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Iron Mountain Inc  (NYSE:IRM)
Q1 2019 Earnings Call
April 25, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Iron Mountain, First Quarter 2019 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 Of Investor Relations

Thank you, Dave. Hello and welcome to our first quarter 2019 earnings conference call. The user controlled slides that we will be referring 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 results and our outlook for the remainder of the year. After our prepared remarks, we'll open up the lines for Q&A.

Referring now to page two 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 the reconciliations to these measures as required by Reg G are included in the supplemental financial information.

With that, Bill, would you please begin?

William L. Meaney -- President and Chief Executive Officer

Thank you, Greer. 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, in part, 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 of -- by approximately $10 million. We should emphasize, however, we remained confident in achieving our budget expectations in line with the full-year guidance targets we issued in February.

Continuing from the summary in a little more detail, as you saw in our earnings materials, revenue growth and record storage volumes continue to be very durable with total revenues increasing 4.5% on a constant currency basis, while 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 under-performing our expectations by $10 million or 3% for the quarter.

Let me give you a bit more color of what led to the earnings results this quarter. Our performance remained 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, but we did not achieve the reductions necessary to deliver the targeted levels, which resulted in unanticipated higher labor costs.

Our confidence in delivering full-year guidance is in part driven from 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 more of 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 within our organic adjusted EBITDA growth rate of approximately 4.5% and on track toward 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 the unfavorable cost performance, you will 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 the identification of areas for improved cost performance and revenue opportunities, which should continue to both drive future growth in earnings and fund our growth in dividends to investors.

Our recent example of -- one recent example of this could be seen in our continued progress with our InSight Platform in 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've revised our volume reporting to better reflect how we manage the business and provide visibility into our comprehensive portfolio of physical storage solutions above and beyond records, including Tape, valet consumer storage and our adjacent businesses of Fine Arts Storage and Entertainment Services. Whilst the non-box storage currently only represents approximately 1% of our storage volume, we believe these areas have the opportunity to represent a significant amount of 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 records stored increased from 686 million cubic feet a year ago to 696 million cubic feet with 2.4 million of the 10 million cubic feet organic, delivering 30 basis points of 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 continue 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 destruction and flat Q4 to Q1 organically.

Western Europe and other international continue to deliver consistent levels of organic volume growth, 2% and 3% respectively year-over-year. Turning to our new reporting of storage volume achieved from adjacent businesses, primarily Fine Art 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 into consumer through the partnership with MakeSpace. We are excited about the opportunity to serve as the logistics and storage arm in the valet consumer space.

This venture combines the strongest capabilities from both of our organizations that leverages MakeSpace as (ph) strong brand in 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 through 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 new or expanded leases for almost 4 megawatts versus the 3.3 megawatts in Q4 on a total built out capacity of a little over 100 megawatts.

Whilst 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 center.

Whilst we are disappointed about the cost impact this quarter. We continue to see the full year in-line with our guidance and within expected slightly improved exit rate going into 2020. With that, I will turn the call over to Stuart.

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

Thank you, Bill, and thank you all for joining us to discuss our first quarter 2019 results. I'll start off with details around Q1 performance with additional information around the cost control issues and overall results, including the initiatives we are taking to expand margins and deliver on our expectations for the remainder of the year.

Slide 7 of the presentation summarizes our quarter's financial results. As Bill mentioned, we are 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 from revenue management and from organic records management volume growth, which increased 30 basis points in the quarter, an acceleration from prior quarters.

Organic service revenue grew by 1.8% in the first quarter, a bit less than we anticipated due to lower box destruction 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 (ph) more on the cost actions we are undertaking in a moment.

Our adjusted EBITDA declined $18.5 million or 5.4% to $325 million with a margin 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 a year ago. Increase in SG&A reflects higher IT-related costs, including information security and investments in our digital offerings like the Iron Mountain InSight platform in partnership with Google.

We also invested in our new Global Operations Support group and added G&A with last year's data center acquisitions. Most of this increase in SG&A was anticipated, and reflects strategic initiatives, which we expect will benefit us in 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 eight, you can see developed markets organic storage rental revenue growth came in at 1.1% for the quarter, slightly better than Q4 2018, reflecting contributions from revenue management and improved volume performance.

Organic service revenue in developed markets increased 1.8% for the quarter, a moderation from the level seen in 2018 due mainly to lower destruction service revenues, paper prices, which 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 the 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 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 for the Phoenix move-outs, which were anticipated when we acquired IO last year. As Bill mentioned, we are trending well toward our targeted leasing 15 mega watts to 20 mega watts for the year. Aggregate data center leasing in the quarter and the related rate per kilowatt included 1.6 mega watts of powered shell in New Jersey, a place (ph) which 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 by business segment. On a year-over-year basis, total margins were impacted by the increase in SG&A. The North America RIM margin declined about 40 basis points, largely because of our shredding business as previously discussed, while the change in lease accounting impacted margins in the segment by about 20 basis points this quarter.

