Q3 2019 Earnings Call
Good day and welcome to the earn out there Q3 to 20 <unk> earnings Conference call. All participants will be in listen only mode. So you need assistance. Please signal conference specialist by pressing the star Keith followed by zero. After today's presentation, there will be an opportunity to ask questions to actually quite see me Press Star then one all your telephone keypad.
Withdraw your question you can press Star then too. Please note that this event is being recorded I would now like to turn the conference over to Grier of Eve. Please go ahead.
Thank you Chuck good morning, and welcome to our third quarter 2019 earnings conference call user controlled fight that will be referred to today in today's prepared remarks are available on our Investor Relations website, along with a link to today's webcast. The earnings press release and supplemental financial information on today's call well hear from Downey, <unk> President and CEO .
So I, just got third quarter before and projects that meet the transformation program and out this morning.
Our CFO will then cover additional financial results and our outlook for the remainder of the year. After our prepared remarks, well open the lines for Q and <unk>.
Sorry, now precisely what the presentation today's earnings call My presentation supplemental financial information will contain forward looking statement, most notably our outlook for 2019 financial and operating performance and expectations for project on it.
Forward looking statements are subject to risks and uncertainties. Please refer to today's press release earnings call presentation.
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 could differ from that was in our forward looking statement.
In addition, we use several non-GAAP measures when presenting our financial results and the reconciliations to these measures are required directionally are included in the supplemental financial information, but that Bill would you. Please begin.
Thank you Greer and thank you all for taking time to join us.
Today's call I would like to cover two main topics first we delivered another solid quarter, showing adjusted EBITDA growth of 5% year over year, and 7% quarter over quarter on a constant currency basis further demonstrating the strong and consistent organic growth. We're building in the businesses as well as continued progression in the year.
Second we announced project summit, which is a transformation program. We are commencing in November that will leave us with a simpler and more dynamic management structure better supporting our future.
Before we get into our discussion of the Q3 results I will first address project summit at a high level. This transformation program focuses on three key areas first we will simplify our global structure by combining our core records and information management or rim operations under one global leader whilst also.
I will eliminate unnecessary work and rebalancing resources.
Second by simplifying our global organization, we will streamline our support structure, whereby we will can dance the number of layers and reporting levels from our current average at six levels down to four levels. This will create a more dynamic agile organization.
And third we will more efficiently leverage our global and regional customer facing resources across room product lines grading better alignment between new digital solutions in our core business, resulting in an enhanced customer experience.
All in all projects I mean, it's expected to deliver $200 million, an annual run rate adjusted EBITDA benefits with all the actions expected to be complete by the end of 2021.
We expect to incur a total restructuring cost to achieve these benefits a $240 million at the total benefit 50 million will be implemented during the course of November and December with restructuring costs of approximately $60 million being recognized in the fourth quarter.
Well, there will be little to no benefit from this first phase at summit in our 2019 result benefits are expected to start flowing through in the first quarter of 2020 on top of our normal growth.
Before diving into more detail on summit, let me provide some context over the course of iron mountain's nearly seven decade history. We have developed unmatched trust and scale. We have built the global player in the records and information management business today, storing nearly 700 million cubic feet of record with extremely deep.
Customer relationships, including 95% of the Fortune 1000.
This global growth, which as in large part been executed through acquisitions has resulted in a certain complexities in areas such as business processes I T systems lines of accountability decision, making and other redundancies across our organization.
To be able to compete most effectively in any industry. Today, you must be flexible have efficient lines of communication and be able to react quickly to evolving customer needs.
We have heard from our customers that we need to be more integrated and our approach to solving their problems. This means tearing down our internal silos equipping our teams with the necessary tools to better meet customer needs across our business offerings and continue to standardize streamline and simplify our.
Systems and processes.
But in order to take fully it it's a fully take advantage of this significant opportunity. We also need to better align our resources and capabilities. So we have a more simplified inefficient operating model.
Well the underlying health of the business is solid as demonstrated by the 3% organic storage revenue growth year on year. We believe summit will allow us to continue that momentum. So we can capitalize on future opportunities faster and more efficiently.
We expect summit to enable us to better execute on our strategy. So we can continue to grow both in revenue and profit while also generating more free cash flow.
This improvement in financial results will come from furthering our position as the global leader in the records and information management industry as well as continued investment to build further scale in data centers and create digital solutions for our customers whilst reducing leverage.
Moreover, through summit, we're simplifying our global structure with a view to provide an environment where people can work in a dynamic workplace, all while identifying and vigorously pursuing the highest potential opportunities to serve our customers.
In doing so we will undertake steps to improve the efficiency of our operations and increase the pace at which we are able to effect change.
And our operations in cost structure will be better position, allowing us to sharpen our focus on higher growth areas that can provide solid returns to our investors and enable us to enhance the strong customer relationships, we already have across the enterprise.
As I mentioned earlier, our key catalyst of this change both from a customer service viewpoint as well as an operating efficiency standpoint is the place olive rim under a single global leader to.
