鐵山公司 (IRM) 2016 Q3 法說會逐字稿

Good morning my name is Quashia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Iron Mountain Q3 earnings conference call.

(Operator Instructions)

Thank you. Miss Melissa Marsden, you may begin your conference.

Thank you, Quashia, and welcome, everyone, to our third-quarter 2016 earnings conference call. This morning, we will hear first from Bill Meaney, our CEO, who will discuss highlights and progress toward our strategic initiatives, followed by Stuart Brown, CFO, who will cover financial results and guidance.

After our prepared remarks, we will open up the phones for Q&A. As we've done for the last 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 investorrelations/financialinformation.

Referring now to page 2 of the supplemental, today's earnings call and presentation will contain a number of forward-looking statements, most notably our outlook for 2016 and 2017 preliminary financial and operating performance. All forward-looking statements are subject to risks and uncertainties.

Please refer to today's slides, our 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 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 those measures as required by Reg G are included in the supplemental reporting package.

With that, Bill, will you please begin?

Thank you, Melissa, and good morning, everyone. We're pleased to be reporting a solid quarter, and I am also happy to be partnering with Stuart Brown for his first Iron Mountain quarterly conference call. Stuart has been on board since the time we reported Q2, and has been spending a lot of time in the field familiarizing himself with the business and working closely with Rod during the transition. Stuart will deliver financial highlights in just a bit.

For the third quarter, we delivered revenue and adjusted OIBDA results right in line with our expectations, and notably drove our adjusted OIBDA margins back to 31.2, more in line with historical norms prior to integrating the historically lower margin Recall business. In addition, we continued to see consistent trends in our core business with positive internal storage rental revenue and volume growth in developed markets, a greater portion of our revenue coming from faster growing emerging markets, and good momentum in our adjacent business segment, particularly data center.

As noted last quarter, due to our quick actions, we are getting Recall integration synergies faster than expected. In fact, we now expect to exit 2016 having achieved more than 85% of the total synergies we expected to have achieved by year-end 2017, this is up from 80% in our Q2 call, and we continue to expect in-year synergies to be $18 million.

It is this achievement of getting synergies faster and the added benefit from our transformation initiative, which is the fuel that allowed us to increase the dividend per share starting in Q4 by 13%, from $0.485 to $0.55 per share. As you will recall, this is in line with what we laid out at our investor day a year ago but we are achieving it a full quarter earlier, despite closing the Recall transaction later than originally expected.

Before going into Q3 performance, let me first provide a little more color on the Recall integration. As we've noted in the past, the Recall transaction benefits us in three primary ways.

First, the level of synergy enables meaningful growth in AFFO and cash available for distribution, which funds increasing dividends and provides cash for continued investment in the business, all whilst over time delevering. Second, it strengthens our ability to reach the high-margin mid-market business where Recall had a strong presence compared with Iron Mountain's enterprise focus. And third, it enhances our global footprint, particularly in emerging markets, giving us more exposure to these faster growing and attractive markets.

As noted in the past, integration efforts will increase the Recall base margin business, which has historically operated at 600 to 700 basis points lower than ours in three areas; SG&A, labor, and in the longer term real estate consolidation benefits. We also continue our detailed review of our real estate platform as we consider further consolidation opportunities, which we believe can provide additional benefit over time.

Further, the growth in cash flow allows us to invest in new products and innovation for the benefit of our customers. Innovation around areas from how we bundle services and simplify pricing, to utilizing excess building capacity for other types of storage, to leveraging our sector-leading knowledge to offer technology solutions to our customers.

An example of this is our analytics dashboard that we recently introduced to help records and information managers demonstrate the effectiveness of their information governance programs and uncover the value of their data. The dashboards help them manage retention schedules, improve inventory tracking, identify potential risk and compliance concerns, and conduct internal and peer benchmarking of best practices. In addition to improving tools such as the dashboard, we are also testing better and easier ways for customers interact with us through mobile devices that enable voice recognition.

When we refer to innovation, we're talking about tapping the ideas our customers and employees have for new products and solutions, vetting them, and then incorporating them into our customer solutions and processes in order to further strengthen our differentiation and profitability. We have discussed some of these items previously, such as our emerging partnership with the likes of EMC/Virtustream and now Dell in building Air Gap, which provides customers with the added cybersecurity all of the seek.

It is these innovations and others which not only provide additional value to our customers, but will also add to future earnings growth both as stand-alone products as well as further differentiating our existing offerings. We're planning to host our next investor day in late April 2017, at which time we intend to share a few of these innovation ideas with you. We'll also have about a full year of Recall under our belts by that time.

In addition, we continued to make progress on the dispositions required by the regulators. You may have seen that just last week, we received approval from the ACCC, or the Australian regulator, for the disposition of our legacy business in Australia to Housatonic Partners, a private equity firm. The AUD70 million transaction closed yesterday.

In addition, we continued to make progress on the sale of the required assets in the US, Canada and the United Kingdom. We are pleased with our progress on these dispositions, and will bring you updates as those transactions are approved by the regulators and closed.

We now expect that total dispositions will to generate approximately $185 million in gross proceeds, compared with our initial estimate of $220 million. Whilst this total is a bit lighter than we originally expected, we're pleased with where we've landed and believe the transactions are consistent with our commercial goals in those markets.

Let me now turn to some highlights before Stuart walks you through the details that can also be found in the bridging graft in our supplemental report. Total revenue growth in constant dollars was up more than 27%, with similar growth rates in constant dollar storage rental and service revenue. Adjusted OIBDA, as I mentioned at the beginning, is back to nearly our high levels before the acquisition, with adjusted OIBDA margins up 150 basis points from Q2.