The North America Data Management margin declines continue to be driven by lower volumes and investments we're making in new products and services including Iron Cloud.

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 markets -- margins were up 10 basis points in the quarter despite a 70 basis point impact from the adoption of the new lease accounting standard.

In the global datacenter 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 in Q1 was 5.8 times, modestly higher than at year end, primarily due to the softer adjusted EBITDA performance. We expect leverage to decline in the back half of the year, aided by capital recycling proceeds and expectations for increased adjusted EBITDA and to end the year around 5.5 times as we guided to last quarter.

We are on track with our capital recycling program and subsequent to the end of the first quarter 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 expect more than $50 million of additional real estate capital recycling for the remainder of the year and are evaluating third-party capital via joint venture 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 into 2020 and beyond. First, we've put in place over two dozen operating initiatives. Without going into details on all the initiatives, one example of improving transportation costs, both routing and fleet utilization. This will result in higher than previously anticipated expense in Q2, that is one-time in nature, and should reduce freight and transportation costs in the back half of the year and continuing into 2020.

Other steps being taken include further labor productivity initiatives and vendor consolidation to reduce supply costs.

Second, as previously discussed, we created a global operation support team at the end of last year to identify areas of improvement focused initially on labor, transportation cost 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 planning.

The first half of 2019 includes cost 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 are reaffirming the ranges that we provided on our Q4 call in February and remain confident that we can achieve these despite our first quarter performance, the expected residual effect on the second quarter and headwinds from declining recycled paper prices.

The upper and lower end of our guidance remain 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, but the second quarter will be flattish as we are cycling against higher destruction service revenue in much higher paper prices.

While we do not generally provide quarterly guidance, given the cost issues experienced toward 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 cost and secure destruction will continue into the second quarter until our actions which are already under way, again improving 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 margin in the second quarter to increase 150 basis points to 200 basis points from the first quarter. Margin should then improve 200 basis points to 300 basis points per quarter for the second half of 2019 as cost improvement initiatives flow through.

As Bill noted, we remain committed to the full-year guidance we provided on our last earnings call. In summary, Q1 performance reflects strong underlying health, and it shows the contributions from revenue management and improved volume trends.

We continue to see good results from our efforts to extend into higher growth markets and our data center platform in adjacent businesses are showing encouraging progress as they gain greater scale. We are confident that the actions we are implementing to improve margins will allow us to achieve our long term targets.

With that operator, we'll open it up to Q&A.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions). The first question is from Sheila McGrath of Evercore. Please go ahead.

Sheila Kathleen McGrath -- Evercore ISI -- Analyst

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

William L. Meaney -- President and Chief Executive Officer

No, I mean the majority of the increase is -- you've got a few different things going on. First of all, the increase year-over-year from a dollar basis, with the acquisition of EvoSwitch and then IO late in January last year, you're getting some increase in sort of the overall overhead cost because of that and then you're also getting increase in the operations team, which we had at AMC (ph) we've got the operating cost of that team as well as in some consulting costs, and those are the two biggest drivers.

And so when you think about the global operations team, as we've stood that up, you've got cost in the first quarter and continuing in the first half of the year and those will switch into benefits as they more than pay for themselves in the second half of the year.

And as we sort of think about as we set these things up, right, we're taking costs earlier in the year, as we're really trying to get them to pay for themselves within the year. We are going to go ahead and just sort of given the operational issues accelerate some things that we would have spread out later in the year and pull those forward into Q2.

Sheila Kathleen McGrath -- Evercore ISI -- Analyst

Okay, great. And then just following up on the MakeSpace acquisition, I just wonder how you view that business fitting in at Iron Mountain, how are you integrating it, will that business be with Iron Mountain trucks? And how the margins compare to traditional -- your traditional storage business?

William L. Meaney -- President and Chief Executive Officer

No, it's a good question, Sheila. So first of all, we are a significant but minority shareholder in the JV. So it's set up as a JV rather than integrating MakeSpace. So for us it's a perfect relationship. So besides being a large minority shareholder in the Company, we are also the exclusive provider of the back-end services. And the back-end services means, it's our trucks and drivers picking up the material or delivering the materials, and our facility is storing it.

So we are the exclusive service provider to that joint venture, which effectively gets us in the consumer space with a B2B relationship. So we are still at business-to-business relationship with MakeSpace and we get the benefit of their understanding of the consumer space and they've proven themselves not only to have a very effective brand and marketing approach, but very efficient acquisition cost of customers.

So, we're pretty excited about the relationship. From their standpoint is that we bring the logistics and handling expertise that quite frankly both them and other consumer self-storage companies have struggled with in this particular area.

So we are able to leverage what really is our core strength and also use our real estate footprint. So they're pretty excited, because we are able to help them expand much quicker across the United States because we're already everywhere in the United States.

