Cintas - Earnings Call - Q1 2026

Executive Summary

• Cintas delivered a clean Q1 FY26 beat and raise: revenue $2.72B (+8.7% YoY) and diluted EPS $1.20 (+9.1% YoY), with gross margin expanding 20 bps to 50.3% and operating margin to 22.7% (+30 bps). Versus S&P Global consensus, revenue modestly beat ($2.72B vs $2.70B*) and EPS was slightly above ($1.20 vs $1.19*) (see Estimates table).
• Management raised FY26 guidance: revenue to $11.06–$11.18B (from $11.00–$11.15B) and EPS to $4.74–$4.86 (from $4.71–$4.85); assumptions include ~$97M net interest expense, 20% tax rate, constant FX, and no future buybacks.
• Route businesses all grew; First Aid & Safety posted strong double-digit organic growth (14.1%) with 56.8% gross margin; Fire is investing (SAP, capacity), creating near-term margin drag but supporting growth; uniform direct sale was down 9.2% (lumpy).
• Capital returns continue: $347.4M in buybacks through Sep 23 and a 15.4% dividend increase ($0.45/sh) payable Sep 15; $182.3M dividend paid Sep 15.

What Went Well and What Went Wrong

• What Went Well

  • Margin expansion and quality of earnings: gross margin to 50.3% (+20 bps YoY), operating margin to 22.7% (+30 bps YoY) on sourcing and process improvements; EPS +9.1% YoY.
  • First Aid & Safety strength: organic growth +14.1%; gross margin 56.8%, with investments supporting sustained double-digit growth.
  • Guidance raise amid uncertainty: “We are raising our fiscal 2026 financial guidance,” citing strong start and momentum; CEO: “Our ongoing investments continue to help drive revenue growth and expand margins”.

• What Went Wrong

  • Fire margin/investment drag: SAP rollout and growth investments pressured gross margin in Fire; management framed as timing and long-term positive.
  • Uniform direct sale softness: down 9.2% YoY; acknowledged as strategic but inherently “lumpy” (2.6% of revenue).
  • Free cash flow declined YoY on working capital: CFO from operations $414.5M vs $460.4M YoY; FCF $312.5M vs $367.4M YoY.

Transcript

Speaker 1

Ladies and gentlemen, please stand by. The presentation will begin shortly. Thank you. Ladies and gentlemen, the presentation will begin in approximately 10 minutes. Thank you.

Speaker 2

Okay.

Speaker 1

Perfect. Okay. Thanks. Welcome everybody to Nashville. I thought the tour yesterday down the landing was fantastic. It was great to see you guys there. I thought the Sims Lifecycle Services recycling team gave us a really good understanding of Sims Lifecycle Services and its strategy. We're here in Nashville today. Let me go through a couple of safety things first. If an alarm does sound, the muster point for us is out on that hill over there. At the top of the hill, there's a sign that says, "Notice we gather there." I would say, as in yesterday, there are no planned drills today. If an alarm does sound, it's genuine. If we're in here, let's all just quietly make our way out the door and at the top.

If we're out on the floor, follow your Sims person and we'll make sure you get to a safe place quickly. The bathrooms are just out this door here. Ladies and gents outside there. I think that's all we need to do from a safety point of view. Today we're going to have a presentation firstly from Ingrid Sinclair. Ingrid is the President of Sims Lifecycle Services and reports directly to me. And Lynn Jacobs. Lynn Jacobs is the Chief Financial and Sustainability Officer here at Sims Lifecycle Services. On that, I'm going to hand over straight to Ingrid. Actually, we'll run through. We'll probably think we'll do it similar to yesterday. We'll run through the presentations, Q&A. We'll then go out onto the floor, have a good look around. I suspect that may sort of spark some more questions.

We'll come back in here, a bit more Q&A and then we'll get you on your way. Thanks very much.

Speaker 4

All right. Thank you, Stephen. Good morning. Welcome to Nashville. Out of curiosity, who's here for the first time to Nashville? Okay. Some have gone through. Any chance that you were here two years ago when we had Investor Day? Anybody? No? It's the first time. Very pleased to have you and pleased to have the opportunity to present the business to you and give you some more insight into why we're so excited about this. My team, SLS, as you know, is a wholly owned subsidiary of Sims Limited, which means we have our own executive team. We're based in Irvine, California, which means we get to spend half the year with Stephen when he's over, which is quite nice. We run independently. What does that mean? We have our own HR, our own IT, finance, ops, and they all report to me. We have global responsibility.

