Q1 2020 Earnings Call

[music].

Oh.

<unk>.

And then mountain Cook Warden County.

Earnings Conference call.

No anymore.

She can either.

He's done this season and conquering, especially my girlfriend hockey followed by Europe.

After today's presentation and believe me an opportunity to ask question.

No what I.

I wouldn't I like to turn the conference all that degree really isn't senior vice.

Please go ahead.

Thank you bet Beth good morning, and welcome to our first quarter 2020 earnings.

That's all the user controlled sides are available on our Investor Relations website, along with a link today's webcast pennies material.

<unk>, President and CEO, who will discuss you highlight and our response to the coven 19th.

Pandemic very heightening our CFO.

<unk>.

Oh, well then cover financial results, our leverage and liquidity position and our expectation my prepared remarks, well open up the lines for acuity.

Turning now to slide you had a presentation today's earnings materials will contain forward looking statements, most notably impact from Cowen 19, and our expectations on how that may impact, our operation and financial performance in 2020 and expectations.

Statements are subject to risks and uncertainties. Please refer to todays on this slide and our annual report on form 10-K, and future Sep filings for a discussion of the major respect there's that could cause our actual results. In addition, we use that all non-GAAP measures when presenting our financial results.

There's as required by ready G are included.

In the supplemental financial information with.

Please begin.

Thank you great. Thank you all for taking time to join US first and foremost let me start by saying I Hope you all healthy and well in our thoughts go out to all those who have been impacted by Covidien G.

I also would like to say thank you to our employees in particular, our frontline Mountaineers, who are on the road in in our facilities everyday as many of our services are considered essential to many of our colleagues have been ensuring our customers' needs are met is seamlessly as possible. Our mountaineers have shown selfless dedication in resilience in these challenging time.

Yes.

As we go through this morning's call I will focus my remarks on a few key subjects.

Well if there is a high degree of uncertainty regarding the length of the cobin 19 pandemic in the assuming recovery from an economic perspective, I am confident we will get through this and come out and even stronger company.

We are already seen customers seek out new services that every self that in revenue. So lost it's possible that customers may not use our services the same way they did historically.

We are competent that we will be able to continue to generate new revenue streams.

[noise], our customer facing teens have been closely listening to customers engaging differently in solving problems that didn't even exist a few short months ago.

Deepening relationships with our customers in further differentiating are mountain from our peers, many of which do not have I level of financial strength breadth of digital and physical offerings and flexibility.

We believe this positions are amount and better for the longer term.

Liquidity remains the top priority from a financial perspective, and we are operating from a strong liquidity in cash position.

Barry will provide more detail on the specific actions we are taking it at a high level, we upright prioritizing cash generation and we have taken action to reduce operating expenses in discretionary capital expenditures, including emanate.

As of the end of the first quarter, we had more than $1.2 billion and liquidity between cash on hand, and availability on a revolving credit facility.

This strong balance sheet should provide us with sufficient runway to operate the business in this uncertain environment.

As you wouldn't expect any crisis, such as such as this our service levels have experienced significant declines in numerous geography is has many customers have.

Instituted mandatory work from home policies or band visits to their offices and facilities from external parties.

The timing of magnitude of decline in service activity has varied by market in byproduct light.

Whilst we are global company with operations and over 50 markets are exposure to countries that sorry teeth into one such as China is limited. So we did not see a significant service activity decline until mid March for the majority of our business.

And our records management and secure shred businesses, which account for approximately 75% of our service revenue service activity has declined by 40% to 50% during the times when the respective markets have had restrictions in place has compared to the prior year.

As restrictions are listed we expect this service activity to gradually pick back up for instance in our Chinese markets. We are seeing current service activity at 60% to 70% of normal levels, which is improved from only approximately 20% at the peak of the virus spread in China.

Well service generally contributes only about 20 per cent of our profit given the size of the decline as well as some of the fix cost and the business impact is significant.

As we even commented this slow down we have made tough decisions that impact our fellow <unk> are mounting colleagues.

And then ever to keep our labor costs inline with levels of service activity, we have either furloughed reduced hours are utilized other temporary reduction that measures for approximately a third about global workforce.

