Iron Mountain Inc

NYSE:IRM

Earnings Call Transcript 2019-Q1

[Operator]

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.

[Greer Aviv, SVP, IR]

Thank you, Kate. Hello, and welcome to our first quarter 2019 earnings conference call. The user controlled slides that we will refer 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 information and our outlook for the remainder of the year.

After our prepared remarks, we'll open up the call to Q&A. Referring now to the 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 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 a reconciliations to these measures as required by Reggie are included in the supplemental financial information.

With that, Bill, would you please begin.

[William Meaney, President, CEO & Director]

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 bit more detail, as you saw in our earnings materials, revenue growth in record storage volumes continued to be very durable with total revenues increasing 4.5% on a constant currency basis, whilst our 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 cost, which are temporary in our secured 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 what led to the earnings results this quarter. Our performance remains 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 that we did not achieve the reduction necessary to deliver the targeted level, which resulted in unanticipated higher labor costs. 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 in overhead cost globally. As a number of these improvements continue in their implementation, we expect it will ultimately lead to more of a marked improvement and 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 expectation 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 increases 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 the - one recent example this could be seen in our continued progress with our insight platform and 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 has insured we are providing our shareholders and analysts value-added information to properly evaluate our businesses and related performance. We revised our volume recording 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 arts storage and entertainment services. Whilst the non-box 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 record storage increased from 686 million cubic feet a year ago to 696 million cubic feet with $2.4 million of the $10 million cubic organic, delivering 30 basis points of the year-over-year growth.

Moreover, during the first quarter, we delivered growth of 3 million cubic feet organically or increase of 40 basis points. Breaking the worldwide volume down further, we continued 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 arts and entertainment services and consumer, we have routinely included these businesses when reporting or 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 in the 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 leverage is MakeSpace a strong brand and front end customer acquisition technology platform with our world-class operational scales and logistics expertise. Iron Mountain has the opportunity to accelerate growth in the consumer market the 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 a 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 third 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 and data center. While we're disappointed by the cost impact 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.

[Stuart Brown, EVP & CFO]

Thank you, Bill, and thank you all for joining us to discuss our first quarter 2019 results. I'll start off the details around Q1 performance, with additional information around the cost control issues and overall results, including the initiatives you're taking to expand margins and deliver on your expectations for the remainder of the year. Slide 7 of the presentation summarizes our quarter's financial results. As Bill mentioned, we're 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 by an revenue management and from organic records management volume growth, which increased 30 basis points in the quarter and acceleration for 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 point from last year to 56.3%, due in part to the operational issues Bill discussed as well as a 20 basis points 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 margins 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 points as a percentage of revenue or almost $18 million from the year-ago. The increase in SG&A reflects higher IT-related costs, including information security and investments in our digital offerings like the Iron Mountain insight platform and partnership with Google. We also invested in a new global operational 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 and reflect 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 came in at 1.1% for the quarter, slightly better than Q4 2018, reflecting contribution 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 one 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 that 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 a phoenix moveouts, which were anticipated when we acquired IO last year.

As Bill mentioned, we're trending well towards our target of leasing 15 to 20 megawatts for the year. Aggregated 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 our business segments. On a year-over-year basis, total margins were impacted by the increase in SG&A. The North America RIM margin declined by about 40 basis points largely because of our shredding business, as previously discussed, while the changes in lease accounting impact margin and a segment about 20 basis points this quarter. North America data management margin declined continues to be driven by lower volumes and investments we're making a new products and services, including Iron Mountain. Revenue management is helping to offset some of the declines support healthy margins, which remain above 50%.

In Western Europe, first quarter margins contracted 230 basis points, reflecting higher temporary facilities cost 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 new lease accounting standards. 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 of 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 the year-end primarily due to the softer adjusted EBITDA performance. We expect levers to decline in the back half of the year, the capital recycling proceeds and expectations for increase adjusted EBITDA and to end the year around 5.5x as we guided to last quarter. We're on track with our capital recycling program and subsequent to the end of the first quarter, close to a number of real estate sales, generating net proceeds of over $40 million as we consolidate into our new U.K. records facility.

