鐵山公司 (IRM) 2013 Q2 法說會逐字稿

Good morning.

My name is LaShonda, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Iron Mountain Q2 2013 Earnings 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 today's call over to Ms. Melissa Marsden.

Ms. Marsden, you may begin your conference.

Thank you, and welcome everyone to our second quarter 2013 earnings conference call.

I'm Melissa Marsden, Senior Vice President, Investor Relations.

And this morning we'll hear from Bill Meaney, our CEO, who will discuss highlights and strategic initiatives, followed by Brian McKeon, our CFO, who will cover financial results and guidance.

Stephen Golden, VP, IR is also with us today.

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

Per our custom, we have a user-controlled slide presentation available 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 and 10-Q 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.

The reconciliations of these non-GAAP measures, as required by Reg G, can be found at the Investor Relations page of our website, as well as in today's Press Release.

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

Thank you Melissa, and my thanks to everyone joining us today, and good morning.

Our second quarter results reflect our focus on sustaining the durability of the business, and supporting our future growth.

Total revenues were $755 million US dollars.

Adjusted OIBDA was $233 million, and Adjusted earnings per share was $0.29 per share.

These amounts include a $5 million legal accrual noted in our Press Release.

Prior to this accrual, our financial performance was in line with our expectations for both the quarter and the year-to-date.

Operating performance is also tracking in line with our expectations, with consistent storage rental constant dollar growth of 3%, and storage rental internal growth of 2.3% for the quarter.

As we've indicated in recent quarters, the trend towards lower levels of retrieval and re-file activity and related transportation services in developed markets continues.

But also as expected, service declines moderated somewhat during the second quarter, and our solid storage rental revenue growth continued to offset service declines and support our consistent profit results.

Overall, our full-year outlook for operating performance remains the same, aside from the impact of foreign currency exchange rates.

Before Brian reviews our financial performance, I'd like to discuss our initiatives to continue to support the durability of our core business, and the growth opportunities we're seeing in both our developed and emerging markets, and progress on our plans to convert as a REIT.

As a reminder, when I refer to developed markets for Iron Mountain, that includes not only our North American markets of Canada and the United States, but Australia and the UK as well.

It also includes Western Europe, where our team continues to deliver solid results, with good volume growth and improved profitability.

This is despite a lack luster macroeconomic environment across Europe.

As I mentioned last quarter, our strategy to sustain the durability of the business in our developed markets includes three elements.

1), tailoring our sales and marketing efforts to focus on vertical markets, and add value for customers through industry-specific solutions.

2), is differentiating our core storage and service offerings, with innovative tools that drive incremental storage from existing customers, as well as attracting new customers.

And 3), acquisition opportunities, driven by ongoing consolidation in our industry.

With respect to the first of these elements, we've worked through the realignment of our sales and marketing organizations to focus on verticals.

This transition has taken some time to implement, but we are beginning to see results.

For example, our focus on the healthcare market in North America is driving storage rental in this vertical, offsetting declines in query-driven service activity.

We continue to see this dynamic in the second quarter, with healthcare storage rental up roughly 3% year to date versus last year.

Being aligned along vertical markets also is permitting us to extend our reach into related segments, such as Life Sciences.

While our foray into this segment is more recent, we are seeing good interest from both new and existing customers, driving increases in project-related complementary services, as well as about a 3.5% increase in storage rental year-to-date.

We also have seen a nice pickup in new business bookings in this vertical segment, although the related volume will not be reflected in this year's results.

Overall, we continue to identify ways to leverage our industry-specific expertise and bring best practices to bear.

As we do this, we are having more conversations, deeper within our customers' organizations and increasing the potential to drive incremental business.

In addition to our vertical market approach, we are continuing to differentiate our core storage and service offerings as a means to tap the un-vended market.

Consistent with this approach is our archival tape management offering, which is a solution within our data protection business that helps companies manage data from legacy systems.

Given the fast pace of growth in electronic data and the speed of change in technology, most companies have a tiered system of data storage.

They seek to balance having the right amount of data protected, in the right format, in the right place, and at the right time against the costs of storing that data.

Tape backup is often the second, third, and even fourth line of defense, and remains the most cost effective way to move data off site and store it for long periods of time.

