Iron Mountain Incorporated

Good morning, and welcome to the Iron Mountain fourth quarter 2022 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, then zero on your telephone keypad. 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, please press star then two. We will limit analysts to one question and you can rejoin the queue. Please note this event is being recorded. I would now like to turn the conference over to Jillian Tiltman, Senior Vice President and Head of Investor Relations. Please go ahead.

Thanks, Sarah. Good morning, everyone, and welcome to our fourth quarter 2022 earnings conference call. On today's call, we will refer to materials available on our Investor Relations website. We are joined today by Bill Meany, President and Chief Executive Officer, and Barry Heitman, our Executive Vice President and Chief Financial Officer. After prepared remarks, we'll open up the lines for Q&A. Today's earning materials contain forward-looking statements, including statements regarding our expectations. All forward-looking statements are subject to risks and uncertainties. Please refer to today's earnings materials, the Safe Harbor language on slide two, in our annual report on Form 10-K 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 used several non-GAAP measures when presenting our financial results. We have included the reconciliations to these measures in our supplemental financial information. And with that, I'll turn the call over to Bill.

Thank you, Jillian, and thank you all for taking the time to join us today. We are pleased to have delivered record performance for both the fourth quarter and the full year. These exceptional results are reflective of our broad product portfolio, synergistic business model, deep customer relationships, and committed team. Before I dive into the drivers of our strong performance, I would like to take a few moments to relay how deeply saddened we are all feeling by the devastating and recent earthquakes in Turkey and Syria. Our thoughts and prayers are with our fellow Mountaineers, customers, and all of their families living and working in the region. The safety and security of our employees is our number one priority, and we are committed to supporting our colleagues in the region as they navigate this challenging time. Now let me begin our discussion of our recent performance. I am proud to report that Iron Mountain has had another outstanding year. In the fourth quarter, we achieved quarterly revenue of $1.28 billion, yielding 11.3% total organic revenue growth, and record adjusted EBITDA of $472 million, up 10%. For the full year, we delivered record results across the board, revenue of $5.1 billion, adjusted EBITDA of $1.8 billion, and AFFO of $1.1 billion, representing growth of 14%, 12%, and 10%, respectively. This performance is a direct result of our close relationships with our customers and our commitment to innovation so we can provide them with expanded products and services to meet their needs. For the full year, we delivered organic storage rental revenue growth of 9%, reflecting continued benefit of pricing combined with positive volume trends. We drove double-digit organic growth in our data center business as well as our digital services and asset lifecycle management business areas, capping off another excellent year. Our continued drive to build an ever-expanding suite of synergistic and customer-centric solutions together with global reach and scale fuels our accelerated growth consistent with the Matterhorn Excellence Model we unveiled last autumn. Let me share a few examples of how we've been enabling our customers' success and growth through the diverse solutions and unmatched customer service we offer. Beginning with our records management business, we reported a substantial cross-sell win with a large nonprofit healthcare provider, which has been an Iron Mountain customer for more than 20 years. The win resulted in a new 10-year contract covering records management, ALM, data management, secure storage of non-records, and document digitization services, taking this customer from $2.5 million per year to $5 million annually. Just a few years ago, we would have been unable to provide such a broad range of services and solutions to this long-tenured customer. Today, with our broad offerings, we not only cross-sold the new services and solutions, but we increased our share of wallet for our records management services and solidified our position as a trusted and strategic partner. We also provided a solution for a large U.S. bank to develop a simple and cost-effective process to manage its vast inventory of over 24 million mortgage files. This partnership involves meeting stringent compliance obligations, mitigating risk, and reducing cost. Also in the quarter, we won new business serving the Australian government. Through this work, we will drive considerable cost savings for one of Australia's largest government agencies. Iron Mountain will have a dedicated team to pack, enter data, and transport 375,000 cartons to our new facility in Melbourne. In digital solutions, a key win I would like to highlight is with a branch of the U.S. federal government. As a result of the enormous success of our original project with the customer to digitize 177,000 reels of microfilm in less than the prescribed year, we have executed a sole-source follow-on contract to digitize another 133,000 reels of microfilm. This win is the result of the strategic development of a best in breed AI machine learning solution to auto classify