We have also manage costs by putting on hold our on recruiting activity in terminating most of our temporary in contract workers and our global Records and information management business.

Decisions that impact our employees are never taken lightly.

And we have set up numerous resources to support impacted employees. During this unprecedented time.

This includes but is not limited to continue to provide benefits and sponsoring the employee portion of healthcare for impacted employees, helping our employees utilize their respective government programs available to those individuals unemployed or furloughed.

Assisting our colleagues with outplacement support and actively assisting employees through our employees funded relief fund.

It's the same time or course storage business remains durable and we continue to benefit from our deep in long lasting customer relationships.

Yes, we have seen a slow down in the new boxes that we have been able to inbound the majority of our storage revenues from existing boxes that were invited him prior months in years and we continue to earn revenue on that infantry.

However, the impact on the impact the crisis will have on our future organic storage rental revenue growth in volume remains unknown and it's dependent on the severity and duration of the Kobe 19 pandemic.

And Q1 total organic storage revenue group, 3% supported by strong benefits from revenue management.

Organic volume and Q1 was flat compared to queue for driven primarily by growth in adjacent businesses and consumer of 8% in 5%, respectively on a sequential basis.

Organic Global Records management volume declined approximately 600000 cubic feet from the fourth quarter.

Due to the in fact it goes in 19, we expect our volume of incoming boxes sort of the remaining every year to be lower than we initially expected entering the year.

But we'll continue to look for ways to mitigate the slowdown.

As I mentioned before we also remain an active dialog with our customers about leveraging existing in customized iron Mountain solutions to help the navigate this difficult situation.

I want to briefly mentioned a few key examples.

Whenever I digital services that has benefited our customers. During this crisis is image on demand. This service provide safe contact list digital delivery, which enhances.

The chain of custody security.

Provides a quick 24 hour turn a lot you turn around online delivery.

Solution enables customers to be more affected by sharing information with those who needed plus and ensuring the information secured the information security and privacy or maintain which is even more necessary in today's remote environment.

Another example is one where where we are helping one of our customers and national healthcare provider, which was struggling with a surge in the need for medical supplies and supply chain challenges. This particular customer needed to distribute critical P.P.E. to 32000 employees at 750 sites in 36 U.S. States.

And required to secure location to prep P.P. kids without taking up valuable space that was being used to care for patients.

In order to meet those critical needs, we provided non records business storage and logistic support we inbounded in stored palace from multiple suppliers prepared P.V. kids made up of 12 to 15 items and distributed the kids to healthcare sites.

This is only one example of how we have helped many of our health care and medical customers. During these trying times.

A third relevant example is a government labor department that needed to maintain critical pro sees wealth, enabling home based workers to process high volumes of unemployment plain records has quickly as possible.

The government agency leveraged our insight essentials platform, which enabled the government department to receive the scan planes fire or insight application to more than 800 unemployment examiners. We will continue to store the hard copy records for them until they need to be securely destroyed.

We are currently speaking to multiple U.S. states about similar solutions to address both elevated volume in unemployment and Medicare claims during this crisis as well as the need for remote working of the teams proving the planes.

As you would expect our global data sent a business has also been resilient as an unprecedented number of organizations or adjusting to remote working practices, which is driven a substantial increase in traffic and the need for additional bandwidth.

Moreover, the current pandemic further underscores the vital and expanding role of Multitenant data center play in an increasingly digital economy.

Coven, 19 is causing companies to evaluate and accelerate their digital transformation journeys, especially as it relates to outsourcing their I.T. infrastructure and four to find their remote capabilities. In fact industry experts believe that <unk> that coated 19 is serving to fast track trends that were already evident in the data center industry.

Which bodes well for this portion of our business moving forward.

[noise] looking at recent performance, our global data Center business had a strong to one with organic revenue growth of almost 10%.

We signed 6.4 megawatts of new and expansion leases in our pipeline remains robust.

This leasing consisted of a three megawatt working with a new logo it leading hyperscale enterprise software provider, which also includes the contractually committed reservation for an additional two megawatts in our expanded camp this in Phoenix.

Also continued to maintain good momentum with our enterprise customers.

Commercially despite an unprecedented macro backdrop, our data center team continues to receive <unk> significant engagement in our fees for both Hyperscale corporate and government requirements.

