鐵山公司 (IRM) 2019 Q1 法說會逐字稿

Good morning, and welcome to the Iron Mountain First Quarter 2019 Earnings Conference Call.

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

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

Please go ahead.

Thank you, Kate.

Hello, and welcome to our First Quarter 2019 Earnings Conference Call.

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

You can find the presentation, earnings press release and the full supplemental financial information at ironmountain.com under About Us/Investors/Events and Presentations.

On today's call, we'll hear from Bill Meaney, Iron Mountain's President and CEO, who will discuss first quarter performance and progress towards our strategic plans; followed by Stuart Brown, our CFO, who will cover additional financial results and our outlook for the remainder of the year.

After our prepared remarks, we'll open up the lines 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 2019 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 annual report on Form 10-K for 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 reconciliation to these measures as required by Reg G are included in the supplemental financial information.

With that, Bill, would you please begin.

Thank you, Greer, and thank you all for taking the time to join us.

The first quarter of 2019 was marked by continued progress against our strategic plan.

Some of the highlights included: revenue growth ahead of our expectations, solid global volume performance from our traditional records business, progress and increasing our exposure to new storage areas, in part highlighted by the recently announced MakeSpace JV in the consumer storage area, and continued build-out of our data center business.

Tempering this progress was the underperformance of adjusted EBITDA against our expectations for the quarter of -- by approximately $10 million.

We should emphasize, however, we remain confident in achieving our budget expectations in line with the full year guidance targets we issued in February.

Continuing from this summary in a little more detail, as you saw in our earnings materials, revenue growth in record storage volumes continue to be very durable with total revenues increasing 4.5% on a constant currency basis, whilst organic storage revenue grew 2% consistent with the 1.9% organic storage growth recorded in Q4.

Our revenue performance was slightly ahead of our expectations due to strong volume and revenue management, and despite softer service revenue, we expect total revenue to remain on track with our outlook for the year.

Separately, we experienced higher-than-anticipated labor costs, which are temporary in our secure destruction or shred business.

This was the single biggest contributor to our adjusted EBITDA, underperforming our expectations by $10 million or 3% for the quarter.

Let me give you a bit more color of what led to the earnings results this quarter.

Our performance remained on track with our expectations in the first 2 months of the year, with our underperformance occurring primarily in our shred business during the month of March.

Shred increased head count in an overall attempt to reduce overtime, but we did not achieve the reductions necessary to deliver the targeted levels which resulted in unanticipated higher labor cost.

Our confidence in delivering full year guidance is in part driven from the investment we made at the beginning of the year in our global operations support team.

This team is tasked with driving improvement in both operating and overhead costs globally.

As the number of these improvements continue in their implementation, we expect it will ultimately lead to more of a marked improvement in performance in the second half of the year, moreover, we believe a number of these initiatives will result in a stronger exit rate than we initially planned.

From a strategic standpoint, this implies we expect to exit 2019 with an organic adjusted EBITDA growth rate of approximately 4.5% and on track towards our target of 5% for the end of 2020.

Stuart will provide more detail around our expectations for the rest of the year, including other items impacting comparability.

After adjusting out the $10 million of the unfavorable cost performance, you'll see that the first quarter corporate overhead cost increased year-over-year, as we continue to invest in operational improvement as well as continued investment in innovation and new product development.

These investments are in some areas already leading to both the identification of areas for improved cost performance and revenue opportunities, which should continue to both drive future growth in earnings and fund our growth in dividends to investors.

Our recent example of -- one recent example of this could be seen in our continued progress with our insight platform in partnership with Google.

3 weeks ago, at Google Next, Google awarded Iron Mountain its artificial intelligence and machine-learning partner of the year.

We are proud of receiving this award in an area so important in the realm of information management.

Let me now turn to volume performance in the quarter as well as changes to our volume reporting, which can be seen in our quarterly earnings supplement.

As Stuart mentioned last quarter, we took a fresh look at our disclosures to streamline where possible as well as ensure we are providing our shareholders and analysts value-added information to properly evaluate our businesses and related performance.

We have revised our volume reporting to better reflect how we manage the business and provide visibility into our comprehensive portfolio of physical storage solutions above and beyond records, including Tape, valet consumer storage and our Adjacent Businesses of fine art storage and entertainment services.

Whilst the nonbox storage currently only represents approximately 1% of our storage volume, we believe these areas have the opportunity to represent a significant amount of growth going forward.

Turning to our actual volume results for Q1.

By all measures, it was a solid quarter for volume growth.

First, let me focus on organic volume growth from our traditional records management business.

In the first quarter globally, our cubic feet of records stored increased from 686 million cubic feet a year ago to 696 million cubic feet with 2.4 million of the 10 million cubic feet organic, delivering 30 basis points of year-over-year growth.

Moreover, during the first quarter, we delivered growth of 3 million cubic feet organically or an increase of 40 basis points.

Breaking the worldwide volume down further, we continue to see a consistent trend in North America with a decline of 130 basis points year-over-year.

This is a slight improvement from recent quarters due to lower destructions and flat Q4 to Q1 organically.

Western Europe and Other International continue to deliver consistent levels of organic volume growth, 2% and 3% respectively year-over-year.

Turning to our new reporting of storage volume achieved form Adjacent Businesses, primarily fine art and entertainment services and consumer, we have routinely included these businesses when reporting our revenue per square foot and occupancy, but not in our volume reporting.

Starting this year, we will also provide a breakdown of the volume stored in these businesses.

