Iron Mountain (IRM) William Leo Meaney on Q1 2016 Results - Earnings Call Transcript

| About: Iron Mountain (IRM)

Iron Mountain, Inc. (NYSE:IRM)

Q1 2016 Earnings Call

April 28, 2016 8:30 am ET

Executives

Melissa Marsden - Senior Vice President-Investor Relations

William Leo Meaney - President, Chief Executive Officer & Director

Roderick Day - Chief Financial Officer & Executive Vice President

Analysts

George K. F. Tong - Piper Jaffray & Co. (Broker)

Andrew Charles Steinerman - JPMorgan Securities LLC

Adam Parrington - Stifel, Nicolaus & Co., Inc.

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

Karin A. Ford - Mitsubishi UFJ Securities (NYSE:USA), Inc.

Operator

Good morning. My name is Dushyanta and I will be your conference operator today. At this time, I would like to welcome everyone to the Iron Mountain First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

I would now like to turn the conference over to Melissa Marsden, Senior Vice President of Investor Relations. These go ahead.

Melissa Marsden - Senior Vice President-Investor Relations

Thank you, Dushyanta, and welcome everyone to our first quarter 2016 earnings conference call. This morning, we'll hear from Bill Meaney, our President and CEO, who will discuss highlights of the quarter and progress toward our strategic initiatives; followed by Rod Day, our CFO, who will cover financial results.

After our prepared remarks, we'll open up the phones for Q&A. And as we have done in the past, we have posted our earnings commentary and supplemental disclosure package on the Investor Relations page of our website at www.ironmountain.com, under Investor Relations/Financial Information.

Referring now to page two of the supplemental, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for 2016 financial and operating performance. All forward-looking statements are subject to risks and uncertainties. Please refer to today's supplemental, our earnings commentaries, 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 differ from those in our forward-looking statements.

In addition, we use several non-GAAP measures when presenting our financial results and the reconciliations to these measures, as required by Reg G, are included in our supplemental reporting package.

With that, Bill, would you please begin?

William Leo Meaney - President, Chief Executive Officer & Director

Thank you, Melissa, and good morning, everyone. And thanks to all of the investors, analysts on today's call for your continued support during the process of finalizing our acquisition of Recall. In fact, it was one year ago today that we announced the agreement in principle between our two firms. As you saw last week, we have now satisfied all conditions for closing and will do some next Monday, Australian Time.

I cannot say enough good things about the dedication and focus required and demonstrated by our teams on both sides to get this transaction over the goal line.

And I should add, it is this dedication of our teams that has set us up to hit the ground running with integration. I wish to thank my fellow team members for continued focus on the core business by delivering another strong quarter across all metrics, but most importantly, our earnings and cash flow results.

What does this acquisition mean for Iron Mountain? From a commercial perspective, it enhances our global footprint, both strengthening our existing country presence as well as expanding our reach from 41 countries to 45, and strengthens our ability to reach both global organizations in mid-market businesses looking to benefit from our industry-leading expertise and solutions appropriate to their scale.

The combined strength of our companies expands our ability to meet customers' information, management, and storage needs as they face increasing regulation, ongoing security threats, and seek to turn information into business value.

You may remember a video we featured at our Investor Day last fall with customer stories about the trust they place in us. Today, the stakes have never been higher for organizations of all sizes to ensure their most critical assets are protected and accessible.

They see us as their partner protecting what matters whilst also providing expertise, products, and services designed to get the most out of those assets. That trust is a cornerstone of our business.

A big part of this trust is based not only on our dedication to high-quality service, but it is also derived from confidence our customers have in us to leverage our scale to the kind of innovation that allows us to serve them long into the future.

The industrial logic of this deal is undisputable. And from a financial perspective, it enhances our 2020 strategic plan, delivering cash benefits that drive accretion, both on an FFO and an AFFO basis.

This in turn supports attractive long-term durable dividend growth averaging 10% per year through 2018 as the synergies and benefits from transformation begin to flow through in approximately 4% growth per year annually thereafter through 2020.

I won't go into the detail of synergies and accretion here, as I believe we've covered that thoroughly in the call we hosted on April 1 to announce the conclusion of regulatory reviews in the U.S., Canada and Australia.

But I do wish to reiterate that the benefits of the transaction are compelling consistent with our strategy and importantly, consistent with our expectations in terms of the financial contribution.

Now that closing is imminent, the challenging work of integration can begin. We have been refining and advancing integration plans across all functional areas of the combined companies, and it is encouraging to see how well the teams have come together to support the closing and prepare for a smooth combination. We look forward to welcoming Recall's customers, employees and shareholders.

Turning to Iron Mountain's standalone results, first quarter financial and operating results were strong. Our financial results continue to demonstrate the durability of our core storage rental business. Total revenue growth in constant dollar of roughly 4% was in line with our longer term expectations, driven by constant dollar growth of 4% in both storage and service.

