鐵山公司 (IRM) 2017 Q3 法說會逐字稿

Good day, and welcome to the Iron Mountain Third Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Melissa Marsden, Senior Vice President of Investor Relations.

Please go ahead.

Thank you, Austin.

Good day, and welcome, everyone to our Third Quarter 2017 Earnings Conference Call.

We appreciate that the timing of today's call is a bit unusual for our U.S. audience as we're conducting it today from Sydney, Australia, and we'll be meeting with some new and legacy Recall investors later today and tomorrow.

The user-controlled slides that we will be referring to in today's prepared remarks are available on our Investor Relations site, along with the link to today's webcast.

You can find the presentation at ironmountain.com under About Us/Investors/Events & Presentations.

Alternatively, you can access today's financial highlights press release, the presentation and the full supplemental financial information, together in one PDF file, by going to investors.ironmountain.com under Financial Information.

Additionally, we have filed all the related documents as 1 8-K, which is also available on the website.

On today's call, we'll hear from Bill Meaney, Iron Mountain President and CEO, who will discuss highlights and progress toward our strategic plan; followed by Stuart Brown, our CFO, who will cover financial results and guidance.

After our prepared remarks, we'll open the phone for Q&A.

Referring now to Page 2 of the presentation.

Today's earnings call, slide presentation and supplemental financial information will contain forward-looking statements, most notably, our outlook for 2017 financial and operating performance.

All forward-looking statements are subject to risks and uncertainties.

Please refer to today's press release, earnings call presentation, supplemental financial report, the safe harbor language on this slide and our most recently filed 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 use several non-GAAP measures when presenting our financial results, and the reconciliations to these measures, as required by Reg G, are included in this supplemental financial information package.

With that, Bill, would you please begin?

Thank you, Melissa, and hello, everyone.

We are pleased to report strong third quarter financial and operating results and solid progress against our 2020 plan.

We achieved financial performance in line with our expectations and drove robust internal revenue growth and enhanced profitability across the business.

Our results reflect the durability of our high-margin storage business and improved contribution from Recall synergies and our Transformation Initiative, both of which have enhanced profitability and cash flow growth.

As a result, today we also announced a 6.8% increase in our quarterly dividend per share, well in excess of inflation.

Even after this growth in the dividend, we expect the payout ratio to be a little below our prior guidance with the previous lower dividend per share rate.

During the quarter, we made meaningful progress on the execution of our strategic plan across all facets of the business.

As you know, our plan is focused on: extending our durable business model through continued investment in our core developed markets; expanding into faster-growing emerging markets and adjacent storage-related businesses such as data center and art storage; and capturing opportunities to provide new innovative solutions to both our new and existing customers.

We also achieved internal storage rental revenue growth of 3.5%, which reflects our revenue management focus and 1.3% growth in internal records management volume [or] prior to the effect for the acquisitions to disposition.

As noted last quarter, trailing 12-month volume growth now includes Recall volume in the base, which increased by about 20%, making percentage growth figures a bit lower even though the growth in underlying cubic feet of records remains consistent.

In fact, new volume from new and existing customers of 49 million cubic feet over the past 12 months is consistent with last quarter's reported figure and compares favorably with pre-Recall level of about 43 million cubic feet on a trailing 12-month basis, which you can see in the chart in the appendix.

These stable trends demonstrate the consistency of customer storage behaviors and, importantly, these new record stay for us for an average of 15 years.

Slide 4 is the review of the highlights related to our strategic plan.

In developed markets, which include both our North American RIM and West European segments, we achieved weighted average internal storage revenue growth of 3.2%, with 1 million cubic feet of net internal volume growth on a trailing 12-month basis.

We are pleased with the durability of volume growth and our ability to achieve price gains in developed markets.

In addition, I'm pleased to report solid progress from our dedicated focus on the U.S. Federal market opportunity.

We recently secured an additional multiyear contract from the United States Patent and Trademark Office, or PTO.

We'll be responsible for relocating more than 4.5 million patent files, which includes capturing file level metadata, packing, removal and transportation of all records to our secure federal government-compliant storage facility.

This contract reflects our unique ability to address the government's needs for improving the security and accessibility of government-owned records with superior chain of custody and highly responsive service, whilst helping to reduce its operational expenses and real estate footprint.

With this award, we now protect all significant repositories of PTO's intellectual property, including their data center and continuity of operations records, their patent and trademark files in micrographic formats and their hard copy patent files.

Looking at our goal of expanding our business into faster-growing emerging markets, we are at about 18% of total revenue on a 2014 constant dollar basis, almost double the relative size from about 10% just 3 years ago.

Progress against this goal was supported by emerging market acquisitions closed during the quarter, including the acquisition in Cyprus noted on last quarter's call and a small deal in South Africa totaling about $25 million.

In adjacent businesses, we've laid the foundation for significant expansion of our data center and entertainment services businesses, both of which have growth rates in excess of those of the traditional records management and data management businesses.