To this and we are proud to announce that Ernie Couteaux, our international SVP and general manager will now lead global rim operations in our new structure as we mentioned in this morning's announcement Patrick Kennedy will be retiring has he BP in general manager of North America in Western Europe , Patrick is a seasoned executive who is.
Let developed markets for several years and he will take on a consultative roll assisting Ernie during the transition into his new role and provide support to iron mountain through the beginning of 2021.
We are extremely grateful to both Patrick and Ernie for their leadership in efforts to position the RIN business for sustained success under United structure.
In addition to Ernie taking on this expanded role he will be supported by Greg Mackintosh, who is now charged with establishing and leading our commercial operations along with strategic accounts.
Strategic accounts as a relatively new area of Iron Mountain has we upgrade our ability to grow in service some of our highest potential customers.
In addition to Greg Ernie will be supported by Deirdre Evans, who leads the North American run business. Additionally, Theater will report to me leading to continued development of consumer storage, which includes our partnership would make space.
In terms of transforming the company to be more agile in dynamic to the benefit of our employees and customers. We will can dance the number of layers and reporting level, which is expected to reduce the number a VP level in above position by approximately 45%.
Including the impacted these reductions approximately 75% of which will be action. During the next two month. The program is expected to reduce our total managerial and administrative workforce by 700 positions over the next two years.
It should be noted that summit is causing us to say goodbye to many friends and colleagues.
We are now in a situation that we need far fewer senior leader is if we are to serve our customers and I'm more responsive way.
We are committed to providing the right support to these employees that are negatively impacted including appropriate severance and outplacement support.
Our mountain is a close knit community.
So it is never easy to part ways with team members, but the needs of our business in our continue to evolve and this realignment will prove to be value enhancing for our organization our team our customers and shareholders over the long term.
Turning now to Q3 performance, we delivered constant currency revenue and adjusted EBITDA growth of 1.7% in 5% year over year, respectively.
This has resulted in 120 basis points expansion of our adjusted EBITDA margin to 35.4%, reflecting the benefits of revenue management in lower overhead cost as well as the positive impact from the efficiency initiatives. We began work on earlier this year offsetting lower recycled paper prices.
Turning to business performance Global Records management volume trends continued to be positive with net organic volume increasing by more than 3 million cubic feet or 40 basis points over the last 12 months.
This was driven by modest improvement in new sales wealth Destructions were in line with Q2 levels.
In developed markets volume declined organically by about 3.5 million cubic feet or 70 basis points more specifically declines in North America rim volume are in line with prior quarter down, 1.2% well Western Europe grew organic volume by 1.5%.
Other international net organic volume increased by 6.6 million cubic feet or 3.6% a modest acceleration from previous quarters as new sales growth was strong and destructions moderated.
Remain encouraged by the resilience and durability of our core records management business and believe unifying the rim organization under one global structure will result in unlocking incremental opportunity in the core business and beyond.
We will better align resources across the rim organization to bolster our customer experience globalized processes and extend our reach beyond our core records management offering.
For example, the North American rent team has been successful leveraging our assets to grow noncore storage opportunities in areas, such as consumer Library services and other channel relationships contributing more than 3 million cubic feet year to date to our storage portfolio.
We continue to make good progress in penetrating some of the historically unvended segments of the North American market, including the federal government. Our federal team had its best quarter, yet in Q3 with revenue growing double digits year over year with solid wins across multiple product lines, including core storage shred IGDSS information governance.
Digital solutions and data center.
This is a great example, loved to sell all culture, we are driving toward.
Our our GDS business is showing strong year over year growth with a focus on increasing the contribution from recurring revenues.
We have seen good success with our digital solutions, increasing the naval linked to pull through other revenue opportunities across multiple product lines, allowing us to engage with customers on a different level when addressing a more comprehensive solution that meets their evolving business needs.
Just one example of this was a recent 4 million dollar when including scanning some 250000 cubic feet of documents, where we combined our insight platform with our digitization capabilities.
It was this unique combined offering which can felt this engineering customer to choose us.
Finally, we continue to be very optimistic about our growth trajectory across our global datacenter platform.
Q3 was a busy quarter with new turnkey data center capacity brought online in key markets around the world, including Phoenix, London, Amsterdam and Singapore.
In addition to the Hyperscale lease we signed into critical Northern Virginia market. In early Q3, we are encouraged by the retail focused enterprise demand, we see as evidenced by a growing pipeline.
Looking at datacenter leasing activity in Q3, more specifically, we signed eight megawatts of new and expansion leases, primarily driven by the lease in northern Virginia.
Excluding that we signed two megawatts driven entirely by enterprise demand with nearly 75% of the kilowatts attributable to new logos to the Iron Mountain data Center platform.
Through the ended the third quarter, we have leased a total of 15.2 megawatts and continue to expect to achieve the high end of our 2019 target of 15 to 20 megawatts.