You can see in our reporting that these businesses while small have delivered approximately 5 million cubic feet of net growth over the last 2 years, representing 20% of the overall volume growth for the company.

Moreover, we see the volume contribution of these businesses accelerating as we continue to build further scale in these relatively new storage areas for Iron Mountain.

A good example of this growth potential is illustrated by our recent expansion into consumer through the partnership with MakeSpace.

We're excited about the opportunity to serve as a logistics and storage arm in the valet consumer space.

This venture combines the strongest capabilities from both of our organizations that leverages MakeSpace strong brand in front-end customer acquisition technology platform with our world-class operational scale and logistics expertise.

Iron Mountain has the opportunity to accelerate growth in the consumer market through MakeSpace's strong market position and ambition to expand into new markets.

Finally, we continue to make steady progress in our data center business.

You will see in this quarter, we signed new or expanded leases for almost 4 megawatts versus the 3.3 megawatts in Q4 on a total build-out capacity of a little over 100 megawatts.

Whilst today, data center is about 6% of total revenue, it is already contributing more than a 1/3 of our annual EBITDA growth.

Before handing the call over to Stuart, I wish to reiterate that we remain confident in the health of the underlying business characterized by the growth in revenue from our records and information management business as well as the increased momentum of our growth portfolio including emerging markets in data center.

While we are disappointed about the cost impacts this quarter, we continue to see the full year in line with our guidance and with an expected slightly improved exit rate going into 2020.

With that, I will turn the call over to Stuart.

Thank you, Bill, and thank you all for joining us to discuss our first quarter 2019 results.

I'll start off with the details around Q1 performance, with additional information around the cost control issues and overall results, including the initiatives we're taking to expand margins and deliver on our expectations for the remainder of the year.

Slide 7 of the presentation summarizes our quarter's financial results.

As Bill mentioned, we are pleased with our first quarter revenue, which approach $1.1 billion, reflecting growth of 4.5% on a constant currency basis.

Storage rental revenue increased 5.1% on a constant currency basis, driven by growth in our data center, emerging markets and fine arts businesses and better organic volume performance.

Service revenue increased 3.5% excluding currency changes.

Total organic revenue grew by 1.9% in the first quarter compared to the prior year.

Organic storage revenue grew 2% for the quarter or about $13 million, supported by good results from revenue management and from organic records management volume growth, which increased 30 basis points in the quarter and acceleration from prior quarters.

Organic service revenue grew by 1.8% in the first quarter, a bit less than we anticipated to the lower box destructions in North America, lower project revenue globally and lower prices for recycled paper.

The gross profit margin declined 70 basis points from last year to 56.3%, due in part to the operational issues Bill discussed as well as the 20 basis point impact in the change in lease accounting.

I'll have more on the cost actions we're undertaking in a moment.

Our adjusted EBITDA declined $18.5 million or 5.4% to $325 million, with the margin contracting 210 basis points year-over-year to 30.8%.

Excluding the impact of currency changes, adjusted EBITDA declined $8.7 million or 2.6%.

In addition to the cost of sales already discussed, the margin contraction reflects SG&A excluding significant acquisition costs, growing 140 basis point as a percentage of revenue or almost $18 million from a year ago.

Increase in SG&A reflects higher IT-related costs, including information security and investments in our digital offerings like the Iron Mountain InSight platform in partnership with Google.

We also invested in our new global operation support group and added G&A with last year's data center acquisitions.

Most of this increase in SG&A was anticipated and reflects strategic initiatives, which we expect will benefit us in the future.

Turning to other metrics, adjusted EPS for the quarter was $0.17 per share, down from $0.24 per share a year ago.

AFFO in the quarter was $193 million, down approximately $28 million from the prior year, reflecting the adjusted EBITDA decline, increased interest expense and slightly higher cash taxes compared to a year ago.

Looking at organic revenue growth on Slide 8. You can see developed markets organic storage, rental revenue growth came in at 1.1% for the quarter, slightly better than Q4 2018, reflecting contributions from revenue management and improved volume performance.

Organic service revenue in developed markets increased 1.8% for the quarter, a moderation from the levels seen in 2018 due mainly to lower destruction service revenues, paper prices which have moderated from recent highs and 1 fewer working day in the quarter.

In other international, we saw continued healthy organic storage revenue growth of 4.6% for the quarter and 3.3% growth in organic volume.

Organic service revenue declined 0.6% in this segment, due mainly to a slowdown in project revenue.

In the supplemental, you can see the data center business delivered organic revenue growth of around 3% for the quarter.

Adjusted for the churn in Phoenix, we called out last quarter, the underlying organic revenue growth was about 9%, similar to levels seen in Q4.

Churn in the quarter was about 1.4%, when normalized with the Phoenix move-outs, which were anticipated when we acquired IO last year.

As Bill mentioned, we are trending well towards our target of leasing 15 to 20 megawatts for the year.

Aggregate data center leasing in the quarter and the related rate per kilowatt, included 1.6 megawatts of powered-shell in New Jersey, space which was vacant when we acquired IO.

Our Adjacent Businesses also performed well, with revenue growing 10% on an organic basis in the quarter.

With the international scale we have now built, we continue to see very healthy demand from galleries, museums and studios.

Slide 9 details the adjusted EBITDA margin performance of that business segment.

On a year-over-year basis, total margins were impacted by the increase in SG&A.

