鐵山公司 (IRM) 2012 Q4 法說會逐字稿

My name is Bonnie.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Iron Mountain fourth-quarter 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.

I would now like to turn the conference over to Ms. Melissa Marsden, SVP of IR.

Please go ahead, ma'am.

Thank you, Bonnie.

Welcome, everyone, to our fourth-quarter and year-end 2012 earnings conference call.

As Bonnie noted, I'm Melissa Marsden, Senior Vice President of Investor Relations.

And I just joined the Company's IR team a few weeks ago.

This morning, we'll hear from Bill Meaney, our new CEO, who will discuss highlights and his early focus areas, followed by Brian McKeon, our CFO, who will cover financial results and guidance.

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 earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for 2013 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 differ from those in our forward-looking statements.

In addition, we use several non-GAAP measures when presenting our financial results.

And the reconciliations of these non-GAAP measures, as required by Reg G, can also be found at the Investor Relations page of our website, in addition to today's press release.

With that, I'd like to introduce our new CEO, Bill Meaney.

Thank you, Melissa.

It's great to be here today.

I've had the opportunity to meet with several of you since joining the Company in January.

And I look forward to getting to know our investors and analysts over the coming months.

Before I get started, I'd like to just take a minute to welcome Melissa Marsden to Iron Mountain.

Brian and his team have been working with Melissa as a consultant for some time.

She officially joined us in her current capacity as Senior Vice President of Investor Relations earlier this year.

Melissa brings more than 25 years of Investor Relations experience across a range of industries.

Most recently, she served as Managing Director of IR at Prologis, which, as some of you probably know, is the global leader -- the largest global industrial REIT, where she was named the top REIT IR officer by Institutional Investor.

So, we are very pleased to have Melissa here, and the capabilities that she brings to our team, as we work to expand Iron Mountain's investor base.

Now, that is an introduction to Melissa.

Let me just kick off with a couple of comments on our performance, and then Brian will cover the details in a few minutes.

Iron Mountain wrapped up another solid year, with revenues of $3 billion and adjusted OIBDA of $912 million, and adjusted earnings per share of $1.21, all in line with our expectations.

In the fourth quarter, we continued to achieve strong constant-dollar storage rental growth of 5%, underscoring the long-term durability of our business, and providing a sturdy foundation for our overall financial performance.

Our storage rental revenue growth reflected both healthy increases in our international business, as well as steady growth in our North American business, and offset a modest decline in our total service revenue, which was driven mainly by lower recycled paper prices.

These stable fundamentals are what attracted me to Iron Mountain, namely a track record of durable growth, strong cash flow generation, high return opportunities in the international market, and a great franchise with a strong culture.

While many companies experience wild swings in revenues as global economies peak and trough, Iron Mountain has a unique ability to sustain its growth rate throughout business cycles, due to the attractive, underlying stability of our storage business.

I did my due diligence, and I believe we can sustain the durability of the Business through opportunities in both the mature and emerging markets, as well as potential adjacencies.

Be assured that as we pursue these opportunities, we will continue to view them through our capital allocation approach, which focuses on maximizing cash flow, generating strong returns, and supporting the steady long-term growth of our core business.

My near-term focus upon joining the Company has been to spend a good deal of time with customers, investors, and our associates around the globe.

I came away with a sense of opportunity related to the significant amount of un-vended records in -- that remain in the mature markets in both private and public sectors.

One way in which we are addressing that is organizing our sales efforts into vertical segments such as healthcare, financial services, energy, and government, and a closer alignment between our sales and product management groups.

It is early in the process, but we are pleased with the progress to date.

This sector focus and Iron Mountain's strong customer relationships should, in time, give us permission to handle more data and record management processes for our customers, and provide some higher value-added services.

Additionally, Iron Mountain has an internationally recognized brand, yet only about 25% of our revenues today are generated outside of North America.

Overall, many of the emerging markets are still early in the records outsourcing process, supporting our continued expansion in international markets, which is a great fit with my background.

I spent the last 27 years running multi-national businesses from outside the United States, and I'm very comfortable with the process.

To be clear, in my view and the view of Iron Mountain, international expansion is not about putting pins in the map.

We will pursue entry into additional markets with an aggressive, yet disciplined approach, that is consistent with our focus on return on invested capital and where we can develop leadership positions over time.

We are on track to achieve our goal of 700 basis points of international margin improvement by the end of 2013.

Entry into new markets may slow further international margin expansion slightly in the early stages of market penetration.

But as we've demonstrated in the past, once we achieve market leadership, our international margins are very consistent with those of our developed markets.

Lastly, we look to invest where we can leverage the brand and build off our strengths, but in areas that are adjacent to, or directly tied to, our core operational expertise.

At Investor Day, Richard Reese talked about the opportunity for wholesale data centers, where we can provide the secure space, and customers bring in their own technology.

He highlighted that we are already doing this in our underground data center operations, where we are approaching a run rate of some $20 million in annual revenues, with substantial space to further expand.

This is just one example of where customers came to us and asked for a specific product or service.

And we'll continue to look at additional opportunities consistent with our core business.