As we've shared with you in previous quarters, a clear differentiator for Iron Mountain in datacenter space is our strong brand recognition and the power of our ability to leverage customer relationships of our traditional salesforce.
In summary, Q3 was a solid quarter, which highlights the continued durability instability of the core records and information management business, while demonstrating the growth opportunities available to us and faster growing markets and businesses.
Once implemented projects some it will simplify our day to day operations and enable us to move faster and he is our ability to capture growth opportunities and execute on as I stated strategic priorities through building a stronger more nimble organization that enhances our service to customers.
Generates solid returns for all stakeholders.
I should add also today, we announced a 1.2% increase in our dividend to $2.47 per share on an annual basis.
I continue to grow our dividend, albeit at a more modest space given a solid pipeline of datacenter investment opportunities. We see ahead in 2020.
Stuart will provide more financial details for Q3 is well has the impact of projects summit, both near and longer term Stuart. Thank you Bill we've a lot to cover today. So let me jump in.
Before reviewing business performance and outlook I want to give you some perspective on project summit and the impact on our longer term financial framework a.
A framework showing our plan to generate more cash flow to fund our growth investments and an increasing dividend over the long term.
The benefits of the structural transformation, we announced this morning are expected to expand over the next several years open to fund significant opportunities to create value by investing in both our physical storage and data center businesses.
Looking out we expect our storage business to continue to exhibit is consistent and durable characteristics and see strong demand for data center capacity, resulting in low single digits annual organic storage rental revenue growth.
Service revenue, while more lumpy in nature should remain flattish as declining core services are offset by new customer solutions.
The revenue growth and ongoing continuous improvement initiatives should grow adjusted EBITDA organically and consistently around 4% or approximately $60 million per year.
Project Summit will contribute to help drive higher AFFO generating increasingly more cash flow.
As Bill noted with projects on it we intend to invest in higher growth opportunities, including data Center development and continued scaling of our international operations, while simplifying how we operate.
Our strategic priorities and capital allocation plans remain unchanged as we continue to leverage our glow global leadership in records management information governance, as well as our enter as well as our enterprise relationships.
We will continue to be very disciplined in our capital allocation decisions balancing investments that creates value for shareholders, while providing more solutions for our 225000 customers.
The framework demonstrates our commitment to fund the majority of our growth through robust free cash flow and into our reduced leverage.
As we grow at that FFO, we plan to operate with lease adjusted leverage in a range of four and a half to five times EBITDAR, depending upon where we are in the cycle.
And with our dividend payout ratio more in line with datacenter and other faster growing reads.
Now turning to quarterly results, we generated revenues of nearly $1.1 billion in Q3.
Total reported revenue grew 10 basis points or 1.7%, excluding the impact of the stronger dollar.
As you can see on slide eight our total storage rental revenue increased 4% on a constant currency basis in Q3, driven by organic storage rental revenue growth of 3%.
Affecting results from revenue management and global volume growth.
More specifically developed markets organic storage revenue growth was 2.3% for the quarter, reflecting continuing contributions from revenue management and volume trends that were largely consistent with Q2.
And the other international segment, we continue to achieve healthy organic storage revenue growth of 4.5%.
And data center organic storage revenue growth was 4.1% in Q3, a little lower than previous quarters with churn of 2.4% matching the experts expectations, we had message last quarter.
Our adjacent businesses are also performing well growing organic storage revenue by 5.2% in the quarter.
Total service revenue declined 2.1% in constant currencies with organic service revenue down 3% in the quarter compared to growth of 7.1% a year ago.
This change mainly liver from reflects the swing and paper prices, which were at record highs in the back half of last year and are currently at less than half those levels.
We exclude the 13.8 million dollar impact of lower year over year paper prices organic service revenue would have increased 20 basis points in Q3, which is below recent trends due mainly to lower project revenue in our international markets.
We now expect annual organic service revenue to decline approximately one of the half percent while annual storage organic growth is expected to generate in to increase about 2.5%, resulting in total organic revenue growth around 1%.
Remember the generating gross margins of 74% storage remains a key driver of our profitability.
As you can also see on slide eight third quarter SGN, a declined about $16 million from year ago, reflecting cost management actions as well as lower variable compensation compared to year ago.
Our adjusted EBITDA increased $13 million year over year, 3.7% to $376 million, despite the lower paper prices.
Excluding the impact of currency changes adjusted EBITDA increased $18 million or 5%.
Hey, AFFO in the third quarter, it was $225 million compared to $227 million a year ago.
This decrease is primarily attributable to $9 million at higher maintenance and non real estate growth investments, including the completion of a number of recent shredding plant upgrades to reduced transportation costs improved capacity.
Slide 10 details adjusted EBITDA margin performance by business segment.
In total adjusted EBITDA margins expanded 120 basis points year over year to 35.4%.
Turning to slide 11, you can see that our lease adjusted leverage ratio of 5.8 times remains in line with other reach and was flat to Q2.
We expect leverage to remain flattish through the end of the year held back by lower paper prices and exchange rates as well as the cost of implementing projects summit ahead of our benefits flowing next year.
