鐵山公司 (IRM) 2012 Q2 法說會逐字稿

Good morning.

My name is Lindsey and I will be your Conference Operator today.

At this time, I would like to welcome everyone to Iron Mountain's second-quarter 2012 earnings conference call.

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

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

(Operator Instructions) Thank you.

Mr. Golden, you may begin your conference.

Thank you and welcome, everyone, to our 2012 second-quarter earnings conference call.

Joining me this morning are Richard Reese, our Chairman and CEO, and Brian McKeon, our CFO.

After their prepared remarks, we'll open up the phones for Q&A.

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

Referring now to slide 2, today's earning call and slide presentation will contain a number of forward-looking statements, most notably our outlook for our 2012 finance 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 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 reconciliation of these non-GAAP measures to the appropriate GAAP measures as required by Reg-G at the investor relations page of our website as well as in today's press release.

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

Thank you, Stephen, good morning, everybody, and welcome to our second-quarter investor conference call.

We had good operating results for the quarter, I'd characterize them frankly as good results in a slow world.

I'll go through and give you some update on the trends and what's going on and then I'll have a few comments about the REIT process, which I'm sure you're all eager to wait to hear.

The headline is you're not going to hear everything you want to hear about the REIT because it hasn't changed a lot, but we will at least give you some color and some update.

And then Brian will go through the detailed numbers and as usual, we'll take your questions.

With a little luck, we will attempt to make this call shorter than average because I think things are fairly clear and it's summertime.

So let's get started, as I said I think we're having good execution in the organization and the businesses are performing well against our plans.

We are doing not only on a tactical or an annual operating basis but you should be comfortable that we're also advancing our long-term strategy to continue building out a very durable storage annuity business.

So we're making progress on both fronts and finally trying to balance all those to deliver the short-term results while keeping an eye on the future and I think that the Company and the team is doing a good job of that.

As I said, we'll update you on the REIT process.

Well the only significant news, which we did announce in our press releases, that we have submitted formally our request to the IRS for a private letter ruling.

And as you know that we are going to be relatively silent and absolutely not speak to any details on that while we let them do their work and so forth.

So let me talk a little bit about the operating results.

Storage, which is the key driver in everything we focus on in our business, had good 6% constant dollar revenue growth, which was about 4% of that, 4 points out of 6 was internal growth and the balance from acquisitions.

Storage trends remain consistent within the past year or two.

There were some puts and takes, but constant dollar service growth about flat, excluding the impacts of the lower paper recycle paper prices.

Recycle paper prices in the quarter were the major issue to us with the 37% decline from the last year, and it reduced reported service revenue growth by a negative 4% but also total revenue growth by 1.5 points.

North America, as we had planned and as we communicated, sustained their good strong margins of 42% and adjusted OIBDA levels while posting 2% internal growth of storage.

But total revenue growth in North America felt the brunt of recycled paper trends, it's hard to say, as North America accounts for about 85% of our total recycle paper volume.

International had strong storage growth of 13% in constant dollars, which was 8% internal and the balance from acquisition.

They had some slight softness we experienced in International in service trends, which we suspect is part of the slowdown globally particularly in the UK and in Europe in their economies.

But those trends were only slight and as I said, overall as a Company, our service revenues were about flat.

Internal growth in International, particularly storage, trended up slightly due to the higher than average customer acquisition activity, which was just a good, strong quarter.

And although the dynamics in International are strong, this will move around a bit.

So we're not forecasting these numbers, you can't draw a line forward from these numbers.

These are great numbers, but I don't predict they will recur over and over every quarter.

You'll see some come back to this level in the future but it's going to move around just a bit.

In line with our operating strategy during the-- and we've spoken before, during the quarter and we've announced most of these but just to recap, we acquired Records Management business in Hungary as a fold into our existing business, and Brazil to solidify our market leadership position as we previously announced.

Both of these markets have strong outsourcing trends and are very consistent with our strategy to build market leadership in faster-growing emerging markets.

We also increased some ownership stakes in some ventures we had previously set up in Switzerland and Turkey, consistent with our long-standing joint venture strategy where we typically enter new markets on an International basis, sometimes with a less than 100% or even less than majority control.

But as the businesses evolve and turn into real businesses, we seek to buy out partners or buy up, in effect, become overtime to eventual ownership.

And we executed a couple of those during the quarter.

International also continued to make significant progress against their benchmark target that we set 1.5 years ago to increase our margins by 700 basis points and they generated 150 basis points, so improvement during the quarter.

They are on track for the full year growth of about 200 basis points, that's what their plan says and they're on track for that.

Looking forward to the end of the year, assuming they hit their plans, which we fully expect, since we announced this increase of 700 basis points, we will have reported and generated about 500 basis points, or nearly 70% of the way towards our improvement target.

And to remind you, we still have one more year to go to complete that target.

That margin came-- increasing came from sort of three big buckets in Western Europe, sort of the International business.

It was really about a lot of overhead initiatives, a lot of reengineering and cost structures and process most of which are designed to improve our operating efficiency and effectiveness all at the same time.

In Latin America, we've been focusing on our direct labor and utilization, what we call operational excellence.

It's the same strategy we started North America some years ago, then rolled to Europe.

Now we're rolling it into Latin America and that's showing good margin enhancement improvements.

And of course, it's easier to get good margin when you got good growth in International business, as I've said we've had good strong growth.