We've spent more than $15 million of additional risk that capital 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 in 2020 and beyond. First, we've been 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 was result in higher-than-previously-anticipated expense in Q2, there's one time in nature but should reduce fate and transportation cost in the back of the year and continuing to 2020. Other steps being taken include further labor 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 and additional your labor, transportation cost in 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 training. 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 range that we provided in your Q4 call in February and remain confident that we can achieve despite the first quarter performance expected residual effect on the second quarter and headwinds from declining recycled paper prices. The operating lower end of our guidance remains a little wider due to uncertainty with regard to exchange rates.

We continue to expect a 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 tire destruction service revenue in much higher paper prices. While we 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 costs to secure destruction will continue into the second quarter until our actions, which are already underway, again improving cost of sales. We also expect some onetime cost associated with the operational improvement initiatives, I described earlier. However, SG&A cost should decline sequentially and as a result, we expect the adjusted EBITDA margins 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 to provide on our last earnings call.

In summary, Q1 performance reflects a strong underlying health and shows the contribution from revenue management and improved volume trends. We continue to see good results from the efforts to extend in the high-growth markets in our data center platform in Adjacent Businesses are shelling encouraging progress as the gain greater scale. We're confident that the actions we're implementing to improve margins allow us to achieve our long-term targets.

Then, operator, we'll move to the Q&A.

[Operator]

[Operator Instructions]. The first question is from Sheila McGrath of Evercore.

[Sheila McGrath, Evercore ISI]

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?

[William Meaney, President, CEO & Director]

No. I mean the majority of increase is - you get a few things going on. First of all, the increase year-over-year from a dollar basis, we've - with Acquisition of EvoSwitch and then IO late in January last year, you're getting some increase in overall, overhead cost because of that. And then you're also getting increase in operations team, which we operate in cost of that team as well as some consulting cost. And those are the 2 biggest drivers. And so when you think about the global operations team as we stood that out, you've got cost in the first quarter and continued 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 it as we said these things up, right? We're taking cost earlier this 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 accelerates some things that we would have spread up later in the year and put those forward into Q2.

[Sheila McGrath, Evercore ISI]

Okay. Great. And then just following up on the MakeSpace acquisition. I just wonder how you view that business setting in it at Iron Mountain? How are you integrating it? Will that business we with Iron Mountain trucks? And how the margin compare to traditional's - your traditional storage business?

[William Meaney, President, CEO & Director]

No, it's a good question, Sheila. So first of all, we're a significant by minority shareholders at JV. So it set up as a JV rather than integrating MakeSpace. So for us, the perfect relationship. So besides being a large minority shareholder in the company, we're also the exclusive provider of the back and services. In the back and services means that our trucks and drivers picking up the material or delivering the material in our facilities soaring. So we're the exclusive service provider to that joint venture, which effectively gets us in the consumer space with a B2B relationships. So we're still a business-to-business with MakeSpace, and we get the benefit of their understanding of the consumer space. And they've proven themselves, not only to 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 spit standpoint, is that we bring the logistics and handling expertise that quite frankly both them and other consumer self-storage companies have struggled with and this particular area. So we're able to leverage what really as 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 in the United States. So we think it's actually very synergistic relationship that we've been able to carve out with them.

[Sheila McGrath, Evercore ISI]

So the venture will store the - in your facilities?

[William Meaney, President, CEO & Director]

Yes, exactly. Exactly.

[Operator]

The next question is from Nate Crossett of Berenberg.

[Nathan Crossett, Berenberg]

I saw on the presentation that you're seeking JV partners 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 heading that demand is pretty strong, especially in the flap areas?

