Iron Mountain Inc (IRM) — Q1 2019 Earnings Call Transcript

Thank you, Kate. Hello, and welcome to our first quarter 2019 earnings conference call. The user-controlled slides that we will refer to in today's prepared remarks are available on our Investor Relations site along with a link to today's webcast. You can find the presentation, earnings press release, and the full supplemental financial information at ironmountain.com under about us/investors/events and presentations. On today's call, we'll hear from Bill Meaney, Iron Mountain's President and CEO, who will discuss first quarter performance and progress toward our strategic plans; followed by Stuart Brown, our CFO, who will cover additional financial information and our outlook for the remainder of the year. After our prepared remarks, we'll open up the call to Q&A. Referring now to Page 2 of the presentation. Today's earnings call slide presentation and supplemental financial information will contain forward-looking statements, most notably our outlook for 2019 financial and operating performance. 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 for a 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 reconciliations to these measures as required 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. The first quarter of 2019 was marked by continued progress against our strategic plan. Some of the highlights included: revenue growth ahead of our expectations, solid global volume performance from our traditional records business, progress in increasing our exposure to new storage areas, highlighted by the recently announced MakeSpace JV in the consumer storage area, and continued build-out of our data center business. Tempering this progress was the underperformance of adjusted EBITDA against our expectations for the quarter by approximately $10 million. We should emphasize, however, that we remain confident in achieving our budget expectations in line with the full-year guidance targets we issued in February. Continuing with this summary in a little bit more detail, as you saw in our earnings materials, revenue growth in record storage volumes continued to be very durable with total revenues increasing 4.5% on a constant currency basis, while our organic storage revenue grew 2%, consistent with the 1.9% organic storage growth recorded in Q4. Our revenue performance was slightly ahead of our expectations due to strong volume and revenue management, and despite softer service revenue, we expect total revenue to remain on track with our outlook for the year. Separately, we experienced higher-than-anticipated labor costs, which are temporary in our secured destruction or shred business. This was the single biggest contributor to our adjusted EBITDA underperforming our expectations by $10 million or 3% for the quarter. Let me give you a bit more detail on what led to the earnings results this quarter. Our performance remains on track with our expectations in the first two months of the year, with our underperformance occurring primarily in our shred business during the month of March. Shred increased headcount in an overall attempt to reduce overtime that we did not achieve the reduction necessary to deliver the targeted level, which resulted in unanticipated higher labor costs. Our confidence in delivering full year guidance is in part driven by the investment we made at the beginning of the year in our global operations support team. This team is tasked with driving improvement in both operating and overhead costs globally. As a number of these improvements continue in their implementation, we expect it will ultimately lead to a marked improvement in performance in the second half of the year. Moreover, we believe a number of these initiatives will result in a stronger exit rate than we initially planned. From a strategic standpoint, this implies we expect to exit 2019 with an organic adjusted EBITDA growth rate of approximately 4.5% and on track towards our target of 5% for the end of 2020. Stuart will provide more detail around our expectations for the rest of the year, including other items impacting comparability. After adjusting out the $10 million of unfavorable cost performance, you'll see that the first quarter corporate overhead costs increased year-over-year as we continue to invest in operational improvement, as well as continued investment in innovation and new product development. These investments are, in some areas, already leading to both identification of areas for improved cost performance and revenue opportunities, which should continue to drive future growth in earnings and fund our growth in dividends to investors. A recent example of this can be seen in our continued progress with our insight platform and partnership with Google. Three weeks ago, at Google Next, Google awarded Iron Mountain its artificial intelligence and machine learning partner of the year. We are proud of receiving this award in an area so important in the realm of information management. Let me now turn to volume performance in the quarter as well as changes to our volume reporting, which can be seen in our quarterly earnings supplement. As Stuart mentioned last quarter, we took a fresh look at our disclosures to streamline where possible, as well as ensure we are providing our shareholders and analysts value-added information to properly evaluate our businesses and related performance. We revised our volume recording to better reflect how we manage the business and provide visibility into our comprehensive portfolio of physical storage solutions beyond records, including Tape, Valet Consumer Storage, and our Adjacent Businesses of fine arts storage and entertainment services. While the non-box storage currently only represents approximately 1% of our storage volume, we believe these areas have the opportunity to represent significant growth going forward. Turning to our actual volume results for Q1. By all measures, it was a solid quarter for volume growth. First, let me focus on organic volume growth from our traditional records management business. In the first quarter globally, our cubic feet of record storage increased from 686 million cubic feet a year ago to 696 million cubic feet, with $2.4 million of the $10 million cubic organic, delivering 30 basis points of the year-over-year growth. Moreover, during the first quarter, we delivered growth of 3 million cubic feet organically or an increase of 40 basis points. Breaking the worldwide volume down further, we continued to see a consistent trend in North America with a decline of 130 basis points year-over-year. This is a slight improvement from recent quarters due to lower destructions and flat Q4 to Q1 organically. Western Europe and other international continued to deliver consistent levels of organic volume growth, 2% and 3%, respectively year-over-year. Turning to our new reporting of storage volume achieved in Adjacent Businesses, primarily fine arts and entertainment services and consumer, we have routinely included these businesses when reporting our revenue per square foot and occupancy, but not in our volume reporting. Starting this year, we will also provide a breakdown of the volume stored in these businesses. You can see in our reporting that these businesses, while small, have delivered approximately 5 million cubic feet of net growth over the last two years, representing 20% of the overall volume growth for the company. Moreover, we see the volume contribution of these businesses accelerating as we continue to build further scale in these relatively new storage areas for Iron Mountain. A good example of this growth potential is illustrated by our recent expansion in the consumer space through the partnership with MakeSpace. We're excited about the opportunity to serve as a logistics and storage arm in the valet consumer space. This venture combines the strongest capabilities from both of our organizations, leveraging MakeSpace's strong brand and front-end customer acquisition technology platform with our world-class operational scale and logistics expertise. Iron Mountain has the opportunity to accelerate growth in the consumer market, benefiting from MakeSpace's strong market position and ambition to expand into new markets. Finally, we continue to make steady progress in our data center business. You will see in this quarter we signed a new or expanded leases for almost 4 megawatts versus the 3.3 megawatts in Q4 on a total build-out capacity of a little over 100 megawatts. While today, data center is about 6% of total revenue, it is already contributing more than a third of our annual EBITDA growth. Before handing the call over to Stuart, I wish to reiterate that we remain confident in the health of the underlying business characterized by the growth in revenue from our records and information management business, as well as the increased momentum of our growth portfolio, including Emerging Markets and data centers. While we're disappointed by the cost impact this quarter, we continue to see the full year in line with our guidance and with an expected slightly improved exit rate going into 2020. With that, I will turn the call over to Stuart.

