Iron Mountain Incorporated (IRM) Q1 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Iron Mountain First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will 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.

Thank you, Francesca. Good morning and welcome to our first quarter 2020 earnings conference call. The user controlled slides are available on our Investor Relations website along with a link to today’s webcast and earnings materials. On today's call, we'll hear from Bill Meaney, Iron Mountain's President and CEO, who will discuss Q1 highlights and our response to the COVID-19 pandemic. Barry Hytinen, our CFO will then cover financial results, our leverage and liquidity position and our expectations for the remainder of the year. After our prepared remarks, we'll open up the lines for Q&A. Referring now to slide 2 of the presentation. Today's earnings materials will contain forward looking statements. Most notably, the impact from COVID-19 and our expectations of how that may impact our operations and financial performance in 2020 and expectations from Project Summit. All forward-looking statements are subject to risks and uncertainties. Please refer to today's earnings materials, the Safe Harbor language on this slide and our annual report on Form 10-K and future SEC filings 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 information, 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?

Thank you, Greer, and thank you all for taking time to join us. First and foremost, let me start by saying, I hope you are all healthy and well and our thoughts go out to all those who have been impacted by COVID-19. I also would like to say, thank you to our employees in particular our front line mountaineers, who are on the road and in our facilities every day. As many of our services are considered essential, many of our colleagues have been ensuring our customers' needs are met as seamlessly as possible. Our mountaineers have shown selfless dedication and resilience in these challenging times. As we go through this morning's call, I will focus my remarks on a few key subjects. How we are responding and managing the business in light of COVID-19 pandemic; the new service and storage revenue opportunities we have seized, as we respond in real-time to our customers' changing needs, and the durability and strength of our core storage and data center businesses, which provide valuable recurring revenue during times such as these. First, we continue to closely monitor the COVID-19 situation, which as you are aware continues to evolve at a rapid pace. Our top priority is to ensure the safety and security of our people, their families and our customers. As a global business, we have been assessing the situation and implementing extensive precautionary measures since first learning about the virus in January. We have been constant. First in Asia and now globally in striving to minimize the spread of the virus and its impacts on our people, the communities we operate in and our customers. We have been serving our customers many of which are considered essential businesses in new and innovative ways as they navigate this pandemic. Now let me address the current situation, the impact on our business, and what we are doing to mitigate that impact. As an example, we are reserving storage base for critical assets and unanticipated inventory volumes, including supplies needed by health responders in food and drug retailers. We are also providing outflow storage for businesses now stockpiling inventory due to service or supply chain disruptions. In addition, we are availing our customers of our digital and AI-based services to facilitate remote working on a range of activities, including distribution of mail from corporate mailrooms to providing a digital solution allowing the processing of unemployment benefits remotely. The first quarter introduced unprecedented challenges and required us to closely examine our priorities and focus on what we could do beyond our normal course of business to remain strong, resilient and well positioned to support all of our stakeholders. Fortunately, Iron Mountain is considered an essential service in many locations and sectors where we operate. In our global records and information management business, we have been able to keep more than 96% of our facilities open at varying levels of operations all with heightened safety and cleaning procedures in place. We are seeing a need for new and more creative solutions in our digital solutions and global data center businesses. To help our customers respond to COVID-19, we are providing storage and distribution of PPE and other critical health care supplies and are offering innovative solutions around document scanning and application of artificial intelligence through our Insight platform, which can help enable our customers' home-based workforces. Whilst there is a high degree of uncertainty regarding the length of the COVID-19 pandemic and the ensuing recovery from an economic perspective, I am confident we will get through this and come out an even stronger company. We are already seeing customers seek out new services that have resulted in revenue. So whilst it's possible that customers may not use our services the same way they did historically, we are confident that we will be able to continue to generate new revenue streams. Our customer-facing teams have been closely listening to customers, engaging differently in solving problems that didn't even exist a few short months ago. We are deepening relationships with our customers and further differentiating Iron Mountain from our peers, many of which do not have our level of financial strength, breadth of digital and physical offerings and flexibility. We believe this positions Iron Mountain better for the longer term. Liquidity remains the top priority from a financial perspective, and we are operating from a strong liquidity and cash position. Barry will provide more detail on the specific actions we are taking but at a high level we are prioritizing cash generation, and we have taken action to reduce operating expenses in discretionary capital expenditures, including