Adjusted OIBDA constant dollar growth was about 7%, excluding charges associated with our transformation program and service initiative (sic) [transformation program]. We see consistent trends in constant dollar storage revenue growth for the remainder of the year, while constant dollar service revenue growth will continue to be a bit lumpy. Even with this lumpiness, we continue to expect positive internal service revenue, as well as service gross profit growth for the full year.

Our results in the first quarter reflect the service revenue mix shift we discussed in recent calls with declines in transportation and handling related services, largely offset by growth in shredding, project revenue and DMS, which for Iron Mountain, refers to our imaging or scanning businesses.

We are also beginning to gain some traction with new data management service offerings such as our secure IT asset destruction offering and our data domain venture with EMC. You may have also seen that yesterday we announced a new Iron Mountain cloud archive, offering a cost-effective, near-infinitely scalable repository for organizations needing to protect and preserve data for compliance, legal or value creation purposes. We'll be debuting this new solution at EMC World conference next week.

As our mix shift continues, we will focus more on enhancing gross profit rather than gross margins as these new service offerings are often lower margin, but still generate attractive returns due to the minimal capital investment required.

Turning to internal storage revenue, growth of 2.2% for the quarter was in line with the fourth quarter of last year and is compared with a particularly strong quarter in 2015. We continue to expect average storage rental internal growth to be north of 2.5% for the full year. Internal volume growth or net of acquisitions was positive in all segments and consistent with recent quarters' performance at 1.6% worldwide growth.

Total gross volume of records from new and existing customers was roughly 30.5 million cubic feet over the trailing 12 months also very consistent with what we've seen over the past few years.

Turning to progress on our strategic plan. During the quarter, we continue to advance each of the three pillars of the plan as well as in the foundational elements that support it. Let me briefly highlight progress in each of the three pillars, namely getting the most out of our developed markets, expanding our presence in the fast-growing emerging markets, and expansion and faster growing adjacent businesses.

In developed markets, we achieved consistent performance from North America RIM with positive internal storage and volume growth, while North American data management and our Western Europe segment both generated internal volume growth of roughly 3% and total internal revenue growth of about 2%.

In emerging markets, our goal is to expand our presence and leverage our scale driving these markets to 20% of our total revenue by 2020. Recall's footprint in Southeast Asia will support that objective, but prior to the combination, we already have driven our emerging market business to 15% of total revenue on a constant dollar basis as of the end of Q1. During the quarter, we continue to achieve total internal revenue growth in these markets of 10% with internal volume growth of 7%.

Additionally, as our visibility on closing of the Recall transaction became clearer, we resumed acquisition activity moving into two new emerging markets during the quarter. We acquired a 75% interest in the largest privately owned and the number two overall records management company in South Africa, a company with more than 2 million cubic feet of storage and a range of offerings similar to ours.

We also acquired a Lithuanian-based document storage and archiving firm during the quarter, expanding our presence into three new countries in the Baltics with the acquisition of this market leader. With these acquisitions, we expand our global reach and now operate in 41 countries on six continents. But it's not about putting pins in the map. It's about leveraging our global footprint and capturing the first wave of records management outsourcing occurring in these faster growing markets.

As we noted last quarter, we did see the carryover of the large single customer destruction in our other international segment, which drove destructions up to 4.2% in this segment in line with what we saw last quarter. Again, we do not see any other such unusual destructions on the horizon and expect that the remainder of the year will return to more typical levels of less than 4%. We do report volume change on a trailing 12-month basis, and therefore this level will remain slightly elevated over the next few quarters.

As for adjacent businesses, we are on track to achieve our stated goal to generate 5% of our total worldwide revenue from adjacent businesses by the end of 2020, up from just 2% at the end of 2015. You can now see a full quarter's contribution from Crozier Fine Arts acquired last December, which is performing in line with our expectations.

Additionally, you may have noted our plans to expand our data center business into Northern Virginia, North America's largest data center market. Northern Virginia is also home to the Federal Government data centers and large cloud data centers owned by the major data center REITs.

During Q2, we plan to resell this land to an industrial developer who will undertake land development and shell construction whilst we focus on expanding our data center product offering in this highly desirable location. We are early in the planning for this multiyear, multiphase project.

Whilst we are not yet sharing specific projections, we wanted to share our plans to provide some insight into one of the ways in which we are able to strategically fund our growth opportunities. The result is that whilst we will achieve slightly lower margins through this approach to funding, the impact on our balance sheet has improved and our stabilized ROIC is similar to that of data centers we owned outright.

To sum up, we are well on track to achieve our combined goal of having the expansion of our emerging market presence and adjacent businesses yield 25% of our total revenue mix by 2020 with internal growth rates in the 10% plus range, which is up from a little over 17% (sic)[70%]of our business mix today.

I should also add we continue to make progress on our transformation initiative. Actions in 2015 resulted in run rate savings of $50 million, which is visible in a 120-basis point improvement in year-over-year OIBDA margins this quarter after adjusting for transformation.