So it's a combination of those three that have generated that.

Team's doing a good job.

We would expect them to continue doing that as they hit their margins.

We also saw some flow through of some margin accretion efforts did in our corporate functions because we started investing a little over a year ago and some improvements where we wanted to improve our internal service to ourselves, as well as reduce cost, and those investments had a price tag both in terms of OpEx as well as capital.

And they're starting to flow through and we saw about 40 basis points of margin generated by projects we started a little over a year ago.

So, yes I think we're in really good shape on margin front, and frankly given the markets we operate in and so forth, I think we're doing quite well on the revenue front right now.

A little bit of update on our strategy, just to remind those that either forget or haven't been listening or are new to the story, whichever the case may be.

It is our goal to continue to build a very durable storage based annuity business, as I said in the beginning.

In doing that, we have already optimized and have a very good return on investment North American business segment, which we believe can grow in the low-single digits and maintain their margins.

That is not as easy to do as it sounds, in low growth environments maintain margins are very hard to do, but the team is focused on doing it and so forth.

And it's a business that we will continue to invest in and there around on the edge, there are ways of raising the growth rates a little bit and we will keep focusing on that but it'll be a very measured kind of process over a long period of time because the strategy is not to build a super high-growth business, the strategy is to maintain a really strong business there and we're very comfortable we can do that.

Whereas International, our strategy has been over the last 18 months as we shifted the focus of the strategy away from a portfolio build out, market present strategy to a-- to really a portfolio of return strategy.

And we have been driving returns on invested capital up to the point that the entire portfolio has returns in excess of a weighted average cost of capital.

And when we complete the program and the margin improvement programs, these business, as a total portfolio, will be generating very strong returns.

And to remind you that in that portfolio, some of them already have North American-like returns, quite a bit of them do, but we have some business International that are in their early stages of development where the returns are even negative to very low, but they're faster-growing and they will grow the way into better returns and will optimize our way into even better returns as we've done all around the world.

And we're on a good path to do that and I think the team is focused on that and executing well.

Part of that strategy is expanding in emerging markets through acquisitions as well as new customer acquisition work to cap our leadership and we know that market leadership drives out of line or extraordinary returns on invested capital and that is our goal for the entire business.

So as I said, we are executing on all levels of our operating strategy and we feel very strong about our ability to continue to build out very doable Storage-driven business over time.

Another element of that strategy though that relates to it, that as you know in June we announced, is a new focused capital allocation strategy.

It is a strategy in which we've committed to return excess capital that this operating strategy will generate to our shareholders.

And of course as part of that capital allocation strategy, which is one that brings a lot of discipline, is choosing a tactic to pursue a new or alternative structure operating as a REIT.

And you know we've announced our intention to do that, as I said we believe that a REIT provides substantial benefits to shareholders, first for efficient capital distribution, but it also comes with a burden of extreme capital allocation discipline.

And we think that that burden is acceptable, both as a Management team and as a shareholder, to take and return for the efficiency that we would get out of the structure and so forth.

So we are embarked on both a strong operating strategy to build a very sustainable long-term cash generation energy-- engine.

By the way, one that we've been doing for a long period of time, we have reached the point, though, in which instead of consuming capital to build this business, we are in the very nice position of having significant excess capital.

And as I said, we've gone through the work to understand and believe that the right thing to do is distribute that capital to our shareholders regardless of whether the tactics ultimately pan out to be a REIT or not.

The strategy is one of disciplined capital allocation.

So let me talk a little bit about the REIT.

As I said, as I started, a couple of things.

This is not a subject that we're going to give you a lot on.

To be frank with you, we don't have a lot to give you, more than we've told you.

We've been out on the road talking since we made the announcement early June and so for those, and I would expect that most of you, got a chance to see us or hear us.

There's not a lot that's changed and frankly, what we also told you was as it did change, we're not going to give you blow-by-blow or play-by-play a color on this, that and the other and so forth.

If it turns out that the IRS approves us, obviously we'll tell you.

If they reject us, we'll obviously tell you.

If we were to find the reason it couldn't work, we would obviously tell you.

But we're going about trying to execute on becoming a REIT.

We're taking a positive hypothesis approach, which mean that we filed for approval from the IRS while they do their thinking and their work and so forth.

We're moving forward with a process to restructure our business to separate entities into the QRS, TRS structure and to have ourselves ready to be a REIT as of January 1, 2014.

We've said before and we'll reiterate, it's-- and the more we look, the more I'll have to say this, it's a lot of work and as you know, we forecast $100 million to $150 million of work to get there.

Obviously we expect the payback to be worth it.

We've made significant progress.

We've established a task force office headed by Jeff Lawrence.

Jeff, as many of you know, is our Treasurer, but he's also been a long-term mountaineer and has managed prior to this, many of our major-- anytime we've had major change projects such as Y2K and things like that, Jeff has been the go-to guy.

He's got extraordinary skills and knowledge of the business, so he knows where every-- all the pieces and parts are.

He's organized a team of over 25 full-time people, most of which came up, we pulled out of other jobs and we've-- we're staffed behind them.

We've almost completed that restaffing behind them because we see that they're going to be this for a couple of years.

We went and tried to pull people that are high potential, strong performers and basically making sure that they understand that this is a career-enhancing process.