We have sites throughout the world in EMEA, APAC, and in North America. In the Americas, we have a site in Mexico as well. We're coverage everywhere. The reason we have this autonomous team is so we can have very quick decision-making processes, be able to move quickly and agile because that's the business we're in. It's a very quick-paced business. The one thing that does go up to group is capital resource allotment. We all compete for the same capital funds, and that goes up to group. What is nice about this is that if in the future there are any plans to change ownership structure, it would be very easy to do. Right? Very easy to pivot. I'm going to introduce a little bit of the team. You've seen Stephen present Lynn. She also has IT under her as well as sustainability and finance.

Chris has all the operations globally, and Marie has HR globally as well. Who has heard of AI? It is everywhere. It's really the addressable market for SLS. We have it in entertainment, shopping, at work, everywhere. I know that some of you are integrating AI in your businesses. You're all very well aware of its power and its expanse. I mean, it's just, it's everywhere. I just pull out some of the headlines that have been out in the press lately, and just the pace of change is incredible and the amount of investment that's going on. $80 billion Microsoft, Amazon, $100 billion, Google, $75 billion, Meta up to $65 billion, all on AI building capacity. It's just amazing the boom and the amount of money that's being spent in this sector.

If you think of the pace of change, it took 75 years for people to adopt the telephone to get to 50 million users. The internet took four years. ChatGPT had 10 million users in 40 days and 100 million users in two months. It's just amazing, the pace of change of AI. It's everywhere. That's $1 trillion that's being spent in this sector. Just this week, NVIDIA announced another $150 billion in partnership with OpenAI. Excuse me, it looks like we have a couple more people coming. Sorry, we have a couple more folks joining from back there. To bring an analogy to you, it's like the gold rush. Those who dug for gold weren't necessarily making the money, but the ones who were selling the shovels and the pickets were. It's sort of analogous to what we do. We're adjacent. We provide tech services.

We're not building AI data centers or working maintaining them, but we are adjacent. We're providing tech services to them. As a shareholder of Sims Limited, you probably never thought that by holding Sims shares, you would have the exposure to the AI sector, but here we are. What we did, we wanted to kind of show what this is. The yellow line is the total investment that's going into the AI data centers hyperscaler. We plotted the blue line as Sims Lifecycle Services revenues. I'd like you to look at the comparison of the slopes. It's quite interesting that there is some direct correlation between the AI sector investment and the performance of Sims Lifecycle Services.

What you have to note here is that what is installed today will come to us in four years because a decommissioning cycle is normally three to five years, so four years on average, which means that here we have a rack and all the servers in it. Every four years, it gets refreshed. You might think, okay, but is it slowing down over here where the slope is going? That's still between $350 billion and $400 billion of investment. It's still huge. That doesn't take into account all the recent announcements of the $150 billion that went in with OpenAI and all these things that are coming. I would suspect that that curve will keep on going up. Also to note here, since it's a four-year cycle, what gets installed in 2020, we would see at the end of 2023.

Throughout that, we're also providing services, the lifecycle of it. Because of this, of course, it's a very exciting industry, the growth, and it's appealing to others. What's the competitive landscape look like? We estimate about 95% are local, regionally held providers. They're looking at market sectors that we're not interested in. It would be your universities, your hospital groups, and that type of thing, small regional businesses. The middle part, the 5%, is what Stephen often talks about. The global competitors that we run into, Iron Mountain and SK Tes, those are our main competitors in that sector. Also, the hyperscalers could be a competitor themselves, right? They either pull it in, do it themselves, or they don't do it at all, right? I'm going to be bold and say that there's only one company that's strategically placed to take advantage of this growing aggressive market, and that's us.

Let me kind of break through, go through why I state that. We have strategic market positioning. We're aligned with the growth of AI growth, infrastructure, and we go to where our clients are, where they need the capacity. We're a full-service provider, a one-stop shop. We do from the forward upfront logistics all the way to the decommissioning, all the way through the lifecycle. We innovate with our clients. We have strategic partnerships. We're always coming up with new ideas on how to do things better as the technology changes. We have to change with it. It's very quick. We integrate with them. We get into their data systems and they're in ours. Scalable capacity is what is very important in this sector because you have to be able to move quickly. We estimate we have an additional 50% to 60% extra capacity available in the U.S.

because we've been investing in that growth over the last two years. We've spent 13 years the previous CapEx year, 7%, over 50% of that was for growth capacity. It's just being ready in anticipation of the growth and to position ourselves so we can be ready for it. As I mentioned before, what is super important in this sector is to be able to keep pace with our clients. It grows so fast. It's very quick-moving. We have to move quickly with it and just to have that scalable capacity. If I give you a concrete example of what we did successfully to validate what we do and what we can do as far as moving quickly and being able to pivot. In June of 2021, we were presented with an opportunity to bring in a new service offering, which is a redeployment of DIMMs.

