Iron Mountain Incorporated

Good day and welcome to the Iron Mountain Q3 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, you can press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Greer Aviv. Please go ahead.

Thank you, Chuck. Good morning, and welcome to our third quarter 2019 earnings conference call. The user-controlled slides that will be referred to today in today's prepared remarks are available on our investor relations website, along with a link to today's webcast, the earnings press release, and the full supplemental financial information. On today's call, we'll hear from Bill Meaney, Iron Mountain president and CEO, who will discuss third quarter performance and project summits the transformation program announced this morning. Stuart Brown, our CFO, will then cover additional financial results and our outlook for the remainder of the year. After our prepared remarks, we'll open up the lines for Q&A. Referring now to slide two of the presentation, today's earnings call, slide presentation, and supplemental financial information will contain forward-looking statements, most notably our outlook for 2019 financial and operating performance and expectations from Project Summit. All forward-looking statements are subject to risks and uncertainties. Please refer to today's press release, earnings call presentation, supplemental financial report, the safe harbor language on this slide, and our annual report on Form 10-K for discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements. In addition, we use several non-GAAP measures when presenting our financial results, and the reconciliations to these measures are required by Reg G are included in the supplemental financial information. With that, Bill, would you please begin?

Thank you, Greer, and thank you all for taking time to join us. On today's call, I would like to cover two main topics. First, we delivered another solid quarter showing adjusted EBITDA growth of 5% year-over-year and 7% quarter-over-quarter on a constant currency basis, further demonstrating the strong and consistent organic growth we are building in the businesses, as well as continued progression in the year. Second, we announced Project Summit in which is a transformation program we are commencing in November that will leave us with a simpler and more dynamic management structure, better supporting our future. Before we get into our discussion of the Q3 results, I will first address Project Summit. At a high level, this transformation program focuses on three key areas. First, we will simplify our global structure by combining our Core Records and Information Management, or RIM, operations, under one global leader whilst also eliminating unnecessary work in rebalancing resources. Second, by simplifying our global organization, we will streamline our support structure, whereby we will condense the number of layers and reporting levels from our current average of six levels down to four levels. This will create a more dynamic, agile organization. And third, we will more efficiently leverage our global and regional customer-facing resources across RIM product lines, creating better alignment between new digital solutions and our core business, resulting in an enhanced customer experience. All in all, Project Summit is expected to deliver $200 million in annual run rate adjusted EBITDA benefits, with all actions expected to be complete by the end of 2021. We expect to incur total restructuring costs to achieve these benefits of $240 million. Of the total benefit, $50 million will be implemented during the course of November and December, with restructuring costs of approximately $60 million being recognized in the fourth quarter. Whilst there will be little to no benefit from this first phase of summit in our 2019 results, benefits are expected to start flowing through in the first quarter of 2020 on top of our normal growth. Before diving into more detail on Summit, let me provide some context. Over the course of Iron Mountain's nearly seven-decade history, we have developed unmatched trust and scale. We have built the global player in the records and information management business today, storing nearly 700 million cubic feet of records with extremely deep customer relationships, including 95% of the Fortune 1000. This global growth, which has in large part been executed through acquisitions, has resulted in certain complexities in areas such as business processes, IT systems, lines of accountability, decision-making, and other redundancies across our organization. To be able to compete most effectively in any industry today, you must be flexible, have efficient lines of communication, and be able to react quickly to evolving customer needs. We have heard from our customers that we need to be more integrated in our approach to solving their problems. This means tearing down our internal silos, equipping our teams with the necessary tools to better meet customer needs across our business offerings, and continue to standardize, streamline, and simplify our systems and processes. But in order to fully take advantage of this significant opportunity, we also need to better align our resources and capabilities so we have a more simplified and efficient operating model. Whilst the underlying health of the business is solid, as demonstrated by the 3% organic storage revenue growth year-on-year, we believe Summit will allow us to continue that momentum so we can capitalize on future opportunities faster and more efficiently. We expect Summit to enable us to better execute on our strategy so we can continue to grow, both in revenue and profit, whilst also generating more free cash flow. This improvement in financial results will come from furthering our position as the global leader in the records and information management industry, as well as continued investment to build further scale in data centers and create digital solutions for our customers whilst reducing leverage. Moreover, through Summit, we are simplifying our global structure with a view to provide an environment where people can work in a dynamic workplace, all whilst identifying and vigorously pursuing the highest potential opportunities to serve our customers. In doing so, we will undertake steps to improve the efficiency of our operations and increase the pace at which we are able to effect change. and our operations and cost structure will be better positioned, allowing us to sharpen our focus on higher growth areas that can provide solid returns to our investors and enable us to enhance the strong customer relationships we already have across the enterprise. As I mentioned earlier, a key catalyst of this change, both from a customer service viewpoint as well as an operating efficiency standpoint, is to place Olive Rim under a single global leader. To this end, we are proud to announce that Ernie Cloutier, our International EVP and General Manager, will now lead global RIM operations in our new structure. As we mentioned in this morning's announcement, Patrick Keddie will be retiring as EVP and General Manager of North America and Western Europe. Patrick is a seasoned executive who has led developed markets for several years, and he will take on a consultative role assisting Ernie