鐵山公司 (IRM) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Iron Mountain Second Quarter 2018 Earnings Conference Call.

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

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

Please go ahead.

Thank you, Kit.

Hello, and welcome to our second quarter 2018 earnings conference Call.

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

You can find those presentations at ironmountain.com under About Us/Investors/Events & Presentations.

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

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

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

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 2018 financial and operating performance.

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

Please refer to today's press release, the earnings call presentation, supplemental financial report and the safe harbor language on this slide as well as our annual report on Form 10-K -- or sorry, Form 10-Q, which we expect to file later today 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 the supplemental financial information.

With that, Bill, would you please begin?

Thank you, Melissa.

And hello, everyone.

We are pleased to report another strong quarter of financial and operating results that demonstrate the durability of Iron Mountain's global storage rental revenue, the relevance of some of our new service offerings and continued progress against our 2020 strategic plan.

Our performance, outlined on Page 3 of the presentation, is on track with our full year expectations as illustrated by total revenue growth of 11% on a constant dollar basis; strong growth in adjusted EBITDA with 130 basis points increase in EBITDA margins; continued durability of our storage business with internal revenue growth of 2.7% for the quarter and 3.2% for the year-to-date after adjusting for last year's data center early lease termination fee; strong internal revenue growth of 7.6% for the quarter and 4.2% year-to-date, driven by solid growth in our digitalization and special projects business as well as shred; and further expansion of our global data center platform, both through internal development and acquisition, including EvoSwitch based in Amsterdam, a top 5 global market.

Globally, we continue to see growth in internal storage volume.

However, you will see us increasingly emphasize yield management when looking at our developed markets as we continue to maximize yield rather than market share by focusing on net operating income per foot.

In our international -- other international segment, total internal revenue is driven more by volume where organic volume growth was 3.8% in the quarter.

In developed markets, which include our North American records and information management, North America and data management and Western European segments, we achieved internal storage revenue growth of 1.3% for the quarter, driven by revenue management despite a 1% decrease in internal records volume on a trailing 12-month basis due in part to an uptick in destructions related to the release of legal hold.

New volume from existing customers globally was stable in the quarter, and we continue to prioritize volume from new customers supported by our focus on penetration of unvended segments such as the mid-market and the U.S. federal government.

Turning to Slide 4. We continue to make progress on the execution of our strategic plan.

As you will recall, we are extending our durable business model through continued nurturing of our developed markets, expanding into faster-growing emerging markets and investing in storage-related Adjacent Businesses such as data centers as well as art and entertainment services.

We continue to listen to our customers in identifying new opportunities to provide innovative solutions in services to both new and existing customers.

The significant growth in internal service revenue in the second quarter was, in a large part, driven by growth in shred mainly due to higher paper prices, higher level of destruction of records and growth in customers.

We're also seeing good growth in our digitization business.

An example of this is a project we are undertaking for a major North American bank who was challenged by application form accuracy and turnaround times from their third-party resellers.

The bank found its lending process had been taking up to 3 days with higher-than-acceptable error rates representing lost revenue.

We propose to complete solution for tens of thousands of file and are ensuring the bank's files are now securely uploaded for ingestion into their systems and applications securely stored electronically for future retrieval.

Paper documents are stored according to retention policies and later, securely destroyed.

As a result, this customer has been able to reduce their SLAs for new accounts down to 24 hours and virtually eliminate errors in keying.

We're excited by the potential for similar projects within our information governance and digital solutions business as our customers increasingly see us as a critical go-to partner for effective management of their hybrid physical and digital information management needs.

Our newly announced partnership with Google only reinforces this.

Turning now to emerging markets.

For our records management business, we continue to see solid internal growth as well as attractive acquisition opportunities.

During the quarter, we closed on 2 transactions in EMEA, leveraging our scale and infrastructure in these regions.

Our deeper penetration into these faster-growing markets supports enhanced market leadership, and we expect to drive margins higher.

As I noted earlier, during the quarter, we closed on the acquisition of EvoSwitch for approximately EUR 205 million or 14x 2018 adjusted EBITDA, giving us 11 megawatts of existing data center capacity in the Netherlands, which is 100% leased, with the expansion capability of an additional 23 megawatts for a total potential capacity of 34 megawatts.

EvoSwitch operates one of the largest co-location facilities in the Amsterdam region.

Its existing campus supports more than 50 connectivity and telecommunication providers.

And it has an attractive diversified base of global customers including multinational enterprises, cloud service providers and public sector institutions.

The Amsterdam region is the second-largest data center market in Europe enhancing our presence in, what I refer to is, the FLAP data center markets, Frankfurt, London, Amsterdam, Paris, following our entry into London earlier this year through the purchase of a data center facility from Credit Suisse.

In addition, we broke ground early in the third quarter on a new building at the IO Data Center campus in Phoenix, one of the fastest-growing markets in the U.S. The new building can ultimately accommodate 48 megawatts of capacity with the first of 2 phases of construction scheduled for completion in June 2019, delivering 24 megawatts.

When combined with current and potential capacity, the Phoenix campus will be able to support approximately 100 megawatts in one of the U.S.'s highest absorption markets.