In five months, we stood up a site, and it's not a regular site. This is to hyperscaler standards, which means the floor is epoxied. You have the environmental controls, temperature, humidity, anti-static controls, high security throughout the site. It's not just a regular asset management site. It is a higher manufacturing-like site, which you'll see in about an hour when we go out on the floor. We did that in five months, which is incredible. Within a year, we had reprogrammed 1 million DIMMs. Lynn, put sort of the DIMM. This is when I their memory sticks, DIMMs. If I kind of get a little bit technical with you here, there's a group called OCP, which was founded in 2011. It's the Open Compute Project. It was founded by the hyperscalers like Google, Microsoft, Meta. Intel's also in there.

They came together to try to agree on a generic form of the hardware. This is OCP hardware, which means it could be used anywhere. You're not with proprietary DIMMs, proprietary hard drives. It's all open compute. They did that so they could be more scalable, efficient, sustainable, and cost-effective. In 2019, Intel introduced CXL, which is Compute Express Link. This is ideally what these reprogrammed DIMMs are used for. It's older tech that can go into new tech. What they do is they build pooling. It's pooling for memory, storage, and compute power. You can imagine with all this AI, with the language learning model modules that you need, you have these peak periods of compute demand. CXL is an opportunity. It's a pooling, so you can meet those peaks. Instead of designing for a peak, you can go use the pool. It's a much more cost-effective way.

You're not using the new technology. You don't have to have a DDR4. You can use the 4, which is right here. More sustainable, more cost-effective, and helps data centers meet their challenges with memory constraints, the performance bottlenecks, and hardware inoperability. The old technology can be used in newer technology for pooling effects. That's the main use for the redeployment of DIMMs. When we go down the floor, you'll meet Isaac Martinez, and he's the expert on this. If you have any extra questions on that, he's the guy to talk to. The markets we serve in, I've talked a lot about the hyperscalers, the data centers. We have most of them under contract, long-term contracts, three to seven years. Enterprises, these are global enterprises. Your large banks, like SAP, Bank of America, all those types of clients, and then the OEMs.

The folks that make the equipment, you know, your Ciscos, your Dells, your Oracles, those types. All under contract. They all, in one way or another, touch the hyperscaler space. To note here, no single customer contributes more than 20% of our total revenue base. We try to keep it very diverse. This is looking inside a data center. I mentioned the four-year cycle, but we're in all aspects of it from the beginning to the end, not just at the end of the decommissioning of the four years, but we're also upfront. We do the upfront supply in their supply chain. We have some of our employees that are sitting in data centers now and doing services in a live data center. We do the wiping of hard drives. We do the shredding of hard drives.

It is all ongoing throughout the four-year cycle, just in a way to make sure that we're there throughout, not just at the end of the four years. What's super important here is to be sticky with the clients. These are the methodologies that we use to be sticky, right? Sticky so it's hard to change. You know, the high switching cost. We want to make it hard for them to leave us, right? Integrating their data is a big part. We're in their data systems and they're in ours with the APIs, reporting, and so forth. We have our employees sitting in their site. Currently, we have 15 SLS employees sitting in 15 data centers in the U.S. We have some hyperscaler employees that are sitting in our site. We have clients, hyperscaler clients, that have their employees sitting in an SLS site.

We also offer custom programs throughout, be it the backup battery supply in the forward chain and so forth. All of this makes us unique to this market. I know yesterday you went through a metal yard, scrap yard. I wanted to bring into focus a little bit of what you saw out on the floor or out on the yard. Lynn has my three DIMMs. My three DIMMs here, new DIMMs, are the same revenue value as one ton of ferrous scrap. Size doesn't matter in this case. With that, I will switch it over to Lynn, and she'll do a deeper dive into financials.

Speaker 3

Hi. Thank you, Ingrid. Ingrid spoke about how fast-paced this industry is. I have a tendency to speak at the same rate at which the industry is growing. I'm going to slow it down. If I get going too fast, just let me know. They say that the success of a recipe is in the proof, is in the pudding. I'm lucky enough to show you the pudding today. If we go to our financials, you'll see we are presenting 2023 to 2025. We've eliminated 2021 and 2022 as they were COVID years. We're going to focus on 2023 to 2025. Your eyes will automatically be drawn to the underlying EBIT earnings, which have increased 78% from 2023 to 2025, moving from $8 million to $32 million. How is this possible? This is built on a really robust revenue stream, which outpaces the rate at which costs have increased.

