Iron Mountain Incorporated

Good morning, and welcome to the Iron Mountain fourth quarter 2019 earnings conference call. All participants will be in the Sonali mode. Should you need assistance, please signal a conference specialist 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. I would now like to turn the conference over to Greer Aviv, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Keith. Good morning, and welcome to our fourth quarter and full year 2019 earnings conference call. The user-controlled slides 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, the earnings press release, and the full supplemental financial information. On today's call, we'll hear from Bill Meany, Iron Mountain president and CEO, who will discuss highlights and progress toward our strategic plan. Barry Heitman, our CFO, will then cover financial results and our outlook for 2020. After our prepared remarks, we'll open up the lines for Q&A. Referring now to slide two of the presentation, today's earnings call, slide presentation, and supplemental financial information will contain forward-looking statements, most notably our outlook for 2020's financial and operating performance and expectations from Project Summit. All forward-looking statements are subject to risks and uncertainties. Please refer to today's press release earnings call presentation, supplemental financial report, the safe harbor language on this slide, and our annual report on Form 10-K, which we expect to file later today, for discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements. In addition, we use several non-GAAP measures when presenting our financial results, and the reconciliations to these measures, as required by Reg. G, are included in the supplemental financial information. With that, Bill, would you please begin?

Thank you, Greer, and thank you all for taking the time to join us. Before we get into our discussion of the Q4 results, I want to first welcome Barry as our new CFO to the Iron Mountain family. Barry brings a successful track record of navigating transformation and effective change of various organizations. Most recently, he led efforts at Haynes Brands to increase operating cash flow, reduce leverage, and produce strong international growth. His insights will be very valuable as we roll out Project Summit, our 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. In terms of adjusted EBITDA, 2019 saw growth of 3% or nearly 5% if we apply 2019 paper prices to 2018. More broadly, progress over the past six years is visible in nearly all metrics, not the least being the expansion of EBITDA margin by almost 500 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 and a broader portfolio in 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, and adjacent businesses, and successfully implementing our revenue management program. We also made important progress on Project Summit, our 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 am pleased to share with you that we are very much on track with our execution 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%. As of the end of December, we had 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 and 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 $50 million of annual adjusted EBITDA benefits that will begin to flow through in Q1. We have good line of sight to the incremental $30 million of in-year 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 Project Summit to expand organic revenue beyond the current growth rates, all whilst boosting adjusted EBITDA by an additional $200 million over the next two years. This is all on top of the 4% plus organic adjusted EBITDA growth we have been achieving the last few quarters. Turning to fourth quarter performance, constant currency revenue increased almost 3% over the prior year. We delivered solid adjusted EBITDA growth of 8%, adjusted EPS growth of 24%, and AFFO growth of 18%, while simultaneously increasing investments to support future growth. Barry will provide more detail on the financial performance as well as our outlook for 2020. Turning to business performance, organic global records management volume remained relatively steady in with a 10 basis points decline over the trailing 12-month period. To put this into perspective, globally, volumes declined approximately 500,000 cubic feet on a base of nearly 700 million cubic feet, driven mainly by fewer acquisitions of customer relationships. More specifically, in 2018, we acquired 3.5 million cubic feet of customer relationships, which tend to be some of our highest returning investments, as opposed to only 2.8 million cubic feet in 2019. We expect the impact of fewer 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 volume, along with incremental storage opportunities in non-box categories such as consumer and alternative storage 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 headwind 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 15 years. Whilst the average age of a box when it is destroyed has remained steady over many years, the average age of our inventory will naturally skew during periods where the growth rate of incoming boxes is undergoing change. For example, if a vertical is experiencing a slowdown in the rate of incoming volume, then the average age of our inventory will increase. Whilst we can't predict when equilibrium 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 become one of our slowest growing yet most stable verticals. The North American legal vertical began its digital transformation journey many years ago. This change in customer behavior has resulted in a deceleration in the rate at which existing legal customers send us new boxes and every year until recently. The good news is that we have seen the growth rate stabilize 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 100 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 4% growth rate. Today, a similar customer would send us two to three new boxes and still destroy one or two boxes, making them flat to net 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 unvended and 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 do not anticipate a change in the foreseeable future. As I like to say, it's the financial beast that allows us to fund growth opportunities whilst returning cash to our shareholders. We have also made considerable progress in transforming our core RIM business to a more diversified model and are on track to achieve our targeted geographic mix, which, as a reminder, is 20% of revenue from faster 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. Moreover, over the same period of time, we have expanded the adjusted EBITDA margin for these relatively new and faster-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 whilst managing our cost structure efficiently. Related, our global digital solutions business had a record year with revenue increasing 10% year over year. As we shared with you last quarter, our digital solutions offerings, such as Insight, 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 its physical file room storage in-house with over 600 employees across five 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, and applying digital solutions such as RFID and artificial intelligence and machine learning through our Insight 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 the business based on our unique combination of document management and workflow expertise combined with our digital solutions, which we expect will result in close to $30 million in annual revenue for the next 10 years, making 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 leasing up our facilities, ending Q4 with a stabilized utilization rate of 90%, we did see some deals in the pipeline shift from Q4 into 2020. The 17 megawatts leased 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 100 new logos to our global data center platform, further diversifying our enterprise customer base and underscoring our brand strength in this dynamic industry. We continue to make good progress organically building our global platform, delivering almost 20 megawatts of capacity in key markets around the globe, including London, Amsterdam, Singapore, New Jersey, Northern Virginia, and Phoenix. We are excited about our newest development in Frankfurt and currently have a strong pipeline of pre-leasing opportunities in various stages of discussion. Additionally, in Q4, we entered into an agreement for a second site in Slough, which will allow us to expand our presence in the important London 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 footprint in London, which is adjacent to this new site, is nearing stabilization, and this new agreement provides capacity for larger requirements in a very desirable market with low latency network connectivity. Looking into 2020, the first half pipeline looks strong with a number of larger opportunities on the horizon. That said, these larger deals tend to be lumpy and timing is often harder 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 and a building pipeline of demand, including hyperscale interest in a number of our markets such as Phoenix, Northern Virginia, and Frankfort. 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 whilst 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 and our outlook for 2020.

