鐵山公司 (IRM) 2012 Q1 法說會逐字稿

Good morning, my name is Anita, and I will be your conference operator today.

At this time I would like to welcome everyone to the Iron Mountain Q1 2012 earnings call webcast.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(Operator Instructions) Thank you.

Mr.

Golden, you may now begin your conference.

Thank you, and welcome, everyone, to the 2012 first quarter earnings conference call.

Joining me this morning are Richard Reese, our Chairman and CEO and Brian McKeon, our Chief Financial Officer.

After their prepared remarks, we'll open up the phones for your questions.

Per our custom, we have a user controlled slide presentation at the investor relations page at our website at www.IronMountain.com.

Referring now to slide 2, today's earnings call and slide presentation will contain a number of forward looking statements, most notably our outlook for our 2012 financial performance.

All forward looking statements are subject to risks and uncertainties.

Please refer to today's press release, the Safe Harbor language on this slide and our most recently filed annual report on Form 10-K for a discussion of the major risk factors that could cause our actual results to be materially different from those contemplated in our forward-looking statements.

As you know, we use several non-GAAP measures when presenting our financial results.

Adjusted OIBDA, adjusted EPS and free cash flow before acquisitions and investments, among others, are metrics we speak to frequently and ones we believe to be important in evaluating our overall financial performance.

We provide additional information and the reconciliations of these non-GAAP measures to the appropriate GAAP measures as required by Reg G at the investor relations page at our website, as well as in today's press release.

With that, I would like to introduce our Chairman and CEO, Richard Reese.

Thank you, Stephen.

Good morning, and thank you, everyone, for joining us.

As you've seen from our press release this morning, our business performance is really pretty clean, and as we forecasted and since we spoke about our business to you only about two months ago, maybe with a little luck, this call may be shorter than usual, but we'll get started and let's see where it takes us.

But before we get started and deep dive into the business, I want to update you on the status of our special committee work.

The progress is ongoing, and we will meet our commitment to report the Board's conclusions and rationale for its conclusions no later than June 9.

Since we're close to reaching a conclusion, we will not be entertaining any questions on this topic today or in any future meeting until we come forth with the final answers.

Having said that, I realize that may disappoint some of you, but we are getting down to the short strokes, and we're going to have to keep everything close to our vest.

And I realize many of you will try to ask questions or want to ask questions to try to get some insight into how we're thinking about it, but we're just going to have to be pretty disciplined and basically, we're not going to answer them, so just be prepared for that.

One year ago I returned as CEO, and we announced a new three year plan which was focused on driving returns on capital and returning capital in excess of that required to operate our strategy to you, our shareholders.

We have made excellent progress on all fronts.

At the time I committed to giving you a report card on our progress against our plan, and since we are one year from announcement and nearly halfway through execution, I'll review our progress on this plan and its impact on our business.

But before I do that, let me make a few comments on the quarter.

As I said in the beginning, performance showed consistent trends we operated at plan.

Total revenue on a constant dollar basis grew at 1% and adjusted OIBDA grew at 2%.

Without the impact of the decline in recycled paper prices we've been speaking to you about for a couple quarters, total revenue would have been up 2% and adjusted OIBDA of 4% as paper is a 1% drag on revenue growth and a 2% drag on adjusted OIBDA.

FX is a 1% drag on both of those, by the way.

Our team is executing well and the underlying business trends are consistent with what we have seen over the past several quarters.

We continue to focus on sustaining our annuity revenue stream driven by storage over the long-term and believe that we can maintain a low single-digit growth rate in annuity revenues over the long-term, even in the face of the secular trends on the activity and use of physical information.

Storage growth was up 3% in constant dollars for the quarter.

This is 2% coming out of North America.

International had a very strong 7% constant dollar storage growth.

And as you know, storage is the annuity flywheel.

It is the foundation of our business, out of that is what's all good things are derived because it is the beginning of the relationship and the center of the relationship with our customers, and it also drives the majority of our margins.

Storage gains were partially offset by service revenue decline of 2% in constant dollars.

Activity trends remain the same.

Core service, where these activity trends are shown, though, was a positive 1% in constant dollars.

Activity base core service revenues were down moderately in North America, consistent with the past, but this impact was offset by strong International gains and by strong global growth in hybrid revenues.

Comp services were down 9%.

This is driven primarily by paper, which was down 31% on a price basis for the quarter from last year.

And paper is expected to remain a headwind throughout the year.

The impact of paper, though, was partially offset by some improvement in project revenues in some of our other core service lines.

[Profits] performance was strong for the quarter, adjusted OIBDA margins were up 40 basis points.

International adjusted OIBDA increased 15% on constant currency basis with margins up 200 basis points, and I'll talk more about this later.

North America did as we asked and sustained their strong margins, even in a headwind of some mix of businesses and recycled paper prices being down.

As you know, it's a very strong margin business at 41% adjusted OIBDA margins.

So, Q1 was a good start for the year and in our business if you start behind in the beginning, it's almost impossible to make it up.

But if you get off to a good start, the year looks pretty good, and we remain optimistic for the year because we've had a good start.