The North America RIM margin declined about 40 basis points, largely because of our shredding business, as previously discussed.

While the change in lease accounting impacted margins in this segment by about 20 basis points this quarter.

North America data management margin declines continue to be driven by lower volumes in -- and investments we are making in new products and services including Iron Cloud.

Revenue management is helping to offset some of the declines and support healthy margins which remain above 50%.

In Western Europe, first quarter margins contracted 230 basis points, reflecting higher temporary facilities costs and consulting cost for process improvements in France.

Other international margins were up 10 basis points in the quarter, despite a 70 basis point impact from the adoption of the new lease accounting standard.

In the Global Data Center segment, adjusted EBITDA margins were 42.3% in the first quarter, reflecting the acquisition of EvoSwitch in the Netherlands last May, which operates at lower average margins and the impact to the Phoenix churn, which, as mentioned, was anticipated.

Turning to Slide 10.

You can see that our lease-adjusted leverage ratio at Q1 was 5.8x, modestly higher than at year-end, primarily due to the softer adjusted EBITDA performance.

We expect levers to decline in the back half of the year, aided by capital recycling proceeds and expectations for increased adjusted EBITDA and to end the year around 5.5x, as we guided to last quarter.

We're on track for -- with our capital recycling program and subsequent to the end of the first quarter, closed on a number of real estate sales generating net proceeds of over $40 million, as we consolidate into our new U.K. records facility.

We expect more than $50 million of additional real estate capital recycling for the remainder of the year, and are evaluating third-party capital via joint venture to fund the Frankfurt data center development.

Before discussing outlook, I want to take a moment to outline the plan to improve margins this year and set us up for success into 2020 and beyond.

First, we've put in place over 2 dozen operating initiatives.

Without going into details on all of the initiatives, 1 example is improving transportation costs, both routing and fleet utilization.

This will result in higher-than-previously-anticipated expense in Q2 that is onetime in nature, but should reduce freight and transportation costs in the back half of the year and continuing into 2020.

Other steps being taken include further labor productivity initiatives and vendor consolidation to reduce supply costs.

Second, as previously discussed, we created a global operations support team at the end of last year to identify areas of improvement, focused initially on labor, transportation costs and revenue management.

This includes expanding the use of productivity management tools with engineered labor standards to improve service margins globally as well as the centralization and standardization of transportation planning.

The first half of 2019 includes cost to establish the team and some third-party professional fees, and we expect to see the benefits in our results beginning in the second half of the year and into 2020.

Turning to guidance.

We're reaffirming the ranges that we provided in your Q4 call in February and remain confident that we can achieve these despite our first quarter performance, expected residual effect on the second quarter and headwinds from declining recycled paper prices.

The upper and lower end of our guidance remain a little wider due to uncertainty with regard to exchange rates.

We continue to expect total organic revenue growth to be in the range of 2% to 2.5% in 2019, including organic storage revenue growth of 1.75% to 2.5%.

We continue to expect service organic revenue growth in the low single digits, though the second quarter will be flattish as we are cycling against higher destruction service revenue and much higher paper prices.

While we do not generally provide quarterly guidance, given the cost issues experienced towards the end of the first quarter, we wanted to provide some further color on our expectations for the rest of the year.

We expect some of the higher labor cost in secure destruction will continue into the second quarter until our actions, which are already underway, begin improving cost of sales.

We also expect some onetime costs associated with the operational improvement initiatives I described earlier.

However, SG&A costs should decline sequentially and as a result, we expect the adjusted EBITDA margin in the second quarter to increase 150 to 200 basis points from the first quarter.

Margins should then improve 200 to 300 basis points per quarter, through the second half of 2019, as cost improvements initiatives flow through.

As Bill noted, we remain committed to the full year guidance we provide on our last earnings call.

In summary, Q1 performance reflects strong underlying health and shows the contributions from revenue management and improved volume trends.

We continue to see good results from our efforts to extend in higher-growth markets, and our data center platform and Adjacent Businesses are showing encouraging progress as they gain greater scale.

We're confident that the actions we're implementing to improve margins will allow us to achieve our long-term targets.

Then, operator, we'll open up the Q&A.

(Operator Instructions) The first question is from Sheila McGrath of Evercore.

Yes, just on adjusted SG&A as a percent of revenue for the quarter, it was, as you acknowledge, elevated at 25.5%.

I'm just wondering, how much is attributable to labor?

Or what are other drivers of that increase?

No, I mean the majority of the increase is -- you get -- few different things going on.

First of all, increase year-over-year from a dollar basis.

We've -- with the acquisition of EvoSwitch and then IO, late in January last year, you're getting some increase in sort of overall overhead cost because of that.

And then you're also getting increase in the operations team which we've added in, so you've got the operating costs of that team as well as then some consulting costs, and those are the 2 biggest drivers.

And so when you think about the global operations team, as we've stood that up, you've got costs then in the first quarter and continuing in the first half of the year, and those will switch into benefits as they more than pay for themselves in the second half of the year.

And as we sort of think about, as we set these things up, right?

We're taking costs earlier in the year, as we're really trying to get them to pay for themselves within the year.

We are going to go ahead.

And just sort of given the operational issues accelerate some things that we would have spread out later in the year and pull those forward into Q2.

Okay.

Great.

And then just following up on the MakeSpace acquisition.

I just wonder how you view that business sitting in at Iron Mountain.

How are you integrating it?

Will that business be with Iron Mountain trucks?

And how the margins compare to traditional -- your traditional storage business?