Thank you, Bill. I am delighted to be here at such an important time in the company's evolution, and I am energized by our strategy, the engagement and strength of our team, and the opportunities we have in front of us. Turning now to results. In the fourth quarter, revenue, EBITDA, and AFFO were in line with our guidance ranges. We continued to expand margins as adjusted EBITDA increased 8% over last year. Additionally, AFFO increased 18% to $228 million. Revenue of $1.1 billion increased 18 million, or 2% on a reported basis, and 3% on a constant currency basis compared to the prior year. Total organic revenue grew by 1.3% in the fourth quarter. This was driven by total organic storage rental revenue growth of 2.5% for the quarter, reflecting the volume trends Bill discussed and contributions 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 at record lows. Adjusting for the $13 million impact of lower paper prices, organic service revenue would have increased 2.9% in the fourth quarter. Adjusted EBITDA grew 8% for the fourth quarter to $386 million despite lower paper prices and FX headwinds with margins expanding 190 basis points year-over-year to 35.8%. For the quarter, our tax rate was in line with guidance and adjusted earnings per share was 31 cents. Turning to Project Summit, as Bill mentioned, we are on track, and in the fourth quarter, we recognize $49 million of restructuring charges to implement the first phase. For 2020, we expect to recognize approximately $130 million of additional restructuring charges, and we continue to expect Project Summit to deliver $80 million of adjusted EBITDA benefits in 2020 and $200 million over the next two years. We continue to expect total restructuring charges related to the program to be approximately $240 million. Now let me take you through our fourth quarter segment performance. Global RIM delivered total organic revenue growth of 90 basis points for the quarter. Organic storage revenue increased 2.2%, reflecting volume growth in faster growing markets and revenue management. Organic service revenue declined 1%, driven by the change in paper prices. GlobalRIM's adjusted IPTA 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 for the year. The leasing was primarily driven by enterprise and federal government customers, and churn at 1.5% remains consistent with expectations. Adjusted EBITDA margin was 51.7% up significantly year-on-year. Profitability was boosted by two non-recurring items. First, a $4 million contractual settlement, and second, a $2 million lease modification fee. Adjusting for those items, margin was 44.4% in the quarter, an increase of 290 basis points, reflecting the increased scale and progress on integration activity. Data Center Development CapEx was approximately $400 million for the full year, including $50 million for the Frankfort land acquisition. In 2020, we expect Development CapEx of approximately $200 million, reflecting the development projects currently underway. For the full year 2019, revenue of $4.3 billion 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 $1.44 billion grew 2.7% on a constant currency basis. Adjusted earnings per share was $1.02. AFFO was $856 million, and dividend per share was $2.45, representing an 82% dividend payout ratio. Turning to cash flow and the balance sheet. Lease adjusted leverage at the end of the year was 5.7 times, which was slightly down versus the third quarter. We expect leverage to remain flat to slightly down in 2020, reflecting our strong focus on profit expansion, partially offset by Project Summit one-time costs, lower year-over-year paper prices, and foreign exchange rates. We remain committed to delevering over time, which will enable considerable strategic flexibility. As part of our ongoing capital recycling program, in the fourth quarter, we sold two portfolios, which generated net proceeds of $83 million, bringing us to approximately $170 million of proceeds for the full year. We expect to generate capital recycling proceeds of approximately $100 million in 2020. As investors know, part of our strategy is to increase scale in faster-growing international markets. We are pleased to report that in early January, we acquired the remaining 75% stake in OSG Records Management, the leading provider of document and data management solutions in Russia. As investors may recall, 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 $50 million, 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 13 of our presentation. We are expecting... 2020 revenue to be in the range of $4.4 to $4.5 billion and adjusted EBITDA to be in the range of $1.52 to $1.57 billion, driven by organic EBITDA growth and Project Summit benefits. We expect adjusted EPS to be in the range of $1.15 to $1.25 and AFFO to be in the range of $930 to $960 million. This strong growth is despite continued low paper prices, additional foreign exchange headwinds, and includes continued investments in digital solutions, IT infrastructure, and 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 adjusted EBITDA throughout the year, beginning in the first quarter. Naturally, we also anticipate organic EBITDA growth 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 where paper prices and the U.S. dollar are currently, we expect both will be notable headwinds in the first quarter. Our 2020 guidance implies total organic revenue is expected to be flat to up 2% as compared to prior year, including organic storage rental revenue growth of approximately 2%. guidance assumes paper prices and effects remain at current levels which combined we expect to result in an adjusted if a doc headwind of approximately 35 million dollars 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 and new borrowings we may also utilize third-party capital for data center development as we have previously discussed in 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 and strategic acquisitions, and reducing lease-adjusted leverage over time. We look forward to sharing further progress with you on our first quarter earnings call. And with that, operator, please open the line for Q&A.

