鐵山公司 (IRM) 2016 Q2 法說會逐字稿

Good morning. My name is Andrea and I will be your conference operator today. At this time I would like to welcome everyone to the Iron Mountain Q2 quarter conference call.

(Operator Instructions)

I would like to now turn the call over to your host, Ms. Melissa Marsden, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Andrea, and welcome, everyone, to our second-quarter 2016 earnings conference call. This morning we will hear from Bill Meaney, our CEO, who will discuss highlights and progress towards our strategic initiatives, followed by Rod Day, CFO, who will cover financial results. We also have Stuart Brown, our incoming CFO, with us on the call today. After our prepared remarks, we will open up the phones for Q&A.

As we've done for the past several quarters, 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 2 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, the earnings commentary, 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 are actual results to differ from those in our forward-looking statements.

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

With that, Bill, would you please begin?

Thank you, Melissa, and good morning, everyone. We are off to a very good start after our May 2 closing of the Recall's acquisition. The base Iron Mountain results continue to show financial and operating performance which is consistent with quarter one.

Synergies from Recall's are coming in faster than anticipated in 2016. And based on all this, we reconfirmed the full-year guidance we gave back in April.

We are also pleased to welcome Stuart Brown as our new CFO. Stuart officially joined us last week and I how he's looking forward to getting more engaged in the business and meeting with our investors and analysts. Stuart has a unique blend of both global operating company and REIT experience, and I know he will be a great fit with our executive team. And whilst we're sad that Rod will be leaving us, he will be around for a few months yet to ensure a smooth transition to Stuart.

Turning now to our progress on Recall's benefits and integration, first, just to summarize, overall the acquisition makes us the only global platform in our industry as we continue to expand our ability to meet customers' information management and storage needs as they face increasing regulation, ongoing cybersecurity threats and seek to turn information into business value. As we've noted in the past, this transaction has three core benefits.

First, it enhances our global footprint, particularly in emerging markets. Second, it strengthens our ability to reach mid-market businesses where Recall's was very present and Iron Mountain was significantly underrepresented in this very large and high-margin segment. And third, the level of synergy enables significant growth in AFFO and cash available for distribution.

This rapid and large expansion of cash flow allows us to simultaneously invest in new product and innovation for the benefit of our customers, significantly grow our dividend, while simultaneously delivering and markedly bringing down our payout ratio. Finally, this acquisition further supports the trust our customers have in Iron Mountain to serve both their current and future needs. Trust in Iron Mountain to protect what matters most trust, trust that Iron Mountain will be available to continue to support them in 50 years time, and trust in Iron Mountain to continue to use its scale for innovation and to provide expertise, products and services designed to get the most out of their overall storage and information assets.

In the customer interactions we have had since closing the acquisition, the commentary has been very positive as they can see how we both have the intention and the resources to be even more innovative. An example of our product innovation was reported in a recent Bloomberg profile highlighting the work we are doing on behalf of MTV as they celebrate their 35th anniversary.

On a more operational note, I'm pleased with the team's work to welcome new customers and begin integrating operations. During the second quarter we accomplished a number of critical integration related initiatives whilst continuing to pursue our transformation agenda. And we delivered internal storage rental revenue and volume growth in the base Iron Mountain business consistent with the growth we saw in the first quarter of this year. In short, we kept our eye on the ball despite all the activities surrounding the Recall's close.

More specifically, since the closing on May 2, our integration progress includes several key initiatives. We completed our review of Recall's leadership and immediately brought the management teams together, enhancing our organization through the retention of key former executives to lead areas such as customer experience, mid-market and SMB sales, as well as key finance roles in a number of country and territory management positions.

We converted Recall's operations in four countries into our REIT structure. We completed the disposition of Recall's business in 23 US markets, as required by the United States Department of justice. We received final clearance from the United Kingdom Competition and Markets authority.

We solicited and are currently evaluating bids on required dispositions in additional jurisdictions. We began a portfolio review of both companies' service offerings to determine optimal platforms for ensuring continued superior customer service. And we undertook real estate reviews in select markets and identified initial consolidation opportunities in France, Spain, United Kingdom and Australia, as well as in the United States.

As a result of these and other quick actions and outstanding facilitation from the transitioning Recall's teams we are getting these synergies faster than expected. This means more impact this year. In fact, we will exit 2016 having achieved more than 80% of the total synergies we expected to have achieved by year-end 2017.