You can see from our reported results for the data center segment that we are on track for annualized results of more than $200 million worth of revenue this year and $115 million to $120 million in adjusted EBITDA after normalizing for full quarter contribution from the EvoSwitch acquisition.

Driven by the acceleration of enterprise data center outsourcing to third parties and attractive growth characteristics of the business, we have shifted some of our growth capital from acquisitions in the records management business towards development within our existing portfolio of data center opportunities.

Stuart will have more on these minor shifts to our capital allocation guidance shortly.

I'm sure many of you saw the announcement earlier this week of our partnership with Google that I referenced earlier.

Starting in September, we will offer joint solutions that allow customers to unlock their physical and digital data to enhance insights, improve decision-making and uncover new revenue opportunities whilst ensuring data privacy and security.

Our customers increasingly ask us how we may help them create value from their data so they are not missing opportunities to mine that data to uncover new revenue.

We believe the combination of our customer base, comprising more than 95% of the Fortune 1000, with deep industry vertical expertise, together with Google's machine learning and artificial intelligence capabilities, can help customers make their physical and digital information more useful and accessible whilst keeping it safe.

Although it is early days, we are excited by the potential represented by this partnership with Google.

Our expansion in the data center business and this new partnership with Google are great examples to how we are seeking to enhance investment returns whilst also supporting customer storage and information needs across a broad range of formats and asset types, whether physical documents, hybrid physical digital records, backup tape, digital data in the cloud or physical space and power within our data centers, these offerings are all part of the information management ecosystem for which we're developing offerings such as Iron Cloud and other SaaS solutions.

And our fine art entertainment services and other Adjacent Businesses also align with our focus on maximizing yield.

In fact, if you look at the net operating income we've generated on a per-square-foot basis on Slide 5, we have continued to grow this across our range of storage businesses.

As shown on Slide 6, we expect the consistent internal revenue growth in our internal business, together with the expansion of our data center platform and recent transactions in other Adjacent Businesses, to drive faster growth with improved margins over time.

Before acquisitions, we are well on track to achieve a business mix delivering adjusted EBITDA growth in excess of 5% before acquisitions by 2020.

Year-to-date, this is consistent with the progression that's fueled by 3.6% internal revenue growth.

Moreover, given the growth in our data center and Adjacent Business -- Businesses, our growth portfolio, which consists of emerging markets, data center and Adjacent Businesses, is already approaching 25% of our revenue mix which is our goal to achieve by the end of 2020.

On Slide 7. I want to reiterate that we remain on track with our deleveraging and payout ratio targets which assume a 4% annual increase in dividends per share between now and 2020.

Stuart will address the progress we've made on our balance sheet shortly.

Before turning the call over to Stuart, I'd like to note that in addition to extending revenue management programs across our portfolio, we also retain the ability to pass through inflation-based price increases on an annual basis.

And given the high-margin characteristics of our storage business, we achieved significant flow-through on those increases, enhancing our ability to deliver meaningful dividend per share growth in not just nominal, but in real terms.

We continue to be unique within the S&P 500 in that we are a top-yielding company that is durable and has strong internal growth, expanding margins, a solid balance sheet and great long-term growth potential supported by acceleration in the contribution from our faster-growing portfolio.

These factors are driving consistent growth in both the top line and in cash flow that ultimately supports our ability to continue to grow dividends per share whilst delevering over time.

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

Thank You, Bill.

And thank you all for joining us today.

I'm excited to discuss our solid results that demonstrate continued progress against our near-term and long-term objectives.

Our records management business continues to deliver steady organic revenue growth and strong margin expansion while at the same time, we're achieving meaningful scale in faster-growing Adjacent Businesses.

We remain focused on driving increased value for our shareholders through strong current performance combined with the investments in our data center and other Adjacent Businesses.

Let me start off by quickly walking you through the highlights before providing a bit more detail.

You can see both the quarter and year-to-date performance on Slides 8 and 9 of the presentation which show results trending mostly ahead of our annual outlook.

For the quarter, revenue came in at about $1.1 billion, growing 11% on a constant dollar basis driven by the impact of our data center acquisitions and solid internal storage revenue growth.

Our internal storage revenue growth, adjusted for last year's termination fee, was 2.7% for the quarter and 3.2% year-to-date, which is in line with our 3% to 3.5% annual guidance.

This reflects solid underlying fundamentals, benefits from our revenue management program and positive net global storage volumes.

Our internal revenue growth is calculated to exclude any impact to the new revenue recognition standard.

However, the accounting change has had some minor impact on reported storage and revenue -- storage and service revenue mix.

Internal service revenue grew 7.6% in the second quarter and 4.2% in the first half, primarily due to contribution from our shred business, which Bill discussed, as well as additional digitization and other projects.

Our gross profit margin improved by 70 basis points in the quarter, primarily driven by labor efficiencies and the flow-through of our revenue management program.

SG&A as a percentage of revenue also improved about 60 basis points year-over-year.

Our adjusted EBITDA grew almost 15% on a constant dollar basis for the quarter to $369 million with margins expanding 130 basis points, reflecting the benefits of Recall synergies and our Transformation Initiative, flow-through from revenue management initiatives, contribution from our higher-margin data center business and the impact of the adoption of the new revenue recognition standard.