The combination of our durable leadership position in developed markets, emerging market opportunities, and close-in adjacencies provide a very solid foundation.

I'm very confident in our ability to build on this position, and to maintain steady, stable growth, and strong cash flow.

In short, I think we've got a great base from which to continue to drive sustainable value.

Beyond the opportunities to sustain the durability of the Business, I was really attracted by the nature of the Organization.

It's not often that one gets a chance to lead a company that has the kind of franchise that Iron Mountain does.

The strength of our brand and the depth of our customer relationships, in my opinion, are unparalleled.

The culture is refreshing and apolitical, something that is exceedingly rare in a global company.

There is deep operational know-how, what I like to call the secret sauce, and its customers trust us with their critical documents.

And it's what enables us to innovate and discuss with our customers how we can do more to improve the efficiency of their records management.

There is also an overarching objective of driving returns through smart and disciplined capital allocation, with a focus on long-term and sustainable growth.

Assuming that we are successful with the Private Letter Ruling, or the PLR, the REIT will complement our core strategy and provide further certainty in our investment focus, resulting in a source of stable and growing shareholder returns.

Financially, we will have the flexibility to fully support high return investments, to expand our network capacity, pursuing tuck-in acquisitions and geographic expansion opportunities, as well as acquiring real estate.

We will also retain the flexibility within the REIT tests to expand closely related service opportunities, as well.

As we move through the PLR process with the IRS, we are working hard to advance our preparedness to operate as a REIT.

We have invested heavily in people, processes and systems to enable us to be ready for conversion at the beginning of next year, and are targeting the third quarter to have our REIT critical systems in place.

This aggressive timeline results in additional investment, which Brian will review.

But this is the right time to invest to ensure we're dotting our I's and crossing our T's.

We're making a significant investment, but one that pales in comparison to the incremental shareholder value we expect to be able to deliver as a REIT.

As we continue to work on the REIT conversion, we have been familiarizing ourselves with various REIT sectors and their characteristics.

In terms of the nature of our Business, we believe that Iron Mountain is most like to self-storage, but with an important difference.

We are enterprise storage serving 94% of the Fortune 1000, as opposed to consumer self-storage, which has a very different credit profile.

In terms of other characteristics of the Business, I think we believe we compare favorably with an attractive cash flow characteristics, low volatility and low risk.

For example, in terms of cash flow, we have a much higher annual rental revenue per square foot, roughly 2 times that of the self-storage sector, where we're approximately $27 a square foot versus $13 to $14 for self-storage.

We also have similar low maintenance CapEx to self-storage at roughly 6% of our storage rental gross profit.

And we have similarly low tenant improvements required when a new customer moves in.

If we look at it in terms of volatility, in comparing ourselves to the self-storage market, we have a very stable storage rental growth of plus 4% to plus 7% versus self-storage, which is ranged anywhere from minus 5% to plus 9% over the past several years.

We also have very high customer retention rates of 98%, compared with only about 55% of self-storage customers who stay more than one year.

On top of that, the average life of a box in our storage rental business, as most of you know, is about 15 years.

In terms of the risk profile of Iron Mountain's business versus the self-storage business, we have a very high-quality, diversified customer base serving 94% of the Fortune 1000.

And we have more than 155,000 customers globally.

Whereas, self-storage has retail or individual consumers as customers, with variable credit quality.

So, we look forward bringing you the specifics of these and other metrics, as well as our thoughts on Iron Mountain's valuation as a REIT over the coming quarters.

In summary, we are executing against our business strategy, and are well-positioned to deliver against our financial objectives in 2013.

Our storage rental business is strong.

We have meaningful growth opportunities available to us, to extend the durable storage annuity.

And we are making good progress towards delivering the REIT.

Before I turn it over to Brian, I'd like to take this opportunity to thank Richard Reese for his innumerable contributions to Iron Mountain.

Many of you have come to know his candid and thoughtful style.

And I believe the culture of the Company is due to his influence and leadership over the past 30 years.

As we met with investors over the past month, many of you expressed your thanks to Richard for his stewardship of the Company, and his willingness to return during a difficult phase in the Company's history.

He will be missed, and I have truly appreciated his insights in the short time that I've gotten to work with him here.

I know you'll all join me in thanking him and wishing him well.

With that, I'd like to turn it over to Brian.

Thanks, Bill.

Let's turn to slide 3, which highlights the key messages from today's review.

We delivered solid operating performance in Q4, driven by consistent storage rental growth.

Storage rental grew 5% on a constant-dollar basis in the quarter, supported by consistent gains in North America, and 12% growth in international, including benefits from our 2012 acquisitions in Brazil and Europe.

Overall growth trends were similar, with reported results constrained by lower service revenues.

As expected, we saw about $3 million of negative impact from lower year-on-year recycled paper pricing; however, the impact was less than we've seen in recent quarters.

And we've worked through the lapping of the significant price declines that began in Q4 of 2011.

Adjusted OIBDA was in line with our full-year guidance.

Our profit results continue to be supported by international margin gains.

