鐵山公司 (IRM) 2014 Q2 法說會逐字稿

Good morning. My name is Kimberly, and I will be your conference operator today. At this time I would like to welcome everyone to the Iron Mountain Q2 Earnings Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Ms. Marsden you may begin your conference.

Thank you Kimberly, and welcome everyone to our Second Quarter 2014 Earnings Conference Call. I am Melissa Marsden, Senior Vice President, Investor Relations for the Company. This morning we will hear from Bill Meaney, CEO, who will discuss highlights for the quarter and progress toward our strategic initiatives, followed by Rod Day, CFO, who will cover financial results and discuss elements of our new supplemental reporting package. After prepared remarks, we'll open up the phones for Q&A.

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

Today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for 2014 financial performance. All forward-looking statements are subject to risks and uncertainties. Please refer to today's press release, Slide 2 of the supplemental reporting package, 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 reconciliation to these non-GAAP measures, as required by Reg G, are included in this supplemental reporting package. With that, Bill, would you please begin?

Thank you, Melissa, and good morning, everyone. This was a good quarter for the Company, highlighted by the receipt in late June of the favorable private letter ruling from the IRS, and our conversion to a REIT. As we've said from the beginning of the process, we believe we fit well as a REIT due to our sizeable real estate portfolio.

We have a very attractive business model through which we incur occupancy costs on a square-foot basis, and generate storage rental revenue on a cubic foot basis. This significant spread between our cost and our return on investment generate high net operating income per square foot, and is core to how we create value for our stockholders.

We also distanced ourselves through low turnover costs per square foot. We have no TIs or tenant improvements required if a customer terminates, and we bring in another customer's records. We also have a low customer churn of less than 2% per annum, as well as maintaining high-quality receivables given our service to 950 of the Fortune 1,000.

The REIT structure complements our strategy while it's enhancing payouts, and it highlights our highly disciplined approach around asset allocation. As a REIT, we expect to continue to generate the cash flow necessary to support attractive stockholder returns, and to invest to sustain the durability of the business, whilst continuing to identify opportunities for enhanced growth in line with our long-term strategic plan. We also see the potential to purchase a significant portion of our leased real estate over time, thereby reducing our cost to debt and enhancing residual values.

The recent road show presentation available on our website addresses many of the common questions related to our conversion, so we're not going to spend a lot of time on that in prepared remarks today. Rather, I will focus on what we're seeing in the business, and the progress on our strategic plan. Then Rod will cover financial and operating specifics, whilst directing you to the relevant sections of our new supplemental reporting package.

Turning now to financial highlights, total revenue for the quarter was $787 million, up 4.4% on a constant-dollar basis, with adjusted OIBDA of $242 million, and adjusted earnings per share of $0.41 per share, up roughly 5%. These results were in line with our presentation during our Investor Day in March, and demonstrate the same growth rate on a like-for-like basis, both as a C-Corp, as well as now as a REIT. We maintained our high adjusted OIBDA margins for the total enterprise of roughly 31% during the quarter, with consistent performance in our North American segments, and international margins in line with our targeted level in the mid-20%s range.

In addition, we achieved solid operating results, and are making good progress on our strategic plan to sustain the durability of our high-return business in developed markets, having added a net 1.3 million cubic feet of internal growth in the first half of the year in North America. Moreover, having reached 12% of our sales coming from emerging markets by the end of Q2, we are on track to our goal of having 16% of our sales from this high-growth segment by 2015. Finally, we continue to identify and test new and emerging business opportunities, as well as further scaling of our data center opportunity.

Total storage rental revenue, the key economic driver of our business, was up 5.7% in constant dollars, driven by strong growth of 14% in our international business, and constant dollar growth of 3.3% in North American records and information management, or RIM. Storage rental internal growth of 1.6% for the quarter reflected solid growth in records management volume of 1.7% in terms of internal growth, and 7.6% if we include acquisitions year on year.

We continue to see improvement in retention in North America, where total records management storage volume outflows dropped to 6.6%, from 6.8% in the first quarter, and 7.1% in the fourth quarter of 2013. We are pleased with this progress, as the reduction in terminations supported by our first-quarter of net positive volume growth in North America records management since 2011.

Importantly, we maintain strong North American records management margins of more than 38% during the quarter, through ongoing productivity enhancements, whilst continuing to invest in strengthening customer relationships and product development.

In our internal international business, constant-dollar storage rental growth was about 14% overall, with 32% constant-dollar growth in emerging markets. These emerging markets, which as I mentioned represent just 12% of our total enterprise revenues today, have very favorable growth dynamics. Emerging markets storage rental internal growth was 12% in the second quarter, whilst volume expanded by 10% excluding acquisitions, or 33% in total, reflecting the successful integration of acquisitions completed in 2013.

