Good morning, and welcome to the Iron Mountain Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Gillian Tiltman, Senior Vice President and Head of Investor Relations. Please go ahead.

Thank you, Andrea. Good morning, and welcome to our second quarter 2023 earnings conference call. On today's call, we will refer to materials available on our Investor Relations website. We're joined here today by Bill Meaney, President and Chief Executive Officer; and Barry Hytinen, our Executive Vice President and Chief Financial Officer. After prepared remarks, we'll open up the lines for Q&A. Today's earnings 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 2 and our quarterly report on Form 10-Q 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 use several non-GAAP measures when presenting our financial results. We have included the reconciliations to these measures in our supplemental financial information. With that, I'll turn the call over to Bill.

Thank you, Gillian, and thank you all for taking time to join us today for our discussion of our record second quarter results. Our team has once again exceeded expectations with performance reflective of our strong legacy of customer service, our laser focus on execution, and our dedication to finding innovative solutions to serve our customers as they evolve their businesses. I'm excited to share that in the second quarter we achieved our highest ever quarterly revenue of $1.36 billion and record EBITDA of $476 million. This performance is ahead of the expectations we provided last quarter. The enhanced operation model we created through Project Matterhorn has continued to prove successful as our commercial team is empowered to sell the entire Mountain range of products and solutions across our portfolio. We are pleased with the high quality and wide range of our offerings today which positions us to be a nimble partner to serve our customers' needs. To highlight some of our results in the second quarter, we delivered organic storage rental revenue growth of 11% and drove high-teens organic growth in both our data center and digital services businesses. We are also pleased to announce that our Board of Directors has increased our quarterly dividend per share to $0.65 or $2.60 per share annualized, commencing with our third quarter dividend to be paid in October. As we have said before, when our AFFO payout ratio reached the mid to low 60s as a percentage, we would increase the dividend. Our payout ratio at the end of the second quarter was just under 64%. I would like to begin our broader discussion of some of the customer wins, which led to our record second quarter results. Let me start with records management, where our success was derived from both new…

Thanks, Bill, and thank you all for joining us to discuss our results. In the second quarter, our team achieved solid performance across all metrics, exceeding the projections we shared in May. Revenue grew to a record $1.36 billion, up 5% year-on-year on a reported basis and 6% on an organic and constant currency basis. Revenue was above the expectations we provided on our last call driven by outperformance in both our Global RIM and data center businesses. For me, a key highlight in the quarter is our organic storage rental revenue, which grew 11%. I'll note, this performance was on top of a stronger year-on-year comp and represents an acceleration in rate of growth. This reflects strong contributions from revenue management, data center commences, and positive volume trends. Total service revenue was $527 million, down 1% on a constant currency basis. This was consistent with our projections, which factored in the previously discussed year-on-year component price declines. Importantly, component pricing was consistent in the second quarter on a sequential basis. While this represents a significant headwind year-on-year, we are pleased that pricing has stabilized. As a reminder, that affects our IT renew business most prominently. Excluding our ALM business, service revenue was up 8% on a constant currency basis. This would have resulted in total company revenue growth of 9%. Adjusted EBITDA was $476 million, a new record, up 5% year-on-year with revenue management and strong data center commencements being the key drivers. Adjusted EBITDA margin was 35%, in line with our expectations, driven by revenue management and mix. AFFO was $277 million or $0.94 on per share basis, up $6 million and $0.01 respectively from the second quarter of last year. This was well ahead of the expectations we shared on our last call. Now turning to segment…

We’ll now begin the question-and-answer session [Operator Instructions] And our first question will come from George Tong of Goldman Sachs. Please go ahead.

Hi. Thanks. Good morning. In the ALM business, performance was impacted by component price declines. And you noted that you saw signs of stabilization in component prices. Can you elaborate a little bit more on that? What trend specifically did you see on component prices, and how would you deconstruct ALM growth between pricing and volumes?