We have undertaken additional actions in the first quarter that support the additional $50 million of savings we expect to achieve by year-end 2016. We incurred told charges of $5.7 million in the quarter related to these actions and were able to pull forward a bit of the run rate savings that contributed to our strong performance this quarter.

Also as previously disclosed, the remainder of the total $125 million of overhead savings will be actioned in 2017 and the full amount for the transformation program will be reflected in our 2018 adjusted OIBDA.

The all-important cash flow result for both today and growth into the future is in line with the growth expectations we highlighted during Investor Day and again on our April 1 call and continues to provide the foundation for our expected dividend growth.

We also updated the high-level goals associated with our 2020 plan. What we've communicated is that we continue to expect to achieve similar top line and adjusted OIBDA compound annual growth.

We also expect to generate similar levels of cash available to grow the dividend by an average of about 10% per year through 2018 and 4% annual growth thereafter, fund organic growth racking investment and increase the amount of remaining cash available to support discretionary investment.

And we will do so whilst both reducing our payout ratio as a percentage of AFFO and deleveraging. We expect to fund additional growth through debt financing in amounts that allow us to continue to delever the business on a debt to EBITDA basis.

Our expectations are underpinned by the continued demonstration of a very durable growing business that performs consistently throughout business cycles. In addition, we are extending that durability through solid execution of our plan in developed markets, identifying and capturing opportunities in both emerging markets and adjacent businesses and continue to enhance our cost structure in both service and overhead.

Our durable storage business generates more than $1.5 billion of annual storage net operating income, which is comparable to that generated by leaders in both the industrial and self-storage sectors. What distinguishes our business is its inherent durability and is this durability that delivers consistent levels of operating performance in good and bad times.

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

Roderick Day - Chief Financial Officer & Executive Vice President

Thanks Bill. I'll begin today with an overview of our first quarter performance, including an update on our transformation initiative and a review of results by segment. Then I'll provide color on the Recall transaction and progress we have made so far in preparing for integration, as well as discuss our plans for funding the transaction.

Let's turn to our worldwide financial results. For the first quarter, reported revenues were $751 million compared with $749 million in 2015. Excluding the year-over-year FX impact of approximately 3.6% or $26 million. On a constant dollar basis, revenues grew by 3.8%.

Total revenues were driven by strong constant dollar storage rental revenue growth of approximately 3.9%. Service revenues also performed well in the quarter up by 3.7%.This was primarily the result of project revenue in North American records and information management and growth in shred revenues driven by new customer wins.

This service revenue growth reflects the mix shift in our business were service revenues are more heavily weighted towards projects which can result in more volatility in year-over-year growth rates.

During the quarter we saw a reduction in service gross profits and service gross margin. This decline was driven by an increase in medical expenses and severance costs related to our service gross margin initiative. Excluding these costs, service gross margins would've been flat on a year-over-year basis.

Consistent with prior quarters we have provided bridging schedules for total revenue, adjusted OIBDA and adjusted earnings per share which explain key variances in year-over-year per performances for the quarter. This quarter, we've also added a similar bridge for FFO per share. This schedules on page 20 through 23 of the supplemental.

Total adjusted OIBDA for the quarter was $235 million compared with $231 million in 2015. Despite FX headwinds early in the year, we grew adjusted OIBDA by 1.7% and by 4.5% on a constant dollar basis. And growth was 7% if we exclude the $5.7 million of transformation initiative charges we took in the quarter.

As evidenced by improvement to total adjusted OIBDA margins, we continued to execute on our transformation initiative. As just stated, during this quarter, we incurred roughly $6 million of net charges related to this initiative. During Q2 and Q3 prior to any adjustments from Recall, we continue to expect the transformation initiative to be $1 million to $2 million net negative to adjusted OIBDA with in-quarter costs slightly offsetting benefits.

In Q4 we expect a net upside of roughly $7 million providing a strong run rate platform for year-on-year benefits in 2017. We continue to expect exit rate savings from actions taken in 2016 of $50 million to flow through to 2017. Our overall savings outlook for transformation remains consistent with what we laid out in our Investor Day in October with $125 million of cumulative savings by 2018.

Adjusted EPS for the quarter was $0.33 compared with $0.32 in 2015. Excluding the cost of our transformation, and after normalizing for the tax rate benefits adjusted EPS would've grown by roughly 9%. Our adjusted OIBDA and adjusted EPS result for the quarter came in ahead of the phasing expectations we laid out on the February's conference call.

This over performance in the first quarter was driven by pulling forward portion of transformation benefits as well as lower overall G&A expenses as we delayed certain costs and hires in anticipation of the recall transaction. In addition adjusted EPS benefited from a lower tax rate.

Our structural tax rate for this quarter came up to be 14.0% compared with 16.2% in the prior year. The year-over-year decrease in our structural tax rate was primarily driven by earnings mix skewed more towards our qualified nontaxable entities. We continue to believe that our tax rate will be roughly 20% once Recall closes due to their exposure and international markets.

Normalized funds from operations or FFO per share was $0.51 for the quarter compared to $0.50 in the year ago period. Excluding the cost associated with the transformation FFO per share would have grown by roughly 8%.