This is a project that you want to be part of and I think we've chosen quite a bit of good talent to help us through that.

That number of people would be augmented over time.

I mean quite frankly to give you a picture of it, we've had to take another floor in our Corporate office building just to house what we expect this work flow to be and will be over time significantly more people, some part-time, some full-time.

In addition to that, we have a group of outside advisors primarily, but not solely, PWC on the actual technical version side because they have direct experience of doing this and direct experience, same teams, same people of doing for nontraditional REIT conversions, which is what we are which is where the real complexity comes, okay.

And IBM and other technology partners, but primarily IBM, is helping us over a lot of the system work.

They-- at the core of this transition is a lot of accounting and IT work and with a strong dose of legal and contract work.

And it requires us to put in some new systems to get more granular in detail of some of the-- some of our details and [systems] and so forth.

Net/net all of this work we will do will make us a better business.

And it would be hard work but plenty doable if we were doing it for one country but we're going to do it across the majority of our big businesses around the globe.

So I only stress all of that just to give you an appreciation of we're on it.

We're not waiting.

That is why we're spending money pretty fast.

So far the money that reported in the quarter was not that big but stay tuned.

Those numbers will get bigger as we try to separate out and make sure you see the operating side of the business versus what we're spending to achieve this target.

So as I said, I think we feel real good where we are both in terms of the process of the REIT.

I feel real good about how the business is operating at this point in time.

I wish the world were a little faster.

I'm not use to this slow pace, it drives me batty.

So with that, let's turn it to Brian, he'll get through the details and we'll come back and take your questions.

Thanks, Richard.

Turning to our presentation, slide 3 highlights the key message from today's review.

We delivered solid performance in Q2 in line with our expectations, reflecting consistent business trends.

Storage, strong storage revenue growth in International performance again drove our overall results.

We achieved 6% constant dollar storage revenue growth in the quarter supported by internal growth that rounded to 4% and benefits from our recently completed acquisitions.

Storage gains continue to be solid globally despite soft economic conditions, demonstrating the durability of our business.

International storage grew 13% constant dollar, augmenting the solid 3% constant dollar storage growth posted by the North American business.

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

Adjusted OIBDA margin in the International segment increased 150 basis points on 8% constant dollar revenue growth.

Our International businesses performing well and we remain on track to achieve our International margin targets in 2013.

Overall our operating results remain solid and in line with our expectations.

Revenue and adjusted OIBDA grew 2% on a constant dollar basis.

As noted in previous calls, sharp declines in recycled paper prices are constraining our operating gains this year.

In Q2, lower year-on-year paper prices reduced revenues by $11 million.

Excluding these impacts, adjusted OIBDA up 7% on a comparable basis in Q2 reflecting continued storage gains and benefits from International margin expansion and overhead cost controls.

On a reported basis, FX changes also constrained reported results.

Excluding these macro factors, underlying business trends were consistent with prior quarters.

Storage revenues continue to grow steadily and hybrid service gains offsetting soft core service activity levels.

We remain on track to achieve our full-year financial goals and we're reiterating our underlying revenue and adjusted OIBDA outlook for the full year 2012.

We're maintaining a consistent outlook for constant dollar revenue growth while lowering our projections for reported results by $15 million at midpoint to reflect current FX rates.

Our adjusted OIBDA free cash flow and adjusted EPS ranges are unchanged from our previous outlook.

These estimates reflect our underlying operations and exclude costs associated with the special committee and REIT conversion.

We'll be tracking these costs separately as we work through the conversion process.

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

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

Please note that we'll be referring to our operating results throughout this presentation.

Operating results exclude costs and other expenditures associate with the 2011 proxy context-- contest, the special committee and REIT conversion costs.

In Q2 2012, we incurred $3 million of cost related to the special committee work compared to about $10 million of cost related to the proxy contest in Q2 of 2011.

We're excluding these items, which are expected to be significant over the next several quarters, in order to better present the underlying performance of the business.

The primary line items that will be impacted are adjusted OIBDA, adjusted EPS, CapEx and free cash flow.

For your information, slides reconciling operating results to our reported results for key metrics in the appendix.

As noted, Q2 operating results were solid and in line with our expectations reflecting consistent business trends.

Enterprise revenue growth was 2% on a constant dollar basis with reported results pressured by unfavorable foreign exchange rate changes.

Overall, revenue performance reflected strong constant dollar storage revenue growth of 6% which more than offset the impact of lower recycled paper revenues which reduced total revenue growth by 1.5%.

From a segment perspective, North America posted constant currency revenue growth of minus 1% as consistent 2% storage internal growth was offset by a 6% decline in service revenues including the impact of lower paper prices.

Excluding paper price changes, North American service growth was down modestly.

Gains in project and data protection revenues and benefits from fuel surcharges offset decreased core service activity levels and lower revenues from shredding and fulfillment services.

Our International segment posted 8% constant currency revenue growth supported by 13% storage growth, reflecting sustained gains in Europe, continued double-digit growth in Latin America and Asia-Pacific and benefits from a recently completed acquisition in Brazil.

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

Gross profit was $439 million in Q2, yielding a gross margin of 58.4%, down 110 basis points compared to the same prior-year period.

Storage gross margins increased 100 basis points reflecting lower occupancy costs.

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

Adjusted OIBDA $239 million, or 31.8% of revenues, up 40 basis points compared to Q2 of 2011.