We appreciate that given the closing of Recall's a month into the quarter our second-quarter results don't fully reflect Recall's contribution. And as we noted on last quarter's call, Q2 margins would reflect that Recall's core EBITDAR margins are lower than ours. In fact, Recall's EBITDAR margins have consistently been more than 700 basis points lower than ours. But we saw a bit more impact from that initially given that the assets to be divested and those already sold are among the higher-margin markets in their portfolio.

You will recall the execution of our integration program increases the Recall base margin business by pulling two levers. First, in the near term we are achieving synergies in SG&A and labor costs. And, second, in the medium term we will improve our operating leverage as we consolidate facilities.

Rod will have more detail shortly and walk you through the buildup to our full-year expectations. In brief, when we prorate year-to-date results, add in accelerated synergies, second-half transformation benefit and typical ramp we see in the business throughout the year, we are comfortable slightly raising the bottom end of our guidance range relative to what we provided back in April.

Now turning to some of the quarter's results at a high level before Rod walks you through the ins and outs that can also be found in the bridging graphs in our supplemental report. Total revenue growth in constant dollars was 19% with similar growth rates in constant dollar storage, rental and service revenue.

On an internal basis, storage growth was 2.1% and in line with levels achieved in Q4 and Q1. We continue to expect average storage rental internal growth to be around 2.5% for the full year. Internal volume or prior to acquisitions was positive in all segments and consistent with recent quarters' performance at 1.7% worldwide growth.

Service revenue was flat over last year reflecting the variability and timing of projects. However, based on our service pipeline we continue to expect positive internal service revenue as well as service gross profit growth for the full year. As mentioned previously, given our expected service mix we will maintain our focus on increasing service gross profit rather than purely gross margins.

Our new service offerings are sometimes lower margin but generate attractive returns due to the minimal capital investment required. Consistent with this focus you will note service gross profit was up more than 18% in a second quarter, exceeding the growth in constant dollar service revenue.

Turning to progress on our strategic plan, during the quarter we continued to advance each of the three pillars of the plan as well as the foundational elements that support it. I will quickly highlight progress in each of the three pillars -- namely, getting the most out of our developed markets, increasing our presence in the fast-growing emerging markets, and expansion in faster growing adjacent businesses.

In developed markets, which includes both North America RIM and our Western European segment, we had 3 million cubic feet of internal volume growth during the quarter. 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 emerging markets supports that objective and has helped drive our emerging market business to 16.4% of total revenue on a constant dollar basis as of the end of Q2.

Additionally, as our visibility on closing of Recall's transaction became clearer, we resumed acquisition activity and moved into new emerging markets during the year. Earlier this week we announced plans to acquire the information management operations of Santa Fe Group in 10 countries, mainly in Southeast Asia, for approximately EUR27 million. The deal also marks our entry into four new emerging markets -- Macau, the Philippines, Indonesia and South Korea -- as well as further bolstering our already strong positions in Hong Kong, Singapore, India, Taiwan and Malaysia, providing a great foundation for further expansion in this dynamic and higher-growth region.

We continue to nurture a deep diverse pipeline of accretive M&A opportunities in emerging markets where we can leverage our global footprint and deep customer relationships to capture the initial wave of records management outsourcing that is in the early days within these faster growing markets.

Before turning away from our international operations I should comment on Brexit. Importantly, we don't expect to see a significant impact. We have built scenarios related to the potential implications of the decision, with particular focus on our customers, our supply base, our staff, and the regulatory and fiscal frameworks in which we operate.

We will continue to monitor developments closely and watch for any shifting legal obligations governing the management of information. But as other multinationals have acknowledged, it will be some time before any meaningful movement toward an exit from the EU gets underway. In terms of our core business, it is unlikely to have much impact from a constant currency perspective. We're generally naturally hedged.

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. In our data center business we had several recent big wins, bringing us to 80% committed in our first phase building in our above-ground facility in Boston. Combining our Boston facility with the undergrounds in Boyers, Pennsylvania and Kansas City, Missouri, our data center space is greater than 90% committed and we are on track to achieve internal growth approaching 20% in this business area.

In our art storage business we are making good progress and acquired another small business, a good example of what we believe will be a long-term consolidation play.

Overall, between the progress we're making in emerging markets as well as adjacent businesses, we are well on track to achieve our combined goal of having the expansion of our emerging market presence and adjacent yield 25% of our total revenue mix by 2020, which is up from about 17.5% of our total business mix today.