Adjusted funds from operations or AFFO was $142 million compared with $128 million in the year ago period. AFFO is at the high end of expectations due to the timing of maintenance capital expenses and non-real estate investments which are typically incurred towards the second half of the year.

Similar to the prior quarter, on page 19 of the supplemental providing a reconciliation between AFFO and cash flow from operations as presented in our GAAP cash flow statement, so you can more readily see the cash items that are not of the typical recurring nature.

Let's turn to our financial performance by segment. In North American Records and Information Management or RIM, internal storage rental revenue increased by 0.2% for the first quarter. North American RIM internal service revenue increased by 3.8% due to an increase in project revenue and new customer wins in the shred business is noted earlier.

North American RIM adjusted OIBDA margins decline year-over-year, primarily due to increased medical costs and severance charges related to our service margin initiative. North American data management or DM delivered storage rental internal growth of 1.8% for the first quarter. Internal service revenue in DM declined by 6.9% as we continued to see reductions in the frequency of tape rotation and related transportation activity in the business.

The high single-digit decline in transportation and handling service was partially offset by mid single-digit growth in the new data management service offerings and other DM project related revenue.

DM adjusted OIBDA margins improved year-over-year due to an increase – due to decrease in overhead costs, primarily associated with lower G&A expense. The Western European segment generated solid results with 2.1% internal storage rental growth. Internal service revenue growth declined in this segment, primarily as a result of activity declines in retrieve and re-file and transportation and a relatively weak quarter for projects.

Adjusted OIBDA margins improved in Western Europe as a result of a decrease in overhead expense specifically compensation expense. In addition, Western Europe benefited from one-off real estate tax benefit of roughly $3 million.

The other international segment, which is made up primarily of emerging markets in Australia showed strong growth in both storage and service revenues. Storage rental internal growth was 9.6% and service internal growth 11.3% for the quarter. Other international adjusted OIBDA margins were 21% for the quarter in line with expectations.

We continue to expect adjusted OIBDA in this segment to deliver profitability on a portfolio basis in the low 20% range in the short-term as we expand our exposure in these fast-growing markets.

Let me now talk about the Recall acquisition and provide details on the cost that we've incurred so far in 2016. We're working diligently on integration planning, as well as preparing to convert portions of Recall's business to our REIT structure. As a result of all this hard work, we're well-positioned to achieve our synergies quicker in 2016 than we originally anticipated when we announced the deal back in June of 2015.

Our expectations of cost to achieve the deal are still consistent with prior projections. In the first quarter, we incurred $7 million of deal close costs and $11 million of integration related costs, bringing the total of Recall costs in Q1 to roughly $18 million in operating expenses. Please note these expenses are excluded from adjusted OIBDA calculations because they are one-time in nature.

Let's turn to our outlook for 2016 on page 12 of the supplemental. Business trends and fundamentals remain consistent. We remain on track to achieve our long-term financial objectives given the durability and strong fundamentals of our business.

As we noted, our 2016 guidance reflects a partial year benefit from Recall as well as the net synergies we're expecting in 2016. Please note this is a preliminary view of the combined group and assumes that all divestitures are effective from May 1st. We'll continue to refine our estimates and provide updates as necessary once the transaction is closed.

Another point about the guidance as you might expect given that we're combining our higher margin business with Recall's slightly lower more margin business, in the near-term adjusted OIBDA margins will be slightly lower than our standalone margins until we realize synergies.

Lastly, I'd like to note that we're starting to see improvement in foreign currencies against the U.S. dollar, which may potentially add some favorability to our 2016 guidance. The top currencies that improved since beginning of the year are the Canadian dollar – euro; Brazilian real and Australian Dollar, partially offset by the declines in the British pound. We're continuing to watch these trends closely and will update our guidance one warranted.

Moving to our expected cash available for distribution and investments for 2016, we continue to estimate that it will be roughly $600 million for 2016. This continues to provide ample dividend coverage and funds our core growth racking investments. Our capital deployment plans remain unchanged. We continue to expect capital expenditures, which include real estate and non-real estate maintenance and non-real estate investment to be in line with the figures we provided on April 1st

We expect to spend $17 million in core growth racking and approximate $35 million in the data center business. For M&A, our plan continues to be a roughly $100 million spend in emerging markets and $50 million in developed markets. We also plan on investing where value creation is compelling in real estate development and consolidation and lease conversions.

Dividend expectations remain consistent with the guidance we laid out on at Investor Day. Dividend per share is expected to grow in the double digits on average in 2017 and 2018 as we realize the benefits of transformation savings and Recall synergies.

Beyond 2018, we expect to grow dividend per share at roughly 4% per year. Importantly the dividend payout ratio as a percentage of AFFO is expected to be approximately 78% in 2016 and 70% by 2020, which underscores the strength of our dividend coverage.

Shifting briefly to the balance sheet, at year end we had liquidity of approximately $650 million and our lease adjusted debt ratio is 5.7 times as expected.

