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Executives

Brian McKeon - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

C. Reese - Executive Chairman and Chief Executive Officer

Stephen Golden - Vice President of Investor Relations

Analysts

Vance Edelson - Morgan Stanley

Zachary Fadem - Barclays Capital

Andrew Steinerman - JP Morgan Chase & Co

Eric Boyer - Wells Fargo Securities, LLC

Scott Schneeberger - Oppenheimer & Co. Inc.

Andrew Wittmann - Robert W. Baird & Co. Incorporated

Nathan Brochmann - William Blair & Company L.L.C.

Kevin McVeigh - Macquarie Research

Iron Mountain (IRM) Q1 2011 Earnings Call April 28, 2011 8:30 AM ET

Operator

Good morning. My name is Bonnie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Iron Mountain First Quarter 2011 Earnings Call Webcast. [Operator Instructions] I would now like to turn the call over to Mr. Stephen Golden, Vice President of Investor Relations. Please go ahead, sir.

Stephen Golden

Thank you. Welcome, everyone, to our 2011 First Quarter Earnings Conference Call. Joining me this morning are Richard Reese, our Chairman and CEO; and Brian McKeon, our CFO. After their prepared remarks, we'll open up the phones for Q&A. Per our custom, we have a user-controlled slide presentation on the Investor Relations page of our website at www.ironmountain.com.

Referring now to Slide 2. Today's earnings call and slide presentation will contain a number of forward-looking statements, most notably, our outlook for our 2011 financial performance. All forward-looking statements are subject to risks and uncertainties. Please refer to today's press release, the Safe Harbor language on this slide and our most recently filed annual report on Form 10-K for a discussion of the major risk factors that could cause our actual results to be materially different from those contemplated in our forward-looking statements.

As you know, we also use several non-GAAP measures when presenting our financial results. Adjusted OIBDA, adjusted EPS and free cash flow before acquisitions and investments, among others, are metrics we speak to frequently and ones we believe to be important in evaluating our overall financial performance. We provide additional information and the reconciliations of these non-GAAP measures to the appropriate GAAP measures as required by Reg G at the Investor Relations page of our website, as well as in today's press release. With that, I'd like to introduce Richard Reese.

C. Reese

Thank you, Stephen. Good morning, everyone. Welcome to our First Quarter 2011 Quarterly Earnings Call. As you know, I haven't done these calls in a few years so this is my first one back, and I'm happy to tell you that we've got good performance to report, even though I didn't have a heck of a lot to do with it since I've only been back in the job for a couple of weeks. But the team's done a great job, the business is running well. And we're off to a good start to hit the plan that we put forth in great detail last week, the 3-year strategic plan, as we've shifted our business into the third phase of our long-held 3-phase strategy, that of the phase of capitalizing on the hard work we did in the earlier years and the investment cycle of the business, building it up. We're now turning to reap the rewards of that on behalf of our shareholders and the rest of our stakeholders of the company.

So today, I'll talk briefly about the results for the quarter, and then turn it over to Brian, who will give you great detail, and then we'll come back and take your questions. And I'm going to review the quarter, frankly, a bit in the context of the plan. So it was a good first quarter; we're off to a good start and it gives us confidence that we'll be able to achieve our goals for the entire fiscal year.

Revenue was up 3% to $799 million, and that was on the back of strong storage revenue growth of 5% reported and really 3% internal for us, which is an uptick. We're seeing a continued trend of steady improvements on units for storage, supported by lower destruction activities and strong new sales, particularly in North America, as the investments we've been making according to our plan are paying off.

We also have seen some continued weakness in some of our recurring service lines and, of course, when destructions are down, the good news is it helps storage over the long run. The bad news is it's a little light on the services in the short term, but it's a trade we would take all the time.

So in general, I think as a company, we're feeling better about some of the trends and starting to see some of the changes from the economy, but I want to be very, very careful to caution you, this is a business that moves very slowly. That's its strength and its weakness. And I would caution anybody from taking these positive signs and trying to forecast up. What we're telling you is we think we're going to be in line with our expectations for the year, and we have a lot of confidence that we'll be able to do that.

So with that, well, let me pull it back. Let me just take you on down a little bit. The other reported numbers, the adjusted OIBDA is up 4% on an operating basis, really a little less on a reporting basis, because that way, it excludes certain one-time expenses that Brian will go through for you in detail. And adjusted EPS is up 24%. So as I said, a good start for the quarter. We have a pretty good confidence, or even better than pretty good confidence, for the fiscal year, assuming banks continue in line, and we'll get through the details as we go.

If we look over at some of the pieces and, as we said, last week, we put forth a 3-year plan. The key elements of it was an acceleration into the third phase of the capitalization phase of our business. And it had a variety of components. But by and large, we've made some -- put a stake in the ground on a couple of issues: One is to increase our after-tax return invested capital by about 330 basis points, up to 11% by 2013. And two is just to return to our shareholders in the form of stock buybacks and/or dividends $2.2 billion of cash with $1.2 billion of that coming in the next 12 months. These commitments haven't changed. You'll hear us continue to talk about them over the next couple of years as we deliver on them, or to guess them [ph] as we deliver on them. If we take the business, as far as North America, it’s following the strategy. It is the market leader. I've spoken of it many times. It is the goose that laid the golden egg. And so our strategy is to make sure we take care of the goose and invest in her correctly, so she can continue to lay the golden eggs. And that was a combination of maintaining and sustaining margins, while at the same time, investing some in sales and marketing to increase the growth rate, or at least to keep the growth rate on the trajectory and overcome any secular trends that may be out there. And first quarter reflected these trends very well. Our storage internal growth was 3%. That's up from a 2% number of last year. Our contribution to our new sales in our Records Management business, North America, from our sales force, the so-called new from new, is almost double what it was the first quarter of last year. So the investments we've started making towards the end of last year in the change in focus is paying off, and we would expect it will continue to pay off. Again, I'll caution you that it takes a while for all these to flow through our reported numbers on an annuity-based business. But we like the trends we're seeing, and we would continue working those trends.