[William Meaney, President, CEO & Director]

So Nathan, select me start with the last question and then Stuart was talking about how we think about joint ventures generally and specifically why we called it up that we're considering up for Frankfort. So you're right. I mean we remain bullish on the European data center markets. So we're really pleased in terms we've been able to establish a strong footprint, both in London in the floor space with the acquisition and out with the EvoSwitch in Amsterdam. So we're really happy with that. And now with the land in Frankfurt. So as you know, Franklin, London, Amsterdam and Paris are considered top markets in Europe and the growth there continues to see - we see robust growth across both the wholesale market as well as the retail market. 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. outsourcing. But they're definitely picking up pace at a really good rate.

[Stuart Brown, EVP & CFO]

Yes, on the Frankfurt joint venture that we're evaluating, yes, it's lots of capital out there looking to be put to work in the data center business and the type of structure would be looking at would be something fairly typical for other REIT. Why Frankfurt? Is really because if you look at some of the development we've got in the other markets in Amsterdam and Arizona, there's frankly, would be probably too many conflicts with our existing. So Frankfurt is easy to carve out into its own joint venture, wouldn't be any conflicts with the existing Iron Mountain properties. And we're in the early phases of that. And we will evaluate demands are. So we're looking for long-term partner who can invest with us in Frankfurt and then we wanted to consider other markets outside of that will be open to that as well.

[Nathan Crossett, Berenberg]

Okay. That's helpful. And is there any preference is there any public or private. There the public eye on the best of potential JV? Or can you give any...

[William Meaney, President, CEO & Director]

It's most likely a long-term pension-type money that's looking for these type of investments, it could be some of these are going to be in this for long time as we build it out.

[Nathan Crossett, Berenberg]

Okay. That's helpful. And then just another question on 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 us to want to kind of having a meaningful impact on AFFO or any color would be helpful on that.

[William Meaney, President, CEO & Director]

We'll give you more guidance as we get into for sure in for our 2020. This year, what we've - our expectations and your expectation should be that any revenue will we get will be a watch with the cost standing this out. I think I might've mentioned in the last call is that we've done over a dozen proof of concepts across the 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 standing 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 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 way we think about this is accelerating that high single-digit, low double-digit growth that we have in our digitalization business as we're - and this is the tool give more encourage them to do that.

[Operator]

The next question is from George Tong of Goldman Sachs.

[George Tong, Goldman Sachs Group]

Looking at your developed markets appears new sales pig down from 1.6% last quarter to 1.5% this quarter and New volume from existing customers also take down from 3.8% to 3.7% while discretion picked up from 4.6% to 4.9%. Can you talk about where or when you might expect from of these trends to stabilize? And what initiatives you have to potentially drive an inflection?

[William Meaney, President, CEO & Director]

Yes, I think, George, what I would say is and it depends on which - whether you're looking quarter-to-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 vice important our whatever call within the range of what we expect. So 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 4.5% to 5% range. And actually in total is - yes, I'm looking at total volume now is we're at 4.5%. Any given market can kind of trench those movements.

So I think you're kind of picking it at a specific market. You see overall actually destructions have gone down this quarter. If you look at the total business. But we still think whilst this nice to see 4.5% versus 5%, we still think, we're operating within that range. So I think we should see it's not going to be any big inflection point either up or down in the business. I think this is pretty much steady as she goes and where we will see it 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 if you think, what do we really see has the being that will make a long-term impact? It is now that you've started to reporting the volumes of these other areas that we've been including, if you will, on our occupancy that we've never shown you how much volume it actually drives.

So if you look at specifically the non-records business over the last two years, over the last two years on a non-records business so that would be the art entertainment services and now consumer. Well, in consumer we've been doing on her 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 over the last two 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 record business, you could see it as steady as you go with a little bit of improvement consolidated has emerging markets continues to become a bigger part of the mix.

[George Tong, Goldman Sachs Group]

Very helpful. Your most recent 2020 targets include revenue of $4.6 billion to $4.75 billion and EBIT target to $1.86 billion to $1.76 billion. And Jude discuss the progress in reaching those targets? And where you see EBITDA margins heading, especially given the margins are relatively FX neutral?