We announced last week that we entered into a commitment letter with lenders to provide an unsecured bridge facility of up to $850 million to provide a portion of the financing for the Recall transaction.

We expect to enter into a definitive formal documentation for the bridge and follow – borrow the full amount on April 29. As previously said, we anticipate refinancing the bridge and replenishing capacity on the revolver with long-term debt as soon as practical.

Overall, we're pleased with the strong performance we saw in the first quarter. Our results are driven by the durability of our business and execution of our 2020 vision.

We're excited to begin the integration of Recall in the second quarter and begin to realize meaningful synergies associated with the deal.

Looking ahead, we believe we are well positioned to deliver on our short-term and long-term goals. We remain focused on extending the durability of our storage rental business, which drives growth in our cash available to fund dividends and core growth investments.

And with that, I'll hand the call back to Bill.

William Leo Meaney - President, Chief Executive Officer & Director

Thank you, Rod. And before I turn the call back to the operator for questions, let me quickly sum up what you've heard today so far.

First, this was a very good quarter, and we are headed into the Recall integration from a strong position. Our core storage business performed well and remains extremely durable, a characteristic that has been demonstrated both in good economic conditions as well as through downturns. And if you recall, last year, we finished the year with a 1.5% internal revenue growth rate, i.e., before acquisition, and our Q1 results showed a 2% internal revenue growth rate, which also compares favorably to the Q1 of last year of 1.4%. So – it was a good quarter also in terms of revenue growth.

Second, we're feeling good about the Recall transaction. Our progress on integration and our ability to derive benefits from scale which supports additional growth in cash flow.

And finally our high-margin business coupled with our focus on continuous cost control continues to give us high confidence in our ability to deploy that incremental cash flow into growth investment, deleveraging and near-term double-digit growth in our dividend per share.

With that, operator, we're now ready for questions.

Question-and-Answer Session

Operator

Your first question comes from the line of George Tong with Piper Jaffray.

George K. F. Tong - Piper Jaffray & Co. (Broker)

Hi. Thanks. Good morning. In the North American tape business, services internal revenue declines remain elevated which suggests that we're still early in the cycle in terms of the tape rotation revenue decline process.

When do you expect the decline in services there to normalize? And could you provide a status report on some of the newer services initiatives you have that can help offset the headwinds?

William Leo Meaney - President, Chief Executive Officer & Director

Okay. Hi, George. Good morning. Thanks for the question. So, we still don't see much of an abating of that trend. So we're not predicting the bottom – I mean it's – as I think I've said a few times, it's on the records management side, we have seen a flattening out, but on the tape, it's a little bit behind the curve.

What's encouraging is that we see high single-digit, low double-digit quarter declines in the – what I would call the transportation or rotating the tapes, as you say, part of the service business, but we see mid-single-digit growth in those new services, which is what allows us to offset the rate of decline. So, we do see – albeit off a small base – but we do see significant impact in terms of growth to some of these new service offerings like the service offering I highlighted on the call with EMC.

George K. F. Tong - Piper Jaffray & Co. (Broker)

Got it. And then looking ahead to the company pro forma for Recall, can you discuss what your expectations are for Recall's fundamental performance? What assumptions are embedded in your guidance with Recall? And if your due diligence findings confirm Recall's existing guidance?

William Leo Meaney - President, Chief Executive Officer & Director

I'll let Rod answer that in the more detailed aspect of the questions, but I think I'll just touch upon your last – the last part of your question in terms of what we found through the integration planning with Recall.

And I think what we – the main difference – I think we talked about that on the April 1 call is we found that we've – what I would call more capital efficiency. So two areas specifically is we found in terms of maintenance CapEx. We feel very comfortable that Recall's maintenance CapEx will be in line with what we spend on our facilities, i.e., around 2.6% of revenue, whereas before we thought we were going to have to spend more because they had done a number of acquisitions. So we feel comfortable based on integration planning that it's kind of a like-for-like integration in terms of level of maintenance CapEx.

The other area which we feel very comfortable now which was an unknown for us is we had a significant uptick or original budgeting for IT systems because again we didn't know if our platforms would be big enough to scale efficiently to absorb all of the Recall operations. And again, we feel very comfortable. So you'll see that we still have significant investment to absorb the Recall operations onto our IT platforms, but much more in line that we're taking on a company that's a quarter of our size rather than one that we would have to rebuild or relaunch major IT systems. So those are then the two areas which I would say are positive surprises that we've had on the integration side, but, Rod, you may want to comment a little bit more in terms of the guidance.

Roderick Day - Chief Financial Officer & Executive Vice President

Yes, in terms of the assumptions we've made for Recall performance for the remainder of this year is essentially is consistent with the performance that we've seen over recent periods. So we've just trended that forward. So it's a modest underlying growth within the business of around 2%, and there's acquisition benefit on top of that. And margins being broadly and consistent so we've not assumed any inflection point up or down in terms of performance, just a continuation of the trend.