On the International front, the strategy is to continue the growth that we've seen because that portfolio has driven good growth, while at the same time, look to improve the operational side of the portfolio as well as returns on invested capital. And the growth did continue on a reported basis. International revenues up 10%, driven by 6% storage internal growth rate. The other big news is that the plan calls for 700 basis points of margin increase over 3 years. We're looking at International to get nearly 200 basis points of margin this year. You didn't see any of it in the first quarter. We expect strong margin growth in the U.K. We're making -- and that's coming off the back of investments that we started some last year. So we expect them to flow through this year. But we got some lapping effects and some comparables that we need to get out of the way. But as we get into the year, we fully expect to see the margins flow through there. We're making some investments in Latin America now, which will yield some benefit towards the end of this year and into next year.

So we haven't started showing the margin improvement yet in International, but we feel very good about what we're seeing and the investments we're making and so forth, the payback we're seeing. But the numbers, it will take a couple of quarters from the flow through for you to see them. But from what we can see, things are going fine.

On our Digital business, as you know, we announced that we are evaluating strategic alternatives, and we're deep into that process. We've got nothing new to report today, but except to tell you that additional business had good performance in the first quarter. And I appreciate the team really focusing on the business, not just maintaining it, but continuing to grow it. Revenues were up solidly in all of our products and areas, except for eDiscovery. And eDiscovery had a great quarter of bookings. But in that business, the bookings lead the revenue by a couple or 3 quarters. So we're showing weaker revenues off of bookings about 3 quarters ago, and it will take some time period for the stronger bookings to show through in our numbers now. But we like the trends we see in the business and we like the performance. We've been able to right size our cost structures so our profits are up in the business. And as I say, we're maintaining good performance in the business even as we look at strategic alternatives. And I think the team's done a great job in doing that.

The other big news that we announced in our plan, as I said earlier, was our commitment to return $2.2 billion to our shareholders in various forms of payout. This would come primarily from our operating cash flow and the future free cash flow, but it does and had included a small change in our leverage, taking our leverage ratio, total leverage up from around 3.0x to around 3.5x, which is a relatively small move. And I will make sure that everybody understands that we're not going out and over levering the business. We're doing what we think is prudent and what we think makes some sense, and the company still has substantial liquidity and substantial capital available to it to execute its plans. We have nothing new to report on how we plan to pay that out, except that since we've spoken publicly about it last week, we've gotten a lot of input from shareholders, which we do appreciate and we will try to factor that input in. And as you might can imagine, it's a little bit of some people would love us to turn left and others would love us to turn right, all at the same time. And we will try to figure out how to walk down both sides of that train track and make it work. But by and large, we'll take your input, but we will do what we believe makes the most sense and try to explain it to you, and if you disagree, we'd be happy to listen to that, too.

This is -- I want to stress to you the fact that we're putting out $2.2 billion in a fairly short period of time is a shift and is a change, but it's not the end. And I think one of the things we -- and I want to help the market over time come to grips with, this is the beginning of a pattern, not the end of a pattern. This business will throw off a significant amount of cash back to shareholders for as far out as I can see. And in fact, failure to do so would delever the business to zero and in not too long a time period. And just to even maintain a prudent leverage level, which is prudent in our capital structure, to maintain a good weighted average cost of capital for our business and so forth, we will have to distribute a significant amount of capital, in addition to making the right investments back into the business to continue the ability to do that for a long period of time.

So we are in a point of the business that I've been waiting on for a long time. And I guess, to some extent, although the retirement was looking awfully attractive, being back at this stage of the business also has its fun because figuring out exactly how to do this stuff is pretty interesting and pretty challenging. And I think we're going to have a good time trying to figure out how to give you cash back.

So with that, as I said, good quarter. We're off to a good start. I hope they're all this easy from a call perspective. And I appreciate the team making my first entry back in fairly easy for me. Let me turn it over to Brian, and then we'll come back for your questions.

Brian McKeon

Thanks, Richard. Good morning, everyone. I'll start today's review on Slide 3, which highlights key messages. First key message is that we delivered solid operating performance in Q1, and it's putting us on track for our full-year goals. We saw solid storage trends, including benefits from new sales initiatives that supported 3% revenue growth in the quarter. Overall storage revenues increased 5% or 3% on an internal growth basis. The International business again posted strong storage results, and both our North American and Digital segments showed improvement. Revenue growth's benefiting from sales and marketing investments, as Richard mentioned. In fact, in Q1, storage volume additions from new sales in North America was the highest it's been in more than 2 years.

Profit and cash flow gains remained solid as well, supported by improvements in our International and Digital segments. Adjusted OIBDA was $222 million, that's up 4% on an operating basis, excluding $4 million of advisory fees and other costs that were related to the recent proxy contest. Adjusted EPS was $0.26, which is an increase of 24% compared to last year, and free cash flow increased 7% in the quarter to $58 million.

