IRM
#Thank you, Bill, and good morning, everyone
I'm pleased to be reporting on another strong quarter that demonstrates the durability of our business and the success of our business plans
Similar to Bill, my comments will be brief this morning and cover key highlights, certain operational and financial metrics, and our outlook for 2017, which remains unchanged since February
Before diving into the details, let me walk you through the key financial highlights
First, we achieved strong internal storage revenue growth of 3%, excluding Recall and other smaller acquisitions
This is consistent with last quarter's performance of 2.9%, and reflects solid underlying business fundamentals and continued volume growth across all major markets
Second, we maintain consistent adjusted EBITDA growth of over 24% from the acquisition of Recall and underlying margin improvement
Third, the integration of Recall and our Transformation Program continues to be on track, as evidenced by the 100 basis point decline in SG&A as a percentage of total revenue this quarter, as Bill discussed
Let's now turn to slide 8, which shows our key financial metrics
First quarter total revenues growth of 25.1% was in line with our expectations, driven by acquisitions and the strong internal storage revenue growth
The internal storage revenue growth of 3% was driven primarily by net internal records management volume growth of 1.9%, as well as benefits from our revenue management efforts
Service revenues increased 26.6% in the first quarter, 0.6% of which was internal growth
The improvement in internal service growth resulted from higher paper prices, as well as increases in project-related revenue
At current paper pricing, we expect to benefit to the first half of the year until we begin to cycle against last year's price increases
Compared to a year ago, the first quarter adjusted gross margin declined 120 basis points due to the mix of Recall's lower margins, including higher rent expense, as pre-acquisition Recall leased close to 90% of their facilities on a square-foot basis
Sequentially, adjusted gross margins declined 80 basis points from the fourth quarter as a result of the seasonality of utility cost and compensation expense
Adjusted to exclude Recall integration costs, selling, general and administrative expenses increased 20.1% from a year ago
SG&A as a percent of total revenues, however, decreased 100 basis points from last year due to the transformation integration benefits, as well as a reduction of bad debt expense
The 24.4% increase in adjusted EBITDA was driven by acquisition benefits, top line growth and the SG&A improvements just noted
Adjusted EBITDA was impacted by $6 million of expense this quarter related to the innovation investments, which we talked about last quarter
As a percentage of total revenues, the adjusted EBITDA margin in Q1 was 31.2%, 10 basis points lower than a year ago due to the mix of Recall's lower-margin business, mostly offset by other business improvements
Looking at the adjusted EBITDA margin on a sequential basis, that is to track progress on synergies and transformation, the EBITDA margin declined 50 basis points from Q4, due partly to the seasonally higher operating expenses in the first quarter, as well as the $6 million of expense-related innovation
Excluding just for the $6 million, adjusted EBITDA would have been 31.8%, up 10 basis points sequentially from Q4 2016. Growth of adjusted EPS to $0.24 per diluted share for the quarter was negatively impacted by $0.03 related to the year-over-year increase in our structural tax rate, which was 14% a year ago and 23.1% this quarter
The tax rate was above our guidance, partly driven by a change in U.K
tax legislation, whose application was recently clarified
The legislation affects our interest deductibility, and we have included this in our effective tax rate, while we are actively pursuing remediation and restructuring to mitigate its impact
In addition, our tax rate has been impacted by our anticipated mix of earnings
Despite our Q1 structural rate, we expect that our full year 2017 structural rate will be closer to the higher end of our guidance, or approximately 20%
AFFO was in line with our expectations at $170.9 million
Compared to a year ago, AFFO growth was limited as we lapped against a cash tax benefit, resulting in a $34 million swing in cash taxes paid
Remember that the calculation of AFFO was changed in the third quarter of last year, so that it reflects cash taxes
While annually, cash taxes will generally reflect our structural tax rate, we will have some quarterly volatility, such as this quarter when AFFO is reduced by a net $30.4 million compared to a year ago, when cash taxes were actually a benefit of $3.6 million
Let's turn to slide 9 to cover internal growth performance by segment for the quarter
The North America records and information management, or RIM, internal storage revenue growth continued to be strong
This performance was driven by price improvement and volume growth
We saw improvement in the North American internal service revenue due to growth in the shred business, including the higher paper prices, and improvement in information governance and digital solutions, which provides digital imaging services to our customers
The North American data management internal storage revenue grew 2.7%
However, internal service revenue declined due to the ongoing reduction in tape rotation, as discussed in our Investor Day
The adjusted EBITDA margin in North America data management declined year-over-year, primarily as a result of increases in investments associated with product development, however, remains a very healthy 52.3%
The internal storage revenue growth in Western Europe of 1.7% improved from the fourth quarter, while internal service revenue growth of 4.4% benefited from an increase in special projects in the U.K
and new customer wins in Germany and Spain
The Western Europe adjusted EBITDA margin declined year-over-year due primarily to a one-time tax benefit in the U.K
of approximately $3 million, which we discussed a year ago