This service, which we just launched in April, provides quick, reliable access to archival tapes for customers, even after they've shut down legacy systems.

It also provides encryption of legacy data for compliance purposes, and protects it from inadvertent disclosures.

This data protection offering promotes discussion with customers in the un-vended space, and we're encouraged by a couple of early wins.

We also continued to expand our business in developed markets through active and attractive fold-in acquisitions.

Also during the quarter, we completed the acquisition of three records management businesses owned by a Texas-based information storage consolidation company, expanding our presence in eastern Michigan, Dallas, and Southeast Florida.

This acquisition adds mid-sized organizations to our customer roster, and is consistent with our strategy for sustaining the durability of our storage business in developed markets, where we continue to have a solid pipeline of active deals.

We are also pursuing a number of interesting opportunities to expand our platform in high growth emerging markets, through both organic growth and accretive acquisitions that meet our financial hurdles.

Customers in these markets often are just beginning to outsource their records management, and we see a significant opportunity to provide storage and related services that can help them become more efficient and reduce costs.

Again, we define emerging markets to include the BRIC countries, in addition to other Latin American markets, Central and Eastern Europe, and Asia-Pacific markets, such as Hong Kong.

These emerging markets currently represent about 10% of total annual revenues, or about a $300 million business for us.

And we have a number of attractive acquisitions and joint venture opportunities throughout these regions.

We believe our emerging market expansion will be an engine for future growth, as demonstrated by strong storage rental constant dollar growth in these markets of 13% in the second quarter.

As we've previously noted, achieving leadership in our international markets drives improved efficiencies, similar to those in our developed markets.

However, we manage our international business as a portfolio, so our ongoing acquisition activity and entry into new markets naturally tempers our ability to continue to pose significant further margin improvement in the nearer term.

That said, we are very pleased with our progress on international margin improvement goal during the quarter, achieving 24.6% for the year-to-date.

This represents a 280-basis point improvement over the first half of last year, and is a significant accomplishment for our international team.

In terms of business adjacencies, we are making progress with plans to accelerate the expansion of our underground wholesale data center in Pennsylvania that we talked about on our last call.

We are developing our pipeline, and continue to evaluate opportunities for incremental investment in this business.

Finally, let me touch on the REIT.

As I'm sure you are all aware, we've been advancing our preparations for conversion, including seeking private letter rulings, or PLRs, from the IRS.

In early June, we disclosed in an 8-K filing that we had been notified by the IRS that it had formed a working group to study the legal definition of real estate as it relates to REITs.

We also said that as a result, we expected rulings on some of our PLR requests, as well as the PLR requests from other companies on similar issues, to be delayed until the IRS completes its study, which might take us beyond the approximate one-year time line we had talked about since mid-July of last year.

Obviously, we are beyond that timeframe.

We felt it was important to disclose the delay, and also to disclose that prior to the IRS pressing the pause button, it had indicated to us that it was tentatively adverse to ruling that our racking structures are real estate for REIT purposes.

We also stated that it is not unusual to receive this type of preliminary indication as part of the PLR process.

We understand that the resolution of these issues is top of mind for all of you as well.

However, we ask you to please understand that we are not providing any updates for you today with regard to the scope of the IRS working group study, the timing of the study, nor the tentatively adverse indication.

For those of you on the call not familiar with this matter, I encourage you to refer to the 8-K filing from 6 June, which includes other details, as well as risk factors.

Given this lack of certainty with respect to timing and our focus on conversion, we plan to break from tradition and will host our next Investor Day in March 2014, as opposed to our typical mid-October timeframe.

Despite this unforeseen delay, we feel good about our position with respect to our racking structures as real estate under our interpretation of the current standards.

And this delay doesn't change our plans to move forward with those preparations we can control to ensure our readiness for conversion in January 2014.

For example, on our targeted date of 1 July, we successfully migrated our REIT-critical IT systems and processes to a new platform that enables us to operate internally as a REIT for a period of time before we officially elect REIT status.

This was a massive undertaking, and I wish to thank publicly all of our cross-functional teams who were successful in meeting this tight, interim deadline.

These system enhancements will allow greater efficiencies and provide a robust foundation for future growth.