On an internal basis, storage rental growth was 2.6%, and we continue to expect average storage rental internal growth to be around 2.5% for the full year. Internal volume growth, which excludes the initial Recall volume we added when we closed the transaction, was positive in all storage segments, in at 1.8% for the quarter. In short, we maintained our focus even in the midst of the Recall integration related activity.

Year to date, service revenue was basically flat over last year, reflecting the variability and timing of the projects. Based on our service project pipeline, we expect internal service revenue growth to be roughly flat for the full year.

As we've talked about on previous calls, given our expected change in service mix, we continue to focus on improving service gross profit and protecting returns on invested capital, rather than on service gross margins. We continue to focus on driving productivity improvement in our service business, but it's important to keep in mind that 83% of our gross profit is from storage. Whilst we continue to devote a fair amount of attention to how we can grow and enhance our service business, our service lines first and foremost provide a strong differentiation to our core storage business.

Turning to progress on our strategic plan which entails getting the most out of our developed markets, increasing our presence in the fast-growing emerging markets, and expanding and faster growing adjacent businesses, we continued to make progress on each of these pillars and the foundational elements to support them.

In developed markets, which includes both North America, RIM in our Western European segment, we added 3.6 million cubic feet of internal volume growth. North America RIM storage growth was 1.1%, reflecting positive volume growth, this is all before the impact of Recall and any other acquisitions during the period.

In emerging markets, it is important to note that these markets are differentiated through higher levels of internal storage growth of roughly 10%. Our goal is to expand our presence and leverage our scale to drive these markets to 20% of our total revenue by 2020.

You may remember, we announced the beginning of this journey about three years ago where we started at 10% of our sales coming from this fast-growing segment. By the beginning of this year, we had approached 16% of our sales coming from emerging markets, and now, with Recall's footprint, we are at 17.1% of total revenue on a 2014 constant dollar basis.

Whilst we did not close any international acquisitions during the quarter, we continue to expect total M&A investment in the range of $140 million to $180 million this year, having closed on roughly $56 million year to date excluding Recall. More specifically, we expect four significant transactions in the emerging markets to close in Q4, which will utilize about $75 million of the remaining M&A budget. In addition to this final stage pipeline in the emerging markets, there are a number of smaller tuck ins, mainly in developed markets which are expected to close.

An example of this focus and continued execution can be readily seen in our Southeast Asian markets plus China. At the start of the year, this region represented just $14 million of annual sales. With the acquisition of Recall and upon closing the Santa Fe transaction we discussed last quarter, we will have grown our business in this region to annualized revenue of more than $100 million with leading positions in virtually all countries where we operate within the region.

In our adjacent business segment, we're 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 announced a major lease in the quarter in our purpose-built Boston data center with SimpliVity, a leader in infrastructure enterprise IT.

SimpliVity needed data center resources to support its engineering lab, and our co-location solution was the right fit from a cost, capacity, efficiency and security perspective. They noted that our 65-year track record of protecting proprietary assets gave them the confidence to trust a third party with such an expansion.

In addition, a couple of weeks ago, we broke ground on construction of the first building of our 83-acre data center campus in Manassas, Virginia using a development partner for this first 150,000 square foot data center. This building will deliver superior physical security, lower power costs and a reduced tax structure compared to other national locations.

In total, our Northern Virginia data center campus will support 42 megawatts of critical load spread across a planned four individual co-location facilities. This represents a four times expansion of our current capacity.

The first building, expected to open in summer 2017, will offer 10.5 megawatts of critical power and a flexible design that can meet the more exacting requirements of cloud service providers, federal government, system integrators, financial service firms and healthcare companies. It will also comply with federal technology and environmental regulations, enabling federal agencies and integrators to comply by stated deadlines for efficient, sustainable data centers. We're pleased with the momentum we're seeing in the business, and are continuing to manage capacity utilization to stay ahead of demand whilst benefiting from pre-leasing activity in existing markets.

Combining our Boston facility with the undergrounds of Boyers, Pennsylvania and Kansas City, our data center space is greater than 90% committed and we're on track to achieve internal growth of 20 % to 25% in this business area. Whilst we don't break out our data center business separately in our financials, we continue to achieve top line organic growth in this business and we expect to end 2016 with an exit run rate of $25 million in sales, which compares favorably with our 2015 exit rate of $20 million.

In terms of supporting foundations for the strategic plan, we continue to make progress on our transformation initiative to remove $125 million in SG&A. We expect to action an additional $18 million of savings by the end of this year, bringing us to $100 million in run-rate savings to be recognized in 2017. Whilst we did not incur much in the way of additional cost in Q3, we laid the groundwork for improvements to be implemented next year focused on achieving the final $25 million of this $125 million program.

Given the timing of Recall synergies, our transformation program, and positive business trends, we remain confident that we will generate cash flow in line with the growth expectations we highlighted during investor day and updated in recent presentations. This provides the foundation for our dividend growth.

Our newly declared quarterly dividend of $0.55 per share equates to an increase of about 13%, reflecting the benefit of synergies and transformation. Our expectations continue to be to grow the underlying business and cash flow, which will support an increase in our dividend per share by an additional 7% in 2018 and 4% annual growth thereafter, in line with our strategic plan whilst also funding core growth racking, M&A and overall investments.