Yes, thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To answer your question, please press star, then 2. As a courtesy to others, please limit yourself to one question and a follow-up. If you have additional questions, you may re-enter the question queue. You may submit questions throughout 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 Sheila McGrath with Evercore.

Yes, good morning. At first glance, Project Summit appears to be focused mostly on cost 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 in strategy that would be focused more on revenues.

Good morning, Sheila. Thanks for the question. So 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 rhythm and what we're doing differently in managing and leading the company. So on the technology side is that 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 customers. So to give you specific examples, we have four instances of Salesforce, which is very hard to get a single view of a customer globally. The second thing 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 better visibility of our customers, which helps them on the selling side, but also in terms of serving those customers when they have inquiries. So that's one area in technology. The part that we're already starting to see 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 as directly on the last call, is Summit isn't just about taking costs out. It's actually redeploying costs. So we're actually adding costs or adding resources around our people that are interacting with our customers, especially in terms of strategic account management. So to give you an example of that, and also in terms of the way we lead the company. So we now have an expanded enterprise leadership team, which we met in January. And first of all, the energy in the room was noticeably different because now we have the top 40 leaders 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 the strategic 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 that that customer is probably 80% served if you look at a matrix of our product offering and the geographies they fit in. And they are completely a global company, virtually in every country we're in and then some more. And the interesting thing is it was just the opposite. We're serving about 20% to 30% of the potential of that client rather than 80%. So a combination of having strategic accounts, taking a global look at how we can serve that customer better, and then the energy of 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 this quarter. I was just wondering if you could provide some insight on your outlook for sources and uses in 2020 and progress on sourcing JV Capital potentially for the Frankfurt data center.

So, Sheila, I'll take the JV question and then I'll hand it over to Barry on the sources and uses. So, we continue to look at entering a JV for the Frankfurt facility as we've spoken on in the last couple of calls. We've slowed roll that slightly because the pre-leasing activity on Frankfurt is very, very strong. So, obviously, we want to line that up before we finalize the negotiations. But we still expect to put Frankfurt into a joint venture. We're quite far down the track with a couple of potential investors, so we feel good about that. But we also want to make sure that we put our best foot forward, and we're really encouraged and quite excited about the pre-leasing activity for the Frankfurt site.