We're off to a good start, and we're making some positive adjustments to our full-year operating forecast to incorporate positive FX changes in our Q1 performance. Given the recent announcement of our comprehensive strategic plan, including the potential sale of the majority of our Digital assets, we'll be taking the following approach with respect to our full-year 2011 outlook. We're going to forecast the business as it exists today, therefore, our current outlook doesn't reflect any impacts from the strategic review of our Digital business, including a potential sale as contemplated in the strategic plan. Our current outlook also doesn't include any impacts from business or revenue risk, transition costs or other costs associated with the ongoing strategic alternative review process. Finally, our outlook doesn't include any costs or increased interest expense associated with potential future financing events that may be contemplated in the strategic plan. We'll update our outlook when we have more clarity around strategic alternatives for our Digital business or potential financing transactions.

Within this framework, we're raising our revenue guidance. We're also adjusting our adjusted -- updating our adjusted OIBDA outlook to reflect these revenue gains, as well as the estimated advisory fees and other costs associated with the recent proxy contest. And I'll speak to these more fully in the outlook section of my remarks.

Let's now turn to Slide 4 and begin with the review of the financial results. Slide 4 compares our results for this quarter to the first quarter of 2010. As noted, Q1 was a solid start to the year. Enterprise revenue growth was 3%, up from Q4, reflecting improved storage revenue growth and benefits from favorable FX and recent acquisitions. Enterprise revenue gains were supported by improved storage revenue internal growth of 3% and expansion of hybrid services. And these gains have offset continued softness in core service activities and lower eDiscovery revenues.

From a segment perspective, North American Physical posted 1% internal growth, supported by 2% storage internal growth, hybrid service gains and benefits from higher recycled paper prices. These gains were partially offset by continued soft core service revenues, in part reflecting lower levels of destructions and reduced special project revenue in the quarter.

Revenues for our International Physical segment grew 10%, supported by 4% internal growth, benefits from our recently announced Polish acquisition and favorable foreign exchange rate changes. Storage internal growth rate for International remained strong at 6%, reflecting gains across all regions, including continued strong growth in expansion markets. These gains were augmented by strong growth in hybrid service revenues. Total service revenue growth was constrained by lower core service activity levels.

In our Digital segment, reported revenues declined 5% in the first quarter, primarily reflecting lower eDiscovery revenues, which more than offset storage gains.

Overall, we continue to post solid comparable profit gains. Gross profits grew 4% in Q1, reflecting a 40 basis point improvement in margins. Higher storage gross margins, particularly in the International and Worldwide Digital segments, drove the improvement. These gains more than offset lower service gross margins resulting from eDiscovery profit declines and moderately higher transportation costs in North America. Adjusted OIBDA grew to $222 million, up 2%, or up 4%, excluding the $4 million and one-time fees associated with the proxy contest. Solid gross profit gains were partially offset by planned investments in North American sales initiatives and productivity initiatives in the International segment, which we expect to yield substantial benefits as we move forward.

Below the adjusted OIBDA line, depreciation was $79 million and amortization was $10 million. Other Income for the quarter was $9 million, including $3 million of FX gains and a $5 million gain on our Polish transaction. Adjusted EPS for the quarter was $0.26 per share, an increase of 24% compared to the prior year, reflecting solid operating performance, lower interest expense, lower structural tax rate and fewer shares outstanding. Reported EPS for the quarter was $0.37 per share, including the $0.12 per share impact of the $9 million of Other Income and a lower effective tax rate. The structural tax rate for the quarter was 38%, and we expect the structural tax rate for the full year to be about 39%.

Let's now take a closer look at our revenue growth on Slide 5. Slide 5 breaks down our overall revenue growth. It shows internal growth by major service line, as well as the impact of acquisitions and divestitures in foreign exchange compared to our 2011 full-year outlook. As noted, overall revenue growth in Q1 was 3% on track with our full-year growth outlook. Improved storage gains of 3% offset service declines, netting to 1% internal growth in the quarter. The storage revenue growth rate reflects continued strong performance in the International segment and improvement in sales in North America. Net global records management volume growth increased about 2% year-on-year in Q1. We'll breakdown key drivers of this change as part of today's review.

Pricing trends remained consistent with net pricing gains of about 2% in North America records management. Core service revenues were down 1% in the quarter, reflecting continued soft core activity levels, in part driven by lower destruction activity. We continue to experience service activity declines in areas like retrievals and refiles and in tape backup activity, as customers have moved to a less frequent tape rotation cycle. Complementary service revenues, which represent about 13% of total revenues, decreased 5% internally in the quarter. Results reflected lower eDiscovery reported revenues and lower special project revenues, in part impacted by the lapping of a large project in the U.S. These decreases offset strong gains in hybrid service revenues and benefits from higher recycled paper pricing.

Let's now turn to Slide 6 to review global volume growth trends. Slide 6 shows key drivers of global records management volume for the last 3-plus years to give you a sense of recent volume growth dynamics. This chart shows annualized changes in quarterly records management volume as a percentage of the beginning cubic feet related to new sales, volume growth from existing customers, offset by outgoing volume return. Revenues associated with physical records management storage drive about 40% of overall enterprise revenues, so trends on this front are meaningful. Overall, global records management volumes have stabilized following impacts from the economic contraction and are starting to show some signs of improvement. There are a few key takeaways from this trend analysis. First, the economy had a meaningful impact on records management volume trends in our business in 2009 and 2010. We experienced a significant increase in destructions related to cost savings initiatives, as well as a lagging impact from longer sales cycles and reduced incoming volume due to high unemployment rates. Within these results are also ongoing secular impacts, as new volume from existing customers continues to moderate slowly. Our focus has been on improving new sales performance in North America, supported by targeted investment, and in expanding our business in faster growing regions internationally. We're seeing positive momentum on these fronts. North America new sales contributions has been rising steadily in recent quarters with Q1 volume additions from new sales at its highest level since 2008. It takes time for new sales benefits to flow through our annuity, but we're on good track with our go-to-market initiatives. This progress is consistent with our long-term plan goals for North America, specifically to increase sales, to offset secular impacts and sustain the North American annuity.

