Iron Mountain Incorporated

Good morning and welcome to the Iron Mountain Third 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. Please note that 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.

Greer Aviv Aviv Thank you, Rocco. Good morning and welcome to our third 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 continuing to respond and adapt to the COVID-19 pandemic, continuing to demonstrate top-line resilience in our physical storage business, continuing to see strength in our data center business, progressing on our transformation program with Project Summit, and how we are remaining committed to funding innovation and new product development. 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 operations and financial performance in 2020. We have also noted our expectations for Project Summit, 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, the safe harbor language on 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 used several non-GATT 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 the time to join us. Let me start by saying I hope you and your families are safe and well. The 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 and set a marker for outperformance through top-line resilience in our physical storage and growing data center businesses, adjusted EBITDA margin expansion, and by maintaining our strong cash generation track record. all while continuing our investment in innovation and new product development. I would like to thank all of our Mountaineers for this remarkable performance and for their steadfast focus on safety and execution. Despite lingering uncertainty related to the global COVID-19 pandemic, we have seen improvements, albeit gradual, in key US and international markets as it relates to our service activity levels, while showing continued strong performance in both our physical storage business and our global data center business. I continue to be inspired by the tireless efforts of our teams as they support and care for our customers, each other, and our communities, whilst accelerating progress on our strategic priorities. From the start, we set out our priorities to deal with the situation clearly and take care of the health and safety of our people and work hard to honor the commitments we have made to our customers. In April, we had up to one-third of our workforce out on furlough or other temporary leave. I'm happy to report that we have 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. While this has been a very difficult time, we have proven to be very resilient. We are financially healthy with strong and reliable cash flow, driven in part by our brand and customer loyalty. This is evident in how we've managed the heightened uncertainty of the past eight months. We quickly aligned on the right mix of priorities to maintain strong near-term momentum whilst continuing our investments in innovation and new products as we execute our plan for long-term value creation. This, combined with the benefits from Project Summit, has allowed us to continue to invest in transforming and modernizing our company. As demonstrated by our year-on-year constant currency, year-to-date adjusted EBITDA and storage revenue growth, we can already see the evidence supporting our belief that we will emerge from this pandemic as 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 governments 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 moderated. In addition, there is clear evidence that as and when the restrictions lift, customers do come back to us. with needs from both a physical and digital document storage perspective. And while some elements of our business may have changed forever, our 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 due to challenges created by COVID-19. Our customers are evaluating their real estate needs, business processes, and ways to increase digitization in a remote workplace setting. We have been focused on helping them navigate these challenges and have tasked 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 has driven this change, and to remind folks, our focus remains on three pillars. First, continued growth in physical storage revenue through pricing, as well as new volume growth achieved from records growth in emerging markets and art and consumer storage 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 in a more and more complex regulatory environment, in one in which hybrid physical and digital solutions are the norm. Further expanding on the product and services pillar, most know us for protecting highly regulated records. But over the years, our relationships have evolved to help customers manage a broader set of assets and to help them solve a broader range of problems. As customers' needs evolve, their expectations of us evolve. For this reason, it is important we continue to invest in creating solutions that unlock value for our customers. A great example of this is a solution we just provided for a U.S. credit union who needed a faster, more efficient method for processing their members' mortgage loans after closing. Their old process was too manual and it could no longer support the volume of work, much less scale, to meet the credit union's 30% year-over-year growth projection. And it didn't satisfy increased regulations the organization must now meet when selling their loans. We rebuilt the customer's workflow to better integrate their mix of paper and digital loan materials. This included mailroom services, document scanning, a private vault with fire-resistant safeguards, and defensible secure disposition. We also applied machine learning to automate how the credit union accessed data, verified its accuracy, and resolved missing or incorrect items. With these changes, the credit union can now process post-closed 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 Summit got underway, putting in place the systems and structures to support this transformation. The benefits of this work are now becoming more evident with notable improvements to our customer experience at a time when demand for our solutions has never been greater. This materialized 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 over time, while their needs expanded beyond