So, now let me shift gears and talk to you a little about our strategic plan and where it's leading us and so forth.

One year ago, we announced a three year strategic plan to make certain commitments to you.

2011 was the first year of the operating plan, and it runs through 2013, and the strategy featured three key elements.

First is the refocus on our traditional physical storage and services business, which was primarily impacted in North America.

And as you know, we sold our digital services business to Autonomy for $390 million last year.

In North America, which is our largest business, our plan is and remains to be to build out on our market leadership position and to invest to sustain this business for the long-term.

It has consistent storage growth of about 2%.

It has sustained strong margins are 41% and good capital efficiency delivering an after tax return on invested capital of about 15%.

This is a high return business, and our goal is to optimize it by investing for sustainability.

Continuous margin expansion is offsetting service headwinds and funding incremental investments in support of the annuity.

In 2011, we increased sales and marketing investment by approximately $20 million.

It takes time for an increase in investment of this type to show results, but we believe we are seeing a return on investment in excess of 15% on ourselves in marketing investments.

We're seeing a slight uptick in unit growth in storage on the margin and expansion of other services helping offset the core service trends.

We've shown that if we can increase the input investment, we can get a good return, and we'll likely make similar investments from time to time in the future where we see a clear path to returns.

Additionally, one change we're seeing in North America since we announced our plan is an increase in acquisition opportunities that we may take advantage of from time to time.

We have a particularly strong network to acquire into and realize significant synergies from and therefore, great returns on invested capital.

We will be disciplined as we look at these opportunities, and they will all be return on investment capital focused, not "strategic".

Now let me shift and talk about the second leg of strategy, which was our International business where our focus is on driving returns from our previous investments.

We have the leading information management services company internationally.

The business has good growth, currently 7% storage, which is the foundation and 5% total, and our portfolio as a whole achieved good returns, beating our hurdle rates through our work we did last year.

We built this business using footprint strategy to acquire critical mass for customer coverage and to expand our access to future high growth markets.

In doing so, we have a mix of businesses on our portfolio with varying levels of performance.

And as part of our strategic plan, we undertook a strategic review out of all of our business units and developed strategies to drive returns based upon certain criteria.

Our analysis showed that being a market leader is the key to driving great returns.

In our international markets where we have a leadership position, which is the majority of our markets, our margins and return on invested capital are in line with those of North America.

Our analysis also showed that in eight markets where we are not leaders, we need to develop plans to improve performance and drive returns up.

For six of those eight markets, France, Germany, Spain, Australia, Hong Kong and Singapore, we have plans that are already bearing fruit and we will bring them in line with our expected returns by 2013.

And in two markets, New Zealand and Italy, we decided to exit, and we're executing on that strategy, one we've completed and the other we've almost completed.

The last category in our portfolio is the BRIC markets where we currently have small but fast growing businesses.

We expect to invest to achieve market leader position where we can do so at attractive prices.

More on this in a minute.

The International business portfolio performed very well with strong margin increase and up 200 basis points in Q1.

This is on top of 220 basis points of margin accretion last year and puts us on target to get the 700 basis points improvement we plan for by 2013.

Last year, the focus and the margin accretion came primarily, the 220 basis points out of the optimization of our biggest International business, the UK.

This year, the focus is in western Europe and Latin America where we're taking the same play books we used in North America, exported those to the UK and now exporting those into LatAm and western Europe, and it's already showing great results, as I said, at 200 basis points in Q1 of this year.

We're off to a good start in International, and we're on track for the full year there also.

As I said, investing in high growth markets to achieve market leadership is a key component of our International strategy as market leadership drives returns.

Consistent with this strategy, we acquired Grupo Store based in Sao Paolo, Brazil in April.

The purchase price is approximately $80 million, and this is a business with approximately $30 million in revenue growing at double digits.

It's a good solid, clean business with great fold-in synergies with our existing platform in Brazil, which we will realize over time.

We'll break even for this on this business on a contribution basis in 2012 due to integration costs, but we expect over the 24 to 36 month time frame to see this to drive great returns.

It has strong revenue growth, and expected post integration margin expansions will help us drive both strong continued growth and returns beyond this year.

When combined with our existing business in Brazil, we will become the market leader in this important emerging market.

It's a large market already, estimated to be approximately $1 billion market potential.

There's a very active group of competitors pushing the outsourcing conversion trend.

We estimate that even with this consolidation of these two businesses and the market leadership position that we have less than 10% share of market, so there remains lots of room for us to continue double-digit growth.

And as the market leader, we expect this trend of double-digit growth to continue for quite a long time, and we expect to generate the kinds of returns that the market leadership generates for us in the rest of the world and Brazil over time.

You'll likely see us do more International acquisitions of this nature.

As I said, the goal is where we can find good clean businesses in strong growing markets and help us solidify based upon our past work, consolidate and solidify the number one market leadership position and drive returns.

We will take the opportunity to do so.

So again, great progress on the strategy and a really good move on the part of our International team, and I think you're going to like what happens there over the long period of time.

The third element of our strategy was the focus on capital allocation.

We committed to return $2.2 billion over 3 years with $1.2 billion coming in the first year.

We met that first $1.2 billion commitment with April's dividend payment.

