鐵山公司 (IRM) 2014 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Iron Mountain Q1 2014 earnings webcast.

(Operator Instructions)

Thank you.

I will now turn the call over to Ms. Melissa Marsden.

You may begin your conference.

Thank you, and welcome, everyone, to our first-quarter 2014 earnings conference call.

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

This morning, we will hear from Bill Meaney, our CEO, who will discuss highlights for the quarter and strategic initiatives, followed by Rod Day, CFO, who will cover financial results.

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

As is our custom, we have a user-controlled slide presentation available on 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.

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.

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.

Before I turn the call over to Bill Meaney, I would like to add that on February 28, we stated that we were in discussions with the IRS on a number of our PLR requests, and we did not intend to provide additional interim updates with respect to any of the specific PLR requests or, generally, our progression through the IRS's PLR process.

Accordingly, we will not be discussing the status of our PLR requests on today's call.

With that, Bill, would you please begin?

Thank you, Melissa, and good morning, everyone.

I would like to thank those of you who attended our investor conference last month.

We very much appreciate the opportunity to present our strategy for future growth, and to demonstrate the durability and low volatility which have become a hallmark of Iron Mountain.

Before I discuss our results for the quarter, I want to acknowledge that many, if not all, of you are looking for an update with respect to our conversion to a REIT.

As Melissa just said, in our forward-looking statements, we will not be discussing the status of our PLR request on today's call.

Turning now to the performance of our Business, total revenue for the quarter was $770 million, up 4.7% on a constant-dollar basis, with adjusted OIBDA of $229 million and adjusted EPS of $0.26 per share, all of which were in line with our expectations.

We maintained our high enterprise adjusted OIBDA margins of roughly 30% during the quarter, with consistent performance in our North American segments, and international margins coming in slightly ahead of our targeted level of about 25%.

In addition, we achieved solid operating results, as we advanced our strategic plan to sustain the durability of our high-return business in developed markets, expand into high-growth emerging markets, and invest in emerging business opportunities, the most advanced of which is our data center business.

Storage rental revenue, the key economic driver of our Business, was up 5.3% in constant dollars, reflecting strong growth of nearly 13% in our international business, and constant-dollar growth of roughly 3% in both North American records and information management, or RIM, and North America data management, or DM.

This breakout for North America is consistent with the way we manage our Business and is reflected in our new segment disclosure, which I discussed during our investor day.

Rod will have more detail on our segmented results shortly.

Total storage rental internal growth was 1.4% for the first quarter.

North America RIM internal growth was impacted by a mix shift to slightly lower average pricing on some contract renewals, which were biased towards a mix of enterprise customers.

These contract renewals have led to better retention rates, and we have seen North America RIM volume up approximately 600,000 cubic feet from the end of Q4 on an internal basis.

As we noted at our recent event, there are several elements to driving storage growth in our developed markets.

It is a mix of organic volume growth from existing customers, sales from new customers including those that were previously un-vended, and some fold-in M&A at the right price with solid returns.

On top of that, you have price.

We continue to analyze optimum pricing across our customer base, and that sometimes means taking some deliberate price dilution to win long-term volume and/or sustain the durability of our customer relationships.

All this being said, we continue to be able to invest in our customer relationships and product development through ongoing productivity enhancements.

We maintained our North American RIM margins with a 37.5% margin versus 37% last year through continuous improvement initiatives, which we undertake to yield both real productivity gains and to modify our cost base as the Business becomes more archival for certain segments.

Our financial and operating results were further enhanced by the successful integration of acquisitions completed in 2013.

Acquisitions continue to be an integral part of our strategy.

They enable us to achieve leadership positions in emerging markets, and leverage our unparalleled platform of people, properties and services in developed markets.

As always, our acquisition strategy is guided by our capital allocation approach, through which we must exceed our cost of capital and achieve targeted returns in excess of our hurdle rates.

Moreover, we always undertake acquisitions with a view how an investment can further both our market leadership, as well as the continued durability of our Business.

We've been actively executing against our deal pipeline since the beginning of the year, completing five international transactions representing $60 million of total consideration, and another $5 million of tuck-in acquisitions in the US.

In developed markets, our leading platform allows us to quickly and accretively integrate acquisitions and achieve targeted returns.