And Sheila, it's Barry, and thanks for the question, and it's great to be here. I'll just highlight a few things, and I'll note that in the slide presentation as well as a supplemental, I think you've got basically all of the items that you'd need. But to call out a few things, cash interest, that'll naturally be below the interest expense that we guided to in light of sort of deferred financing charges and things like that that go through interest. We guided to cash taxes of $70 to $80 million. And you've got all of the, on slide 13, all of the various items for like recurring CapEx and non-real estate is about $150 million. And you see the customer inducements, et cetera. We are assuming $100 million of capital recycling. You know that we did more than that in 2019. I'd call out that Summit, as we mentioned, is about $130 million of expected use in the year. and then you've got our data center development and base acquisitions, et cetera. So I think you'll find that if you work through the schedule, there's a considerable amount of cash available for discretionary, and we feel good about where we are at this point.

Okay, thank you.

Thank you. And once again, please limit yourself to one question, a follow-up. And right now we have a question from Nate Crossett with Barenburg.

Hey, good morning, guys. The volume decline in the quarter, I appreciate some of the color you gave. But can you give us some more detail on the declines? Like what's the breakout of declines for North America versus international? It sounded like you said at the end of 2020, you're expecting volumes to be flat up. Did I hear that correctly?

Good morning, Nate. So first of all, yeah, we expect volumes to be flat to up for the year, including consumer and other alternative storage, such as ARC, for instance. But yes, you heard that correctly. You're right to also assume that it's a North American is where the negative volume is. The rest of the world, Europe is basically flat, slightly positive. It changes from quarter to quarter, but think of Europe as flat. And then other international is kind of mid-single-digit positive, right, because those are the faster-growing emerging markets. So just to come back to it, to put it in context, first of all, we're talking about a half a million cubic feet of negative decline in the year over 700 million cubic feet. And if you look at that, that's more than explained by just the slowdown in the number of customer acquisitions that we did during 19 as compared to 2018. And at that level, that's totally in our control. In other words, we normally do about 3 million cubic feet. We did less than that in 2019. We did more than that, a little bit more than that in 2018. And the difference between those two more than counts for the half a million cubic feet down in 2019. So just put that into context. In addition to that is, you know, we source volume in three different buckets besides volume coming in from existing accounts. We source it from customers that are completely unbended, not just the federal government, but they're even some of our most mature. I mentioned one of our most mature customers. There's, believe it or not, some places where they still do records management in-house. And I actually talked about the file rooms that we're taking over for this customer, which is the largest single customer we ever signed, $30 million a year. We sign that contract because we're actually providing them a full wrap-around solution, but we're taking over all their volume in their records rooms, which historically weren't in our facilities, right? And this is a customer that we've served for many, many years. So there's the unbended bucket. The second bucket, and those are our most highest return. The second and third buckets are either competitive takeaways or these customer acquisitions I talked about, which is historically trended around 3 million cubic feet plus or minus on a given year. Those actually have similar returns. In one case is we're paying per amount fees and sales commissions, in the other case, We're paying someone that wants to get out of the business or is getting out of business completely, and we take over those customer contracts. So if we look at those three vectors, we continue to see that there's a lot of growth. The last thing I would say just to emphasize is that I talked about the legal vertical. The thing that's driving the negative trend is not that all of a sudden people aren't sending us anything. Virtually every customer is continuing to send us new boxes every year. the thing that is driving the slight drag on volume is a secondary effect of slowing down rates as they go through the transformation. So the legal vertical I gave you for a number of years when it was going through that deceleration was in negative net volume territory because each year, the rate of incoming boxes was changing, so the average age of their inventory was ticking up, and so you were getting more boxes destroyed during that period of time. As it's now stabilized at the new normal, at this lower rate, it's actually stabilized to slightly net positive cube. So we see similar trends happening in some of the other verticals that may be a little bit further behind the legal vertical on digital transformation, but it is important to note that the legal vertical which is virtually almost our slowest growing vertical in North America, is actually slightly net positive in terms of cube growth.

Thank you. And the next question comes from Eric Lubchow with Wells Fargo.

Hi. Thanks for taking the question. I'm curious, Bill, on kind of your international footprint. You know, I think you're earlier in the revenue management initiatives in those international markets. So I'm curious what type of impact you've seen as you've rolled that out and if there's been, you know, any impact on customer retention or volume growth as you roll that out more broadly across your portfolio.