This first phase was -- consisted of $1 billion of stock buybacks that we executed as well as about $200 million in dividends.

We're committed to strategy of returning excess capital to shareholders as efficiently as possible and through the special committee of the Board process, we examine the most effective ways to do so.

And as I said, we'll have more to say on these subjects before June 9.

So, in summary, we've off to a good staff on our three year plan, but as with most plans, this one will not exactly unfold as expected.

Lower paper prices, some divestitures and lower service revenues will reduce our expected revenues and OIBDA in 2013 versus the plan.

Acquisitions and other positive trends will likely add to the plan, but we expect that the fundamentals of improved operating margins internationally and greater capital efficiency will remain a core part of our plan and our reported performance.

Let me reflect for a second.

As I said, we introduced this three year plan approximately a year ago now.

It was last April when, as you know, I came out of a semi retirement and came back to the Company and we looked to refocus the Company back to its core.

And so let me reflect a little bit on that job.

I'm very pleased how the business and the organization has responded in the last year.

The business is becoming more and more focused on the core and more and more focused on driving returns on invested capital out of those core businesses.

We have significant opportunity ahead of I us.

It's not for lack of opportunity that we're doing this focus.

It's to make sure that we can really be disciplined to execute against this opportunity, and I personally remain very optimistic about the future, which I predict will be dominated by two key themes.

One is investments to sustain this wonderful annuity business which has a great return on capital and to do so over a very long period of time.

To me, the key is durability or sustainability of the business.

And we believe that we have the tools, the capital, and the opportunity set to do that.

And if we do that well, we will be returning significant capital to our shareholders on a very consistent basis over a very long period of time.

So, as we've shifted our focus on returns, it is clear that though that we should fight the urge to be too greedy.

Our market leader businesses are all great return businesses that we want to optimize for the long-term by driving to even higher margins -- but driving for even higher margins is really not the answer.

We need to continue to drive costs down and reinvest those savings for long-term sustainability, and we have an opportunity set that will allow us to accomplish that if we invest correctly, and I think we have the talent to be able to do so.

The emerging market businesses, and even the nonleader markets that we now remain in will improve over time and produce a balance of more growth and better returns.

Personally, I wish I were younger and had the opportunity to play out the next phase of the life of Iron Mountain.

I see nothing but great opportunity in its future.

But of course I'm not.

We have an active search for a CEO.

We're getting great candidates, but it's not a process to be rushed.

This is a great opportunity, and we want to find the right leader that can balance the needs of all of our constituents, you, our shareholders, our customers and of course our employees over a very long period of time.

As I've often said and many of you shareholders said, one of the real great things about Iron Mountain is not only the annuity business model, but this ability to drive this annuity and sustain it over an extremely long period of time.

As you know, we spent a lot of capital to build the flywheel, to build the annuity.

As I said, this next phase is about having that capital come back out of the business and back to the shareholders.

And of course, the longer we can foresee doing that, the much more valuable the Company is.

When I returned last year, I did state I expected to be here for 12 to 24 months.

We're about halfway through my estimated time frame, and expect that I'll meet my original target.

But I want to make sure you all know that I remain committed to the Company until we found the right leadership for the long-term, but stay tuned as we get closer, we'll talk to you more about where the next phase may be in that area.

With that, let me turn it over to Brian, and then we'll take your questions of interest.

Thanks, Richard.

Slide 3 highlights the key messages from today's financial review.

We delivered solid performance in Q1, in line with our plans, reflecting consistent business trends.

Our financial results were again supported by solid storage revenue growth and strong performance in our International business.

Reported revenues for Q1 were $746 million, up 1% on a constant currency basis as 3% storage gains were offset by moderate service declines, including the impact of lower recycled paper prices.

Profit performance was in line with our expectations with results supported by strong gains in our International segment and sustained high margins in North America.

Adjusted OIBDA for the quarter was $221 million, up 2% on a constant currency basis.

International adjusted OIBDA margins increased by 200 basis points to compare to Q1 of 2011, keeping us on track to achieve our margin improvement goal of 700 basis point improvement by the end of 2013.

Adjusted EPS was $0.29 in Q1 and reported EPS was $0.35 including the impact of foreign exchange gains and discrete tax items.

We continue to expand our International business while driving higher returns, consistent with our three year strategic plan.

Adjusted OIBDA in the International segment increased 15% on a constant currency basis in Q1, supported by strong growth in emerging markets and benefits from cost improvement initiatives in Latin America and western Europe.

As Richard noted, we recently acquired Grupo Store in Brazil, which will position us well to build on this momentum.

We're off to a good start for the year and are on track towards our full year financial goals.

Today we're reiterating our full year 2012 outlook and adding the impact of the recently completed Store acquisition for the balance of the year.

We continue to plan for 1% to 3% internal growth, excluding the effect of lower paper prices and constant currency adjusted OIBDA gains of 1% to 5%, ex- paper impacts.

The Store acquisition will add $25 million to revenues and $5 million of CapEx for the remaining three quarters of 2012.

Adjusted OIBDA gains from this acquisition will be offset by integration costs in 2012.