As reviewed in our Q3 call, we saw impacts in Q4 from costs associated with accelerated facility transactions, and a realignment within our sales and account management organizations, as well as from the true-up of accruals at year end.

Overall, we finished the year on track with our expectations, supported by solid storage growth, strong international gains, and continued efficiencies in capital investment.

Today, we are reiterating our full-year 2013 financial outlook for revenues, adjusted OIBDA and free cash flow.

We're increasing our CapEx guidance to reflect a recent facility lease buy-out, and the relocation of our Boston headquarters that was announced after Investor Day.

Additionally, we're updating our preliminary outlook for our REIT conversion costs to reflect a more informed view of the expenditures required to complete the project, particularly with respect to the international conversions.

We're investing to ensure that we meet the January 1, 2014 deadline, including having our REIT critical systems operating in the third quarter of this year.

Let's move on to slide 4 to review our financial results in more detail.

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

As noted, Q4 results were as expected, supported by 5% constant-dollar storage rental growth.

Enterprise revenues grew 2% on a constant-dollar basis, as our international segment continued to drive strong performance.

International posted 10% constant-dollar revenue growth supported by 4% internal growth, and benefits from our acquisitions in Brazil and Switzerland.

North America posted flat constant-currency revenue growth, as lower service revenues offset 2% storage rental gains.

ForEx changes had a minimal impact in the quarter.

Gross profit was $420 million in Q4, yielding a gross margin of 55.4%, down 210 basis points compared to the same prior-year period.

Storage gross margin decreased 120 basis points, reflecting costs related to accelerated facility transactions in the UK and in the southeastern United States.

And service gross margins were down year over year, due to decreased recycled paper prices and the impact from lower core service activities.

Mix impacts from 2012 acquisitions were also a contributing factor.

Adjusted OIBDA was $207 million, or 27.2% of revenues in Q4.

Our underlying profit performance remained solid, supported by continued improvement in our international segment.

In Q4, this improvement was offset by the negative impacts from the costs associated with the facility transactions I just described -- the realignment within the sales and account management teams in North America; the integration of our 2012 acquisitions; and the impact of year-end cost accrual true-ups.

Lower paper prices and lower service activity were also contributing factors to the year-on-year decline in adjusted OIBDA.

Adjusted EPS for the quarter was $0.20 per share compared to $0.33 in Q4 of 2011.

The decrease was primarily related to lower adjusted OIBDA, and increased interest expense related to our recent debt financing transactions in support of shareholder payouts and the REIT conversion.

Adjusted OIBDA and adjusted EPS exclude the impact of costs associated with the REIT conversion.

These costs reduced 2012 reported EPS by $0.07 per share.

Reported earnings per share of $0.15 includes $18 million of REIT costs, $6 million of losses on asset dispositions, and $2 million of other expense.

These impacts were partially offset by the impact of our lower 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.

Q4 and full-year growth rates were in line with our full-year expectations.

For the quarter, constant-dollar growth was solid at 2.5%.

Overall constant-dollar growth for the year was at the midpoint of our 0% to 2% range, including the impact of lower paper prices.

Excluding these effects, constant-dollar growth for the year was a solid 2%.

In Q4, storage rental grew 5%, driven by consistent performance in North America, and continued strong growth in our international segment.

North America reported 2.4% constant-dollar storage rental growth, reflecting relatively flat records management volume, and consistent pricing trends in the 1.5% to 2% range, with some additional benefit from solid data protection storage rental growth.

International storage rental constant-dollar growth was 12% for the quarter, reflecting sustained double-digit growth in Latin America and Asia-PAC, and benefits from the 2012 acquisitions.

Total services decreased 1%, as expected headwinds in North American activity-based services and lower paper prices more than offset solid DMS growth and benefits from our 2012 acquisitions.

Overall, North America service revenues declined 4% in the quarter, with 1% of that decline related to paper.

Gains in DMS revenues were offset by decreased core service activity levels, and lower revenues from special projects and ancillary service lines, including film and sound, and fulfillment services.

The international segment posted 8% service growth, supported by acquisitions.

In terms of components building to overall growth, storage rental internal growth at 3.2% for the quarter showed an improvement as expected compared to Q3.

Net global records management volume was up 1.8% on a year-on-year basis.

Service internal growth was minus 2%, and total revenue internal growth was roughly 1%.

Acquisitions and foreign exchange changes combined to add about 1.5 points to our reported results -- growth results.

Overall, our storage rental business remains durable, providing consistent results and a solid foundation for overall revenue performance.

Let's take a look at our storage rental performance over the last 12 quarters, on slide 6. Slide 6 shows our constant-dollar storage rental growth over the past 12 quarters for the enterprise, as well as for our two operating segments.

The stability and durability of our storage rental business drives the economics of our Business.

We've now reported 24 consecutive years of storage rental growth.

As you can see in this chart, since 2009, our constant-dollar enterprise storage rental growth has averaged 4% per quarter, while ranging between 2.5% and 5%.

North America, which generates approximately 75% of our storage rental revenues continues to deliver stable growth of 2%.

Our strategy here is to sustain this level of growth by capturing opportunities in the un-vended market in underserved verticals such as government.

