Skip to main content
IRM logo

Iron Mountain Inc

Exchange: NYSESector: Real EstateIndustry: REIT - Specialty

Iron Mountain Incorporated is trusted by more than 240,000 customers in 61 countries, including approximately 95% of the Fortune 1000, to help unlock value and intelligence from their assets through services that transcend the physical and digital worlds. Our broad range of solutions address their information management, digital transformation, information security, data center and asset lifecycle management needs. Our longstanding commitment to safety, security, sustainability and innovation in support of our customers underpins everything we do.

Did you know?

Carries 118.2x more debt than cash on its balance sheet.

Current Price

$106.97

+2.14%

GoodMoat Value

$69.80

34.7% overvalued
Profile
Valuation (TTM)
Market Cap$31.62B
P/E218.68
EV$48.71B
P/B
Shares Out295.59M
P/Sales4.58
Revenue$6.90B
EV/EBITDA24.02

Iron Mountain Inc (IRM) — Q2 2015 Earnings Call Transcript

Apr 5, 202610 speakers8,944 words66 segments

Operator

Good morning. My name is Keyva, and I will be your conference operator today. At this time, I would like to welcome everyone to the Iron Mountain Q2 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I will now like to hand the call over to Senior Vice President, Investor Relations, Melissa Marsden. Please go ahead.

O
MM
Melissa MarsdenSenior Vice President, Investor Relations

Thank you, Keyva and good morning, everyone. This morning we’ll begin our call with remarks from Bill Meaney, our President and CEO, who will discuss highlights for the quarter and progress towards our strategic initiatives followed by Rod Day, our CFO, who will cover financial and operating results. After our prepared remarks, we'll open up the phones for Q&A. As we have done for the last few quarters, we have posted our earnings commentary and supplemental disclosure package on the Investor Relations page of our website at www.ironmountain.com under Investor Relations/Financial Information. Referring now to page two of the supplemental, today's earnings call and supplemental package do contain a number of forward-looking statements, most notably, our outlook for 2015 financial performance. All forward-looking statements are subject to risks and uncertainties. Please refer to today’s supplemental the Safe Harbor language on this slide and our most recently filed Annual Report on Form 10-K 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 those measures as required by Reg G are included in the supplemental reporting package. With that, Bill, would you please begin?