In the Other International segment, which includes the larger legacy Recall Australian business, we continue to see strong storage and service internal revenue growth, and improving margins
As for Corporate and Other, adjacent business internal service revenue showed a small $600,000 decline related to lower project revenue in art storage
Moving to slides 10 and 11 quickly, consistent with the fourth quarter call, slide 10 shows the relative size of each segment and its contribution to our results through a storage and service lens
Storage continues to provide more than 80% of adjusted gross profit with the remainder from services
As you heard in our Investor Day, we continue to innovate on new service offerings for our customers, focusing on value-added services which deliver gross profit growth
Slide 11 contains the same information as slide 10, but viewed on a product line basis
Before turning to our outlook for 2017, let me quickly touch on the composition of our global business
The chart on slide 12 remains consistent with the data provided on the Q4 conference call
As you can see, roughly 60% of worldwide revenues are generated in the U.S
And importantly, approximately 70% of adjusted EBITDA is in U.S
dollars
This demonstrates that the impact of foreign exchange fluctuations are somewhat muted on adjusted EBITDA
Also, we continue to match our foreign denominated debt to create natural currency hedges to mitigate translation exposure, while also being tax efficient
At quarter-end, 23% of our debt was in currencies other than the U.S
dollar
Let's turn to our guidance for 2017, summarized on page 13 of the deck
Our outlook for business trends and fundamentals remains unchanged since February on a constant dollar basis
For full year 2017, at the midpoint, we expect adjusted EBITDA to grow by 17.5%, with adjusted EBITDA margins expanding to around 33%, an increase of about 200 basis points compared to 2016. In addition, AFFO is expected to grow by 11.5% of the midpoint, supporting our expected dividend growth of 7% in 2018. As noted in February, our guidance assumes that we invest about $20 million in operating costs associated with innovation initiatives and global shared service programs
We continue evaluating several storage and service line innovations, and should these innovations meet or exceed specific success-based hurdles, related operating expenditures associated with commercialization of these initiatives could have a minor impact on full year adjusted EBITDA expectations
That being said, we have not made any commitments at this point and have not changed our guidance to reflect this
Turning to slide 14, our projected cash available for distribution and investments, or CAD, also remains unchanged from the Q4 earnings call
For 2017, we continue to expect CAD to cover our anticipated full-year dividend and required maintenance capital expenditures, with approximately $125 million of capital remaining to support core growth racking and other discretionary value-accreting investments, and requiring about $200 million of external funding for the remainder, excluding Recall costs
Shifting briefly to the balance sheet, we had liquidity of nearly $1 billion at quarter-end, and a lease-adjusted debt ratio of 5.8 times, which is in line with our expectations
In the short-term, we expect our leverage ratio to remain above long term targeted levels following the Recall acquisition, and then trend down as we collect divestiture proceeds, fully realize the synergies and transformation benefits, and continue internal growth
We expect our lease-adjusted debt ratio to be 5.6 times at year-end, and then trending down to 5 times in 2020, as we laid out in our Investor Day
To remain in our targeted capital structure and to take advantage of market conditions, we expect we will term out a portion of our borrowings with longer-term debt and attractive rates, thereby extending our average maturity
Overall, we are pleased with our first quarter performance and results that are consistent with expectations
We are well positioned to deliver on our financial projections for the year having started with strong internal growth momentum
As I said last week at our Investor Day, our steady growth, strong margins, and very effective field leadership will allow Iron Mountain to thrive in all business cycles
With that, I'll turn the call over to Bill for closing remarks
Good morning, Michael
What you see, we've been through a little bit from paper pricing, but to take a step back, I mean, we've been experiencing a decrease in activity in records and tape rotation, as we've talked about
And so the team has been doing a great job talking to customers and working more on solution selling
So while the new activities that we're working on for our customers will likely be at lower gross margins than our storage business, when you look at it compared to our service business, we wouldn't expect any real degradation of gross margins from that
And again, we're focused on gross profit and solution selling
So, when you think about different activities that we've got going on out there for our customers, and they're looking for help managing things like HR records, scanning businesses so that they can monetize and take advantage of the records that we store for them, we think that there's not going to be any real degradation in the gross margin to that
And over time, the innovations that we're working on today is – a number of these, as Bill talked about earlier, are still in the garage in early days; these are things that we're going to continue to innovate on as we talk to our customers
<UNK>, hi, this is <UNK>
If you think about it, first of all, 2016, we really had an uptick in storage growth last year, in the second half of the year
And again, I'll point out that, that was after the Recall acquisition, so really showing that our commercial team is really staying focused on delivering
And so we anticipate that we'll be, in the second half, on a year-over-year growth basis, it will slow down because we will have tougher comps
That said, I think at this point, having what we've delivered in the first quarter, we'll be closer to the 2.5% than the 2% in the guidance