It's a good question, Eric. You're right. We are in the earlier innings on those markets, and those are the faster-growing markets. So the growth that we're getting from other international, when you see storage revenue growth, is mainly from volume growth and only a little bit of revenue management. So far, we don't see any difference in trends in those markets. than we did, say, in Western Europe when we rolled it out or North America before that in terms of elasticity. But it does take longer for that effect to show up just because some of those contracts are on three years, some of them are on five-year contracts, of course, some are annual. So what we find is we're, I guess, 18 to 24 months into the rolling revenue management out globally, and you'll see that just like it did in Western Europe, It'll take, I would say, another year, year and a half before you start seeing the full effects of that.

Thank you. And the next question comes from Andrew Steinerman with J.P. Morgan.

Hi, good morning. This is Michael Cho on for Andrew. I just had my first question follow up on Project Summit. I realize there's always a number of moving pieces, and Bill, I think you've given an example of upselling and engineering examples, but if we think about the impact of Project Summit, what's the EBITDA margin goal for Iron Mountain as a result of Project Summit?

Yeah, Mike, I'll let Barry talk about it. We have talked about it, as you said, briefly on the last call, but Barry can give you some more color on that.

Okay. Okay. Hey, Michael, thank you for the question. You know, if you look at where we are from an adjusted EBITDA margin today and what's embedded in the guidance, and then if you play that out over the next couple of years, as you know, Project Summit is going to generate $200 million or more of EBITDA benefit, and you work through both improvements in our base EBITDA as well as Summit, together with a little bit of revenue growth, I think you'd find that over the course of the project as we're exiting it, probably going to find the EBITDA margin into the high 30s. And we feel very good about where we are trending. I'd say Summit is well underway. The fourth quarter actions were taken and completed very successfully. And we have very good line of sight on the in-year benefits here this year. Thank you for the question. Operator, can we go to the next question, please?

Yeah, just like you. Please press star and then one if you have this question. And the next question comes from George Tong with Goldman Sachs.

Hi, thanks. Good morning. I'd like to dive a little bit deeper into your physical storage volume trends. Your global volumes grew 90 bps year over year in 4Q, but this did decelerate from nearly 2% growth in early 2019. This is, you know, rather a large move for relatively stable business. And you talked about legal and the declining rate of change with new boxes. Can you maybe elaborate on what's causing the increase in the second derivative of change and perhaps what needs to happen for volume growth to stabilize or improve, which is what you're assuming for 2020?

George, so let me first start with your observation on Q1. So the reason why I also said that we expect the trend that we saw in Q4 to continue in the first half of 2020 is The Q1 was also a high quarter where we actually did customer acquisition. So the trends that you're kind of calling out is virtually 100% covered by the change in customer acquisitions, not even the second derivative. Now, in terms of the overall trend, change in terms of volumes in North America that we see, as I said, is that when legal was going through its downward march in growth rate as they were transforming or adding more digital processes to their workflows, is we did see similar trends that we see, for instance, in financial services today. I mean, financial services is still one of our higher-growing or incoming boxes from financial services, but it's just at a lower rate than we did previously. So first of all, because we're talking about the thing that's impacting our net volume for some of these verticals is rates of change. Just by its very kind of mathematical nature, these are muted effects or they're secondary effects. And the thing I can't predict, the thing I would predict is I think we're going to be in this territory of, if you think about over a year, kind of 7 to 8 million negative cube growth just on pure rim and mainly focused in North America until we get through. this transformation. And as I said, when we look at legal, we've gotten through that. And legal is actually slightly positive in terms of net Q growth once it goes through it. The thing that's hard to predict is how fast people digitally transform and what growth rate they stabilize to.

We do have a question from Shlomo Rosenbaum with Stifel.

Hi, this is Adam on for Shlomo. Could you talk a little bit more about what's weighing on the organic revenue growth guidance for 2020? Just, you know, the zero to 2% organic. Can you just talk about a little bit more?

Yeah, so thanks, Adam. It's It's linked to the other question on how is the revenue management rolling out into emerging markets. So it is a broader range than, and I understand where you're coming out with the question, is that right now we're still seeing most of the growth internationally, which is becoming a bigger percentage of the whole of the company, is coming from volume rather than pricing. So we want to get more visibility in terms of how quickly some of the pricing changes we're making internationally before we could guide higher.