And you may see us undertake additional steps necessary to support conversion, while we await clarity on the PLR, all in the name of being prepared as we possibly can to convert in 2014.

Of course, we can make no assurances we'll be successful in converting.

But we believe we fit well as a REIT, due to the attractive characteristics of our business, such as the quality and durability of our storage rental net operating income, our high rental revenue per square foot, the low volatility throughout economic ups and downs, the high credit quality, and the high retention customer base, as well as relatively low maintenance and turnover costs.

But whilst the REIT structure complements our strategy, our strategy for sustaining the durability of our business is not dependent upon the REIT.

Our business generates strong, consistent cash flow in excess of what we require to invest in people, processes, and platforms to support our long-term growth.

Our targeted level for investment in emerging markets, acquisitions, and adjacency's is approximately 25% to 35% of our free cash flow, and we believe this would be similar under our existing structure or as a REIT.

It is a level that is consistent with our capital allocation approach, through which we seek to maximize cash flow, and it leaves us with significant excess free cash flow to support attractive stockholder payouts.

Our business is solid with great fundamentals, and we have a strategy to support growth and sustain the durability of our core storage rental business.

And with that, I'll turn it over to Brian to discuss our financial results in more detail.

Thanks Bill.

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

We delivered good operating results in Q2, in line with our expectations, reflecting consistent storage rental growth and solid profit performance, supported by international margin gains.

Overall, our growth trends were consistent.

Storage rental grew 3% on a constant dollar basis in the quarter, supported by consistent gains in North America, and 7% growth in international, including benefits from recent acquisitions in Brazil, France, and North America.

Durable storage gains continue to be partially offset by declines in query-based core service activity.

Core service growth declines improved relative to Q1 as expected, reflecting more favorable comparisons in international markets, but remain a headwind to our overall growth.

Underlying adjusted OIBDA performance was solid in Q2, supported by continued international margin gains, and sustained cost controls.

Our Q2 and year-to-date adjusted OIBDA and adjusted EPS results were impacted by a legal accrual recorded in the quarter of $5 million, or $0.02 per share.

Excluding the legal accrual impacts, adjusted OIBDA is up 1% year-to-date, in line with our full-year goals.

Today, we're updating our full-year 2013 performance outlook to reflect changes in FX exchange rates since the beginning of the year.

The strengthening of the dollar since the beginning of the year is projected to reduce full-year reported revenues between 1% and 1.5%, with relatively similar impacts on adjusted OIBDA.

I'll speak more to these updates later in my remarks.

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 second quarter of 2012.

As noted, Q2 results were as expected.

Enterprise revenues grew 1.3% on a constant dollar basis, as our international segment continued to produce strong revenue performance.

International posted 5% constant dollar revenue growth, supported by a 7% storage rental growth, including benefits from our recent acquisitions in Brazil and France.

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

Foreign exchange rate changes reduced revenue growth by 0.5% in the quarter.

Adjusted OIBDA was $233 million, or basically flat compared to last year's Q2, excluding the $5 million legal accrual.

A key driver of profit performance was the continued improvement in our international segment, consistent with our plans.

International adjusted OIBDA increased 25% year-on-year in Q2, reflecting strong top line growth and continued margin gains.

Savings from North America cost improvement initiatives mitigated impacts from core service revenue declines.

Adjusted EPS for the quarter was $0.29 per share, compared to $0.37 in Q2 of 2012.

Adjusting for the $0.02 per share impact of the legal accrual I described earlier, adjusted EPS would have been $0.31 per share.

The year-on-year decrease was due primarily to 20 million additional shares outstanding, including those issues as part of our special different dividend last November.

Adjusted OIBDA and adjusted EPS exclude the impact of costs associated with the REIT conversion, which reduced reported EPS by $0.08 per share net of tax.

GAAP earnings-per-share of $0.14 includes $24 million of REIT costs and $15 million of other expense, partially offset by $2 million of gains on asset dispositions.

Our structural tax rate for the quarter was 39%.

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

Our storage rental business remains durable, providing a solid foundation for overall revenue performance.

For the quarter, consistent storage rental growth at 3% on a constant dollar basis drove overall revenue performance, and supported total constant dollar revenue growth of 1.3%.

