance ranges at this point for both revenue and EBITDA that's how we're seeing the business perform.
Now in the second quarter, that will be something like approaching $1.3 billion of revenue and $450 million of EBITDA, but we see -- the data center business is continuing to grow. As you know, we've had quite a few new commencements as well as some additional leases recently. The asset life cycle management business will be stronger in the back half to Bill's point as China opens up. And then we continue to see improving trends in digital as well as pricing.
Okay. I think. So as the AFFO gets better, talk about the dividend. We've talked about that as the -- you're going to be down towards the low 60s if you don't start raising that dividend. How should we think about the dividend going forward now?
Thanks, Shlomo. We have a fairly long-standing plan as it relates to the dividend and our target payout ratio. So the way we think about it is we have a target payout ratio of AFFO of low to mid-60s. And if you go back just a couple of years ago, we were in the kind of higher 80s on that metric. And then last year, we got into the 70s. And if you work through our guidance, it would be kind of at the mid to upper 60s this year at year-end. At the end of the first quarter, on a trailing basis, we're 69% as a payout ratio.
So mechanically, if you just kind of work through the math and AFFO is growing, just to hold that target ratio once we get into it, you kind of have to grow the dividend generally in line with the growth in AFFO. I think that's the way folks ought to be thinking about it going forward in light of our long-standing policy.
In addition, just to build on capital allocation a little bit, we have a long-standing target leverage ratio of 4.5x to 5.5x. As you know, for a lot of good reasons, including building the data center business, the business was outside that range for a period of time showing the really strong cash-generative nature of the business, we've been able to de-lever during COVID and get back into our leverage target range while also significantly investing in our growth capital and buying ITRenew as well. So this is, I think, a testament to the really strong cash dynamics that Bill was speaking about.
Great. And are you actually seeing the way asset-life cycle management? I mean from where you see right now really picking up in the second half as you were expecting going into the year?
We certainly expect in the back half to be better than the first half, Shlomo. I think to Bill's earlier points, Shenzhen and China, generally speaking, in the second quarter, as everyone would have read in the newspaper or seen on CNN, et cetera, has been very locked down. So it's been tight.
But from -- the important thing is, and this I think goes to the earlier question about just sort of general flow-through of goods, there's a tremendous amount of volume coming out of those hyperscale players because they've got data centers that they put into service three, four, five years ago, that they need to decommission and bring new gear into it.
And so as that gear comes in, the old gears got to go out. And when we see -- we see that backlog building nicely. And we have very good relationships with several of the largest hyperscale players, as you know. And so that supply side is good, where we see the second half getting better is as China reopens and the Shenzhen issues that Bill mentioned kind of open up that gives us an opportunity to move product through. And importantly, pricing trends are very good in the market.
Great. Thank you so much. I want to thank you both for being here. It's definitely great to have you again. And really appreciate all the comments. Thank you.