Okay. Hi, George. This is Barry. Thank you for the question. Yes, let me help you with that. From a standpoint of the way the decommissioning and component price business has been unfolding this year. As you know, early this year, late last year and into early this year, component pricing was dropping quite appreciably. And by about the February time frame, it had reached over essentially all time record lows. And that's really across the gambit of component pricing from memory to CPUs, all the various components that we're selling. And, that has obviously been a significant impact for both Iron Mountain, but also for many other players in the technology industry. I think importantly what you've seen, and I'm sure you would have been following this, many of the OEMs have significantly reduced their production of new components, which is now limiting supply in the marketplace. And of course, used component pricing tends to directly correlate and follow with new. And so, what we've seen here since the component pricing hit the lows in the kind of February timeframe is, importantly, pricing has been very consistent. In fact, some components have been ticking up. We've seen that in certain elements of memory among other component pricing. So, what we've worked into our outlook though, George, is that, we are keeping component pricing in our outlook for this year at this record level low levels. And our thought process is, that's a prudent way to plan. When you look at industry analysts, then there's -- this is publicly available data, there are many estimates that project for component pricing to begin to lift as we move through the remainder of 2023 and in fact have very, very sharp increases in most component pricing next year in light of supply…

The next question comes from Nate Crossett of BNP Paribas. Please go ahead.

Thank you. So is it fair to say, I guess, that the service revenue growth year-over-year, like, this is the low quarter in 2Q? And that we should expect maybe it to trend out from here? And then maybe just comment on storage rental growth that still remains very strong. Can you maybe just speak to recent customer conversations and your ability to push price?

Okay. Thanks, Nate. This is Barry. Couple things there. So, on services, yes, you are thinking about that right, because really when you look at the total company's service revenue growth, it was completely impacted by the fact that the ALM business was essentially half that which it was in the prior year. And at that some $40 million of revenue, that's a big drag on the service in total because, as you know, all of the ALM revenue essentially is on the service line. And I'll give you a point that if you look at Global RIM, for example, our service revenue there was up over 9%. And so, the total company's service revenue will be improving. It should be positive in the third quarter, of course, and furthermore in the fourth quarter because, frankly, by then ALM no longer is a drag on our service revenue. In fact, I think it may even -- there's a chance it may be accretive to growth rate in service by the fourth quarter. In terms of storage rental revenue growth, we have had -- as your question alludes to, strong performance there and our revenue management actions have been very well received. We are, of course, very focused on driving value for our customers and making sure that they understand the significant value that Iron Mountain provides, both in terms of our core offerings of records and -- but also all the other offerings that we can cross sell around things such as enterprise IT asset disposition, data center services, among other. And so, in terms of where you should expect storage rental revenue growth, volume has been trending very consistent with our expectations. It's been modestly positive and we continue to expect that positive outlook. And from a revenue standpoint, total revenue standpoint, you should expect it to continue to be comping quite well. And as I mentioned in the prepared remarks, we do have some incremental revenue management actions in the third quarter and the fourth quarter. And that helps the growth rate, particularly in the fourth quarter, Nate, because as you may remember, last year more of our revenue management actions were shifted into the third quarter just from a timing of what we were doing last year. And this year, it's a little bit spread out. So these new revenue management actions that I alluded to today on the call, that's incremental to our prior plans and will be, as I said, a nice tailwind to growth rate. So thank you for the question, Nate.

Yes. And just one thing I would add for Nate on the storage trend sort of volume, you probably picked up from some of the wins we highlighted is that, as companies are shifting their use of space as the workforce is more remote or hybrid. That's yielding both increased volume for our storage facilities as they clean out or decide that they want to have it depoed rather than in an office that people don't visit as much or at all anymore. As well as, as Barry pointed out, [indiscernible] behind this 175% year-over-year increase in ITAD bookings, both because as companies are kind of cleaning out, it's a tailwind both on the storage in the ITAD business.

The next question comes from Andrew Steinerman of JP Morgan. Please go ahead.