Strong performance in our International business and the benefits from corporate overhead cost initiatives more than offset negative impacts from lower paper prices.

Adjusted EPS for the quarter was $0.36 per share, an increase of 9%.

The improvement was primarily due to fewer shares outstanding following substantial share repurchases in 2011.

Reported earnings per share of $0.24 includes $3 million of excluded items, $10 million of other expense and the impact of a higher effective tax rate due to foreign currency losses and discrete tax items.

Our structural tax rate for the quarter was 40%.

Let's now take a closer look at our revenue growth on slide 5. Slide 5 shows the components building to our overall revenue growth.

Q2 and year-to-date growth is trending consistent with our full-year expectations by a major service line.

As noted, constant dollar growth was 2% in Q2 driven by strong storage gains.

Storage internal growth remained solid at 4%.

North America reported consistent 2% internal storage growth and International storage internal growth remains strong at 8%.

Net global records management volume was up more than 1% on a year-on-year basis in Q2, reflecting continued strong gains in International offsetting a modest year-on-year decline in North America.

Pricing trends remain consistent with a 2% net increase in North American records management.

Total service internal growth was minus 5% or down about 2% excluding impacts from commodity changes.

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

Core service internal growth was minus 3% in the quarter as growth in hybrid services and benefits from fuel surcharges offset lower shredding service revenues and moderate declines in activity based core services.

Complimentary service revenues, representing about 11% of total revenues, decreased 12% internally.

Results were driven entirely by an $11 million decline in recycled paper revenues as expected.

The impact in Q2 was greater than the impact in Q1 as 2012 paper prices have remained fairly stable, again, sharply rising prices in the first half of 2011.

Assuming paper prices remain stable for the balance of the year, the gap should widen in third quarter before reversing itself in the last couple of months of the year.

Let's now take a look at our year-to-date results on slide 6. Slide 6 looks at our year-to-date 2012 operating performance compared to the first half of 2011.

Our year-to-date performance reflects consistent business trends.

Reported revenue of $1.5 billion is up 1% on a cost dollar basis as continued solid storage gains offset impacts from lower recycled paper prices and software service activity.

Lower paper prices and the SG&A reclass discussed earlier contributed to a modest decline in gross margins.

Despite these impacts, adjusted OIBDA grew 2% year over year on a constant dollar basis, slightly ahead of revenue growth.

Strong International profit performance and corporate overhead cost initiatives are key factors in this improvement.

We expect these factors to continue to support profit performance as we move forward.

Adjusted EPS was $0.67 per share, up 8% for the year to date.

EPS benefited from about 15% fewer shares outstanding, more than offsetting higher interest costs incurred to support our $1.2 billion shareholder payout program that we completed earlier this year.

2012 capital spending is $76 million, excluding $11 million of acquired real estate.

As a percentage of revenues, CapEx excluding real estate, is 5.1% in line with prior year levels.

Capital expenditures historically increased in the second half of the year.

We're currently on track to achieve our capital expending efficiency targets in 2012.

Free cash flow for the first half of 2012 was $117 million compared to $149 million for the first half of 2011.

The decrease is primarily due to higher interest expense in support of our shareholder payout program and higher cash incentive compensation payments related to 2011 performance.

These results exclude year-to-date cost of $5 million at 2012 and $14 million in 2011 associated with the REIT conversion, special committee and prior-year proxy costs.

These year-to-date costs reduced 2012 reported EPS by $0.02 and free cash flow by about $3 million.

Through the end of Q2, we have not made any capital expenditures or incremental tax payments related to the REIT conversion.

We expect to make these types of payments in the second half of this year.

I'll have more to say on this in the outlook section of the presentation.

Let's now turn to slide 7 to review our results by segment.

Slide 7 shows key year-to-date metrics for each of our three segments compared to the same period in 2011.

Consistent with our three-year plan, we're sustaining high returns in our North American segment while continuing to build momentum in our International segment as a significant driver of profit and cash flow gains.

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

In the first half of 2012, our North American business segment reported revenues of $1.1 billion, supported by consistent 2% storage revenue gains.

Overall, North American growth was constrained by the impact of lower recycled paper prices.

Despite these impacts, we sustained adjusted OIBDA margins of 42%.

We also continue to achieve capital efficiencies with spending at about 4% of revenues excluding real estate.

These metrics support very strong cash generation from this business.

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

As noted, adjusted OIBDA increased 15% excluding FX impacts, yielding 180 basis points of margin expansion.

We're benefiting from cost improvement initiatives in Western European markets and strong profit performance in Latin America.

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

Corporate expenses improved slightly compared with prior year levels due to overhead cost control initiatives.

Overall we continue to drive solid operating performance across our portfolio.

Let's now take a look at our debt statistics on slide 8. Strong consistent cash flow generation has enabled us to maintain a strong balance sheet.

We're currently operating with the consolidated leverage ratio of 3.5 times, comfortably within our targeted 3 to 4 times leverage range.

Our leverage ratio will likely increase over the next few quarters as we make expenditures in connection with the REIT conversion process.

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

At quarter end, liquidity was more than $600 million with $170 million in cash and $455 million in additional borrowing capacity.

Our debt portfolio at June 30, 2012, also remains long and fixed.

Our weighted average interest rate was down to 6.6% and we were nearly 80% fixed at quarter end.