As we progress our plan, we will generate more cash available to support discretionary investments, so we will borrow less to fund our growth plan and continue to delever. Our operations are underpinned by our very durable growing business that performs consistently throughout business cycles. We have a durable storage business that generates roughly $1.9 billion of annual storage net operating income, which exceeds that generated by leaders in both the industrial and self storage real estate sectors.

Our lack of volatility through economic cycles and business durability clearly distinguishes our business. It is this durability that delivers consistent operating performance with high rates of utilization and stable pricing in both good and bad economies.

Another thing that distinguishes our business is our relative insensitivity to higher interest rates compared with most REITs. First, our customer storage needs our largely unaffected by interest rate movements. Second, our core storage NOI doesn't change with the value of the underlying real estate.

Third, we incur virtually no TIs, or tenant improvements, if a customer leaves and we bring in a new one. Importantly, we have an operating business, and we effectively control real estate through long-term leases with multiple lease extension options and direct ownership in strategic locations of about one-third of our properties.

In an increasing rate environment, this structure reduces our exposure to real estate value fluctuations compared with REITs that own their entire portfolios. Additionally, it should be noted that we generally enjoy higher levels of real price increases during periods with more inflation.

In summary, it was a solid quarter with good execution on all three pillars of our strategic plan, even in the midst of the Recall integration. We achieved solid internal and constant dollar growth, continued volume increases and meaningful expanded OIBDA margins, all of which support increased cash flow and the 13% increase in our dividend per share.

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

Thank you, Bill, and good morning, everyone. Let me start by saying how excited I am to be a part of Iron Mountain, and working with Mountaineers around the globe. The durability of Iron Mountain's records management and related businesses and the substantial opportunity to continue to optimize performance following the Recall acquisition and through our strategic plan is just part of what drew me to Iron Mountain.

I am really pleased that our strong results this quarter demonstrate our ability to execute. There are many opportunities ahead, and I believe it's a very exciting time to be part of the team. Before diving into the details of our financials, let me take a moment and walk you through the key highlights of the quarter.

First, we achieved strong internal storage rental revenue growth of 2.6%, excluding Recall and other small acquisitions. This compares with 2.1% last quarter, reflecting solid underlying business fundamentals and continued volume growth across all major markets. Making up over 80% of our gross profits growth in the storage rental business remains our key execution focus.

Second, we enhanced our profitability. Adjusted OIBDA margins improved by 150 basis points from the second quarter, as benefits from the transformation program and synergies from the Recall transaction flow into our results.

Third, we're making great progress on the integration of Recall, and over 85% of the $115 million of 2017 gross synergies will be in process by the end of this year. Fourth, since June 30, we completed approximately $380 million of debt refinancing at attractive rates, including a recent $50 million mortgage. Resulting in about 74% of our debt now being fixed after paying down the revolver in early October, and that compares to 68% in the second quarter.

Our average maturity was 5.1 years, and our weighted average interest rate was 5.1%. Our Canadian debt offering tied to the lowest coupon ever in the high yield Canadian market demonstrating our debt investor's appreciation of our solid cash flow, and recognition that our leverage is in line with many investment grade REITs.

We remain steadily on track to deliver our short-term financial objectives and long-term goals. And as Bill mentioned, it is based upon this continued demonstration of growth, the durability of our cash flows and capital efficiency that our Board of Directors increased our dividend by 13% to $0.55 per share.

Now that I've covered the highlights, I will go over our worldwide financial results, followed by a review of our performance by segment and concluding with a discussion on our outlook for 2016 and a preliminary view on 2017. Consistent with prior quarters, we've 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 23 through 26 of the supplemental.

Let me walk you through the highlights. For the third quarter, our total reported revenues increased 26.3% or 27.4% on a constant dollar basis. Excluding the Recall and other smaller acquisitions, total internal revenue increased 1.4% in the third quarter compared with a 0.4% increase in Q2. Again with improvement in all regions and segments.

We expect total internal revenue growth in 2016 to be between 1.5% and 2%. Reflecting continued solid performance in our higher-margin storage activities and growth in adjacent businesses, offset by modest declines in service revenues.

Let's look at storage and service revenue performance in the quarter. Storage rental revenue is the core economic driver of our business, representing 61% of revenue and 83% of our total gross profit. As I mentioned earlier, our third-quarter storage internal growth accelerated to 2.6% from 2.2% growth in the first half of the year, and we continue to expect full-year storage internal growth of approximately 2.5%.

Service revenues, which make up 39% of total revenues and 17% of our gross profits, declined 0.5% from a year ago compared to a year-over-year decline of 2.1% in Q2. As we've highlighted in previous calls, the mix shift in our service business growth rates can be a bit volatile on a quarter-on-quarter basis. However, we expect internal service revenue growth to be about flat for the full year.

Total third-quarter gross profit margin declined slightly from Q2, due mainly to the additional month of Recall results. As we've previously highlighted, Recall pre-acquisition upper due the lower margin at Iron Mountain due in part to having higher rent expense as a percentage of revenue as Recall leased almost all of their facilities. However, we were able to capture overhead efficiencies and other synergies to more than offset this margin decline, resulting in expansion of adjusted OIBDA margin.

In the quarter, we grew total adjusted OIBDA by 29.1% on a reported dollar basis and by approximately 30% on a constant dollar basis. Importantly, adjusted OIBDA margins expanded year on year and sequentially to 31.2%, as we continued to see benefits from transformation actions and from recall synergies.

Adjusted EPS for the quarter was $0.27. Adjusted EPS was impacted by the amortization of Recall's customer relationship values, and the depreciation expense of legacy Recall racking structures. As a reminder, the amortization expense of customer relationships flows through to funds from operations, however, the increased depreciation does not because real estate depreciation is excluded from FFO.

