Q3 2020 Iron Mountain Inc Earnings Call

Good morning, and welcome to the Iron Mountain third quarter of 2020 earnings Conference call.

All participants will be able to Gnome boat.

Did you need assistance with signal way conference specialist by pressing the Star T followed by zero.

After today's presentation there'll be an opportunity to ask questions.

He's note this event is being recorded.

I would not like to turn the conference over to Greer B Senior Vice President of Investor Relations. Please go ahead.

Thank you back up.

Good morning, and welcome to our third quarter, 20th 20 earnings Conference call.

We have provided the user control sides I never Investor Relations website.

We will also be providing the link today's webcast areas material.

We are joined here today I do many president D E L and Bury heightened N R. A V P. M C F L.

Today, we plan to share a number of key messages to help you better understand our performance, including how.

Now we are continuing to respond and adapt to the COVID-19 pandemic.

Continuing to demonstrate topline michelle against in our physical storage business.

Continuing to see strengthen our data center business.

Progressing on our transformation program with projects on it.

And how we are remaining committed to funding innovation and new product development.

After I prepared remarks will open up the lines for Q&A.

Today's earnings materials will contain forward looking statements.

We have noted the impact some COVID-19, and our expectations of how that may impact, our operations and financial performance and 2020.

We've also noted our expectations for project stomach as well as certain other comments on our expectations for the remainder of the year.

As you know as you all know forward looking statements are subject to risks and uncertainties.

Please refer to today's earnings materials.

<unk> Harbor language on site to in our annual report on foreign 10-K, and other periodic S. E C filing for a discussion of the major risk factors that could cause our actual results to differ from those in our forward looking statements.

In addition, we you several non-GAAP measures when presenting our financial results.

We have included the reconciliations to these measures as required by Reggie and our supplemental financial information would that Bill would you. Please begin thank.

Thank you Greer and thank you all for taking the time to join US Let me start by saying I Hope you and your families are safe and well.

Third quarter provided us with a great opportunity to demonstrate the significance of the measures we have taken over the last few months in response to the pandemic instead of market marker for outperformance through topline resilience in our physical storage and growing data center businesses, adjusted EBITDA margin expansion and by maintaining our strong cash generation try.

[noise] record, all waltzing, continuing our investment and innovation and new product development I.

I would like to thank all of our Mountaineers for this remarkable performance into their steadfast focus on safety and execution.

Despite lingering uncertainty related to the global COVID-19 pandemic, we have seen improvements that'll be a gradual and T U S and international markets as it relates to our service activity levels, well showing continued strong performance in both our physical storage business and our global data centre business.

I continue to be inspired by the tireless efforts of our teams is a support and care for our customers each other in our communities, whilst accelerating progress on our strategic priorities.

From the start we sent out our priorities to deal with the situation, So dearly and take care of the health and safety of our people and work hard to honor the commitments, we have made to our customers and.

<unk> April we had up to one third of our workforce out on furlough or other temporary leave I'm happy to report that we've brought a significant number of these mountaineers back to work to serve our customers and we now have over 90% of our employees working regularly.

Well this has been a very difficult time, we have proven to be very resilient.

We are financially healthy with strong and reliable cashflow driven in part by our brand and customer loyalty. This is evident in how we manage the heightened uncertainty of the past eight months we.

We quickly aligned on the right mix of priorities to maintain strong near term momentum, whilst continuing our investments and innovation new products as we execute our plan for long term value creation.

This combined with the benefits from project stomach has allowed us to continue to invest in transforming and modernizing our company is demonstrated by our year on year constant currency year to date adjusted EBITDA storage revenue growth, we can already see the evidence supporting our belief that we will emerge from this pandemic has a stronger company on all dimensions.

Clearly there are still many uncertainties around covid in terms of the development of the pandemic and how the government worldwide will continue to respond with varying degrees of restrictions as infections rise. However in the third quarter, we saw signs of improvement in customer trends and as a result, the decline of our service revenue moderate.

In addition, there is clear evidence that has an when the restrictions with with customers do come back to us with needs from both a physical and digital documents storage perspective.

And while some elements of our business. They have changed forever are positioning with the communities. We serve remains strong.

Throughout the pandemic, we have continued to adapt and transform our business model and solutions to changing customer needs do do challenge is created by COVID-19, our customers are evaluating their real real estate needs business processes and ways to increase digitization in remote workplace setting.

We have been focused on helping them navigate these challenges and if passed ourselves with accelerating our response to our customers needs. One thing is certain the pandemic has created opportunities for us to help our customers in new and innovative ways.

The fact is we're a different company than the one most people know the strategic journey, we have been on his driven this change it to remind folks our focus remains on three pillars first continued growth and physical storage revenue through pricing as well as new volume growth achieved from records growth in emerging markets and art and consumer <unk>.

George in developed markets.

Second utilizing our global scale as well as 70 years of customer trust to deliver a differentiated data center offering and third new products and services that allow our customers to achieve reliable and secure information management and a more and more complex regulatory environment and one in which hybrid physical and digital solutions are the norm.