Importantly, we opened the crossover debt market in early September railing $1 billion of 10 year bonds at 407, eight and offering that was three times oversubscribed.
We use of proceeds to pay down borrowings under our credit facility, which in turn extended or average maturity to six years.
Further we have good line of sight to exceeding $100 million in net capital recycling proceeds from the sale of real estate. This year after having closed on to purchase options in northern California, and selling a portfolio of Midwest properties in Q3.
Turning to 2019 guidance on slide 12, while our core storage and records management business has been strong. This year has had some headwinds that we had not fully anticipated when we laid out guidance.
This includes of course paper prices, which will impact adjusted EBITDA by almost $30 million for the full year.
To a lesser degree we experienced lower growth and project revenue product service revenue and we'd expected.
Well, we have successfully implemented a number of cost savings initiatives, we have only partially offset these challenges.
This implies year over year, adjusted EBITDA growth, a constant currencies of 2% to 3%.
Well, we will provide formal 2020 guidance in February with our Q4 earnings call given the size and impact of project summit, we want to provide some important components to help of modeling.
At a high level, we expect organic adjusted EBITDA growth to continue to be about 4% year over year or approximately $60 million.
Incremental to our normal organic adjusted EBITDA growth, we should see $50 million a benefit from project. Some actions taken in 2019 and $30 million or in your benefit from summit actions taken in 2020, which will be second half weighted.
In addition, current paper prices and exchange rates indicate $25 million to $30 million of headwinds relative to results anticipated for full year 2019.
Implementing this program provides a clear path to delivery of our strategic priorities, including generating cash flow to fund our growth, while helping ensure that iron mountain's position as a trusted guardian of its customers. Most precious assets is protected for years to come.
We look forward to sharing our progress with you on our fourth quarter earnings call early next year with that Chuck I'll turn it back over to you to open up the line for acuity.
We'll now begin the question answer session to actually question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.
And our first question will come from Nate Cross that Ive Berenberg. Please go ahead.
Hi, good morning.
I'm curious to get your sense of how the 200 million an annual cost savings will be.
Allocated I guess just in terms of how you're viewing growth projects like the data centers versus say deal de leveraging what's what's the kind of breakout of uses.
So if it so first of all the projects summit is totally driven in terms of reorganizing the companies. So that were simpler to work with from the from the customer standpoint, and it allows our mountaineers to work more efficiently quicker with less obstacles internally. So it's really about reorganizing the way.
We do things rather than businesses that were conducting so they're quite separate in that sense. So if you think about overall in terms of the project is as we said that $50 million will be action over the next two month and that's easy to the big change in the feeling in the company will be in terms of the way.
When we change kind of the leadership hierarchy of the company so that first 50 million.
40.
Have a 200 million dollar program. So that's how the think sequence, but they're very separate from our investment datacenter to datacenter. We continue to see strong growth has both.
If you think about it this year is we're up about 10% since the beginning of the year in terms of leased capacity and if you normalize for the the churn that we talked about last on the last quarter call, which was which was known when we bought Io then we're up about we're up in mid teens in terms of.
The year on year growth in terms of leaf or leases that weve action and brought into online and then if you look you're going forward and 2020 is we gave guidance that we'd be 15 to 20 megawatts that we would.
We would book this year and at the end of third quarter were up a little over 15 megawatts. So again quite.
Consistent with our guidance that we continue to expect to be able to grow data center between 15, and 20% a year, so but it's very separate from from projects on a project summit is really about reorganizing and so we can be more effective.
<unk> percent of the overall EBITDA the company because it has a higher growth area.
Yes, I agree with you in a but they also a lot of these acquisitions, a pretty pricey and fundamentally when we're looking at capital allocation can be just about bulking up it needs to be a good allocation of capital and it needs to be accretive on both a earnings or EPS as well as an AFFO per share basis. So we're pretty disciplined on looking at that.
We feel really good about the acquisitions, we did we've done to date, obviously, the Io being the larger are the ones, which was about as much about building a platform, but I think we're now we really have been able to build up the platform and attract the talent that we need to lead that so I don't anticipate us doing any major acquisitions. I mean, there are what I call a smaller acquisitions like what we did with Eva switch in AG.
So Dan which is which is close to those type acquisitions. When you pencil them out are close to our near the same cost says it would be cost to build right. So if there's an acquisition, where we think the economics of give us similar cost as a cost to building that allow us to action quicker into the into the market. We will do that but I don't see us doing any major.
Major acquisitions, just a bulk up.
Okay, and then maybe just one last quick one organic storage growth, 3%, let's say, that's the highest thats been since one Q1 8, it's wanting to get your sense of how sustainable that 3% Mark is going forward.
How far along are you in that revenue management initiative, you put in place and you know how much runway do you have on that piece of that going forward.
