鐵山公司 (IRM) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iron Mountain third quarter 2013 earnings conference call.

(Operator Instructions)

As reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Melissa Marsden, you may begin.

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

I'm Melissa Marsden, Senior Vice President of Investor Relations; and this morning, we'll hear from Bill Meaney, our CEO, who will discuss highlights for the quarter and strategic initiatives, followed by Brian McKeon, our CFO, who will cover financial results and guidance.

Rod Day, Acting CFO, and Stephen Golden, VP IR, are 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 at the Investor Relations page of our website at www.ironmountain.com.

Referring now to slide 2 of that presentation, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for 2013 and 2014 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 those non-GAAP measures, as required by a 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 the call over to Bill Meaney.

Thanks Melissa, and thank you to everyone for joining us this morning.

Before we begin, I wish to congratulate the Red Sox.

Sorry for those of you that aren't fans, better luck next year.

It was a great season and a great win.

I couldn't ask for more after being out of the country for 27 years, and coming back home to see the Sox win the World Series, so let's just hope that the other Boston teams do as well this year.

Now back to business.

During the third quarter, we continued to work on advancing our strategy by sustaining the durability of our business through attractive core acquisitions, and supporting the long-term growth through expansion into fast growing emerging markets and selective investment in emerging businesses.

Our financial results were in line with our expectations, with total revenue of $756 million, adjusted OIBDA of $240 million, and adjusted earnings-per-share of $0.31 per share.

We did incur some costs related to the implementation of our strategy, although our underlying performance remained solid and consistent with the recent trends.

I'll cover these charges at a high level, and then Brian will have more on how they impact our outlook, as well as the impact from recent acquisitions on our guidance for the remainder of 2013.

The charges we took in the third-quarter and expect to take in the fourth quarter relate to some realignment within our organizational structure, with a view towards speed and simplicity.

These changes will help fuel our growth strategy by consolidating activities, both within and across units; thereby, eliminating duplication, increasing spans and reducing layers throughout the organization.

Additionally, these changes will reduce operating costs to mitigate anticipated core service revenue declines and cost inflation, and will provide the financial resources for investment in new areas that are adjacent to our core activities.

We also booked early debt extinguishment charges related to our successful August refinancing activities, which we undertook to align our capital structure with our long term strategy in order to both lower our cost of capital and extend maturity.

This was a tremendous accomplishment, particularly as our Treasury team was amending and upsizing our senior credit facility at the same time.

Setting aside the charges for a moment, it was a good quarter, during which we continued to build on the core strength of our organization and enhance our platform for long-term growth and sustainable returns.

And we continued to make good progress with initiatives that support each of the three main pillars of our strategic priority.

As a reminder, those of priorities are, driving continued profitable growth in our mature markets, further penetration in the emerging markets, and identifying, incubating and scaling emerging businesses.

Earlier this month, we gathered the senior leadership of the Company to sharpen our focus on the strategic priorities that will drive our business in the future, and to ensure that our plans for execution are closely aligned with those priorities.

We will have more detail on the specific initiatives at our Investor Day in March.

And as we refine our execution plans, we will continue to pursue opportunities that align with the three pillars I just described.

For example, you saw our announcement a couple weeks ago about our acquisition of Cornerstone Records Management for a total consideration of $191 million.

Cornerstone has a good business, with storage representing more than 60% of its revenues, and a strong presence amongst small and midsize customers in the US.

We expect the transaction to yield attractive fold-in economics, with ROIC of the 10% plus range above our cost of capital, which translates into mid-teens equity returns.

We do expect to incur some incremental capital and move costs, as we realize real estate synergies over time, and OIBDA from this transaction should reach $30 million on a fully integrated basis.

We were also active with acquisitions in the international markets during the quarter.

In August, we announced the acquisition of the Colombian Records Management and Data Protection business of G4S, the market leader in Columbia for $54 million.

The acquisition represents our entry into Columbia, one of the fastest-growing economies in Latin America, and is consistent with our objective to grow our presence and achieve market leadership in attractive emerging markets.

Additionally, we completed the acquisition of File service in Peru, valued at $16 million, which advances us to the leading position in that country as well.

These transactions offer the potential for future benefits as we integrate them into our existing Latin American business, which includes operations in Argentina, Brazil, Chile and Mexico.

Also during the quarter, we acquired a small data protection business in France.

In total, we have completed acquisitions totaling approximately $320 million thus far in 2013, with roughly $220 million of that in the mature markets of the US, France, and $100 million in emerging markets.

Growing our presence in emerging markets is an important part of our long-term growth strategy, as C$ revenue growth in emerging markets during Q3 was 23%, with 15% internal growth.

In addition, we continue to evaluate the potential of emerging businesses, with data centers representing our most significant investment to date.

During the quarter, we broke ground on our first regional data center in Northborough, MA, just outside Boston, at our existing the campus for record storage.

This data center is being built to satisfy stringent security and compliance requirements that we believe will be attractive to many highly regulated organizations in industries such as healthcare, biotech and financial services.

We are making good progress with building our base from which to scale this business, and in total we expect to invest roughly $40 million in the data center business in 2014.

As we were considering frameworks for enhancing our focus on emerging adjacent businesses, we noticed a common construct in best practice amongst leading innovative companies.

To help support leaders with launching and running their new businesses, they typically appoint senior, seasoned executives to lead these efforts.