International growth is continuing at a solid pace with volume up 6% year-on-year in the quarter. We saw year-on-year volume gains across all regions, supported by strong growth in expansion markets like Central Europe and Latin America. Storage progress is also being supported by some moderations in destructions and churn globally. We expect quarterly fluctuations on this front, driven by episodic customer actions. But overall, these impacts have settled into a stable range.

In sum, some of the negative trends we've been experiencing have stabilized, our investment focus is reaping gains, and we're growing the storage annuity consistent with our long-term strategy.

Let's move now to Slide 7 and review our results on a segment basis. Slide 7 shows key metrics for each of our 4 segments compared to the first quarter of 2010. North America remains our financial engine, and we're building momentum in International as a driver of profit and cash flow gains. North America continued to drive high profits and strong cash flows in Q1. Revenues increased 1% on 2% storage revenue gains and increased hybrid service revenues. Adjusted OIBDA margins in our largest segment were sustained at 41% on gross margin gains and controlled overhead spending, which supported planned investments in sales and marketing. Capital efficiency continue to improve with CapEx as a percentage of sales decreasing to below 4%. Our International segment continues to post solid revenue, adjusted OIBDA and cash flow gains. Internal growth for the quarter was 4%, driven by continuous strong storage internal growth of 6%. Adjusted OIBDA grew 10% in Q1, in line with reported revenue gains. We're targeting strong improvement in International margins in 2011, supported by profit gains in the U.K. and expansion of operational excellence initiatives in Latin America.

Gains in our Physical business helped offset lower Digital revenues. Lower revenues and gross margins in our eDiscovery business constrained Digital financial gains in the quarter. These impacts were offset by cost control initiatives, which drove a 25% increase in adjusted OIBDA in the segment in Q1. The increase in corporate expenses primarily reflects one-time costs associated with the proxy contest.

Let's turn to Slide 8 to review our debt portfolio. Our balance sheet remains strong, reflecting the substantial improvements we've driven in cash generation in recent years. Currently, our consolidated leverage ratio is 3x at the low-end of our targeted 3 to 4x leverage range. We're well positioned in terms of cash and financing capacity. At quarter end, liquidity was approximately $760 million with $190 million in cash and $571 million in additional borrowing capacity under our revolver. During the first quarter, we repurchased 384,000 shares of stock at a total cost of $11 million. At the end of the quarter, as of March 31, 2011, we've repurchased 5.1 million shares for a total cost of approximately $122 million. At quarter end, there was approximately $228 million remaining under the existing share repurchase authorization.

Our debt portfolio was long and fixed, our weighted average interest rate was 6.6% and we were 80% fixed at quarter end. Maturity is just under 7 years with no bond repayments due until 2014.

In January, we used excess cash in borrowings on our revolver to redeem the remaining $231 million of our 7 3/4% senior subordinated notes due in 2015. This transaction will reduce our net interest expense by approximately $17 million in 2011. Looking at our maturity schedule, we have approximately $192 million borrowed under our revolver, which matures next April. We expect to refinance our senior credit facility in 2011.

The strength of our balance sheet reinforces our confidence in advancing the shareholder payout commitments outlined in our strategic plan.

Let's now turn to Slide 9 to discuss our 2011 full-year outlook. Slide 9 highlights our approach to our full-year outlook in 2011. As I mentioned earlier, we're forecasting the business as it exists today. At this point, we don't have enough clarity around the final outcome of the Digital process or financing options to provide a forecast of those events. Our current outlook also doesn't include any business or revenue risks, transition costs or other costs we may incur as we work our way through the strategic review process for Digital. We expect to have greater clarity in both of these areas during the coming quarters, and we'll update you on our progress when appropriate.

What is included in our current outlook is approximately $15 million of advisory fees and other costs related to our recent proxy contest. These costs include legal and professional advisory fees, severance costs, estimated costs for the upcoming REIT analysis and other related expenses.

Let's turn to Slide 10 for a look at our outlook for 2011. Slide 10 summarizes our full-year 2011 financial guidance. We've increased our enterprise revenue outlook by about $45 million to be in the range of $3,220,000,000 to $3,285,000,000, up 3% to 5%. This reflects our solid Q1 performance and the impacts of favorable foreign currency rate changes. We now expect CapEx to add about 2% to this year's revenue growth rate. We're now targeting adjusted OIBDA of $938 million to $966 million. This includes the $15 million of estimated costs associated with the recent proxy contest, which more than offset the flow-through benefits from our outlook for increased revenues. This range represents reported growth of minus 1% plus 2%, including previously announced incremental sales and marketing investments. Excluding the $15 million of advisory and one-time fees, adjusted OIBDA growth would be in the 1% to 4% range.

Please note that we will face some tougher adjusted OIBDA comparisons over the next 3 quarters related to low incentive compensation accruals in 2010. In Q2, this will result in a $9 million increase in reported costs. We also expect to about $6 million in fees and other costs related to the proxy contest to be reported in Q2.