Yeah, we feel like it's a great question, we feel really good about a exactly I really the two drivers. One is the revenue management now is rolled out globally. So we see that theres still more runway in terms there continue to get more out of revenue management across all business lines and I would say, it's rolled up globally for rim, but we're also expanding it to some of our.
Other business lives in terms of the Nonres, but in some of those are our storage and some of those are I think the other aspect in terms of volume. We're continue to encourage in terms of the growth that we see in the international markets and even in North American market, where we see slightly negative headwinds in terms of volume what I would call in the traditional records manner.
Judgment business I think I highlighted in my remarks that year to date theater and her team they've actually brought in about 3 million of non traditional storage, which has similar returns as our box business. So we see also some of the new areas of storage. So so net net you put all together is we feel really comfortable to be kind of maintaining and this kind of zip code for our organic.
Oh, God cert organic storage revenue growth.
Okay. Thanks, guys.
Our next question will come from Sheila Mcgrath of Evercore ISI. Please go ahead.
Hi, Good morning, Bill I was wondering if you could give us a little bit more description on projects summit. After the recall acquisition. You did has significant cost savings initiatives. How did how does this project compared to that and did you engage outside consultants for the and.
For those who've been following the story for while is.
Six or seven years ago. When we started on this journey is emerging markets were only 10% of our sales of the company. It's now approaching 20%. We originally set our goal to get that to be 15% now it's approaching 20% and it was important to have a separate and near separate leadership. If we wanted to be able to make sure that we are.
Allocating capital in a thoughtful way and getting the returns we needed as we built out that footprint and both it through one off acquisitions as well as the recall acquisition, we feel really good first of all we've doubled the size of our footprint effectively in those market. So we feel really good in terms of what Mark Diwali and now Ernie and his team have been able to do.
Thats 0.1, so now we actually do have the scale internationally, so having the what I would call separate and silo focus to execute that is for sure less necessary.
On top of that as we talked about earlier this year and we talked again today, we've been hearing more and more from our customers both internal and external we have our employees are telling us how difficult. It is to get things done internally, sometimes on behalf of a customer but also customers are looking for us to show up with integrated solution seamlessly across the geography is they operate in.
And we started setting up a strategic accounts organization under Greg Macintosh earlier. This year, we put those two together we knew that we had to simplify first of all the organization by bringing earnings organization together with Patrick Centre, a single leadership, the timing being quite good because patrick's intention to retire in early 2020.
One we thought now with the time to bring those two organizations together when we brought those two organizations together, there's a bunch of cost to just naturally flows out because you don't have to support functions supporting two different business units. You now have one support function serving a single business unit and we wanted to make sure we took that opportunity to look.
Through the organization completely, especially the service part of the organization on how we could actually operate the business differently. So starting in January if we're taking out 45% of the vice President it's been a Bob as a result of this amalgamation and change which was the catalyst to re look at the organization. This gave us an opportunity can be seen.
People around a single table to execute so that that's really the thing that's behind it and then you know they the good news from a shareholder standpoint, when you do that kind of organizational efficiency. There's a lot of benefits that flow through the last thing I'll talk about some of that I've come to your question about advisors is the back end of a project at summit.
Is.
The front end is really actioning, so that by the end of this year, 75% of that reduction of the management contract will basically be in place.
As we go through the program over the next two years is that we will start building new systems capabilities that allow to support that organization, which a lot of it is I T. I T led.
Last thing to your question on advisors actually this is something that we've been working on for a number of months, but when we got closer to the execution phase we did bring advisors in the middle of August to make sure that we were actually executing in a way that was consistent and with speed. So we did bring in advisors and towards the tail end of the project.
Okay, Great. A couple of quick follow up you mentioned the this with customer driven but do you have to make any meaningful changes to your sales approach and maybe for Stuart where will we see these cost savings is it more in corporate DNA or will it be and segment margins.
Okay. So I'll take the sales and then Stuart can fall on your follow on question.
On the sales you're absolutely right I mean, one of the things that we hear from the customer our customers and it's probably consistent a lot of industry. Our customers are asking much more for solution oriented approach to that rather than selling them, a product and a product might be digitization of product might be box storage and I highlighted a case, where we want to pro.
Roger Act with an engineering company in Europe , where they had 250000 cubic feet. It started out that they just wanted us to remove the 250000 cubic feet and may be digitize some of them and it turned out to be a project, where we really understood. What they wanted we realized a combination of the insight platform to create to automate the creation of more men.
Medidata has we actually digitize their boxes and then they said well actually we want everything digitized in the boxes will be destroyed. So it's an unbranded opportunity. These boxes were stored in their facility, but by actually having a different sales team that's actually engaging them with a broad set of solutions, we were able to actually do more for our custom.
Or isn't as a result, when a bigger and better project from an iron Mountain standpoint, So you're absolutely right is that the this allows us to actually collapse a lot of sales enablement, well sales operations sales enablement strategic accounts and marketing.
Well all be under Greg Macintosh, who actually is is in earnings organization right. So that we're delivering that to our room customers. So there is a big part about it in terms of changing the way, we we go to market.