Year-on-year global net volume growth was 1.4%.

North America reported 1.8% constant dollar storage rental growth, reflecting relatively flat records management volume, pricing gains of 1.2%, and benefits from our recent acquisition.

North American pricing gains were slightly lower in Q2 than recent trends, reflecting impacts from prior year comparisons.

For the full year, we expect pricing gains to be approximately 1.5%.

International storage rental growth of 6.6% constant dollar for the quarter reflected sustained double-digit growth in emerging markets.

For the year, we expect overall storage rental to sustain consistent growth rates of about 3% on a constant dollar basis.

Total services decreased 1% constant dollar, as international service growth was offset by North American service revenue declines, reflecting lower activity-based core services and related transportation activity.

Gains in DMS and increased project revenues in both North America and international helped to offset these impacts.

Paper prices had limited impact in Q2, as lower average prices were partially offset by increased volume in North America.

At current paper price levels, which are down 12% year-on-year however, we will see some pressure on this front moving forward, which will constrain overall service gains.

Overall, total internal growth was 0.5%, as 2.3% gains in storage rental more than offset service pressures.

Let's take a look at our segment performance on slide 6. Slide 6 looks at our year-to-date 2013 performance compared to last year.

In terms of our key financial metrics, we delivered results that reflect consistent business trends, and have us on track to achieve our full-year financial goals.

Reported revenue of $1.5 billion was up 1% on a constant dollar basis, driven by solid storage gains.

Adjusted OIBDA was flat year-over-year on a constant dollar basis.

As noted earlier, excluding the $5 million legal accrual, adjusted OIBDA grew 1%, reflecting North American cost efficiencies and international margin improvement.

Adjusted EPS was $0.56 per share, down 15% compared to the first half of last year, reflecting the impact of additional shares issued in connection with the special dividend last November, higher interest expense associated with shareholder payouts, and the legal accrual noted earlier.

These impacts more than offset lower income tax expense in the period.

First half capital spending was $86 million, excluding [$28 million] (corrected by company after the call) of real estate, and $14 million of REIT conversion CapEx.

As a percentage of revenues, CapEx excluding real estate and REIT CapEx is 5.7% of sales, in line with our full-year plans.

Free cash flow for the first six months of 2013 was $154 million, compared to $117 million for the same period last year.

The year-on-year increase reflects lower cash taxes, which were partially offset by higher capital spending.

The 2013 year-to-date adjusted OIBDA and adjusted EPS results shown here exclude $49 million of costs associated with the REIT conversion.

These costs reduced reported EPS by about $0.18.

Note that 2012 adjusted OIBDA and adjusted EPS excludes $5 million of these costs, and reduces reported EPS by $0.02 per share.

In addition to the $14 million of REIT-related CapEx I just discussed, we paid $28 million in taxes towards our D&A recapture liability.

All told, these items would reduce free cash flow by about $76 million year-to-date.

We've included a slide outlining the actual and expected REIT costs and related expenditures in the appendix to 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 key segments.

Consistent with our business strategy, we're sustaining high returns in our North American segment, while we continued to build 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 first half of 2013, our North American business segment reported revenues of $1.1 billion, supported by consistent 2% constant dollar storage rental gains.

We sustained adjusted OIBDA margins of 42%, as SG&A savings offset pressures from lower service revenues.

We're also sustaining capital efficiencies, with spending at 4.6% of revenues, excluding real estate.

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

Adjusted OIBDA increased 17% on a constant dollar basis, benefiting from solid global growth, and cost improvement initiatives in Western European markets.

International adjusted OIBDA margins have expanded 280 basis points year-to-date, keeping us on track towards our goal of about 25% international segment margins in 2013.

Finally, corporate expenses were up compared to prior year levels, impacted by the $5 million legal accrual.

Let's now take a look at our debt statistics on slide 8. Solid cash flow generation enables us to maintain a sound balance sheet.

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

At quarter end, liquidity was nearly $800 million, with $259 million in cash, and $535 million in additional borrowing capacity.

We are currently operating with a consolidated leverage ratio of 4.1 times, just above the high end of our targeted 3 to 4 times leverage range.