M&A. As of the end of the first quarter, we had more than $1.2 billion in liquidity between cash on hand and availability on our revolving credit facility. This strong balance sheet should provide us with sufficient runway to operate the business in this uncertain environment. As you would expect in a crisis such as this, our service levels have experienced significant declines in numerous geographies as many customers have instituted mandatory work from home policies or ban visits to their offices and facilities from external parties. The timing and magnitude of decline in service activity has varied by market and by product line. Whilst we are a global company with operations in over 50 markets, our exposure to countries that saw a peak in Q1, such as China, is limited, so we did not see a significant service activity decline until mid-March for the majority of our business. In our records management and secure shred businesses, which account for approximately 75% of our service revenue. Service activity has declined by 40% to 50% during the times when the respective markets have had restrictions in place as compared to the prior year. As restrictions are lifted, we expect this service activity to gradually pick back up. For instance, in our Chinese markets, we are seeing current service activity at 60% to 70% of normal levels, which has improved from only approximately 20% at the peak of the virus spread in China. While service generally contributes only about 20% of our profit, given the size of the decline as well as some of the fixed costs in the business, the impact is significant. As we have encountered this slowdown, we have made tough decisions that impact our fellow Iron Mountain colleagues. In an effort to keep our labor costs in line with levels of service activity, we have either furloughed, reduced hours or utilized other temporary reduction measures for approximately 1/3 of our global workforce. We have also managed costs by putting on hold our -- on recruiting activity in terminating most of our temporary and contract workers in our global records and information management business. Decisions that impact our employees are never taken lightly, and we have set up numerous resources to support impacted employees during this unprecedented time. This includes, but is not limited to, continue to provide benefits in sponsoring the employee portion of health care for impacted employees, helping our employees utilize their respective government programs available to those individuals unemployed or furloughed, assisting our colleagues with outplacement support and actively assisting employees through our employee funded relief fund. At the same time, our core storage business remains durable, and we continue to benefit from our deep and long-lasting customer relationships. Whilst we have seen a slowdown in the new boxes that we have been able to inbound, the majority of our storage revenue is from existing boxes that were inbounded in prior months and years, and we continue to earn revenue on that inventory. However, the impact the crisis will have on our future organic storage rental revenue growth and volume remains unknown and is dependent on the severity and duration of the COVID-19 pandemic. In Q1, total organic storage revenue grew 3%, supported by strong benefits from revenue management. Global organic volume in Q1 was flat compared to Q4, driven primarily by growth in adjacent businesses and consumer of 8% and 5%, respectively on a sequential basis. Organic global records management volume declined approximately 600,000 cubic feet from the fourth quarter. Due to the impact of COVID 2019, we expect our volume of incoming boxes for the remaining of the year to be lower than we initially expected entering the year, but we will continue to look for ways to mitigate the slowdown. As I mentioned before, we also remain in active dialogue with our customers about leveraging existing and customized Iron Mountain solutions to help them navigate this difficult situation. I want to briefly mention a few key examples. One of our digital services that have benefited our customers during this crisis is Image on Demand. This service provides safe, contact list, digital delivery, which enhances the chain of custody security and provides a quick 24-hour turnaround online delivery. This solution enables customers to be more effective by sharing information with those who need it, whilst ensuring the information security and privacy are maintained, which is even more necessary in today's remote environment. Another example is one where we are helping one of our customers, a national health care provider, which was struggling with a surge in the need for medical supplies and supply chain challenges. This particular customer needed to distribute critical PPE to 32,000 employees at 750 sites in 36 US states and required a secure location to prep PPE kits without taking up valuable space that was being used to care for patients. In order to meet those critical needs, we provided non-records business storage and logistics support. We in-bounded in stored pallets from multiple suppliers, prepared PPE kits made up of 12 to 15 items and distributed the kits to healthcare sites. This is only one example of how we have helped many of our healthcare and medical customers during these trying times. A third relevant example is a government labor department that needed to maintain critical processes whilst enabling home-based workers to process high volumes of unemployment claim records as quickly as possible. The government agency leveraged our InSight Essentials platform, which enabled the government department to receive the scan claims via our InSight application to more than 800 unemployment examiners. We will continue to store the hard copy records for them until they need to be securely destroyed. We are currently speaking to multiple U.S. states about similar solutions to address both elevated volume and unemployment and Medicare claims during this crisis as well as the need for remote working of the teams approving the claims. As you would expect, our global data center business has also been resilient as