Yes. Hi. This is Alex Hess on for Andrew Steinerman. Maybe just to dig in on Global RIM for a second. Can you remind us what percent of storage revenues are in some manner CPI linked with -- maybe what the price floor and lease terms look like nowadays? And then just quickly on Clutter, how does that factor into your outlook and maybe some thoughts around that business, which we understand had some cash flow issues as a standalone company on its own. Thanks guys.

Okay. Hi, Alex. It's Barry. Thanks for those questions. For proprietary and confidential reasons, we don't generally characterize our contracts too specifically. But what I'll say is, certainly as you know, you follow the company for such a long time, we have a very large number of customers, 200 -- call it, 200,000 plus client relationships. The vast majority of those are on our standard, if you will, paper that allows us to affect revenue management actions. And as I said before, we are very aligned with driving value.at times of essentially our choosing and is not, if you will, linked to any sort of indices. There are some, what I would describe as more bespoke contracts with some of our largest clients, which may have specific agreements around escalators and the like, but that is the -- that is a small number of total contracts. With respect to Clutter, appreciate that question. As just to help others who may not be as familiar with Clutter. Clutter is a business that we have had a minority stake in for a while now and it was a form of a joint venture. We own about 25% of the company prior to the transaction that we mentioned this morning. And that's on the valet self-storage. So it is a business that we have been providing, if you will, back end services too for some time in storing a fair bit of the volume that Clutter had been bringing in from consumers. And what Clutter's focus had been on is building a brand and aggregating consumer demand, principally in, as Bill mentioned, tech enabled manner. On a net basis, when all is said and done, we'll pay a little over some $20 million to buy the business will also contribute various of our…

The next question comes from Shlomo Rosenbaum of Stifel. Please go ahead.

Hi. Thank you very much. Could you talk a little bit about the gross margin trends? They were --look like they were down particularly in the services, down like 200 basis points year-over-year. Does that have to do with something from ALM or something else? I saw the labor costs were up almost 10% year-over-year. And, also, I thought maybe you could just comment. Bill, I always add you about talking about the underlying trends in the volumes in the wind business. If you could just comment on that, are you getting more positive trends in the historical mature markets than what we've seen before. You mentions, like, that hospital contract. Is that something that was going to lead to more positive volume trends in an area that historically been a little bit more of a weaker trends.

Okay. Let me start with the labor costs and the trends in terms of the volume. So I think, first, starting off on the volume trends is, as I was saying to Nate -- to Nate's question is that, overall, the volume, as you can see, is flat, slightly up. So it's trending in the right direction. And I wouldn't say this is a -- it's going to be a massive change. But what we see, if you think about 730 million cubic feet, so it's a very large base that we're operating on, is the trends that we see both in some of the new storage areas, but as well as what we see in people going into a hybrid or remote working aspect. It really is getting a lot more traction for our Smart Sort and Clean Start type solutions, which uncover more storage, also the services that we can provide being depoed. In other words, we can serve their employees anywhere they are. They don't have to come to the office to actually get information back, whether we give it back to them physically or image on demand. And then it's also uncovering, as we say, is driving a lot of the increased bookings that we see in the enterprise ALM side of the business and fueling that 175% growth that we see. So overall, we feel really good about where the trends are, but you can imagine, on 730 million cubic feet around the world, is that -- even what I call quite macro trends that I described are --don't change the overall trajectory like massively, but it is definitely a tailwind for that business. And on labor costs, before I hand it back to Barry is, you're right, labor costs is up. Some of it is as we go into new areas in terms -- as we ramp, or some of the projects that we ramp on, then obviously we're bringing labor in ahead of time. And the other part is making sure that our mountaineers around the world are well looked after, because we really do see the -- it's the core to us. We're a business services company. And the first impression that our customers have is our mountaineers, and we want to make sure that they and their families are well looked after. And the inflation environment globally has been challenging for a number of our colleagues.