When excluding the approximately $6 million of benefits from the data center early lease termination fee and other nonrecurring items recorded a year ago, our adjusted EBITDA margins in the quarter expanded 190 basis points.

Also, our structural tax rate for the quarter was 21.8%, a bit higher than our annual guidance as a result of higher rates in the international markets and increased depreciation and amortization in our qualified REIT subsidiary associated with recent data center acquisitions.

Adjusted EPS for the quarter was $0.30 per share, flat compared to last year due partly to the increased depreciation and amortization as well as increased shares outstanding following our December offering to fund the acquisition of IO Data Centers.

AFFO was $451 million for the first half, up $63 million or more than 16% over the prior year and is trending towards the upper end of our guidance for 2018.

Providing a little more color on our internal growth performance for the year.

On Slide 10, you can see the impact of our revenue management efforts reflected in developed markets' internal storage revenue growth of 1.3% for the quarter.

This quarter's growth is slightly lower as we cycle over a strong 3.4% internal growth in the second quarter of 2017.

Developed markets internal volume growth was negative about 1% on a trailing 12-month basis on a base of more than 500 million cubic feet in storage.

Internal service revenue in developed markets increased 7.6% for the quarter due mainly to growth in our shred business, project revenue and digitization, as mentioned earlier.

In other international, we continue to see steady storage internal revenue growth of 5.9% for the quarter with service internal revenue growth of 6%.

In other reporting segments, details of which are in the supplemental, the legacy data center business delivered strong internal revenue growth of almost 35% for the quarter, albeit off of a small base, after adjusting for last year's early lease termination fee.

Turning to Slide 11.

You can see our margin expansion with growth in almost all segments.

In the global data center segment adjusted EBITDA margins, while down slightly on a reported basis, improved nicely after adjusting for last year's early termination fee, reflecting our scaling of the business.

We expect data center margins over time to move closer to the mid to high-50% range as we fully integrate recent acquisitions and add more scale to this business.

Year-to-date, we have executed 4.4 megawatts of new leases, primarily with enterprise customers and the federal government.

Based on our leasing pipeline, we are tracking well relative to our 10 megawatts of expected leasing this year, and we are pleased with progress considering that our Phoenix data centers were 100% leased at acquisition.

Turning to Slide 12.

You can see that our lease adjusted leverage ratio was 5.6x at the end of the second quarter, consistent with the first quarter and after closing the EvoSwitch transaction.

Our current leverage ratio was comfortably in line with other REITs, especially when considering that our business is more durable than many other REIT sectors.

Additionally, during the second quarter, we refinanced our line of credit, reducing interest on drawn and undrawn balances by 25 basis points and extending the maturity.

As you can see in the supplemental, as of June 30, our borrowings were 74% fixed rate.

Our weighted average borrowing rate was 4.8% and our well-laddered maturity is an average of 6.6 years.

We believe this is an appropriate structure supported by our real estate portfolio and long-term nature of our customer relationships.

With regard to guidance, we remain comfortable with the constant dollar outlook we laid out on our February call, which is in our supplemental materials for your reference.

While exchange rates have had a modestly positive impact on year-to-date results versus a year ago, at current exchange rates, we expect the strengthening in dollar to result in a headwind of about $50 million to reported revenue in the back half of the year which would flow through to EBITDA.

Just a reminder that we evaluate the business on a constant dollar basis and that outlook is unchanged.

We do, however, anticipate greater capital efficiencies as you've seen through the first half of the year.

So expect full year AFFO to be at the higher end of our guidance range.

I'd like to draw your attention to our cash sources and uses on Slide 13 of the presentation, which we have updated since our last quarterly call to reflect the acquisition of EvoSwitch, capital recycling proceeds from the sale of 3 infill properties in London as well as anticipated additional development to expand our data center capacity in Phoenix and Amsterdam.

Our strong operating performance and capital discipline has allowed us to keep leverage flat while borrowing to fund EvoSwitch.

In summary, we are pleased with our second quarter business performance and results for the first half.

Our revenue management initiatives are working well, driving steady growth and strong margin expansion from our records management business.

Further, we remain very encouraged with the progress in data center and the prospects for creating meaningful value for shareholders through expanding our platform.

We're building out a well-rounded competitive data center portfolio with strong growth and a healthy outlook.

We look forward to updating you on our progress on these elements over the coming quarters.

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

Thank you, Stuart.

I just wish to make some quick comments before we open up to Q&A.

First, we're very pleased by the strong financial and operating performance.

And this is punctuated by both strong internal revenue growth, both in storage and service, the continued expansion of EBITDA margins, which, when combined with internal revenue growth, gave us around 4% internal EBITDA growth in the first half.

Our new information governance and digitization services are finding real resonance with our customers as they look to us in helping them manage a hybrid physical and digital world.

This is visible both in our financial results as well as the partnership announced with Google.

Finally, we continue to be a standout as a high-yielding investment, which continues to grow AFFO and EBITDA in the mid to upper single digits fueling continued dividend growth.

With that, I'd like, operator, to turn it over to questions.

(Operator Instructions) And the first question comes from George Tong with Goldman Sachs.

I'd like to dive a bit deeper into your progress of price volume optimization.