an unprecedented number of organizations are adjusting to remote working practices, which has driven a substantial increase in traffic and the need for additional bandwidth. Moreover, the current pandemic further underscores the vital and expanding role of multi-tenant data center play in an increasingly digital economy. COVID-19 is causing companies to evaluate and accelerate their digital transformation journeys, especially as it relates to outsourcing their IT infrastructure and fortifying their remote capabilities. In fact, industry experts believe that COVID-19 is serving to fast-track trends that were already evident in the data center industry, which bodes well for this portion of our business moving forward. Looking at recent performance, our global data center business had a strong Q1 with organic revenue growth of almost 10%. We signed 6.4 megawatts of new and expansion leases and our pipeline remains robust. This leasing consisted of a 3-megawatt booking with a new logo, a leading hyperscale enterprise software provider, which also includes a contractually committed reservation for an additional 2-megawatts and our expanded campus in Phoenix. We also continued to maintain good momentum with our enterprise customers. Commercially despite an unprecedented macro backdrop, our data center team continues to receive significant engagement in RFPs for both hyperscale, corporate and government requirements. The team has quickly adjusted to the new normal of remote working and has been innovative and continue to meet our current and prospective customer needs, including hosting virtual data center tours to support demand and the increased need for capacity. We are committed to ensuring uptime and resiliency for our data center customers and we are ready with capacity and our staff to handle support, upgrades and new installations if additional bandwidth is needed whilst remote workforces are supported. One area that we continue to monitor closely is the impact on the pace of construction of our -- for our data centers currently under development. While it's not significant, we do see modest delays across many of our projects, which is also happening across the industry. Given our relatively high capacity utilization of almost 90%, should delays extend or increase in length, this could create a tight supply situation. As I said, we are keeping a close eye on this and are in regular contact with all of our vendors and construction partners. And at this moment, we do not foresee it will materially impact our anticipated bookings and delivery for this year. As we look ahead these are truly unprecedented times and the path to recovery is clouded by uncertainty and will likely be choppy. It is very difficult to predict how long this current environment will go on. And what the new normal will look like on the other side. It will undoubtedly be lasting changes to how we work and how our customers will conduct business. Given the combined effects of the pandemic and the associated financial impact on the global economy, we believe a conservative approach is warranted. As you can see from our Q1 results, Project Summit is off to a strong start. Now that our project teams are up and running, and given the speed with which we implemented Wave One, we have identified additional opportunities to accelerate strategies to streamline our business and operations. We have pulled forward a number of initiatives that were planned for waves two and three of Project Summit and expect to see those benefits materialize at a faster pace in 2020. In addition to finding new ways to work differently with our customers as we roll out Project Summit, COVID-19 has uncovered ways for us to support our customers as they adjust to remote work -- to a remote working environment. Our customers' increased need for digital delivery has allowed us to reassess our service delivery model. Our R&D and growth initiatives have well positioned us with services like Image on Demand to address customers' changing needs as they adapt to new ways of working. Leveraging these new technology capabilities, enables us to adjust our service delivery model and more efficiently utilize our fleet, labor and real estate. The most impactful changes to our service delivery model revolve around new service level agreements or SLAs. These new agreements will allow us to better align our external customer SLAs with our internal record center SLAs as well as leverage more effective use of digital delivery to serve our customers. In addition, we will also utilize third party logistics providers more extensively than we have historically for our pickups and delivery. We have proactively communicated with our customers in some of our largest markets regarding these changes and have begun implementing the SLA changes, which has resulted in some additional reduction in force across the business. This broadened scope of Project Summit should result in even higher levels of adjusted EBITDA benefit and associated charges than we initially expected. Project Summit is now expected to generate $375 million of adjusted EBITDA benefits exiting 2021. This represents a meaningful increase from the prior expectation of $200 million. The total program is expected to cost approximately $450 million, up from our prior expectation of $240 million. In closing, this additional benefit from Project Summit should only further propel the underlying strength of our business once we emerge from COVID -- from the COVID-19 situation. Our strong performance in Q1, together with the additional promise from an expanded Project Summit makes us confident that we will emerge from the COVID-19 pandemic as an even stronger company than envisioned before. We continue to demonstrate resilience and determination and show all of our customers and communities that they can count on us in their time of need and that Iron Mountain really is iron. I want to thank all of my fellow mountaineers and their families again for their perseverance in these difficult times and I pray for their safety. I hope all of you and your loved ones are remaining safe and well. With that, I turn the call over to you Barry.

