Good day, and welcome to the Iron Mountain Fourth Quarter 2017 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 Melissa Marsden, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Keith. Hello and welcome everyone to our fourth quarter and full year 2017 earnings conference call. The user-controlled slides that we will be referring to today in today’s prepared remarks are available on our Investor Relations site along with the link to today’s webcast. You can find the presentation at ironmountain.com under About Us/Investors/Events & 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 of the related documents as one 8-K, which is also available on the Investor Relations website. On this morning’s call, we’ll hear first from Bill Meaney, Iron Mountain’s President and CEO, who will discuss highlights and progress toward our strategic plan; followed by Stuart Brown, our CFO, who will cover financial results and 2018 guidance. After our prepared remarks, we’ll open up the phones for Q&A. Referring now to Page 2 of the presentation, today’s earnings call, slide presentation and supplemental financial information will contain forward-looking statements, most notably our outlook for 2018 and longer-term 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 this supplemental financial information. With that, Bill, would you please begin?

Thank you, Melissa, and hello, everyone. We are pleased to report a strong finish to 2017, characterized by significant progress against our 2020 strategic plan, with solid momentum in the business and durable internal storage revenue growth clearly demonstrated in our fourth quarter results. Moreover, the acquisition of IO Data Centers coupled with Fortrust earlier in the year, provides us with the platform that will not only deliver our 2020 goals for Adjacent Business growth, but also drive higher and sustainable growth. As shown on Slide 3, we are well on track to having a business mix that will structurally deliver north of 5% EBITDA growth before acquisitions, up from about 3.5% as of the end of 2017. Turning to Slide 4. Full year revenue growth of 9% was slightly above our expectations. And adjusted EBITDA was in line with our outlook, up 16% over 2016, driven by strong internal growth, Recall synergies, transformation and a full year of contribution from Recall. This strong performance represents a 180 basis point improvement in adjusted EBITDA margins over 2016 and 220 basis points of improvement over the past two years despite the integration of Recall, which had historically lower margins than stand-alone Iron Mountain. In addition, AFFO for the full year was up more than 12%. Our strong 2017 performance benefited from favorable currency translation after three years of FX headwinds. For the fourth quarter, our results reflected continued strong internal storage rental revenue growth across the business. We achieved internal storage rental revenue growth of more than 4% in Q4, whilst internal service revenue growth was essentially flat, as expected, at minus 0.1%. In total, internal revenue growth was 2.5%, our strongest performance in the last 12 quarters. This healthy growth was supported by ongoing revenue management progress, primarily in North…

Thank you, Bill, and good morning, everyone. We’re excited to deliver another strong quarter and year of robust storage rental growth and enhanced margins, reflecting the strength of our global position and the discipline of our management teams. We remain steadily on track to deliver on our financial and strategic goals, anchored with a disciplined investment strategy oriented toward faster-growing, value-creating businesses. On today’s call, I will review our 2017 full year performance compared to expectations and cover the fourth quarter’s operational and financial drivers. Then I will lay out our expectations for 2018 with an update on our 2020 plan, considering also the recent data center acquisitions. Turning to our full year performance on Slide 8 of the presentation. Results were generally in line with our guidance discussed on last quarter’s call. Revenue came in at $3.8 billion and just above the range as a result of strong internal storage revenue growth, driven by our revenue management efforts as well as currency translation benefits. Adjusted EBITDA of $1.26 billion was in the middle of our range. Compared to the full year 2016, our adjusted EBITDA margin improved 180 basis to 32.8%, with higher gross margins and lower SG&A as a percentage of revenues. Our structural tax rate for the year was slightly lower than we had guided on the Q3 call due to the mix in North America taxable income between the Q1 and taxable entities. AFFO came in at the higher end of our range due to efficiencies in capital maintenance projects following the acquisition of Recall, as discussed last quarter. Let’s now turn to our results for the fourth quarter. As you can see on Slide 9, it shows our key financial metrics, our fourth quarter total revenues grew 6.1% over last year or 4.1% on a…