George K. F. Tong - Piper Jaffray & Co. (Broker)

Very helpful. Thank you.

Operator

Your next question comes from Andrew Steinerman with JPMorgan.

Andrew Charles Steinerman - JPMorgan Securities LLC

Hi. I'd like to spend more time on the service internal growth of 3.8%. I did catch that you said it is more project oriented but this is kind of a massive standout, if you kind of look over the last four quarters versus 3.8% growth. Could you just give us a sense of – do you feel like there was anything that was particularly one time or are these projects you know that should come up regularly and do you think that service revenues will grow for the year within North American RIM?

William Leo Meaney - President, Chief Executive Officer & Director

So – its a good question, Andrew. So good morning. The – so, first of all, I would say that they are specific projects, but not necessarily one-time in nature. In other words, what I'm saying is we expect to continue to have these kinds of projects that we sell as we go through, but they're not – these are – it could be a project for company X today and company Y tomorrow. So these are discrete projects but not ones that we don't expect to have a recurring pattern.

That being said, which I said both in my remarks, I think Rod also mentioned in his remarks, that these tend to be more lumpy. So I wouldn't change our guidance in terms of overall growth in terms of revenue, because you will see some ups and downs on that. So I would keep the guidance the same, and that's our expectation.

But it is an area – you're right to call it out. It is an area that we're putting more and more discrete focus on as an initiative because we're hearing from our customers, they are looking for more and more those kinds of, what I would call, project related services as we kind of take their – a full management of their document from creation to storage approach.

So just by the very nature, it is more project related. We have focused more of our attention in providing those kinds of services for our customers, so you can expect continued growth in that area, but it will be lumpy.

Andrew Charles Steinerman - JPMorgan Securities LLC

But do you think it will be positive for the year?

William Leo Meaney - President, Chief Executive Officer & Director

It will be positive. Yeah. For sure it will be positive for the year. Yeah.

Andrew Charles Steinerman - JPMorgan Securities LLC

Great. Thank you.

Operator

Your next question comes from Shlomo Rosenbaum with Stifel.

Adam Parrington - Stifel, Nicolaus & Co., Inc.

Hi, this is Adam Parrington for Shlomo. Sorry, I apologize if I missed this, but could you go over the items that caused services or the margin to be lower year-on-year?

William Leo Meaney - President, Chief Executive Officer & Director

Yes. I think probably it's best for Rod to take you through a bridge.

Adam Parrington - Stifel, Nicolaus & Co., Inc.

Okay.

Roderick Day - Chief Financial Officer & Executive Vice President

Yeah, let me do that. So if we look at the same periods last year, our service gross margin was 26.1% and this quarter we came in at 24.3%. There's really two key factors that's driving the difference. One is we had an increase in medical costs year-over-year that accounts for 1.0% of that differential. And the second is we took some severance costs in a number of our services businesses as part of a sort of ongoing program to drive longer-term improvements in margin. And that has an impact of 0.6%.

There's a small other component which has to do with some vacation accruals. If you're to factor those in, we'd actually would have had a service gross margin of 26.2% and say that would compared to 26.1% from last year. So that's the drivers of difference.

William Leo Meaney - President, Chief Executive Officer & Director

And the one thing I would add, so – and you would expect our margins to be kind of similar year-on-year because the mix hasn't shifted that much. But what we've said, I think, on the last couple of calls, what you will see over time is not that we're not focused on margins, but we're less focused on the specific margin number because we're looking at return on invested capital as the mix of services change, because as I was talking – answering the question earlier about what's happening with transportation, for instance, in our data management or our tape business, the transportation typically is very high margin business.

So as we supplant some of that revenue loss with new service initiatives, many of those have a lower margin, but they also have lower capital associated with them so similar returns. So – but I think the bridge year-on-year, you're not going to see a massive change in mix over time. So I think the bridge is important one on a short period of time to see what's really happening.

Adam Parrington - Stifel, Nicolaus & Co., Inc.

Okay. Got it. And there's a decline in maintenance CapEx due to the timing of the Recall acquisition or some other item?

Roderick Day - Chief Financial Officer & Executive Vice President

Yes. Again, I also referred to that in the prepared remarks. It is a timing issue. We typically spend more of our maintenance CapEx in the back half of the year than in the first half. And so, it's just a similar trend that we're seeing this year. We'll obviously – well, to your point, it is one of the items we will be evaluating as well as sort of post-close of Recall, but at the moment, our guidance on that for the full year still stands.

Adam Parrington - Stifel, Nicolaus & Co., Inc.

Got it. Okay. Thank you.

Operator

The next question comes from Kevin McVeigh with Macquarie.

Melissa Marsden - Senior Vice President-Investor Relations

Operator, can we go to the next question, please?

Operator

Your next question comes from Andy Wittmann with Baird.

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

That was great.

William Leo Meaney - President, Chief Executive Officer & Director

Yeah. Yeah. I don't know where Kevin was, but it must have been fun.