Maturities about six years with no meaningful repayment obligations until 2014.

During the second quarter, we paid $43 million in regular quarterly dividends at a rate of $0.25 per share.

In June, the Board increased the dividend rate by 8% to $0.27 per share.

We're managing our balance sheet and cash flows consistent with our strategy and we're well positioned to fund our business plan.

That concludes our review of Q2 2012 results.

Overall we continue to drive solid financial performance and we're on track to achieve our goals in 2012.

Let's now turn to slide 9 to review our full-year outlook.

Slide 9 summarizes our current 2012 operating outlook.

The chart also highlights our expected expenditures related to the ongoing REIT conversion process.

Today we're reiterating our constant dollar revenue growth guidance and our projections for adjusted OIBDA, adjusted EPS and free cash flow.

We are lowering the midpoint of our revenue projections by $15 million to reflect current FX rates, which weakened relative to the US dollar since our last call.

We're projecting 2012 reported revenues to be in the range of $2.990 billion to $3.040 billion at current FX rates reflecting consistent 2% to 4% constant dollar growth excluding the impact of lower paper prices.

We're maintaining our outlook for adjusted OIBDA to be in the range of $890 million to $930 million on an operating basis.

Adjusted EPS for 2012 is expected to be in the range of $1.20 to $1.36, unchanged for the prior outlook.

The calculation of adjusted EPS assumes a 40% structural tax rate and 172 million shares outstanding.

We now expect capital expenditures for the year to be approximately $225 million including an estimated $30 million for real estate.

The increase reflects a real estate lease buyout opportunity we recently took advantage of in Ireland.

Our outlook for our operating free cash flow continues to be in the range of $320 million to $360 million.

As highlighted in our recent announcement of our intent to pursue conversion to a REIT, we anticipate significant one-time operating capital costs associated with the conversion.

Total operating expense and capital costs are estimated to be between $100 million to $150 million with the majority deployed over the next two to three years.

These costs relate to substantial system investments, legal and tax work, advisory fees and other miscellaneous cost to implement the proposed structure.

This efforts underway and we'll be breaking out and reporting on estimated impacts as we advance the process.

For 2012, in addition to the operating expense-- expectations discussed above, we expect to incur between $10 million to $20 million of incremental expense, $10 million of CapEx and about $80 million in additional taxes related to the depreciation recapture in connection with the REIT conversion.

The impact of these items will be a reduction in adjusted EPS of $0.03 to $0.07 and free cash flow of $95 million to $105 million.

The current full-year outlook does not include any projected impact from a potential 2012 distribution of earnings and profits in connection with the conversion.

On a slide laying out our outlook for line items below adjusted OIBDA is included in the appendix.

That concludes our review and summary.

Q2 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 sustaining high profits and cash flow in North America and driving strong growth and higher returns in our International business.

And we're also advancing work in connection with the REIT conversion process as part of our long-term approach to drive value creation for stockholders.

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

Thank you.

(Operator Instructions) Gary Bisbee with Barclays.

Just on Europe, your commentary on the International segment was positive, but how should we think about the impact of what seems like it's been pretty evident deterioration over the last few months in the economic activity across the continent?

Well as you know in our business, on the way down we tend to lag and the way up we tend to lag and I think we are probably seeing that.

Storage remains strong even in Europe and International in general.

And I think storage will hold up okay, if not do fine through this.

Service we saw softness just as we saw it come down in North America, we saw it in this quarter.

It'll find a new point when the economy settles and sort of stay there, whether we've hit that yet or not, I don't know.

But net/net as I said in my comments, we've had some puts and takes, we've had some strengths in other pieces, parts and things.

So overall our service is about flat if you take recycled paper out.

So on a global basis, I think we're feeling all right.

I mean we're not projecting it's going to rise, don't get me wrong, but I think we're feeling all right.

But just on that lag comment, so could things likely get worse next year?

And I guess is there any risk to the margin targets for International or do you think you've got a pretty conservative case built in to how you're thinking about it?

I don't think we have a conservative case but I think we can deliver it, yes.

The margin improvement is really driven by things at our control.

Yes, it's mostly stuff we can control.

Okay and then just any update on how you're thinking about the succession plan for the CEO role?

Yes, I'm trying to get out (laughter).

No, look we're -- it's a very methodical process and the Board is working quite hard and being pretty methodical about it, but look, the trick is I'm not putting my feet to the fire.

I started down this path to help the Company get aligned around a strategy which I think we've done really well, the business has.

And part of that strategy was a capital allocation strategy.

And as I said, we've done our year of homework and we've come out the other end with a direction and now we're going about executing and I'm not running from the completion of that.

So it's a matter of finding the right person when we find them at the right time, and until we do, I'll stay here and try to help the team get the stuff across the goal line.

Great, thanks.

And then just one cleanup one, can you give us a sense how much you spent on all these acquisitions in the quarter and was the revenue contribution material or were they all pretty small deals?

Thank you.

It's roughly $90 million in the quarter.

I'm sorry, $98 million.

The bulk of that was Brazil and the Swiss buyout.

This year we won't see a lot of profit flow through just because the integration cost in Brazil will offset some of the benefit, but it'll be nicely accretive for us as we head into 2013.

By the way, not always but the nature of the kinds of acquisitions we would likely do International will be the kind of things where you buy now and it'll take you 12 plus months to really see the synergy because we're not typically buying new footprint.