Turning to Slide 5. During the quarter, we opened the first phase of our Northern Virginia Data Center campus in late September, with the first 1/3 of that building being fully developed and more than 50% pre-leased.

When adding existing capacity from our Boston, Boyers, Pennsylvania and Kansas City locations through current and planned expansion capacity associated with recent acquisitions in Northern Virginia development, we have the potential to provide roughly 110 megawatts of multi-tenant and hyperscale data center capacity.

We've included a capacity slide in the appendix of this presentation for your reference.

We see the data center business as an area where 1 plus 1 equals 3. In other words, we see our unique combination of additional data center capacity, plus our deep Data Management customer base as an opportunity to add significant value and achieve higher fill rates.

In September, we closed on the acquisition of FORTRUST, which we discussed on our last conference call.

We also entered into a sale-leaseback agreement for 2 Crédit Suisse data centers in London and Singapore, among the fastest growing global markets in terms of data center absorption.

We expect a close of this transaction in Q1 2018.

After the closing, we'll have the ability to leverage the existing infrastructure and in 12 to 18 months' time, develop up to 10 megawatts of new data center capacity in both buildings for lease to other customers.

The sale-leaseback structure is attractive to both us and corporate data center operators, who increasingly are utilizing such strategies to refine their IT infrastructure.

Most enterprise data center facilities are over-engineered and overbuilt.

We can help these companies monetize their assets as they look to focus on core capabilities, whilst we generate rental income from captive, high-credit quality tenants and develop the remaining capacity to support new customer requirements.

Synergies will come over time as we build out the additional data center capacity and gain economies of scale from the existing operations.

Operational costs are in place to scale up the business in these locations.

We expect a double-digit stabilized yield from this transaction following build-out in lease-up of the expansion capacity.

As noted earlier, this transaction is not part of our 2020 growth plan.

That plan, which didn't assume data center acquisitions, also did not assume the issuance of equity.

You may have noted that at the time we announced the Crédit Suisse deal, we also filed a registration statement for an ATM or at-the-market equity issuance plan.

We think ATM issuances are a prudent way to march -- to match fund smaller -- and to fund smaller transactions that are not included in our core M&A plan.

Our ATM plan can support up to 500 million of equity issuance over time, but we've earmarked just $100 million, about 2.5 million shares or less than 1% of total outstanding, for the Crédit Suisse deal.

Also, in adjacent businesses, we acquired Bonded Services, a leading provider of media asset management services for global entertainment and media companies for approximately GBP 57 million or $77 million.

This acquisition is included in our year-to-date total of approximately $195 million, of which $55 million was the cash portion of the FORTRUST consideration.

Entertainment and media companies require specialized services for protecting and preserving intellectual property, whilst also making sure they can monetize it, such as the project for MTV's 30th anniversary that we supported last year and similar relationships with major studios, recording artists and sports franchisees.

Providing these customers both physical and digital storage as well as capabilities to transform content from monetization and longer-term preservation in one place is ideal.

Bonded also provide fine art vaults and shipping logistics and distribution and related services through locations in the U.S., Canada, United Kingdom, France, the Netherlands and Hong Kong.

And it doubles our existing entertainment services businesses and solidifies our position as a partner of choice.

Turning to Slide 6. We also made good progress on our innovation agenda in moving certain projects out of the garage.

We launched Iron Cloud and expanded our Policy Center offerings, which we previewed at April's Investor Day.

Iron Cloud's on-demand storage can be accessed through a secure connection from customers to our network of secure data centers and caters to the unique security and operational needs of medical imaging, surveillance video and other specialty media.

Our suite of Data Management solutions enables organizations to manage risks by complying with industry standards and implement advanced schemes to protect against cyber attacks.

Just in a few short weeks since the launch, we have already secured a major win with an U.K. pharmaceutical company.

To wrap up, we had a very eventful quarter with solid fundamental results underpinning our progress with new initiatives and the expansion of our faster growing emerging markets and businesses.

We continue to leverage our deep customer relationships and leading brand attributes of trust and security to offer more technology-enabled solutions as our customers continue to transform to a more digital way of working.

These are early days, but we are encouraged by the progress we're seeing, and we'll continue to be disciplined about how and where we deploy capital to accelerate growth outside of our traditional businesses.

Our progress supports growth and adjusted EBITDA and cash flow that ultimately underpins our ability to grow our dividend per share and to delever over time.

With that, I'd like to turn the call over to Stuart.

Thank you, Bill, and good day, everyone.

We are excited to report on another strong quarter of continuing growth in our core storage rental business and good progress increasing our capital flexibility through our refinancing activity.

We remain steadily on track to deliver on our financial objectives and strategic goals, with a disciplined investment strategy.

As Bill mentioned, it is based upon this continued demonstration of growth and business durability that our Board of Directors increased the fourth quarter dividend by 6.8% to approximately $0.59 per share, reflecting an annualized rate of $2.35 per share, up from $2.20 per share previously.

On today's call, I'll provide some color on the third quarter's operational and financial drivers, touch on the implications of our refinancing activity and then cover our outlook for 2017.