I mean as quickly adjusted to the new normal of remote working and it's been innovative and continue to me our car in perspective customer needs, including hosting virtual data center tours to support demand in the increase need for capacity.

We are committed to ensuring uptime in resiliency for our data center customers and we are ready with capacity and our staff to handle support upgrade in new installations. If additional bandwidth is needed <unk> remote workforces or support it.

One area that we continue to monitor closely as the impact on the pace of construction number for our data centres currently under development well, it's not significant we do see modest delays across many of our project, which is also happening across the industry.

Given a relatively high capacity utilization of almost 90% shouldn't delays extend or increase in length. This could create a tight supply situation.

As I said, we are keeping a close eye on this in our in regular contact with all of our vendors and construction partners and at this moment, we do not for see it will materially impact are anticipated Brookings and delivery for this year.

As we look ahead. These are truly unprecedented times and the path to recovery is clouded by uncertainty and will likely be choppy.

Is very difficult to predict how long this current environment will go on and what the new normal will look like on the other side. They will indelibly d. laughing changes to how we work and how our customers will conduct business.

Given the combined effects of the pandemic and associated financial impact on the global economy, We believe a conservative approach is warranted.

As you can see from our two one results projects summit is off to a strong start.

Now that our project teams are up and running and given the speed with which we implemented wave one we've identified additional opportunities to accelerate strategies to streamline our business and operations. We have put forward a number of initiatives that were plan for waves to in three a project summit and expect to see those benefits materialize at a faster pace.

In 2020 in addition to finding new ways to work differently with our customers as we roll out project Summit Coed 19 has uncovered ways for us to support our customers has they adjust to remote work into a remote working environment. Our customers increased need for digital delivery has allowed us to reassess our service delivery model.

R.R., and D. and growth initiatives, and well positioned us with services like image on demand to address customers changing needs as they adapt to new ways of working leveraging these new tick technology capabilities enables us to adjust our service delivery model in more efficiently efficiently utilize our fleet labor.

Real estate.

Most impactful changes to our service delivery model model revolve around new service level agreements or S.L. A's. These new agreements will allow us to better align our extra an old customer S.L.A.'s with our internal Records center S.L. A's as well as leverage more effective use a digital delivery to serve our customers.

In addition, we will also utilize third party logistics provide is more extensively than we have historically for our pick ups and delivery.

We have proactively communicated with our customers in some of our largest markets regarding these changes and it'd be gun implementing the S.L.A. changes, which has resulted in some additional reduction in force across the business.

This broad in scope a project summit should result in even higher levels of adjusted even benefit in associated charges. Then we initially expected.

Projects I'm in his now expected to generate 375 million of adjusted either job benefits X. sitting 2021.

Represents a meaningful increase from the prior expectation of 200 million. The total program is expected to cost approximately 450 million up from our prior expectation of 240 million.

In closing this additional benefit from project some it should only for them for fell the underlying strength of our business. Once we emerged from cobin from the cope in 19 situation a strong performance in Q1 together with the additional promise from an expanded project summit makes us confident that we will merge from the cold at 900 pandemic has an even.

Frogger Company, then envision before we continue to demonstrate resilience and determination and show all of our customers and communities that they can count on us in their time of need and that are in mountain really is iron I want to think all my fellow mountaineers in their families again for their <unk> persevere.

<unk> in these difficult times and I pray for their safety I Hope all of you and your loved ones are remaining safe in well with that I turned the call over to you Barry.

Thanks, though and thank you for joining us to discuss our first quarter results I want to Echo bills comments I Hope you are all safe and healthy I would like to say. Thank you two are I am mountain team I've been truly impressed by the teams commitment hard work and perseverance during these challenging times.

As Bill noted we are confident that we will emerge from this period, a stronger company driven by our durable business model and the strength of our balance sheet.

Briefly touch on our first quarter performance before discussing our approach to addressing the pandemic.

In the first quarter, we exceeded our expectations in three the first nine.

Except the poor we we're on track to exceed our targets even more substantially.

Though by mid March or service activity began to experience declines compared to plan as more customers instituted mandatory work from home policies unrestricted visits to their facilities.