As we outlined at Investor Day, our target growth rate for North American storage rental is between 1% and 3%.

Our overall storage rental growth is enhanced by our fast-growing international segment, which has averaged 9% constant-dollar growth over the past three years.

This performance is supported by strong organic growth, and more recently, additional growth through acquisitions.

In the more developed international markets, we'll continue to support the growth of the annuity as we are in North America.

In addition, we'll look to expand in high-quality, high-growth emerging segments.

Over the next three years, we expect to drive 5% to 9% storage rental growth overall in international.

Our long-term focus is to sustain the durability of our storage rental business as the key driver of our overall economics and the foundation for the long-term growth of our cash flows.

Let's now take a look at our full-year and profit results on slide 7. Slide 7 looks at our full-year performance compared -- for 2012, compared to 2011.

In terms of our key financial metrics, we delivered results that reflect consistent business trends and the achievement of our financial goals.

Reported revenue for the year was $3 billion, up 1% on a constant-dollar basis, as solid storage gains offset impacts from lower recycled paper prices and declines in core service activity in developed markets.

Adjusted OIBDA was down 3% year on year on a constant-dollar basis.

Lower paper prices pressured profits by about $30 million in 2012.

As noted, at current prices, we've worked through these tough comparisons.

Year-on-year results were also impacted by discrete costs in Q4, including facility moves, costs associated with the realignment of our sales and marketing organization, and the year-end true-up of accruals.

These impacts offset gains driven by strong underlying international profit performance.

Adjusted EPS was $1.21 per share, down 11% compared to 2011, reflecting lower adjusted OIBDA and higher interest expense incurred to support shareholder payouts, and cost associated with the planned REIT conversion, which more than offset the benefits from fewer weighted average shares outstanding for the full year.

2012 capital spending was $182 million, including $54 million of acquired real estate and $13 million of REIT conversion CapEx.

As a percentage of revenues, CapEx, excluding real estate and REIT CapEx, is 6.1%, in line with our capital efficiency goals.

Free cash flow for the year was $347 million, solidly within our guidance range compared to $467 million for 2011.

The year-on-year decrease was as expected, reflecting lower adjusted OIBDA combined with higher cash taxes compared to low 2011 levels, higher interest expense in support of our shareholder payout program, and the lapping of lower cash incentive compensation payments in 2011.

The 2012 adjusted OIBDA and adjusted EPS results shown here exclude $34 million of cost associated with the REIT conversion.

These costs reduced 2012 reported EPS by about $0.14.

Note that 2011 adjusted OIBDA and adjusted EPS exclude $16 million of these costs, and reduced reported EPS by about $0.05 per share.

In addition to the $13 million of REIT-related CapEx I just discussed, we paid $80 million in taxes towards our D&A recapture liability.

All told, these items would have reduced free cash flow by about $116 million year to date.

We've included a slide outlining the actual and expected REIT costs, and related expenditures in the Appendix to this presentation.

Let's now turn to slide 8 to review our full-year results by segment.

Slide 8 shows key year-to-date metrics for each of our three segments compared to 2011.

Consistent with our business strategy, we're sustaining high returns in our North America 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.

For the full year, our North American business segment reported revenues of $2.2 billion, supported by consistent 2% constant-dollar storage rental gains.

Despite the impacts of low recycled paper prices, we sustained adjusted OIBDA margins of 42%.

Adjusted OIBDA in North America was down year on year due to a decrease in paper revenues of $23 million, lower core service activity levels, and costs associated with the facility transaction, and the realignment of the sales and marketing organizations.

We also sustained capital efficiencies in North America this year, with spending at 4.5% of revenues, excluding real estate.

Our international segment continues to pose strong constant-dollar revenues, adjusted OIBDA and cash flow gains.

Adjusted OIBDA increased 10% on a constant-dollar basis.

We're benefiting from cost improvement initiatives in western European markets, and strong profit performance in Asia-Pac.

Excluding acquisition integration costs and the accelerated facility transactions in the UK, international adjusted OIBDA margins expanded about 150 basis points this year.

Benefits from productivity initiatives and from continued solid growth across our international portfolio have us on track towards our business goals of approximately 25% margins in 2013.

Finally, corporate expenses were consistent with prior-year levels, reflecting benefits from overhead cost control initiatives.

Overall, we continue to drive strong operating performance across our portfolio.

Let's now take a look at our debt statistics on slide 9. Strong consistent cash flow generation enables us to maintain a sound balance sheet.

We're currently operating with a consolidated leverage ratio of 3.9 times, within our targeted 3 to 4 times leverage range.

Our leverage ratio has increased over the past two years, as planned, to support shareholder payouts of $1.5 billion and expenditures in connection with our proposed conversion to a REIT over that period.

As we previously stated, the costs associated with REIT conversion, including tax payments, will temporarily and modestly push our leverage over the high end of our target range.

We're well-positioned in terms of cash and financing capacity.

At year end, liquidity was more than $900 million, with $243 million in cash and $667 million in additional borrowing capacity.

Our strong cash flows support continued advancement of our shareholder payout strategy.

