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Iron Mountain Inc  (NYSE:IRM)
Q3 2018 Earnings Conference Call
Oct. 25, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Iron Mountain Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) 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.

Greer Aviv -- Senior Vice President, Investor Relations

Thank you Kary. Hello and welcome to our third quarter 2018 earnings conference call. The user-controlled slides that we refer to in today's prepared remarks are available on our Investor Relations website along with the link to today's webcast. You can find the presentation at ironmountain.com under About Us/Investors/Events and Presentations. Alternatively you can access today's financial highlights press release, the presentation and the full supplemental financial information together in one PDF file by going to investors.ironmountain.com under financial information. Additionally we have filed all related documents as one 8-K available on the IR website.

On today's call we'll hear from Bill Meaney, Iron Mountain's President and CEO who will discuss highlights and progress toward our strategic plans; followed by Stuart Brown, our CFO, who will cover financial results.

Referring now to page two of the presentation, today's earnings call, slide presentation and supplemental financial information will contain forward-looking statements and most notably our outlook for 2018 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 and safe harbor language on the slide, and our 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 a reconciliation to these measures as required by Reg G are included in the summer supplemental financial information.

With that Bill will you please begin?

William Meaney -- President and Chief Executive Officer

Thank you Greer, and hello everyone. Before I begin I first wish to welcome Greer to Iron Mountain in her role leading Investor Relations, finding someone who has the skills, experience and reputation to replace Melissa wasn't easy. We therefore felt very fortunate when we found that person in Greer, so welcome Greer. We're very pleased you are here.

So, Melissa who will be retiring at the end of the year, I wish to take a moment to thank you as this will be your last earnings call. And Melissa as you know started at Iron Mountain the same time as me and it is impossible today to thank her appropriately. So I do wish to mention that we will be eternally grateful for all she has done doing a superb job, leading not only our IR function but much of our communications as well over the last six years. She has done all this against a backdrop of the company executing an agenda, delivering significant growth to our business which has been transformative. Thank you Melissa. I don't know how we would have done this without you.

Now moving onto the quarter. We're pleased to report another strong quarter of financial performance coupled with marked progress in our strategic plan as articulated four years ago, designed to support the shift in our business mix. Our plan revolves around three pillars: Getting more out of our developed markets in terms of yield and cash flow; expanding our records management model in the faster growing emerging markets; and building on a strong customer relationships with 950 the Fortune 1000 coupled with our know-how in order to expand into adjacent business areas. To this end we are very pleased by our progress across these three pillars. A few proof points of this can be readily illustrated at a high level.

We continue to maximize yield from records management in developed markets with adjusted EBITDA margin in North America RIM now over 46% with growing internal revenue albeit on lower volumes. We achieved internal service revenue growth of 7% which is a result of growth in shred in business areas such as information governance and digital solutions or IGDS. We progressed toward our goal in making records management in the faster growing emerging markets a bigger part of our mix where these markets represent 18% of our revenue while continuing to improve EBITDA margins which are now over 30%.

And we advanced the expansion of our data center business which even at this early stage is now making a marked impact on our EBITDA and AFFO growth given it is now more than 8% of our adjusted EBITDA and is already expect to contribute 100 basis points to 200 basis points of adjusted EBITDA growth on a consolidated basis. All told the consistent delivery against our strategic goals has continued to drive strong growth in profitability is measured by year-over-year expansion in both gross margin and adjusted EBITDA margin, supporting healthy cash flow generation to fund our business investments while also reducing leverage overtime.

As a result this morning we announced a 4% increase in our quarterly dividend per share in line with our 2020 plan. This is supported by our year-to-date AFFO growth of 13.7% which is well in excess of our 8% increase in share count. For the full year our AFFO payout ratio is expected to be sub-80% versus our original guidance midpoint of 81% even after increasing the dividend.

Our third quarter performance outlined on page three of the presentation is highlighted by total revenue growth of 12% on a constant dollar basis, solid growth in adjusted EBITDA with an 80 basis point increase in EBITDA margins, continued durability of our storage business with total internal revenue growth of 2.3%, strong internal service revenue growth of 7.1% for the quarter, good progress on integrating our data center acquisitions illustrated by strong data center portfolio utilization of 91.1%, and continued organic expansion of our global data center platform through internal development including breaking ground on our second phase of capacity in Phoenix and entering into a development agreement in Chicago, a top five U.S. market.

In addition we continue to achieve total internal revenue growth across all markets supported by internal storage revenue growth and strong internal service revenue growth. We also continue to focus on optimizing both utilization and storage rates to maximize yield as evidenced by further increases in net operating income per square foot as shown on slide four.

Volume across our records management business was down 0.1% on a global basis prior to acquisitions or about 700,000 cubic feet. This was driven by negative internal volume growth in North America and a slowdown in albeit continued positive volume growth in Europe. The main implementation of GDPR or General Data Protection Regulation is having some impact on behavior related to destructions, while the European Regulation focused on protection of personal identifiable information, this regulation has global reach and covers records held by European nationals inside and outside of Europe.

Beyond regulatory changes leading to increases in destruction activity from time-to-time we have also seen a slowdown of incoming volume. As the incoming rate of new boxes decelerates, the boxes held in inventory naturally age during this period. As the deceleration continues we expect the ratio of destructions to remain elevated until the rate of incoming global volume normalizes. This interim increase in the rate of destructions is expected to flatten out overtime. However, we expect this net volume dynamic to continue for the next few years in running our business based on this expectation.

Importantly, this impact is de minimis on a bottom line financial basis and does not affect our financial plan in terms of growth and profitability and cash flow as we continue to expect to offset any volume decline through revenue management as well as growth in new services. Stuart will walk you through some of the financial aspects of all this in a few minutes.

