Q3 2022 Iron Mountain Inc Earnings Call

With solutions.

Our strong double digit organic growth is evidence of the early progress we are.

We are making on our initiatives, which gives us the momentum and confidence in our ability to deliver higher levels of profitable growth over the next several years.

Now I'd like to share a few highlights of some recent customer wins, which lie beneath the top and bottom line growth.

Turning to our digital solutions business, we helped a global European Bank evolved to a paperless branch experience to drive enhanced customer service with 360 degree customer data traceable and audible digital records and reduced manual efforts for their tellers.

The customer has a footprint of more than 400 branches in the U S with each branch storing decades worth of customer records on premises.

We are partnering with the bank to digitize all customer records across the U S branches in under a year.

Miles will be securely transferred an image that iron mountain digital Super centers indexing and tagged with critical metadata using machine learning and then placed into insight iron mountain's digital repository.

Insight will be provided to over 3500 tellers across the bank to access these digitized customer records quickly and securely.

This win is just one example of how we are helping our customers evolve their businesses through digitization, resulting in quicker easier and more secure access to their most important information for years to come.

Also in digital solutions, we won a contract with a state court in Brazil from an incumbent provider to.

To comply with the Brazilian National Council of Justice is 100% digital initiatives. All state courts are required to convert active lawsuit documents from physical to digital by 2023.

Your new business, we C continue constraints in the Dow Street demand for recycled I T components. As a result, we expect to see similar levels of IP renew sell through in queue for Hasnt Q3.

With the continued increase of the backlog of components, we remain bullish on the prospects of the business once the situation normalizes.

And are fine Arts business, we're pleased to highlight of wind with an internationally renowned art museum, the customer turned to our team to assist them with multiple onsite projects related to renovations the museum will undergo throughout a three year period.

Lacking the internal resources to staff. These projects they were seeking a trusted partner to support them, providing additional art handling services by.

By leveraging our experienced and successful track record of prior engagements with the customer we were able to offer a compelling proposal that secured this very exciting initiatives and the quarter. This business grew by 17% year over year, which is a reflection of the strong underlying business.

Shifting to the data center business. We are pleased to work seven megawatts of leasing in this quarter, bringing total bookings year to date to 125 megawatts. As a result, we expect to exceed our previous projection of 130 megawatts for new leases for the year.

One of the wins this quarter included a cross sell deal with a large nonprofit community health provider that needed to close down their internal data center and establish a disaster recovery site.

As a longterm tape backup in records management customer of Iron Mountain they reached out to their account team who engaged with our data center team.

As a result, the customer signed a co location contract, which included Internet services in multiple cross connects within 45 days to.

The convenience of having a single provider for all their physical and digital storage needs with a critical selling point. In addition to iron mountain's rigorous data center compliance program, which is essential for the customer given the highly regulated market in which they operate.

Our teams flexibility and willingness to collaborate across divisions to customized solutions for our customer provides a superior experience and ultimately is what made us stand out as their partner and choice.

From a development perspective is discussed in September at our Investor event, we have continued to build our land bank in key strategic markets to support future growth with several several notable expansion deals as previously announced we have added buildable capacity in the Phoenix, Arizona market with the purchase of adjacent land to our existing campus.

Based on current design plans the parcel can support 36 megawatts and includes a 56 MBA substation on site.

This is an important expansion in this dynamic market as our current campus of 89 megawatts is nearly fully leased indoor committed.

We also expanded our footprint in India with the securing of landed power for 20 megawatts of additional capacity in Mumbai.

We remain excited about the growth potential in this strategic emerging market both of our data center business as well as for the Enterprise's a hole.

In total we currently have 52 megawatts available capacity across five markets in India.

Subsequent to the end of the third quarter, we acquired a data center campus in Madrid, Spain, marking our entry into the Iberian market the.

The acid is uniquely scaled data center campus with an existing three megawatt building and fully permitted expansion potential of 79 megawatts. We've.

We view Madrid is a very important European market as it is poised to capture significant growth from supply constrained markets.

With these additions to our portfolio are total capacity is now nearly 670 megawatts.

The Windsor shared with you today demonstrate the breadth and depth of our business our focus on customer centricity in providing innovative transformative solutions and the strength of our global commercial platform driven by a Matterhorn initiative.

I am very proud of our outstanding team or the bedrock of our company and the way in which we come together to drive and deliver our growth journey.

Our business model is highly profitable our pipeline as strong or vision is clear and we continued to climb on <unk>.

With that I'll turn the call over to Barry.

Thanks, Bill and thank you all for joining us today to discuss our results in.

In the third quarter, our team delivered solid performance meeting top line projections, while exceeding expectations for both EBITDA and <unk>.