Looking at revenue, we started at $325 million and we ended at $427 million. Revenue can be looked at in different ways. The growth in the revenue here is definitely as a result of the growth in our hyperscaler revenue, which has moved $100 million in the two-year period. As hyperscalers have grown, Sims Lifecycle Services has captured that market and grown with them. If you cast your eyes further down, you will see a trading margin or gross margin, as we refer to it. That has really increased substantially. One thing that makes our margins robust and sustainable is the diversification of revenue streams. We have different revenue streams, and we'll get into that in the slides that follow. If you go further down, you'll see our operating costs. They've only increased 15% over the period, which is a lot less than the increase in the revenue.

Interesting to note that as a percentage of the overall revenue, our operating costs have fallen 7%. The increase between 2024 and 2025 is $25 million, of which $17 million is directly related to new revenue streams, which indicate growth. Just like in the metal yard, they have tons and they have pounds. We have repurposed units. These are not a financial metric. It's a metric to indicate market growth. Sorry, this thing keeps pinging. Anyway, it's to indicate market growth. What's really exciting to see here is our repurposed units have doubled. Our revenue is not just price-related. It is volume and price, which makes it really robust and sustainable. I think that is it on this slide. It is really exciting. Now you can see the proof.

I'm going to take you further so you can understand a little bit more about how we generate revenue and how it shows up in our P&L. SLS has three main streams of revenue. We break it down into resale revenue, service fees, and commodity. We'll start with resale. At the end of an asset, when we get an asset, for example, a laptop, and we've performed services to it, we've cleaned out the data, we've done data destruction, we get to resell that asset into the market. This is a revenue share for us, and that line will show up as a cost of sales in our P&L. The second type of revenue is the service revenue. This is an area where we see growing and expanding as we go further and further into the hyperscaler market. Each of these is a service fee per unit.

We have several different types of services. We have decommissioning. We have data destruction. There is a whole range of services. As we become more and more integrated with the hyperscalers, we're seeing different types of service revenues being generated. The last one you'll be pretty familiar with, that's commodity recovery, very similar to metal. As Ingrid pointed out over there, we have a real-life server. If you have a look at the server, the outside casing is steel. That will land up in one of our SA recycling or Sims Limited yards, whichever yard is strategically close to us. It goes right back into the Sims family. Every asset comes to an end of its life, so it can no longer be repurposed, and we actually have to recycle it. At this point, we have the ability to provide that service.

You'll see a whole lot of hard drives we will shred, and that shredded hard drive is sold as commodity. We have some smelter activity and commodity recovery. I'm pretty sure you're going to ask me what is the percentage of each of these revenue breakouts. We're going to go to the next slide so that we can go through that. We've taken the $427 million, which is our revenue, and we've split it into the two areas or the two ways in which we would look at revenue at SLS. You can look at it by the type of revenue or the client. If we look at type, you can see a really healthy mix between commodity, resale, and services. This makes our margins very robust and very sustainable.

If we look at a client type, you can see these are the three types that Ingrid spoke to you earlier about: OEMs, enterprise, and hyperscalers. Hyperscalers are 47% of our current revenue mix, and that is up from 31% in 2023. You can see the expanding growth in the hyperscaler segment. All right. Strong revenue growth, very much led by the hyperscaler demand. If you have a look at the pie charts, the dark blue is representative of the hyperscaler growth. It moved from $100 million to $200 million in two years. Really robust growth. The exciting thing about hyperscaler growth is that it touches all three types of revenue. We get service revenue, commodity revenue, and we get resale revenue. As we grow in the hyperscaler space, we will get a further strengthening in the diversification of revenue streams.

To take note here is also the really strong enterprise base on which we stand. This is a strong foundation which allows Sims Lifecycle Services to continue, and it helps us when we have peaks and troughs in decommissioning schedules. All right. Going on to how does it look? You'll see the 40% revenue growth over the two years. Interesting to see, or exciting to see, is the robust growth in our return on invested capital. That allows you to see how we scale profitably and also that we have a very controlled and disciplined capital deployment program in Sims Lifecycle Services. Right. If you go to the chart on the left or right, I'm not sure which one now because I'm confused, you'll see they have underlying EBITDA and operating cash flow.

There's a strong correlation between the two, showing that once again we take high profits and convert them into cash. I'm going to call out the peak in 2024. It's just because it's really noticeable. In 2024, Sims Lifecycle Services had a small refinery business, which was called Franklin Park, and was moved under the Sims Metal umbrella as Sims Precious Metals, as it was better suited in the metals umbrella than ours. That increase just shows the release of the working capital on the inventory in that period. Now you've seen the pudding. I'm going to let Ingrid take you away. Thank you.