Can you elaborate on what extent your increases in pricing has been implemented versus internal plans and how, over the next several years, you expect to migrate the North American price increase strategy over to Europe?

Okay.

Good morning, George.

Yes.

No.

I think that the -- what I would say is it's fully implemented and probably has been for about 12 months in North America.

I'd say we're more than halfway through mark in Europe, but you're just starting to see the results.

So if you -- and you can see that when you actually -- it's the monkey math in the sense that the internal revenue growth, the internal volume growth are done on a slightly different basis.

But you can get a feel for the difference between, say, Western Europe and North America in terms of how much the internal revenue growth is coming from price and how much is volume.

Still, in Europe, we're still getting a lot of the internal revenue growth from volume, whereas the North America, we're getting it all from price.

And over time, what we're driving for is, again, to get more and more of our internal revenue growth from price in these mature markets as we try to maximize the yield or the NOI that we're getting on the assets deployed rather than having to add racking to drive internal revenue growth.

So I would say, North America, we're pretty much there.

And we continue -- and in Europe, we're probably a little bit more than halfway there.

And we continue to look at developed markets to deliver somewhere between, say, 3%, 3.5% of internal price improvement going forward as we roll that program out into Western Europe.

If we look at the Emerging Markets, we have just recently established 4 pricing centers, or revenue management centers, in those markets because we don't want to just leave chips on the table.

But you can expect us to continue to be more cautious in those markets than be too aggressive with price because those are markets that typically -- with a few exceptions, I mean, there are some locations in Latin America and indeed, Eastern Europe where we're very comfortable with our market penetration.

But there are other areas where we're still building market share.

So -- but we have actually initiated 4 regional centers of excellence in terms of revenue management even in the emerging markets now.

Yes.

That makes sense.

And as your pricing initiatives continue to get implemented, would you view this as a onetime step up in pricing?

Or do you think it's going to be a sustained lever over the course of several years?

In other words, what's the time line of revenue lift?

What's the -- essentially, the time frame of when you would expect the benefits to flow through from pricing?

And when would you expect that to normalize back down to low single digits or inflationary trends?

Yes.

Well, right now, I think -- we think that we have a pretty long runway to keep kind of that 3%, 3.5% if we're looking just purely in developed markets.

So, yes, there was probably a little bit of catch-up because I think we were trending in the high -- like the 3.5% to 4% at one point, but we think the 3% to 3.5% in the current inflationary environment that we can continue to do that.

So we feel pretty comfortable that we can get a little bit ahead of the inflation in terms of the pricing and optimizing value for money that we're providing our customers, especially as they're coming to see us as a company that can support them on a number of fronts.

So the storage is just one part of the relationship between us and them.

So they think -- they're actually even seeing more value that we provide from the storage part of the documents because what we're assisting them in doing on getting more revenue or insights from those documents going forward.

So we feel pretty comfortable.

It is not kind of a one-and-done-type thing, that we can continue to drive in the developed markets that 3%, 3.5% annual price increase.

Got it.

Makes a lot of sense.

And then lastly around services.

The organic growth this quarter accelerated to 7.6%.

Can you talk about whether there were any onetime benefits that occurred in quarter?

Or reasons why you might not expect that growth to persist going forward?

Well, it's a good point.

I think we've called out a few times when it was kind of on the other side of the equation that -- especially as we go into more of the digitization projects, which we're really excited about, right?

I mean, that's also one of the reasons why we've established the partnership with Google.

Those are going to be more lumpy, right?

There is a recurring part of that, especially the digitization projects that then rely on Iron Cloud to do the ongoing storage.

So that will look more like a SaaS-type contract where there'll be a recurring part of it.

But there is, many times, a lumpy part of those contracts, which is the initial digitization piece.

So that is part of the thing that has driven that blip.

And that's also why we reported -- you'll notice that I talked about it, both the 7-plus percent that you're referring to, but also the 4-plus percent on the first half because there will be some movement back and forth.

In addition to that, we did also have a very strong quarter on shred fueled partly by paper prices, partly because we've had some documents that have come off legal hold that are getting destroyed.

So that fueled some of the -- so I would consider that kind of a one-off destruction volume hit because of the -- these documents that have come off legal hold.

So it's not a usual occurrence.

And then the other part is we, obviously, have won some new customers.

So there are some one-off, I would say, aspects of even the shred business mainly around these legal hold documents.

But also the -- you will see a little bit more movement up and down as these projects roll through even though that there's a recurring aspect for both of these digitization projects.

And the next question comes from Shlomo Rosenbaum with Stifel.

Bill, I'm going to go back to my golden goose question.

In terms of the revenue stepping up from pricing and looking at some of the volumes coming down.

How are you kind of ensuring that you're not killing the goose that laid the golden eggs in terms of -- we saw the volumes go down.

You mentioned a legal aspect of that kind of a cliff.

Maybe you can go into that a little bit more.

And are we going to see the volumes come back towards -- hover around 0 plus or minus?

Or should we really expect that the mature geographies will just going to see the volumes really just start to decline now?

It's a good question, Shlomo.

But I wouldn't expect you to ask any other questions, that's fine.

Also, I have other ones also by the way.

So guys -- so coming around the goose.

So the one thing -- I think the last time you and I spoke about it is I said, look, we are pushing price.

