鐵山公司 (IRM) 2015 Q1 法說會逐字稿

Good morning. My name is Felicia and I will be your conference operator today. At this time I would like to welcome everyone to the Iron Mountain Q1 earnings conference call.

(Operator Instructions)

I would now like to hand the conference over to Melissa Marsden, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Felicia and, welcome everyone to our first-quarter 2015 earnings conference call. As I'm sure everyone joining us this morning knows we also announced an agreement in principle to acquire Recall.

This morning we'll hear from Bill Meaney, our CEO, who will discuss highlights for the quarter, some key points related to the proposed transaction as well as progress toward our strategic initiative followed by Rod Day, our CFO who will cover financial results. After our prepared remarks we will open up the phones for Q&A.

As we have done for the last few quarters we have posted our earnings commentary and supplemental disclosure package on the Investor Relations page of our website at ironmountain.com under Investor Relations/financial information. We have also posted there a brief presentation related to the proposed Recall transaction at the same location.

Referring now to page 2 of the supplemental, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for 2015 financial performance. All forward-looking statements are subject to risks and uncertainties. Please refer to today's press release, earnings commentary, the Safe Harbor language on this slide and in the Recall presentation 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 to these non-GAAP measures as required by Reg G are included in the supplemental reporting package.

With that, Bill, would you please begin?

Thank you, Melissa, and good morning everyone. Let me first extend our apologies for such a short notice on the change in timing for the release of first-quarter results. But given that was driven by our agreement in principle to acquire Recall we felt it was important to combine the news.

I would like to start by saying we are pleased to announce that our results in the first quarter meet or exceed our expectations. We continue to build operational momentum in the business which is in turn driving strong financial results in spite of the significant FX headwinds.

However, given the breaking news associated with the agreement in principle to acquire Recall I'd like to start with a discussion of this agreement. First I should say we are very excited about our agreed proposal to acquire Recall. We think this proposed transaction represents an attractive value proposition supported by significant synergies and believe it will be highly accretive.

Our revised offer reflects the strengthening of the US dollar and other favorable changes since our last proposal particularly regarding transaction-related tax assumptions. Of course we have yet to complete due diligence and reach a definitive agreement and the successful completion of the transaction is subject to customary conditions noted in today's press release. We have a few slides related to the proposal, the proposed transaction that we have posted to our Investor Relations website which I'll touch on briefly.

Turning first to slide 3 the proposed acquisition is an all-stock deal at a fixed exchange rate of 0.1722 of an Iron Mountain share for each Recall share. Additionally we have made a provision that each Recall shareholder can elect up to a maximum of 5,000 shares to be paid in cash at AUD8.50 per share subject to a cap on the total cash consideration of AUD225 million.

On slide 5 we estimate there is an opportunity to achieve synergies of between $125 million and $140 million driven by economies of scale from the combination of infrastructure and overhead. We expect to realize 50% of the synergies in year two which will already yield by year two high-single-digit accretion in EPS, FFO and AFFO.

Another benefit of the proposed transaction in the medium-term is that it supports our deleveraging strategy. Additionally, we have complementary market platforms with Recall having a more developed presence with the small to medium businesses in the US whilst we have more significant presence with larger enterprise customers in the US.

Turning to slide 6 we also have complementary geographic coverage with Recall having more exposure to faster growing international markets. Slide 7 provides a bit more detail on the benefits to Recall shareholders including the ability through stock ownership to participate in future upside and be supported through a secondary listing in Australia. Slide 8 shows more detail on our estimated net synergies as well as our expected integration and other costs that would be incurred in year one to achieve those synergies.

Assuming that midpoint of this synergy range consensus estimates of Recall's 2015 EBITDA in the fixed exchange ratio we estimate our going-in EBITDA multiple is just over 12 times and is reduced by 4 to 4.5 turns on a fully synergized basis demonstrating the benefits of the proposed transaction. Lastly on slide 9 we've provided a list of next steps in the process.

With that overview of the proposed transaction, let me turn to our results. We are pleased to report another quarter of strong operating performance extending recent progress with continued positive organic volume growth in solid storage rental internal growth. We continue to execute on our three-year strategic plan which rests on three pillars: getting more from our developed markets, expanding our presence in faster growing emerging markets and continuing to explore adjacent opportunities in our emerging business segment.

Rod will have more details in a few minutes but I'll start by highlighting that on a constant dollar basis our financial results for the first quarter were in line or ahead of our expectations with total revenue up 2% and adjusted OIBDA up 5.7% on a constant dollar basis or 4.5% on a constant dollar basis if normalized for restructuring charges as shown on page 20 in our supplemental. We saw further strengthening of the US dollar in the first quarter which impacted our reported results but the fundamental trends in the business remains solid and we are pleased with the momentum. Our results are supported by the durability of our storage rental business and are in line with our strategic plan.

If you reviewed our supplemental disclosure before the call today you probably noted that we added a further breakdown of our international business. Effective with this quarter's reporting we've broken the former international segment into Western Europe and other international.

With this segment change we've consolidated executive leadership of North America and Western European markets under Patrick Keddy to provide better focus and alignment within our developed markets. Patrick has run our UK and Western European markets for several years now having originally joined us from Pitney Bowes where he ran its entire business outside the US including operations in 28 countries.