During the fourth quarter, we paid $47 million of regular quarterly cash dividends at a rate of $0.27 per share, in addition to the $140 million cash portion of our $700 million special dividend.

For the stock portion of the special dividend, we issued 17 million new shares.

As we discussed on the Q3 call, management recommended, and the Board at its regularly scheduled meeting in December, agreed to maintain the $0.27 per share quarterly cash dividend rate, rather than reduce it based on the new, higher number of shares outstanding.

This resulted in an increase to our dividend payout levels of nearly 10% over prior years.

We are managing our balance sheet consistent with our strategy, while advancing substantial payouts to shareholders.

And we're well-positioned to fund our business plan.

That concludes our review of our Q4 2012 results.

Overall, 2012 was another good year in which we continued to drive solid financial performance, and position ourselves well for continued success in 2013 and beyond.

Let's now turn to slide 10 to review our 2013 outlook.

Today, we are reiterating our full-year 2013 revenue, adjusted OIBDA and free cash flow guidance, while updating our outlook for CapEx, adjusted OIBDA and REIT costs.

As we first presented at Investor Day last October, we're projecting 2013 reported revenues to be in the range of $3.02 billion to $3.10 billion, or 0% to 3% constant-dollar growth.

We're maintaining our outlook for adjusted OIBDA to be between $905 million and $935 million on an operating basis.

Storage rental growth is expected to remain strong at 4% on a constant-dollar basis, consistent with the past two years.

Service revenue growth is expected to be down moderately, driven by consistent trends in developed markets.

Based on current prices, recycled paper should have a limited impact on 2013 growth.

Adjusted EPS for 2013 is now expected to be in the range of $1.13 to $1.24.

The change from Investor Day is primarily due to some additional D&A and interest expense, as well as to formally update for the number of diluted shares outstanding that we have after the E&P distribution.

We provided some estimates at Investor Day, and this formally builds in the actual 17 million shares distributed.

The calculation of adjusted EPS now assumes 190 million shares outstanding and a structural tax rate of 39%.

We're increasing our full-year capital expenditures to be approximately $290 million, including an estimated $75 million for real estate.

The increase reflects the addition of $22 million for the relocation of our Boston headquarters that was announced in Q4, as well as about $11 million for the buyout of the lease in Dallas we completed earlier this year.

The $75 million we expect to spend on real estate this year includes $30 million for the expansion of our data center capacity in our Pennsylvania underground facility that we discussed at Investor Day.

Our outlook for operating free cash flow continues to be in the range of $320 million to $360 million, as we expect cash tax efficiencies that will offset the net cash impact from the office move.

As we've been highlighting, we anticipate significant one-time operating and capital costs associated with our potential conversion to a REIT.

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

Total operating expense and capital costs are now estimated to be in the $150 million to $200 million range, up about $50 million from earlier estimates.

We expect the majority of these costs to be incurred in 2013.

We've increased our preliminary outlook in this area to reflect a more informed analysis of the conversion project, particularly with respect to the scope and timing of our international conversions.

We are investing to ensure that we meet the January 1, 2014 deadline, including having our REIT critical systems operating on a test basis by the third quarter of this year.

For 2013, we expect to incur between $65 million and $90 million of incremental expense, between $30 million and $45 million of CapEx, and to pay $105 million to $115 million in additional taxes related to the depreciation recapture, all in connection with the REIT conversion.

The impact of these items will be a reduction in reported EPS of $0.26 to $0.36, and the use of cash of $185 million to $230 million.

We'll continue to track and report these costs discretely from our underlining operating results.

Slides laying out our outlook for line items below adjusted OIBDA, as well as for the REIT-related items are included in our Appendix.

That concludes our review.

In summary, Q4 was a quarter of good financial performance, and we're well-positioned to achieve our financial goals in 2013.

We continue to execute against our business plans, sustaining high profits and cash flow in North America, and driving strong growth and higher returns in our international business.

And we continue to advance work in connection with the proposed REIT conversion as part of our long-term approach to enhanced value creation for stockholders.

Thanks.

And we'd now be happy to take your questions.

(Operator Instructions)

Kevin McVeigh, Macquarie.

Congratulations to Richard.

Bill and Melissa, welcome aboard.

I wonder, Brian, just as we think about the uptick in the taxes related to the REIT, the $105 million to $115 million up from $80 million.

What was the reason for that, in terms of -- was it just tighter discussions with the IRS?

Just any thoughts around that?

Kevin, this is Stephen.

No.

This is just the schedule of payments over the course of time.

There were -- it's more than one layer to it.

There is a small second layer coming in, in 2013 that wasn't there in 2012.

So, this has got nothing to do with conversations with IRS.

This is all fixed payments that just happen to be in bulk in 2013.

Got it.

Then, Bill, it sounded like you've had a wonderful transition so far.

One thing you mentioned were potential adjacencies.

Was that kind of primarily related to data storage or anything else in addition to kind of the traditional service's past data storage?

Would you do that organically or inorganically?

Well, I think right now, the only thing that we've come out public on is the wholesale data center has a potential area for adjacencies.