during the transition into his new role and provide support to Iron Mountain through the beginning of 2021. We are extremely grateful to both Patrick and Ernie for their leadership and efforts to position the RIM business for sustained success under a united structure. In addition to Ernie taking on this expanded role, he will be supported by Greg McIntosh, who is now charged with establishing and leading our commercial operations along with Strategic Accounts. Strategic Accounts is a relatively new area for Iron Mountain as we upgrade our ability to grow and service some of our highest potential customers. In addition to Greg, Ernie will be supported by Deirdre Evans, who leads the North American Rim business. Additionally, Deirdre will report to me, leading the continued development of consumer storage, which includes our partnership with MakeSpace. In terms of transforming the company to be more agile and dynamic to the benefit of our employees and customers, we will condense the number of layers and reporting levels, which is expected to reduce the number of VP level and above positions by approximately 45%. Including the impact of these reductions, approximately 75% of which will be actioned during the next two months, the program is expected to reduce our total managerial and administrative workforce by 700 positions over the next two years. It should be noted that Summit is causing us to say goodbye to many friends and colleagues. We are now in a situation that we need far fewer senior leaders if we are to serve our customers in a more responsive way. We are committed to providing the right support to these employees that are negatively impacted, including appropriate severance and outplacement support. Iron Mountain is a close-knit community, so it is never easy to part ways with team members, but the needs of our business continue to evolve, and this realignment will prove to be value-enhancing for our organization, our team, our customers, and shareholders over the long term. Turning now to Q3 performance, we delivered constant currency revenue and adjusted EBITDA growth of 1.7% and 5% year-over-year, respectively. This has resulted in 120 basis points expansion of our adjusted EBITDA margin to 35.4%, reflecting the benefits of revenue management and lower overhead costs, as well as the positive impact from the efficiency initiatives we began work on earlier this year, offsetting lower recycled paper prices. Turning to business performance, global records management volume trends continue to be positive with net organic volume increasing by more than 3 million cubic feet or 40 basis points over the last 12 months. This was driven by modest improvement in new sales whilst destructions were in line with Q2 levels. In developed markets, volume declined organically by about 3.5 million cubic feet or 70 basis points. More specifically, declines in North America rim volume are in line with prior quarter, down 1.2%, while Western Europe grew organic volume by 1.5%. Other international net organic volume increased by 6.6 million cubic feet, or 3.6%, a modest acceleration from previous quarters, as new sales growth was strong and destructions moderated. Remain encouraged by the resilience and durability of our core records management business and believe unifying the RIM organization under one global structure will result in unlocking incremental opportunity in the core business and beyond. We will better align resources across the RIM organization to bolster our customer experience, globalize processes, and extend our reach beyond our core records management offering. For example, the North American RIN team has been successful in leveraging our assets to grow non-core storage opportunities in areas such as consumer, library services, and other channel relationships, contributing more than 3 million cubic feet year-to-date to our storage portfolio. We continue to make good progress in penetrating some of the historically unbended segments of the North American market, including the federal government. Our federal team had its best quarter yet in Q3, with revenue growing double digits year over year, with solid wins across multiple product lines, including Core Storage, Shred, IGDS, or Information Governance and Digital Solutions, and Data Center. This is a great example of the sell-all culture we are driving toward. Our IGDS business is showing strong year-over-year growth, with a focus on increasing the contribution from recurring revenues We have seen good success with our digital solutions, increasingly enabling the pull-through of other revenue opportunities across multiple product lines, allowing us to engage with customers on a different level when addressing a more comprehensive solution that meets their evolving business needs. Just one example of this was a recent $4 million win, including scanning some 250,000 cubic feet of documents where we combined our Insight platform with our digitization capabilities. It was this unique combined offering which compelled this engineering customer to choose us. Finally, we continue to be very optimistic about our growth trajectory across our global data center platform. Q3 was a busy quarter with new turnkey data center capacity brought online in key markets around the world, including Phoenix, London, Amsterdam, and Singapore. In addition to the hyperscale lease we signed in the critical Northern Virginia market in early Q3, we are encouraged by the retail-focused enterprise demand we see, as evidenced by a growing pipeline. Looking at data center leasing activity in Q3 more specifically, we signed 8 megawatts of new and expansion leases, primarily driven by the lease in Northern Virginia. Excluding that, we signed two megawatts driven entirely by enterprise demand with nearly 75% of the kilowatts attributable to new logos to the Iron Mountain Data Center platform. Through the end of the third quarter, we have leased a total of 15.2 megawatts and continue to expect to achieve the high end of our 2019 target of 15 to 20 megawatts. As we have shared with you in previous quarters, a clear differentiator for Iron Mountain in the data center space is our strong brand recognition, and the power of our ability to leverage customer relationships of our traditional sales force. In summary, Q3 was a solid quarter which highlights the continued durability and stability of the core records and information management business, whilst demonstrating the growth opportunities available to us in faster growing markets and businesses. Once implemented, Project Summit will simplify our day-to-day operations and enable us to move faster and ease our ability to capture growth opportunities and execute on our stated strategic priorities through building a stronger, more nimble organization that enhances our service to customers and generates solid returns for all stakeholders. I should add, also today we announced a 1.2% increase in our dividend to $2.47 per share on an annual basis. We are continuing to grow our dividend, albeit at a more modest pace given the solid pipeline of data center investment opportunities we see ahead in 2020. Stuart will provide more financial details for Q3, as well as the impact of Project Summit, both near and longer term.