Thanks, Bill, and thank you for joining us to discuss our first quarter results. I want to echo Bill's comments. I hope you are all safe and healthy. I would like to say thank you to our Iron Mountain team. I've been truly impressed by the team's commitment, hard work and perseverance during these challenging times. As Bill noted we are confident that we will emerge from this period a stronger company driven by our durable business model and the strength of our balance sheet. I will briefly touch on our first quarter performance before discussing our approach to addressing the pandemic. In the first quarter, we exceeded our expectations. And through the first nine weeks of the quarter, we were on track to exceed our targets even more substantially. Though by mid-March, our service activity began to experience declines compared to planned as more customers instituted mandatory work-from-home policies and restricted visits to their facilities. Despite this, we delivered a strong performance across our key metrics of revenue, adjusted EBITDA, adjusted EPS, and AFFO. Revenue of $1.1 billion increased 1.4% on a reported basis and 3.2% on a constant currency basis compared to the prior year. Total organic revenue grew by 1% in the first quarter. This was primarily driven by organic, storage, rental revenue growth of 3%, which reflected our successful execution of revenue management. Adjusted EBITDA grew 11.9% for the first quarter to $363 million despite the negative impact from lower paper prices in foreign exchange rates. On a constant currency basis, adjusted EBITDA grew almost 14%. Adjusted EBITDA margin expanded 320 basis points year-over-year to 34%. Adjusted EPS was $0.27, up significantly from $0.17 in the first quarter 2019. AFFO grew 20% year-over-year to $231 million, driven by adjusted EBITDA growth. This represents a new quarterly high for Iron Mountain, reflecting our team's focus on driving cash generation and increasing levels of AFFO overtime. Turning to segment performance, global RIM delivered total organic revenue growth of 60 basis points for the quarter, reflecting volume growth in faster growing markets and revenue management, partially offset by lower year-over-year paper prices. Global RIM's adjusted EBITDA margin of 41%, represents an increase of 230 basis points driven by revenue management, benefits from Project Summit and continuous improvement initiatives. The data center business delivered organic revenue growth of 9.9%, driven by strong leasing and low churn of 50 basis points. Data centers EBITDA margin of 45.9%, represents an increase of 360 basis points consistent with our long-term goal to drive margin expansion. As a reminder as we move through the balance of the year on a reported basis, the 2019 data center results have some one-time benefits that we called out last year, which make the year-over-year comparisons less meaningful. Turning to Project Summit, as Bill mentioned, we are on track and have accelerated and expanded initiatives in certain areas in response to COVID-19. In the first quarter, we recognized $41 million of restructuring charges to implement the remainder of the first wave plus components of wave two, which contributed to the first quarter benefit of $25 million. With the increased size and scope of the program, we now expect to realize the full $375 million of benefit related to Project Summit exiting 2021 with all actions complete and the associated $450 million of charges incurred by the end of 2021. In 2020, we now expect to deliver adjusted EBITDA benefits associated with Project Summit activities of $150 million compared with our prior expectation of the $80 million in restructuring charges of $240 million, up from $130 million previously. Now, I would like to provide an update on how COVID-19 is impacting our business and what actions we are taking to ensure we are well-positioned. Given the macro uncertainty, we want to be as transparent as possible to help inverters understand what we are seeing. To that end, I'm going to provide Insights that are more granular than we typically provide. But first I want to put into perspective how much of our storage revenue is generated by what is already on the shelf at the beginning of the year. As a reminder, our core storage business accounts for nearly two-thirds of our total revenue and a larger portion of our profitability. In a typical year, new volume accounts for less than 3% of our annual storage revenue. In other words, nearly all of our annual storage revenue comes from boxes that entered our facilities in prior years. As Bill mentioned, in markets where our ability to service customer facilities is limited, we have naturally seen a decline in the number of boxes that we are able to pickup. Partially as a result of this, we currently expect a net decline in cube volume in 2020, but of course that is subject to change based on the duration of the pandemic. As you would expect, the impact this has on storage revenue is much more muted than the impact it has on our service activity levels. Turning to our service business, which was about 35% of our 2019 revenue. In April, we saw activity declined approximately 40% overall, on the service business. As investors would expect, the impact has not been uniform across our service lines, so let's take a look at how this has trended across our business. I will use North America as an example, as it is both our largest market. And fairly representative of the activity levels, we have seen in other markets with similar closures and restrictions. Records management in North America, for the month of April had a 58% year-over-year reduction in new boxes in bounded and a 49% year-over-year reduction in retrievals and re-files. Data management activity in April declined less approximately 30%. A digital solution has seen a slowdown in activity compared to the first quarter, though April activity levels were flat year-over-year. In our shred business, activity declined approximately 27% in April, which has led to a corresponding decline in our paper tonnage. While we have seen an encouraging rebound in the market for paper prices recently, our average realized price in the first quarter was 44% lower than the prior year, which was a $10 million headwind to adjusted EBITDA. Consistent with the broader industry trends, we saw a sequential improvement in paper price of about 2.5% in the first quarter. And the trend has continued to improve. As investors will recall, in the past we have mentioned that a $10 per tonne change in paper price, represents an approximate $6 million EBITDA impact. Of course, this is clearly influenced by volume, so the EBITDA impact of paper