Acquisitions continue to be an integral part of our strategy overall, with a particular emphasis in these high-growth markets. We have a strong pipeline of opportunities in emerging markets, with more than three times the coverage needed to achieve our goal of growing this part of our business to 16% of total revenue by the end of 2016.

We evaluate acquisitions in terms of how they can both further our market leadership and sustain the durability of our business, after first establishing that we can exceed our cost to capital, and achieve our targeted returns. During the second quarter, we completed a few small customer acquisitions in the US, as well as a tuck-in acquisition in Brazil, and closed the previously announced transaction in Poland, bringing us to about $60 million of Company acquisitions, and another $10 million of customer acquisitions year to date.

Within our emerging business opportunity area, we are pleased with the early interest in our data center operations. We have booked more than 70% of the inventory space we developed in our underground facility, and are kicking off our next phase of development there. Additionally, we have signed our first few small deals in our data center near Boston, which we just completed last month.

It is early days, but we have a good pipeline building up. Our targeted segment of the data center market has good growth dynamics, and a potential to generate very attractive returns. We will continue to employ a success-based approach to investment as we look to scale this business.

For the remainder of the year, we anticipate continued, solid constant-dollar storage rental revenue, and adjusted OIBDA growth in line with the 4% longer-term goals we've discussed in the past. We expect consistent trends with what we're seeing for durable storage rental revenue in developed markets, and a moderation in the rate of activity-based service revenue declines.

We are on track to make emerging markets which achieve low-double-digit internal storage growth rates a more significant portion of our overall sales mix. In our emerging business area, we continue to identify and test opportunities which are complementary to our core business, and resonate with our customers.

Overall, Q2 was a very solid quarter, anchored by our favorable REIT news, and 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 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 generate further upside over and above the 8% to 9% returns, from our investments in additional emerging business opportunities.

Currently, it is interesting to note that we are well on track with this overall goal, given our current dividend yield of approximately 6%, combined with our growth in OIBDA of 5%, or what translates loosely into a total shareholder return, or TSR, of 11%, plus any upside from emerging businesses. The REIT supports these goals, as the yield component is now a bigger contributor to our targeted returns, and supports our capital allocation approach.

Now I'd like to turn the call over to Rod.

Thanks, Bill. In keeping with our conversion to a REIT, we have begun to transition our financial disclosure to provide information that we believe will be useful to both current investors, as well as potential new investors. Going forward, Ron issuing a stand-alone press release and posting slides, supplemental debt statistics, and GAAP reconciliations on the website, we will provide all of these disclosures in one comprehensive supplemental reporting package. We anticipate enhancements to this package over time, and would welcome your feedback.

With that, let me direct your attention to the financial highlights on Page 7. We delivered solid results in Q2, which were supported by strong storage rental growth, good profit performance, and the benefits from recent acquisitions in emerging and developed markets. Total reported revenues were $787 million for the quarter, up more than 4%, compared with $754 million in 2013. Both gross margin and adjusted OIBDA were up approximately 4%, in line with our strategic planning goals.

Year to date, adjusted OIBDA in 2014 includes $3.6 million of costs associated with the Company's 2013 restructuring, and $3.9 million of ongoing REIT compliance costs. Adjusted EPS of $0.41 increased by about 5%, from $0.39 in the second quarter of 2013, which was restated to be on a comparable basis, using our current structural tax rate of roughly 15%. For both the quarter and the year to date, we booked sizable discrete net tax benefits associated with the reversal of deferred tax liabilities and assets related to our conversion.

Just a bit more color on this. Tax accounting for C-Corps requires the recognition of deferred tax liabilities and assets for the future expected tax impacts of temporary differences between our tax basis and our financial reporting basis. As a REIT, instead of that booked-to-tax difference being reflected at our US federal tax rate of 35%, it is now being reflected at 0% for the portion of the business that is included in the REIT and the QRS, or qualified REIT subsidiary structure.

This is effectively a one-time reset of our deferred tax liabilities and assets, and resulted in a large non-cash benefit. While we'll no longer be taxed at the US federal level on our QRS income, we will continue to pay local tax on our international operations, including in those countries that were converted to the REIT structure. Of course we'll continue to pay taxes on our global service operations and certain state taxes.

But the REIT structure allows us to effectively repatriate storage-related income from the REIT's countries and distribute it to stockholders without double taxation. While our structural rate for year to date came out to 15%, we continue to believe that a rate in the 17% range over the long term is about right. For the full year in 2014, we expect the structural rate to be between 15% and 17%. We have normalized FFO to adjust for these one-off tax effects, as well.