No, it's a good question, Sheila.

So first of all, we're a significant by minority shareholder in the JV.

So it's set up as a JV rather than integrating MakeSpace.

So for us it's a perfect relationship.

So besides being a large minority shareholder in the company, we're also the exclusive provider of the backend services, and the backend services means it's our trucks and drivers picking up the material or delivering the materials and our facilities storing it.

So we are the exclusive service provider to that joint venture, which effectively gets us in the consumer space with a B2B relationship.

So we're still a business-to-business relationship with MakeSpace, and we get the benefit of their understanding of the consumer space, and they've proven themselves, not only they have a very effective brand and marketing approach but very efficient acquisition cost of customers.

So we're pretty excited about the relationship.

From their standpoint is that we bring the logistics and handling expertise that, quite frankly, both them and other consumer self-storage companies have struggled with in this particular area.

So we're able to leverage what really is our core strength, and also use our real estate footprint.

So they're pretty excited because we're able to help them expand much quicker across the United States because we're already everywhere in the United States.

So we think it's actually a very synergistic relationship that we've been able to carve out with them.

So the venture will store the -- in your facilities?

Yes, exactly, exactly.

The next question is from Nate Crossett of Berenberg.

I saw in the presentation that you're seeking JV partner for the Frankfurt DC project.

So I was wondering if you could maybe provide some color on what that might look like.

And maybe the types of providers you are looking to maybe partner with?

And then just a follow on to that, just curious to hear your overall comments on the European data center market, as we're hearing that demand is pretty strong especially in the FLAP areas?

So Nathan, let me start with the -- your last question and then Stuart will talk to you about how we think about joint ventures generally and specifically, why we called it out that we're considering it for Frankfurt.

So you're right.

I mean we remain bullish on the European data center market.

So we're really pleased in terms that we've been able to establish a strong footprint, both in London and the Slough Estate through the Credit Suisse acquisition and now with the EvoSwitch in Amsterdam.

So we're really happy with that, and now with the land in Frankfurt.

So as you know, Frankfurt, London, Amsterdam and Paris are considered the top markets in Europe, and the growth there continues to see -- we see robust growth across both the wholesale markets as well as the retail markets.

So we're -- so far we're really pleased in terms of what's happening here, but I think they probably came into their own a little bit behind where the U.S. was on the outsourcing, but they're definitely picking up pace at a really good rate.

Yes.

On the Frankfurt joint venture that we're evaluating, yes, there's lots of capital out there looking to be put to work in the data center business and the type of structure we'd be looking at would be something fairly typical for other REITs.

Why Frankfurt?

It's really because if you look at some of the development we've got in our other markets in Amsterdam and Arizona, there's -- frankly, would be probably too many conflicts with our own existing.

So Frankfurt is sort of easy to carve out into its own joint venture, where there wouldn't be any conflicts with existing Iron Mountain properties, and we're in the early phases of that, and we'll evaluate sort of what the return demands are, but we're looking for a long-term partner who can invest with us in Frankfurt, and then if we wanted to consider other markets outside of that, we would be open to that as well.

Okay, that's helpful.

And is there any preference on whether it's a public or private player out there?

Are the public guys on the list of potential JVs?

Or -- can you give any...

It's most likely going to be long-term, pension-type money that's looking for these types of investments because we want someone who is going to be in this for a long time with us as we build it out.

Okay, that's helpful.

And then just a question on the Google partnership.

Kind of, how should we think about that in terms of bottom line numbers?

And I know it's very early days but do you expect this to one day kind of have a meaningful impact on AFFO or any color would be helpful on that.

We'll give you more guidance as we get into for sure in -- for 2020.

This year what we've -- our expectations and your expectations should be that any revenue we get will be awash with the cost of standing this up.

I think I might have mentioned in the last quarter is that we have done over a dozen proof of concepts across a range of industries, and we're really excited about the results that we're getting from that.

So what we see this as a natural add-on to our digital scanning business.

So globally, we do about $200 million worth of just, what I would call, digital scanning or taking physical documents and turning it into digital formats.

And that grows at high single, low double-digit organic growth.

We see this as a opportunity to actually accelerate that growth because people are looking to get more benefit when they actually digitize historically physical documents.

So it's early days but we really think the we -- the way we think about this is accelerating that high single-digit, low double-digit growth that we have in our digitalization business.

As it -- and this is the tool that will give people more benefit and encourage them to do that.

The next question is from George Tong of Goldman Sachs.

Looking at your record management volume disclosures in developed markets, it appears new sales ticked down from 1.6% last quarter to 1.5% this quarter.

And new volumes from existing customers also ticked down from 3.8% to 3.7%, while destruction has ticked up from 4.6% to 4.9%.

Can you talk about where or when you might expect some of these trends to stabilize?

And what initiatives you have to potentially drive an inflection?

Yes.

I think, George, what I would say is -- and it depends on which -- whether you're looking quarter-over-quarter, year-over-year, and if you're looking at just North America or North America and Europe.

So some of the movements that you're highlighting whilst important are, what I would call, within the range of what we expect.

So what -- I -- we don't see any major change.

Obviously, the result that we're reporting this quarter are better than they were reporting in the last 2 quarters.

But we don't see it as a major change.

So if you kind of look at overall, actually, we said that destructions would be at the 4.5% to 5% range.

And actually, on total is -- yes, I'm looking at total volume now as we are at 4.5%.

Any given market can kind of change those movements.