BM
Bill MeaneyPresident and Chief Executive Officer

Thank you, Melissa, and good morning, everyone. We’re pleased to be reporting solid second quarter results that we’re in line with our expectations on a constant currency basis and underscore the durability of our core business. Despite the FX headwinds, we’re comfortable maintaining our guidance for 2015 as we typically see a bit of a ramp in the second half of the year. It was a very eventful quarter with the announcement of our agreement to acquire Recall Holdings and the initiation of our transformation plan, which will drive significant improvement in our overhead cost structure and support strong cash flow generation in years to come, even prior to the substantial and additional synergies we anticipate from our acquisition of Recall. I’ll get to the last two items shortly, but first I would like briefly cover certain financial and operating highlights. Our momentum in the storage rental business continues to build and drive durable results in line with our strategic plan. On a constant dollar basis, total revenue growth for the quarter was 2.2% reflecting continued solid storage rental gains of 4.1% and service revenue declines of just 0.6%. Foreign currency impacted year-over-year in total revenue by roughly 6%, reflecting the strong appreciation of the dollar experienced at this time in 2014. We also continued to see good internal growth with storage rental, up 2.7% for the quarter and 2.9% for the year-to-date reflecting continued strong growth from data management and the other international segment and stable performance in Western Europe and North America. As we look at the remainder of the year, we are seeing consistent trends and are maintaining our view for internal storage rental revenue growth for 2015 in the mid-2% range. The realignment of our data management business we initiated last year is yielding good results. Data management storage continues to show very strong internal growth with a 5.3% increase over last year. Total service revenue internal growth was flat for the quarter and down just 0.5 points year-to-date in line with our expectations for continued yet moderating top-line headwinds. Looking at volume in records management, we added roughly 14 million cubic feet of net storage volume worldwide on a trailing 12-month basis, representing a 2.8% net growth. This growth was maintained in part as a result of the significant turnaround we are continuing to achieve in North America from negative to positive internal volume growth, or in other words, before benefiting from acquisitions. Net volume growth in North America was 1.2% or 0.4% on an internal basis excluding acquisitions, in line with Q1 levels. Globally we maintain customer retention of 98%, in line with the first quarter and a 20% improvement over the level of customer turnover experienced just two years ago. Now turning to our transformation overhead optimization program we announced in June prior to the Recall acquisition news. We’ve spoken with many of you about this over the past several weeks and highlighted our reorganization in April in which we put a single leader over our developed markets which has facilitated this important program. This initiative calls for taking $100 million out of overhead costs or SG&A between now and 2018, independent of and additive to the Recall acquisition. This will bring us from our current overhead of more than 28% of total revenue down to the mid-20% range, more in keeping with best practices for companies of similar size and global reach. Importantly, we have already implemented a portion of this program and achieved $50 million of cost reduction or half of these savings with a charge to be taken in Q3 and the full benefit of the $50 million to be realized in 2016. With a partial year contribution from this program, we expect the net impact for 2015 to be neutral. Also in recent communications we’ve illustrated how the decline in our service margins over the past few years and more recently FX headwinds have offset the attractive returns we achieved from investment in real estate and acquisitions. In fact, during this period we have been achieving unlevered returns on invested growth capital in the low teens and have seen significant contribution flow through in the past couple of years. We initiated some programs last year and are continuing to implement changes that we believe will stabilize the service margin trend line and get back to around 27% by the end of the year. It is important to keep this in perspective. While service represents 40% of our total revenue, today it represents just 17% of our total gross profit. Again to be clear, we are talking about a slowdown in the activity of physical records and tapes being retrieved, not a slowdown in incoming volume of records and tapes to be stored. While demand for typical office cut sheet paper has declined between 2% and 4% in the mature markets, in the past few years, we continue to see the same number of boxes inbound from our existing customers year-after-year, demonstrating the durability of the storage rental business. We do continue to expect service revenue headwinds of negative 1% to negative 2% annually over the next few years and in fact, we did see flat service revenue this quarter compared to the year-ago period. And while we can’t completely offset the impact of lower service revenues due to a decline in retrieval and re-file in transportation activity, we can do more to align our service cost structure with this decrease in activity levels. So what are we doing to address this service margin decline? First, we are looking at ways to variabilize more of our costs. Second, we are exploring efforts to make more efficient use of third-party logistics suppliers or 3PL where we can be assured they will maintain our quality and focus on secured chain of custody. We have used this in Europe on a smaller scale and believe we can expand the use of 3PL elsewhere. And third, we are using technology more proactively, such as using sensors to detect when shred bins are ready to be emptied to make routes more efficient. Additionally, in this quarter we have seen an uptick in our bad debt. This has come out of our North American business and is primarily the result of refining our billing process over the past 18 to 24 months. During this transition, we didn’t adequately refine the process before moving responsibility for the North American billing offshore. Here is now our robust plan in place addressing this. Now let’s turn to the Recall transaction. This deal is extremely compelling in terms of industrial logic and strategic fit and is supported by meaningful synergies that drive significant accretion. I assume by now you are familiar with the basic terms of the deal, so I won’t review all the information but rather just touch upon the highlights. In the announcement presentation, we illustrate estimated total net synergies of $155 million with $110 million of that to be achieved by 2017. These synergies are driven by economies of scale from the combination of infrastructure and overhead, and when fully realized, will lead to double-digit accretion in adjusted EPS, FFO per share, and AFFO. At 25% of our size, Recall is managing a similar global platform in terms of country coverage as they are in 24 countries, compared to our 36, which drives much of the overhead synergies. Another benefit of the proposed transaction in the medium term is that it supports our deleveraging strategy. With the additional cash available to us from our transformation plan as well as Recall synergies, we can not only fund a stable and growing dividend per share, but we also generate the capital we need for growth. Additionally, we have complementary market platforms with Recall having a more developed presence in the small-to-medium businesses, whilst we have significant presence with the larger enterprise customers. We’ve been on the road over the past several weeks and have met with a number of our shareholders, as well as several major holders in Australia. And what we’re hearing is universal agreement that our two companies are worth more together than they are separately. You can see that several Recall shareholders have increased their holdings and appreciate the attractiveness of owning the combined company. Even our most seasoned advisors have noted that they cannot remember a deal that delivered 26% EPS accretion within three years of time. In the next several weeks we expect to file the shareholder meeting document, seeking approval of the acquisition, which will provide additional detail, including pro forma results. Turning back to Iron Mountain, on past calls we discussed progress on our three-year strategic plan which rests on three pillars: getting more from our developed markets, expanding our presence in faster-growing emerging markets and continuing to explore adjacent opportunities in our emerging business segment. Whilst the Recall acquisition and transformation plan have garnered a bit more internal and external attention of late, we continued to make good progress on our base plan, achieving consistent positive storage volume growth in developed markets and completing an organizational realignment to put developed markets under common leadership, which enables our ability to implement our latest transformation program as well as to accelerate our service margin initiatives. Additionally, in emerging markets, we continued to progress towards our goal of 16% of total revenue from these markets by the end of next year. We pressed the pause button on acquisition for a moment to assess some of the transactions in the pipeline that might be affected by the Recall acquisition, but we are resuming activity and continue to be pleased with the quality, size, and scope of our pipeline. We’ve also discussed on recent calls how we have been impacted by the effects of currency translation in terms of absolute earnings and cash impact in U.S. dollars. While FX variability does impact the absolute dollars we report, the impact on our gross and adjusted OIBDA margins is muted because most of our expenses are denominated in local currency, thereby creating a natural hedge. On the other hand, we continue to believe that the current strong dollar is positive in terms of investment opportunity. Given our intent to expand what is today a relatively small international base, we believe we can create significant value over time by investing selectively in these higher growth markets using strong U.S. dollars during this part of the currency cycle. This may take the form of M&A or in the purchase or development of real estate. In both cases, we can benefit from investing at a low basis. In addition, we have deepened our focus in the real estate investment area, adding an experienced REIT asset manager to accelerate our plan to buy $700 million to $1 billion of our leased facilities over the next eight to ten years. As we seek to shift our mix to a higher percentage of owned properties, on average, we are achieving a spread of roughly 150 basis points between our going-in cap rates and our market cap rates, whilst positioning ourselves to capture long-term residual value from ownership. We think this is important and appropriate as a REIT, as it supports such being viewed more in line with traditional REITs by the rating agencies and investors. Importantly, our debt to total market cap and our debt to EBITDA measures are in line with major REIT sector leaders and our internal storage rental revenue fared better than these sectors during the recent recession, where we did not have a down year. Our low volatility business is distinguished by a track record of 26 years of consecutive growth in storage rental revenue. As we think about the opportunities to grow our storage rental business, it is important not to lose sight of the durability of the business, which is underpinned by roughly $1.5 billion of net operating income from our storage business alone. This amount of NOI is comparable to that generated by leaders in both the industrial and self-storage sectors. As we noted in recent calls, the restructure is consistent with our capital allocation goals; it does not limit our ability to fund our business plan as we become more active in buying our properties and executing on our acquisition pipeline. We expect to fund that incremental investment with excess cash flow or additional borrowing. Now I would like to turn the call over to Rod.