Our current outlook is for adjusted EPS -- our full-year outlook is for adjusted EPS to grow between 1% and 8% to a range of $1.16 to $1.24 per share, reflecting the adjustments described above and refinements to our outlook for DNA and interest expense, including impacts from recent FX changes. DNA is now expected to be approximately $352 million. Interest is expected to be $204 million. Our full-year forecast assumes 201 million shares outstanding. This reflects the level of shares outstanding at the end of Q1, including increases to diluted impacts from recent increases in our stock price. We're keeping our full-year free cash flow outlook at $375 million to $410 million and updating our outlook for capital expenditures, which are now expected to be $235 million for the year. This capital outlook includes about $15 million for real estate.

Finally, as noted on the slide, our current full-year outlook includes approximately $190 million of revenues, $20 million to $25 million of adjusted OIBDA and about $15 million of capital expenditures related to the Digital service lines currently included in our strategic alternative review process.

In summary, Q1 was a solid start to the year, and we're on track towards our full-year goals for improving revenue growth and continued strong profit and cash flow performance. Thanks, and we'll now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Andrew Steinerman of JPMorgan.

Andrew Steinerman - JP Morgan Chase & Co

Internal growth guidance for the 2011 is unchanged even though you're up in your revenue guidance? Or why don't you comment on it? Is it zero to two?

Brian McKeon

It's still zero, two, Andrew. We're feeling good about the storage outlook, and the core services continues to be soft so they're offsetting somewhat. But I think on balance, we're feeling good about the trends, but I think some of the softness in core service activity is leading us to a similar range.

Andrew Steinerman - JP Morgan Chase & Co

And I think I heard Richard say that they're kind of part and partial. As we're getting better on revenues on storage, it's because destructions are stabilizing and that's going to hurt service. And so it's almost -- the two are almost related.

C. Reese

There's some of that dynamic, and that's a good news dynamic over the long run. There's also weaknesses in other services and to start our general retrieval refile activity and same thing in the data protection activity. We're still seeing activity lower even though we're seeing storage pick up some.

Andrew Steinerman - JP Morgan Chase & Co

Makes sense. And last point, just to make sure we get this right, it sounds like you're still committed to hybrid services even though you're looking for alternatives in Digital. Is that correct?

C. Reese

Oh, yes, absolutely. And I want to stress that we are looking to transition to a different model in Digital, not necessarily exit all of the services. In some, we might do with the same technology on a license back basis. Some, we might perform with different technologies on a license basis. But the Digital business, and this is probably a story for a later date because it's a longer story, is a good business and we've learned a lot in it. But the model we had, just didn't make sense us to maintain it, and we think those assets are more valuable to other people.

Brian McKeon

Yes, and it sounded like, too. As you know, Andrew, the hybrid services are very close into our core business. I mean, it's helping customers with their transitioning where they're working with physical records, and the business is going really well for us and we feel good about it.

C. Reese

And I think you'll see over time that we will speak less of hybrid and not of Digital, but we will talk to you about physical logistics services and we'll talk to you about technology product lines, not business units and so forth.

Operator

Our next question comes from Gary Bisbee of Barclays Capital.

Zachary Fadem - Barclays Capital

It's Zach Fadem for Gary. You say that you expected 200 basis point increase in International Physical adjusted EBITDA this year? Can you give us some additional color on the expected drivers of this gain?

Brian McKeon

Yes, big driver this year will be in the U.K. We've been working for some time with the International team of incorporating the North American playbook, and we are targeting meaningful increases in our -- we have good margins in the U.K. They're getting moved -- moving that much closer to North America levels, and we'll see those benefits flow as we work through the year. We're exporting the same playbook to other markets, too. We just have some investment that goes along with that as we kind of gear up the teams and kind of invest in the process redesign that goes along with yielding those benefits and that along with some lapping impacts kind of constrain the gains in Q1. But you'll see the benefits flowing through as we work through the year, and we feel -- our outlook is based on a strong improvement in International margins overall. And it's not just this year; that's the multiyear plan. We'll continue to drive that as we move forward.

Zachary Fadem - Barclays Capital

Okay. And regarding the expected modest increase in leverage, would you expect to stick with your recent history of largely fixed-rate debt or would you consider floating rate borrowing?

C. Reese

We will consider whatever makes sense in the market at the time. I have always had a bias for a large amount of fixed-rate debt. At this stage of our cycle, we may be over fixed, and I think it's something we will look at in a variety of ways.

Operator

Our next question comes from Vance Edelson of Morgan Stanley.

Vance Edelson - Morgan Stanley

Are there any metrics you can provide now regarding the number of Digital customers, the number of hybrid customers or any metrics regarding the percentage of customers subscribing to multiple services, just Physical, Digital and Shredding?

C. Reese

Well, we have the numbers. We don't have them in front of us. So it may be something we can dig up for future discussion with you. I mean, the trends are that we have more crossover selling, obviously, of between records management and our data protection services, as well as our records management, our Shredding services. And we've had good success cross selling there. And we've -- on a name-the-customer basis, we've got pretty good success across our Digital business, but it's a different buyer for sure between our Physical business and our Digital business. The other thing I would also tell you is that part of what we learn in the Digital business, though, even though it was a Digital buyer that our brand would translate, and that although not all the IT buyers -- I think they all have a perception of who Iron Mountain is and so forth. They didn't have a strong perception of how broad a product or service line we had, so we had to sell it. But having said all that, we proved we could sell it, and, in fact, more than half of the revenue we have in Digital today was internally grown revenue, not purchased revenue. So we know the market will accept these things from us, and we've got other research as well as these data points to say it.

Vance Edelson - Morgan Stanley

Okay, that makes sense. And you mentioned higher transportation costs in North America. What about internationally? Are you feeling the same pressure abroad? And if so, is that having a meaningful impact at all on the margin expansion story there?