Normalized FFO per share was $0.44 for the quarter. The decline in FFO per share was driven by two factors. First, the increased non-cash amortization of Recall's customer relationship intangibles, as discussed back in April, that is not added back to calculated FFO.

Second, is the tax impacts of Recall-related expenses, as most of the costs of this integration phase were incurred in our qualified REIT subsidiary, they did not provide a tax yield. This last item also impacted our effective tax rate, which appears high as the Recall costs and the $14 million impairment reduced pretax income, however they did not reduce taxes recorded in our taxable subsidiaries. This is a short-term effect of the integration effort.

Third quarter AFFO was $169 million compared with $134 million in the year-ago period, fueling our dividend increase. Remember, AFFO adds back non-cash items such as amortization and non-cash or discrete tax items. So AFFO was not as impacted by the same items that impacted FFO.

Let's turn quickly to our financial performance by segment. Pages 15 and 16 of the supplemental outline our performance by segment in detail for the quarter and on a year-to-date basis. Let me touch on a few highlights from these pages.

In North America, records and information management, or RIM, internal storage rental revenue increased by 1.1%, reflecting strong internal volume growth. In North America data management, or DM, we saw strong internal storage rental growth of 2.2%, reflecting an improvement from the second quarter. However, service internal growth declined due to the timing of projects and the ongoing reduction in tape rotation, as we have discussed previously.

The Western European segment had 0.3% of internal storage rental growth, having been impacted by the carryforward of certain contract negotiations that we mentioned on our last earnings call. In the other international segment, we continue to see strong storage and service internal revenue growth of 11.6% and 6.9% respectively.

Let me now talk about the Recall integration progress, and the costs that we've incurred so far to achieve synergies and integrate Recall with our business. Bill explained we remain on track to achieve the synergies in total, albeit, we are getting there a bit faster.

Our expectations of total costs to achieve synergies are still consistent with prior projections, $380 million and deal costs of $80 million. In the fourth quarter, we expect to incur roughly $50 million in operating expenses and $17 million in capital expenditures as we accelerate the cost savings programs.

Year to date Q3 we have incurred $103 million of integration in deal close costs and $7 million in capital expenditures. Additional details can be found in our 10-Q which we file later this week. Please note that these one-time items are excluded from our adjusted OIBDA calculation.

Let's turn to our outlook for 2016 and preliminary outlook for 2017 summarized on pages 10 and 11 of the supplemental. Our outlook for business trends and fundamentals remains unchanged, with consistent storage rental growth and accelerating growth in our international and adjacent businesses. In addition, our expectations for Recall's contribution and our standalone business contribution remain unchanged as seen in the table at the bottom of our guidance page.

Our guidance is now on a reported dollar basis, given foreign-exchange differences during the year have been small and this now serves as the baseline for our 2017 outlook. Further, we've updated our 2016 FFO guidance to adjust for the increases in income tax expense, amortization and interest.

Our AFFO guidance remains unchanged at $610 million to $650 million, reflecting savings we've identified in maintenance capital since the Recall acquisition, as well as non-real estate capital expenditures which were partially offset by increases in interest expense and cash taxes. However, we anticipate AFFO for the full year to come in above the midpoint of our guidance.

Our interest expense for the year is higher than we originally assumed, due to the timing and amount of divestiture proceeds as well as the additional Recall integration related spend. AFFO continues to provide ample funding for dividends and core growth racking investments. Given the higher interest in taxes than our original guidance, we expect adjusted EPS to be near the low end of our guidance range for the year.

Upon further review of Recall's real estate assets and overall systems requirements, we reduced our capital expenditure outlook. Real estate and non-real estate maintenance as well as non-real estate investment by $25 million for 2016. The capital efficiency that is created by bringing the two businesses together is better than we had originally anticipated, therefore, this is an elimination not a deferral of spend.

In addition, we reduced our real estate investments by $95 million. Driven mostly by delayed spending on lease conversions and certain real estate development, as we make sure we take the time to optimize each market's needs and negotiate with landlords to consolidate facilities in light of the Recall transaction.

Note that the reduction in real estate spend this year is not impacting our synergy or margin outlook or 2020 vision, as we know that these type of investments take a period of time to stabilize. Distributions for the year will total around $500 million, resulting in our dividend payout ratio as a percentage of AFFO consistent with our prior guidance under 80%, and becoming more aligned with REIT peers over time.

Let's touch on our preliminary guidance for 2017 which is based on September 30 exchange rates. At a high level, this guidance is consistent with long-term expectations, with slightly lower growth from acquisitions given our focus on Recall this year.

At the midpoint of our guidance, we expect adjusted OIBDA to grow by 17% and AFFO to grow by 12% in 2017 compared with 2016. We'll provide more detail on capital allocation and other guidance for 2017 in February after we finalize prioritizing investments. We expect maintenance capital expenditures and non-real estate investments to be approximately $170 million next year, together representing roughly 4.5% of revenue, consistent with 2016.

Shifting briefly to the balance sheet, we currently have liquidity of approximately $1.1 billion and a lease adjusted debt ratio of 5.7 times as expected. In the short term, given the timing of proceeds from divestments, we expect to end the year at a leverage ratio around 5.8 times and to trend down from there in line with our 2020 vision.

Lastly, we continue to focus on strengthening our debt structure through increasing exposure to long-term notes, and shifting a greater percentage of our debt to foreign jurisdictions which creates a natural currency hedge to mitigate translation exposure, while also being tax efficient. In September, we raised CAD250 million in senior notes at 5.375% due in 2023, and closed on a AUD250 million syndicated term loan B facility which matures in September 2022 and currently bears interest at 6.05%.