Speaker 4

Thank you, Lynn. How are we going to continue taking advantage of this aggressive growth in this sector? We're going to continue being capital light. I know Stephen likes to say that quite a bit about us. We will continue that way where the last two years, we had $13 million last year and the year before, $4 million in capital. We will remain that way. Automation, we will automate where it makes sense so we can scale up quickly and again gain efficiencies. We will continue with our geographic expansion, adding more sites and also growing organically with our clients. We are excited for the future prospects of SLS. The market's huge, which I showed you. The investment is incredible that's going on in this sector. We're going to continue with our scalable model to take advantage of this and to continue capturing a meaningful share of the market.

We will continue taking advantage of the tailwind that we see in AI in the hyperscaler space. We are uniquely positioned to serve hyperscalers globally. We are where they need us to be. We have diversified revenue across the sectors of resale, service, and commodity recovery. Ultimately, at the end, when they meet their end of life, we'll remain profitable and take advantage of the accelerated growth and the earnings momentum. We have high returns with our cash conversion supported by capital discipline and effective cost management. We have proven to be successful in the execution of our strategy, the hyperscaler relationships that we have, and the automation that we've put at scale. With that, we'll open it up to questions.

Anna, I think it's the same as you said with the microphone so that everyone on the call can hear it. We've got plenty of time for Q&A. We don't have the 4:30 P.M. bus problem as yesterday. Let's get into it.

All right. Thanks very much. Listen, just a quick one on the growth in hyperscalers. How should we think about how that might influence margins as that grows faster than the other two segments?

Let me pull up the chart. I think certainly the growth is there. We parallel this growth with the margins, with our cost control, efficiency, and automation. The margins should increase.

Speaker 3

We do expect growth, but we're not going to give you any uptick today on 2026 or 2027.

Yeah, yeah.

Oh, do you want the margin mix? Sorry.

Speaker 4

Oh, margin mix. Sorry.

Yeah, oh my.

Speaker 3

Okay. Hang on. You got to slow. Ask me the question again.

Yeah.

Sorry, Brooke.

The volume growth keeps gaining from hyperscalers, as has been the case. Just as that part of your business and that customer grows faster than the others, how should we think about the margin profile? Is it higher margin customer?

I think in the hyperscaler growth, it touches all three revenue streams. As you grow the hyperscaler, you're actually going to touch all three components. We do see growth in the service revenue as we're going to perform more and more services within that service revenue line item. That component will definitely increase.

The margin? Do you make more margin out of service revenue than the others, or is it?

It's really sometimes at the customer's discretion as to what they want to do. When the asset comes into us, they have the ability to decide, do they want us to redeploy it, resale it? It's a bit of a fluid conversation that I don't think is really specific.

I think from my perspective, when I think about it, I've got a mic on, so I'm fine. When I think about it, the hyperscalers is where our good strong margins are. I think to answer the question very specifically, we would expect increased margins from hyperscaler growth, not decreased margins.

Speaker 4

If we can point you to, we use TrendForce, which is you can subscribe to it, and it does forecasting on DIMM prices, in particular, memory. It was $12 four months ago, and now a used DIMM is selling at $64. This is due to the demand. There's not enough manufacturers, new DIMMs coming out, and folks, since they're using CXL, they can use the older technology, which is more cost-effective. Still, with that, there's a huge demand in that area in the DDR4 sector. We do see margin increase definitely in the DIMM space.

I 100% agree with that.

That's information you can get publicly by going to TrendForce.

Yeah, I think that I 100% agree, Ingrid. I think one other comment I'd add to that is why is the hyperscale, why are we focusing on it? One is margin. I think Lynn correctly pointed out that it's margins across all of what we offer, but it's volumes as well. The margin in trading margin percentages are good, but it's volumes. I mean, that's where the growth is. That's why we've focused SLS on the hyperscaler market for the last four years. That's where the growth has come from.

Yeah.

Perhaps just to add some color to that perspective, Stephen, could you, Ingrid, help us understand how you scale? Is it people? Is it robotic capacity? Is it land and buildings? How do your costs flex as you scale?

Right. I had mentioned 50% to 60% capacity in the U.S. that we have available now. That is partially adding a third shift, so that would be people, but also automating where we can. Where we can automate, it has to be a uniform process, and you'll see that when we go out on the floor. Automating is attractive only when you have a uniform process through it. That also helps with the scale. It's decommissioning; they come in big chunks. What we have to be able to do is scale up and scale down. To meet that, the difference is we don't want to be adding people, removing people. Where the automation helps us is that it can run 24 hours, it doesn't take breaks, and if we have a slow, we turn it down.