Thank you, Bill, and thank you all for joining us to discuss our first quarter 2019 results. I'll start off the details around Q1 performance, with additional information around the cost control issues and overall results, including the initiatives we're taking to expand margins and deliver on your expectations for the remainder of the year. Slide 7 of the presentation summarizes our quarter's financial results. As Bill mentioned, we're pleased with our first quarter revenue, which approached $1.1 billion, reflecting growth of 4.5% on a constant currency basis. Storage rental revenue increased 5.1% on a constant currency basis, driven by growth in our data center, emerging markets, and fine arts businesses and better organic volume performance. Service revenue increased 3.5%, excluding currency changes. Total organic revenue grew by 1.9% in the first quarter compared to the prior year. Organic storage revenue grew 2% for the quarter, or about $13 million, supported by good results in revenue management and from organic records management volume growth, which increased 30 basis points in the quarter and accelerated from prior quarters. Organic service revenue grew by 1.8% in the first quarter, a bit less than we anticipated due to lower box destructions in North America, lower project revenue globally, and lower prices for recycled paper. The gross profit margin declined 70 basis points from last year to 56.3%, due in part to the operational issues Bill discussed, as well as a 20 basis point impact from the change in lease accounting. I'll have more on the cost actions we're undertaking in a moment. Our adjusted EBITDA declined $18.5 million or 5.4% to $325 million, with the margins contracting 210 basis points year-over-year to 30.8%. Excluding the impact of currency changes, adjusted EBITDA declined $8.7 million or 2.6%. In addition to the cost of sales already discussed, the margin contraction reflects SG&A, excluding significant acquisition costs, growing 140 basis points as a percentage of revenue or almost $18 million from the year-ago period. The increase in SG&A reflects higher IT-related costs, including information security and investments in our digital offerings like the Iron Mountain insight platform and partnership with Google. We also invested in a new global operational support group and added G&A from last year's data center acquisitions. Most of this increase in SG&A was anticipated and reflects strategic initiatives for the future. Turning to other metrics, adjusted EPS for the quarter was $0.17 per share, down from $0.24 per share a year ago. AFFO in the quarter was $193 million, down approximately $28 million from the prior year, reflecting the adjusted EBITDA decline, increased interest expense, and slightly higher cash taxes compared to a year ago. Looking at organic revenue growth on Slide 8, you can see developed markets organic storage rental revenue came in at 1.1% for the quarter, slightly better than Q4 2018, reflecting contribution from revenue management and improved volume performance. Organic service revenue in developed markets increased 1.8% for the quarter, a moderation from the levels seen in 2018, due mainly to lower destruction service revenues, paper prices that have moderated from recent highs, and one fewer working day in the quarter. In other international, we saw continued healthy organic storage revenue growth of 4.6% for the quarter and 3.3% growth in organic volume. Organic service revenue declined 0.6% in this segment, due mainly to a slowdown in project revenue. In the supplemental, you can see the data center business delivered organic revenue growth of around 3% for the quarter. Adjusted for the churn in Phoenix, which we called out last quarter, the underlying organic revenue growth was about 9%, similar to levels seen in Q4. Churn in the quarter was about 1.4%, when normalized with the Phoenix move-outs, which were anticipated when we acquired IO last year. As Bill mentioned, we're trending well towards our target of leasing 15 to 20 megawatts for the year. Aggregated data center leasing in the quarter and the related rate per kilowatt included 1.6 megawatts of powered shell in New Jersey, space that was vacant when we acquired IO. Our Adjacent Businesses also performed well, with revenue growing 10% on an organic basis in the quarter. With the international scale we have now built, we continue to see very healthy demand from galleries, museums, and studios. Slide 9 details the adjusted EBITDA margin performance of our business segments. On a year-over-year basis, total margins were impacted by the increase in SG&A. The North America RIM margin declined by about 40 basis points, largely because of our shredding business, as previously discussed, while the changes in lease accounting impacted margins in the segment by about 20 basis points this quarter. In the North America data management margin declined due to lower volumes and investments we're making in new products and services, including