Q4 2019 Earnings Call
Good morning, and welcome to the Iron Mountain fourth quarter 2019 earnings conference call. All participants will be in this anomaly mode. Should you need assistance. Please do a conference socialize by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions. Please note. This event is being recorded knowledge conference. I would agree raviv senior vice president of investor relations, please go ahead good morning and Welcome to our fourth quarter and full-year 2019 earnings conference call. The user can walk outside that will be referred to in today's prepared remarks are available on our investor relations website along with a link to today's webcast. We are an Express released and the full supplemental financial information on today. We'll hear from Bill many Iron Mountain president and CEO who will discuss highlights and progress to our strategic plans. Very heightened in our CFO. Will then cover Financial results and our outlook for 2020.
after our prepared remarks
Open up the line for Q&A referring now to slide two of the presentation. Today's earnings call slide presentation and supplemental financial information will contain looking statements most notably our Outlet 2020 financial and operating performance and expectations from Project Summit for all forward-looking statements are subject to risks and uncertainties. Please refer to today's press release during school presentation thousands of financial report the Safe Harbor language on this slide and our annual report on form ten K, which we expect to file later today for discussion of the major risk factors that could cause our actual results to differ from those jobs. Probably looking statements. In addition. We use several non-gaap measures when presenting our financial results and the reconciliations to these measures as required by Reggie are included in the supplemental financial information. Would there would you please begin? Thank you and thank you all for taking the time to join us before we get into our discussion of the Q4 results. So I want to First welcome Barry is our new CFO to the Iron Mountain Family very bring down.
success successful track record of navigate
Transformation and effective change of various organizations most recently. He led efforts at hanesbrands to increase operating cash flow reduced leverage in produced strong International growth insights will be very valuable as we roll-out project Summit our transfer transformation program to simplify our structure and create a more Dynamic and agile organization. We look forward to his contributions as we enter 2020 and Beyond with that. Let me start with a look back at where we have been on our journey over the past six years looking first at total organic Revenue in 2013. It was flat and adjusted ebitda declined 1% today. We reported total organic Revenue growth of approximately 1% and 2% If We Hold paper prices constant issue in terms of adjusted ebitda, 2019, so our growth of 3% or nearly 5% if we apply 2019 paper prices 2018 more broadly progress over the Dead.
Six years is visible in nearly all.
Not the least being the expansion of ebitda margin by almost five hundred basis points. This macro look back is important as it is the basis that continues to provide momentum going forward. We feel this positive momentum in sales and profitability coupled with project Summit in a broader portfolio and service offerings to our core customers is the platform from which we expect this trend to continue. Of course, this progress just didn't happen. It is the result of the successful execution of our strategy of Shifting our Revenue mix to faster-growing businesses, including Emerging Markets data center in adjacent businesses and successfully implementing our Revenue Management program. We also made important progress on Project Summit off transformation program designed to accelerate this strategy and create a more streamlined simplified and agile organization better suited to solve our customers challenges. Furthermore. I yep.
pleased to share with you that we are very much on track with our
On Project Summit we moved quickly with the headcount reduction. We announced in order to ensure minimal disruption to the broader organization. If you recall we announced plans to reduce the number of VP level and above positions by approximately 45% has of the end of December. We have completed approximately 70% of the reductions. We all recognize that change is never easy and over these last few months. Our organization has shown great resilience in Focus. This is a testament to our great people in the fact that a large number of Mountaineers are already feeling energized by being able to more easily address and serve our customers.
As it relates to the savings targets, we communicated the actions. We took in the fourth quarter have resulted in fifty million dollars of annual adjusted ebitda benefits that will begin to flow through in q1. We have good line of sight to the incremental Thirty million of India benefits. We expect to generate in the second half of 2020 with a number of the process and systems improvements underway. We are excited about the new ways. We are embracing technology to improve the way we work so we can all show up differently and drive change.
ultimately
We expect projects on it to expand organic Revenue beyond the current growth rates all whilst boosting adjusted ebitda by an additional two hundred million dollars over the next two years. This is all on top of 4% Plus organic adjusted ebitda growth. We have been achieving the last few quarters turning two fourth-quarter performance constant currency Revenue increased almost 3% over the entire year. We delivered solid adjusted ebitda growth of 8% adjusted EPS growth of 24% in a f f o growth of 18% while simultaneously increasing Investments to support future growth very will provide more detail on the financial performance as well as our outlook for twenty twenty turning to business performed organic Global records management volume remained relatively steady with a 10 basis points decline over the trailing-twelve-month. To put this into perspective globally volumes declined approximate birth.
five hundred thousand cubic feet
On a base of nearly seven hundred million cubic feet driven mainly by fewer Acquisitions of customer relationships more specifically in 2018. We acquired 3.5 million cubic feet off of customer relationships, which tend to be some of our highest return Investments as opposed to only two point eight million cubic feet in 2019. We expect the impact our customer Acquisitions in 2019 to continue its drag on volume through the first half of 2020.