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

I was just hoping that you could talk a little bit about the pricing characteristics by the major markets that you break out, Bill. Are you seeing any change in the marketplace? That would be helpful. Thanks.

William Leo Meaney - President, Chief Executive Officer & Director

Okay. It is a good question. I think I understand the question behind the question because in some of the markets we highlighted, there were some of the segments we highlighted is that volume was growing faster than revenue, if I understand where your question is coming from.

I think the – I wouldn't read too much into that. I think generally, our guidance is the same that we're achieving inflation or a little bit more than inflation in terms of pricing in each of our markets. So it does look a little bit odd in this quarter that you see in a couple of segments where we actually achieved higher volume growth than total revenue growth on a storage basis.

I think that's more driven by a couple of things. One is, that in one of our business lines, we had a major – a very large customer major renewal, and I think as we've talked about before is when we have large customer renewals is you get this sawtooth where at the renewal point is you take a discount, and then it climbs up through that period. So there was a little bit of that going on. And then specifically in Europe, we had a market where we successfully took on a very large public sector customer which has actually similar pricing as, say, a lot of our other developed markets.

But because of the historical volume of some customers just reaching their natural life or some of the boxes of natural – of customers reaching their natural life going out. At the same time you have a – what effectively looks like a dilution effect, but overall, our pricing still continues to track. If we look at it over a 12 months or kind of a trailing basis, we expect it to continue to track to be slightly ahead of inflation. So you'll see that kind of go back into the normal zone.

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

Got it. And then just another question. I asked this maybe a year ago, but I thought maybe ask it again now, which is, your view on Iron Mountain's need and desire to be in shredding as the company gets bigger, as – still another year into the REIT. Thinking about it, I wanted to understand your thoughts on that business?

William Leo Meaney - President, Chief Executive Officer & Director

I think as I probably said a year ago, we like all of our businesses, we never fall in love with any of our businesses. So you know, I would say the same thing about shred or any of our portfolio of businesses.

I think – look, we're getting some good growth out of the business. We – when we sold off the Australian and the UK business, I guess, a little over year ago that was because we didn't think those markets we had the scale to actually do it. I think we're getting a nice turnaround or improvement in our business in North America.

That being said, we look at all our businesses but not just shred. We look in geographies. So businesses and geographies we look at it on a portfolio of basis. And if at some point we feel that there is a better owner for either a business line or even a geography of a – what you might think is even a core business line, we will consider that. So there are no plans, but we're pretty disciplined on a capital allocation approach across our portfolio of management.

Roderick Day - Chief Financial Officer & Executive Vice President

I think maybe just one thing to add on shred. It's not a short-term performance problem for us. Certainly in the last few quarters we've seen some good traction in terms of new customer wins which has helped boost revenue, and there has been some good work actually driving the underlining efficiencies within the business. We also saw the paper price for shred recycled paper start to stabilize.

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

That was my follow-up. You guys mentioned that shredding is up. Is that paper price driven or new customer driven or can you press that out for us?

Roderick Day - Chief Financial Officer & Executive Vice President

It's primarily driven by new customers, and so we've had a couple of good wins.

William Leo Meaney - President, Chief Executive Officer & Director

I mean we – I think we've highlighted before. We've put a new leader in charge of that business and really kind of put a separate, almost managing it as a separate business unit about a year ago, and he's really doing a stand-up job on it. I mean, he is taking a very different approach to driving that business.

I think too much before we were focused on chasing customers rather than managing windshield time, and that is a business that lends itself to route density. So different approach, very strong leader and as a result, we're getting good results from that business.

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

Is there – are you seeing a competitive dynamic with the ownership change in your competitor there in North America? Are you able to – is that a source of the new customers?

William Leo Meaney - President, Chief Executive Officer & Director

No. I wouldn't say that. I mean, I guess you're talking about Stericycle taking over Shred-It, but I think, look, it's – our sense is it was run as a separate business unit when it was PE-backed, and it's run as a separate business unit – in fact it has the same leader of that business now as it did before when it was owned by the PE firm.

So I think it's pretty much the same competitive dynamic that we had before, but I think we're just doing a better job quite frankly than we were before. Not that we were doing a bad job before, but we just have a much more singular focus on day-to-day management of it.

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker)

Great. Thank you.

Operator

Your next question comes from Karin Ford with MUFJ.

Karin A. Ford - Mitsubishi UFJ Securities (USA), Inc.

Hi, good morning. I wanted to ask about storage rental revenue internal growth. 2.2% in 1Q. I think you said in your remarks that you're still expecting it to be up roughly 2.5% for the year. What do you think is going to drive the acceleration later on in the year there? And what are you seeing in terms – which segments are – how are they trending?

William Leo Meaney - President, Chief Executive Officer & Director

Hi, good morning, Karin. So I think a couple things. One is, I think if you look at the 2.2% this quarter, it's in line with what Q4 was and as much of anything driven by that we had a 3% increase in Q1 last year. So it's a quarter on quarter, in other words, it's a high comparable versus last year. So it's the main thing that's driving the – or one of the main drivers of driving it.