price movement will change proportionately with the change in paper volume. Now, let me make a couple of comments on two of our smaller businesses. The Fine Arts industry has experienced a significant slowdown, during the pandemic. And given the nonessential nature of the business, we have temporarily closed all of our Fine Arts facilities. With a prudent view as to the intermediate term impact, we recorded $23 million non-cash impairment charge on the goodwill associated with that reporting unit. The consumer storage business through our partnership with MakeSpace, has seen an increase in demand. This led to over 5% growth in storage volume in the first quarter. And we have continued to see strong demand in April. Given the nature of the service level decline I just discussed, we have taken actions which we expect to be temporary and are in addition to the actions we had underway, with Project Summit. These actions include furloughs, reduced work hours, a pause in hiring, reductions in certain expenses like travel, and lower variable compensation. With these adjustments, we anticipate we will have removed in excess of $350 million on an annualized basis as compared to our prior plans. You will see these reductions materialize in cost of sales within our service business, as well as in our SG&A expenses. These actions are designed to help align our costs and revenues, as we navigate the uncertain environment. Therefore, we expect these costs to come back as revenue recovers. Turning to cash flow and the balance sheet, we are confident, in our balance sheet strength and liquidity position. In the first quarter, our team did a nice job driving cash cycle improvement up eight days year-on-year with benefits coming from both payables days and day's sales outstanding. I view the team's performance is particularly strong, given the COVID-19 backdrop. We continue to see the opportunity for further cash cycle improvement over the long-term. We ended the quarter with $153 million of cash and together with the availability under our revolving credit facility we had approximately $1.2 billion of liquidity. At this point in early May, our liquidity remains unchanged at that level, which we believe provides us ample runway to operate the business, in this uncertain environment. For context, this liquidity represents over three times the 2019, full year adjusted EBITDA of our service business. With our strong financial position, our Board of Directors declared our quarterly dividend of $0.62 per share earlier this week to be paid in early July. As the economy recovers in 2022 and 2023 and with a sustainable dividend at this level, we would expect our payout ratio to glide toward the mid-60s to low 70s, as a percent of AFFO. As we noted in our press release, we are no longer providing guidance for 2020, in light of the unknown severity and duration of the impact of the crisis on our markets and customers. However, we don't want to help you understand how we are currently planning for the remainder of 2020. Let me start with the impact of the much stronger U.S. dollar. Based on recent FX rates, we currently expect a full year impact on our revenue of about $100 million versus last year. At the time of our last call, FX rates implied an adjusted EBITDA headwind of about $5 million. Though with a stronger dollar, current FX rates translate into a full year adjusted EBITDA headwind of $35 million versus last year. Turning to activity levels, we are expecting April to be representative of the trends we experienced for the remainder of the second quarter, which we expect to be the weakest quarter in 2020 for comparative revenue and adjusted EBITDA change. Although recent trends suggest this may prove to be conservative as more and more of our customers around the world are gradually opening back up and we are seeing other positive indicators. I will note we are maintaining flexibility to rebound quickly, if business conditions improve faster than expected. And on the other hand, if conditions worsen we have already identified additional options that can be executed quickly as needed. At this point, we anticipate delivering full year adjusted EBITDA margin flat to slightly up compared to last year, reflecting our solid first quarter performance, benefits from revenue management, Project Summit and other cost actions. This will be partially offset by our conservative posture as to service revenues and fixed cost deleverage. Given the current environment, we have also quickly taken actions to preserve capital. We reduced capital investments both for capital expenditures and M&A by a net total of $110 million relative to our original guidance for 2020. This is made up of approximately $110 million of reduced CapEx and $75 million of reduced investment in M&A and acquisitions of customer relationships. This net total also reflects an increased investment of $75 million, to support the construction of our Frankfurt data center. Additional detail can be seen in the supplemental and is highlighted on slide 14 of our presentation. We continue to expect to generate capital recycling proceeds of approximately $100 million in 2020. As we look at the market for industrial assets, we continue to see attractive valuations and our pipeline has actually increased over the last couple of months. As investors would expect, we have run multiple scenarios based on varying assumptions for revenue, margins the duration of the crisis and the speed of recovery. Included in these scenarios are some extreme stress test models, which we develop to understand the possible impact, if conditions worsened materially and persisted for an extended period of time. One of the stress test we ran was based on service activity being down about 65% year-on-year and persisting at that level through 2021. Even in that scenario, we do not foresee an issue with liquidity or leverage through 2021. I'll also note, the severity and duration of our stress tests are much more extreme than both what we have seen thus far and what current trends and macro forecasts indicate we will likely experience. Even still we would have significant cushion in terms of both liquidity and leverage. In closing, we are confident in the durability of our storage business and believe the magnitude of impact on our service business combined with the actions we have taken leave us in a strong financial position. We look forward to sharing further progress with you on our second quarter earnings call. I hope everyone stays safe and healthy. And with that, operator please open the line for Q&A.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Shiela McGrath with Evercore. Please go ahead.

