Iron Mountain Incorporated

Good morning and welcome to the Iron Mountain second quarter 2020 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. You may re-enter the queue if you have any follow-ups. Please also note this event is being recorded. I would now like to turn the conference over to Greer Aviv, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Rocco. Good morning, and welcome to our second quarter 2020 earnings conference call. We have provided the user-controlled slides on our Investor Relations website. We will also be providing the link to today's webcast and earnings materials. We are joined here today by Bill Meany, President and CEO, and Barry Heitman, our EVP and CFO. Today, we plan to share a number of key messages to help you better understand our performance, including how we are successfully navigating the COVID-19 environment, how we have continued to see durability in our core storage business, how we have continued to see strength in our data center business, how we are progressing on our transformation program with Project Summit, and how we, as an organization, are reflecting and acting on the recent events highlighting continued social injustice WITH REGARD TO DIVERSITY BROADLY AND THE BLACK POPULATION SPECIFICALLY. AFTER OUR PREPARED REMARKS, WE'LL OPEN UP THE LINES FOR Q&A. TODAY'S EARNINGS MATERIALS WILL CONTAIN FORWARD-LOOKING STATEMENTS. WE HAVE NOTED THE IMPACT FROM COVID-19 AND OUR EXPECTATIONS OF HOW THAT MAY IMPACT OUR OPERATION AND FINANCIAL PERFORMANCE IN 2020. WE HAVE ALSO NOTED OUR EXPECTATIONS FOR PROJECT SUMMIT. AS YOU KNOW, ALL FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES. PLEASE REFER TO TODAY'S EARNINGS MATERIALS, THE SAFE HARBOR LANGUAGE ON THE SLIDE TWO, AND OUR ANNUAL REPORT ON FORM 10-K AND OTHER PERIODIC SEC FILINGS 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 NOM-GAP MEASURES WHEN PRESENTING OUR FINANCIAL RESULTS. WE HAVE INCLUDED THE RECONCILIATIONS TO THESE MEASURES AS REQUIRED BY REG G IN OUR SUPPLEMENTAL FINANCIAL INFORMATION. WITH THAT, BILL, WOULD YOU PLEASE BEGIN?

Thank you, Greer, and thank you all for taking time to join us. Let me start by saying I hope you all continue to stay safe and healthy in these trying times. Before we get into a discussion of our second quarter performance, I'd like to take some time to touch on two topics that are top of mind for many of us in the current environment. First, the killings of George Floyd and countless others have left me and my colleagues upset, angered, and heartbroken. I want to reiterate that racism, discrimination, and hate have no place at Iron Mountain. Our commitment is stated as one of our core five values for many years to equality, inclusivity, and diversity is part of our belief that our people are our greatest assets. Given this fact, we must continually attract, listen to, and develop a broad talent pool reflecting our global demographics in order to deliver to our customers and protect our future. These tragic events have sparked difficult but important self-reflection and conversations within our organization about how well we are living up to our stated value and to commit ourselves to do much better. It is up to us to work together, educate ourselves, and encourage open dialogue to promote proactive measures to help eliminate incorrect biases and spread awareness, not just because it is the right thing to do, but also because we will only be successful in serving our customers if we attract and retain the best talent. Having the best talent can only happen if we are recruiting and developing people from diverse backgrounds across the broader demographics we operate in. We remain strongly committed toward taking decisive and strategic action to create a truly inclusive Iron Mountain. We're committed to listening, learning, and taking the necessary actions to support long-term positive change for the black community specifically and people from all backgrounds in general. Whilst we cannot change the past, we have an opportunity as an organization and as individuals to positively impact the future and help fix the racial inequality prevalent in our society. Now I'd like to update you on the impact we are seeing with respect to COVID-19. As you all know, the virus is unfortunately still spreading across the globe. My thoughts and prayers go out to all those who have been affected by the virus including those who have fallen ill, as well as their loved ones and their caregivers. As always, our top priority remains the health and safety of our mountaineers, their families, and our customers. I want to acknowledge and thank the many mountaineers around the world who, despite extraordinary challenges, have kept their focus on ensuring that Iron Mountain continues to move forward during these uncertain times, in doing so with a view towards safety. This is all brought home to me again last week during a visit I made to northern New Jersey so I could thank our frontline teams personally. One of our couriers relayed how he has been serving a large metro New York health system every day through the crisis and how thankful the customer is for our continued service. This particular customer went so far to send one of their doctors to our facility to assist in the protocols and training to protect our staff. For me, this is what it means to be in a true partnership with our customers. Whilst we continue to serve many customers during this crisis, as you would expect, our second quarter results were impacted by disruptions due to office closures and other restrictions put in place as a result of COVID-19. Fortunately, 100% of our records management facilities are now open and operating across the globe. However, many of our global customers continue to operate at significantly lower capacities due to existing restrictions depending on geography. As a result, global demand for many of our core service offerings declined during the quarter. Looking back, no one could have anticipated the magnitude of the impact from this pandemic on the global