So I mean I think you're kind of picking it at a specific market.

We actually see overall, actually destructions have gone down this quarter, if we look at the total business.

But we still think, whilst, it's nice to see 4.5% versus 5%, we still think we're operating within that range.

So I think we should say, there's not going to be any big inflection points either up or down in the business.

I think this is pretty much steady as she goes.

And where we will see a change is as we continue to make Emerging Markets a bigger part of the mix then of course globally that will have an improvement.

So the thing to -- if you're saying do we really see has the thing that will make a long-term impact.

It is -- now that we've started reporting the volume of these other areas that we've been including, if you will, on our occupancy but we've never shown you how much volume it actually drives.

So if you look at specifically the nonrecords business over the last 2 years, over the last 2 years on a nonrecords business so that would be the art, entertainment services and now consumer.

Well, in consumer we've been doing on our own for a number of years now or a number of quarters.

As you'll see that those then amongst themselves generated about 5 million cubic -- increased cubic feet over the last 2 years, which is about 20% of the growth of cubic feet that we've seen as a company.

So small in terms of -- if you look at how much it is in terms of total, but in terms of the growth, if you're looking for inflection points, those are the things that you will see changing over time.

But overall, in terms of the records business, you should see it as steady as you go with a little bit of improvement consolidated as emerging markets continue to become a bigger part of the mix.

Very helpful.

Your most recent 2020 targets include revenue of $4.6 billion to $4.75 billion and EBITDA of $1.68 billion to $1.76 billion.

Can you discuss your progress towards reaching these targets?

And where you see EBITDA margins heading, especially given margins are relatively FX neutral?

George, are you talking about sort of as we're sort of looking -- I mean, just sort of to start off if you look at sort of margin progression for the year, where we expect margins to go, if you look at -- for the -- through the first quarter we talked about we had some unusual expenses, right?

And so the guidance comments that I gave implies about a 600 basis -- 650 basis point margin improvement from Q1 to Q4, right?

So that'll give you a pretty good exit rate from '19.

And then if you sort of think about that in dollar terms, right?

We're a little over $1 billion quarter of revenue, so it implies EBITDA dollars going up from Q1 to Q4 about $70 million.

And when you -- if you think about one of the big buckets that drive that, but you normally get both revenue management as well cost improvement initiatives as we move through the year, that'll continue to be the biggest bucket for that.

You obviously get the benefit from the corrective actions that we're taken and we've talked about here on this call.

You will get lower SG&A as we talked about, and you'll get the benefit from the global ops team which really switches, I talked about before, from cost to benefits from Q1 to Q4.

And that's around procurement, service labor and some of the other areas.

And so that will benefit both North America as well as the international businesses.

And so I think that sets us up pretty well going into 2020 for the outlook that we've provided longer term.

The next question is from Andrew Steinerman of JPMorgan.

It's Andrew.

The organic revenue growth was 1.9% in the first quarter and the guide for the year is still 2.0% to 2.5%.

What gives management confidence that there'll be some acceleration in the organic revenue growth, as I imagine, moves through the year?

Hey, Andrew, this is Stuart.

I mean if you -- the storage is obviously from a gross profit, and cash flow is the biggest driver, and that's right on track.

As we talk about the service revenue in Q1 and Q2, the growth will be a little bit lower than we had a year ago, particularly in Q2 actually to go ahead and foreshadow that as recycled paper prices come down.

But some of the other service areas in terms of project revenue pipeline including some of the information governance and some of the other areas will drive the service growth in the second half.

So we remain quite confident in the service -- implied service growth and what that means for the total.

And if you think about it, Andrew, is that we actually have built our confidence.

Our confidence is even stronger now about revenue then it was say a month or 3 months ago just because we're a quarter into the year, and we can see the pipelines going forward, so we feel pretty good about where we are on the revenue front.

The next question is from Andy Wittmann of Robert W. Baird.

Stuart, I was just wondering, the dollar has strengthened here a little bit since you guys last reported.

How does FX factor into your new guidance?

Yes, I mean -- so our guidance ranges when we built them this year, we sort of changed our process on that a little bit, so we have wider EBITDA guidance this year than we used -- then we sort of had historically over the past few years, to basically go ahead and do in our dollar guidance, before our guidance was around through constant currency.

So I think if you look at the EBITDA impact in the first quarter of currency was actually broad EBITDA year-over-year down about $10 million, that was built into our guidance.

And I think where FX is today, you'll basically be sort of right in the -- towards the middle of guidance and the upper and lower end of the range take into account any potential movement.

So last quarter you guys talked about for the year, I think you said it was going to be a $20 million to $25 million EBITDA headwind on the [$0.10] online, so you think it's $15 million-or-so -- $10 million or $15 million for the balance of the year.

Is that another way of saying the same thing?

That's about right.

Okay.

Just on -- just noticed in your kind of in your CAD schedule that there's an incremental $50 million that I think was called out here for Frankfurt, and then that was offset by an incremental $50 million of capital recycling.

Just given that, I wanted to get some sense of confidence around -- have those assets that you're going to be recycling been identified in on the market, or is that still kind of in the work to figure out how that's going to translate?

We've got a package of about $25 million of real estate in North America, I would call it, sort of more secondary markets, Midwest markets in the market right now and seeing good demands on that.

And so we've got additional packages teed up and ready to go beyond that depending upon how the first one goes.

So then I think the bigger question around that will be we can recycle more real estate, as the question around does it make sense for us to do an investment partnership for the Frankfurt line of purchase.