Iron Mountain. Revenue management is helping to offset some of the declines and support healthy margins, which remain above 50%. In Western Europe, first quarter margins contracted 230 basis points, reflecting higher temporary facilities costs and consulting costs for process improvements in France. Other international margins were up 10 basis points in the quarter, despite a 70 basis point impact from the adoption of new lease accounting standards. In the Global Data Center segment, adjusted EBITDA margins were 42.3% in the first quarter, reflecting the acquisition of EvoSwitch in the Netherlands last May, which operates at lower average margins, and the impact of the Phoenix churn, which, as mentioned, was anticipated. Turning to Slide 10, you can see that our lease-adjusted leverage ratio at Q1 was 5.8x, modestly higher than the year-end, primarily due to the softer adjusted EBITDA performance. We expect leverage to decline in the back half of the year, benefiting from capital recycling proceeds and expectations for increased adjusted EBITDA, and to end the year around 5.5x as we guided to last quarter. We're on track with our capital recycling program, and subsequent to the end of the first quarter, we closed on a number of real estate sales, generating net proceeds of over $40 million as we consolidate into our new UK records facility. We've spent more than $15 million of additional risk capital for the remainder of the year and are evaluating third-party capital via joint ventures to fund the Frankfurt data center development. Before discussing outlook, I want to take a moment to outline the plan to improve margins this year and set us up for success in 2020 and beyond. First, we're in place over two dozen operating initiatives. Without going into details on all of the initiatives, one example is improving transportation costs, both routing and fleet utilization. This resulted in higher-than-previously-anticipated expense in Q2, which is one-time in nature but should reduce freight and transportation costs in the back half of the year and continuing into 2020. Other steps being taken include further labor initiatives and vendor consolidation to reduce supply costs. Second, as previously discussed, we created a global operations support team at the end of last year to identify areas of improvement focused on additional labor, transportation costs, and revenue management. This includes expanding the use of productivity management tools, with engineered labor standards to improve service margins globally, as well as the centralization and standardization of transportation training. The first half of 2019 includes costs to establish the team and some third-party professional fees, and we expect to see the benefits in our results beginning in the second half of the year and into 2020. Turning to guidance, we're reaffirming the range that we provided in your Q4 call in February and remain confident that we can achieve this despite the first quarter performance and expected residual effect on the second quarter and headwinds from declining recycled paper prices. The operating lower end of our guidance remains a little wider due to uncertainty with regard to exchange rates. We continue to expect total organic revenue growth to be in the range of 2% to 2.5% in 2019, including organic storage revenue growth of 1.75% to 2.5%. We continue to expect service organic revenue growth in the low single digits, although the second quarter will be flattish as we are cycling against higher destruction service revenue and much higher paper prices. While we do not generally provide quarterly guidance, given the cost issues experienced towards the end of the first quarter, we wanted to provide some further color on our expectations for the rest of the year. We expect some of the higher labor costs to secure destruction will continue into the second quarter until our actions, which are already underway, begin improving the cost of sales. We also expect some one-time costs associated with the operational improvement initiatives I described earlier. However, SG&A costs should decline sequentially, and as a result, we expect the adjusted EBITDA margins in the second quarter to increase 150 to 200 basis points from the first quarter. Margins should then improve by 200 to 300 basis points per quarter through the second half of 2019 as cost improvement initiatives flow through. As Bill noted, we remain committed to the full-year guidance provided on our last earnings call. In summary, Q1 performance reflects strong underlying health and shows the contribution from revenue management and improved volume trends. We continue to see good results from our efforts to extend into the high-growth markets in our data center platform, and our Adjacent Businesses are showing encouraging progress as we gain greater scale. We're confident that the actions we're implementing to improve margins will allow us to achieve our long-term targets. Then, operator, we'll move to the Q&A.