In addition, I mentioned earlier that our information governance and digital solutions business is growing nicely and should overtime offset some of the volume declines in physical storage as our customers increasingly managed a hybrid physical and digital world in terms of how they conduct their records management operations. IGDS provides our customers with the ability to convert physical documents into digital content through the use of migration services, supporting customers digital transformation. Growth has been supported by a robust pipeline of increasingly larger opportunities as well as great customer traction. Moreover, in terms of further growing our digitization efforts, our newly announced partnership with Google shows early signs in its potential to increase our IGDS pipeline.

With our recently announced InSight platform we have already developed proofs of concept working with customers in oil and gas, financial services and in internal legal applications. Additionally, within our services business we are -- secured shredding unit experience another strong quarter driven by a significant increase in paper prices coupled with a 13% increase in tonnage year-over-year. Moreover, we continue to see new opportunities in largely unvented channels such as the federal government.

Specifically, on federal government we were awarded $65 million five-year blanket purchase agreement with the Department of Homeland Security or DHS. With this agreement we have the opportunity to deliver significant efficiency gains for DHS, providing not only storage and retrieval services, but also accelerating their digital transformation initiatives toward a more modern information governance program. Additionally, we had another award to help the U.S. Army Heritage and Educational Center with their digital transformation in the preservation of historical artifacts. This is an example of what we expect to be an acceleration in U.S. government outsourcing and demonstrates that our efforts over the last few years are delivering results. Another government when came from our fine-art business, where we were subcontracted to relocate the collection of the National Air and Space museum to temporary storage as a result of extensive renovation that will take six years to complete.

Turning now to emerging markets for our records management business. We continue to deliver solid internal revenue growth as well as attractive acquisition opportunities to expand our presence in faster growing markets. For example, we recently acquired businesses in China and South Korea which together added more than 3 million cubic feet of storage increasing our scale and further strengthening our position in these countries.

Our data center business continues to perform well, with revenue, adjusted EBITDA and investment forecast on plan for full year. Development opportunities to provide capacity to support customer demand in high absorption markets and attractive returns remain robust. To that point as I mentioned earlier in Q3 we began construction of our second phase of capacity in Phoenix which is expected to be completed in June 2019. This phase of capacity will be a hyper scale ready data center for which we have entered into renewable energy commitments, they offset 100% of the power. The facility including future phases will add more than 530,000 square feet and 48 megawatts of capacity at full build-out.

In addition we are entering the Chicago data center market through a development agreement with the Pitsco (ph) Realty Group to develop a 13-acre parcel in this attractive market which has been tied on capacity for some time. We are currently finalizing design plans and at this time have not invested any material development capital. The site is expected to permit construction of a 36 megawatt co-location facility to support the digital transformation initiatives of global enterprises as well as meet the security and performance expectations of the largest public cloud providers.

Turning to our fine-arts business. We continue to focus on expanding our presence in this faster growing storage related business, leveraging our cold storage expertise and customer service capabilities while being accretive to our focus on maximizing yield across our range of storage offerings. Subsequent to the end of the third quarter, we completed two transactions in the fine-arts storage business further strengthening the market vision of Crozier Fine Art business, the first L.A. packing, crating and transport strengthens our position in the Los Angeles market.

The second transaction we will assume operations of Christie's Park Royal warehouse in London, representing Crozier's first fine-arts storage and service location outside North America. As shown on slide five, we remain firmly on track to achieve continued internal revenue growth on a global basis fueled by further yield management with ongoing expansion and development in our data center platform and continued growth in our adjacent businesses.

Moreover, given the expansion of our higher growth portfolio which consists of emerging markets data center and adjacent businesses, we are approaching approximately 19% of our internal revenue where 23% including the acquisitions in the last 12 months with a goal to be 30% by the end of 2020. Additionally, we continue to deliver improvement across the organization in terms of optimizing utilization and driving margin improvement overtime. Altogether, we are within reach to achieve a business mix delivering adjusted EBITDA growth in excess of 5% before acquisitions by the end of 2020.

On slide six, I want to reiterate that we remain on track with our deleveraging and payout ratio targets which assume a 4% annual increase in dividends per share between now and 2020. We have increased the midpoint of our constant dollar AFFO growth guidance from 9% to 14.5% for the full year 2018. Stuart will discuss the strength of our balance sheet shortly. Overall, we expect revenue growth in 2018 to be between 9% and 11% versus our original guidance of 7% to 9%. We continue to be unique within the S&P 500 and that we are a top yielding company with durable cash flow delivering low-to-mid-single digit internal revenue growth, expanding margins, a solid balance sheet and great long-term growth potential supported by acceleration in contribution from our faster growing portfolio.

These factors are driving consistent growth in both the top line and in cash flow that ultimately supports our ability to continue to grow dividends per share at an attractive rate while finding investments in delevering overtime. This dividend growth model has been further underscored by our announced 4% dividend increase in solid balance sheet.

With that I'd like to turn the call over to Stuart.

Stuart Brown -- Executive Vice President and Chief Financial Officer

Thank you Bill, and thank you all for joining us this morning. In the third quarter, we delivered strong cash flow growth with solid progress toward our strategic objectives. Our leading records management business performed well with steady internal revenue growth and strong margin expansion. Our faster growing emerging markets, data center and adjacent businesses are gaining scale and expanding margins and our disciplined capital allocation supports strong cash flows to fund our multi-year plan.

We continue to deliver attractive returns for our shareholders through maintaining healthy performance in our durable records and information management businesses, while investing in data centers and other adjacent businesses for further long-term value creation. This is all underpinned by a substantial high-quality portfolio of owned industrial and data center properties.