I think, Ingrid, it's also fair to say that as we're growing, and this is certainly what I've noticed, as we're growing, we're getting a more diversified customer base. Your peaks and troughs tend to smooth out because one hyperscaler is not decommissioning exactly the same time as another hyperscaler.

Correct.

I think that's certainly what I've observed with you guys over the last few years.

We talk a lot with, we're very ingrained with our hyperscalers. We're always in conversation. They know their decommissioning schedules that are coming out. They know where they're coming. We try to place ourselves where we need to be. That might be adding a site. For instance, we'll be expanding into Europe for one of our hyperscaler partners. Stephen will probably announce it at AGM or at the half year where we're going. That is a replication of what we're doing here, and that's to meet their capacity needs. That's adding a site and adding people.

Thank you. Just on that particular point, how close do you need to be? I presume that there's a fairly active freight market in some of these components, and you don't necessarily need to be very close. I'm just curious on that element of proximity.

Too close to the source, do you mean?

To the data center source.

Yeah, we try to be close, honestly, to help with sustainability efforts, with timing, and just the movement of material. We tend to go where they need us to be geographically, yes.

I've just got a few questions around that chart that you've got there on the screen. The first one is just that investment profile you've got there. Just to confirm, that's U.S. only, or is that global?

It is global. Yes, in U.S. dollars, billions of dollars, yes.

A global footprint.

Correct. Yeah.

Okay. The second question is.

Our line is in Australian dollars.

Sure. Can I get an understanding?

It's millions.

Yeah. Sorry.

Million, that's a billion difference.

In terms of whose forecasts are those going forward, are they yours or are they third party?

No, they're publicly available. The yellow line is publicly available, and the blue is us, actual SLS actual.

Yeah, are the forecasts your forecasts? Have you aggregated, you put those together based on publicly announced information?

Correct.

Okay. They're your forecasts. It's not a third party that you've brought in to do that.

Correct. Yeah, AI enabled.

Okay. Yeah. Just a final question on that yellow line. That's data center investment, but I assume that includes the building of sheds, construction costs. Are you able to give a feel for what that yellow line would look like only for the racking equipment and the actual chipsets and the equipment that you would be recycling? I'm just wanting to take away construction costs, fluctuations, and things in those numbers to get a better feel for what your addressable market actually is in terms of an investment profile.

Right. We haven't split out the capital cost from the, you know, it's the data centers themselves don't particularly provide that guidance to us. This was merely just put up to show the growth and the investment in the scale. No.

I'm going to give it, I think I understand your question there, Owen. Let me give you my perspective on that question. A significant proportion of it, though, is the rack costs, which is our addressable market. A good example, I think we're going to see one out there today, is there's these new racks that are going in.

GPUs, the GPUs.

The GPUs, there's a good word. One GPU, one rack holds 30 of these things, and they're $50,000 each. That's $1.5 million. Is it roughly the size of that over there?

It's the same size as that.

That size over there, this new equipment, that's $1.5 million per rack, not that one, but of that size. A massive proportion of it is our addressable market. I mean, we could maybe go away and we could have.

The next slide?

Actually, let's be honest. I don't know what the construction cost of a warehouse is or the air conditioning or the electrical, but what we do know is the investment they're putting in in the racks is huge.

If I may, just on the high charts here, just on hyperscalers themselves, their demand and their growth, is it more, you've mentioned AI a few times, is it more looking for the growth in training facilities or inferencing, the replacement of racks within the cloud?

Right. Yeah. The AI is driving all the refresh cycles, and it'll go faster because the technology has to keep up. As Stephen mentioned with the GPUs, that's going to be the new technology that's going in, so you have that compute power to go forth. Does that answer your question? Is that what you're?

Just a different data center type. If you've got a big AI training facility getting upgraded or a new build, is that where you're seeing the opportunity with the growth in the hyperscalers going forward, or is it more in the existing cloud infrastructure?

Speaker 3

It's both.

Speaker 4

It's both.

Speaker 3

If you look at today, the capacity in data centers is about 82 gigawatts, and that's going to grow to over 200 by 2030. It means that they're going to build total new data centers in order for this AI computing capacity. They also take the existing data centers that they have and refresh those and then rekit them. It's definitely, I think, refreshing what they have, but they're building up new for their growth. We get to catch both tailwinds.

Speaker 4

Right. Yeah.

Thank you. Why SLS? If you're a big firm, no names specifically, why would, and why do they choose you over Iron Mountain or someone else?