On a reported basis revenue of $1.29 billion grew 14% year on year or 18%, excluding the effects of the stronger U S. Dollar.

A key highlight in the quarter is our organic storage revenue, which grew 9.7% and represents a sequential improvement of 150 basis points total service revenue increased 28% to $527 million driven by organic growth of 22%.

These results reflect the strong performance of our commercial team and they are a laser focus on selling the full suite of products and solutions across our portfolio.

Ah just an EBITDA was $469 million up 12% on a reported basis and up over 16% year on year on a constant currency basis.

As the dollar strengthened significantly since the time of our last call I think it will be helpful to provide a bit more context.

As compared to the rates we were using in August the stronger dollar resulted in an incremental headwind in the third quarter of approximately $10 million to revenue and $3 million to EBITDA under.

Under the same effects rates, we were using in our August projection third quarter revenue and adjusted EBITDA would've been approximately $1.3 billion and $472 million respectively.

I just need EBITDA margin was better than we projected and improved 120 basis points sequentially driven by revenue management and next.

A F F L was $288 million or 98 cents on a per share basis up $25 million.08, respectively from the third quarter of last year.

Each of the strengthening dollar there was in approximately $3 million impact to a F F O versus the rates we used in our August projection.

Now turning to segment performance.

In the third quarter or global rim business delivered revenue of $1.1 billion, an increase of $93 million from last year or 9% on a recorded basis.

On an organic constant currency basis revenue increased 14%.

In the third quarter, our team continued to drive accelerating organic growth both in storage and services.

Global <unk> adjusted EBITDA was $484 million, an increase of $48 million a year on year.

Turning to our global data Center business. We are pleased to report another successful quarter.

Our data center storage revenue grew 33% year on year.

On a total revenue basis, we delivered 13% year on year growth now.

Now as a reminder, in the second half of 2021, we provided <unk> date out services for our Frankfurt joint venture in the third quarter of 2021, those services resulted in approximately $14 million of revenue excluding those fit out services on a like for like basis or total data center revenue grew in excess of 30 <unk>.

<unk>.

We completed seven megawatts of new an expansion leasing.

And with the strength of our expanding pipeline, we now expect to exceed our leasing projection of 130 megawatts for the full year.

As Bill detailed earlier, we are continuing to expand our data center platform into new markets.

He closed the Madrid data center transaction early in the fourth quarter for National purchase price of $78 million, which is subject to an additional $10 million earn out.

Turning to corporate and other revenue increased 22% on an organic basis and nearly 120 per cent in total driven by our <unk> business and continued strength in fine Arts.

Within a L M.

Organic I T asset disposition business continued on its strong trajectory growing in excess of 20 per cent year on year.

Turning to I T renew revenue was down sequentially as we projected on our last call. The business was $5 million below that projection as the lockdowns in China persisted throughout the quarter.

We are projecting revenue levels for our total alien business in the fourth quarter to be consistent with the third quarter.

Turning to capital total expenditures with $309 billion in the third quarter, we deploy $270 million of growth Capex and $39 million a recurring <unk>.

Turning to the balance sheet with strong EBITDA performance, we ended the quarter with net lease adjusted leverage a five two times and improvement versus last quarter.

And I think it is worth noting this march our lowest leverage level since 2017.

As we've said before we are committed to our longterm range of four and a half to five and a half times and we now expect to exit the year at five two times.

Our board of directors declared our quarterly dividend of 62 cents per share to be paid in early January .

On a trailing four quarter basis or payout ratio is now 66% approaching our longterm target range of low to mid sixties per cent.

Now, let me share our projections for the fourth quarter, which incorporate recent ethics rates.

We expect total revenue to be approximately $1.3 billion, which represents 12% growth year on year.

This would be a high teams growth rate on a constant currency basis we.

We expect adjusted EBITDA to be approximately $470 million in the fourth quarter, which represents 9% year on year growth, including the negative impact of that fax.

We expect a F F O to be approximately $280 million, which is 94 cents on a per share basis.

As ethics rates have moved significantly bowl this year and in the most recent quarter, we feel it would be helpful to provide a bit more context.

With the ethics rates that we used at the time about August earnings release, our projections for the fourth quarter would be revenue in excess of $1.32 billion EBITDA approximately $480 million a F. F O of approximately $290 million and a F. F O per share of approximately 97 cents.

As compared to our full year guidance ranges with our year to date performance and our fourth quarter projection revenue is at the low end and adjusted EBITDA is at the midpoint I.

I would like to highlight that on the same FX rates, we were using at the start of the year. We estimate our full year revenue would be in excess of the midpoint of our range and adjusted EBITDA would be beyond the high end of our ranch.