Another highlight from this page is our summary of our investments in capital expenditures. As you can see, due to the nature of our storage rental business, maintenance CapEx per foot is very low. Maintenance CapEx of roughly $30 million year to date is running slightly behind the $90-million mid-point of our full-year guidance, as we typically see the majority of CapEx improvement projects undertaken in the latter portion of the year.

Other CapEx is right in line with the $50-million mid-point of the full-year guidance, and real estate investment, including racking, is on pace with our full-year expectation of around $200 million.

Turning to components of revenue growth on Page 8. On a constant-dollar basis, revenue is up 4.4%, reflecting solid storage rental revenue gains at 5.7%, while service revenue growth of 2.7% was driven by recent acquisitions, as well as fees from new inbound volume, and increases in imaging projects and shredding activity.

On a constant-dollar basis, first-half total revenue growth was 4.6%, driven by storage rental revenue gains of 5.5%, and service revenue growth of 3.3%. Also on this page, you can see that we continue to demonstrate improvement in net volume growth in records management, with total year-on-year volume growth in the quarter of 7.6% including acquisitions, or 1.7% excluding acquisitions.

As we have noted previously, despite secular trends in the use of paper, we continue to see very consistent trends in the amount of incoming volume from our existing customers. In addition, we had increased contribution from acquisitions year over year, and further improvements in the level of terminations and withdrawals, particularly in North America, as Bill highlighted earlier.

On Page 10, we present components of growth on a segment basis. As you will recall, in the first quarter we remanded our reporting structure to align with the way we manage the business. We broke down our North American segment into North American records and information management, or RIM; North American data management, or DM; and emerging business, which are currently a component of the corporate and other segments.

Q2 segment results were generally in line with our expectations, and consistent with recent trends. North America records and information management delivered positive storage rental internal growth, and maintained strong adjusted OIBDA margins of about 38%. We also improved capital efficiency, with spending at 4.3% of revenues excluding real estate.

North American data management storage rental was flat. Service declines continues to reflect the trend toward reduced activity and related transportation revenues, as the business becomes more archival. However, we maintained strong adjusted OIBDA margins of more than 60% in this segment, despite the reduction in revenues.

The international segment continued to generate strong growth, with 14% constant-dollar storage rental, and 11.6% constant-dollar growth in services, driven by recurring imaging projects. The international business continued to deliver profitability on a portfolio basis in line with our mid-20%s target, with adjusted OIBDA margins of 23.8%. This is slightly down on the previous quarter as a result of phasing of acquisition integration spends.

Finally, corporate and other revenue was up 9%, reflecting growth in data center service revenues. As Bill noted, we're building out our pipeline in the data center business, so these comparisons are on a very small basis. On Page 17, we provide reconciliations from net income to FFO, and then show further adjustments for non-cash items to arrive at AFFO.

Our FFO and AFFO figures reflect the deferred tax benefits resulting from the flushing entry that I mentioned earlier. If you were to use the Q2 normalized FFO as the run rate for the second half, or $118 million times two, and add it to the year-to-date FFO of about $225 million, you will arrive at about $460 of FFO, consistent with our full-year guidance.

A similar approach to AFFO revealed about $600 million for the full year. As mentioned on our REIT approval call, with our protected ordinary dividend, the $400 million to $420 million, we have strong coverage for our dividend relative to AFFO.

Turning to some of our new disclosures, on Page 18 we present storage net operating income to provide a closer look at NOI from our records management and data management storage operations. We have also added a summary of our global real estate portfolio on Page 19 to show owned versus leased buildings, and the associated facilities count and square footage by major region.

On Page 20, we provide square footage of rack space by product type, records management, primarily the box business, and data protection or tapes. NOI per rack square foot on this page highlights the attractive economics we derive from our real estate, which Bill mentioned earlier.

On Page 22 we provide utilization for our records management and data protection businesses. The top portion of the page shows the trailing five-quarter trend in both cubic feet of records, and data protection tapes stored, as well as year-over-year growth. The bar charts towards the bottom of the page show the total amounts of installed racking we have in these two businesses, and the capacity we have for racking, assuming our buildings were all fully racked.

Utilization numbers below are the cubic feet of records, or number of DPUs stored, expressed as a percentage of the racking we have in place, and as a percentage of what are maximum rack capacity could be. As you can see, our utilization rates are quite high. We believe that due to frictional vacancy, our maximum utilization is in the mid-90%s.

Bear in mind that in a new facility, we would generally target to achieve stabilized utilization in about three years. We have some up side here, as we enhanced the utilization through acquisition integration and facility consolidation over time.