Yes. Just on adjusted SG&A as a percent of revenue for the quarter, it was, as you acknowledge, elevated at 25.5%. I'm just wondering how much is attributable to labor? Or what are other drivers of that increase?

The majority of the increase is due to a couple of factors. First of all, the increase year-over-year from a dollar basis comes from the acquisition of EvoSwitch and IO late in January last year, resulting in some increase in overall overhead costs. Additionally, we are seeing an increase in our operations team, which we operate as a cost overhead, as well as some consulting costs. These are the two biggest drivers. So when you think about the global operations team, as we scale that out, you've got costs in the first quarter that will continue into the first half of the year, which will switch into benefits as they more than pay for themselves in the second half of the year. Also, we have tried to accelerate some of our work given the operational issues, moving some initiatives earlier in the year that we would have otherwise spread out into Q2.

Okay. Great. And then just following up on the MakeSpace acquisition. I just wonder how you view that business sitting in Iron Mountain? How are you integrating it? Will that business run with Iron Mountain's trucks? And how do the margins compare to your traditional storage business?

No, it's a good question, Sheila. So first of all, we're a significant minority shareholder in the joint venture. So it's set up as a JV rather than integrating MakeSpace. So for us, this is a perfect relationship. Besides being a large minority shareholder in the company, we're also the exclusive provider of the backend services. The backend services mean that our trucks and drivers will be picking up the material or delivering the material in our facilities. So we're the exclusive service provider to that joint venture, which effectively gets us into the consumer space with a B2B relationship. So we're still a business-to-business with MakeSpace, and we gain from their understanding of the consumer space. They've proven to have a very effective brand and marketing approach, as well as efficient customer acquisition costs. We're pretty excited about the relationship. From their standpoint, we bring logistical handling expertise, which frankly both them and other consumer self-storage companies have struggled with, and this particular area. So we're able to leverage what is really our core strength, and also use our real estate footprint. So they're pretty excited because we're able to help them expand much quicker across the United States since we're already present. We believe it's a very synergistic relationship that we've been able to carve out with them.

So the venture will store the material in your facilities?

Yes, exactly. Exactly.

I saw on the presentation that you're seeking joint venture partners for the Frankfurt DC project. I was wondering if you could provide some color on what that might look like? And the types of providers you are looking to partner with? And then just a follow-on to that, just curious to hear your overall comments on the European data center market as we hear that demand is pretty strong, especially in the flat areas.

So Nathan, let me start with the last question and then Stuart will talk about how we think about joint ventures generally and specifically why we called this out that we're considering for Frankfurt. You're right. I mean we remain bullish on the European data center market. We're pleased with our strong footprint established in London in the floor space with the acquisition, and out with the EvoSwitch in Amsterdam. So we’re really happy with that. Now with the land in Frankfurt, as you know, Frankfurt, London, Amsterdam, and Paris are considered top markets in Europe, and the growth continues to be robust in both wholesale and retail markets. Thus far, we’re pleased with what's happening here, though we think the market has come into its own a little behind the U.S. outsourcing but is definitely picking up pace at a good rate.