But there's a number of things that we are looking at across all those spectrums.

But I think the way to think about it is, the things we are looking at, is similar to when we went into the tape business.

In 1995, I think, roughly, is when we really got going in the tape business.

It was less than a $15 million business.

Today, we've turned this into a $400 million or $500 million business.

I think the question for us is, what is the next natural adjacency?

Just like we added tape alongside the box, which is the next one.

There's a number of things that we're looking at.

The one that we've highlighted or come a little bit more public about is the wholesale data center as a potentially area.

James Samford, Citigroup.

Bill, welcome aboard.

I just wanted to ask you quickly on the REIT conversion and where we are in terms of the next stage of E&P distribution?

Is that in timing or at any size, as far as anything that you guys have come up with so far this year?

James, this is Brian.

Let me -- why don't I try to take that on.

The next E&P distribution, assuming we're successful with the feedback from the PLR, which we don't have anything new to announced on that front.

But assuming we are successful, would be in 2014.

So, we are not anticipating an E&P distribution beyond the one that we did at the end of last year until 2014.

That's consistent with normal timing on these types of things.

So, we have until the end of 2014 to do the formal distributions as part of the conversion process.

Okay.

Just a quick follow-up on the tape backup and data protection segment.

What's the overall mix today?

I think you said $400 million to $500 million -- $450 million to $500 million.

Is that segment growing?

Any metrics on either gross or margin expectations on that part of the business?

I guess, Brian, it is growing.

We highlighted that actually North America gave us some accretive benefit to the overall growth rate.

You see somewhat similar dynamics in the tape business that you do to box, in a sense that the archival use of tape continues to grow.

So the storage side of the business is solid.

We are also getting the benefit of a refocus within the Company over the last couple of years, really post the divestiture of the digital business.

A lot of the resources that were -- sales resources that were calling on CIOs, we're selling a broader spectrum of products.

Now they're really laser-focused on the tape business.

We are starting to see the benefit of that flowing through our growth rate.

We are seeing headwinds in the tape business, like we are in box, in the sense of activity-based services.

There is less tape rotation going on.

It's more archival in nature.

So there are some headwinds there that constrain the overall growth.

But it's quite a healthy business.

I think, a key thing to highlight there is, it is very much aligned with the growth in digital data, right?

The tape is a storage format for digital information.

So, it benefits from the explosion in growth of digital data.

So, it's a very good business.

Very nice returns for us.

We are pleased with the progress we're making there.

Gary Bisbee, Barclays Capital.

Bill, welcome -- Bill and Melissa, welcome.

My first question, can you just quantify, Brian, for us, the costs related to the facility closures?

How quickly do you get a return in terms of additions to your savings going forward from those efforts?

Secondly, just the rest of the other incremental -- I think you said some accruals in incremental sales investments?

Yes.

The facility transactions, there were two large ones.

One was in London.

It's basically closing one facility and consolidated into another.

We had one in Nashville, Tennessee, in the US.

We'll see returns from those quickly.

So, those are basically payments we're making to get out of lease facilities and some other costs.

We'll consolidate it to other buildings.

That's factored into our 2013 outlook.

It's very quick payback.

So, this is nothing new.

We had some other impacts in the quarter.

The sales and marketing realignment was about $4 million.

We highlighted paper being an issue year-on-year, about $3 million.

There were just a variety of things that all went in one direction on the year-end accruals.

Where we had some litigation accruals, we still incurred some cost to finalize resolution of the government contract matter, which is progressing well.

But there is a lot of money being spent there just to resolve that.

We had some adjustments to stock programs.

We've moved to a world where we are paying a lot more in dividends.

We've made some adjustments to how that impacts the stock incentive programs for employees.

They can basically give them credit for dividends in the future.

Just some other normal noise.

But those, sum total were $7 million of impact.

A lot of noise in the quarter, when you cut through it, we expected a bunch of this.

So it's right in line with our guidance.

Operationally, we feel good about the underlying performance.

The international business is on track.

Good profit improvement in North America, sustained margins that have endured some of the paper price swings, but we've worked through that.

We feel like we are in a good position to deliver the objectives that we outlined at Investor Day.

Okay.

I'm sorry, how much specifically was the cost of those two facility closure charges?

$7 million.

$7 million combined.

Okay.

All right.

The little more color on the sales.

I know there's been talk of investments in sales beginning a year ago or so.

Is this incremental on top of that, in terms of a bid different strategy?

Or is this just continuing to execute what you been working on for a while?

Is it -- you have any tangible sense, yet, how the verticalization -- if that's the word, is actually working?

Thank you.

This is Bill.

I think that it's early days.

But what we did before, is we did a very strong focus and verticalization around the healthcare segment.

Based on that, we were able -- we were getting some good traction and gains against the headwinds that we were experiencing in healthcare with the drop in service revenues as people going to the electronic records.

We saw that actually really worked, to have people -- have the sales teams that were specialized around certain vertical sectors.

So, what we've done at the start of this year is, we've launched a number of different sectors which I mentioned, including government, oil and gas, financial services, doing exactly the same thing.