These tuck-in acquisitions have very attractive fold-in economics, with ROIC of 10% plus, or roughly mid-teens equity returns.

Internationally, we closed three deals in Turkey and Poland.

Both are emerging-market transactions with attractive growth characteristics, where we have achieved or are developing market leadership positions.

Constant-dollar storage rental growth from emerging markets was 32% in the first quarter, with an internal storage rental growth of 13%.

As we recently highlighted, we have a strong pipeline of additional opportunities in emerging markets, representing more than 3 times the level needed to achieve our goal of generating an incremental $100 million to $120 million in revenue from emerging-market acquisitions by the end of 2016.

Combined with 10%-plus compounded annual growth in revenue from our existing base, we believe we can grow this portion of our Business to 16% of total revenues by the end of 2016, from 11.6% of total constant-dollar revenues today and from a previous base of 10% less than a year ago.

With regard to emerging businesses, we are on track with bringing our first data center near Boston online by the end of the second quarter.

We invested an additional $6 million in the first quarter to complete the first phase of the construction, and we are pleased with the interest we are seeing.

Since applying a focus on the Business a year ago, we have seen all of the existing customers in our underground data center in Pennsylvania increase their custom with us by 10% to 15%, in line with industry averages.

We completed our first foray into the colo market in the underground last December, and we have already contracted for 30% of the space, with a pipeline equal to approximately 10 times the remaining space available.

Additionally, we are seeing more deals and larger deals in our pipeline.

For the first phase of our three-phase 6-megawatt campus near Boston, we have strong customer interest, with a pipeline of about 3 times our initial capacity there.

We are still in the early stages of developing this business, but we are pleased with what we're seeing in terms of interest, and expect to achieve attractive returns on investment.

We continue to monitor our progress and invest capital in a success-based manner.

As we look forward to the remainder of 2014, we anticipate continued solid constant-dollar revenue, storage, rental revenue, and adjusted OIBDA growth in line with the long-term goals we've discussed in the past.

We expect consistent trends for durable storage rental revenue in developed markets, and a moderation in the rate of service revenue declines.

In our emerging markets, we are maintaining and modestly improving our profitability, even as we add to our emerging-market base.

We are on track to make this segment, which achieves low double-digit internal storage growth rates, a more significant portion of our overall sales mix.

Moreover, in our emerging-business area, we continue to identify and test opportunities which are near adjacencies to our core business and resonate with our customers.

Overall, it was a solid quarter, anchored by further progress on our strategic plan.

We believe we are on track to deliver against our 2014 goals, as well as our longer-term objectives.

As a reminder, those are to: first, deliver total shareholder returns in the range of 8% to 9%, in line with the S&P 500; provide predictable earnings and dividend growth with low volatility; and nurture our ability to generate potential upside from additional emerging business opportunities.

On a final note, whilst we are not providing any PLR updates, as we have said and reiterated at our investor day, we believe we fit well as a REIT due to our sizable real estate portfolio and attractive characteristics such as a high net operating income per square foot, low turn-over costs, and high customer quality and retention.

The REIT structure also complements our strategy, whilst enhancing payouts to our stockholders, and highlights our highly disciplined approach around asset allocation.

As a REIT, we would continue to generate the cash flow necessary to sustain the durability of the Business and support attractive stockholder returns, in line with our long-term strategic plan.

Now I would like to turn the call over to Rod.

Thanks, Bill.

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

We delivered solid results in Q1, which were supported by strong constant-dollar storage rental growth, good profit performance, and the benefits from recent acquisitions in emerging and developed markets.

As Bill stated, storage rental growth grew 5.3% on a constant-dollar basis in the quarter.

This was supported by 3.0% and 2.8% growth in the North American records and information management, and data management segments, respectively, as well as 12.7% growth in the international segments.

Adjusted OIBDA was in line with expectations in Q1.

Included in our first-quarter adjusted OIBDA and adjusted EPS is $2.4 million of restructuring charges, as well as $3.5 million in charges for the insurance deductible associated with the recent fire in one of our facilities in Argentina.

We expect to incur an additional $3.3 million in the remainder of 2014, in connection with the organizational realignment.