On the Frankfurt joint venture that we're evaluating, yes, there's lots of capital out there looking to be put to work in the data center business, and the type of structure we would be looking at would be something fairly typical for other REITs. Why Frankfurt? It's really because, if you look at some of the development we've got in the other markets in Amsterdam and Arizona, there's frankly too many conflicts with our existing operations. So Frankfurt is easy to carve out into its own joint venture, and there wouldn’t be any conflicts with the existing Iron Mountain properties. We're in the early phases of that. We will evaluate the demand.

Okay. That's helpful. Is there any preference for public or private, or is there a public eye on the best of potential JV? Or can you give any insight on that?

It's most likely long-term pension-type money that's looking for these types of investments, as some may be in this for a long time as we build it out.

That's helpful. And just another question on the Google partnership. How should we think about that in terms of bottom-line numbers? I know it's very early days, but do you expect it to have a meaningful impact on AFFO or any color would be helpful on that.

We'll give you more guidance as we get into, for sure, in our 2020 outlook. This year, our expectations should be that any revenue we earn will be matched with the costs stemming from this partnership. I might have mentioned in the last call that we've conducted over a dozen proof of concepts across various industries, and we're really excited by the results we are getting. We see this as a natural add-on to our digital scanning business. Globally, we do about $200 million worth of just what I would call digital scanning, transforming physical documents into digital formats. That business grows at a high single-digit to low double-digit organic growth rate. We see this as an opportunity to accelerate that growth as people look to gain more benefits when they implement digitization of historical physical documents. It is still early days, but we really think this will accelerate that high single-digit to low double-digit growth that we already have in our digitalization business.

Looking at your developed markets, it appears new sales dropped from 1.6% last quarter to 1.5% this quarter, and new volume from existing customers dropped from 3.8% to 3.7% while discretion picked up from 4.6% to 4.9%. Can you talk about when you might expect these trends to stabilize and what initiatives you have to potentially drive an inflection?

I think, George, what I would say is it depends on which - whether you're looking quarter-to-quarter, year-over-year, and if you're looking at just North America or both North America and Europe. Some of the movements you're highlighting are within the range of what we expect. So we don't see any major change. The results reported this quarter are better than reporting in the last two quarters. But we don't see it as a major change. If you look overall, we stated that destructions would be in the 4.5% to 5% range, and we’re currently at 4.5%. Any given market can experience some fluctuations. We still think we're operating within that range. We should see it change as Emerging Markets become a larger part of the mix. In terms of what will make a long-term impact, now that we started to report the volumes of these areas, you'll see that the non-records business over the last two years has been substantial, adding about 5 million cubic feet, which is about 20% of overall growth. So while small in terms of overall contribution, those growth areas can bring inflection points in the future. Overall, for the records business, it's steady as she goes, with a bit of improvement, as Emerging Markets grows in part of the mix.

Very helpful. Your most recent 2020 targets include revenue of $4.6 billion to $4.75 billion, and an EBIT target of $1.86 billion to $1.76 billion. Could you discuss the progress in reaching those targets? And where do you see EBITDA margins heading, especially given the margins are relatively FX neutral?

George, you're talking about our margin progression for the year and where we expect margins to go. If you look through the first quarter, we talked about some unusual expenses. The guidance comments imply about a 650 basis point margin improvement from Q1 to Q4, resulting in a pretty good exit rate from '19. In dollar terms, we're a little over $1 billion in quarterly revenue, which means EBITDA dollars going up from Q1 to Q4 by about $70 million. One of the major drivers for this will be revenue management as well as cost improvement initiatives as we progress through the year.

It's Andrew. The organic revenue growth was 1.9% in the first quarter, and the guidance for the year is still 2.0% to 2.5%. What gives management confidence about some acceleration in organic revenue growth as the year progresses?

Andrew, this is Stuart. Storage is obviously the biggest driver from a gross profit and cash flow perspective, and it's right on track. The growth from service revenue in Q1 and Q2 will be slower than we saw a year ago, particularly in Q2, given lower recycled paper prices. However, some of the other service areas, including our project revenue pipeline, will drive service growth in the second half. We remain confident in the implied service growth. Our overall confidence in revenue continues to strengthen even more than it was a month or three months ago, as we can see the pipeline getting healthier.