Brian McKeon

It impacts us. It's a smaller factor in terms of our overall cost structure. Transportation is less than 2% of our revenues. We do have some cushion against that with fuel surcharges. Right now, it tends to lag, how the fuel surcharges kick in based off an index. So what we've seen in Q1 is kind of the cost of, but not yet the benefit of the -- the full benefit of the surcharges flowing through. I think that will improve as we work through the year. So on balance, it should be less of an impact over economics, but it is impacting us in the short term.

Vance Edelson - Morgan Stanley

Okay, that's helpful. And maybe one last question regarding the aim to buyback a more significant number of shares. I guess for now, you can at least act under the remaining $228 million from the previously authorized buyback. Is there any blackout period or other technical or legal reason that you need to wait to buyback more shares? Or is it more that you could start buying immediately if you wanted to?

C. Reese

Yes, there's a whole bunch of technical or legal reasons, open windows and so forth. We will come in to an open window of our own policy next [Audio Gap] And yes, we do have some in the buyback. We really, though, are focusing -- I mean, if we’ve got shares to authorize, we're focusing on trying to set up the right strategies and the right plans. So it's a little early for me to tell you exactly how we'll do it. As you've probably noticed, it's all kinds of tools and techniques, and we've spent a lot of time analyzing those. And we still kind of coming to decisions on what's the right way to execute it.

Operator

Our next question comes from Andrew Wittmann of Baird.

Andrew Wittmann - Robert W. Baird & Co. Incorporated

I thought some of the commentary you had on the North American sales initiatives was interesting. I wanted to dig a little bit more into that. Perhaps could you just quantify what the SG&A investment was in that maybe for this year? And then I guess more broadly speaking, give us your sense of where you think the returns are on that investment? You said it was holding you back a little bit in the first quarter, but traction has been good. Is there a long ramp ahead for those presumably salespeople where they're just starting to maybe breakeven and there's a lot of upside from here? Or how would you characterize that from here?

Brian McKeon

We'll try to take the first part of the question and maybe if Richard can help clarify how we're thinking about it. But the investment we highlighted this year is roughly $20 million in terms of sales and marketing and year-on-year. And we were ramping that and getting that in position as we headed into this year. So that is starting to bear fruit. I think we are feeling good. We know the business well. We understand the returns, and we feel very good about the investments we'll be making. Do you want to talk about the margin?

Brian McKeon

Yes, any time you up your sales and marketing in an annuity business like this, you'll see the expense early and you see the results. It's a little bit like watching bookings build up. For our case, we watch boxes or storage revenue build, but the real value comes off the compound effect of it. So it's a multiyear present value kind of analysis, because you're building an annuity. Okay, so any time you up your cost, it takes a while for you to get the return back. But the returns are actually quite good in doing that. In terms of is there upside from here, a little early for me to tell. There's a theme here, so I'll just be clear to make sure everybody hears it. We feel good about our numbers. We feel really good -- better about the trends we have in a long time. But we're not jumping up and down and screaming, "Yeah, this things going to the roof." And by the way, it never has. Welcome to the world of our big flywheel annuity. They're hard to speed up and they're hard to slow down, but the good news is they just keep on rolling. And there's some speeding up, just a little bit. It's rolling, but it takes a while for this to show. So there's no inflection points here. No great things are going to take off.

Andrew Wittmann - Robert W. Baird & Co. Incorporated

That makes sense. And I guess I just wanted to follow up a little bit on an earlier question on the service level. How much of maybe the slower levels of growth that we're seeing are just based on tough comps from higher destruction levels last year?

C. Reese

A piece of that, but if you take it apart by activity class, we're still seeing the weakness in, like I say, in a lot of the core activity elements.

Andrew Wittmann - Robert W. Baird & Co. Incorporated

I see. And then just thoughts -- do you think this is a quarter lumpiness issue or are people really changing the way they utilize documents once they're stored?

C. Reese

I believe it's people -- I believe it's two things. I think there's a pattern of behavior change, and I still believe that until we see employment get back up strong and then a lag behind that. Remember, we tend to deal in records that are at least a year old on average, okay? And so you've got to get people back to work. They've got to generate more records. They've got to build up. They've got to get in the way, and then they've got send them to us before they can ask for them. And the most active records are the newest records. So we've been through a period of people sending us a lot less of -- the average age of our storage portfolio has risen, which will in itself drive down the activity. We're seeing that. If the average age comes down and the storage picks back up as the economy picks back up, we got this great lag effect. I think some of that will come back. They will pick up some activity. Underlying that though, there's also some shift in how people use it. It's hard to parse the difference right now.

Andrew Steinerman - JP Morgan Chase & Co

Very helpful.

Operator

[Operator Instructions] Our next question comes from Eric Boyer of Wells Fargo.

Eric Boyer - Wells Fargo Securities, LLC

I was just wondering if you could comment on how customers may have reacted or are reacting to the new strategic plan and the direction you're possibly going with the Digital business.

C. Reese

Yes. So far, it's a big customer base. So I haven't had my phone ringing off the hook, screaming at me or anything like that. I posted -- we posted and sent out to customers a kind of an open letter from me to them just recently, explaining what we're doing and so forth. And I think the early reaction is, "Thank you for telling us. We appreciate being in the know." And look, what we're telling them and, in fact, in this case, we are focusing, making sure we focus heavily on our Physical business, that we don't lose sight of the services that you expect of us, and we'll continue to build that business. We're not draining it. And part of what we have to explain, and something we have to explain to the employees is, is we've got enough capital to give our shareholders $2.2 billion. I won't give you a $0.50 an hour raise. And if you don't think that's a hard discussion, you come try it a while, okay? And it's the same sort of thing with customers. You're giving your shareholders $2.2 billion, why do you want to raise my price? And you have to get back to economics and market value and cost structure -- there's a lot that you have to do, and you have to train the organization to understand. And that's the kind of stuff we're working on.