However, we are confident that this is a temporary deviation and that records management and volume along with incremental storage opportunities and non box categories such as consumer and alternative storage box and adjacent businesses should result in flat to positive levels of organic volume growth for the full year 2020.
Now coming back to current volume Trends apart from the dynamic. I just discussed the single biggest head win on volume today is the rate of change of incoming boxes from our existing customers. You will recall from previous calls the average life of a box in our inventory has remained Rock Steady at fifteen years whilst the average age of a box when it is destroyed has remained steady e r many years. The average age of our infantry will naturally skew during periods where the growth rate of incoming boxes is undergoing change. For example, if a vertical is experiencing a Slowdown rate of incoming volume than the average age of our inventory will increase while so we can't predict when equilibrium will begin will again be achieved we feel in the meantime, it will remain a minor impact given that our customers continue to add new boxes to storage annually just at a lower rate than historically.
To help you better understand. Let's take a look at what has been come one of our slowest growing yet most days.
The North American legal vertical began its digital transformation Journey many years ago this change in customer Behavior as a result in a deceleration in the rate at which existing legal customers. Send us new boxes off every year until recently. The good news is that we have seen the growth rate stabilized to slightly positive net volume growth. We expect a similar Trend across other verticals that are not as far along on their digital transformation journey to provide further context. Let's say a legal customer stores a hundred boxes with us ten years ago. They would send us six new boxes a year and destroy or remove two boxes. So they would be net-positive four boxes or a four percent growth rate today a similar customer would send us two to three new boxes in and still destroy one or two boxes making them flat stone not positive 1% growth rate, which is the new normal for this customer vertical remaining stable at this lower growth rate given the age profile of their inventory has stabilized.
We should remind you that what I just discussed is only affecting volume from existing customers. In addition to that. We continue to focus on new customers competitive wins opportunities in the unveiling in federal channels. And as we talked about earlier other methods of customer acquisition, we expect all these various sales channels to continue to contribute to overall organic volume growth for Global Rim over time. This is what gives us confidence in the durability of the recurring Revenue stream and strong cash flow generation that comes from Global Rim organization and we often do not anticipate a change in the foreseeable future as I like to say, it's the financial beef that allows us to fund growth opportunities whilst returning cash to our shareholders.
We've also made considerable.
Crescent transfer Transforming Our courtroom business to a more Diversified model and are on track to achieve are targeted Geographic mix which is a reminder is 20% of revenue from fast-growing markets by the end of 2020. We ended 2019 with these markets contributing 19% to total revenue and for comparative purposes faster growing markets represented less than 10% of Revenue in 2013 more over over the same period of time we have expanded the adjusted ebitda margin for these relatively new and fast-growing markets from 20% to 30% in 2019. And we believe we can continue to expand margins as we scale our presence in these geographies and to select new markets that offer Superior growth opportunities all wealth managing our cost structure efficiently related our Global digital Solutions business had a record year with Revenue increasing 10% year-over-year as we yep.
With you last quarter are digital Solutions.
Offering such as in sight are increasingly enabling us to approach our customers with a differentiated solution resulting in a pull through of other products and services.
Just one example of this was a recent win with a large highly regulated financial institution. This customer previously managed. It's physical file room storage in house with over six hundred employees across global locations. We will assume responsibility for the management of all file storage processing of the files and begin providing value-added Services. We plan to transform the operation by consolidating locations reorganizing workflows adding workflow software in applying digital Solutions such as RFID in artificial intelligence and machine learning through life inside platform when completed this effort will not only help our customers significantly reduce costs, but it will also be the foundation for future enhanced digital products. We were able to win a business based on our unique combination of document document management and workflow expertise combined with our digital Solutions, which we expect will result in close to Thirty million dollars in annual revenue for the next month.
in years
Taking this one of the largest single deals we have signed.
Turning now to our data center business. We had a good year executing 17 megawatts of new and expansion leases including our first hyperscale deal whilst we are pleased with the steady commercial progress. We have made a leasing up our facilities ending with a stabilized utilization rate of 90% We did see some deals in the pipeline shift from Q4 into twenty-twenty the 17 megawatts least in 2019 shows good progress on a base of approximately 100 megawatts at the beginning of 2019.