In keeping with that best practice, we are creating a new executive position with Harry Ebbighausen, who is currently President of North America, taking on formal responsibility for emerging businesses effective the beginning of next year.

Harry has the track record and respect within the organization to champion these efforts, and make sure we are leveraging our resources and capabilities wherever possible.

We are splitting Harry's current role into two areas, one focused on physical records management, and another focused on data protection and recovery.

This separation of roles will align responsibilities with our growth strategy, and provide more discrete focus on product lines.

John Tomovcsik, or JT, will take on responsibility for records management, DMS, and shred for North America.

JT currently, Executive Vice President and Chief Operating Officer for North America, has been with the Company for more than 27 years in various operations and sales roles spanning multiple product lines.

He also leads North American operations and one of the primary leaders behind the group's continuous improvement model, which drove significant profitability increases between 2007 and 2010.

In addition to this focus around product lines, we will be leveraging our global capabilities in a more coordinated way in areas such as product management and marketing for example, with the goal of maintaining continuity and exploiting our global scale and knowledge whilst operating more efficiently.

We may have further realignment of our organization as we continue to refine our execution plan, and we'll have more color on this in March.

Turning now to our progress with preparations for REIT conversion.

We successfully completed the integration of REIT critical IT systems on July 1. We are continuing the internal work necessary to ensure compliance with the REIT test, even if we don't have final written rulings from the IRS on our outstanding PLRs, or private letter rulings, prior to January 1. However, we won't be disclosing REIT-related metrics or reporting externally as a REIT until such time as the IRS's final decision is rendered.

As I noted on last quarter's call, we aren't providing interim updates as we move through the process with the IRS.

As most of you are aware, we have several PLRs in the queue.

To the extent that we were to receive verbal indications of rulings throughout the normal give-and-take review process on some of these PLRs, it could be misinterpreted if we were to disclose partial information prior to having formal confirmation from the IRS and all matters necessary to convert.

Although we don't yet have clarity on our outstanding PLRs, we plan to move forward with our plans to convert.

The REIT structure does not impact our strategy or execution plan, it's simply enhances returns.

Our strategy is focused on sustaining the durability of the business, maximizing free cash flow, and supporting attractive stockholder returns, regardless of whether or not we ultimately convert to a REIT.

Our free cash flow before discretionary investments, which we define as M&A, real estate, emerging businesses, and dividends, is roughly $300 million to $340 million based on our anticipated CapEx included in 2014 guidance, which includes about $50 million of CapEx related to acquisition integration and consolidation of facilities in Latin America in order to drive additional synergies.

With regard to discretionary spending, we have a pipeline of attractive acquisition opportunities as demonstrated by our recent transactions in both mature and emerging markets.

Generally, these transactions are accretive fairly quickly, due to our ability to integrate them into our existing infrastructure and consolidate facilities.

We also have opportunities to invest in emerging businesses, similar to the way we are growing our data center business.

As always, all our investments are made through a clear, capital allocation approach to deliver long-term sustainable returns to shareholders.

With respect to new adjacent businesses, we will start small with some interesting new opportunities, assess them, and either scale them or scrap them.

Further, to our capital allocation approach, we know some of you have questions about what our dividend level and/or share repurchase program might look as a C-Corp.

I would just like to reiterate that we are committed to enhancing shareholder payouts, and will strive for a dividend level and/or share repurchases that allow for consistent growth over the long term in line with growth in the free cash flow of the business, whilst allowing the flexibility to pursue high return investments that support growth.

Again, Brian will have more details,.but with regard to our preliminary view on 2014, we are projecting solid C$ revenue growth of 2% to 4%, and C$ adjusted OIBDA growth of 2% to 5%, consistent with the long-term goals we've referenced in the past.

Our guidance incorporates any efficiency benefits from our organizational realignment.

But as I noted earlier, some of this will help offset pressure from expected continued declines in core service activity, whilst some will be reinvested to advance our strategy, which we believe yield attractive returns in excess of our hurdle rates.

Moreover, in the future, you can expect that we will engrain in the organization a continuous improvement approach focused on enhancing profitability to offset headwinds in the service side of the business, provide for some profit growth, and provide resources for investment in future growth.

Before I turn over the call, I want to sincerely thank Brian for his contributions as CFO over the last 6.5 years.

He's added a great deal of value for both the Company and our investors, and he will be missed.

Brian is not just a great professional, but he's been a great colleague, and I am truly thankful for his help with my transition over the past year.

Brian is moving to a new opportunity at the beginning of next year, and we wish him all the best.

He will working with us through the end of the year to transition the role.

I wish also to introduce Rod Day, currently CFO of International, who has been with us for five years.

Rod is very knowledgeable about our operations in emerging market strategy.

He was instrumental in driving the 700 basis points of profit improvement achieved in our International business over a three-year period, and achieving this against a backdrop where he helped add a number of new emerging markets to the portfolio.

He's been a good steward of capital; having allocated resources amongst numerous international markets, deploying more than a $0.5 billion for acquisitions and capital expenditures during that same period.

He has also been involved from the start with the changes we need to make our International business compliant with REIT tests.

We'll be in good hands with Rod as the acting CFO for the enterprise while we consider both internal and external candidates.

In summary, we had a solid quarter; punctuated by several major accomplishments related to the execution of our plan, and further progress towards REIT preparedness, including alignment of our capital structure.