Eric Boyer - Wells Fargo Securities, LLC

So in that context, have you changed your strategy or thinking about changing the strategy with the pricing program?

C. Reese

No. Look, our pricing program has been and, as far as I'm around, will be designed around: a, being fair; and b, recovering the true increase of cost minus some productivity we've gained. I've always believed -- we've always -- if you go back and feel this industry [indiscernible], we've driven an enormous amount of productivity in our industry, both to the consolidation, creating more of just general economic productivity by consolidating competitors. But we've also brought technology, how you store box, we changed radically the whole technology of how you store the box, what the cost are doing that is and everything. It took a lot of time, money and investment to do it. Net of that is, we drove unit storage prices down for about 15 years straight on average to the customer base. And we've kind of run the productivity out of this business from their perspective, and now it's time to take back gains related to true increase of cost, and we'll continue doing that.

Eric Boyer - Wells Fargo Securities, LLC

And then Brian, just on the adjusted OIBDA margin, would that be up slightly year-over-year with your new guidance if you backed out that proxy-related costs? I just want to make sure I'm thinking of that right.

Brian McKeon

It's down slightly because of the -- it's not all that different than what we had talked about heading into the year. We have this significant kind of lap $30 million plus of -- last year, we had very low incentive compensation payments and we had normal payments this year. So that is constraining us. So it's down slightly X the proxy contest cost. But it's all driven by that factor, which is really something that you basically supported last year's margins. The underlying operating performance, we're seeing improved margins.

Eric Boyer - Wells Fargo Securities, LLC

Okay, great. And then Richard, just on the last call, you talked about other capital structure ideas that you may be thinking of other than a REIT. Could you give us a sense of what some of those could be?

C. Reese

A little early. I'm still collecting a list. I have my list. But since I've put it out there, phones have been ringing, ideas are coming in. So let me sort through them a little bit because some of them are interesting and some of them are harebrained, and I'm speaking to some of mine when I say that, and some might be doable, some may not be doable. But after we get a little more homework done, we'll talk to you about it.

Eric Boyer - Wells Fargo Securities, LLC

Okay, fair enough.

Operator

Our next question comes from Nate Brochmann of William Blair Company.

Nathan Brochmann - William Blair & Company L.L.C.

Just kind of wanted to ask a little bit of a question. I know, Richard, you have a lot on your plate in terms of different directions. But one of the things over the past couple of years that you guys have done a great job at is various efficiency programs, and was wondering if -- as you're coming back to business, if you've identified any other things that you kind of wanted to tackle on that efficiency or productivity front in terms of cost reduction.

C. Reese

Look, I didn't identify it, no. The team's been working on this for some time. And I guess you put it in 3 categories. We talk about the North American playbook as if it's a simple little thing that we hand around to each other. But North America has developed over the last 3 to 4 years significant numbers of strategies and implemented them very successful and driving efficiency in the business. And if that, we're exporting, particularly to our bigger businesses in Europe and starting in the U.K., which is where we're looking to get 200 basis points this year. We're also starting a program here we call support excellence. It uses some of the same techniques that we found successful and others targeting to two things: Benchmark all of our support functions against best practices, and then try to figure out how we can get ourselves to a best practice both service level and transactional cost level. And I've stressed this to everybody, it's a combination of making sure we serve ourselves well, serve one another well, as well as a combination of doing it the lowest possible cost. And I happen to believe you can achieve both of those. Better service doesn't always mean higher cost. In fact, doing it right, doing it well usually delivers better tuned service and a lower cost. So we've undertaken those initiatives just to play it [ph] over in the next few years. And all of that is embedded in the plan we put forth last year. So I don't think I'm going to come up with any secret sauce on top of that. In fact, I would tell you, the plans, when I look at them, are awfully aggressive. And some people have asked me, do I worry about them? And the answer is yes. But my worry is that we've really put forth a pretty hard stake in the ground over a fairly short time period. I don't really worry about hitting the number. I worry about hitting the number in the timeframe that we put forth. But you take a shot, you do your best to get there. You've got a better chance of getting there if you take aggressive shots and we've taken aggressive shots.

Nathan Brochmann - William Blair & Company L.L.C.

Fair enough. And then also, there's been a lot of focus, obviously, on the underperforming businesses and services, et cetera. But certainly, the core business, showing some sign of life I think is pretty positive kind of going forward and hopefully starting an improving trend. Just wondering if you could elaborate a little bit in terms of what you're seeing there in terms of the various end market demand and what's kind of driving that and if there's any areas that really stand out to you.

C. Reese

Candidly, been here 2 weeks and most of the time, I've been talking and dealing with shareholder issues. I can't tell you I've gotten personally deep enough in to give you a really good answer on the subtleties in the trends. My time has been focused on the things you've heard about and heard me talk a lot about. Come late in the day and start on Monday, I've got a whole series of meetings with different managers of different groups of the business, where I'm going to go get my head back and calibrate my gut again. And after I've done that, I might can answer that question better.

Nathan Brochmann - William Blair & Company L.L.C.

Fair enough.

Operator

Our next question comes from Scott Schneeberger of Oppenheimer.

Scott Schneeberger - Oppenheimer & Co. Inc.