It's early days.

But it was based on the success that we had in healthcare, in terms of rejuvenating that business.

We thought that this really is the thing that makes sense, to try to go after some of that un-vended business and get more, especially in the mature markets.

George Tong, Piper Jaffray.

Welcome to the team, Bill and Melissa.

Bill, could you talk a bit about the customer traction you are seeing with wholesale data centers?

How much this contributed to 4Q results?

How much you are expecting this to contribute going forward?

Well, I think that we are approaching a run rate of $20 million for 2013.

We have a number of clients or customers that mainly came to us, that we're hosting in that wholesale data center.

So, we are in the process -- as part of this realignment of the sales force, is to actually be more proactive in terms of bringing an additional revenue.

That's where the investment that Brian highlighted, the $30 million that we are budgeting this year, to expand that, is based on sales volume.

So, we are not spending that money hoping that people come.

It is based on our expectations in terms of generating additional customers for that facility.

That's the amount that we budgeted to actually build out the facility to serve them.

Right now, it's early in the year, but we are sticking by our guidance.

That's what we expect, based on the pipeline that we're building.

George, it wasn't a major driver of our economics in Q4.

In 2013, we are investing in the front-end capability, to continue to build out this business, which we think could be $200 million business over time.

So, you'll start to see the benefits of that flowing through more in 2014, in terms of the profit results.

But right now, it's not a major driver of our profit growth.

But, we feel very good about the investments we are making.

The incremental returns on this are very attractive.

It's a great space and good execution and high-end customer interest.

So, we feel very good about this.

I think, to Bill's point, it's a business that we can meter quite well.

We basically invest capital after we've got commitments and long-term contracts.

So, it's a good business all around to investment behind.

Got it.

That's very helpful.

As a follow-up, could you give us some color on what kind of customer activity you are seeing in the healthcare space?

Particularly with regard to the computerization of health records?

First of all, with the computerization of health care records, we are getting a lot less service revenue, which I think goes without saying.

It's becoming much more archival.

They're still retaining the paper records, because they need that proof.

But in terms of the access to the information on those records is, that's being much -- more and more, that's being scanned, which is helping our scanning business.

It's then -- once it's electronic, they don't need to bring the records back and forth.

Where we're finding some new storage opportunities are things that -- which I've discussed with some of you is, for instance, in the pathology segment.

It's in an area that's been overlooked by a lot of the healthcare providers, in the sense that they just stacked up these paraffin slides everywhere.

Also, in terms of the some of the tissue samples.

That's a business that we are seeing some decent growth, which is pure storage, but needs to be stored under special environmental conditions.

Andrew Steinerman, JPMorgan.

Welcome, Bill and Melissa.

Brian, I know we're increasingly talking about constant currency growth.

But I appreciate the reference back to internal growth.

When we look to zero to 3% constant currency, constant dollar growth, for 2013, I wanted also a conversion back to organic growth.

Is there any acquisition that has occurred since Analysts Day?

Is FX still a very modest change?

So, is internal growth going to be close to zero to 3%?

The second question is, within that zero to 3%, how should core service fare?

Yes.

So, breaking that down a bit for you.

If you're just looking at internal, Andrew, is we expect storage to be about 3%.

So consistent where we are.

Services to be down modestly.

So, it's sort of a flat to minus 2% range, I think would be a good estimate there.

That is, basically, reflecting the activity-based pressures we've talked about in more developed markets.

In the emerging markets, we are internationally seeing very good service growth.

But we -- still a significant part of our business is US and UK.

That's the breakdown we've got.

Right now, we've got about 1 point of growth in our outlook related to acquisitions.

That just reflects what we've completed today, right?

So if we do more then there would obviously be some accretion of that.

That's our current outlook.

FX?

FX, limited impact at this point.

Great.

Also, when you said 3% for storage and zero to 2% for services, is that constant dollar or is that internal?

Down zero to minus 2%, I'm sorry.

I was referring to internal.

Shlomo Rosenbaum, Stifel.

I just wanted to follow-up on Gary's question in terms of the one-time -ish type cost that came out in the quarter.

You talk about facility costs in the SG&A realignment.

Can you just give us the dollar amount if I kind of one-time those things?

So I can pull them out and see what the underlying margin is for both North America and international?

I walked through some of the details with Gary.

The latter part of your question, Shlomo, I just wanted to clarify.

You're trying to understand what was international versus US?

Yes.

In just a total dollar number.

In other words, is it -- I think you said $7 million for facilities and then $4 million for the realignment.

Is the total one-time -ish type costs $11 million?

How are they split?

I just wanted to confirm that and then see how they're split.

Right.

In addition to that, you had year-end accrual impacts, which are in the range of $10 million, actually.

In terms of, if you sum total all of the impacts.

We had a fair amount of year-end accrual activity as well.

Keep in mind that you have the paper year-on-year headwind of about $3 million, as well.

So, combined, that was the key drivers of the performance.

I don't have the breakdown between North America and international in front of me.

I'm sure we can follow-up on that for you.

Okay.

We did try to normalize the international margin growth.

So I'm sure you can do the math on that.