I'll start off with the performance highlights which you can see on slide seven and eight of the presentation. We are trending at or above all of our key financial metrics from our original 2018 cost and currency outlook, and have increased our guidance for both revenue and AFFO. For the quarter, revenue exceeded our expectations approaching $1.1 billion growing about 10% on a reported basis with more than 12% on a constant dollar basis, driven by contributions from a data center acquisitions and strong service revenue growth. Total internal revenue grew by 4.1% compared to the prior year and we grew internal storage revenue by 2.3% for the quarter or by $14 million and 2.6% year-to-date.

We are pleased with the results from revenue management, but these are partially offset by slower volume growth which I will discuss in more detail later. Internal service revenue grew by 7.1% in the third quarter and by 5.2% year-to-date, primarily due to increased contributions from our shred business which Bill discussed, as well as additional digitalization and special projects. Our adjusted EBITDA grew almost 15% on a constant dollar basis for the quarter to $364 million, with margins expanding 80 basis points year-over-year to 34.3%.

The margin improvement resulted primarily from the flow through of revenue management. It impacted the adoption of the new revenue recognition standard and labor productivity, including ongoing synergies from the Recall acquisition. I'll provide more color on performance by segment in just a moment.

SG&A as a percentage of revenue excluding Recall and related costs increased about 30 basis points year-over-year to mainly to investing in new growth initiatives and other technology. The adjusted EBITDA margin improvement came even while making these investments. Adjusted EPS for the quarter was $0.28 per share down slightly compared to last year, due mainly to the increased depreciation and amortization associated with acquisitions, as well as an 8% increase in shares outstanding, following our December offering to fund the acquisition of IO Data Centers. This is all in line with the guidance of the time of the announcement.

AFFO was $680 million year-to-date, up about $80 million or nearly 14% over the prior year, reflecting the strong operating performance, expansion of our data center business and a very disciplined approach to capital allocation while increasing investments in new businesses. We increased the midpoint of our full year AFFO guidance by $40 million of which $30 million was from business performance and $10 million was from the adoption of revenue recognition standard. Year-over-year AFFO growth has been expected to exceed 13%.

To touch on operating performance in a little more detail, on slide nine you can see developed markets internal storage revenue growth came in at 0.7% for the quarter, despite the negative volume growth reflecting the impact of revenue management. Internal service revenue in developed markets increased 7.1% for the quarter, due mainly to growth in our shred business, project revenue and digitization as mentioned earlier.

In other international, we continue to see steady internal storage revenue growth of 5.1% -- 5.9% for the quarter and 3.6% growth in internal volume for the trailing 12 months, with internal service revenue growth of 6.6%. In other reporting segments the details of which are in the supplemental, the data center business delivered strong internal revenue growth of 27% for the quarter, they were off a small base pre-acquisitions.

Turning to slide 10, you can see the detail of our 80 basis point adjusted margin -- EBITDA margin expansion with growth in most of the segments. We did experience a margin decline in North America data management or tape (ph) business driven by lower volumes as well as customer mix. In the tape storage business the amount of digital data being stored continues to grow. However greater density on data protection tapes is resulting in lower physical volumes.

In Western Europe margins in the quarter were lower than last year, as we experienced higher bad debt in France where we are now integrating Recalls business. Note that the Western Europe margins were up 190 basis points year-to-date reflecting our focus on continuous improvement.

In the global data center segment adjusted EBITDA margins have improved over 44% year-to-date reflecting increased scale of the business in progress on the integration activity. We expect data center margins overtime to move closer to a mid-to-high 50% range as we fully integrate recent acquisitions and add more scale to this business. Year-to-date we've executed 6.3 megawatts of new and expansion leases primarily with enterprise customers and the federal government. Our churn in the quarter was less than 1%. We remain on track to achieve 2018 revenue of more than $220 million and adjusted EBITDA of approximately $100 million which includes integration costs of $7 million to $10 million. We continue also to expect leasing around 10 megawatts for the year of new and expansion space.

Turning to slide 11. You can see that lease adjusted leverage ratio was 5.6 times at the end of the third quarter very much in line with our original outlook while having debt funded the acquisition of EvoSwitch Data Centers in Amsterdam. Our current leverage ratio was comfortably in line with other REITs, especially when considering that our business is more durable than many other REIT sectors.

As of September 30, our borrowings were 72% fixed rate, our weighted average of borrowing rate was 4. 8% and our well-laddered maturity is an average of 6.3 years with no significant maturities until 2023. Our strong balance sheet and capital structure supported by our significant real estate portfolio and long-term nature of our customer relations.

Turning to our revised outlook for 2018. We now expect total revenue growth of 9% to 11% with total internal revenue growth between 3. 5% and 3.75%, up from 2% to 3% initially. Our outlook for internal storage rental revenue growth is revised downward to 2. 5% and 2.75% with total volumes expected to be slightly down for the year of 2008 prior to acquisitions.

We've also increased our outlook for AFFO growth while narrowing our EBITDA -- adjusted EBITDA guidance. The details of which can be found on page six of the supplemental.

We would also like to remind you about the exchange rate impact on our reported results that we communicated on the Q2 earnings call. Exchange rate headwinds have strengthened since then and we've had reported dollar ranges reflective of the headwind to our guidance page in the supplemental. In addition we've refined our cash available for dividends and discretionary investment scheduled on slide 12, to reflect our expectation of lower cash taxes and interest expense, as well as the lower level of acquisitions in records management and slightly higher proceeds from real estate dispositions generating more internal cash to fund investments.

While we plan to provide comprehensive 2019 guidance on our February earnings call, at this time we are basing our business plan on an expectation that internal volume will continue to be negative in North America and total internal revenue growth to be in the low single digits. As in this quarter we continue to expect revenue management to more than offset any global volume decline and to continue growing our internal storage rental revenue in 2019. While we continue to see good progress on our IGDS business, we do recognize that paper prices in our shred business are at all-time highs, which we do not expect to repeat in 2019.