RD
Rod DayChief Financial Officer

Thanks Bill. Our results continued to demonstrate the durability of our storage rental revenue stream and the underlying strength of our business fundamentals. Our performance is tracking in line with our full-year expectations. To frame my remarks, I'll begin today with an overview of our second quarter and year-to-date performance, including an overview of results by segments. Then I will address plans and expectations related to our transformation program and our next step to improve service gross margins. I will briefly touch on the Recall acquisition costs and also our outlook for 2015, which remains unchanged since June on a constant dollar basis. Finally, I will address other metrics through a REIT lens. Let's turn to our worldwide financial results. Referring now to pages eight and nine of our supplemental, total reported revenue was $760 million, compared with $787 million in Q2 of 2014, down by 3.5% year-over-year. This reflects the continued strengthening of the U.S. dollar, which impacted total revenues by approximately 5.7% or $44 million. Excluding FX, and so on a constant dollar basis, revenues grew by 2.2%. Year-to-date reported revenues were $1.51 billion, compared with $1.56 billion in 2014. Again on a constant dollar basis, first half total revenue growth was also 2.2%. Worldwide revenues were driven by solid constant dollar storage rental revenue growth of 4.1% for the quarter and 4.63% year-to-date. This was offset by service revenue declines of roughly 1% for the quarter and year-to-date. As we did for the prior quarter, we are providing bridging schedules for revenue, OIBDA, and earnings which explain key variances in year-on-year performance. These are on pages 20 to 22 of the supplemental. Adjusted OIBDA for the quarter was $223 million compared with $242 million in 2014, down 7.7% on a reported basis and 3.3% on a constant dollar basis. The constant dollar adjusted OIBDA decline was driven by investments in new product introductions, for example in data management. In addition, we had a $4 million increase in bad debt expense. As Bill mentioned, during the offshoring of our billing activities, our collection efforts fell behind. However, we now have a strong remediation in place. Service margin declines were further driven on the business, although these were offset by improvements in storage contribution. Adjusted EPS for the quarter was $0.28 per diluted share, compared with $0.41 in the second quarter of 2014. The decline in adjusted EPS year-over-year is driven by a 10% increase in share count related to the special distribution, which we made in the fourth quarter of 2014. In addition to the earlier OIBDA write-down, adjusted EPS was also impacted by an increase in interest expense related to higher levels of debt. As stated in our earlier calls, this year-over-year increase in borrowings was driven primarily by REIT conversion related expenses, such as E&P purge and the depreciation amortization recapture payments. On the subject of debt, please note that it’s our intent to refinance our high coupon debt when conditions allow. Our structural tax rate for this quarter came out to 13.9% compared with 15% in the prior quarter, primarily as a result of a mix change in income from foreign jurisdictions. We continue to believe that our tax rate will be approximately 15% to 16% over the long-term. Normalized funds from operations or FFO per share was $0.48 for the quarter, and $0.98 year-to-date, while adjusted funds from operations or AFFO was $130 million for the quarter and $255 million year-to-date. Let me now turn to Records Management volume trends on pages 10 and 11. As you can see, we achieved positive volume growth of 1.2% in North America, 3% in Western Europe, and 9.7% in the other international segment, delivering global records management net volume growth of 2.8%. We continued to experience strong organic growth with second quarter total year-on-year volume growth of 1.8% excluding acquisitions. Underlying this growth is the stable incoming volume from existing customers. We continued to add approximately 30 million gross cubic feet of storage in the last 12 months, consistent with prior periods. Let's now turn to our financial performance by segments. In North American records management and information, or RIM, internal storage rental revenue was flat for the second quarter. Year-to-date North American RIM internal storage rental revenue grew by 0.2%. Internal service revenue growth showed a small improvement in Q2 with a decline of 1.3%, compared with a decline of 1.8% in Q1. Adjusted OIBDA margins in RIM remain solid at 39.4% for the quarter and 40.2% year-to-date. North American Data Management delivered storage rental internal growth of 5.3% in both the second quarter and year-to-date. However, service declined by 1.7% for the quarter and 3.8% year-to-date as we continued to see declines in re-file and transportation activity. During the second quarter, DM adjusted OIBDA declined to 50.8% from 52.7% in Q1 as we continued to invest in new products. The Western Europe segment generated solid results with 3.5% storage rental internal growth for the quarter and 3.6% year-to-date. This growth was partially offset by declines in internal service revenue, 4.8% for the quarter and 3.7% year-to-date. The decline in service revenue was driven mostly by the sale of our shred business in the UK and Ireland at the end of last year. Adjusted OIBDA margins declined in Western Europe this quarter due to legal costs related to a customer dispute. The other international segments, which is made up of emerging markets in Australia, built strong growth in both storage and service revenues. Storage rental internal growth was 11.5% for the quarter and 11.3% year-to-date. Service internal growth was 13.5% for the quarter and 10.2% year-to-date. This quarter emerging market revenues represented approximately 14% of our total revenues on a constant dollar basis. We expect adjusted OIBDA for this segment to deliver profitability on a portfolio basis in the high-teens to low 20s range. We continue to expand our exposure in these fast-growing markets. As Bill mentioned, we are leveraging our new leadership structure to focus on integrating across developed markets. The transformation program which was announced last month is expected to achieve approximately $100 million in reductions in overhead expense by 2018. Actions we have taken this month are expected to yield a full year $50 million benefit in 2016, and we