To conclude our results reflect the strength of our business model and our team's collective execution and focus on growth and operating leverage I'd like to take this opportunity to thank our entire team for their strong performance on our drive to achieve our ambitions and with that operator. Please open the line for Q&A.

We will now begin the question and answer session to ask a question you May press star one on your telephone keypad.

You're using a speaker phone please pick up your handset before pressing the key.

<unk>.

If that anytime your question has been addressed and you would like to withdraw your question. Please press Star then too.

<unk> analysts to one question and you can rejoin the queue.

At this time, we will paused momentarily to some blood roster.

My first question comes from Shlomo Rosenbalm with T. Mobile. Please go ahead.

Hi, Thank you for taking my question.

You.

<unk> mentioned last quarter of that you were talking about doing the third quarter pricing increase and it's usually something that happens nothing more at the end of the year could you give us a little bit more color around the success of your ability to put through some more pricing and kind of its implications for 2023.

Okay. Thanks Schlomo. This is Barry I. Appreciate the question we did put in place those revenue management actions, we talked about on the last call. So those went into effect in September and you see that beginning in the quarter to take hold in the results as you would have noted the implied.

Growth from revenue management accelerated in the quarter and that's been ramping through the year. So thank on our global ring business. It was probably in the six and a half range. That's up from about five earlier in the year and then making steady progress I would expect in light of the macro environment in the research.

Option that we've been seeing with respect to revenue management activities that that would we would continue naturally to be at this level as we move into 2023. So we are preparing similar revenue management actions going forward in the reception has been consistent with what we've seen over many years I think it demonstrates.

The value that were driving for our customers. Thanks for the question.

Alright next question comes from Kevin nickname correctly. Please go ahead.

Great. Thanks, so much.

Can you just.

I just want to make sure of the numbers on IP renew like how much is in the full year guidance versus where you initially got it and was the offset the data center deal or cause obviously, you're you're maintaining despite that sounds like a little bit of runoff, an iced tea and F X Where's the off set on the guidance.

Okay. Thanks, Kevin Good morning, Thanks for the questions.

An I T renew we certainly as we said throughout the year been experiencing challenge like so many other companies that sell into China, and so with the Covid lockdowns that have persisted and then at one level or another throughout the second half and really throughout the year.

Here that has been you know it's been a challenge as it relates to our revenue we as bill and I mentioned, they're prepared remarks, we've assumed that renew will be in total A&M business would be pretty consistent third quarter and fourth quarter at this level and.

In total I T renew was of the order of about $45 million revenue in the third quarter and that was as I said in the prepared remarks down at about five $6 million from the projection we were using at that time. Thanks for the call out as it relates to the total business continuing to perform well. It's you mentioned the data center deal just to be clear that businesses.

Only like three megawatts today, so that is not a driver of revenue performance in the in the fourth quarter at all although we are really bullish on that opportunity because Madrid as a market that we wanted to play and for some time and it's a unique market as I'm sure you know from a standpoint of where it is with the energy grid. It's.

Not constrained like so many other markets in Europe , and we think it is as a market one that has considerable opportunity. Our pipeline. There is is quite good. So we'll be developing that site. We feel really good about the asset in terms of the fourth quarter and our ability to continue to deliver strong growth. That's a testament to our T.

<unk> strong performance across our operations. So in our global Records business will continue to see benefit from revenue management as I mentioned, we got very strong services performance and we continue to see Ah ramping business in our our data center. So thanks, so much for the question Kevin.

Alright next question comes from Georgetown.

Fax. Please go ahead.

Alright. Thanks, good morning wanted to drill into our services revenue performance. The growth is very strong with a quarter up 22%.

Organically and wanted to see what the the sustainability of the drivers are if you could talk a little bit about contributions from the growth portfolio, particularly digital services overall services revenue growth in any other factors, such as paper pretty who or or traditional service trends that might impact the outlook.

For services revenue performance. Thank you.

Thanks, Thanks, George for the <unk>.

Question, what we feel really good as you would have noted is that over the last number of quarters weaving consistently showing north of 20% growth both on our I T disposal business. The traditional part of the organic portion of our asset lifecycle management businesses consistently been 20 per cent or better.

In our digital service business continues to go from strength from strike again north of 20 per cent. So those are really the two of the key drivers of dragnet overall level of service growth and if anything we see in both of those areas. The interesting customers, whether it's helping them at the end of life of some of their assets.

Make sure that there is destroyed.

Or distracted in a way that secure or in the digital service business, we see more and more customer interest in actually customer contracting on us helping them with their digital transformation and you know I think in the current environment, we seem more rather than less in both of those things. So we feel really good about being able to maintain.