Now wait till we get a little leasing done and sort of some questions little bit around timing on that.

But we feel there's lots of demand out there for people to JV with us, just going to make sure the terms make sense.

So is it fair to assume the $50 million number that you have in there is -- that's if you were to do it all by yourself now without a partner.

So that could actually not be $50 million if you've found somebody?

Correct, correct, if we found somebody, we'd put the land in it and get capital back from that partner right away.

The next question is from Michael Funk of Bank of America.

I have 2 quick ones, if you wouldn't mind.

So looking at Slide 17 and you show that $380 million of incremental capital needed for discretionary investment beyond the capital recycling and the JV and then other sources of capital.

Love to get your commentary and how you're think about, I guess, your comfort level with where your leverage is right now.

And then you haven't issued equity in 1.5 year, so any kind of commentary about potentially accessing the equity capital markets?

I think you issued last time around $37 million, so not too far from where your equity is now.

And then second question, I think last quarter you talked about revenue management program, maybe being less of a headwind in the second half -- sorry, tailwind in the second half of 2019.

If I'm correct about that, maybe just comment on how that factors into your margin progression commentary?

Okay.

Let me -- so I'll start with the revenue management and also just give you a snapshot in terms of how we think about debt overall.

And then Stuart will talk a little bit more about what's he seeing in the debt markets and how well we're able to access those.

So on the revenue management side, actually it's a little bit back to front from what you intimated it is.

Generally, in the first quarter, we see around 15% of the revenue management benefit come through in the first quarter, just the way that the pricing reviews are done and the contract renewals are done with customers as we go build through the year, and then it builds towards the end of the year.

So well more than half comes in the last half of the year and Q2 is somewhere between Q1 in the second half of the year, if you will.

So the first quarter is only about -- around 15% of the benefit from pricing.

And we see that.

This year we expect to do a little bit better than we did last year in pricing because we're starting to get some reasonable progress in the international markets, which only start coming online last year.

So we feel good about where we are with that given the first quarter performance in revenue management.

Overall, just to give you a snapshot on the debt, and then Stuart can give you a little bit more specifics around the access to the debt markets right now.

It's generally, we're not uncomfortable in terms of where we sit with the debt nor where we price.

So we actually price usually at the upper end of investment grade, whilst, we're not an investment grade debt issuer.

So we feel relatively good about that.

If you look at us -- our leverage relative to say the REIT peers, we're again pretty much spot on to where those folks are, and I think we have a slide, Slide 10 kind of demonstrates that in the deck.

The issue for us, and the reason why we say we want to continue to de-lever over time is our covenants are roughly 6.5 and we would like 1.5 to 2 turns over time of daylight between where our covenants are and where our leverage sits.

Just so that it gives us more dry powder for opportunistic events that may present themselves.

So we don't feel like we're in a rush to de-lever because the only reason why we would de-lever was to create more -- to build these things opportunistically.

So you wouldn't do anything just to de-lever for that.

And we -- and given the cash generation of our business is we feel really comfortable that we can continue to grow dividends and de-lever over time.

Now in terms of equity issuance is we look at like any investors, we look at the NAV of the company and we say, does it make sense to actually issue equity or not?

And we have an opinion right now that this is not the best time to be doing that given where our share price is sitting.

So we kind of look at it in terms of what is the best investment.

And then we also look at the best way to fund that.

And right now when you look at equity you have to look at the NAV of your company, lastly I'll do just -- before I hand it over to Stuart is, it is fair to say that we're in the data center business that we -- data center is capital-intensive, and growing and building data centers takes a lot of capital and hence, the reason why we're looking at a partnership in Frankfurt.

That being said, don't forget, the thing that separates us from some of our data center peers is we have a -- almost a north of $1.4 billion EBITDA business, most of that generated in mature markets in our core business, which generates a lot of cash.

So what we like to say is we have a very large strong piggy bank alongside a $100 million-plus EBITDA business growing very quickly of data centers.

So we actually have a natural in-house funding source that not only fuels the growth of the dividend, not only can de-lever slowly over time, we're not doing massive de-levering, but also is the thing that allows us to do, I think this year we guided about $250 million that we're putting into our data center business.

So obviously, if we were trying to put $250 million and we were $100 million EBITDA business that would be a strain.

But we are fortunate that we have not just relationships that come with that $1.5 billion EBITDA.

But we -- it is -- most of that's in mature areas that we're able to harvest a fair amount of cash.

But I mean, Stuart, you may want to talk specifically about the data -- the debt markets?

Yes.

I mean, overall just to be -- just quickly.

As from a debt investor standpoint, we get so much credit for the durable cash flow that comes out of the business.

So as Bill mentioned, right, we priced debt close to investment grade, even though the rating agencies have historically not treated us the same way, we talked about that on the last earnings call.

We'll naturally de-lever over time as EBITDA grows, right?

Because if you look at where the investments are that need that incremental capital, it is around building out the data center platforms.

We've got a great platform, but as we've done the acquisitions, it didn't have a lot of capacity to lease up, so we have to build out a development pipeline.

So that's really what's driving the $250 million of the capital needs.

And investors understand that, and I think the rating agencies understand that as well.

So quite confident that as that grows and leases up the value of the data center platform will only continue to increase.

One other thing I'll add on to Bill, is when we're looking at, hey, what's the ways to source that?

We look at debt.