Our leverage ratio has increased over the past two-plus years as planned, to support shareholder payouts of $1.7 billion and expenditures in connection with our proposed conversion to a REIT over that period.

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

Our strong cash flow supported continued advancement of our capital allocation strategy and our REIT conversion.

During the first half of the year, we paid $103 million in cash dividends, and $90 million of REIT costs, including REIT-related CapEx and tax payments related to the depreciation recapture.

As we mentioned in our recently filed 8-K, we expect to engage in some financing transactions in Q3, including amending our senior credit facility.

We're currently working on that amendment, and expect to complete the process shortly.

The scope and timing of any additional financing activities is still to be determined, and we'll keep you abreast of these transactions as they develop.

We're managing our balance sheet consistent with this strategy, while advancing substantial payouts to shareholders, and we remain well positioned to fund our business plan.

That concludes our review of the Q2 2013 results.

Let's now turn to slide 9 to review our 2013 outlook.

Slide 9 summarizes our updated full-year 2013 operating outlook.

While our business trends and operating fundamentals are consistent, today we're updating our full-year 2013 guidance to reflect FX rate changes.

Changes in FX rates since the beginning of the year are driving a projected reduction in reported revenues of more than $40 million, or between 1% and 1.5% for the full year.

Adjusted OIBDA will be similarly impacted on a percentage basis.

We're now expecting full-year revenues to be about $3 billion to $3.050 billion, and adjusted OIBDA to be between $900 million and $925 million.

We're also updating our expectations for adjusted EPS to reflect the FX changes, as well as updated estimates for interest in D&A related to recent acquisitions.

We're not including any impacts from potential future refinancing activities, as the scope and timing of those transactions are not final.

We'll update our outlook as appropriate on the next earnings call.

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 costs to implement the proposed structure.

We're investing to ensure we meet the January 1, 2014 deadline, and several of our REIT-critical systems are now operating on a test basis.

For the year, we expect to incur between $65 million and $95 million of incremental expense.

The impact of these costs will be a reduction in reported EPS of $0.26 to $0.36 per share.

Today, we're also updating our estimate for the earnings and profit distribution to reflect a more detailed assessment of our international profits in countries targeted for conversion in 2014.

As you know, a successful conversion to a REIT requires that we distribute all of our accumulated earnings and profits related to countries converted to shareholders by the end of our first year as a REIT.

Based on updated information and additional analysis, we now expect our total distribution to be between $1.2 billion and $1.7 billion, of which $700 million was paid out in 2012.

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

That concludes our review.

In summary, Q2 was a quarter of solid financial performance, and we're well positioned to achieve our full-year financial goals.

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 enhance value creation for stockholders.

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

(Operator Instructions)

George Tong with Piper Jaffray.

Good morning everyone.

Good morning George.

Storage volume growth this quarter, it appears decelerated from the prior several quarters.

How much of this was driven by reduced growth benefits from your acquisition of Grupo store in Brazil versus a fundamental change in volume trends that you're seeing?

The acquisition impact was the primary driver.

We completed the Grupo Store acquisition in Q2 of last year, and so we're completing the benefit that we got from that relatively larger acquisition.

And the fundamental trends in the rest of the business, very similar.

As we noted, actually the service growth rate improved a bit, on a comparable basis.

We knew we had some unfavorable lapping last quarter that we've worked through.

And basically our storage growth rates were consistent.

I did note that the North America pricing number was a little bit lower than we've been, and that's more of a year-on-year comparison.

We're expecting kind of 1.5% net pricing gains in records management in North America for the full year and for the back half.

Great.

That's helpful.

And as a follow-up, you're seeing improving trends in the services business.

Do you expect to see service revenue declines to continue to moderate throughout the year, and any chance services growth can turn positive on a constant currency basis?

Yes, it's a good question.

I would say that trends are similar.

I think we -- it's a relatively better growth.

It was down 1% constant dollar, and that's better than Q1 largely because Q1 had some comparison issues.

We are seeing benefits from growth in things like DMS and project-related revenue, and continued expense improvement in the international business.

We did note that the paper pricing has moved lower -- the SOP market price is now down to $138 a ton, and that will be a headwind back half of the year.

So I'd be cautious about signaling an improvement, because we're facing that dynamic.