In terms of supporting foundations for the plan we continue to make progress on our transformation initiative to remove $125 million in SG&A. Also, as previously disclosed, the remaining $25 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.

Given the timing of Recall's synergies, our transformation program, and expected ramp in the business, we remain confident that cash flow will be in with the growth expectations we highlighted during Investor Day and again on our April 1 call, which provides the foundation for our expected dividend growth. As a reminder, we expect to grow dividend per share by about 13% in 2017 as the synergies and transformation benefits flow through our results, and by an additional 7% in 2018 and 4% annual growth thereafter, whilst also funding core growth racking, M&A and overall investments in support of our previously presented 2020 plan.

As we progress this plan, we will have more cash available to support discretionary investment, which means we will borrow less to fund our growth and continue to delever. And at the same time we will reduce our payout ratio as a percentage of AFFO.

Our operations are underpinned by our 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 capturing opportunities in both emerging markets and adjacent businesses, and continuing to enhance our cost structure in both service and overhead.

Our durable storage business generates roughly $1.9 billion of annual storage net operating income, which exceeds that generated by leaders in both the industrial and self-storage sectors. What distinguishes our business is its inherent durability, and it is this durability that delivers consistent levels of operating performance in both good and bad times.

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

Thanks, Bill. I will begin today with a high-level overview of our second-quarter and year-to-date performance, which included a two-month benefit from the Recall acquisition compared to the prior year. In addition, I will review our results by segment, provide an update on our transformation initiative, and summarize our successful bridge loan refinancing. Lastly, I will touch on the strong progress we're making integrating Recall into our business, as well as our outlook for 2016 which remains essentially unchanged since April.

Let's turn to our worldwide financial results. Consistent with prior quarters we have provided bridging schedules for total revenue, adjusted OIBDA, adjusted earnings per share, and FFO per share to explain key variances in our year-on-year performance. These schedules can be found on pages 21 through 24 of the supplemental.

Let me briefly walk you through the highlights. For the second quarter, total reported revenues were $884 million compared with $760 million in 2015. Excluding the year-over-year negative FX impact of approximately 2%, or roughly $17 million, on a constant dollar basis revenues grew by 18.6%.

For the first half of the year, reported revenues of $1.63 billion compared with $1.51 billion in 2015. Excluding Recall and other smaller acquisitions, total internal storage rental revenue was up 2.1% for Q2, consistent with the growth we saw in Q1. In contrast, internal service revenue was down 2.1% compared with growth of 1.6% we saw in Q1.

As we noted on our last call, service revenues are more project-based, which have more volatile growth rates on a quarter-on-quarter basis. Based on our review of our service deal pipeline we continue to expect internal service revenue growth to be positive for the full year.

Total adjusted OIBDA for the quarter was $261 million compared with $223 million in 2015. We grew adjusted OIBDA by 17.1% on a reported dollar basis and by 18.8% on a constant dollar basis. Year-to-date adjusted OIBDA grew by 9.3% reported dollar and by 11.6% on a constant dollar basis.

As we noted on our Q1 call, Recall is a lower-margin business than Iron Mountain, therefore, as expected, our adjusted OIBDA margins were lower relative to the first quarter of the year. This impact flows through to our adjusted EPS, FFO per share and AFFO results. As synergies build in future quarters this picture will be reversed.

Adjusted EPS for the quarter was $0.24 compared with $0.28 in 2015. Year-to-date adjusted EPS was $0.55 new compared with $0.60 and in. In the second quarter adjusted EPS was impacted by the amortization of Recall's customer relationship values and the increased depreciation expense of Recall's legacy racking structures.

The amortization expense of customer relationships flows through to FFO per share; however, the increased depreciation does not because real estate depreciation is excluded from FFO per share. FFO per share was $0.47 for the quarter compared with $0.49 in the year-ago period.

Year to date, FFO per share was $0.98 compared with $0.99 in the year-ago period. AFFO was $159 million compared with $131 million in the year-ago period. Importantly, AFFO was not impacted by the increased depreciation and amortization expense in the second quarter, as these are non-cash items and do not impact our AFFO or cash available for distribution.

Year to date, AFFO was $301 million compared with $259 million in 2015. AFFO for the year to date is at the high end of our expectations. However, we expect remain within our ranges for the full year.

Similar to prior quarters, on page 20 of the supplemental we are 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 typically of a recurring nature.