Let's now turn to slide 4 and review our financial results in more detail.

Slide 4 compares our results for this quarter to the first quarter of 2011.

As noted, Q1 results were as expected and consistent with recent operating trends.

Enterprise revenue growth was flat year on year as 1% constant dollar gains were offset by unfavorable year on year foreign exchange impacts.

Overall revenue performance reflected sustained storage revenue internal growth of 3%, global expansion of hybrid services and higher project revenues.

These gains were offset by moderate declines in North America activity based core service activities and lower recycled paper revenues.

From a segment perspective, North America posted flat constant currency revenue growth.

Consistent 2% storage internal growth was offset by a 3% decline in service revenues, including the impact of lower paper prices.

Service growth continues to be constrained by reduced retrieval and refile transportation and data protection handling activity.

These impacts, along with lower recycled paper revenues, more than offset strong gains in hybrid revenues, increased project revenues and benefits from higher fuel surcharges.

Our International segment posted 5% revenue growth on a constant currency basis supported by 7% storage growth, reflecting sustained growth in Europe and continued double-digit gains in Latin America and Asia Pacific.

These gains were again augmented by strong hybrid revenues which offset impacts from lower paper prices and lower revenues from product sales and shredding services.

Gross profit was $431 million in Q1, yielding a gross margin of 57.8%, up slightly compared to the same prior year period.

Storage gross margins increased 240 basis points, driven by lower occupancy costs.

Service gross margins were down year on year due to decreased recycled paper revenues, the previously disclosed reclassification of certain overhead expenses to cost of sales and the growth of relatively lower margin businesses, including our hybrid services.

Adjusted OIBDA was $221 million, or 29.5% of revenues, up 40 basis points compared to Q1 2011.

Sustained high margins in North America and continued strong performance in our International business were key components of the year on year margin expansion.

Included in adjusted OIBDA is approximately $2 million related to the work of the special committee of the Board.

Adjusted EPS for the quarter was $0.29 per share.

Reported earnings per share of $0.35 included $3 million of other income and the impact of a lower effective tax rate due to foreign currency gains and discrete tax items.

Our structural tax rate for the quarter was 39%, as expected.

Let's now turn -- take a closer look at our revenue growth on slide 5.

Slide 5 breaks down our overall revenue growth.

It shows internal growth by major service line as well as the impact of acquisitions, divestitures and FX compared to our full year expectations.

Our internal growth rates for the first quarter were within our expected full year ranges, supported by consistent 2% core revenue internal growth.

As noted, storage internal growth remains solid at 3%.

North America reported consistent 2% internal storage growth, and International storage internal growth remains strong at 6%.

Net global records management volume was up more than 1% on a year on year basis in Q1, reflecting continued strong gains in International and flat year on year growth in North America.

Pricing trends remain consistent.

Total service internal growth was minus 2%, or down about 1%, excluding impacts from commodity changes.

These results are also consistent with underlying trends in recent quarters.

Core service internal growth was flat in the quarter as strong growth in hybrid services and benefits from higher fuel surcharges offset moderate declines in activity based core service revenues.

Complementary services revenues, which represent about 11% of total revenues, decreased 9% internally.

Results were impacted by -- as expected by declines in recycled paper revenues reflecting substantially lower recycled paper pricing, as well as lower revenues in our fulfillment business.

Let's now turn to slide 6 to review our segment results.

Slide 6 shows key metrics for each of our three segments compared to the first quarter in 2011.

Consistent with our three year strategic plan we're sustaining high returns in our North America segment and building momentum in our International segment as a significant driver of profit in cash flow gains.

North America continues to deliver high profits and strong cash flows.

In Q1, our North American business segment reported revenues of $552 million and sustained adjusted OIBDA margins of 41%.

While storage revenue gains remains solid at 2%, overall North America growth was constrained by lower service revenues, including the impact of lower recycled paper prices.

We continue to drive operational improvements in North America to offset these impacts and maintain our high returns in this business.

Our International segment continues to post solid constant dollar revenue growth and strong adjusted OIBDA in cash flow gains.

As noted, adjusted OIBDA increased 15% excluding FX impacts, yielding 200 basis points of margin expansion.

We're benefiting from the expansion of operational excellence initiatives in markets like Latin America and from cost improvement initiatives in western European markets as part of our portfolio improvement plan.

Benefits from these initiatives and from continued solid growth across our International business is keeping us on track towards our business plan goals of 25% margins in 2013.

Corporate expenses were consistent with prior year levels, including $2 million of costs related to the work of the special committee.

Overall, we're delivering consistent solid operating performance across our business which is driving sustained strong cash flow.

This performance is supporting significant shareholder payoffs.

Let's turn to slide 7 to review our stockholder payout program.

Slide 7 shows the substantial progress we've made in returning funds to stockholders over the past two years.

Since first announcing our plans to return to cash to shareholders in February of 2010, we've returned $1.4 billion to stockholders through $300 million of dividend payments and the repurchase of 38 million shares for more than $1.1 billion.

In Q1, we acquired 1.1 million shares for $35 million.

Share repurchases to date through this program represent more than 18% of the shares we had outstanding at the end of 2009.