Thank you. And the next question is a follow-up from Sheila McGrath of Fevercore.

Yes. Bill, historically you've mentioned that you've had some wins with the U.S. government with that specialized account focus group, but you've also mentioned it takes a while to get the inventory from them. Just wondering if you've seen any progress in terms of them implementing the awards to Iron Mountain.

Yeah, it's a great question, Sheila. So I would answer it in two different ways. I think the contract you're talking about, yeah, we had a very large blanket contract with one of the large departments, and it's still exactly – we still have the frustration that you're alluding to. Actually, we've had more wins on the service side because it's been easier for them to give us business on the service side than it is on the storage side. And that's partly because of their relationships with the National Archives. The one thing that we do know both from the National Archives and government leaders is that we do expect over time for that to start coming free because National Archives is publicly announced that there's only a window over the next few months or years where they're going to continue to accept volume from government agencies. So eventually that will come loose. That one has been slower. On the other side, we had a win, I think it was about a year and a half ago, where we, I think it will be two years this summer, we had a win with a large government agency where they were exiting their own warehouses And we moved that, I think we won in the summer, and we had 400,000 cubic feet roughly moved by November into our facility near Joint Base Andrews. So when they decide to move, we can onboard it quite quickly. But the contract that you're talking about, that large government contract, we find that we're getting more success on the services, digital services side right now than the storage because of the stickiness with their relationship with NARRA.

Thank you. And the next question is a follow-up from Nate Crossett with Barenburg.

Yeah, there's certainly been a lot of chatter in the D.C. space in terms of M&A. We've heard that some of the smaller private players are having a harder time of late, and I'm just wondering if that could maybe create some opportunities for you to acquire, you know, what's your current appetite for kind of accelerating the D.C. build-out?

Good question, Nate. I think you asked it last time as well, so I guess I should expect it. But our stance is still the same, is that we feel really good about the acquisitions that we did. If you think about the I.O., that was really building the platform, and Credit Suisse allowed us to start building on our international management team as well as the EvoSwitch in Europe. I think where we stand right now is that we like development. Development still has the highest returns. Now, that being said, we do, when we go into a market, for instance, and I think I may have used references before, when we looked at Frankfurt, we looked at either doing an acquisition or buying land. In this case, we bought a piece of land that was already permitted. And for us, the better opportunity was buying the piece of land and building it out. But we do look, when we go into these markets, what I would call brownfield, where there may be a small player in that market that we want to be in. but it has significant amount of expansion capacity on their land or within their shell. So we do continue. And that was what drove us to the EVOS, which Amsterdam was another market where we looked at, you know, buy a brownfield opportunity for a greenfield. And in that case, it was better to do a brownfield. So we will continue to look at it that way, but we don't feel like we need to go out and buy something to bulk up for the sake of bulking up. You know, we feel, you know, we're, you know, We've grown a lot, and we're in pretty good position in terms of being recognized. And I would say that we see most things that are up for grabs in the markets that we're present in.

Thank you. And the next question is a follow-up with George Tong with Goldman Sachs.

Hi, thanks. Just a follow-up question on volume trends that you're seeing. You called out legal and financial services as being in transition. Can you discuss how volume trends may be evolving in some of your other larger verticals?

Well, I think legal is kind of, George, has kind of gone through the transition. That's why it's now gone back to kind of net positive, flat to net positive. We don't give it to you by vertical, but I'll just give you kind of a flavor. Health sciences is actually one that we're still seeing significant increase in growth. But most of our verticals are going through different degrees. Now, this is mainly North America, a little bit in Western Europe. are going through, we see digital transformation taking hold. So they're further behind on legal, but they're getting impacted right now. But if you wrap it all up together, George, it's still, as I say, it's a second derivative. Sorry to be a little bit mathematical. It's a second derivative effect. That's why we think it's very much bounded in this kind of 7 to 8 million negative cubic feet on a 700 million cubic foot base. And I'd say right now it's really focused mostly in North America, and Western Europe is kind of flat and moves up and down a little bit.

Thank you. And the next question also is a follow-up from Andrew Steinerman with J.P. Morgan.

But in the 2020 organic revenue guidance, what's the data center revenue growth and the margins that are implied in the 2020 guidance?

You know, data center continues to contribute nicely for organic growth, and obviously that can vary some depending upon the level of hyperscale deals that we execute and commence in the year. But you'd be thinking, you know, something in the, you know, call it 10% kind of range on a constant basis.

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