and automate data capture. In addition, we worked with a large global medical equipment and electronics manufacturer to navigate an extensive global medical product recall. The customer needed an efficient partner to assist with the recall in order to meet regulatory requirements and avoid further legal ramifications. The customer also required rapid response in tight turnaround times and was seeking a single partner. The win includes several service offerings delivered by a single point of contact and illustrates the early success of our new commercial operating model that we introduced with Project Matterhorn. Turning to ALM, another noteworthy win this quarter was with a health insurance provider which selected Iron Mountain as its dedicated asset lifecycle management partner. Due to the unique nature of their business, the customer has constant attrition throughout the course of the year, and consequently, they were seeking a dedicated ALM partner to provide collection, wiping, imaging, secure storage, and redeployment of technology assets. The customer's previous positive experience with Iron Mountain and our team, combined with our strong solutions, led to mutual success. Our services resolved their challenges around collection, ease of use, and reporting and tracking. This illustrates our commercial team's strength and ability to cross-sell our set of solutions across the mountain range and is another example of our increased focus and success in driving commercial engagement as part of our Matterhorn client. Moreover, we are especially proud to say that we renewed our largest ALM contract this quarter. This is the fourth contract renewal with this client, one of the largest technology companies in the world. We have worked with them for the past 12 years and are proud of this relationship, the continuation of which demonstrates the potential for longevity in this area of our business. We continue to be excited and encouraged by the total addressable market of the asset lifecycle management category. despite the headwinds we have faced this year as a result of enduring COVID-19 lockdowns in China. In spite of this, our legacy ITAD business continues to perform well, and as we gain momentum on our Matterhorn climb, we continue to focus on moves to accelerate this growth. Finally, turning to our data center business, we are pleased to have finished the year with 139 megawatts of new leases signed, exceeding our original booking guidance of 50 megawatts and our most recent target expressed in the third quarter of 130 megawatts. In the fourth quarter, we successfully completed 14 megawatts of leasing. This area of our business has gone from strength to strength over the past several years, and we continue to see tremendous opportunity in serving both hyperscale and colocation customers and significant growth potential for our data center footprint. With 37% year-on-year bookings growth, excluding our large lease in Virginia 4-5, we will continue to prioritize data centers with our capital program, more details of which Barry will provide in his remarks. One customer win in our data center business that I would like to share is a six megawatt expansion lease at our Phoenix campus with an existing global Fortune 100 customer. The customer, which has a long-term strategic relationship with Iron Mountain across service lines, and has existing capacity in several of our other locations, needed space to expand in Arizona. Our customer was able to leverage our Phoenix data center for their expansion, and we look forward to supporting them in their future growth. Also in the quarter, our team announced a win for our joint venture at the Mumbai 2 data center, which is connected to our Mumbai 1 data center, one of the most robust carrier hotels in the country, providing superb connectivity and flexibility for our customers. We partnered with a global content delivery network company to expand their presence in Mumbai. They required a robust network ecosystem backed by reliable power infrastructure, which we were able to provide. Another win to highlight our ability to cross-sell across business segments involves our existing relationship with one of the largest German banks. This resulted in a new partnership with our data center team, who leveraged their excellent network within the German financial market and demonstrated proficiency in its high regulatory standards, customer buying team structures, and the data center competition in Frankfurt. The customer felt confident in our team's expertise and our ability to support a highly regulated environment to meet their needs. This is yet another excellent example of our ability to listen to our customers and find ways to meet their needs. To conclude, I am incredibly proud of our dedicated team our unmatched customer dedication and relationships, and our solutions, which continue to drive our transformation and excellence. The reorganization we completed in 2022 through the initiation of Matterhorn has established a strong foundation, which is already delivering double-digit growth. It is this foundation built by Matterhorn, which will continue to fuel our growth trajectory and to realize our greatest ambitions. Turning toward 2023, this momentum will continue to drive the opportunities ahead with another year of double-digit top-line growth expected. Barry will speak in detail about our guidance for the year ahead. Our goals are well within sight as we climb on with Project Matterhorn and beyond. With that, I'll turn the call over to Barry.