We remain confident in our ability to grow adjusted EBITDA, cash flows and ultimately our dividend in line with our 2020 plan. To further underscore our confidence, I would like to provide some perspective around the volume moderation. For illustrative purposes, what for example might be the impact that we had a global volume net decline as large as 1% of total volume or 7 million cubic feet, which is 10 times larger in anything we've experienced.

If you assume the volume decrease comes from a combination of fewer incoming boxes and increased destructions, the revenue loss from the fewer incoming boxes would be largely offset by the increase in destruction related fees, even before any paper revenue. So in the first year the EBITDA impact would be de minimis. In second year the loss revenue would be about $20 million or $3 per cubic foot. So even if the global level of decline was 10 times greater, than what we are currently seeing, we could absorb the impact to faster growth on other businesses, better revenue management or cost-saving initiatives and continue to achieve our 2020 plan.

In summary we remain on track to continue strengthening our balance sheet while funding our targeted dividend increases such as that announced this morning. We can -- we expect our strong cash flow generation to enable us to find dividend increases while improving our AFFO payout ratio. We are pleased with our third quarter business performance and results year-to-date. Our revenue management is working well, driving steady growth and strong margin expansion in records management business. Further we remained intently focused on integrating and scaling our data center platform.

We look forward to updating you on our progress in providing more detailed 2019 guidance on the Q4 earnings call.

With that I'll turn the call over to Bill for closing remarks before we'd open up for Q&A.

William Meaney -- President and Chief Executive Officer

Thank you Stuart. To summarize, we've had a strong quarter, both in terms of financial results as well as progress on our strategic plan. Key financial highlights include upping our AFFO in revenue guidance for the year, increased dividend by 4% while improving dividend coverage. In terms of key strategic highlights we've continued margin improvement, build-out our faster growing adjacent and emerging business areas, they now represent almost 19% of sales mix or 23% post-acquisition. This mix is already delivering 4% organic EBITDA growth from 200 basis points better than three years ago and in line with our 5% organic EBITDA growth goal for 2020. So we are well on track for our 2020 objectives given our successful shift in business mix.

Now operator we would like to open up for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question will come from George Tong of Goldman Sachs. Please go ahead.

George Tong -- Goldman Sachs -- Analyst

Hi. Thanks. Good morning. You've indicated that you are largely done with implementing your revenue management initiatives in the U.S. Can you discuss your progress in rolling out your initiatives in Europe and Asia? And frame how continued rollout will alter your internal growth rates going forward in storage?

William Meaney -- President and Chief Executive Officer

It's a good question George. So I think, let me answer it in two parts. So, the first is that when we say we've completed -- we've rolled out the infrastructure but we continue to expect similar levels in absolute terms of revenue management benefit for in developed markets next year as we did this year. So continuing to get that kind of benefit that we've seen in this past year from revenue management for North America and Europe.

In terms of how we're rolling that out -- you can even start seeing that on this -- in this quarter in terms of, historically you'll recall that if you've looked at our internal revenue growth in the emerging markets, you would see that that was almost all driven by volume, and you can now start seeing that that actually getting positive traction. I know one is on a sequential basis and one is on a year-over-year -- or trailing 12 months basis. But if you look -- the numbers are directly comparable, but you can start seeing that they are starting to actually get a positive spread. So we've rolled out during this time ahead, we have a center now, I think it's in Sao Paulo, we have one I think in Hong Kong, we have one in Budapest and there's one in Sydney or Melbourne I should say. So we've got four new pricing clusters if you will, however, we've actually invested in pricing expertise. And you're now starting to see that spread where we're getting even more in the emerging markets. And we expect that to accelerate.

So if you say, if we go forward into 2019, just to underscore this, we expect to get a similar level of absolute dollar benefit or uplift from Western Europe and North America as we did in 2018, and we expect to get further increases next year. So we'll do even better on revenue management, that will be coming from the emerging markets.

George Tong -- Goldman Sachs -- Analyst

Got it. That's helpful. And then as a follow-up shifting to look at your services business. You talked a little bit about paper price trends for next year. Can you talk about on a underlying basis how service activity is currently evolving? How conversations with customers are changing there and how retrieval in new business activity will alter or not alter the growth trends in services?

William Meaney -- President and Chief Executive Officer

So, let me answer at a first cut and then Stuart may want to talk a little bit more about paper prices, because paper prices are a big driver in terms of the results that you've seen in service, because we're benefiting from quite strong paper prices right now. So if you think about it kind of roughly three buckets of service, as we have the shred, we would have what I would call the normal transportation and activity service level around RIM and then we have new business service areas around IGDS.

So, on the shred, there's two aspects and I'll ask Stuart to comment again about the paper pricing. But if you see that our volumes are up by 13%. So in other words we are actually -- so there is an activity aspect about shred which we expect to continue through in 2019. The other part is the benefit that we get on service revenue from selling the paper. If we look at the transportation, our transportation activities continues to slow down, but I think in the -- as we've said before on previous calls, if we look at the box business that's starting to hit a more steady state level. On the tape business we still see a drop in terms of transportation on terms as the tape business is becoming more archival as well.

But where the real improvement has been in service, so the story of obviously I'm going into positive services is not so much a change in the transportation. It's more about these new digital services or information governance and digital services that were operating. And over the last two or three years we've seen a doubling in that size of that business. So, it's really -- we're quite encouraged that as our customers are trying to manage this hyper at digital physical world, the relationships that we have developed with them on information management over the decades where it's historically more in the physical realm is really giving us the opportunities to help them manage that transition. And we think partnerships such as the Google partnership will continue to add products in that pipeline that can only accelerate that. So we feel really good in terms of our setup for 2019 to continue to build out and grow the information governance and digital services, and we've had a great last couple of years in terms of growth and we expect that type of growth to continue.