We have an ATM in place, again today, if you look at sort of where the ATM is and you look at where cap rates are in industrial real estate, we've chosen right now to recycle capital out of some of the industrial real estate, given the high investor demand for that.

And then if you look at our credit, people who want to do sale leaseback transactions love our credit, and the rates that we'll see on these sale leasebacks will be really good.

So I think I'll end it there.

(Operator Instructions) The next question is from Shlomo Rosenbaum of Stifel.

Stuart, can you just walk me through again the labor costs in the U.S. You hired additional people in order to not have overtime with the existing ones, but the timing didn't work out right.

Can you just walk me through that exactly on the ground how that works?

Know that I may give a little bit more detail here than we normally would.

With all great intentions, right?

What you've seen going on overall in the labor markets in North America is more demand, particularly around warehouse workers and drivers.

And we took some steps last year to address that, we raised wage rates.

And with the raise in wage rates we were -- we had a lot of overtime, so we said okay we'll take wage rates up, that will get offset by lower overtime, and which is sort of a natural thing to assume.

And then when you hire people you also have a period of training, so your productivity is going to suffer for a little while as you're staffing up.

I think what happened was, is we weren't managing that change very well and ended up actually overstaffed because good news is attrition went down, we're able to retain people, but we didn't manage the productivity after that training period.

And therefore, ended up with too much overtime.

The month of January is a strong month for sort of -- for the bin tips, so it's really around sort of drivers and people out on the field.

And so the issue really manifests itself in March, when those productivity improvements that should have been there didn't show up.

So overall, when you look -- overall in Iron Mountain, our labor rate, as a percentage of revenue, actually declined.

It didn't decline as much as we expected it to and this was sort of a major cause of the issue and of the shortfall in shred.

Paper prices were actually down and the shred business were down, a little bit below where we expected it to be as well.

Again, the paper prices during the quarter really moved down and March was a little bit lower.

So that was a piece of the overall shred business, but the majority of it was sort of labor productivity.

The good news is that the course correction can happen pretty quickly.

Okay.

And then this is completely different though than Western Europe?

Or you're seeing the same kind of labor issues over there?

As the margin was down as well over there with 230 basis points.

Yes, it's similar -- different issue.

So labor there was impacted, really we had some -- the project revenue in Q1, we got a good pipeline but the project revenue in Q1 was down and we didn't manage some of the -- probably the contingent labor as well as we should have, so on the service side around projects we lost some productivity on that as well.

Again, correctable and regrettable as well, but we're taking action on it.

Okay.

That's good color.

And then is there a way -- first of all, I mean there's discussion on the paper pricing in EBITDA.

And it does seem to catch investors by surprise.

Can you just give us the number in terms of percentage of EBITDA that paper is -- or what it is this quarter versus last quarter, or a year ago quarter, so that we can kind of gauge and not be surprised by stuff like that?

Yes, I think it -- again, the paper prices are volatile.

If you take a step back in the overall shred business, revenue was around $440 million, $450 million a year, and about a 1/3 of that revenue comes from the sale of paper for recycling.

And so that sort of gives you -- and a majority of that flows through, it doesn't flow through at a 100%, but it flows through at probably 90% in the EBITDA.

And so that's sort of where you get the volatility.

So we take those numbers and we say, okay, paper prices can be -- have been fairly volatile last year.

Again, they peaked I think in the second quarter last year.

And -- so Q1, we're actually still -- Q1 was actually a tailwind for us this year, Q2 will be a headwind for us.

So that gives you an idea of what the magnitude of the scope of the business is.

Okay.

That sounds good.

And if I could just sneak in one more.

Just -- on the acquisitions of customer relationships, is there a way for us to triangulate as to how much volume you contribute through those, like you had $33 million or $34 million this quarter.

How much volume does that add to your organic volume when you make those?

Is there like a per million dollars we add x amount of volume or how can we think about that more broadly?

Again, in that number also includes things like service acquisitions, which could be in shred or other businesses.

If you look at it sort of historically and how we sort of -- what the normal pace of the business is, we typically pick up on an annualized basis around 3 million to 4 million cubic feet per year through customer acquisitions, so acquisitions of customer contracts.

And we've always included that organically because really the alternative is, is to go out and pay commissions to somebody else, which really, if it was in a commission line sort of wouldn't be a question about it.

We're not buying assets, we're not buying businesses.

It's really acquiring customer contracts.

And so that's sort of the other side of that coin.

The next question is from Karin Ford of MUFG Securities.

Wanted to go back to the expense topic again.

It sounds like the March cost spike was in shred and then the SG&A line, but you also saw a large increase in storage operating expenses, I think it was up 7% year-over-year including a 24% increase in labor there as well.

Are you seeing cost pressures across the entire business or was there anything onetime in that line?

No.

I think on the storage -- the other piece of the storage side would be, and don't forget that you had the change in lease accounting year-over-year.

So that impacted that as well.

Nothing really to call out.

I mean there's no sort of global labor pressures that we sort of see that are standing out that we didn't expect.

Yes.

No, and if you kind of take just, Karin, one more piece of color on that.

If you take the 2 pieces, so we talked about $10 million that was unexpected.

These things happen from time to time in the business.

$10 million on a $1.5 billion or approaching $1.5 billion EBITDA business, this is not -- these are things, generally, if we catch them early in the quarter we can manage them, and these things happen from time to time.

This one was just -- when you start getting into March, there's not a lot of time to recover.

So that's kind of one thing.