On Page 23 we show service business detail. This presentation has been updated from what was provided in our recent road show presentation. Effective July 1 of this year, we established TRS service entities in each of our identified REIT countries, which included transferring the designation of some employees who performed services in our warehouses that were previously categorized as storage related.

The transfers of these employees in REIT countries resulted in a shift of about $7 million of labor expenses previously categorized as storage rental labor to services labor. We expect similar minor transfers of storage rental labor costs in the future, as we establish TRS service entities in any future REIT countries. The basis for year-over-year comparisons will generally not be the same.

We've provided a look at our customer base on Page 24. This highlights our strong box retention of around 93%, as well as the diversification of our large global customer base. We also provide sales, marketing, and account management, and customer acquisition costs, which we think of as similar to typical REIT turnover costs.

Shifting to the balance sheet, Pages 25 and 26 present our debt maturity schedule and related metrics. Solid cash-flow generation enables us to maintain a sound balance sheet. At quarter end, liquidity was virtually unchanged from Q1, at about $536 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. We expect leverage to temporarily exceed our target range of 4 to 5 times in the short term, due to costs associated with the REIT conversion.

We do have extraordinary expenditures remaining in the first year of conversion, including about $130 million of cash associated with a special distribution, assuming the mid-point of our range and today's share price. Another $85 million, representing the bulk of the remaining tax recapture payments, due to the change in our depreciation schedule, and another $30 million of REIT conversion costs.

If you were to look at 2014 on a normalized basis absent these costs, and grow the components of free cash flow into 2015 at our expected growth rate and adjusted OIBDA, our excess cash available for investment after paying our ordinary dividend more than covers core real estate investments, including racking and leasehold improvements.

Should we be more opportunistic about acquiring buildings outright, or buildings associated with business acquisitions, we would look to borrow at our targeted leverage ratio, or perhaps use equity to fund such investments. Given the returns we can generate from leveraging our scale and global platform, such financing would be a good use of capital.

Lastly, on Page 28 we have provided components of value, which is a summary of the various parts of our business to facilitate valuation. A couple things to note. We present storage NOI and service OIBDA, excluding rent expense, in order to present storage economics on a consistent basis, whether leased or owned. We also provide our total rent expense in the liabilities area.

We are currently showing investment in buildings, racking, and acquisition of book value; but it is our intent to ultimately provide a schedule of these investment categories with their expected returns. This schedule is followed by a comprehensive definition of terms, which we believe will be helpful to investors to adjust to our new disclosure.

In summary, Q2 was a good quarter, supported by sustained storage rental performance, continued high levels of profitability in our North American segments, and strong international and emerging market performance. With that, operator, we're ready to take questions.

(Operator Instructions)

George Tong, Piper Jaffray

Good morning. Thanks for taking my questions. Bill, internal growth in storage rentals this quarter increased about 1.6%, which is up from the prior quarter's growth of 1.4%, but still is below historical 2% growth levels. Can you discuss your outlook for internal storage growth, and what potential catalysts you see that can drive further acceleration?

Thanks George, and good morning. I think as we said last time, we weren't guiding for an immediate rebound to what we saw last year. But I think you have to look at the total picture in terms of the volume growth that we generated, and I say this is the first quarter since 2011 that we've had a positive volume growth in North America. There is a balance to get in terms -- because what we're looking for is total revenue, not just on the pricing front.

I think in terms of on the price, I think the -- it's an area in a low-inflation environment that we continue to work on and optimize further. I think we're still where we were last quarter, which we are slightly improved from where we were three months ago; but we're saying it's more of a gradual improvement to expect, rather than a rapid rebound to the 2% that you referenced.

Right. Turning to services, internal growth this quarter reflected some lower project fees and customer terms in North America. Do you think this is a secular trend, or do expect a rebound in internal growth and services next quarter?

I think there's two bits on the service front. There are things that are -- what I would call core services that are related to our records management and data management business, and then there's the project side. I wouldn't say that there's secular -- you're right to call out that the change in trend on the service revenue side is driven by a drop-off in some large projects that we had last year, but projects in their very nature are lumpy. It's not -- the fact that some of those haven't been replaced at the same level in this quarter is not a trend. It's rather just the nature of that part of the business.

In terms of the other part of the business that we've been calling out as having head winds, which is related to our core services around data management and records management, there we do see a flattening out of the head winds, if you will. But I think in terms of the thing that was driving the major change in this quarter was the lumpiness of some of the specific projects that we do to service some of our customers.

All right, makes sense.

Rod, you've indicated you expect an effective tax rate of about 17% on a go-forward basis. Can you detail how taxes will play out in the remainder of the year, and what you expect cash tax savings to be, taking into account differences between booked and cash taxes?