But overall, relatively similar trends, and we're hoping that we can move this in a relatively more positive direction over time, as we continue to build out these other service lines and grow our international presence.

Got it.

Thank you very much.

You're welcome.

Kevin McVeigh with Macquarie.

Great, thanks.

Brian, could give us a little more background on that $5 million legal accrual that we got in the quarter?

Yes, we tend to not want to get into specifics on legal accruals, but we basically -- we had a customer dispute that's been going on for a number of years.

It goes back a number of years, I should say, in terms of the time period we were looking at.

And we are booking an accrual related to that.

It's not anything that is operationally oriented, and just given the size of it Kevin, just sort of a cumulative effect of something that's going to impact a number of years.

It was large enough for us to highlight that, so that we don't give you a distorted view of what our underlying operational trends are.

But it's relatively unusual, it's related more to a customer agreement.

Got it.

And then, I just want to make sure, and I think I heard you right, but the incremental step in the E&P, that was all international?

In terms of the step up, because I think the range, if I had it right, was $300 million to $800 million now to an incremental $500 million to $1 billion.

That was kind of all international true-up, or it had nothing to do with potentially going out to 2015 on the REIT conversion, right?

Yes, and just to clarify the numbers, we were originally at $1 billion to $1.5 billion, and we're taking it to $1.2 billion to $1.7 billion, so it's a $200 million increase.

And it reflects just more detail, as you might imagine it's a complicated exercise trying to go back in time and calculate the exact cumulative earnings and profits by country of what we've earned over time, and the increase reflects and updated estimates for the international business.

There isn't a change in terms of the timeframe we're looking at.

This is related to the countries that we anticipate converting in 2014 with our initial wave one, if you will, and assuming we're successful with the REIT process.

Got it.

And then just, any sense of timing of when you hear back from the IRS, just given the decision to move the Investor Day?

Is that kind of a reasonable proxy that we should hear before the Investor Day, or around that?

Any sense of timing on when we'll get some type of clarity?

Kevin, we can't really say anything more than we've already said in the 8-K.

So we just moved the Investor Day, because we felt that doing it in October, if we haven't got clarity one way or the other, it would be a bit early to do that.

But I wouldn't read anything into it, because we can't say more than we've already told you.

Okay.

Thanks.

Thank you.

You're welcome.

Steven Shui with Stifel Nicolaus.

-- guys give us the North America--

Steven?

Steven, can you speak up?

Because we can't hear you.

Oh, yes, sure.

Is this better?

Yes, I can hear you now.

Can you guys give us the North America volume growth number, and talk about how that's been trending versus expectations?

Sure.

The volume growth was down 0.2%, relatively flat, consistent with recent trends and consistent with expectations and where we are.

We're advancing a number of initiatives, including the vertical initiatives that Bill can talk to, that our goal is to improve that rate over time.

But I would say the underlying trend is consistent with what we've done.

Yes.

It's almost dead on where we were for the year in 2012.

But I think one of the reasons why we're talking about the verticals, and we highlighted two verticals, which are ones that we had stood up before we had made the major change, where we're actually showing positive storage growth.

Is because I think now, and I think I've said on a previous call is in the mature markets is that getting after the volume now is much more kind of underground mining, whereas before maybe it was more like open cast, so we have to be much more precise, and much more diligent.

That being said, we'll highlight that in every Western European country we are in positive storage growth on an internal basis.

So the trend hasn't changed in North America, but we're making some changes along the vertical line to try to improve that performance.

Okay, got it.

And assuming there's no word on the PLR by the beginning of 2014, how will that affect how you manage the business going into the year in terms of your IT and legal systems, and maybe you can also give us some color on if there's a plan B, if the PLR comes back negative?

So on your first question, I think we are as noted, continuing to advance work to be ready for our January 1, 2014 goal.

And the systems that we're putting in place in terms of financial systems, things of that nature, will have benefit for our business regardless in terms of standard platforms, and kind of standardized ways of looking at information.

It's actually accelerated investments that we would have made as a Company over time.

So we'll see benefits from that going forward.

As Bill noted, we can't really speculate at this point on timing of a process, but we're -- we think it's prudent to continue to move forward with those investments, and we'll get benefit in our business overall.