Thank you, Stuart. Just a few points. We continue to drive improved internal storage revenue growth across both developed and emerging markets. The recent expansion of our data center business through the acquisition of IO and Fortrust and the expected acquisition of Credit Suisse data centers will take our organic EBITDA growth from 3.5% in Q4 to over 5% in 2020. We have done all this whilst remaining committed to our financial framework and targets. Net of all this, we continue to be a standout in the S&P with a strong dividend plus robust and sustainable growth. With that, I would like to hand it over to the operator for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Sheila McGrath with Evercore.

I was just – first, I had a question on guidance, if you could give us a little bit more color. Now owning more data centers, will this mean higher CapEx and straight-lining adjustments to get to AFFO?

Yes, it will mean – well, most of the CapEx that we'll be having initially will really be building out the development pipeline, right? We're really going from a pretty small development pipeline, but the growth opportunities that we have in Denver, in Arizona, in New Jersey as well as the Virginia campus, we'll continue to build the development pipeline. With that comes, from a GAAP standpoint, obviously, capitalized expenses and capitalized interest. And then as the leases grow, we will be straight-lining rent adjustment coming into AFFO.

Okay. And a follow-up. Could you give us an update on how leasing is going at some of the data center projects and some insight on the IO transaction and integration?

Yes, it's a good question. We're really pleased by – I guess, we expected an acceleration in terms of the pipeline, in terms of new sales, but I think getting the new logos, so to speak, from IO, which are also existing customers for Iron Mountain both, some on the data center side, but a number of them in our data management or our records side, has really accelerated the conversation both for us, but also for the IO sales force. So we're really encouraged. It's obviously early days, but the feedback that I've been getting from the sales teams is they've already seen an increase in activity, an increase in interest in what we're offering.

In Northern Virginia, the first data hall we built out is about two-thirds leased already, and that's why we've got in our plans to go and build up the next two data halls. We've seen a lot of interest, the potential pipeline as a multiple of what we've got in our expectations for next year for lease-up. So we're pretty confident in the 10 megawatts that we've got in the guidance for next year.

Okay, great. I’ll get back in the queue.

Thank you. And the next question is a follow-up from Shlomo Rosenbaum with Stifel.

Hey, good morning. Just two, just on the volume decline in 2018, it sounds like there's some kind of mathematical calculation risk over there. Can you just explain why particularly the volumes to decline?

Hi, Shlomo, good morning. Yes. By the way, your – I got the question, but your phone is breaking up. But anyway, there's a couple of things going on. One of the things, as Stuart pointed out, is that we're lapping a strong comparable in Q1 of last year because of some new customer activity. But overall, it's the same trend that we called out last time is that if you look at incoming volume from existing customers in North America versus Western Europe, Western Europe, we're still seeing kind of, what I'd say, steady incoming percentage growth from existing customers, where we've seen a reduction in North America. Now some of that may be because we're being a bit more aggressive in terms of revenue management which, obviously, we rolled out a couple of years before we start rolling it out in Western Europe. That being said, we don't see an increase in destruction rate, and we don't – and we actually see a slight uptick in terms of new customers as we kind of focus on unvended, mid-market and federal government. So we expect that trend to continue. I mean, there is a little bit of an overlap of a high comparable in Q1. But as Stuart said, we think, overall, our developed markets will be flat to minus 0.25 basis point. And we expect those – that kind of trend to continue, and it's mainly driven by a slowdown of incoming volume from – still growing, but a slowdown of incoming volume from existing customers in North America. And I think, going forward, we will continue to optimize price for existing customers and continue to seek new volume more and more from unvended opportunities.

Just to understand this better, if I were to look in 2019 – to be roughly flat or I guess [indiscernible] volumes start to decline?