In terms of the rate that we expect, we had 15% in Q2, as I said earlier. The range that we expect for the remainder of the year will be between 15% and 17%. The reason for the slight level of uncertainty is that we obviously still pay tax on our overseas operations within those countries, and also within -- on the service activity that we have within North America.

Depending on the mix of the business, that will drive some small variation in the amount of tax that we have to pay. Therefore, we do see a range, if you like, between 15% and 17%.

In terms of the cash tax saving, I say as a sort of simple way to think about that would be if you say historically we used to pay 39% and we're now down in the 15% to 17%, that would be the ratio to take as they key driver of change. We will -- as I was saying though earlier, have to pay additional tax associated with the slow-down in the depreciation of our racking, and that will come through this year. It's not part of our normalized tax rate, but it will impact our numbers this year

Got it. You're still expecting cash tax savings about $120 million per year?

Correct, yes.

Lastly, you've indicated you're accelerating your acquisition plans, and plans to own more strategic real estate over time. Can you detail how you plan to finance these growth plans, and if there will be a need for capital raises near term?

We're still working through the details of that, because the key thing for us is obviously to finance these in the most effective way. The likelihood is that we will finance some through debt and some through some level of equity. But we will structure this in such a way that we can generate the maximum level of returns for our investors. We'll provide more details of that as we work our way through that later this year.

Thanks very much.

Scott Sschneeberger, Oppenheimer

Thanks, good morning. Just following up on one of George's questions. Special project activity in the service area -- there's been a belief in the past that that can be an indicator that business is picking up or slowing down. You mentioned it's been lumpy. Do you guys take any read-through from what you're seeing right now, or do you stick more with the view of the lumpiness, and it's not really a foreshadowing of things to come?

No, I don't think it's a very good leading indicator for, Scott, on the activity level. The nature of these things -- for instance, I think one of our larger projects last year was for a mortgage company, because they had certain things that they were actually selling and re-packaging to someone else, so we had to go in and help them both scan and organize a number of these documents. It's that kind of lumpiness of activity.

It's usually related to either a on-boarding of a major customer that has some specific needs, or a major customer doing some kind of transaction that requires special services. It tends to not have a very good correlation with I think any leading indicators. It really is a one-off type project. Given the -- it's even probably more lumpy than you see when you look at our business from analytical standpoint, but given the scale of our business some of those lumps smooth out. But it really is that kind of nature.

Great, thanks. With regard, primarily in core storage, and we'll group shredding in as well, could you discuss the pricing environment and the competitive environment, and what you're seeing out there? Thanks.

I think it's fairly stable. I think if anything, if you look at -- I think it was on Page 8 -- if you look at the trends in what's happening, we don't see additional pressure on that. What we see now is what we euphemistically call the Power of the Mountain is we've gotten a lot more focused in honing our commercial skills.

As a result, we're doing better both on defense and offense. If you look at the trends from a year ago to today, you will see that we have done better both in terms of new sales -- so out there winning by about 300 basis points over the whole period that we've got graft -- and we've improved our defense by about 80 basis points.

I wouldn't -- if you look at that in an environment where we are still pushing positive revenue growth, are we making some trade-offs? Maybe, but a lot of it is also the segments we happen to be addressing, both in terms of the countries we're going after and the customers that we're going after. I think net-net I don't see a major change in the competitive market, other than we are using the Power of the Mountain, or the scale that we have, for the benefit of our customers much more fully, or much more comprehensively.

I think the only thing that's a challenge in the low inflationary environments that we have is price is always a challenge. Because most of the countries we operate in, at least ones that we have any significant size, are in low inflationary environments, and putting price increases through in those types of environments is always difficult.

Thanks. You cited that chart on Page 8. I'm curious. Over the coming year or 18 months, where do you think -- excluding acquisitions from the discussion -- which of the buckets there do you think will show the most change? I can tell ideally which ones you'd like to move the most, but which do you think will have the most significant moves?

Let's look at the chart. If we look at Q2 2014 so we're looking at the same numbers -- let's look at the charts by color shading. If you look at the dark blue block just above the line and the light red block just below the line, I think those things are going to tend to run in similar trends, although the light red to me also tends to have some lumpiness. Some of that is to do with legal holds coming on or off, so you can have some movement around that 4.7%. But I think generally that's what we would call the organic growth of the business.

I think as I pointed out previously that independent of everything else, even though paper itself is in decline, document growth -- new document growth from existing customers tends to be in the 6% to 7% range, which is the dark blue block, and I expect that to stay in that range. That gets netted out, because customers are going through different life cycles with their inventory. That's been bouncing around the 4.5% to say 4.7% range, and I would expect those. I would expect those two to be relatively stable going forward.