And Joe in terms of how the benefits will flow through the actions that we're taking here in the fourth quarter, which was mostly people action. So that'll flow mostly through the DNA line is where you'll see that and then.
Actions, we talked about we're taking in 2020 are more around cost of sales will continue to be some semester DNA improvement as a as well and so you'll see that flow through more more in the back half of 2020, and then when you think about sort of the flow through from there right in terms the impact on our customers.
As we roll out things like.
Frustrates in internally creates a lot of inefficiencies as well for our customers is not not always easy for them. So those will flow through in various lines and that'll continue to flow through them in later years.
Okay. Thank you.
The Capex and how long you think it'll kind of take to hit that target.
Yes, Thanks, Eric I think if you if you look at so what we talked about in our opening remarks really our aim is to grow our feet free cash flow to cover the majority investments, which were obviously, we get a generating good returns on acquisitions and datacenter and so our capital deployment capital allocation strategy in terms were where we're putting capital to work in the amounts are not really.
Changing is no change in strategy there.
Our leverage is aligned with other reach today and actually from a from a rating agency standpoint, the credit markets already treat as it were rated higher than we are you can see that in the results from the and offering.
And so to get to four and a half to five times is really about optimizing our flexibility over time. So if you look at sort of where the de leveraging should come from right with organic EBITDA growth of around 4% and the project summit benefits it will grow to $200 million those in of themselves will reduce our leverage.
Right that will allow us to reduce our leverage we continued to see the strong demand and datacenter another projects and.
What are even what our pipeline is today, we've actually taken our datacenter capital for the fourth quarter up a little bit to get some project started particularly in Amsterdam, and Virginia, where we see strong demand and so we expect that our leverage will be flat to slightly down.
As the as the benefits from project summit start to flow through from there and so going back to sort of longer term.
If you look at your pipeline, how should we think about the mix of kind of the more hyperscale business, which I know is slightly thinner returns and you're kind of traditional retail enterprise business and.
Maybe if you could maybe provide an update on the kind of Frankfurt JV process, and how you're thinking about that.
Okay No. It's a good question, Eric I think that the if you look at this quarter for instance, where it's obviously bias towards the high peak tailwind that we had in July I, I think that kind of smoothes out overtime I think that I I would say that we anticipate we look at sites that lend themselves to hyperscale like Northern Virginia.
A large facility like that which will still give us blended cash on cash returns of the 11% to 12%. So for us. It's all about speed to fill in terms of the mix between Hyperscale and.
And what we call normal enterprise the one thing I would add though is the other aspect about hyperscale, which is which is not lost on US is we do have some hyperscale customers that have similar returns has has enterprise when they actually deploy an edge.
Edge type deployments, so smaller deployments so.
When you say hyperscale hyperscale as a customer for us, but theres even segments within a hyperscale. They have some requirements that look more like enterprise, which they call edge and then they have otherwise which are pure large deployments. So but we still net net we think about half of our business will be hyperscale and we'll end up with the kind of 11, 12% cash and cash.
Cash returns in terms of Frankfurt is we continue to.
They have positive discussions about putting that into a joint venture. It's not it's not absolutely critical that we do that but we would like to do that because it just allows us to extreme stretch our balance sheet or expand.
Sold are booked year to date, we're doing yeah. We're doing we're pretty pleased with that and we don't want to we don't want to slow that down.
And our next question will come from Andy Wittmann of Robert W. Baird <unk> Company. Please go ahead.
Hi, great. Thanks for taking my questions I guess.
The dividend increase your wasn't the 4% you guys talked about.
You mentioned that you're going to use the proceeds that you'd otherwise putting the dividend towards deploying into the data centers.
Is this the right way to think about the long term growth rate of the dividend considering that you're probably going to continue to have data center investments.
It's great. It's a great question, Andy I think that in your right to kind of type because you think about what Weve you know, it's about three or four megawatts that the by growing the dividend at this rate allows us if the exchange is about three or four megawatts and given the pipeline. We have right. Now is we think it definitely gives our our shareholders better return if we were.
Actually taking that cash and giving them, 11% to 12% cash on cash returns and by three or four building out three or four megawatts based on demand product pipeline, you can see that where our occupancy is pretty tight on a on the datacenter side. So they have you say on a go forward basis I will continue to make those kind of trade offs is probably not lost in any one is most of our datacenter peers.
Our.
Have a payout ratio as a percentage of AFFO kind of in the mid Sixtys to low Seventys. So my guess is that's probably where we're going to settle out just given the demand that we see on data center.
Got it that's helpful. I also wanted to ask about the margins in your core North American rim business.
They were noted is down year over year I think the revenue management techniques were pretty clearly a benefit to the quarter. I was just wondering how you Oh you can reconcile good revenue management likely in North America with the margin performance what are the things happen there steward in the quarter, but fit into that.
No.
The main reason is obviously the paper price right. So if you adjust for paper price margins are actually up year over year quarter or year over year for the quarter. So that's really the main driver.