security and compliance, their jobs grew more complex as they now had to store, use, and extract value from growing amounts of information that was in both physical and digital form. The hybrid nature of their data was preventing them from achieving speed, compliance, efficiency, and ultimately growth. A lot was no longer enough. They now needed a key to solve for this hybrid environment. Uniquely, Iron Mountain offers both the lock and the key that organizations need in order to realize competitive advantage from their paper and digital information. Plenty of companies offer a secure home for valued assets. Plenty offer technology services so customers can better use those assets. But this over-specialization falls short of the needs of most customers. We hear from our customers that they want partners who can help them build singular solutions capable of solving for multiple demands of speed, cost savings, revenue opportunities, and security. This is Iron Mountain's distinctive position. We serve as the lock and the key. Now let's take a closer look at business trends during the third quarter. At a high level, we are pleased with the stabilization and early recovery we're beginning to see across our service business. Service activity levels have shown a gradual improvement from the second quarter. However, similar to what we discussed last quarter, the shape of the recovery will be dependent on macro factors. The recent increases in COVID-19 cases in many parts of the world has focused states and countries to implement new restrictions to mitigate the spread of COVID-19. Whilst these factors will make the recovery uneven, our experienced management team is prepared to confidently manage the volatility. Turning now to our physical storage business, total organic storage rental revenue growth accelerated modestly from last quarter up 2.5%. This once again was driven by strong revenue management results as well as growth in our emerging markets and consumer. We continue to be very encouraged with the levels of organic storage revenue growth underscoring the durability of the physical storage business in supporting strong cash generation. Total global organic volume increased 2 million cubic feet sequentially. Contributing to this was 3 million cubic foot increase in consumer and other and fine arts storage, partly offset by a decrease in records management volume. Looking more specifically at records management organic volume, this was down 1.1 million cubic feet compared to the second quarter. While still in decline, this is a significant 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 data center 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. The strong leasing this year, particularly among smaller deployments, has resulted in an increase in our utilization by more than seven points to nearly 92%. Given the need for additional capacity, we have increased our development pipeline to approximately 50 megawatts, consisting of both greenfield development and further build-out of existing facilities. Moreover, an excess of 50% of our development is pre-leased, resulting in a strong backlog. Let me now provide a brief update on Project Summit. Our transformation program is progressing well, and we are on track to realize our permanent structural cost savings of $375 million per year exiting next year. As you saw in our press release this morning, we now expect to be able to generate greater adjusted EBITDA benefits in 2020 as we have accelerated some initiatives. Most notably, these ongoing initiatives should not only significantly reduce our cost base, but also make it easier for our mountaineers to get work done, enabling them to focus on a more customer-centric approach. Some examples include driving global standardization in IT, replacing cumbersome manual processes with reliable automation, and improving the user experience whilst reducing process cycle time. We are as excited about the systems and process improvements at our project summit as we are about the bottom line improvement and believe the end result will be an enhanced value proposition for our customers and communities. As we shared with you last quarter, we are strongly committed to all of our stakeholders. We are focused on our culture, 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. In order to be a sustainable and successful company, we need to attract the best talent to drive maximum creativity through diverse and innovative thinking. I am proud to say we achieved a perfect score of 100 on the Human Rights Campaign Foundation's 2020 Corporate Equality Index. This recognition reinforces the important work we are doing and supports our goal of building and promoting an inclusive culture that encourages our employees to bring their whole authentic selves into the workplace. As we look at our business going forward, we see opportunities as well as risks, and we are making every effort to ensure we are well-placed to maximize the opportunities. We are cautious about our expectation of the pace of market recovery as we progress through 2021. In our own business, as we've shared with you in previous calls, we expect the gradual recovery in our service business to continue as economic activity recovers, leading 2021 to look similar to 2020, just in reverse in terms of quarterly progression. The work we are doing and have done to address the challenges posed by COVID-19 gives us confidence that we will come out of this position to consistently deliver long-term, sustainable growth. In summary, we are leveraging the opportunity in this rapidly changing environment to reaffirm our commitment to our strategy of growth through increased product offerings in a physical storage area, as well as continued rapid growth in our data center and digitization areas. At the same time, we continue to exercise prudent cost control and drive further efficiency across the organization through our transformation activities. We're proud of the progress we have made towards our transformative shift during this crisis. We are now even more enthusiastic about the speed of our future transformation, given the lessons we have learned during the pandemic. I hope you all remain well. With that, I'll turn the call over to Barry.