<unk>, we delivered a strong performance on crossfire key metrics of revenue adjusted EBITDA adjusted D.P.S.N.F.L.

Revenue of $1.1 billion increased 1.4% on a reported basis and 3.2% on a constant currency basis compared to the prior year.

Total organic revenue grew by 1% in the first quarter. This was primarily driven by organic storage rental revenue growth of 3%, which reflected are successful execution of revenue management.

Adjusted EBITDA group, 11.9% for the first quarter to $363 million, despite the negative impact from lower paper prices in foreign exchange rates.

Constant currently basis adjusted in and out grew almost 14%.

Adjusted EBITDA margin expanded 320 basis points year over year three 4%.

Adjusted E.P.S. was 27 cents up significantly from 17 cents in the first quarter 2019.

S. A thorough grew 20% year over year to $231 million driven by adjusted epidemic Road.

Misrepresent, a new quarterly hyper iron mountain, reflecting our teams focus on driving cash generation and increasing levels of F.F.L. overtime.

Turning to segment performance Global Rem delivered total organic revenue growth of 60 basis points for the quarter, reflecting volume growth in faster growing markets and revenue management, partially offset by lower year over year paper prices.

Oval rooms, adjusted EBITDA margin of 41% represents an increase of 230 basis points driven by revenue management benefits from project summit and continuous improvement initiatives.

The data center business delivered organic revenue growth of 9.9% driven by strong leasing and low turn up 50 basis points data centres, even <unk>, 45.9% represents an increase of 360 basis points consistent with our long term goal, it's ride marriage and expansion.

As a reminder, as we move through the balance of the year on a report a basis. The 2019 data center results have some one time benefits that we call don't last year, which make the year over year comparisons less meaningful.

Wanting to project something as Bill mentioned, we are on track and have accelerated and expanded initiatives in certain areas in response to cope with 19.

In the first quarter, we recognize $41 million of restructuring charges to implement the remainder of the first wave plus components and way too which contributed to the first quarter benefit of $25 million.

With the increased size and scope of the program. We now expect to realize the full $375 million a benefit related to project summit exiting 2021, with all actions complete and the associated $450 million of charges incurred by the end of 2021.

In 2020, we now expect to deliver adjusted benefits associated with project some in activities of $150 million compared with our prayer expectation $80 million and restructuring charges of 240 million up from 130 million previously.

Now what I'd like to provide an update on how coping 19 is impacting our business and what actions. We are taking to ensure we are well positioned.

Given the macro uncertainty, we want to be as transparent as possible health investors understand what we are seeing to that end I'm going to provide insights that are more granular than we typically provide.

First I want to put into perspective, how much of our storage revenues generated by what is already on the shelf at the beginning of the year as a reminder, our core storage business accounts for nearly two thirds of our total revenue in a larger portion of our profitability.

In a typical year, new volume accounts for less than 3% of our annual stored revenue.

In other words, nearly all of our annual storage revenue comes from boxes that entered our facilities in prior years.

As Bill mentioned in markets, where our ability to service customer facilities is limited naturally seen a decline in the number of boxes that we are able to pick up.

Personally as a result of this we currently except the net declining q. volume and 2020, but of course that is subject to change based on the duration of the pandemic.

As you would expect the impact this has been stored revenue is much more muted than the impact it has on our service activity levels.

Turning to our service business, which was about 35% of our 2019 revenue in April we saw activity decline approximately 40% overall on the service business.

As investors would expect the impact has not been uniform across her service lines. So let's take a look at how this is trend it across our business.

I will use North America as an example, as it is both our largest market in fairly representative of the activity levels, we have seen other markets with similar closures and restrictions.

Records management in North America for the month of April had 58% year over year reduction in new boxes, Inbounded and a 49% year over year reduction in retrieval and re files.

Data management activity in April declined less approximately 30%.

<unk> real solutions has seen a slow down an activity compared to the first quarter they'll April activity levels were flat year over year.

In our shred business activity declined approximately 27% in April which has led to a corresponding decline in our paper tonnage.

While the obscene and encouraging rebound in the market for paper prices recently, our average realize price in the first quarter was 44% lower than the prior here, which was a 10 million dollar headwind to adjusted if it down.