will see partial benefits this year at the end of the year. However, these will be offset by severance related charges. We are anticipating approximately $10 million of severance related expenses in the third quarter as a result of this program. Let’s now discuss our initiative to maintain and enhance service gross margins. As Bill outlined, the decline in service gross margins has been a drag on our performance in the last four years. That said, it should also be remembered that on a constant dollar basis, we have seen good improvements in overall contribution year-on-year in 2014, and we expect the same in 2015. As discussed earlier and as you can see in the supplemental on Page 26, in the second quarter, service gross margins have declined year-over-year. The actions we are now taking are not yet reflected in our results. In the second half of the year, we expect to see an improvement in service margins that continues to target a year-end run rate of about 27%. Let’s touch on the Recall acquisition briefly. As Bill mentioned, we’re making good progress with regulatory filings. To prepare for closing we incurred approximately $6 million in professional and advisory fees this quarter. We expect about $10 million to $15 million of additional spend in each of the third and fourth quarters of this year. In addition to these advisory fees, we’re expecting approximately $20 million to $25 million charge in the second half of the year to prepare for integration, including Recall’s reconversion. Please note that these costs will be excluded from our adjusted OIBDA calculation, as they are one-time in nature. These costs are also included in our guidance related to the Recall acquisition when we announced the deal. As I mentioned at the outset, our outlook for 2015 remains consistent with the guidance we provided in June when we announced the definitive agreement to acquire Recall. Please note that at this time our guidance doesn’t reflect the benefit or impact of the potential Recall transaction. We’ll provide detailed guidance for 2016 and beyond at our upcoming Investor Day in October. For 2015, although we expect revenue to be as anticipated on a constant dollar basis for the full year, given FX movements, we expect reported dollar revenues to be towards the lower end of our range. As regards to other metrics for both constant and reported dollars, we expect them to be well within our ranges. Our strong cash flow continues to support our dividend at current levels within 2015. And we intend to maintain our dividend per share rates for the remainder of the year, subject to Board approval. Our estimate for cash available for distribution and discretionary investment for 2015 remains $470 million, giving us ample dividend coverage and the ability to fund our core real estate investments or other capital investments, which support approximately 2% organic growth in our adjusted OIBDA. 2016 and beyond, assuming the Recall acquisition closes and with the transformation benefits, we have excess cash that can support potential growth in the dividend and fund discretionary investments in real estate, M&A, or emerging business opportunities. These investments achieve returns and are accretive to shareholders. To sum up, we have adequate dividend coverage, excess capacity and attractive investment options. Shifting to the balance sheet, at the quarter end we have liquidity of approximately $750 million. At quarter end, our lease adjusted debt ratio was 5.7 times as expected. Turning now to REIT-specific metrics. We continue to achieve strong storage NOI of approximately $28 per racked square foot worldwide, which compares favorably to NOI per square foot for most property types within the REIT sector. Our racking and building utilization rates are high at 91% and 84% respectively for the Records Management portfolio. We believe that due to frictional vacancy, our maximum racking utilization is in the mid-90%s. When we enter a new facility, we generally target to achieve stabilized utilization in about three years' time. This investment page, Page 32, the supplemental, highlights our investments for racking projects in process, building development and building acquisitions by major geographic region, their total expected investment and anticipated NOI and returns. Please note that these investments represent growth-related investments and exclude consolidation-related expenses. As you can see on this page, we achieved high returns in our growth racking and building development projects. Lastly, similar to prior quarters, we are providing components of value, a summary of various metrics of our business to facilitate valuation. As a reminder, we present both storage NOI and service OIBDA excluding rent expense in order to present storage economics on a consistent basis whether facilities are leased or owned. To balance that, we provide total rent expense in the liabilities area. Overall, we believe this is a solid quarter and we’re pleased with the momentum we continue to see in the business. We remain on track to deliver our guidance for 2015. Looking ahead, we continue to focus on enhancing shareholder value by extending the durability of our storage rental business, improving service margins, achieving overhead cost reductions through our Transformation Program and realizing the synergy benefits of the Recall acquisition. Now that concludes my summary for the Q2 financials.

BM
Bill MeaneyPresident and Chief Executive Officer

Okay, thank you Rod. Before we turn to Q&A, just to wrap up, I just want to emphasize a few things. First of all, we have a number of exciting developments underway. We have already executed on half of our plan for significant cost reduction of more than $100 million, and we will see the full benefits of the first $50 million in 2016. We have actions underway, that we expect will stabilize the margins in our service business. We are keying up to close the Recall deal early next year and are organized internally to support a smooth integration of Recall. And our attractive emerging business pipeline is delivering interesting adjacencies that can further extend the durability of our enterprise storage business. Finally and most importantly, the strength of our business, plus the transformation program support approximately 11% to 14% growth in the cash we have available already next year to grow our dividend per share over time and fund our growth investment. This is even prior to the Recall acquisition. With that operator, we are ready to take questions.