As we have noted previously, we'll release specific 2018 guidance in connection with our fourth quarter earnings call in February, consistent with most peers.

As you see on Slide 7, which shows our key financial metrics, our third quarter total revenues grew 2.4% over last year, or 1.4% on a C$ basis, impacted by the disposition of our legacy Australian business as well as our businesses in Russia and Ukraine.

Internal storage rental revenue growth was a strong 3.5% in the quarter, while internal service revenue declined 0.2%.

The growth in internal storage revenue resulted from our revenue management focus and continued growth in internal global net volume that is growth prior to acquisitions and dispositions.

Our gross profit margin improved 210 basis points year-over-year, primarily driven by synergies from the Recall acquisition and the flow-through of our revenue management program, partly offset by a $3.5 million charge associated with the recent natural disasters.

In particular, our service gross profit has improved by $10 million year-over-year to $102 million.

In addition, SG&A as a percentage of total revenues decreased 20 basis points year-over-year, excluding Recall costs, due to the benefits of our Transformation Initiatives and synergies.

Compared to the year ago, our adjusted EBITDA in the third quarter grew [by] 10%, to $323 million.

That's growth of over 8% on a C$ basis.

And the adjusted EBITDA margin increased 230 basis points to 33.5%.

AFFO was $210 million in the third quarter, an increase of $32 million or about 19% from last year.

This strong growth resulted from the almost 10% increase for $29 million of growth in adjusted EBITDA and more than funds the 7% dividend increased we announced today.

Touching on Slide 8 quickly.

This shows the relative size of each product line and the contribution of our results split between storage and service in [showing] line of business.

Over 80% of our adjusted gross profit is derived from storage activities, with a 75% gross profit margin.

We continue to innovate on new service and storage offerings for our customers, focusing on value-added services that deliver gross profit growth, and we are pleased with the progress supporting our strategic objectives for developed and emerging markets.

Turning to Slide 9, and internal growth performance.

You see developed markets, which included North American Records and Information Management, North America Data Management in Western Europe as well as Other International, which includes our emerging markets businesses as well as Australia.

Almost half of our total revenues comes from the developed markets storage business, which grew internal storage revenue by 3.2%, largely from our revenue management initiatives, including programs to improve customer mix.

In total, in developed markets, we achieved internal volume growth of 0.2% for the third quarter on a trailing 12-month basis, as illustrated on Slide 15 of the Appendix.

Turning to North America Records and Information Management specifically.

Whilst internal volume growth was negative 0.2%, we continued to see strong internal storage revenue growth of 3.5% in the quarter.

Looking ahead, we anticipate North America internal storage revenue growth to be north of 2.5%, with flat internal volume growth plus or minus, as we work to optimize returns by balancing revenue management and capital efficiency.

Internal service revenue in developed markets was down 0.1% as growth in information governance, digital imaging projects, shred activity and other project-based revenue was offset by lower activity in the Data Management and other businesses and slightly lower paper prices.

In Other International, we continue to see strong internal storage revenue growth of 5%.

Service internal growth in this segment was flat as we cycled over a high level of Recall destruction projects underway a year ago.

As you can see in our supplemental reporting package, adjusted EBITDA margins expanded in all segments compared to a year ago, except in North America Data Management, where we continue to invest in new product development, as Bill discussed.

Adjusted EBITDA margins in this business segment, though, continue to be a healthy 53%.

As a reminder, our Corporate and Other Segment includes overhead costs as well as adjacent businesses, such as data center and fine art.

Internal results are impacted by the small comparative base from a year ago as well as integration costs associated with recent acquisitions in this segment.

Shifting now to our balance sheet.

We opportunistically executed several meaningful debt transactions in the third quarter, which together provide increased capital flexibility and term out our borrowings, as you see on the slide deck.

First, we amended our credit facility with improved covenants, which increased flexibility and better recognize the value of our real estate holdings, thereby reducing our lease adjusted leverage ratio.

Second, we redeemed CAD 200 million Senior Notes due 2021 utilizing revolving credit capacity.

Additionally, we redeemed $1 billion of senior notes through 2020 that has 6% rate and issued new senior notes at 4 7/8% to 2027.

Lastly, we extended and increased our AR securitization program.

In total, these actions extended our average maturity to 6.5 years, reduced our average cost of debt by about 30 basis points, resulting in approximately $18 million in annualized interest expense savings while incurring a charge for debt extinguishment cost of $48 million in the quarter.

The attractive pricing reflects bondholders' understanding the health of our business and durability of our cash flows.

As of the end of the quarter, we have reduced our lease adjusted leverage ratio to 5.5x from 5.8x in Q2 and increased the capacity available in our capital structure remaining on track with our plan to reduce our lease adjusted leverage.

Let's turn to our guidance for 2017, which is summarized on Page 11 of the results presentation.

Our core guidance remains unchanged.

So given where we are in the year, we're converting guidance to reported dollar or R$.

Given the somewhat limited net impact of currency changes, we expect to remain within the same guidance ranges on a C$ and reported dollar basis.