Further expanding on the product and services Stiller, most most know us for protecting highly regulated records, but over the years, our relationships have evolved to help customers manager broader set of assets and to help them solve a broader range of problems.

His customers needs evolve their expectations of US evolved for this reason is important we continue to invest in creating solution that unlocked value for our customers.

A great example of this as a solution. We just provided for a U S credit Union, who needed a faster more efficient method for processing their members boat mortgage loans after closing.

Old process was to manual and it could no longer support the volume of work much less scale to meet the credit unions, 30% year over year growth projections.

And it didn't satisfy increased regulations the organization must know meet with selling their loans.

We rebuilt the customers workflow to better integrate their mix of paper and digital materials. This included mailroom services documents scanning a private ball with fire resistant safeguards indefensible secure disposition.

We also applied machine learning to automate how the credit Union access data verified its accuracy and resolved missing or incorrect items.

When these changes the credit Union can know process post clothes mortgage loans much faster more than doubling their capacity, whilst reducing their costs by 25%.

This example speaks to what we see as our differentiation and why customers ultimately call us when they need help.

For some time, we have talked about our opportunity to enable our customers digital transformation journeys. Initially much of this work was going on behind the scenes, especially as project stomach got underway, putting in place the systems and structures to support this transformation.

The benefits of this working now becoming more evident with notable improvements to our customer experience at a time when demand for resolutions has never been greater.

This materialized in third in the third quarter and high single digit growth in our digital solutions business.

If you look at our physical storage business. This remains a key foundation for Iron Mountain customers have long trusted us to secure their information and their assets that matter most to them they needed us to serve as their lock if you will but overtime welfare needs expanded beyond security and compliance their jobs grew more complex.

As they now had to store use an extract value from growing amounts of information that was in both physical and digital for the.

Improvement from the 3.9 million cubic foot decline last quarter again, reflecting the early signs of recovery.

We continue to expect the full year organic volume to be down 1% to 1.5% and up 2.5% in terms of organic revenue based on current visibility.

Turning now to our global datacenter segment.

We are very encouraged by another strong quarter of bookings.

In Q3, we leased 12.3 megawatts, bringing the year to date total to just over 51 megawatts.

Sure, especially our purpose to inspire and build better lives and communities I would also point out that we are committed at the executive level to continue on our path and accelerate improving our diversity and inclusion.

During the pandemic.

I hope you all remain well with that I'll turn the call over to Barry. Thanks.

Thanks, Bill and thank you for joining us to discuss our third quarter results. We are pleased with our third quarter and year to date performance in a challenging macro environment. Our team delivered solid performance across each of our key financial metrics revenue of $1.04 billion declined 2.4% on a reported basis year on year, which includes a 30 basis point.

Impact from foreign exchange total organic revenue declined 3.4% organic service revenue declined 13.5%, reflecting the continued coded impact on our activity levels.

While the pace of recovery continues to be dependent on many factors overall, we continue to see service declines moderate reflecting an improving trajectory since the April may timeframe.

For the full quarter service trends were generally consistent with the July levels, we discussed on our last call.

Despite the macro headwinds total organic storage rental revenue grew 2.5% driven by three points of revenue management and data center growth, partially offset by a 30 basis point decline in global organic volume on a trailing 12 month basis. This is 30 basis point improvement as compared to the second quarter on a trailing 12 month basis.

Yes.

Alright, withdrawals declined 28% and Destructions were down 22%.

In our shred business activity declined approximately 17%.

Or the third quarter are average realized paper price was 20% higher than the prior year, which was more than offset by a decline in paper tonnage leading to a net 3 million dollar of junk reduction and adjusted EBITDA as.

As we projected on our last call after the temporary spike and recycled paper prices in April and May prices have taken a step down and by October paper prices have now returned to the low levels experienced at the end of 2019.

Our consumer storage business has maintained momentum and continues to be a more meaningful contributor to our overall physical storage volume growth.

In the third quarter, we continued cost reduction actions, including furloughs and reduced work all hours, albeit at much lower levels than earlier in the year.

As service revenue expectations improve we want to ensure we our staff to the appropriate level. So we can fully support our customers.

Hundred and $75 million exiting 2021.

In terms of cost related to project summit, we now expect to spend closer to $200 million. In 2020, we continue to expect the cost to implement the full program to be approximately $450 million.

Turning to cash flow and the balance sheet.

We are operating from a position of significant balance sheet strength in the third quarter. Our team did a nice job delivering further cash cycle improvement with solid performance in both payables days and days sales outstanding.

On a sequential basis cash cycle improve by a full day as a result of continued DSO improvement.

Part of our venture with HSBC.

Now, let me share a few thoughts as to our capital allocation strategy.

First we are committed to our dividend at the sustainable level and over time, we expect to glide into our targeted AFFO payout ratio of mid Sixtys percent.

Second we are committed to our target long term leverage range of four and a half to five and half times on a net lease adjusted basis.

This year the team has made good progress toward our target.

As investors know, we have been allocating significant capital to our datacenter business for several years and as our pipeline continues to build with high return investment opportunities. Our strategic intent is to increase the amount of capital we dedicate to the business with that we have considered options to generate incremental funds for investment we.