[Stuart Brown, EVP & CFO]

George, you're talking about sort of as we're sort of looking start off margin progression for the year where we expect margins to go. If you look at - for the - through first quarter, we talked about we had some unusual expenses, right? And so the guidance comments that I gave implies about 650 basis point margin improvement in Q1 to Q4, right? So I'll give you a pretty good exit rate from '19. And then if you think about in dollar terms, right? We're a little over $1 billion quarter of revenue. So that implies EBITDA dollars going up from Q1 to Q4 about $70 million. And if you think about one of the big buckets that drive that, but you normally get both revenue management as well as cost improvement initiatives as we move for the year. That will continue to be with the biggest buckets for that. You've always get the correct affections that they're taking to talk about year in this call. You will get lower SG&A as we talked about and you get the benefit from the global team which really switches before from cost of benefits from Q1 to Q4. And that's around procurements service labor and some of the other areas. So that will benefit both North America as well as the international businesses. So I think the sets us up pretty well going into 2020 for the [indiscernible] we've provided longer term.

[Operator]

The next question is from Andrew Steinerman of JPMorgan.

[Andrew Steinerman, JPMorgan Chase & Co.]

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 some acceleration into organic revenue growth as I imagine moves through the year?

[Stuart Brown, EVP & CFO]

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 you talk about the service revenue in Q1 and Q2, the growth will be a little bit slower than we had in the year-ago, particularly in Q2 actually going 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.

[William Meaney, President, CEO & Director]

And if you think about it, Andrew, is that we actually have built our confidence. Our confidence is even stronger about revenue than it was a month or 3 months ago just because we were quarter into the year. And we can see the pipeline going forward, so we feel pretty good about where we are in the revenue front.

[Operator]

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

[Andrew Wittmann, Robert W. Baird & Co.]

Stuart, I was just wondering the dollar strengthens here a little bit since you guys last reported, how does that fact factors into your guidance?

[Stuart Brown, EVP & CFO]

Yes, I mean it's our guidance range and when 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 - sort of had historically over the past few years. It basically goes ahead 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 the broad EBITDA year-over-year down a bit $10 million, that was built into our guidance. And I think where FX is today, you basically right towards the middle of guidance and the upper and lower end of the range taking into account any potential movement.

[Andrew Wittmann, Robert W. Baird & Co.]

So last quarter, you guys talked about for the year I think you saw it was going to be a $20 million to $25 million EBITDA headwind on the [indiscernible] line, 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?

[Stuart Brown, EVP & CFO]

Yes, that's about right.

[Andrew Wittmann, Robert W. Baird & Co.]

Okay. Just on - just noticed on your kind of on your CAD schedule that there's an incremental $50 million that but I think was called out here from Frankfort and then that was offset by $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 that identified on the market whether that still kind of in the brick to figure out how that's going to translate?

[William Meaney, President, CEO & Director]

Yes. We've got a package of that $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 seem good demands on that. And so we've got additional package up and ready to go have the first one goes. So then the bigger question around that will be recycling more real estate as the question around doesn't make sense for us to investment partnership for the Frankfurt line of purchase. Now leasing gone into some questions around time and with that. But we feel there's a lot of demand out there for JV with us, just going to make the terms make sense.

[Andrew Wittmann, Robert W. Baird & Co.]

So is it fair to assume that $50 million number that you have in there is - that's if you were to do by all by yourself now without a partner. So that could actually not be $50 million, if you found somebody?

[William Meaney, President, CEO & Director]

Yes, correct, correct. If we found somebody, we [indiscernible] land in it and can get capital back from that partner right away.

[Operator]

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

[Michael Funk, Bank of America Merrill Lynch]

I have two quick ones, if you wouldn't mind. So looking at Slide 17 and you showed the $380 million of incremental capital needed for discretionary investments beyond the capital recycling and the JV than other sources of capital. I'd love to get your commentary on how you are thinking about maybe your comfort level with where your leverage is right now? And then you haven't issued equity in a year and half, so I want your commentary about potentially accessing the equity capital markets? I think it was last around 37 so not too far from what your equity is now. And then second question, I think last quarter you talked about revenue manager program, may be being less of a headwind in the second half - sorry, tailwind in the second half of 2019. If I'm correct about that, may be just comment on how that factors into your margin progression commentary?