Thanks, Bill, and thank you all for joining us today to discuss our results. Before I begin, I would like to echo Bill's sentiments with regard to the tragedy of the earthquakes in Turkey and Syria. Turning to our financials, in the fourth quarter, our team continued the trend of delivering strong performance, exceeding expectations for both adjusted EBITDA and AFFO. On a reported basis, revenue of $1.28 billion grew 10.3% year on year, or 14.2%, excluding the effects of the stronger U.S. dollar. Total organic revenue grew 11.3%. Revenue was in line with the expectations we shared when we reported the third quarter in November. A key highlight in the quarter is our organic storage revenue, which grew 11% and represents a sequential improvement of 130 basis points. Total service revenue increased 17% to $510 million, driven by organic growth of 12%. These results reflect the strong performance of our commercial team and their focus on selling the entire mountain range of products and solutions. Adjusted EBITDA was $472 million, a new record, up 10% on a reported basis and up 13% year-on-year on a constant currency basis. As compared to the rates we were using at the time of our last guidance, the dollar strengthened in November, which resulted in an incremental headwind in the fourth quarter of several million dollars to adjusted EBITDA. Adjusted EBITDA margin was better than we projected at 36.9% and improved 40 basis points sequentially driven by revenue management and mix. AFFO was $287 million or 98 cents on a per share basis of $20 million and six cents respectively from the fourth quarter of last year. This was well ahead of our projections, partially due to the timing of a nearly $10 million cash tax item which is now incorporated into our 2023 guidance. Now let me briefly summarize the full year. Revenue of $5.1 billion increased 14% on a reported basis and 17% on a constant currency basis. Adjusted EBITDA increased 12% year on year to $1.827 billion, an increase of $192 million year on year, exceeding the projections given on our last call. AFFO increased 10% to $1.11 billion or $3.80 on a per share basis. I would like to briefly compare our results to our financial guidance. As we have noted throughout the year, FX rates have been more of a headwind than we had initially planned. In fact, using the same FX rates we had in our projections in February of 2022, we would have exceeded the high end of our guidance for EBITDA, AFFO, and AFFO per share. Now turning to segment performance. In the fourth quarter, our global RIM business delivered revenue of $1.08 billion, an increase of $61 million from last year, or 6% on a reported basis. This equates to a 10% increase, excluding the effects of the stronger U.S. dollar. On an organic, constant currency basis, revenue increased 11%. Global Rate Majestic EBITDA was $486 million, an increase of $39 million year-on-year, driven by revenue management. Turning to our Global Data Center business, we are pleased to report another successful quarter. From a total revenue perspective, we delivered 15% year-on-year growth on a reported basis and 19% year-on-year on a constant currency basis. As a reminder, in the second half of 2021, we provided unique fit-out services for our Frankfurt joint venture. In the fourth quarter of 2021, those services resulted in approximately $9 million of revenue. Excluding those fit-out services, on a like-for-like basis, our total data center revenue grew in excess of 27%. And we are now back to a more normalized service revenue run rate. Our data center storage revenue grew 25% year on year or 28% on a constant currency basis. Turning to new and expansion leasing, we completed 14 megawatts in the fourth quarter and 139 for the full year. This is well ahead of our updated leasing projection of 130 for the full year. Excluding our large bill to suit lease in Virginia, we leased 67 megawatts for the full year. With our increasing pipeline and the depth of our customer relationships, for 2023, we project leasing 80 megawatts or more for the full year. This represents 20% bookings growth. We are continuing to expand our data center platform into new markets, and as we discussed in November, we closed the Madrid data center transaction early in the fourth quarter. Turning to our asset lifecycle management business, We continue to be pleased with the results of our legacy ITAD business, which grew approximately 30% for the full year, and we are happy to report that we have seen strong growth in our pipeline. For the hyperscale decommissioning portion of the business, we are conservatively planning the year with an expectation for continued impact from COVID-19 in China. For example, at the midpoint of our revenue guidance range, we have assumed revenue from our total ALM business is consistent year on year, As a reminder, the decommissioning market was performing better through the first half of 2022 and slowed down sharply following more intense lockdowns in China. And as we are planning for ramping performance through the year, we anticipate the first quarter of 2023 revenue in our ALM business to be consistent with the fourth quarter of 2022. With that, We will naturally have some impact on our organic growth rate in the first two quarters of the year as we anniversary the IT renew transaction in January. Turning to capital, for the full year 2022, we invested $820 million of growth capital and $142 million of recurring. For 2023, we project capital expenditure to be approximately $850 million of growth with the vast majority of that dedicated to data center development and $145 million of recurring. Turning to the balance sheet, with strong adjusted EBITDA performance, we ended the quarter with net lease adjusted leverage of 5.1 times, better than our projections and an improvement versus last quarter. I think it is worth noting this marks our lowest leverage level since 2017. As we have said before, we expect to operate within our target leverage range, which is 4.5 to 5.5 times. For 2023, we expect to exit the year at similar levels to year-end 2022. Our board of directors declared our quarterly dividend of 62 cents per share to be paid in early April. On a trailing four-quarter basis, our payout ratio is now 65%, approaching our long-term target range of low to mid-60s percent. Now let me share our projections for the full year of 2023. We expect total revenue to be within the range of $5.5 to $5.6 billion, which represents between 8% and 10% growth year on year. On consistent FX rates, this implies growth of 9% to 11%. We expect adjusted EBITDA to be within the range of $1.94 billion to $1.975 billion, which represents 7% year on year growth at the midpoint. On consistent FX rates, this implies growth of 8% at the midpoint. We expect AFFO to be within the range of $1.15 billion to $1.175 billion, which represents 5% year-on-year growth at the midpoint. On consistent FX rates, this would be 6% growth at the midpoint. We expect AFFO per share to be $3.91 to $4. This represents growth of 4% at the midpoint, and on consistent FX rates, this would be 6% growth at the midpoint. Our guidance for both AFFO and AFFO per share includes the timing of the approximate $10 million cash tax item I previously mentioned from the fourth quarter of 2022 into the first quarter of 2023. This represents approximately two points of growth on both metrics. I would like to share some commentary to help investors better understand our guidance. In terms of FX, we are using current rates in our projections for 2023. While the US dollar has weakened some recently, we currently expect FX to be nearly a $40 million headwind to revenue for the full year. I would like to further note that at these levels, FX will be a more pronounced headwind in the first half of the year. We expect revenue management will continue to be a significant benefit, and I will note the vast majority of the actions we have planned for in 2023 have already been implemented at this point. Now turning to the first quarter, Revenue in excess of $1.3 billion, adjusted EBITDA of approximately $460 million, AFFO of approximately $270 million, and AFFO per share of approximately 92 cents. To conclude, we are pleased to have delivered a strong year in 2022 and are realizing our growth ambitions that we outlined at our recent Investor Day. I'd like to take this opportunity to once again express my thanks to our entire team for their continued dedication serving our customers and delivering on our collective commitments. And with that, operator, would you please open the line for Q&A?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. We will limit analysts to one question and you can rejoin the queue.