That kind of level of growth, which is all part of the the Matterhorn project that we outlined that are investor event, a few weeks ago that when you put it all together.

Drives what we see over the next coming years consistent.

Growth rates that turned into a keg or if 10% or better.

Alright next question comes from <unk> <unk>.

Wells Fargo. Please go ahead.

Alright, thanks for taking the questions. So so too if I could and probably both were Berry just wanted to return to your Investor day from from September .

Maybe you could give us a little color the $450 million a cash cost you expect to incur over three years as part of the Matterhorn, a little more insight into what those costs are where there'll be spent to help drive some of the growth rates you laid out longer term and then secondly, no just as you think about capital allocation. If you could talk about your funding plans.

To achieve that.

Longer term Capex Guy to know your longterm that yields or you know about 7% today and obviously the forward curve on short term rates and can use that to March higher. So just wondering how you are thinking about managing Fitch the floating mix as you <unk> your elevated data center Catholics pipeline. Thank you.

Okay. Thank you Eric for the questions.

Couple of ones in there on Matterhorn the cost that we spoke about as you know we're moving from to a new operating model that Bill just touched on briefly that being with a global commercial organization also a global operations function in those cases that is a pretty substantial change.

And for US in terms of the way we go to market on the commercial side, it's really putting together an organization that is singularly focused on serving our customers with on a solution basis and really developing a tremendous amount of excellence around all things commercial and then we are also constructing a global operations function.

<unk>, which is meant to serve our customers effectively and drive significant customer satisfaction and high quality service, while also creating and furthering the shared services backbone that we have to support the entire organization as well we are moving to a business unit function that being.

As we discussed at the Investor day event storage and asset lifecycle management and the data Center is you know so those are pretty substantial changes. We we think of it as bill mentioned is a transformation and with that.

Probably about one third of those costs, Eric will be maybe slightly last will be specific to enable meant to a line and transform into that commercial operating function and then the bulk of the cost will be around in fact, transforming the broader operating model, which would include costs that you would expect with respect to that kind of transformation.

Including activities, such as restructuring and further ring.

Our transformation. So thanks for that question and I guess I'll just note as I said on the at the Investor event, we would expect to be at the approaching the run rate of that level in the fourth quarter as we continue to move into the Matterhorn model as Bill mentioned his prepared remarks in terms of the funding plan I appreciate that question as well.

Well.

<unk> just as a highlight for those that were unable to join the Investor meeting. We we noted that we expect a five year revenue tager of 10% and five year EBITDA behavior of 10% <unk>, 8% and that equates to <unk> per share of let's say, 7% as we said in our <unk>.

<unk> this morning, and with that it's a fully funded capital plan through EBITDA expansion and leverage within our target range. You know that our rates have moved up recently and I'll just note that with with what we consider ourselves in a very good position, we have one and a half billion dollars.

Liquidity and we're about 80% fixed as you know Eric and so from time to time, we will continue to term out dead, but in light of the very good position. We're in with respect to availability on a revolver in the lowest levels of leverage we've experienced in its 2017, we can.

Really kind of pick our timing as it relates to that over time. So there's we will be funding through expansion of EBITDA and leverage within our target range I. Appreciate the question Derek.

Alright next question comes from Wendy mile with Apple could I. Please go ahead.

Good morning, everyone. Thank you for taking my question.

Four three Q as in leaving update that's interesting <unk> sounds very compared to historical levels.

So could you please talk about the <unk> <unk> <unk> <unk> slowing down economic environment.

And also how should we think <unk>, leaving activity maybe heading into 2023.

Okay.

Good morning, when did Ah. Thanks to the question. So we we remain really excited and very bullish about our data set of businesses. You know as I said that you know if you look at let's see.

Hundred 30 megawatts that we had laid out or forecasted our last call. So we're continue to bill has that and we see similar momentum as we go into next year. So we don't see any change in terms of our our pipeline and turns it turns into leasing activity as we as we start approaching.

2023 so.

We continue there's always a little bit of yellow lumpiness. Because these are fairly large contracts. When you look at quarter to quarter vote. We see continued strength of momentum as we go into next year and you know I think we are also in key markets. That's why we've we've expanded in Phoenix, where as I mentioned that we're pretty much fully Lee.

Or committed on our current.

Campus in in Phoenix, and we've expanded there is Barry mentioned is that wealth. There's three megawatts that comes with the north of 70 megawatts of capacity that we've we've purchased in the Iberian Peninsula, specifically in Madrid is that comes with a pipeline of activity because we've been clearly speaking to our customer.