So there is always the potential there'll be some slowdown from existing customers.

The one thing I was encouraged this time -- so we do watch that, right?

To say there's no elasticity out there is probably not fair, although I think there's less and less elasticity going forward especially as we broaden what we're doing for the customers across this kind of hybrid digital physical world.

But specifically, we were encouraged that if you look at new volume from existing customers, that stayed steady from last quarter to this quarter.

So I don't think there's a -- I think we're -- there may have been a little bit of an impact, but I don't think -- it's not getting worse, right?

So I think that's kind of flattening out.

So I think that's encouraging that we can continue to drive the type of price increases that we've been pushing through.

Knowing that, yes, it may slow down that a little bit.

The big difference this quarter was really around these legal holds.

And you can see that in terms of the destruction, that's ticked up.

And just -- to give you or put some context on that.

So the thing is we're -- on a trailing 12 months, if we look just at developed markets because developed markets is where we see this trend that you're describing, right, which are the more mature markets.

So if I just look at developed markets, we continue to get in about 28 million boxes a year on an internal basis, before acquisitions, on a trailing 12-month basis.

And that's staying pretty steady.

So we think that's really good.

So we don't see a dropoff on what new is coming in.

Historically, you've watched the story a long time.

We average about 20 million boxes of destruction a year, right, that go out.

And now we've seen this uptick which is driven mainly around legal holds which -- both before and after the GFC.

So during that period of time where the uptick in the -- on a percentage term, turns out to be 2 million or 3 million boxes of additional destruction on that 20 million base.

And we think it's going to take some time for that to wash through.

So if you said today, net-net, where that all leaves, we're still kind of in the same guidance that we provided last time.

Because I think that we do expect the developed markets to be flat, plus or minus on the 0. I still -- we still see -- especially with the federal government and some of the middle market, which is going to be also lumpy, how those things come in.

We will have some quarters that are going to be on the positive.

We're going to have some quarters on the negative.

If you ask me, looking forward over the next 12 to 24 months, I think we're going to have more quarters on the negative side of 0 than the positive side.

We think it's going to be kind of in that range.

So we don't see an acceleration in terms of the drop-off.

And so we feel very comfortable that we can continue to drive the kind of internal revenue growth even from the developed markets that we've been able to achieve.

So we should see this improve?

We should see that we're going to go ahead and get volumes that are going to get closer to 0 or even plus a little bit at some point in the next 12 to 24 months?

I think the next 12 to 24 months, I think we're going to be more in the negative side.

But after that, yes.

I think we'll have some quarters that we'll be in the positive column.

So over the next 1 to 2 years, we should expect this to be a negative trend.

Not -- I wouldn't say negative trend.

I would say it's going to be at about the same trend -- if I'm kind of looking through all these legal holds are kind of flowing through, and I'm looking through in terms of how our pipeline is building with the some of the less-penetrated areas of our business before, which is the middle market and the federal government, then I would say, if you kind of look through that, I think we're going to kind of be in the same volume trends -- they're not trends, I would say, the kind of same volume levels that we're seeing right now on a quarter-by-quarter basis, but not trending negatively but kind of staying in that kind of range.

So I think we're going to be probably on the negative side of 0. But I do see as we kind of -- as the destruction levels go back up to normalized trends and looking at the forward pipeline, if you're saying to me, do I think there's going to be some quarters that we'll also be on the positive side, yes.

So if you kind of keep the volumes flat, what you're saying is that after -- you comp on a way that makes the quarters go negative on a year-over-year basis but essentially, you're not accelerating the decline.

That's right.

Did I understand that correctly?

That's correct.

Okay.

And just if you look at the organic revenue growth on storage and like each market except other international, the organic revenue growth -- I'm not talking volumes, it's just the revenue growth.

It seems to have like gone down a little bit lower than in the last 4 or 5 quarters.

Is there something going on over there?

Or how should we think about that?

Well, I think if you look at developed markets, right, to your point, it kind of -- let's just put it in the total of -- it comes up to, I think, around 2.3%.

And then, okay, if you do the kind of the -- and if you do -- on a monkey math in terms if you take the volume, you can take the volume, you take revenue and you get like around 2.3%, 2.4%, right?

It's -- in terms of price that we've got.

And we're normally getting 3%, 3.5% in that growth.

There are some one-offs that were -- from a comparison last year that kind of suppressed that comparison.

So we're still tracking from -- we're still tracking in that 3%, 3.5% of price increase on an annual basis in the developed markets.

So we don't actually see it trending down.

There were some one-offs in the Q2 last year that make that comparison look -- again, monkey math, acknowledging that volumes on a trailing 12-month prices on year-over-year -- or revenues on year-over-year.

But if you do the monkey math, you get to 2.3%.

But if you kind of correct for that, we're still kind of in the 3%, 3.5% range.

So we expect that to continue to trend about -- in that range.

Okay.

I might take that off-line just because what I'm seeing storage internal growth in NA RIM at 1.4%; and then in data management, 0.7%; and then a 1.8% in Western Europe.

And each one of those is a decel.

Yes.

Just to add on to what Bill said.

There was -- remember, we're cycling over a strong first quarter in NA RIM a year ago.

And there were some onetime benefits on an annualized basis, not a big number, but it impacted the second quarter by probably about 40 basis points.