Because we are publicly traded, we have big Sims that are helping us get some capital allotment. Mainly, why? Because we can move quickly. We can move at pace. What I showed you with our concrete example is because we were able to put a site up in five months, so we move very quickly. This space, you have to move fast. That's really one of the reasons why. We integrate with our clients. It's the continuous innovation. Technology is changing so fast, so it's staying lockstep in them. What's coming next? What can we do next to increase the sustainability, to use the tech again? You don't need to buy the newest, as I mentioned, you know, DDR5. You can use the 4s, which is much more economical, sustainable.

Speaker 3

Can I add?

Speaker 4

Efficient. Yeah, please.

Speaker 3

We hear from our customers also, it's the level of service that we give and the ability to meet our SLAs and that we consistently deliver. There is a whole lot of ancillary services that we provide. We may help them with their sustainability reporting. We have, as Ingrid said, really automated interfaces which allow them to pull data, which makes their tracking of their data just so much easier. The fact that we can partner with them, and then just with working with such a strategic relationship, we actually are able to put ourselves in the front end. When there are new services coming up, we're always on the front end of it. We're definitely, I would say, a bold statement of the first movers in a whole lot of areas within this space, which is attractive too.

Speaker 4

Yeah. If I can add to it, I had mentioned where we're sitting in their data centers. That gives us also the ability to hear what's going on, what's coming next, what their problem areas are, how can we service it. I would say it has a lot to do with our ability to customize and serve quickly. It's a tech service.

Thank you. Just one more question, if I may. It's just the location. We're here in Nashville. There's a lot of data centers in Virginia. In terms of your footprint, could you touch on your footprint and then why here in Nashville?

Why here?

Speaker 3

Just a music break.

Speaker 4

Yeah. No, originally, we started here with our electronics recycling just over the road because it's 65 and 24. You had UPS up in Louisville, FedEx in Memphis, this logistic location. As far as some of our clients do their kitting here, there's Qantas close by. There's a lot of tech that is starting to come here. It's not Virginia where you have kind of all your data centers, but a lot of them are here in this area.

Other locations, Ingrid?

Other locations? Yeah, Roseville, California is servicing that area, the West Coast.

Where's that?

Chicago. We're getting a lot of, picking up a lot of data center work there as well.

Atlanta now as well. I've been there visiting a lot of times.

Atlanta, yeah. Atlanta is, yeah, our.

Speaker 3

A little bit in Tucson.

Europe's on its way.

Speaker 4

Mexico. We're just outside of Amsterdam. We're in Eindhoven. We're in Gutisburg, outside of Frankfurt. We're in the UK, Manchester, and Slough, which is right in the data center activity, just outside of London.

It's probably fair to say though, Ingrid, when you and I talk about it, that the U.S., I mean, we've got some announcement. You know, we're doing some things in Europe, which are going to be very interesting. The U.S. is our massive market, and you should expect to see growth in the U.S. as well. I mean, we will be opening up, we'll be opening up new sites in the coming years. Again, I guess I have an interesting perspective of it. I guess every now and then I go to see, you know, to see these companies that we service. I agree that it's entirely around service levels, is what drives it. Location is what's going to drive it as well. We will locate where we need to be. It's still capital light. If I were you, I'd expect to see significant further growth in both the U.S.

and some interesting things in Europe. Virginia, where do we service? Do we service Virginia from anywhere at the moment? There's a great growth opportunity. Right now, Owen, I mean, we've got a, I think we've planned our growth well. If we do need to be in Virginia, we'll be in Virginia. We've stood up, we stood up, you know, a new site in five months. It's an expertise we all have now. We'll be wherever the growth needs us to be.

If I can also add to that, the new hyperscaler builds that are coming out, you're going to see them. For instance, in the primer pack I sent you, there was a little map of Meta's new site that's going in Northeast Louisiana, the middle of nowhere, right? It's getting the cheap land, and they're bringing the power. You're going to see new builds that are going to be, it used to be you would go where it'd be close to the people. Now it's where you can get the cheap land, and they're bringing their own power, be it nuclear power or whatever. It's going to be diverse.

Can I ask a follow-up question to that? For all the reasons for why this business is good for Sims Limited now—capital light, return on invested capital is high, high growth industry—it seems like we're still fairly early in the piece. For all the reasons why it's good for Sims Limited now, is there a reason for this business being disrupted by someone else, whether it is the customer or your client saying, "Hey, look, there's actually a lot of value in this. So please, can I just." That

Speaker 2

back or someone else coming in and offering a similar service? How do you plan or how do you keep ahead of the competition and make sure that you don't get disrupted by someone else?

Speaker 1

Yeah, really, it is integrating with them, getting sticky. Making sure that our systems are integrated. I mean, once you're in each other's system, it's really hard to unpick that, right? It's being there and providing the capacity as they need it. As far as taking it in-house, there's one in particular that did that and found it very challenging because it's not their core business. They're taking away valuable real estate from their data center to do decommissioning, which is very lumpy, right? The reason it works for us is because we have multiple hyperscalers, so the decommissioning schedules will, you know, space out.