Overall, we're pleased with our performance this quarter and with the progress we've made integrating recall and executing on our transformation program. Looking ahead, we are confident that we're well positioned to deliver on our short-term and long-term financial projections. Our expectations are underscored by the durability of our business, and we are extending that durability through solid execution of our strategic plan and optimizing our costs.

Before closing, I wanted to mention that I continue to be impressed with the caliber of the team here at Iron Mountain and appreciate the passion that our teams in the field have to care for our customers. Their focus on moving the business forward during a major acquisition and integration was evident in the performance this quarter. I continue to expand my knowledge of the Iron Mountain business, and look forward to meeting with many of you in person over the coming months.

With that, I'll turn the call over to Bill for closing remarks.

Thank you, Stuart. We're pleased with our underlying results, as well as our progress with integrating Recall. And at a high level, you should think about it as we've issued 20% more shares to purchase Recall, and less than six months in on a Q3 to Q3 basis, we have seen revenues up 26%, adjusted OIBDA is up 29%, and AFFO is up 27%. All this has allowed us to increase our dividend per share by 13%, and do this three months sooner than predicted.

With that, I'd like to take questions.

(Operator Instructions)

George Tong, Piper Jaffray.

Hello, thanks. Good morning. Now that more of your services business is project based, can you discuss how signings look for services and whether your signings trend support positive internal services revenue growth for full-year 2016 and 2017?

Good morning, George. I think as we noted, is what we expect is that service revenue for 2016 to be flat based on the pipeline that we have looked at. And then for 2017, we expect -- we will give you further guidance in February, but I think you can expect a slight improvement on 2017 based on what I see in the pipeline right now.

But you're right, as we now as more and more is project based, is we need to take that into effect as the core services declines as the because this becomes more archival. But right now, I would say 2016 is going to be flat and 2017 we expect we will give you more later in February. But I would expect that it's going to be a slight improvement on 2016.

Got it. And can you, as it relates to Recall, discuss some of the early realization of the synergies you saw in the quarter, and what aspects of the transaction helped allow for this early realization of synergies? And then whether there is potential for additional upside beyond what you already see?

Well it's a good try, George. But I think you know what I'm going to say about the upside, is right now we're very pleased that we're getting it faster. I think where we still remain optimistic that there will be upside is when we get into the real estate consolidation, but obviously that's the longer term.

I think the biggest fuel to being able to get it faster, to be honest with you, was cultural. That when you always when you have a competitor across, you always tend to think they're are more different than yourselves. But actually, when we brought the two organizations, there was a lot of common understanding and common way of doing things, and the result of that was we were able to bring the teams together much faster because especially these early synergies are mainly headcount related.

So as I say, we're not going deeper than we expected in terms of the headcount reductions, but the speed at which we will be able to align processes and then release people was much faster than we planned. So I would say it's probably the key driver has been cultural But as I say, on terms of further upside is we still remain focused that we think there's going to be further upside when we start consolidating the facilities, but that's more in the midterm rather than in the near term.

This is Stuart. The other thing I'd add quickly is that just on our procurement teams have done a really great job going through and comparing contracts, who had the better pricing, and starting to capture that upside. Everything from facilities management costs and the third party that we used to help us with that to the paper business. So there's a number of things that they are working hard on.

Very helpful. And then lastly, can you elaborate on any one-time items you expect to impact FFO and AFFO in 2017?

I will let Stuart answer that. As he highlighted, his FFO looks a little bit odd right now because of some of the one-time issues in terms of bringing the two companies together, and especially some of the integration cost wasn't tax-deductible. But I don't know, Stuart, you may want to comment in terms of how FFO gets normalized are starts running in more of a clean fashion as we get (multiple speakers).

Yes, and I think we're starting to get more of a regular run rate. You'll expect on a year-over-year basis, for the year, you will continue to see some amortization impact. The tax rate as well. While this year, there's been some normalization items, so we've brought our FFO guidance down this year.

A lot of it has been due to integration costs and how those have hit. So our guidance next year for FFO and flowing all the way down has got a tax rate around 17% or 19%. So that's the other thing that will get normalized.

And the one thing that I think is just add is that not saying that FFO doesn't matter, but the thing that in terms of driving that cash book to invest in the business and dividend growth is obviously AFFO is the main thing. Because it's the more pure thing that has purely focused on cash.

Because as Stuart pointed out on FFO, there are some non-cash items that don't get added back to FFO where they do you get added back to AFFO. So I'm not saying that it's not important, but the cleaner measure in terms of cash generation of the business going forward is for sure, or especially the way our business operates, is the AFFO metric.

Got it, thank you.

Shlomo Rosenbaum.

Thank you for taking my questions. Bill, what is going on with the North American data management services line? That was down 11.3% year over year, last quarter it was down 10.3%. We had a discussion about some tough comp and project-related revenue. It seems to have even worsened a little bit this quarter. What's the story behind that?

Good morning, Shlomo. So it actually is pretty much consistent with what we've said. I think as I've always said on the calls for the last I would say few quarters, that it's really the transportation. And I said that's generally down between high single digits, low double digits in terms of revenue. So it's continuing -- we've continued to see the trend.

As I said before I think on a couple calls ago, we see a flattening out of that archival drop in transportation when we look at the paper storage business or the records storage side of the business. But in the data management, it's still a little bit lagging that transition into becoming more about backup and recovery rather than rotating the tape. And we still are not declaring a bottom. So if you say going forward, I still expect that we're going to see transportation declines in the tape business still in the high-single digit low double-digit level. So it's really not the projects that are driving that, it's the transportation decline.