No. Well, I think it will be roughly – if you look at developed markets, it will be roughly flat. I mean, I think you're still going to be, from a volume – don't forget, this is on 500 million cube, and so I think volume, if you look at developed markets, are probably continuing to hover in kind of the flat, plus or minus, let's say, 0.25 basis point, so maybe negative, maybe flat, maybe slightly up. But we continue to feel that we're not going for share in these markets. And so we think the right thing to do is to make sure that we're using revenue management appropriately, so we're not trying to increase the amount of growth from existing customers.

Okay. And just, Stuart, can you walk us through some of the assumptions beyond 2018 to get us to 2020, how are you going to delever to 5x and get AFFO coverage down to 70% to 75% if you're going to be continuing to invest in data center and build out these data center assets? Is there some kind of big step-up in margin that we should be expecting that are going to improve the leverage ratio? Just can you give us some of the pieces of the puzzle that we need to build a model that will help us understand this?

Shlomo, let me start with the – I mean, the target of – for leverage and – for our leverage framework is really built around two things: a, optimizing our cost of capital; and b, making sure that we've got capacity in our balance sheet to be able to take advantage of opportunities. There's no liquidity issue where we're sitting today from a leverage standpoint. So as we want to delever over time, it's more about getting back to creating that capacity for us to take advantage of dislocations. So with that said, we said when we purchased IO that we will be taking a step-up in leverage related to that and that will delever naturally over time with organic growth. However, we will be putting capital back to work in development as well. And so the funding of that additional development as we kind of build our data center pipeline like other data center REITs, how are we going to fund that? We will get some cash flow from operations. We will use the ATM for things like Credit Suisse, and we're looking at capital recycling opportunities. And we've been – just to give you an example of one we've got right now is we've recently purchased a property in the Midlands outside of London. And we're going to sell some fairly high-value properties that are in – much closer into the city, I think it's three properties, as we move out to the Midlands over the next couple of years. So those are the types of opportunities where we can sell those types of properties through a short-term leaseback and then move back and move out to cheaper properties as records management becomes more archival so that we've got a number of levers that we can pull to fund the data center expansion. And if you look at the model that we provided on 2020, coming back to your payout ratio question, right, we're not going to – we don't anticipate the dividend to grow as fast as AFFO. And so again, you get a natural reduction of the payout ratio down into the mid-70s.

Okay, and I'll work with that. And then can you give me – give us, on the acquisition – excuse me, when you're saying the data center is expected to provide $200 million of revenue, $100 million of normalized EBITDA in 2018, what are you normalizing for?

So the only thing that's normalized for in that number is the integration costs related to IO, and that's $4 million to $5 million. That $4 million to $5 million is built into our total EBITDA guidance, but we normalize for that when you look straight at just the data center number.

Okay, thank you very much.

Thank you. And the next question comes from Andrew Steinerman with JPM.

Hi, it’s Andrew. When looking at the current status of the 2020 plan on Slide 14, one of the underlying assumptions there is to achieve the $2.54 dividend per share goal is a higher margin assumption. The implied margin for 2020 is now 36.8%. Previously, it was 35.6%. What gives your team confidence in higher 2020 margins than previously thought?

So let me kind of give you the high-level view of it, Andrew, and then I'll let Stuart comment more. But the part that's really given us the confidence is the traction that we've gotten on the revenue management side of the storage business. You can see that in terms of the margin expansion that we've gotten in the last 12 months because what we're doing right now is we still think we'll be able to maintain 3% to 3.5% internal revenue growth on the storage side, and we're doing that at the same time whilst minimizing the amount of racking and boxes that we have to put in place to take the boxes because we're relying more and more on price. So we feel really good about – and we already see that. We've seen an acceleration in our margin increase. But I mean, Stuart, you may want to comment more in terms of our specific margin target.

Just two other quick things I'll point out, right, we're coming in, in a little bit of a higher base, right? We've outperformed expectations in 2017. The other thing, Andrew, don't forget, is the revenue recognition accounting change has an impact on that margin as well, so you need to normalize for that.