Yeah. Shlomo, this is Barry. Maybe I'll just pick up there on [Technical Difficulty] you would have seen a similar increase in the first quarter when we made the actions as it relates to improved wages that Bill was just referring to. And then, I would point out on a sequential basis, labor was up about 2%, while service revenue was up 5% on a sequential basis, reflecting the [Technical Difficulty] down year-on-year. As your question alluded to, that has all to do with our component pricing, IT renew, because when you think about it, we are still processing a considerable amount of volume, yet we are recognizing a much lower price. And so, if you excluded the impact of component pricing, actually service gross margins were up quite nicely, which speaks to the ongoing trend in the rest of the core and frankly to the productivity that the team is driving in asset lifecycle management. So when you think about what could happen with our gross margins as pricing recovers, we've got a lot of operating leverage in that business. So I feel good about the forward look if the industry projections are anywhere close to accurate for where pricing will be next year, I think we're going to see a really nice lift there. So thanks, Shlomo.

The next question comes from Jon Atkin of RBC. Please go ahead.

Thank you. Couple of questions. First, just interested in how to kind of frame the exposure in your data center business to [indiscernible] where there's a lease in in Phoenix. And then, interested in just the data center development pipeline and kind of the opportunities ahead and your thoughts about bringing in third-party capital to maybe co-invest. There was obviously a recent transaction in India and in other countries where third-party capital is [indiscernible] in the development projects of some of the established players and your thoughts on pursuing that route from a capital standpoint? Thanks.

Okay. Thanks, Jon. I'll start with the -- what we see on the data center horizon and the I’ll turn it over to Barry. I think first of all, we're really pleased with how our data center business continues to grow. And also, as you know, I know you cover the industry extremely closely is that, pricing is up markedly, like as we look in markets like Northern Virginia on a triple net basis as we see around the hyperscale segment, pricing up some 40% so the returns continue to grow and keep pace. I think in terms of -- looking at the size of our pipeline, Barry mentioned [Technical Difficulty] million on top of the $1 billion that we already had for investment capital in 2023. Based on the strength of that pipeline and the success that we're having, pretty much across the globe is that -- I mean, you're right that we're always kind of conscious of in terms of how we fund our projects. That being said, we're actually fortunate that we have the records management business and our other services business, which is like a financial beast. I mean, it just generates a tremendous amount of cash that not only fuels the dividend, but it also fuels a lot of the development capital into our data centers. So I wouldn't say that we're in a situation where kind of a company that is solely in the date center space that has only to itself to look for in terms of how it funds itself going forward to drive a lot of the development. We actually have a growing, but some people will consider a mature business in terms of the amount of capital we have to put into that because it’s a very scaled high operating leverage business and we are able to use funds and profitability from that to fund a big part of our development. That being said, as you know, that we've done -- we have taken third-party capital a couple of times already, and we typically do that on stabilized or near stabilized assets and tap into funds that where people are looking for relatively low yielding, but long maturity or duration type assets. And we'll continue to do that as some of our portfolio stabilizes. I can imagine that we would recycle capital when the opportunity presents itself. But overall, if you look at the plan that we laid out last September in terms of our Investor Day, we're probably a little bit ahead of that in data center just because of the growth that we've been seeing in the first half of this year and what we see in the pipeline. But we feel pretty good about that we have a fully funded plan in terms of the way we're doing it now. But if there's opportunities, as I say, to take third-party capital, especially around stabilized assets, generally that boost our returns long term and we will do that.