The other thing which we said is that we expect a ramp through the year. I mean, we feel like we're well on track. But that's why we said we expect still at the end of year to end up north of 2.5% in terms of internal storage revenue growth.

The other thing you should go back, is important to look at, if we look at year-on-year comparison, if we look at just total internal revenue growth, total internal revenue growth for the company quarter one 2015 was 1.4% and we have delivered 2% this quarter and overall last year we had 1.5% and we delivered 2% this quarter.

So we feel comfortable with the ramp even on a total revenue basis that we're achieving. And specifically, if we look at the storage rental revenue, as I say, you need to look at, quarter-on-quarter is we're looking at a very strong quarter in 2015 and then we have a natural ramp during the year.

Karin A. Ford - Mitsubishi UFJ Securities (USA), Inc.

Okay. So, easy comps plus a ramp later on in the year. Got it. Okay.

William Leo Meaney - President, Chief Executive Officer & Director

I would say more normal comps.

Karin A. Ford - Mitsubishi UFJ Securities (USA), Inc.

Normal comp. Okay, got it. Second question, a follow-up on a previous one. The internal service revenue growth performance that you got on 1Q going to be lumpy for the rest of the year, but net positive, are there any quarters that you're expecting from here to go negative on that line?

William Leo Meaney - President, Chief Executive Officer & Director

I think you can probably appreciate, we don't guide by the quarter we have a lot of confidence as we look out the course of the year because we see the pipeline of projects, but the actual timing of those projects. You know, quite frankly, some of those projects came in earlier in Q1 than we expected, some of those we thought we are going to come in Q2. So the exact timing of projects are not in our control many times. So we feel comfortable with the pipeline and what we're going to deliver for a year-end result, but to give you quarterly guidance, we're not going to do that.

Karin A. Ford - Mitsubishi UFJ Securities (USA), Inc.

Okay. Are you seeing any impact from global economic turmoil on any of your international businesses today?

William Leo Meaney - President, Chief Executive Officer & Director

No. I think, I'll let Rod talk about it. He can give you a little more flavor about currency. I mean, FX is usually the thing that affects us but doesn't affect us from a liquidity because our costs in revenue are matched, but generally, the great thing about this business, its – maybe I shouldn't say battleship. That probably is – people don't like that analogy, but it just plows through basically any weather. I mean, the – if you look at the GFC [global financial crisis], we had positive rental revenue growth right through the GFC where of any of the company, whether self storage or industrial storage didn't have that.

So first of all, even if we see turmoil, it doesn't really affect our business, and we don't see anything that would affect it, even a Brexit which – which Rod – which I think can probably comment on more than I can. So you know, we look at these things all the time. We do want to say that we are not complacent as a company as we do look at political risks when we make investments. And we think about the political risk both in terms of what could happen in that country in terms of economic turmoil, but also in terms of currency, but, Rod, you may want to comment a little bit on currency.

Roderick Day - Chief Financial Officer & Executive Vice President

Yeah. Maybe two things, Karin. Just in terms of currency, as I mentioned in the remarks, because we've actually seen a sort of slight weakening of the U.S. dollar more recently and that could be a favorable for us for the full year. So, across the basket of currencies, if things stay as they are, it would be a slight favorable. So, that – that's a negative if you like for us has turned around, I'm sure as for many other global businesses.

In terms of the economic turmoil in certain markets, it's a good question but as Bill points out, we are relatively immune from that. So if I could pick an example such as Russia or Colombia or Brazil, which it's quite difficult straits and more broadly our business is actually performing well and to plan in those markets. It's really to do with the fundamentals of the businesses as Bill pointed out.

Karin A. Ford - Mitsubishi UFJ Securities (USA), Inc.

Great. And just last question for you, Rod, where do you think you could raise a long-term debt today, what cost?

Roderick Day - Chief Financial Officer & Executive Vice President

That's a good question. We think – well, we hope it will be in the sort of 5% to 6% range, but when we go to market, we will see what the conditions are, but we recently raised some U.S. debt a few months ago at 6% when the market conditions actually weren't as favorable as they are now. So hopefully we can get a bit below that.

Karin A. Ford - Mitsubishi UFJ Securities (USA), Inc.

Thanks very much.

Operator

William Leo Meaney - President, Chief Executive Officer & Director

If there's no – it doesn't look like there's any further questions, operators. So first of all, I guess we'd like to thank everyone. I know it's a busy time of the year for dialing in and listening in today. And again, we're very excited that we think we've had a very good quarter, which is more importantly is giving us a very strong foundation and entry point into the Recall acquisition which we're really excited about. And the company hasn't done an acquisition that is this transformational probably since the Pierce Leahy acquisition, which was done my predecessor. So we're really looking forward to taking the strong quarter, layering on what Recall can bring as a next stage for growth in the company both in terms of cash flow and dividend growth.

So thank you again and look forward to speaking to you next quarter.

Operator

Thank you, ladies and gentlemen. This does conclude today's call. You may now disconnect.

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