[William Meaney, President, CEO & Director]

Okay. So let me - 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 he's 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 is. Generally, in the first quarter, we see around 15% of the revenue management benefit come through in the first quarter, just the way the pricing reviews are done in the contract renewals are done with customers as we go built 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 and 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 and 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 fear 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. Is generally we're not uncomfortable in terms of where we stayed with the debt we know very price. So we actually price usually at the upper end of investment grade, buys were not an investment grade data sure. So we feel relatively good about that. If you look at us our leverage relative to say that to reap 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 debt. So 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 daylight between wherever our covenants are and where our leverage states. Just to give more dry powder for opportunistic events that may present themselves. So we don't feel like we are in a rush to deliver because the only thing we will deliver is to create more 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 continue to grow the dividend 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 your share price is sitting. So we kind of look at in terms of what's the best investment. And then we also look at the best way to find that. And right now, when you look at equity you have to look at the NAV of your company, but before I headed 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 at Frankford. That being said, don't forget the thing that separates us from some of our data center peers is, we have an almost as north of $1.4 billion EBITDA business. And most of that generated in the mature markets in our core business, which generates a lot of cash. So what we like to say is that we have a very large strong payee 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 deleverage slowly over time, not doing massive delivery, but also is a thing that allows us to do this year we guided about $250 million that we're putting into our data center business. So obviously, if we will try to put $250 million and we were $100 million EBITDA business, that would be a strain. But we're fortunate that we have another relationships that comes with that $1.5 billion EBITDA, but we - it is most of that in mature areas that we're able to harvest a fair amount of cash. But I mean, Stuart, you may want to talk about specifically the data - or the debt markets?

[Stuart Brown, EVP & CFO]

Yes. Let me go overall just to be - just quickly. As from an debt investor stand point, we get so much credit for the durable cash flow that comes out of the business. So as Bill mentioned, it's right, we price that close to investment grade, even though the rating agency have historically not treatise the same way. We talked about in the last earnings call. We'll actually deliver over time as EBITDA growth, right? Because if you look at for the investments are that need and incremental capital. It is around building out the data center platform. So we've had a great platform, but as we've done the acquisitions, it didn't have a lot of capacity to least out. So we have to build out and developed.

So that's really what's driving the $250 million of the capital needs. And investors understand, I think the rating agency understand that as well. So quite confident as it grows and leases up, the value of the data center platform will only continue to increase. One other thing I'll add to Bill, is that when we're looking at, hey, what's the way to source that? We look at debt. We have an ATM in place again today, if you look at where the ATM is and you look at where the cap rates are an industry really states. We've chosen right now to recycle capital and some of the industry real estate some of the higher invested and if you look at our credit, people who want to do sale lease back transactions love our credit and the rates that you will see on these are really good. So we are going there.

[Operator]

[Operator Instructions]. The next question is from Shlomo Rosenbaum of Stifel.

[Shlomo Rosenbaum, Stifel, Nicolaus & Company]

Stuart, can you just walk me through again the labor cost in the U.S. You hired additional people in order to not have over time 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 it works?

[Stuart Brown, EVP & CFO]

No, I'll give you a little bit more detail here than we normally would. With all great intentions, right would chew seen in the liver markets of North America is more demand, particularly around warehouse workers and drivers. And we took some steps last year wage rates. And with the raise in the wage rates, we were - we had a lot of overtime. So we'll take these rates up that will get offset by lower time and which is sort of a natural thing to assume. When you hire people you also have period of trainings, so your productivity is going to suffer for a little while as you're stacking up. I think what happened is we weren't managing that change very well and actually overstaffed because good news is attrition been done were able to retain people, but we did manage the productivity after the training period. And therefore, ends up with too much overtime.