Operator

Thank you. Your first question is from the line of Kevin McVeigh of Macquarie.

O
KM
Kevin McVeighAnalyst

Great, thanks. Bill, very helpful comment, are there any type of goal post you can give us in terms of cadence on Recall? I know there’s a process involved in any regulatory review, so on and so forth. But is there anything you could point to that we can codify to give us a cadence as the deal progresses over the course of the year?

BM
Bill MeaneyPresident and Chief Executive Officer

Hi, good morning, Kevin, thanks. Well, I think the same goal post that we set on the beginning is that we started the regulatory review process and engaging the regulatory review process is a six to 12 months process. We feel that we should be able to do it at the lower end of that range. So our expectation is still the first quarter for 2016, and we will continue to update that as changes occur. But I think right now that’s our expectation. I think the other goal post as we said on this call within the next few weeks both us and Recall will be issuing documents for their respective shareholders to prepare for the shareholder votes. But those are probably just two goal posts that are important to highlight.

KM
Kevin McVeighAnalyst

And then just the $20 million to $25 million of Recall reconversion costs, is that something about right? Does that mean it’s a dual track in terms of you start that reconversion process now? So when the deal occurs, it goes live on day one?

BM
Bill MeaneyPresident and Chief Executive Officer

Yeah, well, I think that’s a very good point. Yes, we will start incurring costs and Rod can give you more detail on that. We’ll start incurring costs as we speak now in preparing for the REIT conversion because we need to convert before the close of the first quarter. So you’ll also note us in the documentation that we have set up indicating that we will close at the beginning of a quarter. So the idea is that we will close either at the beginning of the first quarter, or the first month of the first quarter, i.e., around the month of January, or at the beginning of the month of the second quarter, again to give us time to actually execute the conversion. But the preparation for that conversion obviously starts well in advance of closing the transaction. I don’t know, Rod, if you want to add anything?

RD
Rod DayChief Financial Officer

Yeah, I think that’s a good summary, Bill. Kevin, I can’t exactly tell you when but it is by the end of the first quarter and obviously given the limited amount of time that we have, it’s important we get our preparation right in advance of that.

BM
Bill MeaneyPresident and Chief Executive Officer

And you’ll see that in the documentation on the deal that it’s very clearly set out that if we miss roughly the first four or five weeks of a quarter then it’s been a delay for the next quarter because again we have to get the conversions done during that period.

KM
Kevin McVeighAnalyst

Got it. And then this will be my last question, I apologize. Would there be any incremental tax expense like a step-up from the racking on the initial conversion or that $20 million to $25 million had primarily professional fees things like that?

BM
Bill MeaneyPresident and Chief Executive Officer

Yeah, that relates primarily to professional fees.

Operator

Our next question is from the line of Andy Wittman of Baird.

O
AW
Andy WittmanAnalyst

Hi, good morning guys. Bill, I had kind of a strategic question. We’ve seen some consolidation in the shredding industry. You guys have kind of aided that as you got rid of your shredding operations in Europe. I was wondering as you look at your business today, particularly as a REIT, does even more disposition of the shredding assets make sense for you, particularly if you could find a partner that would be able to do this with? Is it something you’d be open to considering or are you considering today?

BM
Bill MeaneyPresident and Chief Executive Officer

Well, I think first of all, just from a general capital allocation standpoint, we look at all our businesses and say, are we the best owner for that or is that where we should invest capital. So we look across all our businesses. To say that we are open to certain segments and not open to others would be a false premise. But I mean, we look with interest in terms of what seems to be happening in the shredding business. We feel good in terms of what we’ve done over the last six to 12 months in terms of, first of all, divesting those shredding operations in Australia and the UK, where we didn’t think we had the scale to get the kind of returns that we expect in demand. We’ve been separating the U.S. operation to be more of a standalone unit, so that it has the right focus and cadence associated with it to achieve the results that we think are possible. So I think we feel comfortable where we are, but we are also very pleased in terms of the way the market seems to be valuing these assets, whether we own them or we sell them.

AW
Andy WittmanAnalyst

Yeah, okay, good, that’s helpful. And then I guess I wanted to gain a little bit more in the transformation initiatives. Can you give us a little bit more detail about what some of those actions are and what confidence you have that they are not going to affect customer experience and your retention rates as business drivers?