So we think it's actually a very synergistic relationship that we've been able to carve out with them.

Sheila Kathleen McGrath -- Evercore ISI -- Analyst

So the venture will store the -- in your facilities?

William L. Meaney -- President and Chief Executive Officer

Yeah. Exactly, exactly.

Sheila Kathleen McGrath -- Evercore ISI -- Analyst

Okay, thank you.

Operator

The next question is from Nate Crossett of Berenberg. Please go ahead.

Nathan Crossett -- Berenberg Bank -- Analyst

Alright. Thanks for taking my question. I saw in the presentation that you're seeking JV partner for the Frankfurt DC projects. So, I was wondering if you could maybe provide some color on what that might look like and maybe the types of providers you are looking to maybe 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're hearing that demand is pretty strong, especially in the FLAP areas.

William L. Meaney -- President and Chief Executive Officer

So Nathan, let me start with your last question and then Stuart will talk to you about how we think about joint ventures generally and specifically why we called it out that we're considering it for Frankfurt. So you're right, I mean, we remain bullish on the European data center market. So, we're really pleased in terms of -- that we've been able to establish a strong footprint, both in London and Florida (ph) state through the Credit Suisse acquisition and now with the EvoSwitch in Amsterdam.

So, we're really happy with that, and now with the land in Frankfurt. So, as you know Frankfurt, London, Amsterdam and Paris are considered the top markets in Europe and the growth they continue to see -- we see robust growth across both the wholesale markets as well as the retail market. So we are -- so far we're really pleased in terms of what's happening in Europe. I think they probably came into their own a little bit behind where the US was on the outsourcing, but they're definitely picking up pace at a really good rate.

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

And on the Frankfurt joint venture that we're evaluating, there's lots of capital out there looking to be put to work in the data center business and the type of structure we'd be looking at would be something fairly typical for other REITs.

While (ph) Frankfurt is really because if you look at some of the development we've get in our other markets in Amsterdam and Arizona, there frankly would be probably too many conflicts with our own existing. So Frankfurt is sort of easy to carve out into own joint venture where there wouldn't be any conflicts with the existing Iron Mountain properties and we're in the early phases of that and we'll evaluate sort of what the return demands are. But we're looking for a long-term partner who can invest with us in Frankfurt, and then if we wanted to consider other markets outside of that, we would be open to that as well.

Nathan Crossett -- Berenberg Bank -- Analyst

Okay, that's helpful. And is there any preference on whether it's a public or private player out there, or are the public guys on the list of potential JVs, or can you give any...

William L. Meaney -- President and Chief Executive Officer

It's most likely going to be long-term pension type money that's looking for these types of investments, (inaudible) some of this is going to be in this for a long time with us as we build it out.

Nathan Crossett -- Berenberg Bank -- Analyst

Okay, that's helpful, thanks. And then just a question on the Google partnership, kind of how should we think about that in terms of bottom line numbers? And I know it's very early days, but do you expect this to one day kind of have a meaningful impact on AFFO? Or any color would be helpful on that.

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

We'll give you more guidance as we get into for sure in -- for our 2020. This year what we've -- our expectations and your expectation should be that any revenue we get will be awash with the cost of standing this up. I think I might have mentioned in the last quarter is that we have done over a dozen proof of concepts across a range of industries and we're really excited about the results that we're getting from that.

So you know what, we see this as a natural add-on to our digital scanning business. So globally we do about $200 million worth of just what I call digital scanning or taking physical documents and turning it into digital formats and that grows at high-single, low double-digit organic growth.

We see this as an opportunity to actually accelerate that growth, because people are looking to get more benefit when they actually digitize historically physical documents.

So it's early days, but we really think that we -- the way we think about this is accelerating that high single-digit, low double-digit growth that we have in our digitization business as a way -- and this is the tool that will give people more benefit and encourage them to do that.

Nathan Crossett -- Berenberg Bank -- Analyst

Okay, that's helpful. Thanks. I'll get back in line.

Operator

The next question is from George Tong of Goldman Sachs. Please go ahead.

George Tong -- Goldman Sachs -- Analyst

Hi, thanks. Good morning. Looking at your records management volume disclosures in developed markets, it appears new sales ticked down from 1.6% last quarter to 1.5% this quarter and new volumes from existing customers, also ticked down from 3.8% to 3.7% while destruction ticked up from 4.6% to 4.9%. Can you talk about where or when you might expect some of these trends to stabilize and what initiatives you have to potentially try of an inflection?

William L. Meaney -- President and Chief Executive Officer

Yeah. I think George what I would say is, and it depends on which -- whether you're looking quarter-to-quarter, year-over-year, and if you're looking at just North America, or North America and Europe. So some of the movements that you're highlighting while important are, what I would call within the range of what we expect.

So I -- we don't see any major change obviously with the result that we are reporting this quarter are better than they were reporting in the last two quarters, but we don't see them as a major change.