The good news, if you look at the storage, as we've said that the storage both on a revenue and a volume basis, if you look at revenue quarter on quarter, we're up a little over 2%. If you look on a trailing 12-months in terms of volume, we're up 2%. And to keep in mind is if we look at the margins of the business and the profitability of the business, whilst I think services is important, it's first and most important in terms of differentiating our storage product. Because that's where we build the reliability in is through the robustness of our transportation.

But the part that's driving the cash in the business we continue to be pleased with. But if you're asking me just specific on transportation, I'd have to say that I expect it to continue to decline in the high single, low double digits for a few more quarters. Because we still seem to be behind the transition that we have pretty much have worked most of the way through on the records management side.

I thought that is true, but you typically get a certain amount of project-related revenue and that helps offset it and you had a particularly strong project-related revenue quarter in 2Q 2015. And that's what made it tough to comp on that on 2Q 2016, was I just misunderstanding how that was flowing through?

No, you are right because it was mid-single-digit decline I think the quarter that you're referring to, Shlomo, so you've got a very good memory. I think that specifically, we do see, if you look at especially in our film and sound, this includes our film and sound business, is we do have specific projects with some of the studios that rotate in and rotate out.

And whilst it does drive the top line in terms of the revenue, again, if you come down to in terms of if you back up and say, you see even though that we've lost that project which so you're now seeing raw more the transportation decline that you see in some quarters, is it hasn't affected our ability in terms of driving overall profit growth. But you're right, we do see those -- and those typically, I'm not saying all, but most of those lumpy projects come in our film and sound unit.

Okay. And then can you -- maybe this is a question for Stuart. Can you talk about the specific items that resulted in the FFO guidance? Just go through them one by one, and what changed from last quarter for 2016?

It is pretty simple really. So if you look at the change in guidance, which on a total dollars basis it was about $80 million or I think at the midpoint on FFO was about $0.35. You get the biggest piece of it is tax expense, and that's really about half of it. And the reason for that is, is that the integration costs out of Recall are really hitting in the REIT subsidiary, so you're not getting any tax benefit from those and that is different than what we had originally assumed.

You've got about a third of it is coming from the amortization of customer intangibles. That's really came out of purchase accounting, and as we've finalized purchase accounting, I'll point out that's not in cash. So you get that added back in AFFO.

So that's about a third of it, and the last piece of it is really interest expense and that's the rest of it. And that's really the timing as we talked about of the divestment proceeds and a little bit lower proceeds from that on a cash basis.

So is it half from the first part of the integration of Recall costs are being in the REIT as opposed to not lowering the tax rate outside of the REIT?

Yes.

And I guess is that something that flows through in 2017 as well, or is that something that we are in since most of this is in action this year?

That'll will mostly will hit this year, there will be a little bit next year. But next year, we will have it built into our -- into the tax expectations and the guidance. We've got it built in now to how that's going to flow through.

Okay. And then the amortization of customer intangibles hits the FFO but not the AFFO because it gets added back. Is that the right way to understand it?

Yes.

And then the interest expense will hit both of them, right?

Yes.

That's just higher interest expense. Okay.

Yes.

Why did the out perms and other international step down? If you look at those bar charts that you give for storage, if you look at other international it looks like 2Q 2016 minus [3.7%], 3Q minus [4.5%], what's going on over there?

I think if you remember, we talked about there is a specific customer that we have in other international that was going through a specific I would say a legacy destruction project. So you see that still flushing through.

Okay. Do you know when does that end so we can start to see the trend going the other way?

I think we've been calling it out now for about three quarters, so I think we've got now one or two more quarters because it's a trailing 12-month. So you have to see the 12 months. We can go back and check, but I think we've been calling out for about three quarters so you've probably got more quarter to flush that through.

Okay. And then what was the impact of the UK pound on the 2007 OIBDA guidance?

You're asking the Marmite question, Shlomo?

The what question?

The Marmite question. I don't know if you're following the UK, they're talking about the price of Marmite. Right now, it hasn't had a big impact to date because it's more of a translation issue. You are right, it does show up in our numbers.

But it's a translation issue only at once you get to the profit numbers. So we don't have the double whammy that some companies have where they have a manufacturing cost issue that they are selling into the UK, and then they have the translation issue. But that being said, we are sensitive to the translation issue. But right now you don't see a major impact in the numbers, and we have built that in going into our guidance for 2017.

So is it fair to assume somewhere between 6% and 7% of revenue is UK pound, and that just drops down on the translation either up or down depending on what's going on?

Actually, not quite. Because when you go through the P&L, you remember when we had FX going against us for so many quarters over the past couple years. If you go from the top line, you start getting a dampening as you go down through the P&L because we actually have costs in that local market that get absorbed that are also lower when you translate it.

So it's a little bit less. You're right to think about it as a start point, but it actually gets mitigated. I don't know, Stuart, if you want to talk a little bit more detail about it.

Shlomo, one thing, when the Q gets published, there is a line by line of all the currency changes, you remember some of that currency change gets offset by the strengthening in Canada and some of the other currencies. So the net effect is not as big as you may think it is as it flows through the full P&L, but in the Q we will detail that out specifically.

All right thank you.

Andrew Steinerman, JPMorgan.