I think the -- let's leave the acquisitions out, because that is -- we do have an acquisition strategy, biased more towards the emerging markets. But I think what you're really referring to is what's the organic health of the business in terms of things that are -- that's more incremental. I think then it really comes down to your asking are we going to do better, or what's the trend in terms of new sales, which is the lighter blue or the medium blue bar at 2.2%, and our defense, which is the out-perms, or where we actually are losing business, which is the dark red at minus 2%.

To say that we're going to continue on a certain trend line -- I'm not going to guide for that. The only thing I would say is that I think the improvement that we've highlighted, I think we should be able to hang on to in that order of magnitude, or where we're taking this. We are quite encouraged by a couple things that we've done with our commercial operations, both in terms of the way that we develop products now, and take advantage of our global scale -- not just local scale in terms of getting insights in terms of what customers find helpful in terms of product and solution delivery.

The other part of it is that some of the reorganization of our sales force that we've talked about a few quarters now, both in terms of the verticalization -- which again gives us better insight in terms of the solutions that our customers are looking for. That seems to be resonating where you see in both the -- the better trend both in new sales as well as defense.

The last aspect is that we are boosting our presence in the middle market. Our presence in the enterprise part of the segment has been strong for many years, but we're now also trying to have a similar representation in the middle market. Again, I think there's lots of things that underpin that we should be able to maintain those kinds of trends, but I'm not guiding for a major increase in either of those.

Bill, it's interesting points you make there. One addition I want to add is that we have service revenue associated with out-perms and terms. As they've decreased in the quarter that actually had an impact to our service revenue in the quarter. It's a negative as it were on service, but it's a positive for the longer term of the business.

Thanks. Rod. One other thing. I like the new presentation, by the way. On Page 24, where you show North America revenue by vertical, that pie chart -- is that the end of 2013? Is that as of June 30? Could you give us a feel for maybe over the past few years and maybe looking forward to some activity you're seeing in the vertical, how might that pie chart change?

Yes, the numbers refer to year to date 2014, so it's the latest view. I think what you will see is as we develop our vertical strategy and really look to drive specific areas, we would expect some shift in this chart. It's likely to be slow, just given the annuity basis of our business. The areas where we do see potential, for example, would be federal, which is one area where there is plenty of un-vended activity for us to go after. The whole area of the life sciences, energy and business services -- very interesting new areas for us to be getting after.

Legal and financial insurance, historically we've been very strong in those segments. We'd expect to continue to bolster our presence; but in terms of potential relative to some of the other segments, it's probably less. I would suggest. Would you agree with that, Bill?

That's a good summary. The only thing else I would add is in the other category, a lot of that is in the middle market. We have roughly 20% share of wallet in the middle market where we have say, 60% share of wallet in the large enterprise market. I'm not saying we're going to get to the same share of wallet, but we do feel, like the federal market, that we're under-represented in other.

How those things move out -- I would say that I agree with what Rod is saying is we're well represented in the big three, so to speak -- legal, financial, and insurance. Not that we wouldn't want more business there. We are constantly pushing. But we do have some areas like federal, and I would say the middle market and other, where we're under-represented, and we think there's real opportunity.

Thanks. One more if I can sneak it in, and then I'll turn it over. The one topic you didn't hit in that category was health care. Curious if you're seeing anything change on that front? Thanks.

It's a good question. We do normally talk about health care, so I'm glad you brought that up, Scott. We continue to be pleased with what we're seeing -- the swap out or the change -- because obviously the electronic medical records has affected our service revenue in health care probably more than any other vertical, as more and more of the health care records have gone online.

That being said, we've been able to increase our storage revenue in health care by taking in more records, so we have year-on-year storage growth of almost a little less than 1%, which goes to that trend. They're not destroying the records. In fact, we're getting more records as they're cleaning out the hospitals, as well. Storage, as you recall, has about 2X the margin that service.

Health care continues to be a major focus for us. We're also finding through these conversations, which goes back to Rod's comment about the verticalization, is we're gaining further insights on how we can service them even beyond the traditional -- what I would call medical record area. It is an area where innovation is actually helping us, especially shifting us to higher-margin work.

Great. Thanks, guys.

Andrew Steinerman JPMorgan

Hi there. You talk about the activity service revenue declines narrowing. I remember this activity base -- moving boxes around, moving tapes around -- being a drag for many years. I think it might've started in 2009. My question is why do you feel now is a time where these activity service revenues are starting to even out, and do we think that's sustainable?

There's a couple things. One is, we're still seeing -- if we look at the two business, Andrew, I think it's worthwhile to look at records management versus data management. Data management, we still are seeing probably stronger head winds in terms of getting to a -- what I would call the stable floor -- than we are in records management.