In terms of plan B, if you will, so if we were in a position that we weren't moving forward with converting to a REIT, just to reinforce some things that we've said and in the past, we would be pursuing as a Company the same business and capital allocation strategy.

We'd expect to continue to generate substantial cash flow.

We've indicated that we estimate we'd have about 70% of our free cash flow, ex-real estate, the way that we've defined it publicly, available for distribution to shareholders.

That's a longer-term kind of an average, assuming a moderate level of M&A investment, $100 million to $150 million a year.

And obviously, we don't convert.

We wouldn't have the benefit of some of the tax savings that come from that -- the discipline associated with the REIT structure, but we'd still have substantial flexibility to support financial payouts.

And we'd expect to do that through a combination of a growing dividend, which right now is about 60% of our free cash flow, and likely some level of share repurchases.

So we haven't defined that plan specifically, but directionally, it's the same business and capital allocation strategy.

We've continued to generate substantial cash flow, and we'd be continuing to drive payouts to shareholders, including the growing dividend.

Okay.

Thank you for answering my questions.

You're welcome.

Andrew Steinerman with JPMorgan.

Good morning.

Brian, just correct me if I'm right about this and kind of footnote number 1 of your 2013 outlook, which is now 0 to 2% internal growth, that is a little bit of a bump-up from the last estimate we had, which included a negative 1 at the low end.

What's caused this kind of lean forwards?

It's really rounding, Andrew.

I think it's fundamentally the same outlook.

We took the opportunity given the FX changes, to kind of fold through kind of a re-look overall.

But I would say it's fundamentally the same outlook.

We do have some incremental benefit from acquisitions kind of flowing through.

It's small, but fundamentally, there isn't a change in sort of our operating outlook from where we were.

It's consistent, excluding the FX changes.

Right, and what would be a D&A estimate for the year?

I think we have that in the slides for you.

It's in the final the appendix numbers right now --

Okay.

I'll look it up in the appendix, yes.

And then just to make sure we model the FX correctly, because that's what you're calling out here, you called it $40 million for the year.

How much will FX have as a drag on third and fourth quarter in terms of growth rates?

I believe it's about a 1.5%.

A 1.0 to a 1.5%.

Perfect.

Okay.

Thank you very much.

Thank you.

Justin [Hauke] with Robert W. Baird.

Good morning guys.

I was wondering, so Brambles obviously announced that they're going to be spinning off Recall as its own publicly traded entity.

I guess my question is, have you seen any change in strategy as they start to think about themselves as an independent entity?

And also, how does that maybe change the dynamic on the M&A opportunities that are out there, considering that they'll be infused with maybe a little bit more capital going forward?

Well I think it's too early to tell.

They've just made their announcement, although the company, you can say has been in play or under discussion for a while.

I think that net-net for our standpoint, that it's a good thing because I think having a company that is not in the dressing up stage for a sale, but rather operating in the public markets like we are, then I think we would expect them to be competing on a purely rational basis, not looking towards a transaction.

So I think that's always a good thing from our standpoint.

So, I think net-net for us, it's a positive.

Whether or not they'll be more aggressive in terms of acquisitions, they've been aggressive in terms of acquisitions before.

They've always been competing with us in the past, and there're other people that compete with us in acquisitions.

So I think overall, we welcome them to the forum of being a public company.

Okay.

Thanks for that.

And then Brian, just a quick one.

What was the EBITDA contribution from the acquisitions that you completed this quarter?

Do you have a number for this year, or maybe a full-year run rate?

It's small for the full year acquisitions year-to-date, it's about $2 million additive and that's net of the initial integration costs.

So obviously, those get more accretive over time.

Great.

Okay.

Thank you very much.

You're welcome.

Scott Schneeberger with Oppenheimer.

Thanks.

Good morning.

Brian, in the Press Release, it calls out the declines in service revenue moderating, one of the reasons being increased special records management project volume.

Could you take us a level deeper on that, and if it's a trend that could persist?

Well, it's been a focus area for us for a while.

But I think as we've -- it's early on, but as we increase the focus around serving vertical segments and having our sales organization align with them, I think we're identifying opportunities to aid customers, not just through storage, but through some transitions that they're working in terms of how they're managing their organization.