Hey, Jon. It’s Barry. Thanks for the question. We for natural and perhaps obvious reasons we don't tend to comment on individual clients. But as you noted, there are some things out there in the public domain as well as in their filings that would confirm that they are client of ours in Arizona. That's obviously a very long-standing relationship that goes back to prior to our ownership of one of the data centers that we purchased there. I mentioned that intently because, of course, it's a long standing contract with pricing that goes back quite a ways and, frankly, is sort of a -- almost a build to suit type of situation for them where it would not be [Technical Difficulty] let me put it this way. In Arizona, we are essentially a 100% [Technical Difficulty] we are 100% lease now in Scottsdale on what we're under construction for in our second facility, phase 5 and 6, were 100% -- 5 and 8, we're 100% leased as well in terms of prelease. So it's not a particularly large revenue client, Jon. And beyond that, I wouldn't want to comment, but you would see in the filings the relative amount of, let's say, credit that we have between the two entities. And I feel very confident that in light of where we see pricing, and I'll just -- maybe I should just add this. That in general, on hyperscale pricing today, we're seeing on a triple net basis pricing up about 40%. And so, we feel very good about where data center is trending on a macro basis and where we are. And one last point, just build on thing Bill was mentioning. And when you look at our, I think there's a unique part of our data center story is, we're operating about 220 megawatts. We're nearly fully leased on that. And we're under construction on about another 200 megawatts. And the thing to think about that is, we're not building to [Technical Difficulty] anything, and we're 91% prelease on everything that we have [Technical Difficulty] doing a phenomenal job, and we're working hard to figure out which other facilities to start construction on as the pipeline continues to build quite appreciably. So we feel really good about where our data center business is trending, Jon. Thank you.

The next question comes from Kevin McVeigh of Credit Suisse. Please go ahead.

Great. Thanks so much, and thanks for the disclosures. Hey, Barry, can we unpack the guidance a little bit? I just want to make sure understand, because it seems like you reiterated the full year. But if I think about the puts and takes, it sounds like the pricing is a lot better. The CapEx is going up a lot. And, again, that may not be revenue that comes in. It looks like the Q2 is a little better. It looks like the Clutter is going to have some incremental revenue modestly. Is that offset the ALM business, or is it just a little bit of conservatism? And just, as you put that all together, how should we think about cash flow for the full year, not operating, but just what the use of cash should be, particularly given the step-up in the CapEx.

Okay. Thanks Kevin. Appreciate that. You're right that our revenue management program is doing very, very well. And obviously, our storage rental revenue growth has been growing. And as I mentioned, some of our growth rates are actually accelerating that being one of those. And that's thanks to both our Global RIM teams, as well as our data center teams, because commencements has been very strong. You referenced that CapEx is up, as I mentioned, that's going to build out our data center portfolio that's already preleased. So we are endeavoring to meet all customer demand, which continues to ramp. In terms of -- you are right, Clutter adds a relatively small amount of revenue. We probably are a touch more conservative with ALM in the back half, Kevin, than where we were at the beginning of the year because, of course, at the beginning of the year component pricing was still -- was still coming down. And now it's stabilized we've recognized that those stable levels of pricing. As I said, that may prove to be conservative as we move through the year, but we are only halfway through. So we tend to try to not get ahead of ourselves, Kevin. In terms of cash generation and the compilation of the incremental CapEx. Here’s what I'd underscore. We have reiterated our leverage expectations that we will be at 5.1 times at year end, which is consistent with where we are today, and at a multiyear level low. So we feel really good about the cash generation of the business. We're generating incrementally higher returns in data center on that CapEx investment. Returns on hyperscale have moved from kind of the seven, eight level to more like eight, nine, and retail cash on levered returns are also quite firm. And so, we're blending into that low double digit vicinity on a combined basis. We feel really good about where things are trending, Kevin, so appreciate your questions.

The next question comes from Eric Luebchow of Wells Fargo. Please go ahead.

Hi. Thanks for the questions. Two, if I could. So, just wanted to touch again on the data center pipeline. Any requirements you see that you think are tied to this wave of generative AI demand we're hearing about in the industry? And does that change at all how you design your data center for some of the higher densities that are required for these types of deployments? And then secondly, on the hyperscale ALM business. I know you talked about China COVID shutdowns impacting that business. Has there been any move to kind of diversify your end markets to resale beyond China to help reduce the concentration there? Thank you.