The reason for that simply is that we're still finishing up the transition from tape being for backup and recovery, to tape being an archival product. Our storage volume continues to grow in the DM business, but how tape is being used is different. As a result, we're doing this transition to a different service model, which happens to have a lower activity associated with it.

The thing I should highlight is we are able to maintain our margins pretty closely during these drops in activity. It's important to understand that it's an activity driven. Whereas on the records management side, the data we're looking at, we're further down that cycle if I will, that transition, to a more archival nature. Things like I was highlighting in health care -- health care traditionally was a high-service business, because it had a lot of what we call active file, with medical records going backwards and forwards between the hospitals and our facilities. That obviously is gone away or going away fairly quickly in most locations.

I think in records management that trend to archival nature of our service is further ahead, and we see that decline flattening out. That's what we're really -- where we're looking at. At some point it does get to the transition from active to archive. You get through 80%, 90% of the transition. I think that's where we're at with the records management. We're well down that journey with data management, but we're not as far down the journey as we are with records management.

Right. Do you think we'll ever get to a point where the service revenue -- activity-based service revenues could be flat?

I think relatively. Then it's probably going to go up and down a little bit. It depends on what we replace some of that service revenue. Some of it is we're replacing -- we're cannibalizing our own backwards and forwards transportation, if you will, by providing them scanning and online options to retrieve data, as well. Part of it is that we're also providing different ways for the customer back that's more efficient.

Thank you.

(Operator Instructions)

Shlomo Rosenbaum, Stifel.

Thank you very much for taking my questions.

I wanted to ask a little bit about some of the real estate side of things in terms of the potential lease buyout. Does your portfolio have any particular amount of favorable purchase options versus market value? Is there anything in there that's particularly attractive if you go through the portfolio, like a certain percentage of them?

Yes, actually on Slide 27 of the supplemental, it gives you a profile of how our leases look to expire. What this shows -- if you look at the top chart, it shows when the leases come up -- the first expiration, as it were. In the bottom is what would happen if we were to extend our leases into the longer term. The reason why there's such a difference is when we have taken out lease agreements, we have typically looked for very long-term leases. We've always had that option in there for us to be able to extend.

The first point in terms of our ability to buy is we are long-term tenants, people see us as long-term tenants. We try to structure that within our lease arrangements. The second thing we try to do -- not with all leases, but with certainly a significant number -- is indeed to incorporate elements of buy-out clauses within there, which should work to our advantage.

We have a purchase option -- a good purchase option of around 6 million square feet. That should be at good terms for us. We would look to move forward on the elements of that. We will always do this in a way that creates value for shareholders. That's where we stand today.

Is there an arbitrage opportunity in your portfolio -- your lease versus buy, in terms of market value? That's what I'm trying to get at.

Yes. No, for sure. If you think of it, typically we might borrow around 6%. The lease rate, if you like, would be around 8%, so you've got a 200-basis-point spread, as a general rule.

Let me re-state what I'm trying to get at. I'm saying in terms of the purchase option, will you be buying real estate at below-market prices when you exercise those options? That's actually more about what I'm getting at.

I think the way to think about it is just re-emphasizing what Rod is saying. Because we have fair-market clauses in most of our leases -- virtually almost all of our leases when we renew -- that allows -- the way you have to think about it is it's the cost of financing is how you create value. It's not the arbitrage, in terms of being able to get something at a lower price. I think the better way to model it or to think about it is that 200-basis-point spread, which is around the financing cost of 8% to lease, 6% to own. I wouldn't try to build in us being able to buy at a better price.

I think where the arbitrage comes in, potentially, is on the residual values. What we're capturing, especially in the emerging markets, which where in my previous life I played this out a number of times, where we used to buy our real estate purposely, because we could capture in 15 or 20 years the urban growth to capture additional residual value. That's a longer-term capture.

I think you have to also do it as a back-drop. When we say leases is that a number of our leases -- as I say, these typically are very long leases. In fact if you look in places like Asia, you typically can only buy lease-holds. But you're able to get effectively the full economic ownership. In fact in some markets you can even get part of the residual value because of your ability to trade leases. That's not in every country, but in some countries you can do that.

That's what we're really talking about, is how do we actually take some of these long-term leases, where we have a lot of the economics of owning, and how do we further capture it. I think the best way to think of it is the 200 basis points of potential spread between cost of ownership.

Okay, so if I take that further, to the extent that you will issue equity in order to affect either lease buy-outs or properties M&A, the immediate impact on a lease buy-outs would be the 200-basis-point spread. That should be accretive to investors on a cash-flow basis? Is that the way to think of it?