Our structural tax rate for this quarter came out to 17.2% compared with 13.9% in the prior year. Expected year-over-year increase in our structural tax rate was mostly driven by the legacy Recall business, which had higher exposure to international markets with their respective foreign tax rates, and which do not have the same tax efficiency as we do in the US with the REIT structure.

Also, the tax rate this quarter is below the previously communicated run rate expectation of 20% as our pretax income was impacted by Recall's integration and deal costs. For the remainder of 2016 we expect our tax rate to be approximately 18% as a result of these Recall costs. However, beyond 2016 we expect the tax rate to be closer to 19% to 20%.

Let's turn to our financial performance by segment. In North American Records and Information Management, or RIM, internal storage rental revenue increased by 0.7% for the second quarter. North American RIM internal service revenue declined by 1.2%. Growth in shredding and scanning was offset by declines in core transportation.

North American Data Management, or DM, delivered storage rental internal growth of 1.3% for the second quarter. Internal service revenue in DM declined as we continued to see reductions in the frequency of tape rotation and related transportation activity, partially offset by strong growth in new data management offerings.

In addition, we had a large project which benefited the prior-year periods. After normalizing for this, DM service revenue performed in line with prior quarters. DM adjusted OIBDA margins improved year over year due to a decrease in overhead costs, as we continue to realize transformation benefits.

The Western Europe segment generated 0.1% internal storage rental growth, and internal service revenue declined by 4.6%, primarily as a result of lower activity in transportation-related revenue and lower project revenue. The low internal storage growth in Western Europe was due to a large customer win in the year-ago period and certain contract negotiations that occurred this quarter. Adjusted OIBDA margins improved year over year in Western Europe due to lower G&A expenses.

The other international segment, which is made up primarily of emerging markets and Australia, showed strong growth in both storage and service revenues. Internal storage rental growth was 8.6% and internal service growth was 5.3% for the quarter. Other international adjusted OIBDA margins were 25% for the quarter, in line with our expectations.

We are pleased with the progress we made with our transformation initiative. During the second quarter we did not incur significant costs related to transformation, but the focus was not headcount related, rather it was on streamlining business processes. Year to date we've actioned $28 million of the $50 million exit rate savings and have line of sight on the incremental $22 million to be implemented by the end of this year. Our overall savings outlook for transformation remains consistent with what we laid out at our Investor Day in October, with $25 million of accumulated savings by 2018.

Let me now talk about the Recall integration progress and provide details on the costs we've incurred so far in 2016 to achieve synergies and integrate Recall within our business. As Bill explained, the synergy program is ahead of schedule. As you can see on the supplemental on page 25, we expect to exit this year having already achieved more than 80% of the total synergies originally anticipated for 2017.

Our expectations of total costs to achieve the target synergies are still consistent with prior projections. Because we are accelerating synergies to set us up for a strong rate for 2017, we expect to incur roughly $10 million more in costs in 2016 than originally contemplated. Year to date we've incurred $37 million of integration costs and $32 million of deal close costs.

Additional details can be found in our 10-Q which will be filed later today. Please note, these expenses are excluded from our adjusted OIBDA calculation, as 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 given the durability of our business. We remain on track to achieve our short- and long-term financial objectives.

Please note that although our guidance assumes divestitures would occur on day one, the benefit for businesses yet to be divested that are running through our operating results are not significant. Some legacy Recall assets were sold to Access nearly at the same time as the close, so they are not reflected in our results. The remaining legacy Recall assets to be sold are included in discontinued operations, therefore not flowing to our operating income.

Lastly, the remaining Iron Mountain assets to be disposed of are flowing through our financials; however, with an immaterial benefit for the quarter and full year.

Overall, our core Iron Mountain business is performing to plan. Recall contribution is tracking in line with our previous expectations, and we have accelerated the realization of net synergies for the year, which is why we bought up the lower end of our adjusted OIBDA guidance by $5 million.

Let me now refer you to the table at the bottom of our guidance page on page 12 of the supplemental to follow our expectations for full-year adjusted OIBDA. We thought it would be helpful to cover how results track against our original expectations. But please note we will not be reporting actual results separately given our financial statements are now fully integrated.

Our standalone expectation for Iron Mountain's core business remains $950 million to $970 million, consistent with what we previously communicated. And our performance in the first half of the year is tracking right line with our expectations.

For the second quarter, excluding Recall's base and synergies less divestitures, Iron Mountain's standalone adjusted OIBDA was in line with Q1 results of $235 million. So, year to date Iron Mountain standalone adjusted OIBDA was roughly $470 million.