As part of our three year strategic plan that presented in April of 2011, we committed to $2.2 billion in payouts through 2013, including $1.2 billion by May 2012.

We've completed our initial $1.2 billion commitment and we're well positioned to continued advancement of shareholder payouts supported by our strong operating performance.

We remain committed to driving strong cash flows and driving an optimal approach to our capital structure to support shareholder returns.

Let's now turn to slide 8 to review how we're managing our balance sheet to fund our business and drive our strategy.

Strong consistent cash flow generation has enabled us to maintain a strong balance sheet while supporting substantial shareholder payouts.

As planned, we recently increased our leverage by approximately one-half a turn in support of our payout program.

Currently our consolidated leverage ratio is 3.5 times at the midpoint of our target 3 to 4 times leverage range.

We remain well positioned in terms of cash and financing capacity.

At quarter end, liquidity was more than $700 million with $178 million in cash and $529 million in additional borrowing capacity.

Our debt portfolio at March 31, 2012 also remains long and fixed.

Our weighted average interest rate was down to 6.7%, and we were 80% fixed at quarter end.

Maturity is more than six years with no meaningful repayment obligations until 2014.

We're managing our balance sheet consistent with our three-year plan, and we're well positioned to fund our business strategy.

That concludes our review of the Q1 2012 results.

Overall, we continue to drive solid financial performance and we're on track to achieve our goals in 2012 as we continue to advance our three year plan.

Let's now turn to slide 9 to review our 2012 outlook.

Slide 9 summarizes our current 2012 outlook.

Today we're reiterating our full year 2012 financial guidance and adding the impact of the Store acquisition in Brazil.

As a result of the Store acquisition, we're including our revenue outlook by $25 million.

There will be no impact on adjusted OIBDA as operating profits will be offset by integration expenses in 2012.

As noted, we're planning for consistent revenue growth trends, excluding impacts from recent declines in recycled paper prices.

Supported by consistent storage internal growth of about 3%, we're expecting constant dollar revenue growth of 2% to 4%, excluding paper.

As noted, our internal growth outlook, ex- paper impacts, remains at 1% to 3%.

A 30% decline in paper prices compared to the average for 2011 and negative year on year impacts from foreign exchange is projected to reduce our reported growth to a range of minus 1% to plus 2%.

Our outlook for constant currency adjusted OIBDA growth, excluding the impact of lower paper prices, remains between 1% and 5%.

At current levels, lower paper prices are projected to have a negative 5% impact on adjusted OIBDA growth this year.

Adjusted EPS is expected to be in the range of $1.20 to $1.36 per share.

Our calculation of adjusted EPS assumes a structural tax rate of 39% and 172 million shares outstanding.

We're planning for capital spending of $220 million, includes $5 million associated with the Store acquisition and about $25 million of spending for real estate.

Our outlook is for free cash flow performance -- our outlook for free cash flow performance remains in the range of $320 million to $360 million, including about $20 million of negative impacts this year from higher prior year capital spending accruals.

Finally, based on our outlook for 2012, we expect our return on invested capital to be in the range of 11%.

In summary, Q1 was another quarter of solid financial performance and we're on track to achieve our financial goals for 2012.

We continue to execute against our three-year plan, completing our $1.2 billion payout commitment, sustaining high profits and cash flow in North America and driving strong growth and higher returns in our International business, and we're well positioned to build on this progress.

Thanks, and we'd now be happy to take your questions.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster.

And your first question comes from the line of Andrew Steinerman with JPMorgan.

I want to ask about core services.

We're flat now.

We've been flat for two quarters.

The forecast for the year is unchanged at negative 4 to 0.

I surely heard that you had a couple of things moving around there and that activities, meaning moving boxes around, is still dead, at least in North America.

But why after being flat this quarter and flat in the fourth quarter is the forecast for the year kind of unchanged to being 0 to minus 4?

At very least you would feel better about the high end of that.

It's early in the year, Andrew.

We are within the range.

I think there is always noise on those type of numbers at the margin.

As Richard said, we're off to a good start to the year.

We feel good about the track that we're on and --

Don't like to predict things we don't see for sure either, Andrew but basically, we didn't focus on making a change there.

It's in the range.

Right, and maybe let me just ask the question one more time.

Is the flat, the zero more a function of how strong hybrid is, or has there been some improvement, meaning less negative, in terms of moving stuff around?

A couple things, we're getting about 1 point benefit from fuel surcharges, so it helps a little bit.

The -- it's more similar trends than different trends, I think our international business is doing well, and I think the activity trends in international are relatively stronger than what we've seen in North America.

I think North America has been a very similar place.

We do record, as you note, some of the hybrid revenues through the -- we record some of that in our core service, the more recurring nature where we have more recurring projects, and that's double digit growth.

We're doing very well on that front.

So, that's helping, but --

On balance, more similar than different, but I think we do have some positives.

And Andrew, the international business is much less of its portfolio has any health care in it, and health care is the major drag factor in North America.

Okay, all good reminders, thanks so much.

Thanks.

Your next question will come from the line of James Samford with Citigroup.

Great, thank you.