Our Q1 2014 CapEx of $47 million, excluding real estate and REIT costs, was in line with our expectations.

Free cash flow of negative $20 million was primarily driven by higher cash interest expense, the payment for restructuring charges accrued at the year end, as well as the timing of payables.

Looking at the free cash flow on a rolling 12-month basis, this was $320 million, in line with our projections.

At this time, we are not making any changes to our guidance.

Although 2014 full-year results will be boosted by recent acquisitions, this increase to revenue will be partially offset by the FX losses, based on current rates.

In addition, there is some volatility relating to costs in Argentina, but at this time, our best view is these fall within the range of our guidance.

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

As we discussed previously, during this quarter, we amended our reporting structure to align the way we manage the Business.

We changed the composition of our North American segment to the following three operating segments.

First, North American records and information management, or RIM; second, the North American data management, or DM; and finally, the emerging businesses.

Emerging businesses are currently a component of the corporate and other segments.

As we break down the numbers, Q1 operating results were generally in line with our expectations and consistent with recent trends.

Enterprise revenues grew 4.7% on a constant-dollar basis, as our international segment continued to produce strong results.

Indeed, international posted 12.8% constant-dollar total revenue growth, helped by benefits from our recent acquisitions in emerging and developed markets.

North American RIM posted 2.7% constant-dollar total revenue growth.

North American DM posted a 1.5% decline in constant-dollar total revenue.

As we mentioned at our recent investor day, this business is becoming more archival in nature, which has created headwinds in the service revenue; although to be clear, we continue to see consistent growth in DM storage revenue.

Our corporate and other segment reflects revenue from our data center business.

FX rate changes reduced total growth by approximately 160 basis points in the quarter.

Adjusted OIBDA was $229 million, up 0.5%, including the previously mentioned $2.4-million restructuring and the $3.5-million insurance deductible charges.

The key driver of profit performance was the continued improvement in our international segments, as well as margin improvements in our North American RIM segments.

Adjusted EPS for the quarter was $0.26 per share compared with $0.27 in Q1 2013.

GAAP earnings per share were $0.22 -- include $10 million of REIT costs, $5 million of other expense, and $8 million of gains primarily from the disposal of property assets in the United Kingdom as we continue to consolidate our operations.

Our structural tax rate for the quarter was 39.4%.

Let's now take a closer look at the components of revenue growth on slide 5. Overall, total revenue internal growth was 0.5%.

When we add the benefit from acquisitions of 4.2% and the offsetting 1.6% impact from negative foreign currency movements, total revenue reported growth was 3.1% for the quarter.

Storage rental growth of 1.4% reflects the pricing mix that Bill described.

However, we maintain solid margins in the Business due to our speed and agility initiatives.

Looking at the storage service splits, total storage rental growth of 5.3% on a constant-dollar basis drove overall revenue performance.

North American RIM reported 3.0% constant-dollar storage rental growth, reflecting flat records management volume, pricing of 0.8%, and the benefits from recent acquisitions.

Records and information management pricing gains were below historical quarters, which reflects taking some appropriate pricing management to win and/or sustain the durability of customer relationships.

North American DM reported 2.8% constant-dollar storage rental growth, driven by organic revenue, which was 2.3% for the quarter.

International storage rental growth was 12.7% in constant dollar for the quarter, reflecting 32% storage rental revenue growth in emerging markets, supported by strong organic growth and the benefits from acquisition.

Internal storage rental growth remains strong, with a 5.2% gain in the quarter.

Total service revenues were up 3.8% on a constant-dollar basis, supported by recent acquisitions, as well as increases in imaging projects and shredding activity, offset somewhat by a decrease in paper pricing when compared with the period one year ago.

In North American RIM, paper-related revenue increased due to volume increases, but this is partially offset by average paper price declines of approximately 5% year on year.

On a more general level, as noted in recent quarters, we've seen a moderation in the rate of decline in our North American RIM service business.

DM service revenues are experiencing headwinds associated with the trend towards reduced activity levels and related transport revenues.

International service growth was boosted by acquisitions and special projects.

Let's now move to slide 6 to discuss our volume growth.

As we mentioned at our investor day, our proprietary customer insights platform is giving us a better view on customer thinking, and that's resulting in lower levels of termination.