I think the transportation to me now is, is still weaning a little bit but it's not, it's being more than offset by our growth in shred and in IGDS. And then the -- going into the 2019, I'll turn it over to Stuart is that the paper prices are an impact in terms of what 2019 will look like.

Stuart Brown -- Executive Vice President and Chief Financial Officer

So just to quantify the impact of paper prices. So, if paper prices reverted back to the historical three-year average from where they are today, that would be about 100 basis point impact on service internal growth.

George Tong -- Goldman Sachs -- Analyst

Got it. Very helpful. Thank you.

Operator

The next question will come from Sheila McGrath of Evercore. Please go ahead.

Sheila McGrath -- Evercore ISI -- Analyst

Yes, good morning. I was wondering if you could comment on your revenue management approach. Do you believe some of the elevated destructions are a result of customers revisiting these boxes under higher pricing scheme?

William Meaney -- President and Chief Executive Officer

We've been -- yeah, it's a good question Sheila. And we continue to monitor. We don't see -- it could on the margin, but we don't see a major link in terms of what we're doing on pricing in terms of increasing destruction. The major increase in destruction I would say was in part by the GDP -- GDPR coming into effect at the end of May. So that was forcing people to relook at the way that they retain personal identifiable information.

By the way it also leads more opportunities on the IGDS, I should say. And then the other part is that we have seen a deceleration in terms of incoming volume from verticals, they are from customer segments. I should emphasize that virtually every customer segment is still sending us new boxes, but as that rate has reduced over the last months, is what -- what happens is that you get a deceleration of incoming. The boxes that they've already sent us are not being replaced at the same rate.

And generally what we find is in the zero to seven year mark, is when people more -- it's usually around the seven to 10 year mark is when people do their destructions that they keep things over 10 years, they tend to be kept for very long periods of time. So it's in that seven to 10 year the number of boxes that are in the seven to 10-year mark is the one where we see the destructions happen. And if the incoming boxes are coming in at a slower rate then you get a imbalance between what's being destroyed at year seven or 10, versus what's coming in. So we just have to kind of go through this process, albeit still positive incoming volume but get that into balance and then we expect it to even out overtime.

Stuart Brown -- Executive Vice President and Chief Financial Officer

The other thing I'll add Sheila is just to remember, so if you look at implied price in North America records management it's about 3%. So it's nothing really extreme. It's just higher than what it was historically. And you also have to remember this is a pretty small part of people's cost base in terms where they're trying to save money.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. Fair enough. Just one follow-up question on margin. It was positive to see EBITDA margin increase 80 basis points in the quarter. Just wondering, when you look at your mix adding -- increasing the data center percentage, just the outlook of margin trends bigger picture over the next few years?

William Meaney -- President and Chief Executive Officer

One thing if you look at the margin trends in the quarter we're impacted also by the increase in service revenue which is a lower margin business. Overtime as the data center business continues to grow that'll be at higher average margin for the rest of the business, so you'll get some positive mix impact from that. So if you go out and you look at 2020 guidance that implies basically from where we are at 2018 of 200 basis point to 250 basis point margin expansion overtime.

So a lot of that'll come from continuous improvement initiatives that we have around cost of sales SG&A. Obviously the pricing flow through on the revenue management that we're talking about a little while ago, as well as we'll continue to get margin expansion in emerging markets as we lever up with continue to grow those businesses and get the leverage of higher revenue on a fixed cost base. So every part of the business should contribute including data center growing as well as the margin they are expanding from where we are today.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. Great. Thank you.

Operator

The next question will come from Andy Wittmann of Robert W. Baird and Company. Please go ahead.

Andrew Wittmann -- Robert W. Baird -- Analyst

Great. Thanks for taking my question. I'll just keep going at the margins here. We've heard a lot of kind of outsourced business service companies talking about the impact of tight labor market as well as fuel costs. Stuart probably for you, can you just comment on how that affected the quarter and how that's impacting your outlook as you move into 2019?

Stuart Brown -- Executive Vice President and Chief Financial Officer

If you look at what's going on in the -- actually in labor in the third quarter actually was one of our biggest margin improvement drivers, and that's continuing synergies from Recall. So actually if you look at our current results, actually our labor was favorable some of that also driven by the health and welfare costs as we've changed our provider and continue to manage those costs well. The other side of it, if you look forward we are seeing labor pressure and there is lots of demand for warehouse workers and for drivers. There is a somewhat of a pass-through to our customers in terms of the revenue management, right, it's one of the things when we are talking to our customers, they understand that there's labor inflation going on out there, so it's one of the reasons that we're able to get the price inflow that we do.

And fuel which you mentioned, fuel there's a -- that we do have a fuel surcharge that we can pass-through to our customers as well when prices move up.

William Meaney -- President and Chief Executive Officer

Just one thing I would just add Andy to Stuart's comments is that the fuel as we say from us would just come base positive but the other thing is that we still have a long way to run in terms of the productivity that we think we can drive. So after at one level you're right. the competition for warehouse workers and drivers is keen. On the other side if you look at this year, we consolidated 30 facilities and we expect to consolidate another 90 next year. So we're looking for ways to continue to streamline our backend, it allows us to get more labor productivity.

Andrew Steinerman -- JP Morgan -- Analyst

Helpful, perspective. Thanks and then just on the data center strategy next kind of finish up on this one at least for me. Previously I guess you reiterated that greater than $200 million of revenue. I think previously you guys talked about a little bit more EBITDA than you signaled on this call. Just curious as to what the differential is on that? Is it just -- is it timing of when some of these kick-in? Is it the rates that you're able to achieve? Maybe just kind of an update on kind of how that leads up in the profit margins that you expect here?