Speaker 4

A healthy enterprise, below it.

Speaker 1

That's right. We have the enterprise foundation that we.

Speaker 2

I essentially, Kristen, and I often get asked what I think worries us the most. To be frank, it's not so much the external competitors, because I think Ingrid's did right. With the service you're offering, once your systems get integrated and you're really offering that really safe and secure way of doing this redeployment, that is hard to just rip out and put to someone else. You really are embedded in the customer at that point. I think what worries me the most is either the hyperscalers doing it themselves or not doing it at all. I think those are our two biggest competitors, and we've talked a lot about that. I guess our argument would be on hyperscalers doing it themselves is it's not really core to their activity. I think Ingrid's did right.

They want to and should be focusing on very much the front office, getting new data centers up to deploy all this AI that's going to be required. Their back office is our front office, and I always find that's a good model. When someone else's back office, which for them is decommissioning, is someone else's front office, which is us, you always do it better when it's your front office because you're focused on service, you're focused on security, you're focused on that full-scale delivery. I think that argument's compelling. I think not doing it at all is a risk. Where if they do locate in the middle of nowhere, how can you effectively decommission? I think that is definitely a risk. I would say for us, for the foreseeable future, the addressable market in places where the logistics work is huge.

If we can only capture that market, the growth is going to be enormous. Can you help me understand when you talk about systems integration? You're going to have to pardon my ignorance here, but what does that actually mean practically? Like, do you plug into their CapEx plans or how does that all work?

Speaker 1

Some of it could be inventory. They can see, we can see, decommissioning schedules is what we can also see into their systems. For certain, we do BBU for one of the clients, which means we store backup batteries, bring them in, and kit it out once they need it and send it to their data centers. We hold inventory. We're in their inventory system on that, and then it's the information going back and forth in that way.

Speaker 2

Ingrid, presumably that's important because they want to know that they're getting their DIMMs on time at the right place every time because for it not to be is a disaster for them. Ingrid said right, once your systems are integrated like that, is it really, so we're in their inventory, they're looking at us and we understand where parts are. When we go out and you'll see, it's a massive logistics operation to make sure that the DIMMs are in the right place, at the right service level, whatever you want to choose. It would be very risky to pull apart and give that to someone else. You're really going to take on that risk of not having those DIMMs where you need them or whatever particular service we're providing.

Speaker 4

Every component is serial coded, and those serial codes track it from the time it enters into our door to the time it's finished, whatever its purpose is. That information between the two systems is actually used to correlate their systems and to work out their schedules. It really is integrated. There's so much information between the two. I came from IT also; there was a lot less detail or a lot less trackable information. Everything is tracked here. That integration is key to them.

Speaker 1

Each of those DIMMs, you can track to which server blade it came out of and which rack. That is a system that we hold for them, and they can follow that out when it goes back to their data center. It's a full circle.

Speaker 2

Thank you. Just another one from me, again on that chart there. Just looking at that revenue lag by four years, I just wanted to get a sense as to what drives that four-year delay. Is it something that you've just estimated based on the volume flows and general interactions, or is it basically back down to this whole inventory integration where you know that the customers are wanting to, I guess, refresh those facilities? The reason I ask that is because conversations I've had with data center operators in Australia are very different with regards to that refresh profile. I just want to understand, is that a very US-centric dynamic?

Speaker 1

Yeah, so normally refresh are three to five years. Certainly during COVID, we saw it get pushed more to seven, right? Just due to conditions in the market and all that was going on. What we're seeing now is the refresh cycles even going faster due to AI, right? It's the tech change that they have to do. It's the recycling going faster. Honestly, getting closer to three years. We use four as kind of in the middle average.

Speaker 2

No more questions?

Speaker 1

No, we're right on time to go for our tour.

Speaker 2

Anna, plan now. We're going to get on safety gear. The safety gear is out there for everybody.

Speaker 1

We have safety vests and safety glasses. If everybody has closed shoes, we're good. We'll walk down to the other site, and we have to go through a metal detector. You can't take any pictures out on the floor, so I would leave your cell phones here and what have you. You can leave everything; it's safe to leave here. We'll go over there, take the tour, then come back and have more Q&A. We have goodie bags for you to take away with a little bit of Nashville stuff to bring back to Australia. There we go.

Speaker 4

Thank you for your time.

Speaker 1

If you have some further technical questions, Isaac is the man to speak to. Certainly on CXL, he's very, very knowledgeable on that.