Just wanted to -- actually, if I could just follow up on that a little bit, if you could just sort of frame the activity cycle in terms of the macro environment.

I was just sort of curious whether activity internationally is a function of -- it's a lot of changes going on there, and that's sort of driving activity levels.

I just wanted to frame it on some of the macro perspective.

Yes, look -- no, I think international is more driven by the 7% storage growth, and that drags along with it more services.

Newer records are far a more active, and they age fairly quickly in terms of activity patterns.

So, the faster you're growing them, the greater the amount of newer records you've got and therefore, the more active they are.

And plus part of that activity is the charges of bringing things in, so if you're growing faster, you've got more service activity to assess or bring things in.

No, I don't think it's an economic impact, although services have -- do respond to the economy quicker than storage.

Storage growth is a real lag on an economic rebound.

Like in North America we've seen no real clear trends in the economy, and we expect to be an 18-month or so lagger there.

On services, we would pick up a little faster.

One thing that's tough for us parse, too, is just obviously the first quarter in North America you had better weather, and I think when weather's bad, you hear about the negative side of it.

When it's good, no one's saying that's helping support performance, but it could be at the margin, something that's helping us a bit.

I don't -- to Richard's point, I don't think we've seen kind of a change in the economic environment.

It's more reflective of what's going on underlying --

And then just a quick follow up on, it looks like volume growth picked up a little bit here.

You've got stabilization in the output and destructions, looks like the organic piece.

Is that international organic or how should we think about the mix of volume growth on the records management side?

It's very big and very similar.

I think you're looking at our attachment where we show kind of the quarterly numbers annualized.

It's very similar in the US, kind of flat volume trends.

We're seeing benefits from the sales and marketing initiatives that we advanced, and that's helping us to stabilize the incoming volume, which was down a bit, and now it's more in the stable zone, which we feel very good about.

And international is in a similar zone of solid growth.

There is some seasonality in the quarterly numbers.

We do tend to see more add lodged in the first quarter, and so when you seasonallize those numbers, that's part of the dynamic you see there.

But it's a similar trend.

We feel good that we've moved from where we had more pressure on our growth to where we're more stable and seeing positive flow through from some of the investments and looking forward to building on them.

And we spoke a little bit about the investment in sales and marketing, it's a long cycle to see it come through, but we're seeing better performance.

We're seeing better pipeline growth.

We're seeing better conversion ratios.

We're seeing a variety of things that make us feel like we pulled out of the bottom and started back in another direction.

But it's a very, very slow cycle we caution people.

I really caution people, this is not a business that you can take sort of a data point and draw a line up or a line down.

It takes a while to move either way.

But I think we feel like it's moving in a better direction now than it was moving, say a year plus or so ago.

That's perfect, thank you.

But I would, again, caution you, don't go reforecasting things.

You'll be absolutely wrong.

Your next question will come from the line of Kevin McVeigh with Macquarie.

Great, thanks.

Richard, I may have misheard you, but did you tend to talk about a longer term trend on the storage side in terms of revenue growth?

And was it low single digits or was that within storage itself or just -- could you put some context around that?

Yes, yes.

What I'm really saying is I think we can keep our business overall growing in those ranges, but build on a foundation of storage and annuity based kinds of businesses in effect.

And we're going through some shifts and changes.

You know that we've talked about health care restructuring itself.

Look, our health care business is growing, but the big service components coming out of it, it was our most active business.

It will take a while for that to absorb.

I know people believe that that foreshadows what's going to happen in the rest of the market.

They're wrong.

Not that records aren't going to get less active.

Like everything else, they've been doing that for 30 years and they will over the next 30, 40 years, but not at the same pace as health care.

But we've got those headwinds, and those headwinds of health care will take a while for us to eat through.

But we've got a bunch of other positive things, and we've got some new things in the hopper.

And if we look out over the long haul, and we've done quite a bit of work on this and look out over a very long period of time.

What we're saying is, we believe net/net, we have the opportunity set and we have the tools.

Staying within our core business, not throwing big long passes or anything.

Staying with our core business to keep the core -- keep our business all annuity based by and large growing in the low single digits.

And that's why we talk a lot about confidence around the ability to sustain the fly wheel and sustain the cash generation capabilities of the business.

Understood.

And then just -- it seems like on a relative basis acquisitions are starting to pick up a little bit.

Is that just purely opportunity, kind of how you're feeling about the business overall?

Or just any thoughts on that.

It -- I have been saying around here for a couple years that we're going to see another mini consolidation wave in North America and like everything else I predicted, and it takes a long time for it to happen.

That's our business.

It's starting to happen.

That is the nature in North America of just the -- the impact of the first consolidation wave was to consolidate the market, create a bunch of new competitors.

Now there's new competitors or a reasonable number of them have been out there a while investing capital for a long time and looking to monetize.

It's just a cycle.

I think we'll go through that cycle again.

And we will play that opportunity cycle because unlike the last time where we were a driver of that cycle, we were building footprint, this time we're not building footprint.

We're building returns and we're going to do it by -- if it's a great consolidation economics and it's a good, clean business at a fair price to both parties, we'll do it.

If it's now, we'll pass on it and go on, okay?