We are making some changes to the organization to support our strategy and speed of execution.

And we believe our plan sets us up well to sustain the durability of the business and support long-term growth.

Additionally, our outlook for 2014 is solid and in line with our expectations for the business.

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

Thanks Bill.

Given that we've got a lot to cover today, including our preliminary outlook for 2014, we've moved a few of our regular year-to-date slides to the appendix for your reference.

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

We delivered solid results in Q3, reflecting strong operating performance, supported by consistent storage rental growth and international profit gains, as well as benefits from recent acquisitions.

Storage rental grew 4% on a C$ basis in the quarter, supported by consistent 2% gains in North America, and 10% growth in International, including benefits from recent acquisitions in Latin America and North America.

Adjusted OIBDA performance was in line with expectations in Q3, driven by continued International margin gains and sustained cost controls.

As we deliver solid operating performance, we continued to advance our strategic plan, supported by core acquisitions and investments in our data center offerings and capabilities.

These investments are intended to sustain the durability of our core business, and provide a platform for future revenue and profit growth.

For the full year 2013, the core business is on track to achieve its financial goals.

Today, we're updating our 2013 outlook to reflect recently completed acquisitions, including Cornerstone, and the impact of the restructuring charges of about $30 million we expect to record in 2013.

Looking ahead to 2014, we expect constant dollar growth of 2% to 4% in revenues, and 2% to 5% and adjusted OIBDA, supported by continued strong offering performance and the benefits of our 2013 acquisitions.

Although we continue to pursue REIT conversion effective January 1, 2014, our preliminary 2014 outlook assumes C-Corp.

reporting.

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 third quarter of 2012.

Q3 results were in line with our expectations, and consistent with recent trends.

Enterprise revenues grew 2.2% on a C$ basis, as our International segment continued to produce strong results.

International posted 7% C$ revenue growth, supported by 10% storage rental growth, including benefits from our recent acquisitions in Colombia and Peru.

North America posted flat C$ revenue growth, as 2% storage rental gains were offset by lower complementary service revenues.

FX rate changes reduced revenue growth by approximately 130 basis points in the quarter.

Adjusted OIBDA was $240 million, up 0.4%, excluding the $5 million restructuring charge.

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

International adjusted OIBDA increased 18% year-on-year in Q3, reflecting strong top-line growth and continued margin gains.

Year-to-date, our International adjusted OIBDA margin is 25%, in line with our three-year improvement plans to increase International margins by 700 basis points.

We expect the underlying margin to exceed 25% for the full year, though the reported numbers will be slightly lower, due to the impacts of recently completed acquisitions and related integration costs.

Adjusted EPS for the quarter was $0.31 per share, compared to $0.34 in Q3 2012.

The year-on-year decrease was due primarily to 19 million additional shares outstanding, including those issued as part of our special 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 $0.03 included $21 million REIT costs and $46 million other expense, including $44 million of early debt extinguishing charges in connection with our Q3 refinancing activities.

Our structural tax rate for the quarter was 38%.

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.

Q3 growth rates showed some improvement compared to last quarter, and were in line with our full year outlook.

For the quarter, consistent storage rental growth of 3.6% on a C$ basis drove overall revenue performance.

Year-on-year global net volume growth was 3.2%, including a 2.2% benefit from our 2013 acquisitions.

North America posted 1.6% C$ storage rental growth, reflecting relatively flat records management volume, pricing at 1.3%, and the benefits from our recent acquisitions.

North American pricing gains were consistent in Q2, reflecting impacts from prior-year comparisons.

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

International storage rental growth was 9.5% C$ for the quarter, reflecting 24% growth in emerging markets, supported by strong organic gains and benefits from acquisitions.

Internal storage rental growth remained strong in International, with a 6.5% gain in the quarter.

For the year, we expect overall storage rental growth to grow above 4% on a C$ basis.

Total services were flat on a C$ basis in Q3, as International service growth supported by acquisitions was offset by North American service declines, driven by lower complementary service revenues.

Higher incoming volumes and related transportation revenues helped to offset these impacts in the quarter.

Average paper prices declined 19% year-on-year, resulting in $3 million less revenue in Q3 compared to the last year.

At current paper price levels, which are down about 15% versus the 2012 average, we will see some pressure on this front moving forward, which will constrain overall service gains.

Overall total internal growth was 1%, as 2.3% gains in storage rental more than offset modest service declines.

Let's move now to slide 6 and review our 2013 acquisitions in more detail.

As you know, acquisitions are an important tool we use to execute key components of our stated business strategy to drive continued profit growth in our mature markets and to further penetrate attractive emerging markets.

To date, in 2013, we've completed six core acquisitions for total consideration of approximately $320 million.

This includes our most recent acquisition of Cornerstone Records Management here in the US for approximately $190 million.

Excluding Cornerstone, which was a unique opportunity, we've spent approximately $130 million on core acquisitions so far this year.

This aligns with our projected average annual deployment of $50 million to $150 million presented at Investor Day last October.

In the mature markets, the goal is to optimize the storage network we've built through fold-in acquisitions and extend the durability of these high return businesses.

Although Cornerstone is certainly larger than the typical business we're likely to acquire, the fold-in economics of this transaction are attractive and will support future revenue and profit growth.

Post acquisition, we generally realized the benefits of operating efficiencies within the first year or so.