Thanks, Eric. So, yes, on the trends that we're seeing, I mean, and you've been following this industry for [EON's] (ph). I think you see the same thing I did -- we have, right? I mean, maybe a year ago we saw -- still very high growth in high scale, but they're probably a little bit more conservative. And now there's another wave of really accelerated growth because they're trying to keep pace with the amount of compute power is required to really run a lot of these large language models associated with the AI programs. And so, we have seen a -- it's not just type, but we actually see virtually all of our largest hyperscale customers coming to us looking for more capacity. And that's why we were speaking with such confidence that we'll exceed our original full year guidance in terms of the amount of leasing activity we expect. It's just -- it is very, very strong. Now in terms of the type of deployment, you're also right that the density that they're looking for is much higher. And I think I'm right to say probably year, year and a half ago we didn't have any customers coming to us and asking us to water cool in racks to actually support some of these higher densities. And now we are seeing a number of deployments that are requiring that kind of design. Luckily, I mean, we built our designs to be flexible. And of course, for these large deployments, we're actually doing the design to meet the customer, very specific customer requirements. So we're able to accommodate the higher density quite easily. But you're right. I mean, with the density that some folks are looking at and the amount of power they want to put in a rack, we are cooling using different methods and specifically some water cooling in rack to support the requirements.

And Eric, it's, Barry. As it relates to diversifying away from China, as we've talked about before, that certainly is a focus of the team. We have added to our organization in ALM and specifically around diversifying the downstream channels, we are making steady progress, but it is slow because, of course, as we've said before, China is the main market for us in that regard. But we are looking at and branching into throughout Southeast Asia there are opportunities we think over the intermediate term in India. We certainly have been selling more components into the U.S. and Europe as well, and that's a key focus, as well as the Mid-East. So there is -- there are opportunities there, and we are building that -- those channels The other thing I'll just build on and link the two questions is, when you think about hyperscale decommissioning, we generally are decommissioning data centers that were put into service, let's say, five years prior. And so -- on average. And the thing about AI in this very significant ramp in terms of hyperscale data center development right now is, it will provide even another leg to our hyperscale decommissioning growth five years on. Historically I've had some questions about like, well, how does the decommissioning business continue to ramp over time? And of course, the things that we'll be decommissioning this year are components that were put in place about five years ago. And next year, we'll be decommissioning things that were put in place four years ago. And as those data center platforms have grown, it provides that much larger of a platform for us to decommission in the future. And I think it shouldn't be lost on us that of this AI growth is going to drive another substantial leg up in the opportunity for hyperscale decommissioning in the future. And as the leader in that space, we feel quite good about the future.

[Operator Instructions] And our next question will come from Brendan Lynch of Barclays. Please go ahead.

Hi. Good morning. Thanks for taking my questions. I wanted to ask on the storage -- excuse me, the retention rate in the Global RIM business, it looks like you contracted about 100 basis points year-over-year and it's at, probably the lowest level in the past few years. I understand that the storage business has generated really strong growth, driven by price, but maybe you could kind of square some of those dynamics there as well.

Okay. Hi, Brendan. It’s a -- thanks for the question. When you look at that metric, I'll just remind you that it is on a trailing four quarter basis. So what you've got going on there is -- what you've got going on there is an element of COVID still because we were naturally seeing client fell little bit less activity of switching and/or disruption, what have you, during the COVID period and even in the period after we all felt like COVID was over, if you will. And so, that's a little bit of catching up. But if you look back on that metric over, let’s say, the last 15 years and that data is available in our historic disclosure, you'd find that we're in a very tight band and not outside our normal levels from a pre COVID standpoint. I appreciate the question. I will tell you that we feel we feel -- we are -- our customer relationships are very good. We can -- as you linked it to revenue management, I would say our focus on revenue management is continuing to educate our customers on the very significant value we drive for them day in and day out. And the fact that our volume continues to trend positively, I think, should give you a very good indicator there of how we're doing with our customers.

This concludes our question-and-answer session and the Iron Mountain Second Quarter 2023 Earnings Conference Call. Thank you for attending today's presentation and you may now disconnect.