There will be some rare exception to that statement, but we already did the heavy lifting of putting the footprint in place, now we're really trying to buy major fold-in tuck-in and the big fold-in, tuck-ins take a little time to do right and continue growing fast and maintain it and so forth, and we're taking our time with those.

Great, thanks.

Andrew Steinerman with JPMorgan.

I want to ask a question about the slide that goes through global volume trends.

I would have thought given the storage growth being at 4% kind of a nice accelerated level that we haven't been at for awhile, that that chart that you have in the slide decks would also show acceleration.

Could you just go through the differences between what that slide is trying to portray and how it ties back to storage internal growth?

Yes, so the slide actually is a -- it takes quarterly performance and annualizes it, Andrew.

And so it's -- because we're trying to break it out across these key metrics and we found that that's the easiest way to show it and that compares to when we talk about the growth, we're talking about year-over-year volume, so it's slightly different.

I think the key theme here is more consistency than change in terms of the trends.

If you look at the storage growth in the quarter and it rounded to 4%, it was 3.5% actually and we've been in that 3% range for the last -- since I think it's seven, eight quarters now.

Some of the benefit was -- of improvement was related to customer acquisition activity in International just in terms of, as you know kind of the old [pumby] terminology that we use but when we acquire customers from other business, customer relationships, we had some of that flow through from a timing perspective.

And Andrew, I think you sort of said it was just good strong quarter, how do we -- portraying?

Look we're positive about the business in the economy we're operating in.

It's a crappy world out there, okay?

But we're not suggesting, in fact I am cautioning that you don't take a strong storage quarter and try to project it forward that we're going to stay at these levels.

I don't believe we will.

Right.

I think we'll move up and down, we'll see this level again, I'm not saying that, okay.

But it might not be next quarter or the quarter after, I think we're going to be hovering around the 3%-ish range, give or take, 3.5%, 2.75%, hovering around there.

And they round to different numbers as you know, we'll be hovering around those ranges.

And I think we can do that very well and so forth, but we're not talking about major acceleration here.

Okay, thank you very much.

You're welcome.

George Tong with Piper Jaffray.

Just want to get some color on your acquisitions in Hungary, Switzerland and Turkey.

How do the acquisitions position you from a market share perspective and when can you expect to achieve market leadership in those countries?

In Hungary, it was a nice fold-in and we already have market leadership there, it was just good economics.

Switzerland, we've got leadership in everything except Geneva.

And Turkey, we are a strong number two.

Got it, that's very helpful.

And could you give us a sense of how, just globally, how activity based core services performed and how much hybrid services contributed to growth?

Yes, I would say hybrid services were up solidly on a global basis.

It wasn't -- it was probably a point or so of contribution net to our overall service growth and that helped to moderate the -- it basically helped to offset the continued moderate decline we've seen in service levels in places like the US.

And as Richard noted, I think the International --

There's some acceleration in the International.

International was not -- International having grown quite well and we saw that moderate somewhat, so that could be a leading indication.

And as you know, we fully expect that our hybrid business as it gets bigger and it's still growing well we'll overcome the other declines in the physical business.

I'm not calling that turn yet, but this quarter that pretty much happened.

But again I wouldn't say that for sure it's going to happen next quarter or the one after.

Still a little early to tell that we're drawing lines yet, guys.

Yes, and last question, you touched on this earlier but could you give us a sense of how the volatility in Europe is impacting core and complementary services?

I know you're on track to achieving the margin expectations, but do you see negative impact and deceleration in growth due to that?

We haven't for the last of -- in terms of our business overall, I think it's held up very well and I think the team feels good about the ability to sustain that.

We are highlighting at the margin we're seeing some deceleration in the level of growth in the service activity.

But I would say the theme is more that we're holding up quite well and I think we're going to plan the business prudently and make sure we're managing appropriately in an environment that could get softer for us but I think it's more -- at this stage, more at the margin and something that we're keeping an eye on.

Yes and look, I tell you sort of the key theme if you look is our total growth and so forth is our shredding businesses, although they're growing on units and everything else, we see some price compressions.

A good part of that, it used to be -- it still is a very aggressive price market although in general at the street, that has modified itself a bit as paper prices have come down, which is what you'd expect.

We are still rolling off some rather large multi-year agreements that were priced in a different market environment and as they roll off they get repriced.

We'll -- that'll run off but the tail of that's coming and it'll run off and so forth.

But the shredding business between that dynamic and the -- and of course the paper prices themselves is much a drag on total revenues anything and so forth.

Great, thanks very much.

Yes.

Welcome.

Thomas Allen with Morgan Stanley.

I'm following up on your comments on paper prices.

We've heard that expectation of the market is that prices should actually gradually improve over the course of the year.

Are you hearing the same and any additional color there?

Thank you.

We've heard conflicting data.

Yes, see some people say they believe at the demand level it's strengthening, at the front line demand level it's strengthening which would naturally lead to some increase, and others say not.

So we don't have an opinion on that right now.

But look, North America may strengthen while Europe doesn't, some of this will be about where China goes because a lot of this recycled paper winds up in China and with their economy, you guys know better than I do, the changes going on over there.

So I think it's a little early to make a call.

There's a bit of seasonality in the business where the pricing goes down a bit in the back half of the year normally.