But we are in the market.

We want to make sure the market hears us that way, and if anybody's interested in selling, you've got my phone number.

You know how to call.

We'll talk to you.

Now, that's North America.

International, although in certain parts of international, there's some of that same dynamic, but on a much smaller scale.

The other part of international, it's about us being a bit more targeted around a strategy that says market leadership.

Where we -- where there are great markets, particularly those with lots of growth left, and I've spoken before how a lot of the emerging markets have a 20 to 30 year cycle just like the North America and the mature European markets went through of the one time outsourcing decision.

That's where customers accumulate their existing records, get it organized and move it from inside to outside.

That's kind of a once in a lifetime decision and during that cycle, it takes a long time.

It took us over 30 years in North America to physically move all those records, and we're only about halfway through it, okay?

But that long cycle in the emerging markets and a good part of the international places like eastern Europe, Latin America,.

Asia and so forth is a very large business opportunity for us, and so we want to be market leaders in a good part of that space.

We have leadership and quite a bit of it, but there are places where we don't.

Brazil was a good example.

And so internationally we would be more targeted towards finding those places where we can go ahead and achieve leadership, get to scale and ride that outsourcing conversion curve and do what we've been able to do in North America, build great returns and much bigger businesses.

And the international play gets a lot better over time.

It just takes time for it to grow because each of those countries is not like -- a foreign company -- country operation is not analogous to a city in North America.

It's got a different overhead structure.

It's got a different cultural bias.

It's got a different way of selling.

It's got variations and the bigger you get, the better you get at adapting to those variations, the more efficient you get.

There's a lot of positive things coming out of it.

And like our business, that takes patience, but now that we've done our portfolio review, we're in good shape, we're just going to keep adding to it.

And so net net, North America is a more opportunistic strategy where the returns make sense.

International is a more strategic M&A strategy where it's about driving leadership to drive returns.

Understood, and then just one final, if I could.

Within the context of overall capital return, kind of M&A versus kind of the dividend and buy back and aggregate, out of 100%, how would that play out over the next couple of years?

You're talking about a capital allocation strategy going forward, and --

Yes.

And I'm not going to comment on that because that just gets wrapped up into the whole issue of what we do next, and so we'll talk about that sometime between now and June 9.

Okay.

Thank you so much.

Thank you, Kevin.

Your next question will come from the line of Gary Bisbee with Barclays Capital.

Hi guys, good morning.

As I was looking through the 10k, one thing jumped out that, maybe I'm making too big a deal out of, but it was interesting to me that on your cash flow statement the cap -- the portion of the customer acquisition costs that you capitalize, that addition to customer relationships/acquisition cost lines, it was larger in absolute terms in absolute terms and as a percent of revenue than any point it's been in the last 10 years, and yet revenue growth is pretty slow.

I guess I wondered, is this maybe another sign that the sales investments you've done are working, or is there something that's changed that would be driving that, maybe like higher customer turnover, but you're doing a better job of adding to offset that or something?

We have a lot of tools in terms of how we build new business and in some cases, we will acquire business, what we call pickup and moves, we're basically -- we're acquiring business from competitors without necessarily taking the real estate.

You're buying a portfolio of customers and moving them into existing sites.

And that's an area where it's a similar judgment in terms of deploying capital and looking at returns, and we've had opportunities on that front, and that is an area that we'll continue to deploy to grow as well, and we understand the economics of those types of investments very, very well, as you might imagine because it's clearly defined and we can spot that into areas where we have excess capacity and help to manage our facility utilization, so that's what it's reflective of.

Okay.

Great, and then I was thinking back to, I guess now 1.5 years ago, your last investor day, and I remember one of the themes at that was a focus on where you could being more targeted in trying to get pricing.

Has there been any change in that, or is it sort of the economy where it is not having gotten better enough kept you from making any major, moves towards that strategy you're talking about.

Well, we restructured pricing in not all of our business, but a reasonable amount of our business.

And over the last say three years or so where we went to more list price and then discount off a list and try to rationalize pricing and looked across the board at the value proposition and so forth.

That would be the sort of the what you might call big move and effect of things and since then, if you think about it, we have a significant part of our revenue where it's just sort of on an annual cycle and we're going through those annual increases.

But we also have the significant part of revenue that's on multi-year contracts that are indexed by and large one way or the other, inflation.

In the last three years, those indexes have been down, and so that puts a limit on the natural limit of price.

The flip side is if you believe we will see inflation in the future, we will be well protected on the way back up.

Strategically, we're increasing our focus on being more segmented in our offering by customer vertical and looking across the scope of the services that we offer and linking that into our pricing strategy.

So, I think we're looking for ways to increase the value that we bring to customers and capture that through the pricing strategy.

So, that's really the next wave, building on what Richard said.

I think we've got a very good foundational structure for how we approach pricing and are advancing the same strategy and trying to look at ways to increase our value add through segmented approaches to growth.

And that will be the next wave of where we might be able to get some incremental value out of our pricing approach.

Okay, great, and then just one last one.

Everybody's noticed that Brambell's didn't sell recall at the price or the timing they wondered -- they wanted to.