economy and our own business. However, our team moved quickly to assess the risks, understand the consequences, and take decisive action to ensure the safety of our employees, customers, and communities. As I mentioned, these various decisions have not been made lightly, and we are aware of their consequences, especially for our mountaineers that have been impacted by furloughs and other temporary and, in some cases, permanent actions. We told you in May that approximately a third of our global workforce has been impacted by these actions in an effort to keep our labor costs in line with levels of service activity. Fortunately, we have been able to bring a number of our mountaineers back to work, so at this time, this number has decreased to approximately 20% of our global workforce. Furthermore, the mix has shifted over the past few months, so fewer of the impacted employees are on full furlough, and a higher percentage are working reduced hours or using vacation or sick times. At this time, we have also reopened all our corporate offices with the exception of London, which we plan to open at the beginning of September. We are practicing strict protocols around social distancing and, as such, the majority of our salaried workforce is continuing to work remotely. We should note we have seen strong productivity rates with working from home. That being said, given some of the increased stresses of working remotely, we continue to monitor and care for our Mountaineers' mental health and resiliency as part of our overall focus on wellness. Turning to our financial performance, Our continued navigation of this challenging and uncertain environment has delivered a second quarter performance that further demonstrates, improves the durability and resilience of our people and ultimately our business model. I'll touch on a few highlights here. Q2 cost and currency revenue declined $58 million of 5.6% year over year, driven entirely by a 21% decline in our service revenues. This is partly offset by strong storage revenue growth, which increased 3.7 percent. The early benefits of Project Summit are evident as we deliver constant currency adjusted EBITDA line in line with the year-ago level despite the revenue decline, leading to a 200 basis point margin expansion. Barry will review the rest of the Q2 financials in more detail. Looking at our service business, we have seen improvements in activity levels across the various product lines since the end of April. as global economies are starting to reopen and customers are increasingly utilizing our core service offerings in many geographies. However, the pace of our recovery still remains uncertain. Whilst the revenue decline wasn't as steep as we expected when we last spoke in early May, we continue to see some risk around the second half depending upon what happens with the progression of the virus and possible additional restrictions on a country-by-country and state-by-state basis as they continue to fight specific localized outbreaks of the virus. Turning now to our core storage business, total organic storage rental revenue grew 2.3% supported by strong revenue management contribution. Moreover, we saw cash collections improve both in absolute terms year-on-year as well as by two days outstanding. This level of organic revenue growth underscores the durability and essential nature of our storage business and our ability to continue to generate substantial cash flow. Total organic volume decline, 1.8 million cubic feet sequentially, contributing to this decrease was in records management volume partly offset a 2 million cubic foot increase in consumer and others. Looking more specifically at records management organic volume, this was down 3.9 million cubic feet compared to the first quarter. This shouldn't be surprising based on the decline of incoming boxes in April and a decline of 45% for the quarter. We have been asked by many investors as to what we see happening to physical volume post-COVID. So let me take a step back and provide some further context on organic records management volume. We estimate that the impact from COVID in Q2 was somewhere between 4 and 4.5 million cubic feet, net of a slowdown in permanent withdrawals. If we continue to normalize Q2 for similar levels of volume in Q1, combined with our expectation for a pickup in permanent withdrawals, volume would be flat to slightly up on a normalized basis. To get to a total physical volume impact, I will now factor in consumer performance. In the second quarter, we added 2 million cubic feet. Analyzing this would imply we would be net positive 8 million cubic feet or approximately 1% volume growth on a base of total physical volume of more than 720 million cubic feet. However, Q2 is a seasonally high point for consumer business, so this would be overly optimistic to assume for a full year. When we net all this out in a post-COVID world, we would expect physical storage volume growth to be roughly a half a percent, with volume from records management flat to slightly up, with a small net positive growth coming from consumer. It should be noted that this is all before the contribution from our normal price increases, which generally add approximately 2 to 3 percent to the volume growth, yielding approximately 3 percent organic storage revenue growth from the physical side of the business. However, when we will see this reversion to post-COVID normalized business environment remains uncertain, and it's certainly not before the second half of 2021. Despite the stress and strains from dealing with COVID's impact, we have not let up on our investments in innovation. Specifically in the quarter, we had many instances where we were able to serve our customers with a focus on delivering innovative solutions in order to help them navigate their challenges that have arisen from COVID-19. For example, regarding the commercial impact, in April, pipeline of more traditional offerings was down 40% versus the same period last year due to COVID in the resulting lower economic activity. However, we recovered a third of this loss through new solutions we recently launched that help address our customers' needs during this time. This is just one demonstration of the resiliency and dedication of our mountaineers as we expect many of these solutions to be additive to our top and bottom lines, even after our base activities rebound. Turning now to our global data center segment, this business continues to perform exceptionally well, delivering strong results in the second quarter. In June, we announced a 27 megawatt data center lease with a U.S.