Stuart Brown -- Executive Vice President and Chief Financial Officer

I'm glad you asked the clarifying question. The numbers are in my script was included integration costs. So we've talked previously about exit run rate and we're right on track with those numbers.

William Meaney -- President and Chief Executive Officer

It's about $10 million of EBITDA.

Stuart Brown -- Executive Vice President and Chief Financial Officer

Yes it's by $10 million more of EBITDA over what the 2018 number is when you look at the exit run rate.

Andrew Wittmann -- Robert W. Baird -- Analyst

Okay. Thank you.

Operator

The next question will come from Nathan Crossett of Berenberg. Please go ahead.

Nathan Crossett -- Berenberg Capital -- Analyst

Hi. Yes. Just a kind of follow-up on the data centers. I believe you said it's around 8% of EBITDA in your prepared remarks. When we think of kind of the long-term maybe five years plus, how should we think about where that percentage can migrate to? Could we get to a level of that could be 30%, 40% data centers for you guys?

William Meaney -- President and Chief Executive Officer

So Nathan, I think at this point we've only guided out to 2020. So I'd love to give you longer term guidance but it's a good try. But anyways in 2020 we've guided that it'll be about 10% of our EBITDA, but if you can even see a 10% given the growth rates that we're getting that's why we saying this is driving 1% to 2% of the consolidated EBITDA growth just enough itself. So it's already becoming an important driver toward our march to 5% EBITDA growth in 2020.

And just -- I know that you've come onto our story recently. When we started this with journey before we were only at about 2% organic, a little -- even little bit less than 2% EBITDA organic growth. So we're actually making good progress and data centers already proven to be a large compartment. But we'll keep you updated as we start extending our horizon beyond 2020 in terms of how we see that shaping up, but you can expect it to be continue to be a major driver in terms of our EBITDA growth.

Nathan Crossett -- Berenberg Capital -- Analyst

Sure. And maybe you can comment just on potentially converting some of your storage facilities to data centers? I remembered you guys saying when you did the EvoSwitch transaction there was, I think a few facilities nearby that were storage facilities that you could convert. So I'm just wondering if you did an analysis kind of across the rest of your portfolio, and just wondering how many centers could maybe be converted overtime?

William Meaney -- President and Chief Executive Officer

So it's a very good question. So you're right. There is -- I'll be specific in Amsterdam, there is a facility that we're looking at Amsterdam to do exactly that. And there's two other facilities in North America, one which we've gone to a fair amount of detail and its associated with the potential customer and then another case is because of the advantages power rates that we can get because of our historical footprint. So there's two facilities in the U.S. that we're actively -- two locations in the U.S. we are actively looking at and then obviously you just highlighted the Amsterdam one which we talked about before. So those are three areas where we continue to develop our thinking.

Nathan Crossett -- Berenberg Capital -- Analyst

Okay. Thanks. And then just one quick final question. Can you talk a little bit about the China storage acquisition and kind of how you view the long-term opportunity in China? Is that a large untapped market for you guys?

William Meaney -- President and Chief Executive Officer

Yes. It's a really good question. So, China is growing low double digits in terms of organic volume growth. So it is an important market for us. And we are now the leading international player, we were before but we are firmly the leading international player in that market after this recent acquisition. So there are two parts of the Chinese market. So I feel really good about our ability to serve multinationals in the China market and the way we approach the market, the types of services we provide is very familiar with them because they expect that kind of service everywhere they go in the world.

The other part of the market is the state-owned enterprise in China. And we do have some state-owned enterprise customers, but that's an area which is more difficult to penetrate quite frankly as a multinational. So our business case and business plans associated with China are more around serving multinationals or Chinese companies that are looking for that kind of service. And overtime, we think we will be able to access more fully state-owned enterprise channel. But right now I would say our state-owned enterprise and as you know is a big part of the Chinese economy is relatively limited.

Nathan Crossett -- Berenberg Capital -- Analyst

Okay. That's helpful. Thanks.

Operator

The next question will come from Andrew Steinerman of JP Morgan. Please go ahead.

Michael Cho -- JP Morgan -- Analyst

Hi. Good morning this is Michael Cho in for Andrew. I just had a follow-up on the margin discussion that we just -- I guess first the clarifying question was, did the change in the margin guide for '18 is just a difference in business mix? And two, just more a longer term Stuart, I know you gave some color on it, but historically we've thought about margin expansion from really two buckets of Recall and transformation or efficiencies. And then I realized there's pricing and other efficiencies and data centers that you talked of. Can you just help us frame a little bit better that the magnitude of contribution from some of those pieces that you mentioned as we go from 34% margins to 36.8% at the midpoint in 2020?

Stuart Brown -- Executive Vice President and Chief Financial Officer

Yeah, Michael, so firstly I did 2,000 -- in terms of taking the revenue guidance up and keeping the EBITDA guidance largely the same, it is primarily mix, and really in the service business, and you can see that obviously the internal growth on the service side. So then if you take that and look forward to the sort of the 250 basis point margin improvement then that sort of is implied from the current midpoint in guidance in 2018 to sort of the midpoint of 2020 in terms of what that plan is. The 250 basis points I think you can think about it in the sense that about half of that will come from continuous improvement and cost reductions.

Bill touched briefly on productivity improvements, we think we can keep making. And then on top of that then you'll get some mix benefit from data center, as the data center margins itself grows as those business integrated as well as that business growing. And then you'll get leverage in emerging markets from M&A primarily as well as organic growth as we've overtime built up the infrastructure to support a larger business, and you continue to see the margins in the emerging markets expand quite nicely. And then margin expansion in developed markets in addition from the continuous improvement also coming from revenue management.