Also as noted, despite secular trends in the use of paper, we continue to see roughly the same amount of incoming volume from existing customers.

In addition, we are seeing an uptick in new sales, and of course, volumes are bolstered by acquisition activity.

The resulting worldwide net volume growth of 6.7% in Q1 2014 is compared to the previous year.

Let's now move to slide 7 to discuss our segments in more detail.

Consistent with our strategy, we're sustaining high returns in our North American segments, as we continue to build out our international segment as a significant driver of profit.

North America records and information management delivered solid profits, and reported revenues of $446 million, increasing 2.7% on a constant-dollar basis.

This increase was driven by acquisitions.

Adjusted OIBDA margins improved by 50 basis points year over year due to reduced overhead costs as a result of our restructuring efforts.

We're also sustaining capital efficiency, with spending at 3.8% of revenues, excluding real state.

North American data management delivered revenues of $97 million for Q1, which declined by 1.5% on a constant-dollar basis, primarily due to the decline in service revenues.

This service decline was the result of a trend towards reduced activity and related transportation revenues, as the Business becomes more archival.

Adjusted OIBDA margins declined by 400 basis points year over year due to the service revenue headwinds, and cost reductions not yet being in proportion to the decline in revenue.

Our international segment continues to post strong revenues and contribution progress.

Adjusted OIBDA increased 23.8% on a constant-dollar basis, benefiting from good global growth and cost improvement initiatives in developed markets.

The international business continued to deliver profitability on a portfolio basis, in line with our mid-20%s targets, with adjusted OIBDA margins of 26.2% for the first quarter.

Finally, corporate and other revenue was down due to a change in contract terms with an early-stage customer, as we continue to build out our pipeline in the data center business.

Adjusted OIBDA was down compared to prior-year levels, driven by the insurance deductible, restructuring costs, compensation, and consulting fees relating to various strategic initiatives.

Let's now talk about our acquisitions for 2014 on slide 8. Acquisitions are an important element of our stated business strategy to drive continued profitable growth in our developed markets and to further penetrate attractive emerging markets.

Through the end of April, we have completed five core transactions, investing approximately $60 million.

These include three deals in Turkey and Poland, which enhanced our leadership position in these emerging markets, and the acquisition of a leading provider of offsite data storage and data protection services in Australia.

In addition, we increased our ownership of a joint venture in Denmark.

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

However, acquisition integration costs impact our adjusted OIBDA for the first year.

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.

Our acquisition pipeline remains robust, and we will continue to evaluate these opportunities through disciplined capital allocation and a return-on-capital lens ensuring we create value for our shareholders.

Let's now turn to slide 9 and look at our current debt.

Solid cash-flow generation enables us to maintain a sound balance sheet.

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

At the quarter end, liquidity was about $560 million, with $170 million in cash and $390 million in additional borrowing capacity.

Our total lease-adjusted leverage ratio of 5.1 times, which is at the high end of our targeted range, has increased over the past three years, as planned, to support shareholder payouts, expenditures in connection with our proposed conversion to a REIT, and recent acquisitions.

Further, as previously stated, we expect leverage to temporarily exceed our target range in the short term due to costs associated with the REIT conversion.

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

In Q1, we paid $53 million in cash dividends, and $10 million of REIT costs, including REIT-related CapEx.

We're managing our balance sheet consistent with our strategy, while advancing substantial payments to shareholders, and we remain well positioned to fund our Business.

This concludes our review.

In summary, Q1 was a good quarter, supported by sustained storage rental performance, continued high levels of profitability in our North American segments, and strong international performance and recent acquisitions.

We continue to execute against our strategy, extending our reach into high-growth emerging markets, driving continued profitable growth in our developed markets, and prudently pursuing new business opportunities that are adjacent to our core business.

With that, operator, we are ready to take questions.

(Operator Instructions)

George Tong.

Thanks for taking my questions.

Could you provide some color on your organic storage revenue trends?

I see they improved fractionally from last quarter, but the organic internal growth remains below your 2% historical range.

Just some color on what drove performance in the quarter and when you might expect growth to return back to your 2% historical level.

Hi, George.

Thanks for your question.