As in anticipating that <unk>. So so we continue to see that we are going from strength to strengthen that business and building really strong momentum as we go into 2023.

Our next question comes from Andrew signing me with J P. Morgan. Please go ahead.

Hi, Barry now when you're talking about the fourth quarter revenue guide $1.3 billion could you tell us.

How that shakes out in terms of organic constant currency revenue growth and if you can make a comment between storage and service.

Sure Hate Hi, Andrew Good morning, and thanks for the questions. When we look at the fourth quarter revenue rate that being of the order of high teens growth on a constant currency basis and something on the order of 17, 18%. So very strong continuation train out on that.

That that's basically the rate we've been running at through the years. So it's a very good continuation of a trend and from the standpoint of storage and services as Bill mentioned in response to one of the earlier questions are our services business continues to go from strength of strength I mean, that's thanks to things like our digital solutions and our historic.

I T asset disposition business, which is growing in excess of 20% and 25 per cent of the most recent quarter very strong performance and we view many of our businesses as playing in markets that are quite large growing secular Lee at double digit rates and that we expect to continue to take market share in.

So.

For the fourth quarter, you should expect continued strong performance from both storage and services throughout the business I. The only thing I would further underline is that for I T renew in <unk> in general we've we've assumed it would be consistent on a sequential basis.

And so that you can you can work into the organic if you'd like from that.

Thank you for the question.

Okay, and if you'd like to ask a question. Please press Star then one.

Our next question comes from Brendan Lynch with Barclays. Please go ahead.

[laughter].

Good morning, Thanks for taking my question I wanted to get a little bit on your power cost exposure for the D C business.

I I believe you are largely hedged, but maybe you can just give us a bit of color on.

<unk> excuse me, how you've hedged for this exposure and what the order of magnitude is.

That you expect for cost to go up for your customers specifically thank you.

Okay, maybe I'll take the first part of that and and if bill wants to add he can but thank you Brenda for the question and I appreciate those points that you're asking about so we I think our team has done quite effective job with respect to hedging and getting us into a place where we are in a very good position as we work into <unk>.

<unk> 23, as it relates to power to give you a sense brand and we.

Obviously this is a little bit based on forecasts of next year, but we estimate that we were in excess of 95% locked in terms of pricing at this 0.44 power in fact, it's probably closer to closer to 99% and I would say the other important point is when you look at our customer base.

<unk>, we have the ability to directly pass power pricing onto a roughly 90% of the customers and that's either through pass through or surcharge for example to retail customers and in many cases that month to month as as we've highlighted before and for those that we don't have that direct ability.

Of course, we have the ability to adjust pricing on renewals and that's principally in the <unk> in the retail portion of our businesses. You know those are relatively shorter contract. So we have the ability to price quite frequently with or consistently with power. So it's not a huge headwind and I think the fact that the team has.

Has continued to drive gross margins to be inconsistent in fact in the most recent quarter up several hundred basis points in our data center business is.

Is it is very good Testament to the fact that we're we're managing the impact of power, which is you know is a margin drag, whereas it's increasing so we feel very good about where we are going into next year as it relates to power and as it relates to pricing more broadly thing I would point you to is.

As you look at our Mark to market. It has continued to improve throughout the year and as you know that's a lagging indicator in light of when the contracts for renewals were sign. So we continued to see a very healthy environment for pricing within data center or at least within the markets that we operate in there they are generally speak.

<unk> I would say, there's more demand and supply we feel very well positioned as it relates to the assets. We have in our ability to continue to price, but I also know of course that construction costs are up and so when you look across the platform of our data center business, we feel very good about how the team.

Is performing.

The only thing I would add you were asking about how how we manage with the customers. Because this has been a pain <unk> for our customers is Barry said you can see our margins can continue to improve.

So we're as we're building out of operational leverage in the business, which is you know first.

First and foremost, but we've been able to manage the price increases in line with energy costs. So it hasn't been a dry for us but for our customers. It's been a pretty big pain point and recently I could say that you know speaking to customer a large e-commerce customer in Asia, we actually serve them around the globe based in Asia and I <unk>.

Large global financial institution.

Even though we have the.

And indeed do pass the power question to them is having the uncertainty in the budget is is difficult with them. So we have been working with a number of those customers to actually buy power in advance or contract forward for some power that we can give them certainty in terms of what their energy Bill is going to be on a on a rolling 12 months.

Basis, So we have been working with our customers to try to to minimize the volatility in the pain that they're experiencing so so far so good.

This concludes that question and answer session and the Iron Mountain third quarter, 20th 22 earnings Conference call.

Thank you for attending today's presentation.

You may now disconnect.