We've seen sort of modest improvement on the sorted office paper rates, so we'll -- it's gotten relatively better but this does get tied into the overall demand situation so right now we're -- the numbers we're using basically reflect that the current level is sustained.

Okay, thanks.

And then on your global records management slide, it looks like you had the lowest level of destructions in the past 10 quarters, anything going on there?

No, we did see -- it's a little different geographically but actually in Europe we've seen a decline in some of the destruction levels.

These things tend to move around a fair bit where you have some larger destructions that people may be planning and you work through them and so there is some volatility in that, but we've seen some contraction there that's helping (multiple speakers).

And by the way, the Europe destruction pattern is behaving the way the business historically always behaved, except for the 2007/2008 financial crisis period, which is in slowdowns, people delay destructions because they're protecting their current year budget.

So there's the storage pickup, storage charge rental pickup for destroying the item is not as large as the -- in the current period as large as the destruction fee and they try to protect their budget.

And I suspect that's what we're seeing there now.

That's helpful.

And then if I could fit one more in, you bought the controlling interest in your Turkish and Swiss JVs this quarter.

Were the acquisitions related to the REIT conversion at all?

I mean are you going to maybe accelerate kind of converting JVs into Company-owned quicker because of the REIT conversion?

No, no, the JVs themselves by and large the ones we have right now are in kind of the emerging markets, strong extreme emerging market front, which means they would be late in our cycle of REIT conversion as in not this year or next, the year after.

Over the due course of time, yes we would want to deal with those sort of things, but we're not going to be pushed in to doing that.

We're starting with what makes sense from a strategic point of view, a value-creation point of view and then we'll factor in how to think about the REIT more as the tail on that kind of consideration.

So these are good, strategic investments that we'd be doing regardless of the path we're pursuing as a Company.

Great, thank you.

Kevin McVeigh with Macquarie.

Brian, can you remind us on the core services side, just round numbers, what percentage is kind of related to the destruction and other type services just to kind of get a sense of the contributions to that revenue line item?

It's a smaller part, so I'm going to find it.

5% we're seeing.

So it's -- we have a long list of services that we provide that are in core service, the bigger items are things like transportation activity, but destruction services contribute to that.

Overall the core services are a little north of 30% of total revenues.

Got it.

And then in terms of timing on the distribution of the equity, is that something, Richard, we can talk about now or just any sense of -- I know the IRS is in the process of the private letter ruling, but just any sense of the timing around when we can expect any update on that?

Well our view hasn't changed from what we said in early June.

And that view is is that we would strongly consider but we haven't 100% committed to, but strongly consider doing a major E&P purge sometime during this year.

I think you would expect it towards the back end of the year.

And there's a lot of mechanics to actually making that work since it would be a combination of cash and stock.

But we're moving forward on that front as all others.

That decision in itself does not depend upon necessarily the private letter ruling in fact, okay.

Understood (inaudible).

And then are we going to have an investor day this year, is that back on or --?

Yes we are -- we had hoped to have the precise date, we don't yet.

We're nailing down the venue and we -- but we will have an investor day in October in New York City, and within a couple of days, we expect to have out the invitation with the exact date and time and so forth.

Super.

Thank you.

Yes.

Andrew Wittmann with Robert W. Baird.

First I wanted to start off with a couple of technical questions.

Just Brian, on the $10 million to $20 million of cost that you're experiencing this year, did you say that that was outside of $100 million to $150 million that you previously talked about in the June conference call?

Sorry if we confused on that, no it's a subset of that.

So it's within the $100 million to $150 million.

We expect to incur $10 million to $20 million of OpEx this year and about $10 million of capital.

The $100 million to $150 million is both OpEx and capital, I think our estimates were it was like 60% capital which is largely the systems and 40% OpEx.

But we'll be breaking this out for you as we go and actually we'll start adding some tracking relative to the overall estimates for you as well, so it's very clear how we're -- (multiple speakers)

And that will get spent beyond January 1, 2014 because there's -- it's a strategy to get ourselves to the point where we can legally convert and operate but it won't be as pretty as it likely -- we would like it to be by that date, and we will continue working beyond that.

So those expenses will flow on beyond that.

Yes.

That makes sense.

Just in terms of that process, now that the team has been kind of assembled and started off on this path, Richard, just kind of curious I mean, obviously very complex.

Can you just give us any positive or negative surprises that may have arisen that could help or hinder your ability to hit that January 2014 date?

No, I don't -- look, we've gone through the detailed planning.

I think we have 20-odd work streams all running parallel.

We've got program managers, project managers, we've really gotten it organized as -- it's just a massive kind of project.

Look, the tall pole on the tent so to speak is in the systems arena and it's primarily in the arena of -- we actually have to change our chart of accounts for our entire accounting system and in many ways update some technology and/or convert technology particularly some of the global platforms.

And some of that we may two-step because it's too much risk to do one step.

And when you're doing that much technology change, to be candid with you, our goal is to have all those systems operating mid- next year to give us six months of working out the kinks and making sure nothing happens.

Although our head -- Chief Information Officer is sweating a lot right now, he and his team are doing good work, and they'll get it done.

And so, no, we're not -- this is not something that I lay awake at night worrying about but then again I don't do this kind of execution.

Brian does it and his team, and Jeff and Tasos and those guys do it and they're sweating a bit and complaining, want me not to go up and do anything else, but that's not my nature either.