The 1.4%, and as you say, our historical trends which are at 2%, 2.5% I think we made a deliberate decision, and you can see it in terms of our retention rates.

Our retention rates are up about 30 basis points.

When we were looking at renewing large enterprise customers, we look at retention, obviously, which is a key driver in terms of our long-term economic performance; the terms, in other words, how long those are.

So for example, we just renewed a financial service client where we not only increased the volume that we had with that client, but we went from a normal five-year contract to a 10-year contract.

So we put all of that into the mix when we look at that.

Overall, what we're look at is optimizing or maximizing the revenue and profitability of our customers.

And we look at price, we look at volume and retention, we look at the length of the contract and the contract terms, all with a view in terms of building the durability of our business.

If you put that into the mix, and you see where we have delivered on the OIBDA, you say -- historically, we were at 2%, 2.5%.

We were at 1.4%, but we increased retention by 30 basis points.

We still hit our OIBDA target.

It is a number of things and variables that we look at.

And when we looked at the specific renewals, it made a lot more sense to make sure that we improved our retention rates especially with a view of signing up longer contract terms.

That is very helpful.

Could you provide some additional detail on the organization realignment actions you've taken in the quarter and what benefits from a cost perspective you expect to see as a result?

First, it's consistent with what we said on an earlier call.

I think it was back in October when we discussed our reorganization is that while there is a reduction in our cost basis associated with it, that was not the motivation for our realignment.

The realignment was triggered back in October, but some of that is just following through in terms of the structuring costs in the Quarter 1 of 2014.

So the reorganization was, for the most part, completed last year, but there was some carry on in terms of the first quarter.

The main part of that was taking out two layers in our North American organization and mimicking what we have internationally that comes naturally around the country organization.

We have installed something similar into the United States where we have put a lot more accountability into the local markets.

That was really with a view to being more competitive in the mid-market segment.

Combined with our acquisition of Cornerstone, those two things came together with the reorganization, as they say, again with a view to be more competitive.

And have more accountability going after the midsized segment.

That is very helpful.

Thank you.

Andrew Steinerman.

I will go to the next question.

Scott Snyderman.

Following up on George's first question, I think you partially answered it, but we've seen a nice trend in termination and destructions.

You were talking about retention, but could you delve in a little bit more on the progress you've made there and what you are seeing?

Maybe I will give the first part of the answer and then let Rod emphasize as he was also referring to some of the tools that we have introduced.

We have brought in more sophisticated tools and made some investments to better predict when we seem to be losing traction with customers.

And when we go in early on, you have a much more I would say robust discussion, which includes how long we can renew the contract for.

So we saw some contracts which normally renew for three years, and we renewed them for five years.

As I highlighted just previously, we had a contract where we did not have anywhere near the share of wallet that we do now.

Actually we went from having a fraction of their wallet to 100% of their wallet instead of five-year contract to a 10-year contract.

And when we look at that, that leads to not only better retention rates, which as we said you can see the results in this quarter.

Whether you look at North America or you look at our overall business, we've improved retention rates by about 30 basis points.

In addition is we're gaining better terms and conditions in terms of the length of those contracts, which as you know for us, it's all about the durability and low volatility of our business.

Rod, I don't know if you want to add anything to that.

Just to build on that a little bit.

There's two sides to the equation here.

One is we have invested in predictive analytics to better understand the likelihood of customers terminating or destroying and then trying to work with the minimal proactive way, both for our benefit as well as their benefit.

And I do think we're seeing the consequences of that starting to come through in some very key volume metrics.

The other thing that we use to build from that is to think more about the long-term value of the customer relationship rather than just a short-term quick win that we might try and get.

By thinking about that and structuring that value into the contract and over a longer period of time, again, we think it is better for us and better for the customer.

Hopefully, and I think we are operating in a more sophisticated manner.

Thanks.

This is fairly broad-based.

Are you seeing any variances across the end markets which you serve with regard to destruction and terminations?

And for that matter, new business wins?

Probably the best way -- you have to have a little bit of a helicopter view, especially our exposure to financial services where you have legal holds in specific markets that can skew the data one way or the other on any given period.

I think we have to look at -- I think the better way to look at it is do we see a different trend in North America versus our other developed markets say in Western Europe or Australia.