BM
Bill MeaneyPresident and Chief Executive Officer

It’s an excellent question. So I think first of all, we need to start from a base, where our SG&A is 28% of sales, which is clearly on the upper end of what our company with our scale and scope should be able to achieve. It should – a company of our scale and scope should normally be in the mid-20s, probably more in the 23% to 25% range where a company of our size and complexity should be. So that’s the first thing to give you kind of a sense of what’s possible. Then the thing that triggers it is, this – really if you think about it, there are, I would say, three buckets. One is just getting efficiency through the reorganizations that we put all the developed markets under one leader, which allows you to rationalize. You know, you have two finance groups, you have two HR groups, you have two commercial leadership groups, you have two engineering groups, etc. So you’re able to actually shrink that to one to get some of the efficiencies and economies of scale that you would expect. I think the second aspect of it is looking at what we call general spans and layers. This is probably triggered by that move by just saying, what is the right breadth of responsibility in the organization? Do we have too many layers? I think that’s just good housekeeping that all companies of our size need to go through every so often to make sure that we don’t have what I would call organizational tree or layers building into the organization and to me that’s important not just from a cost standpoint but also from a dynamic standpoint. I mean, by dynamic I mean to be quicker, more nimble, less bureaucratic. So I think that shows up in the cost line but we also expect that to show up in the revenue line. And then the third aspect is it’s related a little bit to the aging of some of our receivables which led to a bad debt charge. We need to look at our processes first and foremost in terms of how can we make those more efficient and then where should those be done? Should they be done internally, should they be done offshore, or should they be done by an outside party? And that’s the third bucket that we’re going through to optimize those processes. And then figure out where they should be done, either within Iron Mountain or by an outside vendor. That’s kind of the three buckets that we’re going through. Now at last, we are actually using some outside help that have done this numerous times. So we feel very confident in terms of the targets and we feel very confident that we are doing this in areas that don’t impact the customer experience and service levels, and in fact, I think our expectation is it should improve as we look to make the organization quicker, more nimble and less bureaucratic.

RD
Rod DayChief Financial Officer

Yeah, I mean, I’ll just add to that, Bill. I think if you benchmark our announced initiatives against comparable type companies, I think, you can say we are behind where we should be on some of the stock. And that gives us confidence around the program that we have. So things like offshoring, we’ve done some of that, but nowhere near enough. We’ve done some process improvement but nowhere near enough. There has been some improvement in our SG&A and as a percent of revenue over the last couple of years. But again, if you look at benchmarks, if the median benchmark represents 25%, Bill, and you compare that to where we are, obviously, it gives us additional confidence around what we’re trying to do, it’s not rocket science, it’s just what we should be doing.

AW
Andy WittmanAnalyst

Yes, okay. I’ll leave it with that. Thank you.

Operator

Thank you. Your next question is from the line of George Tong of Piper Jaffray.

O
GT
George TongAnalyst

Hi, good morning.

BM
Bill MeaneyPresident and Chief Executive Officer

Good morning, George.

GT
George TongAnalyst

You’ve talked a bit about various puts and takes in OIBDA margin performance in the quarter and some of it appears to be transient in nature. Can you frame up how you think about OIBDA margin on a go-forward basis? And any plan for reinvestments of the benefits you expect from the transformation program?

BM
Bill MeaneyPresident and Chief Executive Officer

So I’ll let Rod kind of go through a little bit more detail, but the bridging to get at a high level and that’s one of the reasons why we provide these bridging schedules is so that you can – we’re highlighting the things that we view as one-offs either because something specifically had an impact in the quarter or when we’re talking about the service, where we think we’re going to end up at the end of the year, in terms of service margins based on some of the improvements that we’re making. So the intent of those bridging schedules is to guide you to where we think we’re moving to on a normalized basis on an OIBDA margin basis. But Rod may want to comment in more detail on that.

RD
Rod DayChief Financial Officer

Yes, maybe to answer the question in two parts. First, in terms of the underlying fundamentals of our business, we expect to see continuous improvement in performance as the year progresses. And that is to be expected as you know, key volume continues to build at decent prices closer to decent margins. So quarter after quarter after quarter, we should continue to build. Around that, obviously then you have to account for some of these one-offs in the quarter and we pulled out a couple of them, one with this bad debt expense issue and Bill referenced some of the costs related to the offshoring of our billing activities. We also had an investment in the data management space around new product introduction, which obviously the expectation of that is that there will be returns coming from that in future. So there were a couple of key one-offs for the quarter. But underlying that, there are solid fundamentals in the P&L, and we see a relentless drive upwards on the storage side.

GT
George TongAnalyst

Got it. And can you talk about how your storage pricing strategy compares with Recall, and how do you think about pricing as a contributor to storage revenue growth going forward?

RD
Rod DayChief Financial Officer

Well, I think, first of all I can’t comment in terms of comparing it to Recall. We haven’t exchanged or shared any commercial information. We have to go through the regulatory aspects. So I can’t comment on how we compare to Recall. But I think if you look at the results that we’re getting, as you can see – I mean, I think, the way you look at it is a couple of ways; we’re getting, I would say fairly regular yet modest price increases that offsets the low inflation levels. But I think as I said a number of times on calls, there’s been a low inflation environment, and price increases are more challenging. I think the other thing to look at if you look at what’s been happening to our gross margins associated with storage you can see that they actually show a slight uptick. So that gives you a view that in a low inflation environment, obviously we have wage inflation that is still real in terms of what we pay our folks. But we’re able to get both productivity improvements and pricing increases that allows us to maintain or slightly enhance our gross margin. So we feel pretty good in terms of what we’re getting in terms of pricing and something that we continue to work on. I think I told you we brought somebody in about a year ago - our new leader for the pricing group - that seems to be getting some good traction. But I also think it’s important to understand that in the low inflation environment, these are small numbers you are dealing with; you are not dealing with large orders of magnitude. But the results are good. I mean our gross margins are stable and I would say they are slightly higher than they were a year ago.

GT
George TongAnalyst

Great. Thank you.