So if you kind of look at overall, actually, we said that destruction would be at the 4.5% to 5% range and actually on total -- I'm looking at total volume now as we are 4.5%, any given market can kind of change those movements.

So I mean, I think you're kind of picking at a specific market. We actually see overall actually destruction have gone down this quarter, if we look at the total business. But we still think while it's nice to see 4.5% versus 5%, we still think we're operating within that range. So I think we should see -- there's not going to be any big inflection point either up or down in the business, I think this is pretty much steady as she goes.

And where we will see a changes is, as we continue to make emerging markets a bigger part of the mix then of course globally that will have an improvement.

So the thing -- if you're saying what do we really see has the thing that will make a long-term impact, it is, now that we've started reporting the volume of these other areas that we've been including, if you will, on our occupancy, but we've never shown you how much volume it actually drives.

So if you look at specifically, the non-records business over the last two years -- over the last two years on the non-records business, so that would be the art entertainment, services and now consumer. Well, in consumer, we've been doing on our own for a number of years now, or a number of quarters is, you'll see that those then among themselves generated about 5 million cubic -- increased cubic feet over the last two years, which is about 20% of the growth of cubic feet that we've seen as a Company.

So Mall (ph) in terms of, if you look at how much it is in terms of total -- of the total, but in terms of the growth if you look it from inflection points, those are the things that you will see changing over time, but overall in terms of the records business you should consider -- see it as steady as you go, with a little bit of improvement consolidated has, emerging markets continue to become a bigger part of the mix.

George Tong -- Goldman Sachs -- Analyst

Very helpful. Your most recent 2020 targets include revenue of $4.6 billion to $4.75 billion and EBITDA of $1.68 billion to $1.76 billion.

Can you discuss your progress toward reaching these targets and where you see EBITDA margins heading especially given margins are relatively FX neutral?

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

George, you're talking about sort of -- as we're sort of look at it, let me just sort of start off with you (ph) with sort of margin progression for the year where we expect margins to go.

If you look at for the first quarter, we talked about we had some unusual expenses right, and so the guidance comments that I gave implies about a 650 basis point margin improvement from Q1 to Q4 right, so that'll give you a pretty good exit rate from '19.

And then if you sort of think about that in dollar terms driving a little over $1 billion quarter of revenue, still implies EBITDA dollars going up from Q1 to Q4, about $70 million.

I mean, if you think about what are the big buckets that drive that, you normally get both revenue management as well a cost improvement initiatives as we move through the year. That will continue to be the biggest bucket for that.

You obviously get the benefit from the corrective actions that we're taking that we've talked about here on this call. You will get lower SG&A as we talked about and you will get the benefit from the global ops team, which really switches as I talked about before from cost to benefit from Q1 to Q4. And that's around procurement service labor and some of the other areas.

And so that will benefit both North America as well as the international businesses. And so I think that sets us up pretty well going into 2020 for the outlook that we've provided longer term.

George Tong -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

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

Andrew Steinerman -- JP Morgan -- Analyst

Hi, it's Andrew. The organic revenue growth was 1.9% in the first quarter and the guide for the year is 2% to 2.5%. What gives management confidence that there will be some acceleration into organic revenue growth, as I imagine moves through the year.

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

Hi Andrew. This is Stuart. I mean the storage is obviously -- gross profit and cash flow are the biggest driver and that's right on track and we talked about the service revenue in Q1 and Q2, the growth will be a little bit lower than we had a year ago, particularly in Q2 actually to going (ph) foreshadow that as recycled paper prices come down, but some of the other service areas in terms of project revenue pipeline including some of the information governance and some of the other areas, will drive the service growth in the second half. So we remain quite confident in the service -- implied service growth and what that means for the total.

William L. Meaney -- President and Chief Executive Officer

And if you think about it Andrew is it -- we actually have built our confidence. Our confidence is even stronger now about revenue than it was a month or three months ago just because we're a quarter into the year and we can see the pipelines going forward. So we feel pretty good about where we are in the revenue front.

Andrew Steinerman -- JP Morgan -- Analyst

Okay. Thank you very much.

Operator

The next question is from Andy Wittmann of Robert W. Baird. Please go ahead.

Andrew Wittmann -- Robert W. Baird -- Analyst

Great, thank you. Stuart, I was just wondering, you know, the dollar strengthened here a little bit, since you guys last reported, how does the FX factor into your new guidance?

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

Yeah. I mean, so our guidance ranges when we built them this year -- we sort of changed our process on that a little bit, so we have a wider EBITDA guidance this year, than we used -- than we sort of had historically over the past few years to basically go ahead and do in our dollar guidance before our guidance was around sort of constant currency.

So I think if you look at the EBITDA impact in the first quarter of currency it was actually broad EBITDA year-over-year down about $10 million, that was built into our guidance and we think where FX is today, you basically will be sort of right toward the middle of guidance and the upper and lower end of the range taking into account any potential movement.