Hi. Yes, good morning. That was very positive news on your guidance on the savings from Project Summit. I was just wondering, can you explain in a little bit more detail where that upside is coming from? Where you're finding those savings?

Good morning, Sheila. Thanks for the question. So as we got into COVID-19, as I alluded to is that our customers needed to be served a different way. And we already had a Summit teams spun up to look at our cost of sales. And what we found was, if we look specifically at SLAs for instance returning a box in 24 hours -- returning a box in 24 hours in this environment where people are working remotely wasn't going to help. So what we've done is we've actually in the major markets we've already implemented this. So this is United States, Canada, Ireland, the U.K., Australia and New Zealand. As we said, we're taking that to five business days so once a week we will pick up or deliver physical boxes. If they need something quicker then we will actually digitize it and we'll send it to them in a digital secure link through our InSight platform in Image on Demand. So we're actually giving them a better service and at the same time changing from 24 hours to five business days or once a week. You can imagine how significant that impact is on our logistics operations and allows us to really take out quite a bit of cost.

Okay. And then also I was just wondering, if you could comment on the dividend philosophy. As your – many REITs have chosen to revisit their dividend just as a source of liquidity. And just want to understand how you're thinking about the dividend?

Well, I think we're blessed by being kind of an industry one. So we're a specialized REIT and our operations are still running strongly. We – although service has been impacted as Barry said 40% to 50% that's on 20% of our profits or 40% of our sales. So whilst it's impactful it's not a threat to our liquidity. So for our – from our standpoint, there isn't a liquidity reason that we would have to adjust our dividend. And then, as if you look at 2022, where we think we'll be looking at COVID in the back – in the rearview mirror by 2022. So we're assuming that it doesn't happen until then. Then we're actually gliding quite nicely into our original goal in our financial models as we get into the 2022 and 2023 period in terms of getting into the mid-60s to low-70s as payout as a percentage of AFFO. So we feel good about where we are. We'd rather not have COVID-19 because we would have gotten there much faster, but we feel good about the position.

[Operator Instructions] Your next question is from Nate Crossett with Berenberg. Please go ahead.

Hey, good morning. Just a follow-up on Sheila's question about Summit, so how much of that $175 million benefit is coming from that SLA change, and are there any other kind of big drivers in there?

Yes. So thanks Nate for the question. So it is -- that is actually the major driver. Because if you look at our cost of service, which is a combination of labor, fleet in terms of the trucks that we put on the road and our facilities. It is -- we are one -- it is actually the largest cost as a company. And when you then say okay we're going to a five-day or once a week service cycle which allows us to marshal or consolidate volumes much more. And then for more rapid turnaround to give people digital ways of getting that back it's a major change in terms of cost of sales. We always as part of Project Summit we're going to optimize the cost of sales across those three labor trucking and facilities. But actually changing that from a 24-hour rhythm to a once a week rhythm is super impactful.