Right. So just to say, cleanly, the success of 2017, revenue recognition, but it's not like you're saying I'm going to have higher synergies than previously thought on Recall or higher transformational initiatives.

No, no. It's really driven by the gross margin on the business.

Perfect. Thank you.

Thank you. And the next question comes from Karin Ford with MUFG Securities.

Hi, good morning. Just a couple more questions on guidance. What are the expectations on the service side for revenue growth and margins in 2018?

Revenue growth on the service side is expected to be flat. It will be a little bit better than we've had in the past really because of the shred business. We see stronger growth on the shred side.

Okay. And do you expect steady margins based on that?

Well, I think, actually, if you look at it, Karin, if you look at historically over the last three years, we're really pleased in the progress that we've made both on the storage margin but also as well as just in terms of storage growth. You can start seeing through – you see that we have positive internal storage rate of growth both for developed markets and emerging markets. And that's really how – as we've been replacing with historically with the bedrock, which was the transportation, with some of the new service offerings, so we feel really good with the progress and the momentum that we're building there.

Great. Next question is, you mentioned you're going to be rolling out revenue management into the emerging markets in 2018. How much do you think that could boost organic revenue growth in the emerging markets?

We're not – we're going to stay within our overall guidance that Stuart laid out, the 3% and 3.5% overall. I mean, we'll give you more flavor as we go forward. You could see a little bit of the impact this past quarter, but we're still focused in those markets. Think about those markets, a lot of them were still focused on getting to a market-leading position. And when you're in a market-leading position, obviously, volume is your primary lever that you're looking at. And then at some point, you start harvesting that volume and optimize it with revenue management. So we are introducing because we think there are some – there is some low-hanging fruit in some of those markets. But I think our first quarter call, sort of speaking, that we are applying some of the tools now in emerging markets is Western Europe because we think there's a lot more that can be done if you just look at that Western Europe, we're still relying on volume growth more than revenue growth in terms of – I mean, volume growth more than revenue management to get to the revenue growth in that market. And we think we can optimize that further as we look at being efficient capital allocators.

Okay, thanks. I know I've asked you this question on calls past. But now that the tax law is settled, did you guys review whether or not you want to maintain your REIT status? And did you consider de-REIT-ing?

I'll start, and then Stuart could give you the technical answer. Yes, I mean, of course, we look at these things, but it's not even close, right? I mean, if you think about us as an income-oriented stock, we're kind of unique. We have a high yield and we have strong growth going forward. And we're attractive to income-oriented investors, whether they are REITs or C-Corp type investors. And given the nature of our business where we generate a lot of cash, the REIT framework is still an efficient way for us to give benefits to our shareholders, and we drive our – most of our revenue from real estate in terms of the storage nature of the business. And the fact that tax rates have come down, it just means they're paying less tax on the service side of the business. So – but I mean, Stuart, you may want to comment.

The other thing I'll add is on the data center side, I mean, the main reason we're expanding the data centers relationship we have with our customers and our ability to create value, the ability to leverage the REIT status on that is clearly helpful as well, right? So if you're Credit Suisse of the world, you're not getting the tax shield that we can provide as a REIT on those things. So a lot of data centers that are on the balance sheet of C-Corps are actually better in place than a balance sheet of a REIT. So we'll continue to leverage that as well.

Great. Last one from me. In past cycles, have you seen demand increase when GDP growth goes above 3%? And what type of economic forecast have you baked in the guidance?