Given we have increased our outlook for storage internal revenue growth to be between 3% and 3.5% from 2.5% to 3%, as a result of this better growth in considering a modest benefit from exchange rates, 2017 total revenues are expected to be near the high end of the guidance range.

On adjusted EBITDA, we are maintaining our guidance range despite the delayed timing of acquisitions, though still incurring integration costs, the impact of the Russian/Ukraine dispositions as well as charges related to natural disasters, which were partly offset by favorable exchange rates and onetime items we highlighted in the second quarter.

As a reminder, our shared service implementation costs as well as innovation investments are weighted to the latter part of the year.

As a result, we expect only limited adjusted EBITDA growth in the fourth quarter from the third quarter.

Following on the strong margin improvement in 2017, we remain on track with our 2020 plan to deliver about 200 to 250 basis points of margin improvements from our underlying business, as outlined at our Investor Day, implying an improvement in adjusted EBITDA margins of 50 to 75 basis points in 2018.

In addition, our expectation for the 2017 structural tax rate is now 21% to 22% driven by changes in our business mix.

For 2017, the increase in taxes will only somewhat offset by the partial year benefit of the interest expense savings.

Touching on AFFO guidance.

We expect to be closer to the upper end of the range of $760 million as we expect total maintenance and non-real estate investment to be roughly $150 million for the year, benefiting from better efficiencies and discipline following the acquisition of Recall.

In turn, we expect an improved dividend payout ratio relative to AFFO considering also the dividend increase we've just announced.

The FORTRUST and Bonded acquisitions are not expected to have a significant financial impact this year, given the partial year contribution and the integration costs associated with both transactions.

Remember also that FORTRUST was partially funded by a private placement of shares to the seller, so our outlook reflects an increase of about 2 million shares outstanding or roughly 1 million shares on a weighted average basis for 2017.

Overall, we are very pleased with our performance this quarter, reflecting the hard work and discipline across the organization.

We remain well-positioned to deliver on our financial projections for 2017, and our performance continues to be underscored by the durability of our storage rental business which fuels our cash flow growth, thereby funding investment through continued growth and returns to shareholders.

With that, I'll turn the call over to Bill for closing remarks before we open it up to Q&A.

Thank you, Stuart.

And just to sum up, we had a very good quarter punctuated by another period with strong revenue growth and particularly strong storage revenue growth of 3.5% before acquisitions.

We continue to be on track with our integration of Recall, which shows through our continued growth in EBITDA margin.

Based on this performance, we have pulled forward our anticipated 6.8% dividend per share increase by a quarter.

And even with this payout ratio of roughly 80% of AFFO, we will be below our original guidance for the year with the previously lower dividend.

We continue to make good progress in our adjacent business areas with the closing of the FORTRUST data center business in this quarter and the announcement of our agreement to purchase some of Crédit Suisse's data centers, and doing all this, whilst improving our financial flexibility, extending debt maturity and reducing our interest cost.

With that, I'd like to turn the call over to the operator so we can begin Q&A.

Operator?

(Operator Instructions) Our first question comes from Sheila McGrath with Evercore.

Another solid storage same-store revenue growth of 3.5%.

You did cite the yield management system.

I'm just wondering if there are any other factors driving that strong growth relative to your 2016 kind of growth levels.

No, I mean, you can see that if you look overall -- the overall business is there is also the volume growth that we had.

And so if we look across the business, it's positive volume and the revenue management together, yielded 3.5%.

But I think the most -- the big difference, as you say, a year ago, Sheila, is the revenue management program that we started putting in place 2 years ago.

And it takes a while to ramp that through as contract become renewed.

And you can see the difference between, say, North America from an internal revenue growth versus Europe, where Europe, we're probably about 1 year behind in developed markets as well, about 1 year behind from when we rolled it out in North America.

So we think there's still more to be done.

Specifically, in Europe and developed markets as those results start flowing through from the work that we did starting a year ago in those geographies.

But a big part of it is the revenue management system.

Okay, great.

And just one follow-up.

On the data center space.

I know it's still a small or in your adjacent business, but you are allocating more capital there.

I just was wondering if you could talk about pricing of the 2 acquisitions, how you look at it.

Is it just on a stabilized basis?

Or how are you underwriting it?

Because I realized it's a competitive environment out there.

Yes, it's a good question, Sheila.

You can probably appreciate having watched -- having -- you've watched the stage for a while is that, we passed on more than these action.

In other words, it's a -- it's an area where you have to be disciplined in terms of your capital allocation.

So our first -- our first and foremost thing is to make sure that on a stabilized basis that we get the types of returns that make a sense, given our cost of capital, and both on an IRR and NPV-type basis.

So typically what we find is that, if we're doing a greenfield like Northern Virginia, you're kind of in the 14%, 15% internal rate of return.

And when we do the acquisitions is that we're pretty disciplined as we look at something that's north of 11%.

So it is a little bit -- it's fair that when you're buying something with revenue already attached to it, it is a little bit lower in terms of the internal rate of return.

But on the other side is, you're taking less risk, right, because it's coming across with customers.