Operator

Your next question is from the line of Andrew Steinerman of JP Morgan.

O
AS
Andrew SteinermanAnalyst

Hi Bill, I just want to know if the data management new products were as planned, should we expect a similar level of investment to $1.5 million in the quarter in the second half of the year? And if you could just give us a little description of these new products in the area of capability or is it something a little different from data archiving?

BM
Bill MeaneyPresident and Chief Executive Officer

Hi, Andrew, good morning. There are couple of aspects, first of all what we have in the bridge was a very specific one-off associated with our relaunch of a product that’s associated with secured destruction. So that was a very specific one-off re-launch of that particular product. I think that there even if you add that back, you will notice that our margins are slightly down from where they were a year ago, albeit they are very good margins. But they are slightly down. And we didn’t bridge to that for the reason that you are highlighting right now, is we have made a conscious decision to incur some additional OpEx which is associated with launching new products in that area. So one of the areas, I think we’ve publicized is that we have a partnership with EMC that offers both their customers and our customers a joint combination of our data center, our cap business and EMC's data domain business, which is a data center replication hardware offering they have. There is an investment associated with standing up those new products. Our expectation, the reason why we didn’t bridge that is you could say that was a one-off for this quarter, but our expectation is we will continue to make those kinds of investments as we see a pipeline of further products like this one that we’ve announced publicly with EMC. So I think that’s the way I would think about it. So what we have in the bridge was very specific to a product launch that we did this quarter that we really anticipate as a one-off, but we have incurred and we expect to continue to incur some OpEx investments in terms of the new product launches.

AS
Andrew SteinermanAnalyst

And was that always envisioned in the plan? So that spending now doesn’t affect the guidance for the year?

BM
Bill MeaneyPresident and Chief Executive Officer

Yes, that was always in the plan, and that was part of separating data management under a separate leader that we brought in just a year ago specifically. So that was part of the plan.

AS
Andrew SteinermanAnalyst

Okay. And then if you let me one more. The bad debt write-off, the 3.8, obviously that’s a surprise. Are you hoping some of the cost initiatives that you’re talking about could offset that? Or does that in some way kind of tilt the EBITDA guidance towards the lower end?

BM
Bill MeaneyPresident and Chief Executive Officer

No, I think that what we’ve said in the press release is that we think that on a reported dollar basis we are still within the range of our guidance. On a revenue basis, we think we’re towards the lower end of the range, but on a reported dollar basis, it’s in the range that we’ve guided to. So we still feel comfortable about maintaining our guidance that our OIBDA will be in the range as we stated at the beginning of the year. I think the specific highlight that we talked about on bad debt, I will ask Rod to comment further. But it’s more about an aging issue in terms of when we moved the process, we didn’t optimize the process fully before we moved to offshore. We moved that offshore and as we slipped behind on the aging. So we feel good over the next six months to 12 months that we are going to be able to get that back in shape and we are well underway, but you can imagine that when you slip behind on the aging it takes a while to fix it, but I don’t know Rod, if you want to add?

RD
Rod DayChief Financial Officer

That’s right, Bill. In terms of the general component of our bad debt provision it’s driven by the aging of our receivables and as we move this offshore, the aging deteriorated a little bit and therefore that triggered an increase in the bad debts and bad debt expense by half a point. And we are – just to be clear, we will get back to our normal range of about half a point of revenue in terms of bad debt expense.

BM
Bill MeaneyPresident and Chief Executive Officer

Absolutely right, and though we have various rigorous plans to ensure that that is the case. And just to be absolutely clear in terms of the contribution guidance, we’re in no way signaling the lower end of the ranges very well, so within the range on that.

Operator

Perfect, thank you.

O
DD
Dan DolevAnalyst

It’s actually Dan Dolev with Jefferies. Thanks for taking my questions. I’ll ask a few questions. We thought a few weeks ago, Bill, you did the conference call, you mentioned service margins stabilizing. I see a 330 basis points decline. What gives you confidence that you could actually stabilize margins in the coming quarters?

BM
Bill MeaneyPresident and Chief Executive Officer

Hey, good morning, Dan. It’s a good question. If we look – obviously this quarter was below our target of getting to 27% by the end of the year. But if you actually – when we looked at the performance as part of the improvement program, we looked at. If we took the month of May, May was a specifically weak month for us in this quarter in terms of our service margin and profitability. If we took the month of May out, we would have 26.1% service margin in this quarter, which is still 100 basis points, but we know how to bridge that gap. Even when we looked at May, some of the things that we’re introducing, we get the spirit to manage them. So with the month of May, was particularly soft for really two reasons. First, we didn’t variabilize some of our cost quick enough associated with a normal downtick in revenue because there is some seasonality in revenue and plus it was a short month. But in terms of the way the holiday was felt, those two things that – which is part of our program, if you remember our three-pronged approach to this is variabilizing our cost base, which the month of May is a great example of what that program is designed to offset. The second thing is using outside parties, and the third one is technology. So again, the data for the quarter looks worse than it is, if you know what I mean in terms especially if we add back some of the programs that we’ve introduced to minimize that going forward. So we still are sticking by our guidance that we think by the end of the year we will be at 27%.

DD
Dan DolevAnalyst

Thank you and two more quick questions. On the bad debt expense, I know you’ve addressed it fully, so the uptick from 50 basis points to 70 basis points, is that – was that a result of aging or did I misunderstand it?