In the second half of the year we expect to realize $7 million to $10 million of transformation benefits to offset costs associated with that program in the first half. We also expect a ramp in the business as our storage base continues to expand. This ramp is consistent with 2015 during which second-half years results were $10 million higher than the first half on a reported dollar basis. You annualize the first-half actual run rate, add transformation benefits, and a similar ramp to last year, standalone expectations are in line.

Now let me address the second line related to Recall's contribution for the year. Prior to divestitures, we expect the recall business to contribute $115 million of adjusted OIBDA at the mid point. This reflects eight months of Recall contribution. And our range implies $13 million to $15 million per month of contribution prior to synergies and divestitures.

Lastly, we are expecting $18 million of adjusted OIBDA synergies, net the impact of the divestitures for the year. As Bill noted, this is up from #our initial expectation of $15 million. As a result, our adjusted OIBDA guidance range for 2016 is now $1.075 billion to $1.11 billion.

For adjusted EPS, our guidance remains unchanged. Although our expectations for the structural tax rate are lower than previously anticipated, this benefit will likely be offset by the accelerated depreciation of Recall racking structures.

Although our total normalized dollar AFFO guidance remains the same, we changed our FFO per share guidance to reflect where we expect the final weighted average share count will settle for the year. We did not update adjusted EPS for this impact because the benefit is offset by the incremental real estate depreciation expense mentioned earlier.

Please also note that constant dollar guidance remains close to reported dollars. Assuming current rates hold we do not see a downside from FX in our guidance.

Moving to our expected cash available for distributions and investment for 2016, we continue to estimate that it will be roughly $600 million. This provides ample funding for dividends and core growth racking investments.

Our capital deployment plans for 2016 are unchanged. We continue to expect capital expenditures, which include real estate and non-real estate maintenance, and non-real estate investments, to be in line with the figures we provided on our last earnings call, and to total $170 million for the year.

Our expectation for total real estate investment spend remains $320 million. This includes $70 million in core growth racking investments. And the remainder of our real estate spend is expected to be real estate consolidation, development, data center and some lease conversions.

As we've said in the past, we are focused on consolidated facilities, particularly given the Recall transaction. We expect real estate consolidation will provide upside to synergies in the long term, but it is too early for us to quantify the exact benefit at this time.

For M&A we continue to expect to spend roughly $150 million, with approximately $100 million in emerging markets, $50 million in developed markets.

Dividend expectations remain consistent with our previous guidance for 2016. Our dividend per share is expected to grow from $1.94 this year to a minimum of $2.20 in 2017 and $2.35 in 2018, as we realize the majority of benefits from the transformation savings and Recall synergies. Beyond 2018 we expect to grow dividend per share at roughly 4% per year.

Importantly, our dividend payout ratio as a percent of AFFO is in line with prior expectations and should reduce to 70% by 2020, which underscores the strength of our dividend coverage. In addition, we're targeting a leverage ratio of 5.0 times by 2020.

Shifting briefly to the balance sheet, at the quarter end we had liquidity of approximate $580 million, and our lease adjusted debt ratio was slightly up at 5.8 times, as expected. Our leverage ratio increased primarily as a result of the timing of Recall integration and deal costs discussed earlier. We expect to end the year at a leverage ratio at 5.7 times as we start realizing synergies and transformation savings.

As many of you may already know, we refinanced the $850 million bridge facility associated with the Recall transaction primarily with long-term debt. We raised $750 million in aggregate principal amount and senior unsecured notes, which included $500 million at 4-3/8 due in 2021 and $250 million at 5-3/8 due in 2026.

Our unsecured debt was priced at spreads similar to business services issues rated 2 notches higher than Iron Mountain and at the top of the spread range for our investment grade issuers, which reflects debt investors' favorable view of our predictable cash flow. In addition, we also amended our credit agreement and extended maturities to 2019.

So, overall we are pleased with the performance we saw in the second quarter and year to date. Our results are driven by the durability of our business and execution of our long-term plan. We are excited with the progress we've made so far in integrating Recall, and pleased that we will be realizing synergies earlier than expected.

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

I'll now hand the call back to Bill.

Thank you, Rod. To wrap up before going to Q&A, just to summarize, we are off to a very successful start after closing Recall and having accomplished what we set out to do in the first three months since closing. We've made great progress on integrating Recall's people, platform and portfolio.