Just one from me. Richard, I heard your response to that last question. So more conceptually, I guess, is the way I'll ask this. Certainly we've thought about the special projects and the services area as kind of a lead, something that we've watched to see things start to come back. Have you had any conversations with your people out on the street as to what they're seeing and hearing; is that picking up? And then the second part of the question is, do you believe that's the way you'll see the recovery of the business?

C. Reese

No. I think we'll see the recovery of the business exactly where I think but do not absolutely know. We are at the brink of, and that is that storage leads, everything else follows. Think about what I said earlier: Newest boxes create the most activity, okay? So you've got to have -- you've got to build up your newest boxes if you want to have the activity come back. With the activity comes transportation; the more you pick, the more you move. All those things lead and come in that direction. In terms of special projects, a lot of the special projects are designed around either events, as in people get sued or they have big internal audits and so forth, or they're driven around other events as in M&A. A reasonable amount of our special project work moves with M&A as customers takes 2 businesses, put them together. They have to clean out the records of the -- and sometimes even have to split the records of buyers or sellers or selling a division or this, that and the other. So their kind of event or any. We don't control those events and so forth. And then they have a third element, which is, "I've got budget money and I want to improve my program," or "I've been dying to do something to clean up a past mess, and I've got to have budget money to do that." And in lean years, that budget money just doesn't show up at our customers. In years, things get better in our customers, they'll reinvest back in their programs. And oftentimes, you'll see that late in the year, by the way, for obvious reasons. So Q1 is not usually a good special project. So that's sort of the trend. That's sort of the buying pattern, and I think we'll see it, but we'll see it a little later in the cycle. The other things we see is our eDiscovery business is, as we said, is off. And that flows through our comp services and sort of projects side of our business. But the bookings are back up. And I think that is as much as a factor of us losing focus on it in our Digital business 9 months ago as it is anything and really getting focused back on it and doing a really good job, which, if we were to own it, 9 months from now or 6 months from now, we'd see the revenue flow through well there. So I think that -- and then the last I'd say is our DMS part of our hybrid business is solid and growing really well, which flows through some of that too. You get some puts and takes across the board now in a lot of those categories. And by the way, the DMS business, the reason it's growing well, it is primarily driven to help customers on the productivity side. It's customers looking to use the information in different ways to create more productivity, and that's really the trend we sell into there.

Operator

[Operator Instructions] Our next question comes from Kevin McVeigh of Macquarie.

Kevin McVeigh - Macquarie Research

What percentage of the business is hybrid now? And just more conceptually, do you think some of those services are sapping some of the revenue from the traditional services side of the business, or is it -- they don't cannibalize each other?

C. Reese

Yes. It's about 5%. And in terms of cannibalization, there's two ways to answer that. In terms of cannibalizing storage, no, not in any significant manner. And in fact, I can make the argument that you'll actually get more hard copies storage by doing more of this. And part of the simple argument is every time you go to look at a small vendor in that space, they'll all have a net warehouse full of boxes that they just seem to accumulate, okay? Because customers digitized things for good reason, but for productivity, for process reasons. But for archival reasons, digitizing is a bad idea because the cost of transporting that data multiple times over 15 years costs way more than just keeping the box for 15 years, and that's what they tend to do. So it's not a cannibalization issue. From our perspective, early on, as we got the business going a couple of years ago, it cannibalized our box storage business because we really waved the shiny object of a new service in front of our sales force and made it too easy for them to sell that new service and make their targets and make their compensation, and they didn't have to work as hard on selling for box storage. And to some extent, we did that to ourselves and we have clearly recovered from doing that. And we've clearly gotten better at balancing how we sell so we can sell them both. And that's the results you're seeing there. But we went through the learning curve of that; it was painful.

Kevin McVeigh - Macquarie Research

Super. And then just, obviously, with the way fuel's gone, it seems like you'll benefit from the surcharges. We start to see that on the service line, if I remember, on the service line, if I remember that. Is that right?

Brian McKeon

Yes, you'll see that. You'll see some benefit points around the core service revenues, Kevin. I just wanted to highlight it, it won't have an impact on profit, right? It will be offsetting higher fuel costs.

C. Reese

And Kevin, we're seeing the costs on that. We'll see the revenue later. But there will also be the costs there later, too.

Kevin McVeigh - Macquarie Research

Super. And just a last question, Brian, you tweaked the CapEx a little bit, or Richard?

Brian McKeon

Well, about $5 million of that was just an updated real estate estimate and $5 million was just obviously refining just how we're looking at the year. So combined, that was the adjustment.

C. Reese

So it looks like we've hit the end of hour. I appreciate you all coming and your questions today. As I said in the beginning, we've got a great business. It is performing well. That's a great welcome back for me. I'm glad I didn't have to come and explain a tough quarter the first time out. As I told somebody who asked me how I like being back, and I said, "Well, I'm still on a honeymoon period right now, but it won't last forever. But I'll enjoy it while I can." So I appreciate all your support and your cards and letters and your input. It is useful to us. It's helpful to us. We do listen to it, and we try to factor it into our thinking as we have to make trade-offs and decisions as we go forward. I'll also -- I don't know exactly what the schedule is, but we will be out on the road some, in cities near you over the next 6 to 9 months, and I'd love to get a chance to get reacquainted for some I haven't seen in a while and those that I really don't know, I'd also like the chance to talk to you. And the last invitation is you're always welcome to come see us in Boston. So just give us a call. We'll try to find a date and time that works. Again, thank you very much, and I'll look forward to seeing you down the road. Goodbye.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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