So when we look at it, we first look at it on an NPV and IRR basis, and we also look at the cost of acquiring a megawatt versus, what it costs us to build it out.

So we kind of look at 2 different lenses.

And then, it goes without saying, we only focus on high-quality assets, and high-quality assets is not just the physical aspect of the building but it's also the absorption rates we see in the markets that they operate in.

So we're really excited about, for instance, the Crédit Suisse, and we look forward to closing that because London and Singapore are amongst the best markets globally in terms of absorption.

And specifically, the London operations has been the (inaudible) estate, which is a great location.

And Denver is also in the top 10 end markets, but great question.

The other thing I'd add real quick -- this is Stuart -- is that if you look at on a replacement cost basis, which Bill touched on, FORTRUST was -- we paid about $13 million per megawatt.

You need to remember, that's 85% leased.

So that in itself was good and then the cost to build that future -- to build out the future capacity is actually that $6 million a megawatt.

So when we sort of think about what the replacement cost is, we feel really good about this investment as well as (inaudible).

The next question is from Shlomo Rosenbaum with Stifel.

So why are you guys not giving guidance out for '18?

Again, just usually you've been doing that ever since I've been covering you.

Just why are you not giving it out now?

Shlomo, this is Stuart.

I'll take that one.

I just joined a year ago when we issued guidance in the third quarter.

But what you see is that, and you see some of the things have changed even now in terms of how the business changes from February to March.

At the end of the day, we've given 2020 outlook out there with our Investor Day, so you've got a little bit of road map to work from already.

And to be able to give the most appropriate guidance, it's really better for us to get 2017 closed out.

See what final results are, tax rates, things like that.

So in February, we'll be able to get better quality guidance in the sense of the number of business decisions that have been made.

So this is something we talked about really, back in the first quarter -- or I think it's actually the fourth quarter last year, we mentioned this.

Did you say anything -- I missed something about adjusted EBITDA setup for -- I thought you said for '18.

Did you make any comment about the EBITDA for '18 or I just misheard that?

Yes.

Consistent with the 2020 plan, that we expect the EBITDA margins would be 50 to 75 basis points higher in '18 relative to '17.

I mean, based on what I'm seeing in terms of both the transformation, the integration, some of the pricing, that sounds like kind of a low ball number to me.

We'll give more detailed guidance in February.

We're just trying to lay out the road map with what the 2020 plan is, and that's consistent with that.

Okay.

And can you just talk a little bit more about the North American volumes that were negative by 0.2% last quarter, 0.1% -- excuse me, this quarter, 0.1% last quarter.

I think you alluded a little bit to the kind of a juggling between pricing and volume over there.

Can you just elaborate on that a little bit more?

Yes, sure.

Shlomo, this is Bill.

So I think the best way to think about it, if you look at North America and Western Europe, right?

Both very similar markets in terms of level of maturity.

But if we look at this quarter in North America RIM, we had a 3.5% internal revenue storage growth, right?

And in Western Europe, we had 2.3%.

And then, if you look at the volume that made up that, is that and as you pointed out, North America was negative 0.2% and Western Europe was internal volume growth a positive 2%.

So this tells you where we're obviously a little bit ahead in North America than we are in Europe in terms of rolling out the revenue management system.

We started rolling out about 1 year ago in Europe.

And what we're doing with the revenue management is optimizing it.

For sure, when you adjust price, it does at some point affect the speed of incoming volume of from customers, and you can see that a little bit happening in the different -- the divergence between North America and Western Europe.

But at the end of the day, what we're interested in is what you eat is cash.

And we're -- so we're really happy with the North American results that we had a 3.5% internal storage revenue growth.

And that allows us to even further optimize the CapEx because we're getting more value for staying on the shelf, if you will.

So Western Europe it's 2.3%.

I'm not saying it's bad.

We're actually happy with the 2.3% internal storage growth -- revenue growth.

But we think there's more to come.

But there is some elasticity if you try to optimize that.

And you can see that in the North American and Western European numbers this quarter.

Okay, that's good color.

And then just 2 kind of metrics type numbers that I want to get some color on.

First, my calculation on the mature markets is between pricing and mix, the lift is 2.7%, 2.8%.

Stuart, does that look right to you?

And then also, for Stuart, it looks like your DSO moved up both sequentially and year-over-year and maybe you can give us a little color on what's going on there.

I missed the second question, Shlomo?

Say it again?

The second question is receivables days.

Looks like they were up to me sequentially and year-over-year.

I'm just wondering what's going on over there?

Yes.

And so the first one specifically on developed markets?

I was just looking at total company.

I mean, the days that I'm getting were 73 days versus 69 days for the last 2 quarters.

And developed year-over-year, it looked like it was 67 days the last time, 3Q 2016?

Yes.

So (inaudible) the first question.

On the receivables question, receivables is up but mostly in North America where AR's up.

And that's really driven by fewer collection days than we actually had in September in the U.S. And it was up a little bit in India as well, was the other market where receivables are up.

We had tax law change there.