Benefits derived from rationalizing the real estate portfolio in an acquisition may take up to several years, depending on the size of the business, lease expiration dates, and the volume that needs to be moved.

All of this is factored into our valuation models as we make our investment decisions.

We continue to acquire businesses in high growth emerging markets to build market leadership and position ourselves to capture the first time outsourcing wave taking place in these countries.

In June, we acquired Archivum in Brazil, building on last year's acquisition of Grupo store.

In September, we acquired File Service, the leading records management company in Peru, and entered a new market with the acquisition of the records management division of G4S in Colombia.

Our acquisition pipeline remains robust, and we'll continue to evaluate these opportunities through a disciplined capital allocation and ROIC lens, ensuring we create value for our shareholders.

Let's now turn to slide 7 to look at our balance sheet metrics.

As previously announced, we completed several financing transactions that sustained our sound balance sheet.

First, we amended our senior credit facility, upsizing it to $1.5 billion with a syndicate of 21 banks.

The new facility is composed entirely of a revolving credit facility with no term loans.

Pricing under the credit facility didn't change as a result of this amendment, and is based on our choice of interest rate and currency options, plus an applicable margin, which varies based on certain financial ratios.

We also took advantage of attractive market opportunities to lower the cost of our fixed of debt and extend maturities by issuing $600 million of 6% senior notes, due 2023 in the US, and $200 million of 6 1/8% senior Canadian dollar notes due in 2021.

The net proceeds of these transactions were used to redeem all of our 8% percent senior subordinated notes due 2018 and 2020 to redeem our outstanding 7.5% Canadian dollar senior sub notes due in 2017, and a funded cash tender for $138 million of our 8 3/8% senior sub notes due in 2021.

Through the amendment to our credit agreement, we changed our consolidated leverage ratio for compliance purposes to a lease adjusted consolidated leverage ratio, which is an EBITAR based calculation that adds leases to our total debt.

This better aligns with how rating agencies view our leverage, and recognizes that leases are a form of financing.

At the end of Q3, that ratio was 4.9x with a requirement not to exceed 6.5x.

This compares to 4.2x calculated under the prior credit agreement, which excluded the impact of leases from the calculation, and had a requirement not to exceed 5.5x.

To align with this new calculation, we're establishing a target lease adjusted consolidated leverage range of 4 to 5x.

This equates to our previous range of 3 to 4x, excluding lease financing.

As we just indicated, we're currently operating with a net total lease adjusted leverage ratio of 4.9x , which is just below the high end of our targeted 4 to 5x range.

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

The costs associated with REIT conversion, including tax payments, will temporarily push our leverage to, or just above, the high end of our range.

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

At quarter end, liquidity was more than $1.1 billion, with $172 million in cash, and $975 million in additional borrowing capacity.

Our strong cash flows support continued demands of our capital allocation strategy and our REIT conversion.

Year-to-date, we've paid $155 million in cash dividends, and $130 million of REIT costs, including REIT-related CapEx and tax payments related to depreciation recapture.

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

That concludes our review of the Q3 2013 results, let's now turn to slide 8 to review our 2013 outlook.

Slide 8 summarizes our updated 2013 operating outlook.

As I mentioned earlier, our business trends and operating fundamentals are consistent, and we're on track to achieve our financial goals for 2013.

Today, we're updating our full year 2013 guidance to reflect recently completed acquisitions, including Cornerstone, and the $30 million of restructuring charges Bill discussed in his comments.

For ease of discussion, we're presenting our updated outlook for the underlying business, excluding the $30 million of restructuring charges separately, and then layering in the charges to show their impact on our expected reported results.

We're now expecting full-year revenues to be between $3.025 billion and $3.05 billion, and adjusted OIBDA ex-restructuring to be between $905 million and $925 million.

Our expectations for adjusted EPS, CapEx and free cash flow remained basically the same as last quarter, with the exception of $5 million of data center spending that will now take place in 2014.

The impacts of the restructuring charge will be to reduce adjusted OIBDA by $30 million, adjusted EPS by $0.10 per share, and free cash flow by $18 million.

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

We're investing to ensure that 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.

These costs are tracking consistently with previously disclosed estimates of total conversion costs.

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

Let's move now to slide 9 to begin our review of the preliminary 2014 outlook.

Slide 9 highlights key factors supporting our preliminary outlook for 2014 performance.

First, let me remind you that although we continue to pursue REIT conversion, our preliminary 2014 outlook assumes C-Corp.

reporting.

As such, there are approximately $10 million to $15 million of ongoing REIT compliance costs that are not included in our operating forecast for 2014.

These costs are currently being categorized as REIT costs, and being reported separately.

If and when we successfully convert to a REIT, we'll update our guidance accordingly.

As noted earlier, our outlook is for 2% to 4% C$ revenue growth, and 2% to 5% C$ adjusted OIBDA growth in 2014, supported by sustained performance in North America, solid revenue profit growth in our International segment, and benefits from our 2013 acquisitions.

We expect to realize $30 million to $40 million in annual cost savings from our restructuring plan.

These savings will offset cost inflation and pressure from continuing service activity declines, and fund investments to support our growth strategy.

Our International business, excluding the impact of acquisitions and their related integration costs, will continue to accrete margin of about 50 basis points next year, building on the 700 basis point improvement we achieved over the last three years.