To your question, no surprises, we thought it was a lot of work and it's turning out to be true.

And we've had a really good team working on it and committed to getting this done.

Yes.

Okay.

And just thinking about the capital base and some of the capital needs that you have this year, Richard, can you just update our thinking?

It sounds like you mentioned the $600 million of liquidity that you have today, that would be I guess all of your cash and all of your credit facility.

Can you talk about what you're seeing out in the markets that maybe fund any hole that you might have in the capital base to do the E&Ps and other investments?

We have discussed this, likely we're going go to the market at some point to help fund that and we'll update you as we move forward on that.

But we will likely want to have put some more financing in place.

Yes and our sense is the market environment is quite good right now.

When you mentioned in your comments here that your guidance does not impact any -- or does not reflect any impact of the E&P distribution, is that really the financing terms of that E&P distribution, is there any other impact that it would have to your P&L, is it about cost?

It would include the -- obviously there's a cash [outflow] but keep in mind too if we did the majority of our E&P distribution this year, which has been our plan that we signal, there would be a number of shares that are issued, right, that go along with it.

So your per share metrics would change, your interest cost would change and so forth.

Because it effectively works like a stock split, but we haven't plugged any of that into the outlook and we'll obviously get you more details as we firm up plans there.

Sounds good, thank you very much.

Shlomo Rosenbaum with Stifel Nicolaus.

Just to piggyback a little bit on the last line of questioning, just to be clear, you're thinking of funding-- you're going to fund the gap with debt, not equity, right?

Yes, that would be our current intention recognizing that we're going to do likely 80% of it in issuance of new stock, yes.

The question is, in order to get into the REIT structure, the hole that you have in terms of the capital that's going to require you to raise capital, you're planning to do that with a debt offering or more bank debt, but it is not going back to the markets for an equity offer.

Correct, we don't need equity.

We don't need equity.

I'm never going to say we won't go to the markets for equity.

You tell me the price and I'll tell you if we'll go.

But as we sit here today, we don't perceive going to the markets.

It's not in my -- our thinking at the moment for equity.

Okay, great.

And then just following up--

I would tell you, though, just to be clear, just to close out that subject for you a little bit, as we do M&A, we may use some equity in transactions to the extent that the deals are highly accretive to our shareholders, okay, we might do something like that.

But that's not going to be major-- not going to be big numbers.

Yes, as we talked in our announcement, over time we think it will make sense to operate at lower leverage levels and so equity may be part of our future plans but it's not a requirement for us to get into the structure.

We're well positioned to get -- to fund the conversion.

So, Operator, we're going to take one more question.

I said this was going to be a shorter than average call, this has already run an hour, so we'll take one more question then so that those of you that need to get onto other calls.

Nate Brochmann with William Blair & Company.

Thanks for making me the last question, I appreciate it.

Better be a good one, Nate.

Well, I'll try.

One of the things, obviously, I mean I know the economy hasn't been helpful in this in terms of the service revenues always consistently being a pain in your side every quarter.

Is there any light at the end of the tunnel in terms of what turns that around or in terms of just finally reaching such easy comps that it doesn't get any worse?

Well, I think, I think we're seeing that scenario in North America because the decline rates are slowing, okay and it'll drift into the right space there.

And it's hard to know where Europe is going, I mean quite candidly.

But Europe does not -- we don't have quite the risk profile in Europe, our business there is much less active in the physical side because we don't have a big medical business.

And still the number one driver to that decline is a healthcare trend, it's not the economy.

The economy is the second driver of that decline, which is primarily a North American issue totally.

So the fact that we don't have the big driver in healthcare will mean it's not going to impact us as much, it's likely be on the margin kind of stuff.

Okay, that's helpful.

And then just one quick question too in part of the margin improvement in North America you've mentioned in the press release the lower occupancy cost, is that because you're already starting to consolidate some facilities there or it is just lower lease costs and lower property values, et cetera?

We're always working to optimize the utilization our network.

We have improved that a bit and I think that's reflective of the work that we're doing on that front as well as utility costs, I think we're down a bit as well in the quarter but it does reflect the work that we're doing to optimize the real estate.

Great, okay, thanks, guys.

Very helpful.

Sure.

So thank you very much for giving us this hour.

We appreciate your support and so forth.

As we did mention earlier, we will be out, there's one more -- one or two more conferences we'll be at.

We'll be at the Barclays Conference in a few weeks in New York, next week, they tell me, I got to look at my calendar more carefully I guess.

But we are driving towards an investor day in October and we'll be out shortly with the precise date and location, so hopefully you can put in your calendar.

We would expect at that investor day to talk quite a bit about what we see for finishing out our three-year plan that we started about 18 months ago, making sure you see that we're on track there.

We'll expect to be talking a little bit about how we're going to build a more durable business, hopefully give you, likely give you, some access to some of the key managers that are doing it.

And then, of course, we will be talking not about the REIT process, because we'll be in the middle of it and we won't know anything and if we did, we wouldn't tell you anyway.

We will be talking about, though, what Iron Mountain might look like as a REIT a bit more than we have so far.

So I think you will hopefully find that a useful time to come and spend a morning or so with us.

Again, thank you, we hope you all have a good summer and we'll see you later.

This concludes today's conference call.

You may now disconnect.