-based Fortune 100 customer in Frankfurt, Germany. This customer will occupy the entire Frankfort facility, which should result in stabilization significantly sooner than we originally anticipated when we purchased the land last year. In addition, we signed a three-megawatt data center lease with a Fortune Global 200 company in Singapore, another signal of strong momentum in that market. These bigger deals have been won alongside a series of smaller but significant agreements, including a number of new logos. We welcomed an online gaming platform, a state government, and a global logistics provider to the IMDC ecosystem in Q2. All of this has contributed to a strong performance in the first half of the year with nearly 39 megawatts of new and expansion leases signed against our initial guidance of 15 to 20 megawatts for the full year. Given this great success in the first half of the year, we now expect to be able to sign leases for a total of 45 to 50 megawatts this year, or an additional 10 plus megawatts of leasing in the back half. I would like to congratulate the entire data center team for an exceptional first half performance. Thank you. Based on the strength of our pipeline, we will continue to prioritize investment in data center growth. We are actively building our capacity across our global footprint with new development projects started in Amsterdam, Singapore, and Phoenix. In early July, we completed the first phase of four megawatts at our new building on our Northern Virginia campus, and customers are already deploying. As I mentioned earlier, Project Summit is already paying dividends. No one could have predicted the depth or breadth of this pandemic when we first announced Project Summit in October 2019. Thankfully, the decisive actions we took early in the program allowed us to reconfigure our cost structure, as well as realign our organization to be more nimble and customer-centric. These changes enabled us to be more responsive in delivering new solutions to our customers' specific needs during the crisis, as well as matching our costs to a changing demand environment. In addition to the cost reduction Project Summit has achieved, as demonstrated by our increased margin, We've also made progress on the next phase in improving our customer intelligence, as well as simplifying our IT systems. One such example being our master data management initiative. Through this initiative, we're improving the platforms and processes that handle all of our data. This intelligence will allow us to better understand and serve our customers, making data an asset for our business. Finally, I'M ALSO VERY PLEASED WITH THE INITIAL SUCCESS WE HAVE SEEN FROM THE RECENT CHANGES TO OUR SERVICE DELIVERY MODEL. THE ROLLOUT OF THE SLA CHANGES OR SERVICE LEVEL AGREEMENT CHANGES WE DISCUSSED LAST QUARTER HAVE GONE SMOOTHLY. WE HAVE ALREADY SEEN THE EARLY BENEFITS OF DENSER ROUTES AND LESS FREQUENT PICKUPS AND DELIVERIES. OUR IMAGE ON DEMAND SERVICE HAS SEEN AN INCREASE IN ACTIVITY AS MORE CUSTOMERS LOOK FOR SOLUTIONS, WHICH INCLUDE THE USE OF DIGITAL SOLUTIONS AS IT HELPS THEM integrate more contactless process to reduce infection risk at their businesses. A recent survey indicated that more of our customers are interested in converting to digital versus physical delivery. In particular, our customers tell us they value speed of delivery, ease of use, and security as the most important considerations when evaluating the use of image on demand. To summarize, there is no doubt that COVID-19 pandemic has been a challenge to our business. However, this challenge provided confirmation that the changes we have made to our organization and the investments we have made in the recent past were the right ones. COVID-19 accelerated many workplace trends, and we have demonstrated that we can provide the necessary solutions to help our customers adapt to their new, unexpected work environment. Despite the unprecedented volatility of COVID-19, we remain focused on long-term growth in doing what's right for the health of our employees, our customers, and our business. Importantly, we have also recommitted ourselves in our fight against racial injustice prevalent in our societies around the globe and in creating an inclusive and diverse workforce. We are fortunate to have a strong balance sheet and a durable business model which are helping us successfully navigate this challenging period whilst providing us with the flexibility to continue investing in our long-term growth plans which go beyond Project Summit. As Barry shared with you last quarter, we are proactively managing expenses and have additional levers to further adjust our cost structure if necessary and appropriate. In closing, while the high degree of uncertainty remains as we look to the back half of the year, we are confident that the value of our offerings is more relevant to our customers today, and we will continue to provide innovative products and services that address their evolving business needs. Our confidence is further shared by our bondholders as evidenced by our $2.4 billion issuance to refinance some of our notes. Strong investor confidence and demand allowed us to upsize our transaction as well as extend our maturity profile. On behalf of the leadership team, I wish to extend our heartfelt gratitude to our frontline mountaineers who have kept our operations running seamlessly to serve our customers. Stay safe and well. With that, I'll turn the call over to Barry.