At this time, we will pause momentarily to assemble our roster. Our first question comes from George Tong with Goldman Sachs. Please go ahead.

Hi, thanks. Good morning. Services organic revenue growth remained in the double digits at 12% year-over-year in 4Q, but decelerated from 22% growth in 3Q. Can you discuss the puts and takes you're seeing with respect to services organic revenue growth trends?

Yeah, no, thanks, George. So, you know, first of all, we're very pleased with the continued growth, you know, especially where we just started Matterhorn last year. So if you look at overall in terms of the organic growth through the year and increased in terms of total revenue growth as we progress, so we're very pleased. To your specific question on service is, you know, one of the biggest factors in terms of when you're looking at the year-over-year comparison, if you recall a year ago we had the big fit-outs, for data center in Frankfurt. So that's the biggest factor in terms of that slight drop or that noticeable drop when you look at the year over year. Still double digit growth, but that was the biggest factor. I don't know, Barry, if you want to add anything.

You know, George, the only other thing I'd add, I suppose, is that it was right in line with our expectations when we set the projections, because of course, as we signaled last quarter, we obviously knew that we had an anniversary over the fit-out services. So we're very pleased with the way services and I will just tell you that as we look forward, we've got very good pipeline on things like digital solutions, our legacy IT asset disposition business is ramping, and we have, as I mentioned in the prepared remarks, very nice pipeline there. And we will see some incremental benefit from revenue management. So we feel very well positioned, George. Thanks for the question.

Our next question comes from Kevin McVeigh with Credit Suisse. Please go ahead.