I would say that we see very consistent -- we're using similar approaches to the market that Rod just described.

And I would say we're seeing similar trends, almost identical trends across both of those markets in the improvement that we're getting.

Thanks.

Finally if I could slip in one more, how is the pricing environment across storage and service.

What you are seeing, what some of the pushbacks you are hearing from customers, or are they fairly open to the strategy you are applying?

Thanks.

I think the price -- again, I will let Rod maybe follow-up -- but first of all on the price is that from our customers is it's much more important in terms of what their overall both quality and cost of their whole records program is.

And quality is about obviously making sure -- if you think about this as a safety deposit box for some of the most viable documents for our customers -- is making sure that those things are stored in a way and can be retrieved in a timely fashion when they need them.

And the other thing is to make sure that they have a robust records management program which means that they retain the things that they need to and don't retain the things that they don't need to.

And then the other aspect is how much does that whole program cost.

Those are the types of discussions that we have with our customers, rather than on a specific price.

Any low-inflation environment is that everyone is driven by trying to get more productivity out of their operations, and we're not immune to that like any other vendor.

But the conversation we're having with our customers is how can we reduce the cost of their total program and at the same time improve the quality of that program.

Which may mean lower volume for some customers in certain areas, but it definitely doesn't mean lower margin from our standpoint.

I think that's right.

What we're trying to get at is what value can we bring to the customer, and it's a complicated mix.

It's not just storage.

There's a whole other service element that we provide as well.

As the industry leader, we are concerned to make sure that we bring that value and demonstrate that value to the customer.

It's part of our negotiations; it sets up a wider and more holistic discussion I suppose rather than just a simple price discussion.

I think by doing that, it's good for us and it's good for the customer.

Thanks very much.

(Operator Instructions)

Shlomo Rosenbaum.

This is Josh James actually filling in for Shlomo.

I was wondering if you could give us --

Shlomo, can you speak up?

We're just barely hearing you.

Can you hear me now?

Yes much, better thank you.

This is actually Josh James filling in for Shlomo.

Was wondering if you could give a quick update on how the Cornerstone acquisition is progressing?

I think in terms of the integration, Josh, it is ahead of plan.

I think the revenue is slightly lower than what we originally expected, but in terms of overall OIBDA delivery, we're comfortably ahead of plan.

That was, in effect, much more similar to a large pickup and move.

The other thing, as I alluded to earlier on the call, is where we picked up significant benefit is insight on how our commercial operations can be better aligned to serving customers who I would call in the mid market.

I think between those two things in terms of our ability to integrate and synergize it quicker than we thought and also pick up some DNA about going after or aligning some of our commercial operations to the middle market, I would say it's gone quite well.

I don't know, Rod, if you want to comment on any of the financials.

Just on a revenue point, just to be clear, it was never that far off in terms of our expectations.

When we went into the deal, it was a few hundred thousand.

As we've been able to work with the business, that gap if you like has been closing as the months have progressed.

I think we are encouraged by the performance of what we have seen the top line and bottom line plus, as Bill said earlier, secondary benefits in terms of better understanding of small and mid market that we can gain from.

Thank you very much.

Dan Dolev.

Thanks for taking my question.

A question about North America OIBDA margins.

They have been down a few quarters in a row.

What would need to happen for North American margins maybe to bottom or start to reaccelerate at some point?

Thanks.

It's really -- I will let Rod comment more specifically -- but it's really a tale of two stories.

The OIBDA margins in North America haven't gone down when you look at our storage business.

As the business this becomes more archival, then the service side of the business does face certain headwinds, and there are two things going on.

One is paper prices makes a fairly large impact on that.

The other thing is as the business becomes more archival, whether you look at the RIM business or the DM business, is that you can only be so proactive in terms of restructuring your cost base because you still have to service the customers until they become that -- less active.

It is kind of a thing where we can be proactive to a certain degree, but during this transition, until the declines in service revenue or the archival nature flattens out in the business, there will be continued pressure under the service side of the margins.

But to be clear on a storage side is we are maintaining our margins on the storage side.

In fact, in most cases, we are improving them.

I don't know, Rod, if you want to --

I think that's right.