And so what you're seeing in India is a little bit of a lag in terms of getting billing out and collections done as -- over a pretty short period of time.

You've got the entire system in India changing to new tax regulations.

So that's what's going on in the receivables.

If you look at the developed markets and other international volume, which is on the appendix to the presentation, the net internal growth number there is about 0.2%.

Okay.

So we should see this -- that reverse in the fourth quarter on the receivables?

You should see -- yes, you should see some improvement trend in the fourth quarter.

Okay.

I'm sorry.

I've used up a lot of the time, but just the pricing thing I want to confirm, was the 2.7, 2.8 between mix and pricing sound right in developed markets?

Yes, in total, that's about right.

For North America and Europe, yes.

The next question comes from Andy Wittmann, Robert W. Baird & Co.

When I look at the cash chart, it looks like you took up your guidance for the year in terms of the customer inducements and customer relationship spend from $60 million from $35 million, which is a pretty decent amount, I would say.

So I wanted to ask you, Bill, what you're seeing in the marketplace.

Was this just being -- you guys being opportunistic on select handful of deals?

Or is the inducement need a little bit higher to date to get those organic boxes in the door?

Yes.

Andy, even watching us long enough.

It's opportunistic.

And you can't time these things.

When the opportunity arrives, it arrives.

So there is always a little bit of movement up and down that number because it's market-driven.

Got you.

And then, I guess, my next question was related to the Crédit Suisse acquisitions.

It sounds like there's some -- if there's already some vacancy -- it sounds like there might be a little bit more.

Can you talk about the lease-up plan and how long it takes to get to some level of stabilization?

Maybe the way to look at it from our point of view externally is, at what point do you get this to be FFO-accretive?

Yes.

So it's a great question.

And so the nature of the Crédit Suisse acquisitions, because they were running these for their own books, so to speak, is think of 2018 as the year when we have to move some of their operations out, which was non-data center-related, and then prepare the data vaults for lease.

So in '18, you'll see the thing is slightly dilutive.

And then in '19, it's flat.

And by 2021, it's fully stabilized.

So that's kind of the -- so already by 2019, you'll see that it's flat, slightly accretive.

And that's really the first year that we're able to start leasing up part of that 10-megawatt that I talked about.

2018 is effectively creating the 10 megawatts.

Got it.

Stuart, maybe one for you.

I wanted to ask about, I guess, sequentially here with the refinancing, we've got some benefit to the lease-adjusted leverage ratio.

Can you talk about the mechanics of the new credit agreement and how that had an impact on that reported results?

I guess, maybe the fundamental question there is, was it definitional -- was it mostly a definitional change or was there an improvement in the lease-adjusted ratio sequentially here?

Yes.

And the most important point is that, it was definitional -- it was a change in the definitional calculation.

But what that does is it improves the overall capacity in terms of what our leverage is today and what the covenants are to build real capacity and your ability to fund future growth if you needed again to be opportunistic.

Overall, those will continue to reduce our lease-adjusted leverage ratio.

But the way the mechanics work -- the key mechanics of the lease-adjusted leverage ratio is that the adjust for rent expense right and capitalize that in the lease-adjusted number, the old credit facility was 8x rent.

The new facility is 6x rent.

So we got annual rent of around $300 million, right?

That will reduce your overall leverage about $600 million.

And the way -- the reason that, that was done is essentially it was a back-end way to give us credit for the value of the 200 -- or the 28 million square feet that we actually own on the balance sheet, right?

The value of the real estate that we own is going up, we left to the credit facilities.

We had to work out mechanism to give us credit for that, and this is the way to do that.

And Andy, to me the important thing about these ratios is if you look at our total level of indebtedness, it's actually pretty consistent with our peer group, both on the industrial REIT and self-storage and the data center REIT.

You don't see a big divergence.

But the important thing is now, it's 5.5, we have a full turn against our most restrictive covenants, which kicks in at 6.5.

So we've got -- and what we've always said is, it's less about the absolute number, the 5.5, for instance.

It's more about that we would like to see 1.5 -- over time we'd like to see 1.5 to 2 turns of our free board between where our most restrictive covenant is versus our debt that just gives us the flexibility that Stuart was saying.

So right now, I mean the good news is we've got a full turn below where our most restrictive covenant is.

And over time, as we've guided to, we'll see that widen to 1.5 or better.

Very helpful and very clear.

I wanted to just go one other question on some of these matters and specifically talking around the usage of the ATM.

I guess, since the Crédit Suisse deal is going to be funded with these fresh proceeds off the ATM, is it your intent, Bill, that you'll have those proceeds in the door before that closes?

And maybe more broadly speaking, is the ATM going to be done under a 10b5-1 plan?

Or is it going to be at management's discretion opportunistically in the marketplace?

It's going to be the management's discretion depending on the marketplace.

I think again, looking at our balance sheet right now, we're not going to have our guns to our head to say that we're absolutely going to use the ATM to fund the Crédit Suisse.

Our intention is to do that.

And it will -- Stuart and myself and the board will make a decision on when to use the ATM.