Assuming that FX rates remain at recent levels, foreign exchange will not have a material impact on our reported growth rates in 2014.

The six core acquisitions completed to date in 2013 will build on sustained operating performance, and set a solid foundation for future revenue and profit growth, consistent with our long-term strategy.

Overall, we expect these completed transactions to add 2.5 percentage points to our C$ revenue growth in 2014, along with $20 million to $25 million of incremental adjusted OIBDA after initial integration costs.

Additional efficiency and operating gains will be realized over time, as our real estate consolidation plans are implemented for these businesses.

Our CapEx and free cash flow will be impacted by our recent acquisitions and investments in our data centers.

We targeted nearly $40 million of CapEx for acquisitions, primarily Cornerstone, and about $10 million to support real estate consolidations, especially in Brazil and Argentina.

These investments will drive future profit growth.

We also expect to invest about $40 million in data center build-outs, including our first above ground facility in Massachusetts.

Let's turn to slide 10 to summarize our 2014 outlook.

Again, on a constant dollar basis, we're targeting 2% to 4% revenue growth and 2% to 5% adjusted OIBDA growth.

On a reported basis, this outlook supports our preliminary revenue guidance of between the $3.09 billion and $3.170 billion, and adjusted OIBDA of $930 million to $960 million.

Our outlook for adjusted EPS is to remain in the range of $1.03 to $1.14 per share, as adjusted OIBDA gains are offset by higher depreciation and amortization and increased interest expense.

Our adjusted EPS calculation assumes 193 million shares outstanding, and a structural tax rate of 39%.

Our outlook is for consistent underlying free cash flow reflecting solid operating performance and consistent trends.

The year-on-year decrease in expected free cash flow is primarily due to higher capital expenditures of $245 million for the year, driven by approximately $50 million in acquisition integration and real estate consolidations designed to drive future profit gains.

This outlook for 2014 is preliminary, and is based on current FX rates, paper prices, and shares outstanding, any or all of which can change materially in short periods of time.

We'll update our outlook again on our Q4 earnings call to reflect changes if any in these variables.

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

That concludes our review.

In summary, Q3 was a quarter of solid financial performance, and we're on track to achieve our 2013 financial goals.

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

We continue to advance work in connection with the REIT conversion as part of our long-term approach to enhance value creation for stockholders.

Thank you, any we'd now be happy to take your questions.

(Operator Instructions)

George Tong, Piper Jaffray.

I want to get a sense for what your outlook is for organic storage volume trends in North America.

How much has your sales force verticalization in sales and marketing investments contributed to tapping the unvended storage opportunity?

George, it's Bill.

Thanks for your question.

I think right now we're still seeing continued traction on the verticalization, but it's, again as I said last time, it's still early days, because we've stood up a number of the verticals.

I think right now in terms of volume growth is we're flat and starting to trend upward in some of the markets that we've applied it to.

But I think in terms of revenue, we're still staying with the 1% to 1.5% revenue growth if we look at the North American business.

Got it.

And within international storage, can you talk about whether you're maintaining share in the countries where you have a leadership position?

And what your progress is in taking non-leadership countries to leadership positions?

Well, I think on that, we're actually gaining share in the markets where we have leadership positions.

And in some countries where we've been at it longer than others -- in spots in South America for instance, we're mimicking margins that we see in North America in the most mature markets.

So that's progressing very well.

Overall, I think if you look at the countries, Peru, we did an acquisition which puts us into a strong leadership position now in Peru this year.

Last year, through our acquisitions in Brazil, we achieved a market position, but we've done now even a more recent acquisition in Brazil, which furthers the distance between ourselves and our next competitor.

So, I think with the targeted acquisitions we've done, we continue to build a market-leading position.

So if we look at Latin America right now, in Chile, Brazil, Peru, and Colombia -- because the acquisition we did in Colombia was already in a leading or a pole position in that market -- we have clear market leading positions in all those countries.

That's helpful.

And can you talk a bit about the progress you're making and additional color in scaling your wholesale data center business?

And any other diversifying growth initiatives you have beyond wholesale data centers?

It's too early for us to comment on it.

We have a pipeline in the emerging businesses, which Harry is now taking over; and there's a number of things that are building up in that pipeline, and we're screening those to figure out which ones will go through the testing phase.

And as we said, we'll test.

And then based on those tests, we'll either drop or we'll scale.

So we're in the process of that.

In terms of the wholesale data center space, we are making some real progress.

And in fact, we're starting to see more and more synergies between the wholesale data space and our data protection business, because many customers like the continuity in terms of what we can do for them vis-a-vis their tiered archiving strategy.

So it's more of a continuous product.

So again, early days, but that's why we were encouraged to go ahead and start the construction of the above-ground facility in Northborough, Massachusetts.

Thanks.

And then last question, excluding special charges this quarter, OIBDA margins were flat from the prior year.

What are the drivers for continued margin upside?

Any specifics you have, especially on the International front?

I think on the International front, I think Brian highlighted -- and he can go into more specifics -- a modest gain.

But I think again, I think said this last time on the call, you need to think about International as a portfolio play.

And that's why I highlighted in my remarks that Rod, with his leadership in International, achieved 700 basis points, whilst adding a number of emerging markets.

Because when we buy these emerging market plays, it takes us a while to get them to the margins that we get as we fold in and rationalize the real estate.