Within our leasing for the year. We were successful in attracting over a hundred new logos to our global data center platform further diversifying our Enterprise customer base and underscoring our branch and this Dynamic industry. We continue to make good progress organically building our our Global platform delivering almost 20 megawatts of capacity in key markets around the globe including London, Saddam, Singapore, New Jersey Northern Virginia in Phoenix. We are excited about our newest development in Frankfurt and currently have a strong pipeline of pre-owned nice opportunities in various stages of discussion additionally in Q4. We entered into an agreement for a second sight in slow, which will allow us to expand our present in the presence in the important Boston Market by adding an incremental of 25 megawatts of capacity under the terms of the agreement. The landowner will build a shell after which we will finish the build out of the data center to our specifications.
our existing
Friend in London, which is adjacent to this new site is nearing stabilization in this new agreement provides capacity for larger requirements in a very desirable Market with low latency network connectivity am looking into twenty-twenty the first half pipe line Looks strong with a number of larger opportunities on the horizon that said these larger deals tend to be lumpy and timing is off a quarter to predict putting this all together. We would expect to be able to lease up another 15 to 20 megawatts of capacity in 2020. We feel very good about our commercial momentum in a building pipelines and including hyperscale interest in a number of our markets such as Phoenix Northern Virginia and Frankfurt.
In summary 2019 was not without its challenges in terms of consistently declining paper prices, but we ended the year in line with our expectations having a number of strong commercial wins while I'm making measurable progress on our strategic plan. We are focused on maximizing the benefits from Project Summit not only financially but in how we operate as a team and an organization, we have a unique opportunity to translate a streamlined and more agile organization into speed to unlock further Revenue opportunities through how we connect with and build additional value for our customers with that. I will turn the call over to Barry who will walk you through Q4 performance in our outlook for 2020. Thank you Bill. I am delighted to be here at such an important time in the company's Evolution off and I'm energized by our strategy the engagement and strength of our team and the opportunities we have in front of us turning out to results.
in the fourth quarter Revenue
Vivitar and a f f o were in line with our guidance ranges. We continue to expand margins as adjusted evidence increased 8% over last year additionally a f f o increased 18% $228 million dollars revenue of 1.1 billion dollars increased eighteen million or 2% on a reported basis and 3% on a constant currency basis compared to the prior-year total of organic Revenue grew by 1.3% in the fourth quarter. This was driven by total organic Storage Rental Revenue growth of two and a half percent for the quarter reflecting the volume Trends Bill discussed and took abuse from revenue management.
Total organic service Revenue declined 70 basis points in the fourth quarter year-over-year this reflects the change in paper prices, which were at record highs in the back half of 2018, but ended 2019 record lows adjusting for the $13 impact of lower paper prices organic service. Revenue would have increased 2.9% in the fourth quarter adjusted ebitda group home for the fourth quarter to three hundred eighty six million dollars despite lower paper prices and FX headwinds with margins expanding 190 basis points year-over-year to 35.8% for the quarter after tax rate was in line with guidance and adjusted earnings-per-share was $0.31 attorneys project Summit as Bill mentioned we are on track and in the fourth quarter, we recognize $49 of restructuring charges to implement the first phase for 2020. We expect to recognize approximately 130 million dollars of additional restructuring charges and we continue to expect project Summit to deliver eighty million.
of adjusted ebitda benefits in 20
20 + 200 million over the next two years we continue to expect whole restructuring charges related to the program to be approximately 240 million dollars. Now, let me take you through our fourth segment performance Global trim delivered total organic Revenue growth of 90 basis points for the quarter organic storage Revenue increased 2.2% reflecting volume growth. In fact growing market and revenue management organic service Revenue declined 1% driven by the change in paper prices Global rims adjusted ebitda margin of 42.3% represents an increase of 90 basis points driven by Revenue management and continuous Improvement initiatives.
Turning to the data center business. We delivered strong organic Revenue growth of 7.8% We executed approximately 2 megawatts of new and expansion leasing for a total of 17 megawatts per month. The leasing was primarily driven by Enterprise and federal government customer's insurance at 1.5% remains consistent with expectations.
Okay.
Margin was 51.7% up significantly year-on-year profitability was boosted by to non-recurring items first, a $4000000 contractual settlement and second a two-million-dollar modification fee adjusting for those items. Margin was 44.4% in the quarter and increase of 290 basis points reflecting the increased scale and progress on integration activity log.
The center development cap ex was approximately $400 for the full year including fifty million for the Frankfurt land acquisition in 2020. We expect development capex of approximately two hundred million dollars wage in the development projects currently underway for the full year 2019 revenue of 4.3 billion dollars increased 3% on a constant currency basis compared to the prior-year total organic Revenue grew by 1.1% for the full year adjusted ebitda of 1.4 or four billion dollars grew 2.7% on a constant currency basis adjusted earnings-per-share wage was $1.02 was $856 and dividend per share was $2.45 representing an 82% dividend payout ratio month.
Turning to cash flow in the balance sheet.