The next question comes from Andrew Steinerman with JPMorgan. Please go ahead.

Hi. Two questions. I didn't understand if this new rhythm for delivery to once a week from once every day was also positioned for the post-COVID environment meaning it would stay? And my second question Barry is with the stepped-up benefits from Project Summit when you reach those benefits what would be the implied EBITDA margin?

So Andrew on the first one yes this is -- and we communicated that to our customers. This is beyond COVID. And in fact, this probably is something that could have happened before, but it's easier to actually get people to change their mindset in terms of how they want to be served given the current environment. Because if you think about the 24-hour SLAs than something that was historical in the business for decades. And the way people use the information that they retrieve now is very different. And quite frankly, lots of times they'd rather have it electronically. So yes this is -- COVID was -- it allowed us to have the catalyst to have that conversation with the customers, but it's permanent going forward.

Hi. Andrew, thanks for the question. Good morning. While we're not giving guidance for even this year's EBITDA, it's a little bit hard to get into projecting how much of that extra $175 million of benefit from Summit going forward is going to be as it relates to the numerator and denominator of EBITDA and sales. But certainly, if you thought about that $175 million incremental in sort of perpetuity and that's the way you should because it's a ongoing benefit. And put that against either our prior guidance or last year's results, for example, it is a very significant increase in the relative level of profitability and will certainly dramatically assist us in our goal of increasing margin and moving that into the very high 30s, if not potentially beyond going forward. But I think what we'll do is take it one quarter at a time this year and provide you updates as how we're doing. But I will tell you as Bill -- I'll reiterate Bill's point, we feel very good about what we've got going on with respect to Summit and the way the teams are performing. And we look forward to reporting the progress against that with you every quarter.

Thank you.

Your next question is from Marlane Pereiro with Bank of America Securities. Please go ahead.

Hi. Thank you for taking my question. Just a quick one. Just to clarify, under your extreme scenarios, you anticipate not staying within both your maintenance and incurrence covenants, is that correct?

Yes.

Okay. I mean, do you have -- would you be able to provide roughly an idea of how much cushion or headroom that you would have under those scenarios?

So I mean let me frame it this way for you. As we think about leverage for this year based on the -- our current view of trends and the outline of how Bill and I spoke about it earlier, we would expect leverage to be flattish to maybe slightly up year-on-year at year-end this year. Now I will note that it is a positive development I think speaks to the team's progress and the performance we put up in the first quarter that are actually our leverage ticked down a 10th from year-end. But when we stress test the business, it probably slightly above those levels, but we feel very good about in each scenario. I don't want to give and I think you can appreciate why specific leverage points under various stress tests because there are so many models -- so many elements that go into those models. But as we said on the call, we would have sufficient cushion in both the leverage -- on all the tests that you mentioned as well as liquidity. So we feel very good about where we're positioned. And that is thanks to the incremental Summit benefits, we've pulled forward here at the incremental Summit benefits coming from the SLA changes that Bill mentioned, as well as the cost actions we took to align revenues and costs in this period here during the pandemic.

[Operator Instructions] The next question is from Franois – it’s from Kevin McVeigh with Credit Suisse. Okay, excuse me. The next question is from Andrew Steinerman with JPMorgan.

One more. Yes just one more question from me Andrew. Organic revenue growth in storage. Is your working assumption that it stays positive throughout the year?

Yes.

Okay. Thanks very much.

The next question is from Franois Mambo [ph]. The next question is from Kevin McVeigh with Credit Suisse. Please go ahead.

Great. Thank you. Maybe just give a little thought as to the impact on kind of both the storage and the data center business longer term given the shift in service, do you expect any impact on the storage business? And then ultimately data center as well as it relates to maybe incoming volumes things like that if you think about potential structural changes as a result of COVID-19?

On the storage side Kevin post-COVID-19 there – right now our surveys there's many customers that say that there will be no change as there – those that say that will be continuing on their current program. So no, we don't expect a major change in the trends that we're seeing on the storage. On data center, as we said is that we've seen actually continued building of our pipeline through COVID-19 and we expect that to continue to be strong on the other side. We can't tell you right now if our strong pipeline is just because of the momentum we were building into the – in the data center business as we were coming in or specific to COVID-19. But yes, there's nothing that we're hearing from customers that's saying that their demand post COVID-19 is going to be any different on the data center side than what we're seeing in terms of the positive momentum in the basis today.

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