You can see that a little bit in our numbers for the quarter actually, because on the RIM side, the records and information management side, if you look year-on-year, our margins actually improved by 50 basis points.

There's three drivers of that, if you like.

One is ongoing good performance within storage.

Two is a slowdown in the rate of decline that we have seen in service within the RIM side of things.

And three within that context we've been very proactive about taking out costs to try to make sure we can maintain and enhance margins.

You can see that coming through in the RIM segment.

If you look at data management though, you do see a decline in margins, which is where the service decline is more accentuated at this point.

That presents us with a challenge, if you like, to take costs out as quickly as we can to at least try to mitigate that impact.

It depends a little bit in terms of where we're at within the segment, but at least on the RIM side, we are up and data management where we are seeing more of the service headwinds where we are down but taking action on the cost side.

The only thing I would add to what Rod said is that if we look at data management, remember we're talking about a base of 60% OIBDA margins on that business.

The storage component, while we have seen a decline as the business becomes -- as tape is used much more for archive than backup purposes, we've seen an increase in our storage volume, even though that tape formats are becoming more efficient, et cetera.

We actually -- the amount of data that we're storing continues to grow.

It's not for backup as much anymore.

It's much more for archival, and you need to do this in the context of we're talking about a 60% margin business.

Understood, this is actually very good color.

I appreciate it.

(Operator Instructions)

Andy Wittmann.

Hello, good morning.

I didn't want to ask about your IRS process, but I did want to get your view on any implications or your thoughts really around the successful conversions of Lamar or CBS Outdoor and what that could potentially mean for the overall thinking.

That was a good way of, Andy, not asking a question about the reprocessing.

All I can say as we congratulate them both.

We're in a completely different business segment, so I don't think you can read much into their process versus ours.

I appreciate the question.

What you gave us is fair, and to hear that is actually helpful.

I also wanted to get a thought just on that sales strategy for the mid market as well as what you did with the verticalization.

Are you seeing benefits from that already, or is that still yet to come?

Your view of the success there.

I think there's still a lot more to come.

I think we are clearly seeing some.

I think that the 30 basis points of improvement on retention -- don't forget retention is almost the same as selling for us because of our presence and leadership in a lot of these segments.

So retention is an important bellwether, and it is getting closer to the customers from verticalization, through using better analytical tools that Rod discussed in his remarks, and I think this is all started to have the benefits.

That being said, some of the things we're doing around the middle market and even for our large enterprise customers, I think it's early days.

As we discussed at investor day, we're in the process of standing up essential marketing operation under the chief marketing officer that is still being implemented.

I do think there are ways where as a Company we can use our unique scale to further our leadership position, and I think there is more to be done.

But we are starting to see some benefits as we have highlighted around retention.

Great.

Maybe a final question, Rod, I was hoping you could give us a little bit of a flavor as to the acquisitions that you have done this year.

I guess we heard you've had some acquisitions, you've had some FX headwinds.

No change to the guidance because obviously the annuity is large.

Can you put a pencil to the paper on what the FX dollar headwind and the revenue benefit is from the acquisitions for the year?

Approximately for the acquisitions, we're looking at around $20 million or something like that.

There will be more detail in the 10-K on this.

And similar kind of offset on the FX side.

And to be clear, that's the 2014 contribution, so it's the partial year contribution for the acquisitions and not the run rate annualized contribution to revenue?

That's annualized.

The fact is we made these acquisitions fairly early in the year, so it won't be far-off that number.

Okay.

Thank you very much.

There are no further questions.

I will now turn the call over to CEO Bill Meaney for closing remarks.

Thank you, operator.

To wrap up, we delivered a solid quarter with strong constant dollar growth in margins.

We have many attractive investment opportunities in order to grow our business over the long term and will do so prudently consistent with our focused capital allocation approach.

At the same time, we will continue to sustain the durability of our storage rental business, expand our presence in emerging markets, and pursue attractive emerging business opportunities.

We believe our durable platform and deliberate growth plan will continue to deliver opportunity and maximize total returns for our shareholders.

Moreover, the value of these returns is further enhanced due to the higher certainty and lower volatility inherent in the nature of our business, which combines a durable and global customer base with superior scale.

Thank you for joining us this morning.

This concludes today's conference call.

You may now disconnect.