But I mean, it's good thing we the have the financial flexibility.

But over time, I think you're right.

If you look at our macro level, it wasn't a coincidence that we announced the ATM when we announced the Crédit Suisse acquisition because what we said was the 2020 plan stood on its own, but we didn't have any data center acquisitions built into that 2020 plan.

So we just think an ATM is a very efficient and kind of great mechanism to fund specific acquisitions such as the Crédit Suisse opportunity.

So that's our intention, to kind of match-fund these tuck-in acquisitions that weren't part of the original plan, the original 2020 plan.

But again, with our balance sheet, we have the flexibility on planning.

We're not kind of forced to draw it down any today.

The next question is from Andrew Steinerman with JPMorgan.

This is Michael Cho in for Andrew.

Just a quick follow-up on that discussion on leverage and the ATM.

I mean, it seems like a lot of financing capacity or flexibility coming on board.

I mean, is there anything particular that's driving that decision for more flexibility now versus some other point?

I think, Michael, it's -- again, it's Bill, is that I think the area where we see the most relevant for the ATM, quite frankly, is the data center space.

We feel really good results.

We've been able to build on over the last 3 years from the data center.

We're really pleased in terms of the pre-lease commitments that we have in the Northern Virginia.

So we're really seeing the proof points in the market that 1 plus 1 equals 3. But the ATM at this point is mainly focused on making sure that we see other opportunities, like the FORTRUST and the Crédit Suisse come down the pike that we have a mechanism or a tool in the toolkit that allows us to do that efficiently.

So again, we don't guide to acquisitions on the data centers because, as I pointed out to our Karen that -- or Sheila, rather, that we've passed on more than we executed on because we're pretty disciplined.

But at the same time, we're very pleased in terms of the traction that we're getting in that segment.

Understood.

And if I could just follow with one quick question around -- I know we touched on this on the North America volumes.

I mean -- and I know you gave some color with North America and Western Europe.

Did you say for North American, I just want to make sure I got this, that the customers are holding back new volumes because of the pricing?

Is that what I heard?

Or...

Oh, what you'll see is there is a relationship between organic volume growth from existing customers based on pricing.

I mean, it's like anything else, people will determine whether or not they'll decide to store on-site or how quickly they send boxes in for us to be storage depending on the price of that.

Like anything else, it's not completely inelastic.

So we do try to optimize that.

And so we feel pretty good where we planned it right now.

And Stuart's remark is that we expect volume going forward, as a result in North America to be kind of plus or minus the 0 point as we continue to drive better results in terms of internal storage revenue growth.

Because revenue growth is the thing that drives EBITDA, which drives our ability to grow cash flow which drives our ability to grow dividends.

So that's really the name of the game.

So since I've been in the company, this is the best result that we've had in North America overall.

And looking at optimization, if you look at Western Europe, which I would say has similar level of maturity and similar customer behavior, it's a much stronger internal volume growth.

But the overall result, in other words, how much price growth we're getting at the same time, is lower.

So we're only getting 2.3% internal storage revenue growth.

And going forward, we'll continue to look to optimize Western Europe as well.

The next question is from Karin Ford with UMFG (sic) [MUFG] Securities.

Just a sort of clarification, Stuart, did you say that there would be limited EBITDA growth looking quarter-over-quarter from the 3Q to 4Q?

And if so, just why is that?

Yes, I know.

And consistent with what -- the answer is yes, that's what I said.

And that the main reasons for that are higher integration cost that we'll be incurring and will flow through adjusted EBITDA in the fourth quarter as well as then the fact that the shared service cost is from the innovation spend, is back-end weighted.

So those are the 2 main causes.

The timing of acquisitions, right, the original guidance and assumed the acquisition would be earlier in the year so you would have picked up the EBITDA and would have incurred integration costs by now, obviously you get delayed EBITDA.

Another thing, you've also got from a year-over-year standpoint, we've disposed Russia and Ukraine.

And doesn't affect sequentially, but year-over-year basis.

Right, got it.

And the 3.5 million of disaster expenses, what that line item is that in on the income statement?

That is in the corporate and other from -- it's sitting in [CSG], sitting in sort of the corporate overhead costs -- I'm sorry, sitting in cost of sales.

Okay, great.

And then, just last question.

Just on the revenue management topic.

I know you said you still think you have some more wood to chop there and you're going to get some more benefit from that.

But once you get it sort of rolled fully through and get your system where you want it, is that kind of a onetime benefit?

Or do you think that that'll help elevate organic revenue growth going forward?

All right.

It's a great question.

I think the -- we think the level that we're talking about, if you look at 3.5% versus North America, we think that we can continue to maintain kind of north of 2.5% going forward.

So there's a little bit of catch-up, but for the most part, we feel really good that customers understand the value equation that we provide and that they understand that that's kind of an appropriate level of a price increase for them, which will just naturally over time increase our margins as well.

So we feel pretty good that we can continue to push that through.

I think where we still have probably the most wood to chop, as I said, is Europe, in developed markets.