Michael Cho -- JP Morgan -- Analyst

Okay. Great. Thank you.

Operator

The next question will come from Eric Compton of Morningstar. Please go ahead.

Eric Compton -- Morningstar, Inc. -- Analyst

Hi. Thanks for taking my question. I guess I wanted to kind of switch back to the volume growth kind of discussion. So I guess first, as people are changing, not bringing as much in your physical paper storage or whatever, and they are switching to digital, do you guys disclose any numbers on what percentage of the business is being replaced kind of with these digital initiatives?

William Meaney -- President and Chief Executive Officer

No. I mean other than the segments we already report, no, but we're also -- let me just kind of put it back into context. So if you look at, Stuart the math that Stuart took you through and let's take the year two, because the year two is after you don't get the benefit for the one-time charges when people actually pull things out for destrcution, is that we're talking about at the rates that we're seeing around a $2 million EBITDA impact. Because remember he gave you an example that's 10 times anything that we see or expect to happen in what we can see going forward. So this is really a very small impact.

I mean, on a $1.4 billion -- on a business that's approaching $1.5 billion for that matter in EBITDA, they are over $1.4 billion as we sit here today, a couple million in EBITDA associated with this trend is de minimis. So it's not a major thing. If you -- we don't break out the segments more fine than you want but on the other side is where, if you ask me the question in a different way, are we getting more than $2 million of EBITDA from our uplift in IGDS services or Information Governance and Digital Services absolutely.

So we're more then getting -- we're getting -- as we're helping our customers on this digital transformation journey going from the -- in this hybrid world is we're more than picking up what we are losing on the volume side. So it's a -- it's not one versus the other.

Eric Compton -- Morningstar, Inc. -- Analyst

Got you. That's super helpful. And then my last one is you said you kind of expect some of the change in customer behavior with this volume to potentially reverse overtime. Is that just related to kind of -- if I understood your first example correctly, kind of a silly example you might have a client that was previously bringing maybe five boxes a year and now they've changed to four, so you'll kind of get that one time downdraft than as long as they stay at four, kind of that initial decrease will sort of reverse so to speak is that kind of the main driver there? Or are there any other kind of longer term reasons you'd expect this kind of acceleration in declining volumes to reverse? Thanks.

William Meaney -- President and Chief Executive Officer

You've got it absolutely. That's exactly the dynamic is going on. And then the wildcard so to speak on the upside is, is that if some of the unvented market or less vented markets that we have talked before, if those things start coming in and those things can kind of offset that while you're going through that process. But that process alone is the thing that's the key driver at this point.

Operator

Your next question will come from Karin Ford of MUFG Securities.

Karin Ford -- MUFG Securities -- Analyst

Hi. Good morning. Stuart I think you said in your comments that there was about $30 million of business changes that drove the AFFO guidance increase. Can you just detail what contributed to that $30 million?

Stuart Brown -- Executive Vice President and Chief Financial Officer

Karin, probably the easiest thing is to refer you to the year-to-date calculation in the supplemental of the reconciliation of AFFO. But to add couple of things that I talked about is, you've got taxes coming in lower than we originally expected. Interest expense is favorable. From a capital standpoint continuing to focus, as I also refer you back to the guidance page as well where you'll see some of the detail. But some of the efficiencies we're getting on maintenance capital as well as just sort of the underlying business performance those are the key drivers. And I did mention that of the total $40 million increase in AFFO at the midpoint, of that $10 million of that is from better flow-through to AFFO of revenue recognition chain. So I didn't want to call that out because that is different than our previous guidance as well.

Karin Ford -- MUFG Securities -- Analyst

Got it. Okay. Thanks for that. And I wanted to go back to that volume loss example that you described. You're expecting continuing volume pressure next year on top of what we've seen this year. So if you think you'll see a bigger impact in year two versus year one given the fact that you no longer have the fees offsetting. Should we expect more pressure on revenue next year given that sort of pattern there?

Stuart Brown -- Executive Vice President and Chief Financial Officer

I think as Bill discussed with the trend that you see are really -- incredibly small right? So even if it was the same global volume decline as we saw now, it's been almost around $2 million. So the example I gave is what, I would probably classify almost as an extreme scenario right 10 times what we're seeing today. And which Bill talked about, was easily offset by digitization services but there's lots of other things we can use to offset that as well.

Karin Ford -- MUFG Securities -- Analyst

Got it. But I'm understanding that the numbers are in the $2 million range. Just trend wise, we should expect to see a little bigger impact if volumes continue to come down next year versus what we saw this year right?

William Meaney -- President and Chief Executive Officer

It's not -- we expected to maintain around this level Karin. So we're not seeing a compounding effect if that's what you're getting it in other words. We're not -- but next year would be compounded on top of that. We would see it at a similar level as what we have here.

Karin Ford -- MUFG Securities -- Analyst

Got it. Okay, great.

William Meaney -- President and Chief Executive Officer

That's what we're planning for and then we'll issue guidance in February.

Karin Ford -- MUFG Securities -- Analyst

Okay. Just a question on pricing. So developed market internal revenue growth was 70 basis points that was 60 basis point deceleration from the Q2 level. The volume deceleration was only 30 basis points. So should we read into that you're getting less benefit from pricing and revenue management from 2Q to 3Q?

Stuart Brown -- Executive Vice President and Chief Financial Officer

I know it's always hard to put together because we do it on two different pieces. But if you just kind of mapped mathematics it's still that we're getting kind of high 2% range for the North America and on a blended basis you're getting them reduce across the globe. So it's still in the same range.