Consistent with the broader industry trends, we saw a sequential improvement in paper price of about 2.5% in the first quarter and the trend has continued to improve.

As investors will recall the past we had mentioned that a 10 dollar per ton change and paper price represents an approximate 6 million dollar <unk>.

Of course this is clearly influenced by volume so the the impact of paper price will change proportionately with the change in paper volume.

Now, let me make a couple of comments on two of our smaller businesses.

<unk> industry has experienced a significant slow down during the pandemic and given the non essential nature of the business. We have temporarily closed all of our fine arts facilities.

With a prudent view as to the intermediate term intact, we recorded at $23 million noncash impairment charge on the goodwill associated with that reporting in it.

Can sing are stored business to our partnership with makes phase has seen an increase in demand. This led to over 5% growth in storage volume and the first quarter and we have continued to see strong demand in April.

Given the nature of the service level decline I just discussed we have taken actions, which we expect to be temporary in addition to the actions we had underway with project summit.

These actions include furloughs reduced work hours, a pause in hiring reductions in certain expenses like travel and lower variable compensation.

With these adjustments we anticipate we will have removed in excess of $350 million on in any lies basis as compared to our prior plans.

You will see these reductions materialize in costs of sales within our service business as well as interest G.N.A. expenses.

These actions are designed to help align our costs in revenues as we navigate the uncertain environment. Therefore, we expect these costs to come back as revenue recovers.

Turning to cash flow in the balance sheet, we are confident in our balance sheet strength and liquidity position in the first quarter are teamed at a nice job driving cash cycle improvement up eight days, you're on here with benefits coming from both tables days and days Tales outstanding.

I need the team's performance is particularly strong given the cobin 19 backdrop.

We continue to C.D. opportunity for further cash cycle improvement over the long term.

We ended the quarter with $153 million or cash in together with the availability under revolving credit facility, we had approximately $1.2 billion up liquidity.

At this point in early May our liquidity remains unchanged at that level, which we believe provides is ample runway to operate the business and it's uncertain environment.

For context. This liquidity represents over three times, the 20 1930 year adjusted the job of our services.

With our strong financial position or board of directors declared a quarterly dividend of 62 cents per share earlier this week to be paid in early July.

As the economy recovers in 2022, and 2023 and witness sustainable dividend at this level, we would expect to our payout ratio to glide toward the mid sixties to low seventies as a person today at that though.

As we noted in our press release, we're no longer providing guidance for 2020 in light of the unknown severity and duration of the impact of the crisis on our markets in customers.

However, we don't want to help you understand how we are currently planning for the remainder of 2020.

Let me start with the impact of them much stronger U.S. dollar.

Based on recent F.X. rayed, we currently expecting well you're impact on our revenue of about $100 million versus last year.

At the time of our last call F.X. rayed implied in adjusted either <unk> of about $5 million, so with a stronger knoller current x. rays translate into a full year adjusted EBITDA headwind, a $35 million versus last year.

Turning to activity levels, we are expecting April to be representative of the trends we experience for the remainder of the second quarter, which we expect to be the weakest quarter in 2020 for comparative revenue in adjusted it but that change.

Although recent trends suggest this may prove to be conservative as more and more of our customers around the world gradually opening backup and we are seeing other positive indicators.

Well no we are maintaining flexibility to rebound quickly. If this is conditions improved faster than expected and on the other hand, if conditions worsened we have already identified additional options that can be executed quickly as needed.

At this point, we anticipate delivering full year adjusted here, but done margin black to slightly up compared to last year, reflecting are solid first quarter performance benefits from revenue management projects on it in other cost actions.

<unk>.

In total of $110 million relative to our original guidance for 2020.

This is made up of approximately $110 million have reduced cutbacks and $75 million of reduce investment in emanate an acquisition of customer relationships.

<unk> total also reflects an increased investment of $75 million to support the construction of our Frankfurt data Center.

Additional detail can be seen in the supplemental and is highlighted on slide 14 of our presentation.

We continue to expect to generate capital recycling proceeds of approximately $100 million and 2020.

As we look at the market for industrial assets, we continued to see attract evaluations.

And our pipeline has actually increased over the last couple of months.

As investors would expect we've run multiple scenarios based on bearing assumptions for revenue margins the duration of the crisis in the speed of recovery.