We are on track with our financial expectations for the year and, in fact, slightly raised the lower end of our range for the full-year guidance. And, additionally, we like what we see as we look at our exit rate from 2016 and our entry into 2017. Overall, we are excited by the potential we see to realize the benefits of combined scale with Recall, and look forward to updating you on continued progress next quarter.

Before I turn it over to questions I should say that I think our transformation program probably has reduced the caffeine in my coffee in the morning, so I did, I think, misstate that Access -- we sold 23 US markets to Access. I meant to say 13. 13 is much better than 23. And I will talk to the transformation folks to put the caffeine back in my coffee.

With we, operator, I would like to turn it over to Q&A. Thank you.

(Operator Instructions)

Shlomo Rosenberg [sic -- Rosenbaum] with Stifel Nicolaus.

It's Shlomo Rosenbaum over here. A couple things I want to ask. One of them is around what looks like the destructions and the out-perms. If you would, particularly at the out-perms in Western Europe international, it looks like in the last couple quarters you are seeing some acceleration over there in terms of volumes. Can you give us some color on what exactly is going on there?

Sure, Shlomo. First of all, let's look at the absolute net volume. So, if you look at Q2 2016 this quarter, you will see that out-perms and destructions, if you subtract that from new sales and organic growth, you have a net before acquisitions of 3.8% growth versus a Q1 of 3% growth. So, the net growth has actually increased.

But coming to specifically your question about what's going on with out-perms is the 2.3% in Q1 of 2016 is not out of norm. So, if you go back and you look at the supplemental on page 11, you will see that over the last, let's say, year and a half or, you will see going back into Q3 of 2014, it goes somewhere between 2.1% and 2.3%.

Where you really see the spike is in the Q2 2016 number where you see that go up to 2.6%. So, it's really a Q2 issue. But, as I say, the net volume is positive.

For those that followed Recall, there was a program that Doug would euphemistically call close the gap, and the two things he referred to was the 700 or so basis points lower gross margin that their business yielded in terms of their overall business. And the other thing is he highlighted the level of out-perms that they had relative to ours.

Where we see the roughly 30 bps increase in out-perms from Q1 to Q2, that's driven by merging Recall's business into ours, which we knew had a higher volatility or a higher turn in that. But you will see that come down over time because obviously we are wrapping the same customer loyalty program, which I think we've spoken on previous calls, where, with outside help, we built an algorithm that helps predict 6 to 12 months ahead of time certain customer issues that prevent the out-perms.

So, they had a higher out-perm. Was it the nature of their business? Or, based on what you are describing, it sounds like they didn't have as effective a customer outreach as what Iron Mountain core had. Is that the way to think about it?

Yes, it is the latter. So, Doug used to comment on his calls, they only did half-year results, but it is exactly that. They did not have the same tools. And, in fact, three years ago we basically introduced the tools -- I can't take credit for it, they started the work before I came in -- but we started ramping up just as I came in. And you would've seen the same decrease in Iron Mountain's business.

One of the things that Recall had is they couldn't afford to take the investment that we did. We brought in some outside help and advisors that know how to build these tools.

And it looks at a number of different things. It looks at volume through the call center, it looks at number of boxes coming in, it looks at the types of complaints that we're getting from our customer. There's a number of different things that you pick up the last time we gave them a price increase.

You look at those different pieces of data and it is pretty accurate in terms of predicting when you are heading for a crisis with that customer, and that you can intervene. I forget exactly what their number was but it was significantly, it was at least a full point higher than ours in terms of the out-perms. And you're seeing that averaging when we go from the 2.3% to the 2.6%.

So, it isn't structural in the Recall business. It was much more, they just didn't have the same tools and sophistication that we introduced, say, three years ago.

Bill, did you have a chance to go back, now that you've owned the Company, and a look at how many of the out-perms that they were experiencing actually were incoming to you guys and do an analysis on that?

A great question and I wish I could have gotten the DOJ -- the DOJ asked the same question and I wish I could have gotten them to be data-driven. Actually, the loss ratio, the win and loss ratio between us and them was actually much smaller than you would think. We like to say we competed against each other, and we did, but, actually, generally they lost to somebody else and we lost to somebody else.

I think we've talked about it previously. They have taken business from us, there's no question about that. But where they were much more present was in that middle market and SMB space. So, they were winning and losing against much more the smaller players.

We are actually quite excited about it, to be honest with you. Their head of sales for North America now runs our whole mid-market SMB segment. And that business is, I think, approaching almost $800 million -- I think $750 million -- of sales if we combine the two companies. So, it is of the same size as what Recall was globally just in North America, and we think we can do a better job. So, they were losing typically to other people and we were losing to other people, for the most part.