So it is something that we're hopeful will be a continued positive trend, and it's consistent with our business focus.

So I think the -- I do want to reinforce the kind of the main change from Q1 to Q2 is kind of working through some tough lapping.

We had some customer losses that we worked in shredding and international.

We worked through some of those things.

But look, we're encouraged with the progress on their front, and we do have some ongoing headwinds that have kind of constrained growth.

The query-based service activity continues to be a challenge, and right now paper will be a bit of a challenge.

But overall, we feel good that we're on the right track with the strategy.

Okay, thanks.

And then just looking across your major verticals, legal, healthcare, could you give us a feeling -- and others, could you give us a feeling as to just trends within them, and particularly healthcare?

Thanks.

Well I think in healthcare, I highlighted in the remarks that we're seeing about a 3% year-on-year growth in storage.

But I think that if you look at the services, we continue to feel the headwinds because the service mainly historically in healthcare has been about active files in terms of retrieving when hospitals need to retrieve people's medical files and of course that's going electronic.

So what we've done now with the vertical, is we've gone into new areas, and have mined deeper within the healthcare customers and helping them make themselves paperless in their operations and get the paper out of there and stored properly.

So much more of an archival trend.

But as you see, we're getting significant year-on-year improvement in terms of the amount of storage volume we're getting.

And I think I highlighted in the last call, is bear in mind also, the margin for us on storage is about 2X what it is on the service.

So, we continue to see a trend towards the electronic medical record, which takes away some of the service revenue that we had before on active file.

But at the same time, we're getting into new areas and helping our customers store even more off-site, and we like those trends.

Thanks.

And anything notably outstanding in legal or financial services, or has that been fairly consistent with past?

Thanks.

That's been pretty much consistent in the past.

Those are two areas where the vertical -- we've stood up the verticals this year, so they're relatively new in those areas.

So it's too early to really say how that is progressing.

But, I think right now it's trending pretty much consistent with the past.

Thanks.

Yes.

Andrew Berg with Post Advisory Group.

Yes, two questions, just to housekeeping.

Going back to the legal accrual, that goes back over how many years?

It's over a decade.

Okay.

And with respect to realigning the sales force in the different verticals, is that completed now across all verticals, or are you still rolling that out amongst them?

It's pretty much completed.

But the one thing I just want to highlight, it's work in progress, because as we've stood them up, we look at making sure that we've picked the right verticals and we're getting the benefits that we want.

But so, yes, we have done the realignment, and we've set the organization up.

But it's one of these things where we have clear metrics around each of those, and we continue to evaluate them.

And from the ones you did earlier to the ones you did most recently, how much of a differential in performance are you seeing?

Well, I think the two that I've highlighted are the ones that have been up the longest, which is both Life Sciences and healthcare, and we're seeing, as I said, 3%, roughly 3%, 3.5% year-on-year storage growth in those too.

Overall in North America, as Brian highlighted earlier, we're down about 0.2% in terms of physical storage growth year-on-year.

So you can see the difference that we're getting in those two.

But I'm not going to try to extrapolate -- I think it would be dangerous to extrapolate across the board.

But that's one, it's not the only thing we're doing but it is one of things that we're doing to try to mimic similar performance that we're getting out of mature markets in Europe in terms of physical storage growth.

And as I said, this is much more like going from open cast mining to underground mining.

This is a part of the tools and the drills that we're deploying to get at the storage revenue, is this verticalization of the sales and marketing groups.

Okay.

Thank you.

You're welcome.

There are no further questions at this time.

I would now like to turn today's call back over to your presenters for closing remarks.

Thank you operator.

To wrap up, our 2013 performance is on track.

It's driven by the consistent growth in our storage rental business, and we believe we have numerous opportunities to sustain that growth in both developed and emerging markets through our vertical market focus, our innovative tools and services that drive incremental opportunities, and attractive acquisitions.

And we continue to make progress on preparations for our planned conversion to a REIT.

As we move forward through the year and sharpen our focus on the key drivers of value for our business, we will, as always, continue to focus on prudent capital allocation, maximizing total returns, and delivering sustainable value to our shareholders.

Thank you for joining us this morning, and have a good day.

This concludes today's conference call.

You may now disconnect.