Hello, Stuart. You made a passing comment and it was actually too quick for me about CapEx for 2017. I think you referenced part of CapEx for 2016 and said it was about 4.5% of revenues and it might be the same next year. I assume you're talking about maintenance CapEx, so if you could just bring us together on what you're willing to say about 2017 CapEx at this point?

So maintenance CapEx and non-real estate investments will be about $170 million that we've got built into guidance right now. And again, we will finalize that and update it in February if we need to. So total together is about 4.5% of revenue.

Okay, thank you.

Andy Wittmann, Robert W. Baird.

Hello, great. So I guess my question, so in North America, it looks like we had a little consecutive or a quarter-over-quarter acceleration in volumes, organic growth, and that's all great and you highlighted that. Could you just talk about what you're seeing in terms of some of the dynamics in the marketplace that are leading to a little bit better than last quarter's growth rates? Was it distraction maybe from integration and now you're better integrated and can focus more? But some of your commentary around that I think would be helpful.

Good morning, Andy. Well I think that you have to see the overall trend. If you go back three years ago, I think we've been going a steady march forward. And I'm saying on a quarter-by-quarter basis you can see some noise like in any business.

But if you think it on an annual-to-annual basis, as we continue to march forward, and I think we are one of the largest implementers of Salesforce.com. I think we've got the salesforce much more organized and aligned. We did the big organization three years ago, that's starting to bear fruit. And as you know, as of being a long observer of this business, nothing happens fast but you have to put certain foundations and building blocks.

So I wouldn't say it's any one thing, I think a lot of it goes back to what we did. And I wouldn't say last quarter's performance was because of noise of Recall, it's just that on a quarter-by-quarter basis, it does move around. But we are starting to see that whilst this isn't a high-growth business, there is still growth to be achieved, which I know is counterintuitive, but I think this business will be running longer than the iPhone franchise.

I know a lot of people in their stomach don't believe that. But if you look at the results, we continue to drive positive organic growth out of the business and I think the new organization gets better and better every quarter of doing that. I'm not saying the sky is the limit, but I would continue -- we continue to expect to get more out of even the developed markets on an organic basis going forward, albeit these are small incremental improvements not large swings.

Then just -- okay maybe another way of -- or to dovetail to that question is just with the integration of the two large global players, have you seen any competitive response from the competition, maybe the trends and the outlook for pricing in particular for national accounts? Can you talk about how those things have maybe changed since the closing on the deal?

Well we don't think about pricing in isolation. What I do feel, I talked about it a little bit on my call, in my script or when I was going through my remarks. Saying that innovation is an important part, and one of the things bringing the two organizations together, it gives us not only a larger customer base but it gives us more capacity to innovate and that innovation resonates with our customers.

What we're finding, especially for the regulated customers that have to worry about compliance in so many different jurisdictions, the fact that we can give them better solutions around information governance is a differentiating factor. And you can say, do they pay for the product or do they pay more for the storage? And sometimes it's built up in the storage costs or pricing, and sometimes is built up in the product.

But what we do find is that the world is getting more complex, especially for the heavily regulated industries, and bringing the two companies together does give us more economies of scale to do that kind of R&D and that is resonating with customers. So I think that's the way I'd think about the power of bringing the two companies together. It just gives us a deeper pool, if you will, to innovate around.

And so far, it's early days, but I have spent a fair amount of time with different customers. We had a top financial service customer forum in Louisiana in June. I just came back from one in Europe a couple weeks ago, and there is even more excitement that I'm hearing from our large customers about bringing the two companies together rather than less because they are expecting even more in the way of innovation.

The other thing I would highlight is it's early days, but I also expect we've reorganized the North American salesforce again a little bit in light of bringing Recall in. They were, as I said, much better at running after the middle market, which is a higher margin segment, and a lot of it is unvended and we haven't been as present there as Iron Mountain whereas Recall was more present. And so now the head of North American sales is the person from Recall who's driving the charge. Not just in terms of our traditional segment in the enterprise, but he also has two new leaders that are helping drive more penetration into the middle market which we expect over time to start coming through. It's early days, you don't see that in the numbers today but I would expect to see an improvement in those areas.

Great, thank you. I will leave it there.

Thank you.

Karin Ford, MUFG Securities.

Hello, good morning. Can you give us more color on why the proceeds you're expecting to receive from your dispositions are coming in below your previous expectations? And can you tell us -- just update us on what the OIBDA multiple is that you're selling those businesses at today?

Good morning, Karin. So I think that when you get into -- and you can probably appreciate I'm not going to give you probably as much detail as you want because of the confidential nature when you are dealing with both commercial parties, but also the different regulating authorities. But I think it's as much -- there is certain science about it.

We have certain requirements that we have to hit. But when you actually start negotiating with sellers, each seller, each buyer rather I should say, has different parameters that they are interested in. And lining that up, that makes sense for the regulator and makes sense for us commercially is something that we work through.

So I think the hence my comment is that we are lighter on cash that we're getting from these dispositions, but we are quite pleased in terms of where we're coming out commercially. So I think everybody wins on those things. So I think that's about all I can -- I think you can probably appreciate that's all I can say given the confidential nature of these discussions.

But I think it's a good platform, and you can see that in our guidance for next year. In other words, we're not taking down guidance for next year because we ended up lighter on cash, and we're -- still believe that we will get to the leverage numbers that we expect.

Okay. Is it just that the size of the businesses that you're selling is changing, or is it that the valuation is different than what you originally expected?

I think I'm just going to leave it there, Karin, I think you can probably appreciate it. But I think that the best way to unpack it is if you look at the guidance we're giving for 2017 and beyond, as you say, I wouldn't even say it's noise in terms of our -- you don't see a blip in terms of where we're going to end up in 2017 and you definitely don't see any change in terms of where we're going to end up in 2020.