And then could just.
Because there's always a lot of moving pieces in your numbers Stuart could you just help us understand the change in the mid point or the guidance what were the key factors. There I mean, you kind of lists some of them paper, obviously was one of and as well, but if there's some other things just maybe here can you just help bridge the new guide to the old guide.
Yes, I mean, the old Guy the midpoint was 14 60, we've now lowered that to midpoint of 14 40, which is actually took the lower end of our previous range the key drivers or.
Even just as the last earnings call paper prices are down so down about $15 per ton.
So that in themselves about four or $5 million of lower paper price actually the stronger dollar.
There's also impacted so thats right given where the dollar is right now again that can can vary a little bit that's about $5 million. The other other pieces of it is the North America Records management. The core services are down part of this due to actually lower Destructions, which which is good for volume, but that's obviously a headwind or negative four.
For the revenue that comes from the destruction and we also have lower service gross profit in the UK in France, and a little bit higher bad debt.
Those things are then partly offset with the.
Lower global SGN ages of the cost actions that we've taken and lower incentive comps not where we wanted to be but.
I think sort of clear path to.
Where we are in this range.
Okay. So just just on that the.
Yes, if there are different periods is what you've got right. So one of them is I'm reckons on guidance and got it doesn't seem versus what's changed from from three months ago on slide 13, if you look at where spot paper prices today compared to the average of 2019 is down about $35 per ton and we've talked about on the last call that you know every 10.
Sellers change in price per tonne is about $6 million that gets you into the low 20 million dollar impact if paper prices stayed where they are today compared to the average paper price that we that we recognized in 2019.
Okay cool, yeah that that period is that the key thing.
The year over year guide.
The difference here okay.
I will leave it there thank you.
Thanks, Good morning, I'd like to dive a little bit deeper into the pricing and volume growth trends, you're seeing in the storage business. Once you strip out the benefits of you're very strong data center growth from storage performance can you discuss broadly any changes that you may be seeing with pricing and volume growth.
Yes.
You data centers, a bigger impact on EBITDA growth than it does on the revenue growth is we said before is it's it's about 7% of our sales as a company.
Does contribute.
About a third close to.
Coming up to 30, 35% of our consolidated EBITDA growth, but on the sales side, it's actually fairly minimal.
Got it that's helpful.
I'd like to go back to your strategy around managing your financial leverage I know project summit definitely going to help with with leverage but then structurally longer term what what are your strategies around.
Changing or improving the translation of growth capex into generating EBITDA, such that your EBITDA growth accelerates and can support increases in gross leverage over time.
And that does appreciate you asking that question because you get sort of.
A little bit multiplying effect right, you'll get increasing EBITDA from the result of projects summit on top of the normal organic EBITDA growth. So and so if you look today from a capital allocation standpoint would generate plus or minus $100 million.
Cash flow after dividend to fund growth well that will grow over time rights of free cash flow. After after summit glad we talked with $200 million or so of EBITDA take a little bit attacks off of that so our free cash flow available for growth investments themselves will allow us to borrow less so you get hired.
EBITDA you won't we won't be borrowing as much to to fund growth and then you get the benefit of the growth itself. So as we're putting capital to work. The EBITDA comes off of the acquisitions as well as comes off the data center growth will then accelerate the deleveraging. So you won't see as much deleveraging in 2020 because of the cost of summit as the.
And our next question will come from SLO Mo Roseland Dom of Stifel. Please go ahead.
Hi, This is Adam on for some of 'em could you talk more about the trends in record management volumes this quarter, I'm, particularly particularly in the developed market markets with volumes declining again sequentially.
Yeah actually no. Thanks for the question I actually we were pretty pleased actually moderated the decline in North America Ram I mean, any you have to remember this on a very large base, but if you see this quarter, it's actually an improvement over the though the brief most recent trend part of is driven by what Stuart said on the other side it it's a drag.
Service revenue, because we've seen lesser destructions. So we're not picking up the revenue there and then yeah. So it is slightly negative as you pointed out and where we're picking up some volume is on the new storage areas, which we picked up about 3 million cubic feet, but ah, but overall actually the trend is that is moderating.
We don't see a major difference you know the thing that's driving the trends in North America, you could look at North America, which is slightly negative and you can look at in Western Europe actually we just slightly positive in terms of volume trends very similar economic status is both very mature markets, but I think it really comes down to the rate of change of income.
Got it okay. Thank you.
And the next question will come from Andrew Steinerman of JP Morgan. Please go ahead.
Hi, Good morning says that Michael Trail for Andrew.
Couple of quick ones on the on the data Center segment that just given the healthy activity really healthy leasing activity.
Maybe can you just remind us.
Revenue growth goals with the data segment.
And the second part of that is maybe you could provide some pricing commentary as well in terms of the environment you're seeing thanks.
Okay, well I'm. So first of all you know we maintained consistent if you look at right now is it going back to this year, we're adding up about 10% since the beginning the year in terms of leased up activity and if you correct for the churn that we've got a that the customer churn that we called out at the last quarter, which we knew when we bought Io were actually up.