And we already have started chopping that 1 year, 1.5 years ago, but it just takes longer to become visible.

The next question is from Kevin McVeigh with Deutsche Bank.

Congratulations on the dividend boost.

So if we're at kind of $2.35 getting this year, if we look at kind of the equities going into '18, do we maintain the $2.35?

Or is the goal to kind of keep it at the $2.20 that it was through -- all of 2017?

Or would there be a step-up commensurating with the equities to keep it at that $2.35?

We would intend to keep the dividend rate the same rate.

It's very consistent to what we said even back at Investor Day in terms of passing the synergies and transformation benefits back to shareholders.

If you look at the dividend payout ratio, it's actually an improvement from what we put out in the original guidance.

So we've got plenty of capital to continue to fund the ongoing business.

As Bill said, we do things sort of outside of the plan, like the data center acquisitions.

We'd look to fund that either through ATM.

Or we also have sale-leaseback opportunities, we want to sell some of our existing real estate to fund the data center growth.

Yes, just to be clear, Kevin.

I very specifically said dividend per share.

So we're very focused on growing dividend per share.

And we only increase dividend per share when we know we can maintain that.

As we said, we're able to do that and at the same time improve our payout ratio as a percentage of AFFO.

That's helpful.

And then just going back to the pricing a little bit.

Hey, Bill, so if we get to kind of 2.5%, if you would, is there kind of a certain level we should think about where the unit volume growth settles?

So if it's -- if there's kind of a trade-off, is it, does that get to kind of 50 basis points of decline, so it's a net 2%?

Or any thoughts around the sensitivity?

Because as you priced the price, right, it looks like the new volume growth has slowed a little bit.

Does that -- is there an acceptable range?

Is it 50 basis points of decline?

Or any way to think about the sensitivity of price to volume?

Kevin, just to be clear, what we're talking about is internal revenue volume -- storage growth.

So that's net of any pluses and minuses of volumes.

So when we said we'll get 3.5% in North America, that's after subtracting out the 0.2% volume.

So when Stuart guided that next year, we feel really good that we're going to be north of 2.5%, that's 2.5% net of any up or down in terms of volume.

So that's including that.

So at the end of the day, which we guide on and focus on, is internal revenue storage growth because that's what really, right, that's what drives the dividend per share growth.

And then, I get that.

I guess, I'm just trying to figure out is it, hypothetically, would it be 3 percentage points of price that gets offset by 50 basis points of volume decline like, I say, the net 2.5%?

No, I mean, you don't see that now, Kevin.

If you look at the overall company, is we're up in terms of volume growth and up in terms of revenue growth from an internal basis.

So no, you don't get those types of swings.

(Operator Instructions) Our next question is a follow-up from Shlomo Rosenbaum with Stifel.

I just want to follow up, just the items that were, I guess, you'd say taken out of the garage, the Iron Cloud and Policy Center.

Is there a significant startup cost on those items that -- or is it going to be flowing through over the next several years as you try to grow those businesses?

And can you give us this just a little bit of color around that on how we should think of it?

It's a great question, Shlomo.

First of all, if we look at both -- actually, both of those things, a lot of the original startup cost has already been -- come through.

There's a little bit more development that we still have to do, what we are doing on Iron Cloud to add more features to it, but that's kind of go-forward basis.

I mean, where I see the bigger investment in both of those things is on the go-to-market side, which typically has a shorter gestation period.

I mean, if we see an opportunity to ramp that up, we'll talk about that in our guidance in February for '18.

But specifically, for those 2, most of what I would call the development cost, while there's a little bit still ongoing, which is say, building up more features is pretty much done.

And you've seen that in the lower service margins, in the EBITDA margins in Data Management, for instance, which was a reflection of the some of the expense that we've done to launch Iron Cloud.

But still it was 53% -- that it's lower versus a year ago.

But I think if we do make investments in either of those areas next year, it's more in the go-to-market side.

Okay.

And is that -- are those -- do those become -- when you talk about a shorter gestation, I mean, I'm just trying to figure out, what are you looking for?

Because these are the newer things that you're rolling out.

And clearly, when there's a go-to-market event, something like that, there's an investment that's going to show up in the numbers.

When you are looking for return on, say, like that, what's the time that you expect to see like a material return on something like that?

These things are pretty quick, right, because just the nature and the size of the investment.

And then if you look at go-to-market investments, it's that you're definitely getting a payback within 2 years.

In some cases, it's within the year.

To be honest with you, the thing that we're looking at more on things like Iron Cloud because the market interest -- we've been getting a lot of positive feedback from some of the technical analysts on these things.

One question is, do we need -- is this something we can build in-house or do we need to use partners to really execute -- or work to take advantage of the opportunity?

So those kinds of decisions, [we're not sure].

But on the go-to-market side, you generally see fairly quick payback, definitely within 2 years and most of the times, within the year that you take them.

This concludes our question-and-answer session.

We currently have no more questions.

Thank you, operator, and good evening to those in the United States, and good morning to all those here in Australia.

Thanks a lot.

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