All right, thank you.

George Tong, Piper Jaffray.

Hi, thanks good morning. You're substantially pulling forward Recall synergies, about 80% of total synergies previously expected, by the end of 2017. That said, OIBDA guidance for the full year is not meaningfully increasing. Can you discuss what incremental headwind you expect in the back half that are reflected in guidance?

It is a good question, George, but it is more the math. It's not as big a delta as you think because you have to look at what the translation of the $15 million -- because the way the synergies flow in during the course of the year what we get for impact in 2016, which is small, leads to a very high exit.

I'm trying to remember the number. I'll ask Rod to comment. I think we were, before, the 15% translated into around $60 million, $65 million, and the 18.5% translates into around $80 million. But we were always going to achieve a very high percentage, just we weren't going to achieve 80% before in terms of going into 2017.

George, our exit rate is 80% of next year as opposed to the in year being 80% of 2017. So, in year, we're net $3 million higher. But that translated to quite significant improvement in the exit rate that we have for next year and sets us up really nicely for 2017.

So, it's not that the number's gone up and we're using that to cover for other things. That's not the case at all.

Yes, it's just that we are getting it faster. It is a speed but it gives you an idea that when we get into 2017 we are cracking the back of it. We were always going to crack the back of it 2016. We are even cracking a bigger part of it in 2016 than we originally thought.

Can you remind us what the 80% previously was in terms of exit rate?

I think it was around 70%, right? We will give you the exact number. I think it was about 70% because it was 60% on 90, right? So, I think it was about 70%.

It was of that order, George, 65% to 70%.

Got it. Okay. That's helpful. Can you provide some additional details around how records management volumes performed in Recall's business compared to recent historical trends and expectations?

Say that one more time.

Basically, how Recall's volumes performed relative to our expectations and relative to their historical trends.

In terms of their first historical trends, pretty much as we expected, other than we expected, as I answered to Shlomo, we expected that the out-perms would be higher. And that pretty much translated straight across because we could see that in the results. The growth in opportunity we see in the middle market is pretty much what we expected.

So, the trends of merging their business into ours, we're pretty much on track. The margin that both I commented on and Rod commented on, we commented on last quarter before we closed, we knew that that was the case.

I think the one thing that has been -- so, it has been more of an upside. And I think the upside has been more around the people. Not that we expected to get bad people but I think when you buy a competitor you always think that they are different than you, and when you are talking to customers you typically demonize the competitor.

And, guess what? They have blood flowing through their veins just like us, and we've gotten some really good people as a result of it. And they had almost identical values in code of conduct as we had. In fact, the lay the two slides up next to each other, we did it at a town hall, and they're virtually almost the same. So, I don't know who copied from who.

We've actually, probably, if anything integrated the people much quicker. And when I say integrated, not just get them into slots but people feel like they've been around a lot longer than they have, if you know what I mean. In other words, they didn't spend a lot of time trying to figure stuff out or adapt to a new culture.

So, that part's been better than we thought. But in terms of the way the numbers have flowed in, we have not found any surprises.

Got it, helpful. And then, lastly, could you provide an update on services trends, if you are seeing continued signs of stability or any potential risks to growth ahead?

It is a good question. I think we also foreshadowed at the last quarter that we thought we would see a drop in service revenue, that the next Q2 wouldn't be as strong as Q1. So, obviously we could see the pipeline and we knew how that worked.

The one thing that I think, again we commented last time, is that as we shift more to project-based rather than transportation-based service revenue, we do expect it to be pipeline dependent, and therefore more project, and therefore more lumpy. So, it is much easier to predict that if you look over 12-month period than if you look at it on a one-month or even a three-month period.

As that as a backdrop, if we look forward to the rest of the year, we like the bookings and the pipeline that we see for the rest of the year. We are very confident that for the total year we will see positive service revenue growth, which obviously means that the new services are offsetting the declines that we talked about in the transportation, which is driven to the structural shift in the way that the information is being used.

So, we feel very good that for the full year you will see a trend that's consistent with Q1 as the pipeline turns into bookings and turns into projects that we see in front of us.

Very helpful. Thank you very much.

Andrew Steinerman, JPMorgan.