Andrew Wittmann -- Robert W. Baird -- Analyst

So last quarter you guys talked about for the year I think you thought it was going to be a $20 million to $25 million EBITDA headwind, the $10 million (ph) sounds on line (ph) so you think it's $15 million or so -- $10 million or $15 million for the balance of the year. Is that another way of saying the same thing?

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

That's about right.

Andrew Wittmann -- Robert W. Baird -- Analyst

Okay. Just noticed on your kind of -- on your CAD schedule that there's an incremental $50 million that I think was called out here for Frankfurt and then that was offset by an incremental $50 million of capital recycling. Just given that, I want to get some sense of confidence around, have those assets that you're going to be recycling been identified in on the market or is that still kind of in the work to figure out how that's going to translate?

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

We've got a package of about $25 million of real estate in North America. I would call it sort of more secondary markets, Midwest markets in the market right now and we're seeing good demand from that and so we've got additional packages heat up and ready to go beyond that depending upon how the first one goes.

So I think the big -- bigger question around that will be -- and so recycle (ph) more real estate, and so the question around does it make sense for us to do investment partnership for the Frankfurt land purchase. Now we would (ph) like to get a little more (ph) leasing done and so there are some questions a little bit around timing on that and we feel there's lots of demand out there for people to JV with us to kind of make sure the terms make sense.

Andrew Wittmann -- Robert W. Baird -- Analyst

And so is it fair to assume the $50 million number that you have in there is that's if you were to do it all by yourself now without a partner, so that could actually not be $50 million if you've found somebody?

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

Correct. If we found somebody, we'd put the land there (ph) and can get capital back from that partner right away.

Andrew Wittmann -- Robert W. Baird -- Analyst

Okay, great. Thank you.

Operator

The next question is from Michael Funk of Bank of America Merrill Lynch. Please go ahead.

Michael Funk -- Bank of America Merrill Lynch -- Analyst

Yeah, thank you for taking the question today. I have two quick ones, if you wouldn't mind. So looking at the Slide 17, you showed that $380 million of incremental capital needed for discretionary investment beyond the capital recycling in the JV, and then other sources of capital.

You know, I'd love to get your commentary on how you're thinking about -- I guess your comfort level with where your leverage is right now, and then you haven't issued equity in a-year-and-a-half.

So any kind of commentary about potentially accessing the equity capital markets. I think you issued last time around 37 (ph). So not too far from where your equity is now. And then, you know, then the second question, I think last quarter you talked about revenue management program maybe being less of a headwind in the second half -- sorry, tailwind in the second half of 2019.

If I'm correct about that, maybe just comment on how that factors into your margin progression commentary?

William L. Meaney -- President and Chief Executive Officer

Okay. Let me, so I'll start with the revenue management and also just give you a snapshot in terms of how we think about debt overall, and then, Stuart will talk a little bit more about what he is seeing in the debt markets and how well we're able to access those.

So on the revenue management side actually, it's a little bit back to front from what you intimated is that generally in the first quarter we see around 15% of the revenue management benefit come through in the first quarter, just the way that the pricing reviews are done and the contract renewals are done with customers as we go build through the year, and then it builds toward the end of the year.

So, well more than half comes in the last half of the year and Q2 is somewhere between Q1 and the second half of the year, if you will. So the first quarter is only about around 15% of the benefit from pricing and we see that.

This year we expect to do a little bit better than we did last year in pricing, because we're starting to get some reasonable progress in the international markets, which only started coming online last year. So we feel good about where we are with that given the first quarter performance and revenue management.

Overall, just to give you a snapshot on the debt and then Stuart can give you a little bit more of the specifics around the access to the debt markets right now, is generally we're not uncomfortable in terms of where we sit with debt nor where we price.

So we actually price usually at the upper end of investment grade, while we are not an investment grade debt issuer. So we feel relatively good about that. If you look at us, our leverage relative to say the REIT peers, we're again pretty much spot on to where those folks are and I think we have a slide, Slide 10 kind of demonstrates that in the deck.

The issue for us and the reason why we say we want to continue to delever over time is our covenants are roughly 6.5 and we would like 1.5 to 2 turns over time daylight between where our covenants are and where our leverage sits.

Just so it gives us more dry powder for opportunistic events that may present themselves. So we don't feel like we're in a rush to delever, because the only reason why we would delever was to create more buildings (ph) things opportunistically so you wouldn't do anything just to delever for that. And we've and given the cash generation of our business is we feel really comfortable that we continue to grow dividends and we delever over time.

Now in terms of equity issuance is we look at like any investor, we look at the NAV of the Company and we say, does it make sense to actually issue equity or not. And we have an opinion right now that this is not the best time to be doing that given where our share price is sitting.