I wondered if you had any comment if that would be something that might make sense as something for Iron Mountain to look at or maybe would be willing to say if you have not really been involved in that or are not.

We have not been in the process.

I think that was Brambell's choice.

It's not that we wouldn't have been interested in looking, because we would have.

I think for their own reasons and probably good reasons they chose not to bring us into the process, so we're sitting on the sidelines and watching like everybody else.

Okay.

Thank you.

Your next question will come from the line of Andrew Wittmann with Robert W.

Baird and Company.

Morning, guys.

I'm just curious on the pickup and moves.

I'm just curious if you'd talk about or quantify how much of the volume growth you're seeing as a result of that today.

And given that it does sound like this was a little bit of a shift there.

What was it maybe a few years ago?

It's in a relatively similar range.

I think it's less than 1% on the margin.

I do think we are -- we're increasing our focus across a number of areas including acquisitions in terms of growth, but I don't think it's a fundamental change from where we've been.

We'll take a closer look at that, but it does go up and down depending on the nature of the opportunities that are out there, and I think we've seen better pipeline more recently.

This does tie in to some of the themes that Richard's talking about with -- in North America, more things being available for sale.

This is in many ways a different form of the sale for smaller businesses.

And we -- as we go forward, we will use various tools that keep driving sustainability to the business.

As a Company, the theme we said is -- for this year and for our three year plan is to refocus back on our core physical business.

The reason we state it that way is looking prior to that.

It's not that we lost focus on the business, but there's a few tools we had put down and just weren't using, and these were one of them.

We were not looking at any form or fashion to speak of, particular in North America the opportunity simply came up, and so we're just opening up and looking at those sort of things.

Makes sense.

Just on the service business, Richard, are there any knobs that you have in your arsenal to maybe induce some level of services there?

Is there a pricing strategy that maybe lines up to marginal costs and marginal revenues there better, or is there anything you're doing today to maybe offset some of the headwinds you're seeing there?

There's some new services that we have introduced, and they're getting traction, but like everything, they take a long time.

That's the good and bad side of our business.

One of them, for example, in the health care space, is an approach to pathology customers.

We've repackaged and come up with a better value proposition, and we're getting good traction on it, but it takes a few years before you see any major impact out of that.

So, we're doing things like that, and it's more about the theme of verticalizing our services and being much more specific around specific industry needs.

And we have some other new service programs or new product programs related to our core in what I'd call beta phases.

We're not going to pound the table on them for a while until they turn real, but yes, some of them look very promising and some could be substantial big businesses over time.

And so rather than coming out and hyping them, what we're going to do is go over some betas and get into the markets a little bit, and when we have some real results that are significant, we'll come back and talk you about them and so forth.

And that's all part of us maturing as a Company, learning how to look across our own customer base.

And we've been evolving those skills, product management type skills and so forth, to be able to verticalize, to be able to be more creating and look for opportunity sets and custom design what we do and didn't repeat it over and over and so forth.

And we're getting better at that.

We'll have to keep getting better it, and that's where a reasonable amount of money has been invested in the last three years, and I think we'll continue doing that.

And just kind of another one, just testing on your -- in your sales process here a little bit.

On the digital business, it's been out of your portfolio now for a while.

Can you talk a little bit about how the new relationship with your digital vendors is going, maybe what you've learned from that process?

And maybe Brian, can you give us or quantify how much of revenue we're seeing today from you selling digital services that are not assets or technologies that you own?

That's a small number.

It's a small number.

We -- because we shifted 100% of the sales force that sold the technology services and chose not to rebuild that sales force.

Having said that though, we are selling a lot more connected some (multiple speakers).

-- immaterial.

And what we did was is frankly, at the request of my leadership in North America, they asked me to slow down on doing that.

Not slow down selling it per se, but on focus because what they found was that they really wanted to get their sales force refocused and requoted back towards the core business.

We had -- the quotas and focus had gone very much towards the new services side, and that's one of the reasons that storage started to come off.

And by refocusing and making people focused on going back and digging out the storage, they're doing it, we just didn't want to confuse people.

We continue to own the intellectual property management business, which is a great business for us, and it's roughly $30 million in revenues.

That was part of the digital business that was doing well.

And look, we'll come back.

Some of those new beta services talking to you about have a strong partner technology component potential and -- but we're going to take our time and we're not going to spend a God awful amount of money trying to do this stuff.

Great.

Thank you very much.

So, I think that's the last question operator?

My understanding, so hey, I was right.

We finished five minutes early.

That's a record for me.

Thank you very much.

As I said, the businesses before me, as we expected, we're off to a good start for the quarter and hopefully, the rest of the calls this year will be equally good, if not better and so forth.

We are really busy, though.

There's a lot going between, like I say, looking at an acquisition pipeline and looking and so forth.

But the real focus of some of the organization is on being prepared to have a conversation with you prior to June 9.

And I know everybody's eager to hear us talk, and we will be prepared and we'll let you know probably the day of or some number when we come forth and talk, so we'll look forward to talking to you again in the next couple of months.

Thank you very much for your support, and we will talk to you later.

Thank you for your participation.

This does conclude today's conference call.

You may now disconnect.