The month of January is a strong month for sort of - for the bin tips, it's really around sort of drivers people in the field. And so the issue really manifest 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 to, and this was sort of a major cause of the issue of the shortfall in trade. Paper prices were actually down on the shred business were down a little bit below we expected it to be as well. You get paper prices in the quarter really move down and March was little bit lower. So that was a piece of the overall shred business but majority was sort of labor productivity. The good news is that the course correction as pretty quickly.

[Shlomo Rosenbaum, Stifel, Nicolaus & Company]

Okay. And then this is completely different though it than Western Europe? Or using the same kind of labor issues over there as margin was down as well over there with 230 basis points?

[William Meaney, President, CEO & Director]

Yes, it's similar - the different issue the labor there was impacted greatly we had some good project revenue in Q1. Do you have a good pipeline and the project revenue in Q1 was down and we did manage some of contingent labor as well we should have on the server-side around projects. We lost some productivity and that as well. Again, correctable add regrettable as well, but you were taking actions on it.

[Shlomo Rosenbaum, Stifel, Nicolaus & Company]

Okay. That's good color. And then is there a way - first of all, I mean there's discussion on paper prices and EBITDA and it does seem to catch investors by surprise. Can you just give us the number or in terms of percentage of EBITDA that paper is? Or what it is this quarter versus last quarter a year ago quarter? So that we could kind of gauge and not be surprised by stuff like that?

[William Meaney, President, CEO & Director]

Yes, I think the paper prices are volatile. If you take a step back in the overall shred business, revenue was around $440 million, 4450 million a year. And about a third of that revenue comes from the sale of paper for recycling. And so that what's give you a majority of that close through. It doesn't flow through at 100%, but it flows through at probably 90% in the EBITDA. So that sort of where you get the volatility. If you take those numbers the paper prices can be really worried to last year. Again, it peaked in the second quarter last year. So Q1 we are actually stable Q1 was actually a tailwind for us this year. You too will be a headwind for us. So that gives you an idea what the magnitude of the scope of the businesses.

[Shlomo Rosenbaum, Stifel, Nicolaus & Company]

Okay. That' sounds good. And if I could just sneak in one more. Just - and the acquisitions of customer relationship, is there a way for us to triangulate is to how much volume you contribute through those, like $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 them more broadly?

[Stuart Brown, EVP & CFO]

In that number also includes things like service acquisitions, which could be in shred or other businesses. If you look at sort of historically and how we sort of look the normal pace of the businesses we typically pick up on an annualized basis about 3 million to 4 million cubic week per year through customer acquisitions, through acquisitions and customer contracts. And we've always included that organically because really the alternative is to go out and pay commissions to somebody else, which really, if it wasn't the commission lines, it sort of wouldn't be a question about it. We're not buying assets, we're not buying businesses. It's really acquiring customer contacts. And so that is sort of the other side of the coin.

[Operator]

The next question is from Karin Ford of MUFG Securities.

[Karin Ford, MUFG Securities Americas Inc.]

I wanted to go back to expense topic again. It sounds like the March cost in the shred and the SG&A line, but you also saw a large increase in storage operating expenses, I think was up 7% year-over-year including a 24% increase in labor there as well. Are you seeing course pressures across the entire business or was there anything one-time in that in that line?

[Stuart Brown, EVP & CFO]

No, the other piece of the story sides have the change in the lease accounting year-over-year. So that impact to that as well. Nothing to call out. There's no sort of global labor pressures that we sort of see standing out that we expect.

[William Meaney, President, CEO & Director]

Yes, no, if you kind of take, Karin, one more piece of color on that. If you take the two piece so we talked about $10 million that was unexpecting, these thing happens 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 things generally we catch them early in the quarter, we can manage them and these things happen from time to time. This one was just then you start getting into March, there's not a lot of time to recover. So that kind of one thing. The other product in terms of the increased SG&A, as Stuart said before, was actually planned is. Because if you want to get continuous improvement to pay for itself in year, we have to execute in the first quarter. So when the ramp up programs like this you generally see a frontload of the cost in Q1 into a certain degree of Q2. So that benefits. Now the good result is that we set this group up. And because they've actually week in our expectation when the set them up 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, you're not able to make the $10 million, which is as you say, is not the hardest thing and given the size of the business in 9 months to run. But it means stronger EBITDA margin exit rate when we go into 2020.