I think what -- I'll actually let Rod speak about it, but I think what Rod's saying, it will be a blend most likely. That's the one thing we're working out, is the blend between equity and debt to do that. It will be on a blended basis.

That's right, Bill. Certainly we aim for the -- I think to the point, we aim for the investments to be accretive, correct? Yes.

The other part of that, in terms of I think people are getting to this, is in terms of potential equity issuances. How fast -- should you deploy, or raise additional equity -- how fast would you be able to deploy that in terms of being able to increase your FFO per share and AFFO per share? In other words, do you think there would be a lag time of six months, or you would you be doing it -- add the money as you need that type of stuff, so you would make it immediately accretive?

I think it would depend on the speed with which we could effectively acquire the leases, if I'm answering the question.

Yes, I think --

It would depend on that phasing. We wouldn't -- we obviously wouldn't be able to go out and buy all our leases on day one, but we would -- we expect to have a program to do so over time.

None of these things -- it would be wonderful if we could do something today, and it's absolutely accretive the next day. These things -- we look at allocating capital on a net-present-value basis, and an earning-per-shares basis over stabilized returns, and we look at how long it takes you to get there, versus how much you have to take in early. I think the ability for most companies to be able to time these things exactly is never there.

I think it's fair to say, to emphasize what Rod's point is, is that if we go out and raise equity, for instance, it will be with a clear visibility and understanding of how that becomes accretive for the shareholders. But to say that you can do these things, matching on a one-to-one basis instantaneously, I think -- we're not saying it can't be done, but I would say right now that it's hard to see how to do that. That being said, whatever we do would be -- we would have the transparency around it with our shareholders and investors that how that is accretive, in terms of their interest in the Company

That's fair. Then a housekeeping question on Slide 28 in the annualized NOI. Could you, maybe Rod, walk us through a little bit what you mean exactly for a stabilized portfolio versus the NOI that you would be reporting on a quarterly basis?

Yes. The way to think about the stabilized portfolio is kind of the like-for-like. Where we -- we're excluding acquisitions and buildings that would have come out of that portfolio. It's like the core, if you like, within that.

It's going to exclude racking that is not fully utilized? I'm trying to --?

No, it's the buildings as opposed to the racking. If we sell a building or acquire a building in the period, we wouldn't include that.

Okay. I'll take that further off line. Thank you very much.

Dan Dolev, Jefferies

Hi guys. Thanks for taking my question.

Just a real quick data point, two questions. On Slide 8, sorry if I missed it. Are those LTM or are those quarterly figures?

Those are LTM.

Thank you.

I don't know if you've mentioned it already, but would you mind giving the data point on how this would look like on a North America record management, like you did in the last few quarters? Those say metrics, but on a North America basis?

Yes, I highlighted that in my remarks. If you go back, I think you'll see that I went through -- for instance, in North America we added 1.3 million cubic feet of internal growth in the first half of this year.

Okay, but you didn't specify those specific -- the things that make up the buy, you did not specify the specific organic versus disruption, et cetera, for North America. Right? Like the equivalent of Slide 8 for North America?

Yes. What I can give you is, for instance, is that below the bar for North America was minus 6.6.

Okay, and then the --

Versus -- which is a minus 6.7 in this one. We can give you the numbers on above the bar. What the North American bit -- the North American below the bar is a little bit better than what it is on a consolidated basis. In terms of the net volume growth before acquisitions in North America, as I said we added 1.3 million cubic feet.

Which is 0.3%. You've got a minus 6.7. You've got a plus 7 on

Right, so it improved -- on an (inaudible) basis, it improved versus Q4 and Q3 of last year. It's an improvement?

Actually, yes.

Okay. Yes, that's what I wanted to know. Great. Thank you so much.

This concludes our Q&A session. Presenters, I will now like to turn the conference back over to you for closing remarks.

Think you, operator. To wrap up, we had a strong quarter the demonstrates the durability of Iron Mountain, as well as our renewed commercial focus in delivering what we call the Power of the Mountain to our customers through harnessing our scale and product development, and solution delivery.

We demonstrated progress with our strategic plan in several areas. We are getting more out of developed markets, with solid improvement in volume and improved trend in internal growth. We're building our business in emerging markets, and continuing to drive strong organic growth there, and our conversion to a REIT is driving improved returns, enhanced disclosure, and we believe over time, an expanded shareholder base.

We feel very strongly as a real estate Company the REIT structure enhances the value to our shareholders, and we're committed to driving attractive returns through continued expected growth in OIBDA, and ultimately FFO and AFFO of about 4%, and believe the durability and stable growth in our business will support growth in our dividend in line with cash flow growth over the long term. Thank you very much for joining us today.

This concludes today's conference. You may now disconnect.