Yes. We haven’t – if we look at the guidance, right, what we've baked in is a little bit of inflation because probably, in the near term, I think the biggest benefit for us is – it's kind of like a rain dance, I pray for inflation every day I come to work because inflation, our top line is really driven by inflation. And GDP, for sure, I think if you've been following the company a long time, my predecessor had shown a number of graphs where GDP does drive volume growth. But I think given the amount of growth that we expect in – the change in growth of GDP over the next 8, 12 or 24 months, I think that's going to be less of a driver than the change of inflation. And of course, with a 75% gross margin storage business, every point of inflation expands our margins. So you were kind of unique in that sense. So I know that a lot of income-oriented companies don't like inflation because it's hard to keep dividend growth at pace with inflation. In our case, it's just the opposite. It allows – the more inflation allows us even to outperform with our dividend. So it's – so I think in the near term, I'm doing my inflation dance.

Great. Thanks for taking the question.

Thank you. And the next question is a follow-up from Sheila McGrath with Evercore.

Yes. Any update, insight how we should think about Recall and transformation impact in 2018?

It's mostly – I mean, Stuart, you may want to give more, but it's mostly done at this point. I mean, there's still a little bit – we always said that we think there's more to get done on some of the integration in terms of integrating facilities in real estate, and we're still picking through that. But I would say the bulk of it, I mean, Stuart.

Yes, the bulk of it is done in terms of the Recall investments. We do still have some back-office systems and some IT Recall costs as well, as well as the real estate that Bill mentioned. And the synergies will continue to sort of flow through as we ramp up. It's built into the guidance numbers, and we're right on track.

Okay. And then just on G&A, that was a little higher than we had forecast in fourth quarter. I wonder if you can provide any detail on that and how we should think about this line item going forward.

If you look at – what I would look at, Sheila, because there's puts and takes, there is a seasonality aspect in terms of certain things that happened at the end of the year. If you look at year-on-year, you're right, Q3 to Q4 were flat. But if you look at year-on-year, we saw a nice improvement. There was some noise in the end of the quarter that we had some VAT issues that we're still working through, for instance, in India. But I think if you look at year-on-year, we continue to see that we'll continue to slowly tick down. I mean, in fairness, we've got most of the SG&A improvement, and we baked a little bit into our guidance for 2018. But a lot of what you see between the flattening out between Q3 and Q4 is in the year. But year-on-year, we're pretty happy.

Okay, that's helpful. And then I was wondering if you could talk a little bit about Iron Mountain sales force and cross-selling all of Iron Mountain. Are you restructuring incentives or anything to encourage the sales force to sell the new and expanded data center segment? Or is this segment going to rely mostly on the data center specific sales force?

No, it's a great question. That's one of the things that really excites us about the data center space. I think as we might have mentioned back in December that 65% of our sales – of our customers right now in our data centers are Iron Mountain ones. And then with IO, there's about a 45% overlap. And even in the short time that we've owned it is we see that the inquiries coming through our data management especially and, to a certain degree, our records management folks has been increasing. So – and how we coordinate that, there's always been a pretty good coordination, but we coordinate it with both art and science. So the art is fixed. So I'll give you an example. The Credit Suisse data centers came through our records management sales force in Europe that have been the relationship manager with Credit Suisse for a number of years, not even the data management folks just because of the strong relationship we have with Credit Suisse. And that we use both spiffs, and we also have some of those people actually carry a quota with a – which is the science part of it. But that's one of the reasons why we're really excited. And as I say, 950 of the Fortune 1000 are our customers, and over 35,000 data centers just in North America alone are people in and out of almost on a weekly basis. So it is starting to show real benefits.

Just to add one quick point onto that as well, just to give you a little bit of color. I mean, our data center team, even district commercials and our the data center team met the first day that IO closed at IO's facility, right, we got the entire commercial team together. And one of the reasons they're excited to be a part of Iron Mountain is now they've got a much bigger platform to be able to sell. And companies have been owned by private equity, right, or don't have the sort of the balance sheet to be able to provide the capacity for these sales teams to be able to provide the customers. So they've got a great roster of customers and a lot of potential transactions in the pipeline. And I guess I should probably welcome them all to the Iron Mountain team.

Okay, great. Thank you.