So I figure you're sort of -- if you normalize for that, you wouldn't see the same trends you're seeing.

Okay.

And then just the services projects are on one hand, encouraging; the other hand, they're more volatile.

And towards the guidance is a little bit -- I thought maybe you could talk about it a little bit more.

Is there of portion of these businesses that we're not just going to see a bunch of projects that go up and down, up and down?

Is there a portion of these businesses that are really going to really -- or projects that will end up being recurring multiyear type of items that will bring the services business to strength on a more of the regular basis?

Yes.

So that was the -- I was trying to highlight before is that there's kind of 2 aspects of a lot of these projects, not always but more and more especially since we've launched Iron Cloud.

The part which is getting the information in digital format that they can either apply machine learning to or they can -- just taking physical documents and putting it into electronic documents.

There's a project aspect to that and there's -- that will continue to be lumpy.

And then there's the other aspect when they're utilizing Iron Cloud, then that becomes a more like a SaaS project.

I mean, that's a -- it's an ongoing recurring revenue associated with that digital storage that we're providing through Iron Cloud.

Okay.

So it's like -- if I look at that -- if you look at some of the projects that you have right now, are these going to be ongoing for several quarters?

Or should we infer that if you had a really strong quarter, like very often; and we'll see the next year, you have very tough comp or even the next quarter, it drops down because of that?

I think as we start up, you're still going to see probably similar kind of lumpiness that you've seen historically.

So I wouldn't say that you're going to see a major change in the next couple of quarters because the Iron Cloud, we just launched in the last few months.

So we're just starting to get that -- what I would call, that recurring base that comes from that aspect of it.

But I'll give you an example.

We signed a market research company just recently, which is a 5-year contract, which is just recurring revenue year after year after year, right?

So it's -- and we expect it to renew after 5 years because it's still going to need access to that data.

But it's going to take some time for the Iron Cloud to ramp which is the main part of the recurring -- we do have some other projects that recur as well.

But I think if you look at the next few quarters, Shlomo, I think you're going to see continued lumpiness.

Got it.

And then I'm just going to leave off with this.

It seems like the focus on data center, the capital is going there versus -- or some reallocation from records management.

Typically, records management acquisitions have helped keep the volumes up as well.

Is that going to kind of change the volume look on a go-forward basis as more of the kind of the capital is allocated to the data center side?

Yes.

I mean, you'll see more of the -- you'll see -- I think we will be able to continue to deliver growth on the records management side.

I think what you see from a capital discipline standpoint, what we've done is we've gotten -- we're building less in advance than before.

We're building out racking sort of 2 to 3 years in advance on the storage side.

So we're able to continue to keep the records management growth.

We may not be building out quite as much.

So we've been able to take some of that capital allocate -- some of that capital, reallocate that to the data center business.

And so as you're taking the strong base that we have from EvoSwitch with the strong ongoing earnings revenue, take customers out of their existing data centers, expand them out, you're seeing us get good pre-leasing on the development side.

So we'll get -- continue to get earnings expansion from that in the strong capital returns.

The capital returns from our racking is, obviously, the best returns.

And we'll continue to allocate capital there as we have the opportunities.

But the data center business I think longer term, which we're going to continue to create the most value for shareholders as we're developing those assets as a low teens -- low to mid teens return in the business has got cap rates that are mid to upper single digit.

So that creates a lot of value for shareholders.

And the only thing I would just add to what Stuart said, Shlomo, on that is that it goes back to the pricing, what we're doing on yield management in developed markets.

So if you look at North America, for instance.

And you look at North America 2 years ago, is our internal revenue growth was almost completely driven by volume, right?

So we were adding racking to support that.

Now we're actually getting higher internal revenue out of -- growth out of North America.

And we're doing that without any additional racking or nearly any -- or almost no additional racking.

We thought to add racking in a couple of places, but much less racking than we had to do to drive that.

And you can see that in the chart that we introduced this time around looking at NOI growth in terms of our records management business is we've grown it not only on absolute terms, but we also have grown it on a square foot basis.

So we are getting much better yield also out of our mature markets, and that allows us where we have to spend money on racking to before is to be able to reallocate them.

And the next question comes from Sheila McGrath with Evercore.

You've made several larger data center acquisitions with personnel from the different companies.

I was wondering if you could touch on how integration in that line of business is going.

And also any examples of cross-selling the data centers to Iron Mountain's storage customers?

Okay.

Now -- thanks, Sheila.

It's a great question.

So first of all, we're really -- I think I said this the last time I saw you.

We're really pleased with the assets that we have.

We're really pleased with the people assets.

In fact, Mark Kidd had an off-site with his management team.

I think it was about 10 days ago that I went and spent a little bit of time with them.

And the level of engagement, the expertise, the customer relationships that those folks have brought across both at IO and Eric from EvoSwitch, for instance, was in the room as well that he's bringing -- in the terms of strengthening, our position in Europe is fantastic.

So I feel really both fortunate the people that we were able to get as part of the acquisition and just the sense of their engagement,, motivation and excitement of being in Iron Mountain because a number of them felt like they were capital-constrained before we bought them because, obviously, their company is getting ready for sale et cetera.