So we kind of look at it in terms of what's the -- what is the best investment and then we also look at the best way to fund that and right now when you look at equity, you have to look at the NAV of your Company. Last thing I would do just before I hand it over to Stuart is, it is fair to say that we're in the data center business that we -- data center is capital intensive, and growing and building data centers takes a lot of capital. And hence the reason why we're looking at a partnership in Frankfurt.

That being said, don't forget the thing that separates us from some of our data center peers is we have a -- almost a north of $1.4 billion EBITDA business, most of that's generated in mature markets in our core business, which generates a lot of cash. So what we'd like to say is, we have a very large strong piggy bank alongside a $100 million plus EBITDA business growing very quickly of data center.

So we actually have a natural in-house funding source that not only fuels the growth of the dividend, not only can delever slowly over time, we are not doing massive delevering, but also it's a thing that allows us to do I think this year we guided about $250 million that we're putting into our data center business.

So obviously if we were trying to put $250 million and we were a $100 million EBITDA business, that would be a strain. But we are fortunate that we have not just relationships that come with that $1.5 billion EBITDA, but we -- it is, most of that is in mature areas that we're able to harvest a fair amount of cash. But -- I mean, Stuart you may want to talk specifically about the debt markets.

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

I mean, I'll go overall just -- just quickly, as -- from an debt investor standpoint, we get so much credit for the durable cash flow that comes out of the business. And so as Bill mentioned, it's right we've priced debt close to investment grade even though the rating agencies have historically not treated us the same way. We talked about that on the last earnings call.

It will naturally delever overtime as EBITDA grows, right, because if you look at where the investments are that needs an incremental capital, it is around building out the data center platform. So we've got a great platform. But as we've done the acquisitions, it didn't have a lot of capacity to lease up. So we have to build out a development pipeline.

So that really was driving the $250 million of the capital needs and investors understand that. I think the rating agencies understand that as well. So quite confident that as that grows and leases up, the value of the data center platform will only continue to increase.

One other thing I'll add on to Bill is when we're looking at, hey what's the way to source that, you look at debt, we have an ATM in place, again today, if you look at sort of where the ATM is, and you look at where cap rates are in industrial real estate, we've chosen right now to recycle capital out of some of the industrial real estate, given the high investor demand for that.

And then if you look at our credit, people who want to do a sale leaseback transactions love our credit and the rates that we'll see on these sale and leaseback to be really good. So I think I'll end it there.

Michael Funk -- Bank of America Merrill Lynch -- Analyst

That's all super helpful guys. Thank you.

Operator

(Operator Instructions). The next question is from Shlomo Rosenbaum of Stifel. Please go ahead.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Hi, thank you very much. Hey Stuart, can you just walk me through again the labor costs in the US? You hired additional people in order to not have over time with the existing ones, but the timing didn't work out right. Can you just walk me through that exactly on the ground how that works?

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

I know -- and I may give a little bit more, a little bit more detail here than we normally would. With all great intentions, right, what you've seen going on overall in the labor markets in North America is more demand particularly around warehouse, workers and drivers.

And we took some steps last year to address that. We raised wage rates and with the risen wage rates we were -- we had a lot of overtime. So we think (ph) we'll take wage rates up that will get offset by lower over time.

And which is sort of a natural thing to assume. And then when you hire people, you also have a period of training. So your productivity is going to suffer for a little as you are staffing up. I think what happened was -- is, we weren't managing that change very well, and it ended up actually over staffed because the good news is attrition went down. We were able to retain people. But we didn't manage the productivity after that training period, and therefore ended up with too much over time.

The month of January is a strong month for sort of -- for the bin tips and so it's really around sort of drivers of people out in the field. And so the issue really manifested itself in March when those productivity improvements that should have been there didn't show up.

Overall, when you look overall at Iron Mountain, our labor rate as a percentage of revenue actually declined. It didn't decline as much as we expect it to, and this was sort of a major cause of the issue and of the shortfall in shred.

Paper prices were actually down -- on the shred business were down, a little bit below where we expected it to be as well. Again the paper prices during the quarter really moved down and March was a little bit lower. So that was a piece of the overall shred business, but the majority of it was sort of labor productivity.

The good news is that the course correction can happen pretty quickly.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Okay. And then this is completely different though than Western Europe where you're seeing the same kind of labor issues over there as the margin was down as well over there with 230 basis points.

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

Yeah. It's -- similarly different issue, so labor there was impacted really. We had some good project revenue in Q1. You know, we have got a good pipeline but the project revenue in Q1 was down, and we didn't manage some of the probably the contingent labor as well as we should have. So on the service side around projects, we lost some productivity on that as well. Again correctable and regrettable as well, but we are taking action on it.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Okay, that's good color. And then, is there a way -- first of all, I mean there's discussion on the paper pricing and EBITDA and it does seem to catch investors by surprise. Can you just give us the number in terms of percentage of the EBITDA that paper is or what it is this quarter versus last quarter, or a year ago quarter, so that we can kind of gauge and not be surprised by stuff like that?