And so our view is that if you start seeing a major ramp-up in the overall International margin, it's saying that we're not finding places that are good opportunities to start building market-leading positions in other geographies.

So next year, I think Brian highlighted, it's a fairly modest improvement in terms of our OIBDA margin on International.

It's not saying that the business isn't growing in value; I'm just saying that we see an acquisition pipeline which it takes time to actually bring those things up, both to a market-leading position and to actually consolidate the operations so that we start mimicking the margins.

So we have countries in South America that, as I say, are at the same or actually even slightly higher margin than the United States; and we have others that are further back on the development curve that are growing.

So it is really a portfolio play.

I think that's exactly right.

I think in North America we're trying to sustain very high returns where we have, in two-thirds of our portfolio internationally, where we have leadership and very good returns.

We're trying to sustain those as well, and drive additional margin improvement overall as we continue to scale out the International portfolio and control our overhead costs in corporate and drive efficiencies that enable us to reinvest selectively against new growth opportunities.

So in balance, right now, we're in a zone where our profit is projected to grow at or slightly above our revenue growth rate.

And I think over time as we continue to be successful advancing growth opportunities, I think it will give us greater chance to again leverage our cost base and produce some margin gains.

Yes, and one thing on that, just to add to Brian's comment, is the thing you should keep in mind -- that we're always doing these things above our hurdle rate.

So, yes, we want to actually make even higher returns on equity.

That these acquisitions that we're doing in these emerging markets typically are a 20%-plus return on equity, and have very attractive, obviously then, returns on invested capital.

But as they grow, then of course the returns grow even more.

Shlomo Rosenbaum, Stifel.

Bill, I wanted to ask you a little bit more about Cornerstone.

The acquisition -- is this, would you say, more of a real estate consolidation play?

Or is this more of a play where you have much a better entree into this mid-market where you guys typically haven't played that much?

Good question, Shlomo, thanks.

It's both.

I think that, first of all, to your first question on the real estate side, the reason why the returns look so attractive -- as we say, it's mid teens in terms of return on equity, and a 10%-plus return on invested capital, is going to your real estate question.

It's almost like a pick up and move, because there's such an overlap in terms of their real estate and ours.

So, it takes a little while.

Because I think that some of the leases go out to 5 years, so we won't be able to consolidate the real estate overnight.

But we're going to be able to consolidate a lot of it fairly quickly.

So it is, to your point, a real estate operations consolidation move, is what's in our acquisition model driving the value, first and foremost.

So that's what we based our modeling on, and that's what we're banking the returns on.

So it's something that we're very comfortable with.

I think the potential upside to out-performance, but it's very difficult to quantify, is your comment about their presence in the middle market.

And some of the organizational changes that I alluded to are also helping us get at that.

So we are looking to get some DNA from Cornerstone, and being more aggressive in the middle market where we may not have been as present in the past.

And we think there're some interesting opportunities there.

Do you think you're going to need to stand up a separate sales organization?

Because typically, the typical account that they went after really has a different parameter than the national or even international accounts that you typically go after.

Shlomo, I'd rather get into that on Investor Day in March.

Because I'm not trying to be coy, but the announcement that we've made in terms of the reorganization of the alignment and the restructuring that we're taking, is going -- part of that is addressing your question.

And as you can probably appreciate, we're in the process of communicating that throughout the organization.

So I don't want to really get ahead of myself in terms of our announcements internally.

But part of our restructuring is to actually address the question that you're asking.

Okay.

I'll move on from there.

I appreciate that.

The core service decline was the lowest we've seen since 1Q 2012.

Just from what you guys talked about in terms of expectation that service may continue to wae, do I assume that you guys view this as an anomaly as opposed to a bottoming?

Yes, I think there are similarities in the trend, Shlomo.

We are seeing benefit as we're acquiring businesses and integrating them -- the related transportation activity, and things of that nature -- there's a benefit that flows through core service.

We are seeing some leveling of the service trends.

I don't want to make too much of that at this stage, but I think some of the flattening we're beginning to see -- it's still down and we're still anticipating a level of pressure there.

And we also have just some more favorable compares year on year.

We worked through some of the tougher comparisons areas like our shredding business and International.

So on balance, it's somewhat better and we've got some discrete things that are helping us.

But I would reinforce, we still expect to have a level of pressure on just the really key impact of technology, which is not on our storage business but more on how paper records are used in business operations.

We do anticipate some local oppression going forward.

And then, Brian, maybe you could just walk us through the difference between the OIBDA and the free cash flow this year, and the OIBDA and the free cash flow next year.

How much of it is the difference of interest expense, and how much of it are relating to some of the other efforts that you guys have maybe in data center and some of the other things?

It's principally capital.

So if you took our numbers next year, Shlomo, we try to highlight that there's roughly $50 million of investment and integrating the acquisitions, as well as including some discrete investments we're making in Latin America to get more efficient real estate operations.

If you adjusted for that $50 million number, I think you'd basically see very similar trends year on year in adjusted OIBDA.

We'll have somewhat -- we have low cash taxes this year, driven by the timing of some payments, but next year that will be more normalized as well.

Andrew Steinerman, JPMorgan.

I'm sorry, I can't resist, I'm going to ask another core service question, if that's okay.

So in the quarter, there's language in the press release that says new incoming volume related to transportation.

So could you just be specific -- you definitely have been very clear that there's a long-term trend to less retrievals.