Stuart, I was just wondering, the dollar has strengthened a little since you reported last. How does that factor into your guidance?

Yes, our EBITDA guidance this year is wider than we had historically. It incorporates FX fluctuations and the effect of currency changes in the first quarter, which impacted our year-over-year numbers by about $10 million and was built into our guidance. At this point, the currency is sort of in the middle of our guidance range.

So last quarter, you mentioned a $20 million to $25 million EBITDA headwind from FX for the year. Do you believe the estimate has shifted to about $10 million to $15 million for the balance of the year?

Yes, that's about right.

I noticed on your CAD schedule that there's an incremental $50 million tied to Frankfurt, offset by $50 million of capital recycling. Can you give some insight on the confidence around those assets being identified on the market and how that will translate?

Yes. We have a package, about $25 million worth of real estate in North America that is currently on the market, with good demand. We also have additional packages ready to go. The bigger question revolves around recycling more real estate while assessing whether it makes sense for us to invest in a partnership for the Frankfurt line of purchase.

So it’s fair to assume that the $50 million number in there reflects you doing it alone, which could be less if you find a partner?

Yes, correct, correct. If we find a partner, we can leverage the land, and we can get capital back from that partner right away.

I have two quick ones, if you wouldn't mind. First, looking at Slide 17, you showed $380 million of incremental capital needed for discretionary investments beyond the capital recycling and joint venture. Could you comment on your comfort level with your current leverage? And I noticed you haven't accessed equity in a year and a half; could you comment on the possibility of accessing the equity capital markets?

In a snapshot, we are not uncomfortable with our current leverage as it is well-priced. We typically price towards the upper end of the investment grade, which demonstrates a strong position. If you look at us relative to REIT peers, we are quite aligned with them. We would like to maintain a cushion between our covenants and leverage, creating dry powder for opportunistic events. As such, we are not in a rush to deleverage, but rather want to do it opportunistically. Given the cash generation of our business, we feel comfortable that we can grow dividends while gradually deleveraging. Regarding equity issuance, we gauge it based upon the NAV of the company; currently it doesn't make sense given our share price.

Overall, we get credited for the durable cash flow of the business, as mentioned. When looking at debt, we have a strong standing in the market and investors comprehend the growth and cash generation of our data center builds as well.

Regarding your capital needs, can you give some insight into your comfort with how the market will translate to those requirements and potentially addressing equity?

Regarding the revenue management initiative, it presents an opportunity for us in the second half of the year as we see positive trends. Typically, about 15% of revenue management benefits materialize in the first quarter. A significant portion comes through in the second half of the year, and revenue management should not only help us maintain but grow margins as we see the overall revenue increase as a result. Consequently, there should be a gradual improvement in our EBITDA performance through the year.

Stuart, can you walk me through the labor costs in the U.S.? You hired additional people in order to not have overtime with the existing ones, but the timing didn't work out. Can you provide more detail on that?

With all good intentions, demand for labor in North America has increased, particularly for warehouse workers and drivers. We took steps last year to raise wage rates, intending to offset overtime. While we had good intentions, we overstaffed, which resulted in productivity suffering during the training period for new hires. This issue manifested itself in March when productivity improvements didn't show up as anticipated. Overall, Iron Mountain's labor rate as a percentage of revenue actually declined but not as expected due to these operational issues. The good news is that we can correct this situation quickly.

Is there a connection to this regarding the higher margin decline in Western Europe as well?

Yes, there are similar struggles, particularly with project revenue in Q1. We managed toward contingent labor projections poorly, leading to lost productivity there as well. We are addressing both issues through planned initiatives.

I wanted to revisit the expense topic. It appears there was a large increase in storage operating expenses year-over-year, including a notable rise in labor costs. Are we seeing cost pressures consistently across the entire business, or was there anything one-time in that line?

The other item impacting that would be the changes in lease accounting year-over-year, which also plays into that increase. There are no straightforward global labor pressures evident in the business that we anticipate.

These operational issues, such as the $10 million unexpected shortfall, happen occasionally but let us assure you these do not signify a broader concern. The flow from your question about the increased SG&A stems from planned initiatives. Consequently, we are positioned for improved EBITDA contracts going forward.