Thank you. And the next question comes from Kevin McVeigh with Deutsche Bank.

Great, thank you. Hey. Really nice job on the internal storage growth, the 4.2% in Q4. That kind of took the full year up to 3.9% versus a range of 3% to 3.5%. Was there anything in there in terms of one-time like a termination fee or anything like that? Or was that just kind of the pure price kind of versus making the volume growth algorithm?

The only unusual item that was in there for the year was that – which we have it in the second quarter, and we fully talked about the SimpliVity on an annual basis, we had the SimpliVity termination fee back in the data center. And so that impacted the storage rental growth about 20 basis points for the quarter. But other than that, it's just strong underlying performance, 20 basis points for the year.

Great.

Yes.

For the full year. So the 3.9%, Stuart, would have been 3.7%, right, x that?

Correct.

Is that the way to think about it?

Yes.

Super. And just as you folks think about kind of price in kind of the revenue management versus the volume in the emerging markets in 2018, to get to that 3% to 3.5% range, is there any way to bracket how much is kind of revenue management versus emerging market unit volume growth, just to try to get a tighter range on what would be 3% versus 3.5%?

No, I mean, we gave you the guidance at the top level. If you look at the momentum that we built in the business between revenue management and volume growth in terms of how that's driving the 3% and 3.5%, it's pretty clear. And if you look at the emerging markets, you can see a slight upward trending, but I would instead continue on those trend lines. Effectively, what we're calling out is a similar – we expect a similar momentum or continued momentum and similar trend in the businesses.

Got it. And then just last one from me, if I could. The rev rec, the $7 million of revenue and the $25 million to $30 million in EBITDA, does that sit in storage or service? And would that be considered part of that internal growth, the $7 million of revenue? Or is that not impacted at all?

It was mostly – really mostly in service because it's the commission side, right, that's getting capitalized on EBITDA.

Got it. And Stuart, that impacts the internal growth in terms of the revenue or no?

No, no, we will exclude definitely internal growth.

Okay, awesome. Thank you, guys.

Thank you. [Operator Instructions] And next question is a follow-up from Shlomo Rosenbaum with Stifel.

Hi, thank you for squeezing me back in. Stuart, can you give us just a little bit more detail on what your expectations were for data center in 2018 organically versus how much of the data center $200 million revenue, $100 million EBITDA, is acquisition? I know the vast majority of it is, but can you give us a little more specificity?

Yes. On the revenue side, I think the ongoing legacy business was about – I kind of remember off the top of my head, but – about $30 million – from the legacy business, about $30 million, and then you had the Fortrust acquisition and then IO on top of it from a revenue standpoint. And then from the IO transaction, we talked about it, with the equity offering, that, that will be, from an EBITDA perspective, around $80 million after integration.

So when I think about it, should I be expecting, including the other acquisitions like Credit Suisse and everything, more like $90 million from EBITDA from acquisitions?

I mean, the numbers that we've provided include Credit Suisse, right. So the guidance numbers include Credit Suisse assuming that closes here later in the first quarter.

Right. Okay. I was just trying to get a kind of an organic growth of what you guys are seeing, expecting versus the acquisition growth.

I think if you can think about it, Shlomo, this way, is that we expect this year – because some of the acquisitions we have, we have to build out some capacity, so I think the organic growth will be a little bit slower than what we've seen in the previous years. So I'd say mid-teens in terms of organic revenue growth, and EBITDA will grow a little bit faster than that as some of the assets stabilize because we're, obviously, moving up in terms of our EBITDA margin. But I think it's kind of – I would expect kind of mid-teens in terms of revenue growth and a little bit better on EBITDA.

Okay, thank you.

Thank you. And as that was the last question, I would like to return the call to management for any closing comments.

We'd just like to thank everybody for listening in, and we look forward to a continued strength in 2018. Have a good day.

Thank you. This concludes our question-and-answer session and today's conference call.