[Stuart Brown, EVP & CFO]

Okay. One of the things I forgot to mention on the other storage as well, you do have the impact year-over-year on 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 is one of the drivers just the gross margin storage.

[Karin Ford, MUFG Securities Americas Inc.]

Got it. That actually your answers segues into my next question, which - it just seems like 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 points margin swing, basically in three quarters?

[William Meaney, President, CEO & Director]

It's actually not that - while I appreciate - I'm going to tell my board you have a very complex job I make sure I use that. Right now, it's not a 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 are replacing over time with full time you have to manage the overtime people don't know where it's really been over time we didn't do that properly. There was a learning lesson for us because we don't do that that often. We actually run our place pretty efficiently, but many times overhead - overtime so edifies that we have to do this large hiring and then manage that out. So that 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, as Stuart said, we actually brought consultants in to help build out the upstream, the global upstream and into 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 area and some of the areas in terms of the get to what our global ops team have identified in Q1 and start initiating some of it was just global best practices on transportation. So we actually in any given day around the world the good thing about having transportation being a heavily demanded area is we have open racks or open positions in our pretty much globally and our transportation. And we're able to manage that cost out pretty quickly by just not feeling 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 issue believe it or not coming is from procurement. We've done a pretty good job in speeding agility a few years ago and procurement. That was primarily focused in North America. And now we've actually given, with JB coming in as the Chief Operating Officer, we've expanded his - including procurement, and procurement now's 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, it's fairly straightforward.

[Karin Ford, MUFG Securities Americas Inc.]

Great. And I'll just finish up with data center question. Can you give us an estimate of what you think the mark-to-market is going to on the 68% data center rent you have expiring over the next three years?

[William Meaney, President, CEO & Director]

I think, overall, again, we - from a GAAP standpoint, right, we adjusted through the acquisition on IO and EvoSwitch, basically two market on GAAP basis. And we did both of those acquisitions, we found them pretty close to the markets. So we don't expect a big mark-to-market on the turnover.

[Stuart Brown, EVP & CFO]

Yes, I think the good 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 contract is still relatively new other than the mark-to-market during the acquisition. And when we look at our exposure in the hyperscale is still relatively small. 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 where the prices have adjusted to now rather than us trying to hang on to business that was priced at higher historical pressures. We think pressing now it's pretty much leveling out to where the clearing price is based on the expected returns that underlie our sales should expect.

[Operator]

The next question is from Kevin McVeigh from Crédit Suisse.

[Kevin McVeigh, Crédit Suisse]

Billing or Stuart, is there anything in terms of revenue? I mean the organic growth came in at 1.9%. I think if you have it right, it's the easiest comp of the year and then the comps come and get more difficult. Is there anything that kind of comes in and helps that grow over factor. How should we think about that over the balance of 2019?

[Stuart Brown, EVP & CFO]

Kevin, this is Stuart. From a growth perspective year-over-year, I mean you get a little bit of lumpiness. But again, on the 700 million cubic week of volume, right, that we're storing for the customers that think paying every month. On the margin in the numbers you talked about on seasonal stand point of view are really small. So as I think Bill mentioned little bit better than we expected, both from destruction as well as in new sales from existing - new customers. And we've got to feel good about the problem that we have for the year. And so we're pretty much right along with her outlook.

[Kevin McVeigh, Crédit Suisse]

Got it. And to your point to kind of have a wider range given the FX. At this point do you plan on become - would you think you're coming with the lower end of the range or the higher rent based on where we are in quarter into it?

[Stuart Brown, EVP & CFO]

I think the Rangers upper hand or both FX dependent, and I'll leave it at that.

[Operator]

[Operator Instructions]. This concludes our question-and-answer session. And today's conference call. The digital replay of the conference will be available approximately one hour after the conclusion of this call.

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