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

Yeah, I think it -- again the paper prices are volatile. If you take a step back in the overall shred business revenue was around $440 million, $450 million a year. And about a third of that revenue comes from the sale of paper for recycling.

And so that's what gives you -- and a majority of that flows through -- doesn't flow through 100% but it flows through probably 90% in the EBITDA. And so that's sort of where you get the volatility. So we take those numbers and we say OK, paper prices can be -- it's been fairly volatile last year, again they peaked I think in the second quarter of last year, and so, Q1, we are actually still -- Q1 was actually a tailwind for us this year.

Q2 will be a headwind for us. So that gives you an idea of what the magnitude of the scope of the business.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Okay, that sounds good. And if I could just sneak in one more, just -- and the acquisitions of customer relationships, is there a way for us to triangulate as to how much volume you contribute through those like $33 million or $34 million this quarter?

How much volume does that add to your organic volume when you make those. Is there like a per million dollars if we had X amount of volume or how can we think about that more broadly?

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

In that number also includes things like service acquisitions, which could be in shred or other businesses. If you look at sort of historically and how we sort of what the normal pace of the business is, we typically pick up on an annualized basis of around 3 million to 4 million cubic feet per year through customer acquisitions -- of acquisitions of customer contracts and we've always included that organically because really the alternative is to go out and pay commissions to somebody else.

It's really -- if it wasn't a commission line, there sort of wouldn't be a question about it. We're not buying assets, we're not buying businesses as to really acquire customer contracts, and so that's the sort of the other side of that coin.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Okay. Thank you very much.

Operator

The next question is from Karin Ford of MUFG Securities. Please go ahead.

Karin Ford -- MUFG Securities Americas Inc -- Analyst

Hi, good morning. I wanted to go back to the expense topic again. It sounds like the March cost spike was in shred and in the SG&A line, but you also saw a large increase in storage operating expenses. I think, it was up 7% year-over-year, including a 24% increase in labor there as well. Are you seeing cost pressures across the entire business or was there anything one time in that line?

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

No. I think on the storage, the other piece of the storage side would be -- I don't think they had the change in the lease accounting year-over-year. So that impacted that as well. But nothing as a way (ph) to call out. I mean there is no sort of global labor pressures that we sort of see that are standing out that we didn't expect.

William L. Meaney -- President and Chief Executive Officer

Yeah, I know. And if you kind of take -- just Karin one more piece of color on that if you take the two piece, so, you know, we talked about the $10 million that we was not expecting, these things happen from time to time in the business, you make $10 million on a $1.5 billion or approaching $1.5 billion EBITDA business. This is not the -- these are things generally if we catch them early in that quarter, we can manage them, and these things happen from time to time.

This one was just when you start getting into March there is not a lot of time to recover. So that's kind of one thing. The other part in terms of the increased SG&A as Stuart said before was actually planned. It is because if we want to get continuous improvement to pay for itself in year, we have to execute in the first quarter.

So when we ramp up programs like this, if you generally see us front-load the cost in Q1 and to a certain degree in Q2, so that during the course of the year the benefits pay for themselves.

Now, the good result as we set this group up and because they've actually exceeded our expectations when we set them up is we said, OK, let's go even harder going into Q2 on some of the programs that they teed up in Q1, which means that at the end, you know, not only will it make up the $10 million, which is say it's not the hardest thing and given the size of the business in nine months to run, but it means it's also going to give us a strong EBITDA margin exit rate when we go into 2020.

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

You know, one of the thing I would like to mention on the storage side as well you do have the impact year-over-year of the Evoswitch acquisition, which has got from a higher facilities costs obviously and sort of the core part of the business as a percentage of revenue, so that will be -- also be one of the drivers. And if you're looking at just the gross margin on (inaudible) storage.

Karin Ford -- MUFG Securities Americas Inc -- Analyst

Got it, thanks. That actually your answer segues into my next question which it just seems like it's kind of a quick turnaround on the expense side, given the complexity of the initiatives you laid out, what gives you confidence that you can achieve a 650 basis point margin swing basically in three quarters?

William L. Meaney -- President and Chief Executive Officer

It's actually not that -- Well, I appreciate -- I'm going to tell my Board that you think that I have a very complex job. I'll make sure I use that.

But no, it's not as complex as you see. The thing that is -- first of all, the labor issue in shred, you know, it takes management, but the bottom line is, if you're replacing over time with full time, you have to manage the over time. People don't naturally wean themselves up over time and we just didn't do that properly.

There was a learning lesson for us because we don't do that, that often, right. We actually run our plays pretty efficiently. But there aren't that many times where we overhead -- over time gets so ahead of us, that we have to do these large hiring and then manage that out.

So that's a -- but we're able to reverse that very, very quickly. So now that we've been able to identify it and put people on it, I think in terms of the SG&A, first of all in that area as Stuart said, we actually brought consultants in to help build out the ops team, the global ops team and to initiate a number of those projects.