But in the third quarter, was there some recovery in that retrieval piece?

And then looking at 2014, do you feel like core service internally could be flattish?

Andrew, it's add lots, is where we're seeing some benefit.

There is some acquisition benefit as well, but the add lots, it's an area of focus in terms of selling force effectiveness, growth in international markets.

We saw better trends on add lots or new incoming volume in Q3.

And I think your outlook overall next year for services is in the ballpark.

I think overall, our underlying growth on an internal basis we're looking at to 2% to 3% storage and relatively flat service numbers.

Obviously, paper and things like that will have some impact on that.

But given our current view, that those are reasonable estimates.

Right.

And those flattish comments about service for 2014 was an internal comment, right?

That was internal.

That's right.

And so there's about a 2.5% benefit overall from the acquisitions.

Andrew Wittmann, Baird.

Brian, sorry to see you go.

It was a pleasure having you as a representative of the Company.

Wanted to ask first on the data center strategy, Bill, and maybe Brian as well -- can you help us phase in what you think that a reasonable capital outlay for that business is?

And then, more strategically, can you just talk about how, as a real estate play here, Iron Mountain is going to differentiate in the marketplace versus already some pretty good competitors?

And then maybe lastly, if you haven't already, can you comment if this data center that you're currently starting construction on is spec, or if it already has some tenants?

I think, first of all, the reason why we have an emerging businesses, this is a step-by-step approach, as we said.

We invest capital based on where we see that there's potential demand, is the way to test it out.

So right now, our plan is the $40 million that we've discussed that we've earmarked, which is both expanding our operation in Boyers and the underground facility, as well as building the above-ground facility on our campus in Northborough, Massachusetts.

I think that the other part of your question is, how do we compete against the other players in this space?

In the feedback -- I was actually with a customer last week -- that the feedback we're getting is that because of our strong customer relationships on the data protection side, and our understanding in terms of what CIOs and data center infrastructure people understand what their business is about, is that they're very comfortable talking to us.

Especially when they start thinking about their archiving strategy in a more continuous method.

So what we're finding is, is that we actually do have a differentiated brand.

And in fact, we've hired a couple people who used to be in what are competitors' to us today.

So, early days still.

But we felt confident enough, based on the lead regeneration and customers that we're starting to sign up, that this is definitely a business that we should pay attention to and continue to test and develop.

So I think right now, I think that's where we are.

I think in terms of customers signed up, as you probably can appreciate it, is that it's chicken-and-egg.

In other words, to sign somebody into a co-lo or a wholesale data center contract in the Northborough facility, is more about colocation, is that the facility has to be done or nearly done.

But we didn't break ground until we had a robust enough pipeline of leads that we felt comfortable that this was a very low-risk opportunity, or a low risk investment in terms of to start the construction.

So at this point, we haven't signed anyone for the Northborough facility; but we have a strong pipeline that we feel pretty comfortable that will be able to get traction relatively soon when the facility is completed.

Got you.

That's helpful.

And then, I wanted to just dig in on some of your comments.

You mentioned that there's several PLRs with the IRS.

As we looked at the 8-K from the summer, it really seemed like the racking was the one that was specifically called out there as the main issue.

Not looking for any insight as to where we are in the process, but just to understand the scope and the number of issues that are in front of the IRS -- should investors be thinking about that summer 8-K on racking as really the crux of the issue?

Or are there other of these several PLRs that are out there that also we should be thinking about or contemplating as we think about the Company here today?

So Andrew, there are a range of topics that we sought clarity from the IRS in terms of the REIT conversion.

Just going back to what we've said in the past, there are in our PLRs a few key issues; racking is one of them.

Goodwill is another topic.

There are some specifics related to our business model and how we store items that are related to something that we wanted to clarify.

The issue of racking was specifically what the IRS had highlighted when they informed us about the formation of the working group and the delay in the process.

And so that was the issue that they were centered on, related to whatever it is they're sorting out through the working group.

There are other topics that we need to clarify.

And consistent with what we've said all along, going back in time.

And, as we've said, we feel good about our arguments.

And it's not certain, the outcomes aren't certain here, but we feel good about our arguments and positioning, and we're continuing to work to be ready to become a REIT as something we can get favorable clarification on that over time.

Okay.

So is it fair to say that just because these other issues weren't mentioned in the 8-K that you filed this summer, that, that does not necessarily mean that they're fully addressed or signed off on by the IRS?

I'm trying to answer that question.

We haven't referred to getting clarity on other issues with the IRS.

Kevin McVeigh, Macquarie.

Great, Thanks.

And Brian, thank you as well.

Bill, in terms of the search, what are you looking for in terms of CFO?

And, as you think about that, just any characteristics you're looking for?

Brian has obviously done a wonderful job operationally.

What are you focused on as you think about the next candidate in that seat?

We're looking for Brian's twin.

But that's not our likely since he doesn't have one.

Look, I think you can have a long list and it can be trying to identify a purple squirrel, so to speak.

I think that we feel pretty good that we have strong internal candidates.

But it's like any of these situations, you need to go outside and look at the benchmarks; and we will look across both the REIT and non-REIT world.

It's going to be important whoever is the CFO going forward has a strong operating bent, as well as a good financial bent.

Because we do have a fairly, I wouldn't say complex business, but we have a lot of moving pieces and it's a very global business.