Today's first question comes from Shlomo Rosenbaum with Stifel. Please go ahead.

Hi, Thank you very much I, just actually wanted to ask a little bit about the Frankfurt JV or.

Can you talk a little bit about like how much of your cash in how.

How much debt density will occur just trying to understand how that was structured and whether that.

How well you did on that and is this really the kind of structure, we could expect in the future for.

It kind of builds and then maybe sale with the joint venture.

Sure Hi, Shlomo good good morning, and thanks for the question and we really feel very good about the Frankfurt to joint venture and what the team has done there would that fully leased up facility.

We invested about $100 million at closing essentially with the deal overtime will cash out nearly all of that impact all of it.

Nearly all of that act the clothes, we retain over 20, 20% retained equity interest in the venture we will earn fees for things like property management development and construction and we'll take those proceeds and redevelopment every redeployed into development pipeline, which has nice higher return opportunities. So essentially we see it as.

The opportunity to monetize a stable essentially what does a stabilized asset boost that return and then redeploy you asked about debt. Yes of course, the entity would as you're expecting have debt on it that debt will approximate the incremental development costs, so that might be over time that could be as much as a couple of hundred million dollars.

Zero, we have a very attractive rate on that debt I might add and we feel very good about the way. The development is proceeding bill anything you'd like to add I think we've talked about some a few times if we see that as a path that we would like to continue to close if you think about if you have a fully stabilized data center assets Theres, a lot of pension money or.

Our our funds that manage pension body.

7%. If you just look at the physical storage rack and took out the data center. So goes from two five to one seven but still strong positive growth based on some of the success that we've been having on the back of consumer so.

Please both in terms of records management did better this quarter and also consumers is really starting to show that is starting to to hit hit a groove that being said we do expect.

The quarters are going to kind of go backwards and forwards a little bit because consumers a seasonal business, but we think the trajectory is moving in the right direction for both businesses.

On the pricing side, you can see actually that we are continuing to get roughly the three points of price that Barry highlighted we don't see any slowdown in that at all.

And we have more to get in the emerging markets, which are relatively new to the game in terms of revenue management processes. So.

Good response from the customers.

We're still considered very much an essential business or essential service to our customers. So it's a great position to be in.

Thank you and the next question for the nutrition.

Critics Leafs. Please go ahead.

Great. Thank you not to.

So you're good morning, and thank you for the thank you for the questions that a couple of by if I could yeah going back to the digital transformation that that you were talking about you know working with customers. There can can you help us think about you know comparing the revenue contribution from our customer transitioning to more of a digital solution.

As a physical solution and then where do you see the growth opportunity there as well.

Thanks cycle. So I think first of all is that B. It's incrementals, it's hard to us. So we don't see a lot of people, saying Oh, we're going to go digital and then softness as well as a few cases of that but usually people want to keep their physical records as well for proof, but where we see the digital transformation is really around the use.

Service activities are generally following the same trajectory I would say that we look at go going forward. We would use the October September kind of levels as being.

Indicative of what we're expecting.

And Thats.

Embedded in the kind of forward outlook that we mentioned as it relates to sort of third quarter fourth quarter looking similar in terms of revenue and EBITDA.

[music].

Thank you. Our next question today comes from Bird flu draw with Wells Fargo. Please go ahead.

Great two questions if I could the first one on the data center business wondering if you could.

About 50, 50, so about 50% of that 51 megawatts that we'd signed up year to date is hyperscale, including obviously, the Frankfurt site and about 50% is retail so we're really happy with the mix, but you're sure you're right is that the cash and cash returns on Hyperscale deployments are are lower but there.

Longer term contracts and it allows you to build out the facilities or the campuses faster. So it still has the the right mix, we think in terms of maximizing returns.

And Eric it's very thanks for the question as it relates to the fourth quarter I would say that we're we're working with a modeling of service revenue decline being similar in nature Q3, Q4 versus prior year and that's what's essentially embedded in that outlook and that should work through you'll be able to work through the store.

Ridge number and I would note that that's aligned with my answered in Georgia earlier about where we see activity levels as being fairly consistent to slightly better. Thanks.

Thanks for the question.

There was one of those or a motorist Thursday question, please grow slower than one.

The very first question is a quote from Shlomo Rosenbaum with seafood. Please go ahead.

Hi, Thank you very much can you just come with a little bit about the step up in fine Arts volumes, that's something that we really haven't seen for awhile wondering what's driving it.

Yeah, No no. Thanks, Shlomi, it's actually in our entertainment services and the the real improvement in physical I think you're on a sustainable basis isn't the consumer side. So that was more of a true up in terms of some private faults that we had with our entertainment services. So if you look overall.

If you think about the the overall records management's down about 1.1 million cubic feet consumer was up two and a half and then I would say that it was kind of a one off threw up of a little over half a million cute with Andrew.

Entertainment services.

Thank you. This concludes our question and answer session and today's conference call.

Digital replays of the conference will be available to talk suddenly one hour. After the conclusion of this call.