As part of our ongoing Capital recycling program in the fourth quarter, we sold two portfolios which generated net proceeds of 83 million dollars bring us to approximately 170 million dollars of proceeds for the whole year. We expect to generate Capital recycling proceeds of approximately one hundred million dollars in twenty-twenty as investors. No part of our strategies increase scale and faster-growing international package. We are pleased to report that in early January. We acquired the remaining 75% stake in records management the leading provider of document and data Management Solutions in Russia as investors bought all this had been a joint venture in which we previously owned 25% We now have complete ownership of the business which has annual revenues of more than fifty million dollars manages approximately 18 million cubic feet of inventory. And is exhibiting strong growth turning to guidance, which is detailed in the supplemental for your review and highlighted on slide thirteen of our presentation.
We are expecting money driven by organic growth and project Summit benefits. We expect adjusted EPS to be in the range of $1.15 to $1.25 and a f f o to be in the range of 132 nine hundred and sixty million dollars. This strong growth is despite continued low paper prices additional for exchange headwinds and includes continued investments in digital Solutions wage structure in our data center business while we don't provide quarterly guidance. There are several items. I would like to call out to consider when modeling the first quarter
first
We expect project Summit actions taken in 2019 will be a significant addition to adjust it. If it. Throughout the year beginning in the first quarter. Naturally, we also anticipate organic if it's off from our base business. I would also remind you that in the first quarter of 2019. We experienced elevated labor and other costs lastly given we're paper prices in the US dollar are currently off. We expect both will be Thursday or ganic Storage Rental Revenue growth of approximately 2% Our guidance assumes paper prices and effects remain at current levels, which combined we expect a result in an adjusted ebitda headwind of approximately $5 in 2020 compared to 2019 anticipated Investments, which are detailed in our supplemental will be funded by a combination of cash available from operations Capital recycling dead.
a new borrowings we
Also, utilized third-party capital for data center development as we have previously discussed.
And closing we expect to deliver organic growth while also realizing the benefits from Project Summit our Capital allocation priorities continue to be commitment to our dividend investing in growth areas through both organic investment in strategic Acquisitions and reducing lease adjusted leverage over time. We look forward to sharing further progress with you on our first quarter earnings call in with that operator. Please open the line for Q&A. Yep. Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 and your touch tone phone. If you're using speakerphone, please pick up your handset before pressing the way jeeze to enjoy your question, please press * then two as a courtesy to others. Please leave me yourself to one question at a follow-up. If you have additional questions, you may re-enter the question queue. You may submit questions to read today's webcast by clicking the submit a question box on your screen at this time. We will pause momentarily to assemble the roster.
And the first question comes from ceiling McGrath with evercore. Yes, good morning. At first glance project Summit appears to be focused mostly on wage Cuts via employee reduction. I was wondering if you could give us a little bit more detail.
On how any improvements in Information Technology might be part of the mix and any other changes or tweaks and strategy that would be focused more on revenues Thursday morning. She'll thanks for the question. So let me let me answer the question on two levels one in terms of the technology aspect that you alluded to and then the other in terms of the operating room and what we're doing differently in managing the company. So on the technology side is that one of the one of the biggest areas of Change is Going to Be upgrading and applying new technology in terms of the way we track and interact with our customer. So if you give you specific examples, we have four instances of Salesforce, which is very hard to get a single view of a customer globally. Second thing is is we have over 40 billing systems, which again billing is an area where we need to make sure that we're consistently not just billing but responding to queries around billing for our customers. So that's an area where we're applying technology to allow our Mountaineers to have dead.
better visibility of our customers which helps them on the selling side, but also in terms of serving those customers when they have inquiry, so that's one area and Technology the the part that's we're already starting to
A big effect is in terms of how we're leading the company. So one of the things that we talked about but probably not is his directly on the last call is some it isn't just about taking cost out if she actually redeploying cost. So we're actually adding cost or adding resources around our our people that are interacting with our customers are especially in terms of strategic account management page give you an example of that and also in terms of way we leave the company. So we now have an expanded Enterprise leadership team which we met in January. And first of all the energy and the rep was noticeably different because now we have the top 40 liters and on a regular rhythm every quarter in a room to discuss where we're going and how to get there faster and better but also part of that briefing was a jerk account team had the opportunity to put up a slide of one of our most mature customers that we serve globally and the interesting thing is if you had surveyed people beforehand, they would have said Thursday.
that customer
Probably eighty percent served. If you look at a matrix of our product offering in the geographies, they they sit in an error completely a global company virtually in every country where in and then some more and the existing thing is it was just the opposite we're serving about twenty to thirty percent of the potential of that client rather than 80% So a combination having strategic accounts taking a global look at how we can serve that customer better and then the energy being able to have that discussion with the top leadership of the company globally on a quarterly basis. I think it's going to make a real change.
Okay, that's helpful, and I didn't see a sources and uses slide.