So we think we have both strong internal candidates, but we also think it's important to benchmark those people against what the market also has available to us.

So we'll see how we progress.

But, one of the things that I highlighted on the call about Harry's move with JT coming in his place -- Brian is moving out Rod is coming in.

It is something that we take seriously; succession planning and building bench strength.

So, we feel like we're in good shape, but we, at the same time, I think for good diligence, we should go out and see what the market has.

Got it.

And then, any sense of timing on -- I know when Brian came in, John had transitioned before Brian came in.

Any sense of timing on when we should expect an announcement?

No.

I think we're going to be -- we're in the process of appointing a headhunter to assist us with it.

And we're going to go through his fast and deliberate as we can.

But I don't think that we can be pinned down to a timing at this point.

Got it.

And then just shifting gears, looking at the storage internal growth, it looks like we're seeing a pretty consistent trend in terms of a slower rate of destruction, and obviously the storage overall benefiting.

That seems pretty consistent with past recoveries.

As you think about the reacceleration and the internal growth in the core storage businesses, is this tracking pretty similar to past recoveries?

And should we expect more organic sales as overall?

I know that's always a function of -- there's a macro component to it, but any flavor on that as well?

Kevin, I think that I wouldn't.

Because I think this is -- especially given a lot of the legal holds recently as well.

And some of it just driven by legal holds, and as those cases get cleared you can get some lumpiness in terms of the destruction.

So I wouldn't at this point read too much into those trends.

I think where some of the things that we're highlighting, which I discussed in an earlier question, about how we're making some realignments and adjustments in our go-to-market, that we think we're going to get a better response in share, say.

The middle market, I think is where the benefit is going to come from.

At this point, I wouldn't start reading too much into trends around destruction.

And I think where our intention is focusing on much more improving the inbounding rather than thinking that we have a lot of control or see a different trend on the destruction side.

I would say I think the trends reinforce the durability of this business, and we're doing quite well in a slower-growth global economy.

And I think we have opportunities to build on that operationally, and that if there's improvement in the macro economy, that can help us as well over time.

Great.

And then just, if I could -- what percentage of the business now is middle market versus larger enterprise on the storage side?

Roughly half of our business is larger customers with multi-year agreements.

And roughly half are customers that are relatively smaller that are on annual agreements.

And that's in terms of revenue, not in terms of number of customers; obviously there would be more smaller.

But I think that the opportunity here is not just to increase the focus on the small or relatively small customers, but also to extend our reach a bit here and really fully develop that opportunity.

And in terms of the unvended opportunity, I think there's a lot of indications that there's still substantial potential there.

So, we have a good established base, but I think it's something that the Company can build on.

Great, thanks.

Good luck, Brian.

Thank you.

Scott Schneeberger, Oppenheimer.

On the lines of the services, Brian, you answered Andrew earlier on, I believe it was core service as an outlook for next year.

And I just wanted to confirm that was core as opposed to overall service, because I noticed in the press release, complementary services decreased due to delayed timing and some document management services and special projects.

And the second part of this question is, are you seeing a buildup now of special project activity and it's just delayed?

Or is that a more broad, longer term statement?

Thanks.

The special project was just a very specific reference to the quarter, just near term activity.

I was just trying to highlight some of the drivers.

And the reference was to core service, overall service probably is going to be flattish as well, just because we do anticipate some pressure given where paper prices are currently, offsetting some of the gains that we're making on other fronts.

But I think overall our relatively flattish core service outlook before acquisitions, and internal growth of 2% to 3% in storage.

Okay, thanks for that clarification.

And before I forget, best of luck with everything.

And my last question will be, with regard to acquisitions, you guys mentioned somewhere in the prepared remarks that the long term guidance for acquisitions was somewhere domestic and emerging, $50 million to $150 million, and near the high end of the range of that without even bringing Cornerstone into the mix.

So I just wanted to get an update on how you're thinking about that longer term?

Is there going to be a pause, or is a bit of a pedal to the metal from here?

I think, Scott, I think that we have -- if we look at International, we've got a pretty strong pipeline, so I do not see much pausing because we've got them queued up to a certain degree.

But it's opportunistic.

We don't chase deals and we don't chase markets, but we are constantly scanning the horizon and we see, especially in the International side, some good opportunities.

And we see some possible good bolt-ins in some of our core markets to keep those strong and healthy and our cash flow going forward.

But it's also opportunistic.

We don't control the timing on these things, but we feel pretty good, for instance, with the International pipeline.

I think we probably have to close it, and wrap it up then, if it's okay.

We're a little bit over time.

So I want to thank you, Operator.

And to wrap it up, just to emphasize, we had a good quarter, driven by consistent growth in our storage rental business; and we made good progress on all three key pillars of our strategy; which is sustaining growth in the mature markets, growing our presence in the emerging markets, and evaluating, incubating, and scaling new emerging businesses.

Our financial position continues to be strong, and we feel good about the opportunities to grow the business at attractive returns on capital based on what we see going forward.

We've enhanced our focus on the key drivers of value for the business, and are starting to realign the organization for maximum of efficiency and to go after those opportunities.

As we implement our plan, we will always continue to focus on improving capital allocation, maximizing the total returns, and delivering a sustainable value to our shareholders.

So I want to thank you all for joining us this morning, and let's hope the Sox keep it up.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may now all disconnect.

Everyone have a great day.