So I think the excitement is really good and the talent that we got is really good.

I think we're continuing to work through on the integration.

I wouldn't say we're all done on the integration.

I think in the people integration, we're pretty far along.

But we still have some operating systems that we're still standardizing and integrating because, obviously, every time you buy one of these companies, they have their own operating systems.

So we're still integrating across that.

In terms of the cross-selling, yes -- I mean, we've seen it in both ways.

So we have a relationship with pretty much -- on the Iron Mountain side with all of the -- almost all the large global financial service customers.

As a result of that, some of the data center folks have been able to expand their footprint using the Iron Mountain relationships in those financial service customers which they were unable to before.

And on the other side, even we have cases where, say, IO was serving a bank but they didn't have the Northern Virginia location and we've already seen cross-selling within the data center business being able to take customers that we might have been serving in Northern New Jersey, for instance, into our Northern Virginia facility, which has been also great in terms of retention of some of the sales folks that we've been able to get through these acquisitions because we've effectively given them more shelf space or more product on the shelves that they can sell.

So we've seen revenue synergies, if you will, by just building the footprint and giving our salespeople more product to sell by geographical expansion.

And then we've also seen some relationships that we've had on the records management side that we've been able to facilitate so they can actually add new logos.

So yes, so far, it seems to be really positive.

Okay.

Great.

And then moving to the venture with Google.

Just to understand how that came about, does it require new employee hires for Iron Mountain?

And who is offering the marketing?

Is like -- is Iron Mountain marketing this to their customer and Google is just the tech programming part?

Just a little bit more detail how you expect this to unfold.

Okay.

Yes.

So we're really excited about the Google partnership.

So to me, it's kind of little bit the Reese's peanut butter cup, right?

I don't know who's the chocolate and who's the peanut butter.

But I guess it depends on what you like.

I like chocolate better, so I'll stay with the chocolate.

But I think that it was one of these things where I think we were both looking at this.

We continue to work with our customers and our customers continue to come to us especially as they go through their digital transformation on how we can help them in this hybrid digital physical world.

And because we have a lot of their physical content, we've been historically helping them digitize that and we have their trust.

They -- we were the natural person for them to come to.

So we had been -- we've started looking at could we find a partner that would help facilitate some of the machine learning.

Because we're not an artificial intelligence or machine learning company, but we know how to actually ingest data, tag it and put it together in a way that actually machine learning can efficiently be applied to that and then store the results after within a secure, both a cybersecure and an -- from an intellectual property secure methodology.

So we had actually independently started looking at the space.

We've hired a number of people from the tech community, Fidelma Russo, as you know, that we brought over from EMC about 14, 18 months ago.

She's systematically recruited a team not just for this area, but for a number of areas where we think technology can really drive new revenue streams for the company.

So we've brought in a number of people.

They actually have developed this, what we call, records management as a service, this product offering.

At the same time, Google has been looking at that space.

And if you kind of look at -- I think you have to ask Google, but when I speak with Google, the reason why they were attracted to us really is kind of 2 levels.

One is that we have such a deep trusting relationship with 950 of the Fortune 1000, and we truly are a B2B marketing and selling organization, right, which is slightly different than Google.

The other thing is, is we have that trusted position and we have tons of data.

So if you look at the medical records, for instance, we have 850 million medical records.

Now it's not going to be our decision to do this.

This is our customers come to us and say they want to try to get more insights and do things faster and better in a more compliant way with their information.

So when we have those opportunities, coming to your question who's selling it, Iron Mountain is selling, and we put something together for the customer and in transparently, if the customer says yes, we want to actually apply machine learning to that, Google, as you know, is a one of the strongest machine learning artificial intelligence companies around.

It has the scale to actually do these type of applications on a global footprint, not just in the United States.

So we're really excited.

It's early days.

We -- as we say, we'll launch it in September.

So we've already done proof of concepts in a couple of industry verticals.

And we were at Google next -- last week speaking about it and Google was also speaking about it.

Okay.

Great.

And one last quick one.

Just in the supplemental, there was a ratio on internal data center growth which was negative.

Was that skewed by that lease termination fee that you mentioned in the year ago period?

Right.

Exactly.

And there was a lease termination fee.

SimpliVity paid a lease termination fee when they got acquired last year.

It was about $4 million.

And the next question comes from Andrew Steinerman with JPMorgan.

Stuart, how much cost efficiencies are left in the transformation initiatives and the Recall synergies?

And what will drive margins forward past these 2 areas?

Yes.

When you look at sort of our margin outlook in our 2020 guidance, I mean, you sort of get an ongoing, call it -- it'll be up and down a little bit to sort of a 60, 70, 80 basis point margin expansion per year.

And so that's -- a piece of that is obviously continued efficiency improvements.

Some of those efficiency improvements will drop to the bottom line.

Some of that will continue to reinvest in back office improvements and the customer service initiatives sort of customer solutions that Bill talked about.

So some of that will get reinvested.

Obviously, a good margin expansion as well from revenue management.

So that contributes to it as well.

And over time as the data center business grows, that's a higher-margin business also.

So that -- just from the mix standpoint, we'll wake that up.

Right.

So Stuart, I think you just answered the second part of the question on capacity initiative.

But what about the first part?