BM
Bill MeaneyPresident and Chief Executive Officer

Yes, it’s primarily the result of aging, the issue that we’ve referred to earlier.

DD
Dan DolevAnalyst

Got it. And without result in any impairment to the capitalized acquisition cost on the balance sheet?

BM
Bill MeaneyPresident and Chief Executive Officer

No, not any.

DD
Dan DolevAnalyst

Nothing, okay. And then last question, when I was looking at EPS obviously was a little slight outdated versus consensus. If you look at both FFO and EPS, it does imply a very significant acceleration in the second half of the year. Can you maybe talk a little bit about how your components have actually getting it?

BM
Bill MeaneyPresident and Chief Executive Officer

Well, I think first of all on the AFFO basis, you see, we’re actually ahead of where the consensus stands coming out. So first of all from a cash standpoint, we’re actually ahead. I think the bridging schedules do a pretty good job in terms of what the puts and the takes were in terms of why we ended up a bit below on consensus. But if you just look at our normal ramp in the second half of the year, part of this is just in terms that we don’t give quarterly guidance; we give annual guidance. Part of this just a way that the revenue aside from the carve-out our annual guidance. So if you just look at historical ramps in the second half, you don’t find this as a surprise. That’s why I feel very comfortable in terms of maintaining our guidance.

RD
Rod DayChief Financial Officer

I mean maybe just talk specific about EPS, year-to-date we’re at on an adjusted basis $0.60 a share, the midpoint of our guidance for the full year is $122.5 million. And so you could see we’re almost at the halfway point. As I was saying earlier, because of the dynamics of our business, the storage revenue and contribution growing and quarter-after-quarter, I think you can sort of see how we can reach that point.

DD
Dan DolevAnalyst

Right. I was also referring to FFO, it’s a midpoint is about – it prices about 14% acceleration?

BM
Bill MeaneyPresident and Chief Executive Officer

And I think what’s significant is the same logic, if you like in terms of the flow-through, the P&L. So we expect contributions to continue to build that actually has a disproportionate impact, in sense of the flow-through to the FFO. So again we feel comfortable around that number.

Operator

Your next question comes from Shlomo Rosenbaum of Stifel. Please go ahead.

O
SR
Shlomo RosenbaumAnalyst

Shlomo here. Thank you very much for taking my questions. Yes, Bill, could you go into little bit more detail on what you mean about variabilizing the cost with third-party logistics vendors. Are we talking about working with like UPS or FedEx or something like that?

RD
Rod DayChief Financial Officer

Yeah, good morning, Shlomo. Well, there are two parts, it is variabilizing and using third-party so that there – and you could say that there are kind of two – there are two ways of doing it. We also look at variabilizing more of our costs under our own control and we do use temporary workers that are trained and certified and cleared by Iron Mountain. It’s about getting that mix right. So first of all, we do have a variabilized workforce internally and making sure that we are using more of that, which is the thing that helps to offset some of the variabilization of some of the service revenue that goes through and then service revenue for us. Don’t forget it is more than just transport; they are rather bid that are contract based, so that’s one aspect. And then on the 3PL side, yes, it is like the – it’s the FedEx and UPSs of this world and other courier services. We use some of them today, we’ve used them more extensively in some European countries, where we – where the necessity has come even faster because of the size of some of our operations in some of the smaller countries. And we’re using that same model and know-how to accelerate that in North America. So it is anytime those logos and others.

SR
Shlomo RosenbaumAnalyst

Okay, great. Thanks for your clarification. Then maybe this is for Rod, the non-real estate investments in the maintenance CapEx, at least for the first half of the year are trending well below the annual targets. Is this expected to get a tick up in the second half of the year or are current levels a good run rate? How should we think of that?

RD
Rod DayChief Financial Officer

I think there will be a tick up in the second half of the year, but closer to the guidance numbers that we issued in June. It’s just to do with the phasing of certain aspects of all activity.

SR
Shlomo RosenbaumAnalyst

Is there a seasonal component to that or does it just happen to be year-by-year, and works in different parts of your base and what your plans are?

BM
Bill MeaneyPresident and Chief Executive Officer

It’s actually largely based on our own plans. It’s an element of seasonality around some of the maintenance activity that we prefer to sort of backload as opposed to doing in the middle of winter of January, February. But it’s largely down to our own planning.

SR
Shlomo RosenbaumAnalyst

Okay, and then am I understanding you correctly that while you are guiding to the low end of the guidance range because of currency for revenue, you are not signaling that for – am I misunderstanding that?

BM
Bill MeaneyPresident and Chief Executive Officer

Yeah, that’s correct, that’s correct. So we are taking action on cost to ensure that we still stay towards the midpoint of our guidance right from a constant and a real dollar perspective on contribution and cash.

SR
Shlomo RosenbaumAnalyst

And is that because of this program or largely because of the other programs that you just announced?

BM
Bill MeaneyPresident and Chief Executive Officer

No, actually that’s not that specifically. In fact the transformation program for us is neutral because we incur severance charge during Q3, which will be offset by run rate savings in Q4. This is more due to other activity that we’re taking.

SR
Shlomo RosenbaumAnalyst

Okay, great. Thanks.

Operator

There are no further questions at this time.

O
BM
Bill MeaneyPresident and Chief Executive Officer

Okay, well thank you very much everyone for joining us this morning and have a good day.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

O