Including the included in these scenarios are some extreme stress test models, which redevelop to understand the possible impact if.

65% year on year in persisting at that level 320, 21, even in that scenario, we do not for C.N. issue with liquidity or to leverage 320 21.

I'll also know the severity integration of our stress tests are much more extreme.

Yeah, and both what we have seen thus far and what current trends in macro forecasts indicate we will likely experience even still we would have significant cushion in terms of both liquidity and leverage.

In closing we are confident in the durability of our storage business and believe the magnitude of impact on our Sir.

Service business combined with the actions we have taken.

<unk> leave us in a strong financial position.

Well now began the question it on to <unk>.

<unk>.

They use in a speaker phone these big <unk>.

I used my son peace process five <unk>.

You mean questions for how to de SMET. That's my clicking this problem that question.

<unk> so she demographic whatever current <unk>.

<unk> go ahead.

I guess good morning.

That was very positive news on your guidance on just stating some projects on it I'm. Just wondering can you explain in a little bit more detail, where that upside is coming from where the where you're finding those savings.

Yeah. Good morning show no. Thanks for the question. So as we got into a covert 19 as I as I alluded to is that our customers needed to be served a different way and we already had a summit team spun up to look at our cost of sales and what we found was if we look specifically at F.L.A.'s for instance.

Turning a box in 24 hours, returning Boston 24 hours in this environment, where people are working remotely wasn't going to to help so what we've done is when you've actually in the in the major markets. We've already implemented this or this is a United States, Canada, Ireland, The U.K., Australia, New Zealand, if we say, we're taking that to five.

Stays her once a week, we will pick up or deliver physical boxes, if they need something quicker than we will actually digitize it and we'll send it to them in a digital secure linked through our insight platform and image on the Mad. So we're actually giving them a better service and at the same time changing from 24 hours to.

Five isn't stays where once a week you can imagine how how.

Significant.

[laughter] that impact is on our logistics up.

<unk> and allows us to really take out.

[laughter] quite a bit a cost.

Okay.

Just as a source of liquidity and just one understand how you're thinking about the dividend.

Well you know I I think we're we're blessed by being kind of an industry. One so where you know where a you know specialized street and our operations are still running strongly you know although service has been to unpack it as various at 40 to 50 per cent. That's on 20 per cent of our profit so 40% of our sale so well if that's impactful it's not a.

Threat to our liquidity. So you know for our from our standpoint, there isn't illiquidity reason that we would have to adjust our our dividend and asked if you look at 2022, where we think we'll be looking at Colgate in the back in the rear view mirror by 2022. So we you know we're assuming that doesn't happen until then then we're actually gliding quite nice.

The into our original bowl and our financial models as we get into the 2022 and 2023 period in terms of getting into the the mid sixties low seventies as pay out <unk>, but both so you feel good about where we are yeah, we'd rather not have <unk> would've gotten their much faster but.

We feel good about position.

[laughter].

Mmm I look wants to keep one question <unk> things <unk>.

Hey, good morning <unk>.

Just to follow follow up I feel it's question about from it so.

[laughter], how much of that point in 70.

[laughter] 5 million benefit.

[laughter].

[laughter] is it's it's super.

Apple.

[laughter] <unk> J.P. Morgan Hmm.

Aha.

Hi, two questions I I didn't understand if if this new read 'em for delivery to.

You know once a week from <unk> you know once every day was also position for the post covert environment, meaning it would say and my second question Barry is with the staff job benefits for projects on it when you reach those benefits you know what would be the implied either die margin.

And are on the first line, yes. This is and we'd community <unk> communique that to our customers. This is the on coke, but in in in fact, you know this probably is something that could have happened before but it's easier to actually.

So you get people to change their mind set in terms of how they want to be served given the.

[laughter] parent environment, because if you think about the 24 hour S.L.A. has been something that.

[laughter].

[laughter].

As historical and the business for decades and.

Clarify under your extreme scenario.

Do you anticipate not staying within both your maintenance and incurrence covenants is that correct.

Yes.

Okay. I mean do you have would you be able to provide roughly an idea how much Cushing our headroom that you would have under those scenario.

So let me let me frame it this way for you as we.