Then, just going forward for 2013.

It looks like kind of an $8 million OIBDA improvement and margins that go down about 30 basis points.

Is there -- is there going to be a continued improvement, should we think, in the future, that OIBDA should continue to gradually go up?

Is the margin going down because you are getting better growth in international?

Is that the way we should think of it?

We highlighted at Investor Day that we are advancing some new business investments in 2013, areas like wholesale data center that we talked about.

We've got some other areas in beta, in terms of new services around our tape business and highlighted, there is about $10 million of investment there.

That is -- our underlying outlook for the business, reflects sustaining North America returns and following through on the margin improvement that we have in international and then having moderate margin improvement post 2013.

So, really what you are seeing is just a reflection of -- we're making some selective business investments in 2013.

That's mitigating some of the benefits from the international margin gains.

Okay.

The second -- this is the second quarter, I think you guys have said that the storage volumes in the US are relatively flat.

Do they fall into the relatively flat negative territory or relatively flat positive territory?

Just trying to figure out -- is there any trend to be seen over there at all.

They were down 30 basis points, year-on-year, in North America.

Okay.

Final question.

What's the Plan B, if PLR doesn't come back favorable?

We will share more specifics with that, if that's the case.

But, we would -- our business strategy doesn't change.

We are committed to growing the business and improving our operations as we've talked about it and returning capital to shareholders.

The REIT was a better way to do that and aligned with how we are managing the business.

We will bring some more specifics around that, but you should anticipate us just bringing clarity -- how we intend to return capital to shareholders in the context of our business strategy going forward.

But, we don't have anything specific to share with you today.

(Operator Instructions)

Andrew Whitman, Robert W Baird.

So, I just wanted to get your thoughts, Brian, since you've been leading the REIT conversion process.

Is there anything to be read from the correction course and GEO Group approval process?

Is there anything you can take away of those offers may be confidence or less confidence in your conversion process?

I think they are all independent events.

We don't have any insight into the dynamics in those discussions.

We have our own set of fact and our own proposals with the IRS.

So, I can't offer any insight from what -- from what's going on with others.

Clearly, there are more companies looking at this area.

This is an area that's getting a lot of attention, in terms of review and that -- there are other companies that are kind of nontraditional, if you will, in terms of proposing REIT structures.

But, our facts and circumstances are discrete and distinct.

I wouldn't read anything from other discussions into our situation.

Got it.

On the government opportunity, I think, as I think back how you guys have talked about the government records and that they are -- they outsource, but internally.

They have their own kind of document management facilities.

Something that's been a long-term opportunity, but probably one of the most difficult opportunities that you guys have had going after.

As you've re-verticalized here, are there any green shoots of success in capturing that government business?

I think in the context of austerity, in fiscal cliff, maybe that's more relevant today, is there anything to report there on your successes?

Look, I think that the -- I would put it in the bucket with all our vertical vision as early days.

But we are doubling down on that.

Our view is net net, that as the government comes under tighter and tighter budget pressure, that's a net positive for us.

We are in a lot of discussions at different -- coming out from different angles with different government agencies, including their own internal storage people.

They are full and running out of capital.

So, I think that there's -- the opportunity for us is growing.

But, it is an area where we are doubling down our efforts to see if we can get something to happen in 2013.

It's early days, but we are optimistic.

Otherwise, we wouldn't have focused on it as a separate vertical.

Maybe one final question.

It's really just around the M&A environment.

There's been a bit of activity here in the last year or so.

I think, you guys kind of forecasted that might be happening.

Is that -- is there still more out there?

Then with the balance sheet leverage at the high end and probably going over the high end of your range here with some more of this conversion spend and what have you.

Does that keep you maybe a little bit more conservative in how you would go after that M&A?

Or, do you feel unconstrained about doing what you see is a good deal?

We are comfortable with the strategy that we've outlined.

The M&A activity that we are driving is within our core business and the businesses that we buy.

The activity that you saw a fair amount in Q4 are smaller North American acquisitions.

They tend to be highly accretive, bring very good profitability.

So, actually, in terms of when you think about our leverage structure, where we've historically been 3 to 4 times EBIDTA.

When you get these businesses, they fund -- a significant amount of them fund themselves in terms of the incremental OIBDA.

So, we are comfortable with the acquisition kind of ranges that we've talked about.

Within the normal band that we've been functioning within, I think, we had an estimate of about $100 million a year in our longer-term estimates and are quite comfortable we can manage that.

At this time, there are no further questions.

Okay.

Well, just to wrap up.

I think we delivered on our expectations for the 2012 financial performance.

Looking forward to 2013.

Just to recap, we expect continued solid growth in the storage rental and further expansion into existing and new emerging markets on our international side.

Sustained -- we don't see anything other than sustained high margins in North America and additional profit improvement, which we've already highlighted in the international business.

We will continue to pursue these with a strong focus on prudent capital allocation with an overarching goal for total returns and delivering sustainable value to our shareholders.

So, we want to thank you all for joining us today.

We really appreciate your support.

Thank you.

This concludes today's conference call.

You may now disconnect.