Mid teens year to date, if you correct for that.
I think that if you look at our bookings this year of 15 out of 20 megawatts target in so I think we're on track to hit the that the upper end to that original range that again is going to put us in kind of the mid teens to 20% I would like 15% to 20% or it will set us up for 15, 20% growth next year. So we.
Continue to see the growth of our datacenter business to be mid teens in terms of pricing I would say that.
Pricing is is fairly consistent another words that if we're if we're looking at enterprise, we're still getting cash on cash returns anywhere from 12% to 15% depending on the size of the deployment for an enterprise customer and on the.
Hyperscale deployments were continuing to get 8% to 9% cash on cash returns blended 11% to 12% over an entire site or campus. So the the pricing is is staying pretty stable from what we see in we're very pleased with those kinds of returns.
Thanks, It Didnt American just squeeze one more on on the dividend I know you.
Oh, you mentioned the dividend comment along with the costs I just want to make sure. Okay got it right. So.
Right.
The dividend growth will moderate toward that the range bands I thought you mentioned in contract that before from there.
Yeah, I think most likely I think the thing that drives it obviously its capital allocation right. So yeah. We yeah, we do want to continue to grow our dividend at what we think is a reasonable rate.
To to to.
Get back to our shareholders, but then if you kind of look at if you look at this year as they say the difference between what we're growing the dividend this year versus last year equates to being able to build on another three or four megawatts for our data center. As an example, so if you think if you try to think of a proxy on that if you look at datacenter peers.
As they are all kind of in the mid Sixtys to low Seventys is a payout as a percentage of AFFO and my guess is wearing kind of the high Seventys right. Now. So my guess is we'll probably settle out somewhere in that in that range with our datacenter peers given the given the pipeline of opportunities we see.
Okay, great. Thank you.
Our next question will come from Marlene Pereiro of Bank of America Merrill Lynch. Please go ahead.
Hi, Thank you for taking my question I just a quick one can you discuss make space in terms of how much kind of for growth in consumer and other cubic feet and storage volumes. This year.
Yeah no. Thanks, it's it's a it's a couple million you know I called out we had about 3 million of what I would call other or.
New kind of storage and it's about.
Two and a half we expect the full year to be about two and a half the 3 million cubic feet coming from make space a.
Small, but growing and we're really pleased with the partnership we have would make space.
Great. Thank you.
And our next question will come from Kevin Mcveigh of Credit Suisse. Please go ahead.
Great. Thanks.
Hey.
You folks were pretty clear, but I wonder you pretty sizable restructuring when did you kind of make the decision that it kind of had happened and then you know the design aspect of it how long did it take kind of.
You know number one determined are going to do it and then you know that put the structure in place to announce it.
Well, the making the decision to so it was was literally this week do obviously because you don't do these things lightly we wanted to make sure we had.
Full discussions with our board.
What we we taxes, but obviously we've been looking at this for for months. So I mean, you can imagine that we've been looking at this for.
Pretty much the since the wintertime.
And then I guess you know from a cost perspective is it primarily on the board side, where it's going to sit or the service and then ultimately you're in a way to think about you know the 2020 framework on the EBITDA was helpful does it assume there's no revenue slippage or any thoughts on what the careful impact like you to think about.
Free cash flow in 2020 store. It is are we to maybe just help us frame that I know, it's not formal guidance, but it seems like the EBITDA is pretty you know there's a range there, but just any thoughts on what that cash flow would look like and again is there any kinda revenue impact from these actions or is it kind of revenue continues on trend.
Hi.
Kevin just just to be clear on this is what were doing. This this is probably atypical that what you hear in a lot of restructured this is not about the coal face or the people who are actually delivering and picking things up with our customers every day, nor about our people at the front line for the most part this is really about changing the way we manage and.
Lead the company from the top that's why if youve coming back to it is 45% of people from Vice President above our are impacted which is which is difficult.
For all of us, but the main benefit of this coming to your revenue question is a year from now it's painful going through these kinds of realignments and organizational change. So you can imagine that.
People are feeling that because it's a close knit company.
But a year from now we're going to have a much nimbler and agile leadership structure, which allows us to action quicker on behalf of our customers and giving them integrated solutions, which quite frankly, none of our competitors in specific business lines can do because most of our competitors are.
They are doing storage or scanning.
None of them are doing storage scanning artificial intelligence have the data center and have a relationship with them that's globally with the customers that have global. So this is really about speed. So what we see we haven't built any that into our guidance, but we're doing this because we expect it to have a positive impact on the revenue side.
But we haven't built that end because we're much more saying, we'll tell you when we see it we don't promise something that we don't see so right now what we've laid out with the program by actually changing the way we lead and operate the company we've outlined the cost impact that naturally flows from that but this is all about speed.
He is both for our internal mountaineers make their job easier as well as for customers to interact with us.
Understood.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.