So those are -- that was planned cost to come in and come out. So that's actually already done and pretty straightforward. And then the other area, and some of the areas in terms of -- if we get to what our global ops team have identified in Q1 and started initiating, some of it was just global best practices on transportation. So we actually on any given day around the world the good thing about having transportation being a heavily demanded area is we have open reqs or open positions in our -- pretty much globally in our transportation. And we are able to manage that cost out pretty quickly by just not filling or canceling some of those openings as we bring productivity into our fleet.

So that's one area. And the other area, which I don't think we did mention in our remarks, a big chunk of our improvement this year, believe or not is coming from procurement. We have done a pretty good job in speed and agility a few years ago in procurement, but it was primarily focused at North America.

And now we've actually given with JT coming in as the Chief Operating Officer, we've expanded his remit including procurement and procurement now is a global exercise. So, fairly straight -- well, still I would say it's the low-hanging fruit stage, I'm sure it will get complex and I'll make sure I'll tell my Board that in the years to come. But right now, I'd say it's fairly straightforward.

Karin Ford -- MUFG Securities Americas Inc -- Analyst

Great. And I'll just finish up with a data center question. Can you give us an estimate of what you think the mark-to-market is going to be on the 68% of data center rent you have expiring over the next three years?

William L. Meaney -- President and Chief Executive Officer

I think overall again we -- from a GAAP standpoint right we've adjusted through the acquisitions on IO, and Evoswitch basically two market on a GAAP basis and when we did both of those acquisitions, we found them pretty close to markets. So we don't expect a big mark-to-market on the turnover.

Yeah. I think the good thing about it Karin is, we're relatively new in the data center space. So it was a lot of it -- I think the question behind your question, there was a lot of price compression I think over the last three or four years. Our contract is still relatively new other than the ones we mark-to-market during the acquisition.

And when we look at our exposure in the -- on the hyperscale, it is still relatively small, I mean, we think that's an important segment and we continue to grow and look for ways to expand in that business, but our models are based at where the prices have adjusted to now rather than us trying to hang on to business that was priced at higher historical prices.

So we think the pricing now is pretty much leveling out to where the clearing price is based on the cost of the assets and the expected returns that a vendor like ourselves should expect.

Karin Ford -- MUFG Securities Americas Inc -- Analyst

Thank you for taking the questions.

Operator

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

Kevin McVeigh -- Credit Suisse -- Analyst

Great, thank you. Hey Bill or Stuart, is there anything in terms of the revenue? I mean the organic growth came in at 1.9%. I think if you have it right, it's the easiest comp of the year and then the comps kind of get more difficult. Is there anything that kind of comes in that helps that grow over a factor. How should we think about that over the balance of 2019?

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

Hey Kevin this is Stuart.

Kevin McVeigh -- Credit Suisse -- Analyst

Hey Stuart.

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

I mean, from a growth perspective year-over-year, I mean you get a little bit of lumpiness, but again, on almost 700 million cubic week of volume, right, that we're storing out there for our customers that are paying every month. On the margin the numbers you talked about from a seasonal stand point are really small.

So I think as Bill mentioned, we started off the first quarter a little bit better than we expected, both from a destruction as well as a new sales from existing -- from new customers, and we've got -- we feel good about the pipeline that we have for the year, and so we're pretty much right in line with our outlook.

Kevin McVeigh -- Credit Suisse -- Analyst

Got it. And then -- obviously to your point you kind of have a wider range out there given the FX. At this point do you plan on kind of -- would you think you're coming at the lower end of the range or the higher end based on where we are again at quarter end to it?

William L. Meaney -- President and Chief Executive Officer

I mean I think the range is what it is -- I think we said the upper and lower end are both FX dependent, and I'll leave it at that.

Kevin McVeigh -- Credit Suisse -- Analyst

Okay.

Operator

(Operator Instructions). 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 US and +1 (412) 317-0088 internationally. You will be prompted to enter the replay access code, which will be 10129729. Please record your name and Company when joining. Thank you for attending today's presentation. You may now disconnect.

Duration: 59 minutes

Call participants:

Greer Aviv -- Senior Vice President Of Investor Relations

William L. Meaney -- President and Chief Executive Officer

Stuart B. Brown -- Executive Vice President and Chief Financial Officer

Sheila Kathleen McGrath -- Evercore ISI -- Analyst

Nathan Crossett -- Berenberg Bank -- Analyst

George Tong -- Goldman Sachs -- Analyst

Andrew Steinerman -- JP Morgan -- Analyst

Andrew Wittmann -- Robert W. Baird -- Analyst

Michael Funk -- Bank of America Merrill Lynch -- Analyst

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Karin Ford -- MUFG Securities Americas Inc -- Analyst

Kevin McVeigh -- Credit Suisse -- Analyst

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