So I think these are you think about MPV calculations, these are trade-offs that you make between cash today, platforms, et cetera. So I think it's -- we are comfortable where we came out.

Okay. My second question is just regarding the line balance, it was $1.5 billion at the end of the quarter. Can you just update us where it stands today?

And, Stuart, I think you mentioned plans to do more debt fixing in 2017. Can you just give us your thoughts on where you think is appropriate for the line balance to be on an ongoing basis?

I don't have the line balance right in front of me, total liquidity right about now is about $1.1 billion. You've got to remember, we did one of the debt offerings right at the very end of the quarter. So we had the cash sitting on the balance sheet, and had not paid off the credit facility. And then in addition, in October, we did the $50 million mortgage notes, so that brought down the balance as well.

Sitting fixed to floating, we call it 74% today, we're continuing to evaluate where we are in the cycle. I think over time, you will see us stay in the 70% to 80% range. My personal view would be to try to continue to push that up a little bit given where the world is today, but we're right in the middle of where our target range is.

But I think one thing, Karin, just to keep in mind on that is we have gone from -- the thing that I think it's amazing in terms of the way that the debt markets have gotten the Iron Mountain story is we've gone from 68% to 74% fixed. And at the same time, we've taken our cost of debt, Stuart correct me, but I think it's down by about 80 or 90 bps in terms of the average cost of debt. We're now at 5.1%, and before we did this latest refinancing that fixed even more of our debt, we were at 5.8%, 5.9%.

So to me, it's an interesting reflection that the debt markets definitely get the durability of Iron Mountain's business and they are rewarding for it. So if you think about where we are now, it's in a -- we're in a much sweeter spot, not that we were in a bad spot before, but we are in a even a stronger spot in terms of the debt markets than we were a few months ago.

Compared to the end of last quarter, our average interest rate is basically flat despite fixing all that debt and terming it out.

Great, thanks for the color.

Thanks, Karin.

Shlomo Rosenbaum.

[Thanks for] squeezing me back in. I am trying to understand the difference between the FFO guidance last quarter and this quarter. I understand you're not going to include additional interest expense of that due to future offerings. But wasn't the accelerated customer relationship intangibles known last quarter?

And also, the costs coming out in the REIT subsidiary versus non-REIT subsidiary, is that something that is truly accounting? Wouldn't you understand that's really coming out in the US versus some of the international geographies, or really coming out in the areas that you had identified from before hand?

Let me answer -- I will let Stuart address in terms of how the intangibles flow through. But I think just specifically your question on the tax and where that flows through. I think you can appreciate when we knew the number of heads that came up, because the diligence on a public company is different than the diligence on a private company.

So we had pretty clear view, and you can see that in terms of our improvement on AFFO of where we were actually getting the restructuring savings. The issue is, and it's specifically in the US because that is where we have the tax deductibility or non-tax deductibility depending if it is in the QRS or the TRS for the qualified REIT subsidiary or the non-qualified subsidiary. Is when we got into the US, a lot of the cost savings were in the part of Recall that would be in terms of the qualified REIT subsidiary, and that was where we didn't get the deductibility.

It doesn't affect international. Because although we do have split between qualified and non-qualified subsidiaries, you remember that internationally we get fully taxed in those local entities because the US REIT rules don't apply. It's important in terms of the way we repatriate money back into the United States for dividends, but it's not important in the local tax scheme.

So it's specifically a US situation. And as we finish the restructuring, I said there will be a little bit more than next year and that's built into our guidance because we now have clear view of what the restructuring is left that's in the qualified REIT subsidiary versus not. So we know where the tax deductibility is, but I think you can probably appreciate when you are buying a public company trying to have that level of detail until you actually get into the restructuring, that's where you get into the tax deductibility.

But if you think about it in terms of the ability, whilst cash taxes does affect AFFO as well, but when we are starting to actually get through those one-time restructuring charges, then we are still in line with what we think the total cost of the integration project is. Stuart, you may want to talk about the intangibles.

On the customer intangibles as well, that was something that was highly in flux last quarter. So it started to flow through in the second quarter, but we were still between that and the racking and the lives of the assets and things like that, we're still working through a lot of those valuations. So have not fully flowed that through our forecast for the rest of the year. So could we have forecast better, maybe, but it's getting updated now.

The other thing I would point out though too, as we've gone through and cleaned up and reconciled these things, is I'm going to turn to AFFO for a second. Is if you go back and look at second-quarter AFFO, we actually had understated that by around $10 million. That's because we had a -- for our Mexico REIT subsidiary, we had some one-time tax integration costs or tax so we had to pay to restructure that entity. Those costs had actually been accrued as part of purchase accounting, never went through the P&L. Because it was a cash tax payment, it had actually gotten picked up as a reduction of the AFFO last quarter. But it was one time in nature, and those are the types of things we exclude.

So if you go back and look at second-quarter AFFO was actually better in our trends and that's one of things when we talked about AFFO guidance being above the midpoint for the year that gives us comfort.

Okay. I'm going to take the other stuff off-line. Thank you very much.

Thank you.

Operator, I think we're all set.

Okay. At this time, there are no audio questions. I will turn the call back over to you for closing remarks.

Thank you. Appreciate everybody joining us this morning, and wish you all a -- as we start into the holiday season a good holiday season. So have a good day.

At this time, ladies and gentlemen, that does conclude today's conference call. You may now disconnect your lines.