Karin Ford -- MUFG Securities -- Analyst

Okay. And then last question just on data center. So it look like in the sop there were a few changes to your investment volume and timing on a few of the different projects, Arizona being the biggest you talked about that one. It also look like Northern Virginia and then in the Boyers and other category, there were some investments you showed and 2Q they are no longer there. Can you just talk about what those changes were?

William Meaney -- President and Chief Executive Officer

Yes. In the supplemental -- in the developmental activity we actually added more detail to clarify, sort of what's actually under construction today versus what's future construction. So, we broke those pieces out because there were some things that were held for future development and able to be built out but not currently under construction. So we just broke those pieces out for you. So the data is still there. It's just in separate columns.

Karin Ford -- MUFG Securities -- Analyst

Got it. And can you just talk about the size -- the potential size on your return expectation on the new Chicago development?

Stuart Brown -- Executive Vice President and Chief Financial Officer

It's still early days in terms of what the -- what it's going to be. We're in the process right now as Bill talked about in his script. This is the Crystal Realty group has got land in the Chicago market that is currently being prepared. They're doing site preparation work now. We will develop about 36 megawatts on that size what the plan is. It won't actually start construction probably until -- could be late Q4 or probably in the first quarter. And so we're mentioning this today we'll put out a formal announcement to the broker community soon, so we can start pre-leasing on that.

Karin Ford -- MUFG Securities -- Analyst

And you'll buy the land and provide the capital for the project?

William Meaney -- President and Chief Executive Officer

The land will actually be contributed so it will be -- it's not a legal joint venture. It's structured as a land lease but it'll basically operate like a joint venture where the Crystal Realty group can participate in the upsize as they help us with the -- in the Chicago market with local companies and things like that. So they've got some skin in the game as well and be part of the upside.

Karin Ford -- MUFG Securities -- Analyst

Great. Thank you.

Operator

The next question will come from Kevin McVeigh of Credit Suisse. Please go ahead.

Kevin McVeigh -- Credit Suisse -- Analyst

Great. Thank you. Hey, just one thing I wanted to -- it feels like the businesses is a little less predictable, just kind of looking at kind of the Pure Storage versus service components over the course of this year. So what I wanted -- is there any way to frame out like what the delta is between kind of the step up in the service, because it looks like the services has been over kind of 7% which is a great outcome for you folks but how much of that is kind of sorted office paper? How much is the pickup in destructions and then how much of that is the new TMBS initiative? And that was actually my first question. And then just what percentage of the EBITDA today is sorted office paper?

Stuart Brown -- Executive Vice President and Chief Financial Officer

If you go back, if you look at the total shred business Kevin you've got about a third of that is from the sale of paper. So as speaking you can go back and sort of do the math on that. If you look at through the third quarter, total shredding revenue was up about 15% or $15 million year-over-year. And if you remember from the paper pricing standpoint last year was actually a little bit of dip compared to where we are this year. So of the $15 million increase, about $6 million to $7 million that increases is paper price and the rest really has to do with volume and bin tips as the business continues to grow. We have done some tuck ins as well in that business and so you've seen good margin expansion, performance of the business performing really, really well.

William Meaney -- President and Chief Executive Officer

But I think Kevin just to pick up on your predictability, as you've been following the story for a long time. So I kind of go back is when you first started -- we were 2% organic EBITDA growth. We're seeing here 4% EBITDA growth. The company was struggling to maintain $900 million of EBITDA, we are now approaching $1.5 billion of EBITDA. So when we talk about $6 million or $7 million coming from paper, this is quite frankly and not complacent, I chase every million dollars but this is noise in the way we run the system. So if you sit there and say we are approaching 5% EBITDA growth organically, before we do an acquisition whereas, when you started following us, we were less than 2% is the business is a lot easier, it can take a lot more noise in the system than it used to. So I actually think the predictability and the robustness of the business is really strong.

Kevin McVeigh -- Credit Suisse -- Analyst

Got it. That's helpful. And then just Stuart the delta, because it looks like the storage revenue, the guide for the full year came down to $2.5 million to $2.75 million versus $3 million to $3.5 million. Does that imply the back half deceleration -- and was that primarily all volume driven, to the kind of took those numbers down?

Stuart Brown -- Executive Vice President and Chief Financial Officer

Yes. I mean you see the year-to-date numbers. So it is primarily volume driven in the storage side. There -- as well as the offset looking forward right, some of the other storage businesses is giving more digital, we continue to invest in Iron Cloud and Iron Mountain in the inside product that we're offering. So we're continuing to talk to our customers about what needs they have, and so on to back to sort of Bill's point on the predictabilty these are numbers despite, that's actually increasing investments in some of those new businesses.

Kevin McVeigh -- Credit Suisse -- Analyst

Understood. Thank you.

Operator

And this concludes our question-and-answer session and today's conference call. The digital replay of the conference will be available approximately one hour after the conclusion of this call. You may access the digital replay by dialing 877-344-7529 in the U. S. and 1-412-317-0088 internationally. You'll be prompted to enter the replay access code which will be 10123998. Please record your name and company when joining. Thank you for attending today's presentation. You may now disconnect.

Duration: 60 minutes

Call participants:

Greer Aviv -- Senior Vice President, Investor Relations

William Meaney -- President and Chief Executive Officer

Stuart Brown -- Executive Vice President and Chief Financial Officer

George Tong -- Goldman Sachs -- Analyst

Sheila McGrath -- Evercore ISI -- Analyst

Andrew Wittmann -- Robert W. Baird -- Analyst

Andrew Steinerman -- JP Morgan -- Analyst

Nathan Crossett -- Berenberg Capital -- Analyst

Michael Cho -- JP Morgan -- Analyst

Eric Compton -- Morningstar, Inc. -- Analyst

Karin Ford -- MUFG Securities -- Analyst

Kevin McVeigh -- Credit Suisse -- Analyst

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