When you look at the -- those 2 buckets, transformation and recall synergies, how much is left in those?

Yes.

I mean, from Recall, we've got about $5 million to $10 million of synergies left.

Okay.

Okay.

Yes.

And most of that's coming from the real estate consolidation.

That's the -- most of the benefits have flown through.

What we talked about is the piece that we would be trailing would largely be around the real estate consolidation just because it takes a little while to set that up.

Right.

And then are your original transformation initiatives that are ongoing?

Or...

We've captured most of that as well and that's inherent in this year's guidance already.

And the next question comes from Eric Compton with MorningStar.

I've got 2 quick ones.

One, just on data centers.

So I'm looking at kind of Q2, the revenue per leasable square foot and per leasable megawatt compared to Q1.

And I'm seeing kind of some trends up there.

I'm wondering like am I -- is that just a function of some of the mix change maybe adding Amsterdam now?

Or is that actually -- is there something to that trend or maybe I'm reading a little bit too much into that?

And then related to that, just kind of maybe a little more color on your take of kind of supply and demand, what you're seeing in the data center market pricing?

Anything along those lines.

I think the -- because we're looking at a number of different markets, it is a mix issue.

In other words, it depends on how much hyperscale, how much smaller colo in that.

And obviously, retail has a different pricing per kilowatt.

In terms of the trend, we continue to see -- well, first of all, we're emphasizing on the top 20 or top 20 global markets, top 10 in the U.S. and top 10 in international, right?

And those markets, by their own definition, have the highest absorption rates.

So we still -- we continue to see very strong demand pipeline.

I mean, we -- you know that we announced the expansion of the Phoenix campus, for instance, with first 24 megawatts being available by July next year, so in about a year's time.

We do that based on the pipeline of commercial deals that we see coming in, right?

So we really remain very bullish on the data center segment and especially in these high absorption markets which we're focused on.

And just to come back on the supplemental.

When you look at that, the majority of that changes really the layering in EvoSwitch during the quarter.

Got you.

Okay.

And that's helpful.

And last one from me.

Just on the Corporate and Other segment, I know there's a lot of kind of moving parts in there.

But I just got on my notes just -- I think the goal is maybe 140 by 2020, if I'm reading this right.

So it's -- I'm just curious.

I know we had the art acquisition, I believe, it was last quarter.

So maybe any updates there as far as growth and what the -- just kind of maybe an updated run rate there or what future growth might come from in that segment.

I think the -- you're picking up the general right numbers.

Because what we've done is we had the art segment, as you highlighted before, and we, this year, have actually taken the entertainment services, which used to be part of data management, and we put that together with art because once the -- some of the -- a number of the customers are obviously different is the way we go to market and the types of services that we offer, whether it's the entertainment services or the art market are very similar.

So when you look at those businesses, they do tend to have growth rates that are on an organic basis in the mid to upper single digits.

And we can see that consistently.

And we're also seeing we're getting some synergies on that.

But we'll provide more guidance as we go forward.

But right now we put it in the corporate segment because it's actually still relatively small to the whole.

And the other thing to remember is Artex, which is the art business that's really been focused on the museum was acquired late, was closed late in the quarter.

And so that's had very small impact, but that's -- that integration is going well already.

(Operator Instructions) And we have follow-up question from Shlomo Rosenbaum with Stifel.

Bill, I just wanted to see if you'd let me back in.

I'll always let you in, Shlomo.

I'm just kidding with you.

I want to -- I just want to ask absent the data center acquisitions, would you still hit that 2020 plan in terms of margins?

We hit it.

Yes.

We -- I think we would be close because the way that the data centers -- look, the data centers have a higher margin, right?

When they're stabilized, as we say, they're kind of have 55%, let's say, roughly margins.

That being said, between now and 2020, because of the growth in the data center business, is we're not running that portfolio on a fully stabilized basis.

Over time, you can expect that we're going to -- that's going to give us more tailwinds behind our margin expansion.

But between now and 2020, given the development pipeline, it may add a little bit but still the bulk of our growth is in the core business.

The thing I'll add, Shlomo, is we did update the 2020 plan after we bought IO.

So we actually increased the margins at that time, so we already made an adjustment for that.

But I'm just saying, if you go back and I looked back at say the last Analyst Day that you guys had -- you had a 2020 plan.

Are you -- I'm going back a little bit to, I think, what Andrew was asking, are you guys on track with the overall core business?

We'll probably answer -- if you look at the trends rates we've been hitting and the benefits of the revenue management programs, we probably would be exceeding those targets.

Yes.

And you can see that in the results that we're printing now, right?

I mean, we're actually continuing to grow EBITDA.

And this is -- I mean, as I said, the -- and a lot of the data centers not fully stabilized now.

So it's adding a little bit benefit, but the bulk of the benefit is what we've been able to drive through the integration of Recall, Transformation and the general health of the business, and then you layer on revenue management.

So the bulk of the -- coming back to the margin expansion.

Over time, though, I'd say once you get beyond 2020 and every year as the data center business continues to grow, obviously, that's going to just fuel the EBITDA margin growth even more.

And as there are no more questions at the present time, we would like to return the call to management for any closing comments.

Well, thank you very much.

Have a good weekend, everyone.

Thank you.

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