The other part in terms of the increased SG&A, as Stuart said before, was actually planned is because if we want to get continuous improvement to pay for itself in year, we have to execute in the first quarter.

So when we ramp up programs like this is you generally see us frontload the cost in Q1 and to a certain degree in Q2.

So that during the course of the year the benefits pay for themselves.

Now the good result is we set this group up, and because they've actually exceeded our expectations when we set them up is we said, okay, let's go even harder going into Q2 on some of the programs that they keyed up in Q1, which means that at the end not only will it make up the $10 million, which as I say is not the biggest -- not the hardest thing, and given the size of the business and 9 months to run.

But it means it's also going to give us a stronger EBITDA margin exit rate when we go into 2020.

One other thing I forgot to mention on the storage side as well.

You do have the impact year-over-year of the EvoSwitch acquisition, which has got from a higher facilities cost, obviously, and sort of the core part of the business as a percentage of revenue.

So that will also be one of the drivers and -- of just the gross margin on storage.

Got it.

That actually -- your answer segues into my next question which -- it just seems like it's kind of a quick turnaround on the expense side, given the complexity of the initiatives you laid out.

What gives you confidence that you can achieve a 650 basis point margin swing, basically in 3 quarters?

It's actually not that -- while I appreciate -- I'm going to tell my Board that you think that I have a very complex job, I'll make sure I use that.

But no, it's not as complex as you see.

The thing that is -- first of all, the labor issue in shred, it is -- it takes management.

But the bottom line is if you're replacing overtime with full time you have to manage the overtime.

People don't naturally wean themselves off overtime and we just didn't do that properly.

We -- the -- there was a learning lesson for us because we don't do that, that often, right?

We actually run our place pretty efficiently, but there aren't that many times where overhead -- overtime gets so ahead of us that we have to do these large hirings and then manage that out.

So that's a -- we're able to reverse that very, very quickly.

So now that we've been able to identify and put people on it.

I think in terms of the SG&A, first of all, and that area is, Stuart said, we actually brought consultants in to help build-out the ops team, the global ops team and to initiate a number of those projects.

So those are -- that was planned cost to come in and come out.

So that's actually already done and pretty straightforward.

And then the other areas, some of the areas in terms of -- we get to what the -- our global ops team have identified in Q1 and started initiating.

Some of it was just global best practices on transportation.

So we actually, on any given day around the world, the good thing about having transportation being a heavily demanded area is we have open reqs or open positions in our -- pretty much globally in our transportation.

And we're able to manage that cost out pretty quickly by just not filling or canceling some of those openings as we bring productivity into our fleet, so that's one area.

And the other area, which I don't think we did mention in our remarks, a big chunk of our improvement this year, believe it or not, is coming from procurement.

We had done a pretty good job in speed and agility a few years ago in procurement, but it was primarily focused in North America.

And now we've actually given, when -- with [JT] coming in as the Chief Operating Officer, we've expanded his remit, including procurement, and procurement now is a global exercise.

So fairly straight, we're still, I would say, at the low hanging fruit stage.

I'm sure it will get complex.

I'll make sure I'll tell my Board that in the years to come.

But right now I would say it's fairly straightforward.

Great.

And I'll just finish up with a data center question.

Can you give us an estimate of what you think the mark-to-market is going to be on the 68% of data center rent you have expiring over the next 3 years?

I think, overall, again, we -- from a GAAP standpoint, right?

We've adjusted through the acquisitions on IO and EvoSwitch, basically to market on a GAAP basis.

And when we did both of those acquisitions, we found them pretty close to market.

So we don't expect a big mark-to-market on the turnover.

Yes, I think the good thing about, Karin, is we're relatively new in the data center space.

So it was a lot of -- I think the question behind your question, there was a lot of price compression I think over the last 3 or 4 years.

Our contracts are still relatively new other than the ones we mark-to-market during the acquisition.

And when we look at our exposure in the -- on the hyperscale is still relatively small.

I mean we think that's an important segment and we continue to grow and look for ways to expand in that business.

But our models are based at where the prices have adjusted to now rather than us trying to hang on to business that was priced at higher historical prices.

So we think the pricing now is pretty much leveling out to where the clearing price is based on the cost of the assets and the expected returns that a vendor like ourselves should expect.

The next question is from Kevin McVeigh of Crédit Suisse.

Bill or Stuart, is there anything in terms of the revenue.

I mean the organic growth came in at 1.9%.

I think if I have it right, it's the easiest comp of the year, and then the comps kind of get more difficult.

Is there anything that kind of comes in that helps that grow over effect?

How should we think about that just over the balance of 2019?

Kevin, this is Stuart.

No, I mean from a growth perspective year-over-year, I mean you get a little bit of lumpiness.

But then again, on the 700 million cubic feet of volume, right, that we're storing out there for our customers that paying every month, on the margin the numbers you talk about from a seasonal standpoint they're really small.

So I think, as Bill mentioned, we started off the first quarter a little bit better than we expected, both from a destruction as well as a new sales from existing -- from new customers.

And we've got -- we'll feel good about the pipeline that we have for the year.

And so we're pretty much right in line with our outlook.

Got it.

And then you -- obviously to your point, you kind of have a wider range out there given the FX.

At this point do you plan on -- would you think you're coming at the lower end of that range or the higher end based on where we are, again, a quarter in to it?

I mean I think the range is what it is.

I think we said the upper and lower end are both FX-dependent, and I'll leave it at that.

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