Hi. If it is okay I'm going to dive back into North American tapes decline. I just don't quite get how the minus 13.5% organic services decline in North American tapes has to do with a large project from a year ago. The decline in that business is 7 points worse than the first quarter decline, but the comp year over year is only 4 points, lets call it, less easy. So, when I see this 13.5% decline versus a year ago, minus 1.7%, it just doesn't seem like the year-over-year comparison explains it all.

It is a good question, Andrew. First of all, that business also includes film and sound, which is very project-dependent. A year ago we had a very large project with one of our film and sound customers, and that project fell off.

So, if you normalize for that, what you see is roughly the 9% to 10% reduction in transportation that we've been calling out quarter by quarter. And the new services have been offsetting that between 40% and 50% of that decline.

So, the net decline, and you will see that going forward, as well, is the net decline as the new services replace some of the transportation as the tapes are becoming more for disaster recovery rather than for rotation, then you will see that the typical 9% to 10% decline in transportation, and being offset by 40% or 50% by the growth in new products. But specifically, our data management business includes both the data protection and the tape business, as well as our film and sound business, which we had a very large project for a studio.

I got it. I think what you just said was the transportation business was down about the same as first quarter, we had some more new services in the first quarter, expect more of it for the rest of the year, but not as much in the second quarter, we had a large project a year ago?

No. The first part was right, but we had the same amount of growth in the new service products in Q2 as we did in Q1. So, roughly what I'm saying is that what you can expect is that -- the underlying business in Q2 was like Q1, if you took out the large project. So, you had transportation going down to 9% to 10%, and then you had new services offsetting about 40% to 50% of that decline.

So, in other words you wind up net in the mid single-digit decline in terms of the service revenue of that business. And we expect that trend to be similar in Q3 and Q4.

Yes, it was at this time of Q2 last year, this film and sound project. It screws up the comparison. But Q3 should be about normal.

And that was just one quarter, right? We don't have any tough comps on the film project going into the second half, right?

No, it was a Q2 issue.

Okay, thanks for the time.

It was a nice issue to have last year, I should say. I'm not saying that having large projects is an issue. It is just explaining it a year later how they roll out.

I'm sure it was a fun project. I appreciate it, thank you.

[Joseph Hall], Robert W. Baird.

Thanks, good morning guys. I wanted to ask a little bit just for an update on pricing trends, particularly in Europe, given that the organic volume gains were up pretty nicely, but total organic was flattish. I think you mentioned some contract renegotiation. So, maybe just an update on what's going on in the pricing environment would be helpful.

In Western Europe we had a couple of things, one affected last year, and then also impacting this year. So, in Q2 of last year we actually had a gain as a result of some renegotiations that went on at that point to do with a specific object and a specific customer. This year we had a couple of customers that went the other way in terms of their renegotiations that we had, which obviously you have a strong quarter last year and a relatively weak quarter this year, so you got double impact in terms of the growth rate.

I think in terms of overall, you strip that out and talk about overall pricing, in Western Europe we do see modest price erosion over time because we have quite a high price legacy base. That's a phenomenon that you'll see if you look in some of our historic numbers. That's not the case, say, for example, in North America, which is obviously a much larger business where the legacy base price is more consistent with the price that we get today.

And just to illustrate Rod's point, typically in the UK you see prices in p that you see in cents in the US. That was even more interesting before the Brexit. But, anyway, you do see this range in terms of the high legacy pricing in Europe.

Thank you. That's helpful and that makes sense. Then my second question is really just a clarification just to make sure that we have the right numbers. With the accelerated synergy benefits, it looks like for 2016 now you've got $18 million in net synergy benefit versus $15 million previously. But 2017 is still the same $80 million net synergy target, is that right? And then what's the ultimate synergy target? That's still unchanged, the $105 million?

What we've always said is that was a minimum synergy target. And we will see as we get closer to 2017 and into 2017 if that speed also translates into more. Right now it is speed. But I think we've always said that once we start really understanding the consolidation opportunity, there could be more. But right now I would keep your 2017 guidance and the overall synergy number where it is. So, you are absolutely right, it is about speed right now.

I think that's right, Bill. I think at this stage it's a bit of upside this year sets us up great for next year in terms of confidence around that number. But no change in the total yet for 2017. The big item we are looking at at the moment is real estate consolidation, which we've always called out as a potential upside further down the line. But it is still early days in terms of the analysis there. I'm sure we'll be updating in quarters to come on that.

Great. Okay, that make sense. Thank you.

There are no further questions at this time.

Okay, thank you very much and I hope you all enjoy the rest of your summer. Have a great Labor Day and we will speak to you on the Q3 call.

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