Great, thanks. Hey, so it seems like FX was an incremental headwind, as was ITRenew. I don't know if this is for Barry. Where were the offsets? Because obviously the revenue looked pretty good and EBITDA, but just were the offsets on the revenue management or anything else?

Thanks for the question, Kevin. I would say ITRenew actually performed consistent with our expectations, and I'll just provide a little more color there. As we've said before, with the lockdowns that we were experiencing or everyone's experiencing in China, we had been seeing IT renew declining through last year. And in fact, in the fourth quarter, it stabilized was actually slightly up on a sequential basis, which we view as a positive. Now, we are, I think, being prudent with our expectations for IT renew going forward because as you've probably seen in the press, China continues to, while the restrictions are off, they continue to have a lot of challenges with COVID there. And so we haven't seen the market develop meaningfully yet, but we are cautiously optimistic. So we are planning for the first quarter expectation for ALM business to be consistent with the fourth quarter revenue levels and then ramping over the course of the year. As it relates to the rest of the business that you were pointing out, we had very strong contribution from revenue management, as you would have seen in the supplemental report. In fact, that ramped nicely on a sequential basis, and we feel very well positioned as it relates to revenue management as we move here through 2023, because as I mentioned in the remarks, all of our revenue management actions are essentially already in market. So we feel very confident very good about how things are trending. The other thing I'd call out, which was a really nice performance, was in our data center business. You saw the growth rate continue to be very strong on the storage side, you know, high 20s. And from standpoint of bookings, also ahead of our expectations. So that gives us very strong visibility into 2023 in terms of revenue generation. I'll tell you the pipeline continues to build. So appreciate the question. Thanks, Kevin.

Our next question comes from Andrew Steinemann with JP Morgan. Please go ahead.

Hey, Barry. Just for the sake of precision, could you just indicate what the organic constant currency revenue growth is at the midpoint of your first quarter and 23 guide? And it definitely seems like you're expecting faster growth for the full year kind of after first quarter or maybe compared to first quarter and just maybe, you know, go over that dynamic more unless you feel like you've already addressed that.

Okay. So a couple of points there for you, Andrew, as it relates to how to think about the first quarter. When I mentioned that we probably have something approaching $40 million of FX challenge for the full year, the vast majority of that is going to be in the first quarter. So I think we'll probably have something like 30 plus million, maybe even more than that of a revenue headwind from FX in the first quarter, just based on where rates are now versus last year. The other thing to be thinking about is that from a standpoint of IT renew, that will go into our organic growth rate this quarter. In fact, as you know, we, close that transaction at the end of last January. And so it's organic for February and March. And last year, I don't mind giving you this number for your modeling purposes, I may have mentioned it last year, IT Renew was about 60 million in the quarter, and then it was 65 million in the second quarter. And since I'm planning it to be essentially consistent on a sequential basis, that's about, you know, call it, you know, 45, that vicinity. So I think that will have about round numbers, a couple of point impact to organic growth. But from there, if you work through the model, you're going to see organic continue to improve through the year. And really, at that point, you don't have any additional acquisition revenue of any substance in the number. So you're essentially very close to the constant currency growth. And I think that ought to pencil for you on the model.

Again, if you'd like to ask a question, please press star then one.

Our next question comes from Shlomo Rosenbaum with Spiegel. Please go ahead.

Hi, this is Adam Perrington for Shlomo. What was the pricing list in the quarter and what should investors expect for 2023?

Thank you for the question. It was very strong, as you probably noticed. Organic revenue growth on storage was significant. 11% and overall it was 11.3%. And so with volume being as we planned, just slightly down on a sequential basis, but by the way, up better than our projection for the full year, it was a very nice contribution. And we had 8.9% on that metric for the full year. So it shows you the ramp that we've been seeing through the year. In terms of for 2023, We continue to expect revenue management to be a very nice contributor and be thinking probably in at least the mid single digit range for the whole year, if not a little bit higher in light of what we've got in market. And we feel quite good about where things are. And I guess I'll also add that from a volume perspective, since it goes a little bit to the question you were asking, from a volume perspective, we are continuing to see of good trends there and we would expect for the full year 2023 very similar projection to what we did last year so something like consistent to slightly up thank you for the question this concludes our question and answer session and the iron mountain fourth quarter 2022 earnings conference call thank you for attending today's presentation you may now disconnect