JT Tomovcsik will continue to run our North American records and information management business and Eileen Sweeney will add Western Europe to her leadership responsibility and will head data management in all developed markets. She and JT will coordinate their efforts through Patrick. This integration of executive leadership in North America and Western Europe will allow us to present a single face to our major customers in our largest markets and we'll be better positioned as a global service provider not just a company with a global footprint.

Marc Duale will continue to run emerging markets through the other international segment which covers Latin America, Asia-Pacific, and Central and Eastern Europe. This segment also includes Australia as it is easy to manage within this segment due to geographic proximity. We think this structure will better fuel our continued momentum in developed markets and continue our expansion in emerging markets, thereby more closely tying performance to our strategic plan.

Turning to operating highlights, total storage revenue, a key economic driver of our business grew by 4.6% on a constant dollar basis during the quarter reflecting continued strong growth from the other international segment and consistent trends in Western Europe as well as North America, RIM and DM or data management. Worldwide interim growth in storage rental of 3% continued to show resilience. Whilst internal growth did benefit slightly from favorable comes relative to the 1.4% internal storage rental growth in the same period last year, we are seeing continued momentum and are maintaining our view for internal storage rental revenue growth for 2015 of between 2% and 2.5%.

In records management we added roughly 18 million cubic feet of net storage volume worldwide on a trailing 12-month basis representing 3.5% net growth. This growth was in part achieved as a result of the significant turnaround we are continuing to achieve in North America from negative to positive internal volume growth or in other words before benefit from acquisitions.

Importantly, North America represents nearly 25% of our net volume gains for the trailing 12 months excluding acquisitions. Globally we maintained customer retention of 98% in line with our fourth-quarter 2014 levels but a significant improvement over the level of customer turnover experienced just two years ago.

In our data management business, we continue to see solid storage revenue growth although as noted in recent quarters, we are still experiencing headwinds related to reduced frequency of customer tape rotation. Whilst we continue to evaluate ways to rightsize our cost structure to align with this trend we are continuing to develop new product and services in the data management segment to leverage our strong customer relationships in the more than 200,000 stops we make each month.

During the quarter Google named us as the ingestion partner for its new nearline cloud solution. This means we are the preferred provider to assist Google cloud customers in uploading all the data saved in legacy data storage formats that predated cloud storage so they can better use big data. We plan to begin offering this service later this summer.

We also are seeing good early reception to our restoration assurance program that helps customers retrieve data from legacy media and optimize their backup environment for future technologies. Moreover, just last week we announced a strategic relationship with EMC to deliver cloud backup and replication services which helps customers optimize their on-premise and off-premise data protection strategy. We are the only one of their providers to offer data domain replication to the cloud with tape-out capabilities.

These new initiatives are in their early days and we are not guiding to a specific contribution from them. But they demonstrate our thought leadership, innovation capabilities and partnership with other world leaders in information management like Google and EMC.

Turning to emerging markets, we are making good progress towards our goal of 16% of total revenue from emerging markets by the end of next year. These high-growth markets represent 13.6% of our total revenue at the end of the quarter on a constant dollar basis.

Like most multinationals, we do have exposure to the effects of currency translation in terms of absolute earnings and cash impact in US dollars. Whilst FX variability does impact the absolute dollars we report the impact on our gross and adjusted OIBDA margins is almost completely muted because most of our expenses are denominated in local currency thereby creating a natural hedge.

On the other hand the current FX environment gives us a positive window in terms of investment. Given our opportunity to expand internationally in what is today a relatively small international base we believe we can create significant value over time by investing selectively in these higher growth markets using strong US dollars during this part of the currency cycle. We continue to see attractive growth potential in both storage and service in emerging markets as they are still in the early part of the outsourcing of enterprise storage.

Internal storage rental growth in our other international segment was 11.1% in the first quarter. Rod will describe more fully the impact of foreign currency exchange rate impacts on our reported performance for the quarter.

Furthermore, we intend to pursue attractive investment opportunities that extend the durability of the storage rental business. As we discussed on recent calls, we plan to buy $700 million to $1 billion of our leased facilities over the next 8 to 10 years shifting our mix to a higher percentage of owned properties.

On average we are achieving a spread of roughly 150 basis points between our going-in cap rates and market cap rates whilst positioning ourselves to capture long-term residual value from ownership. Importantly, the REIT structure is consistent with our capital allocation goals and does not limit our ability to fund our business plan. As we become more active in buying in our properties and executing on our acquisition pipeline we expect to fund that incremental investment with additional borrowing and/or equity issuance similar to the manner in which most REITs fund external growth.

As you think about opportunities to grow our storage rental business, it is important not to lose sight of the solid durability of the business which is underpinned by roughly $1.5 billion of net operating income from our storage business alone. This amount of NOI is comparable to that generated by the leaders in the industrial and self storage sectors.

And we have other attractive business characteristics that compare favorably with REITs. Our enterprise storage foundation is similar to sell storage but we serve more than 92% of the Fortune 1000 with superior customer credit quality. We have a diversified base of more than 155,000 business customers with 98% customer retention and a 15-year average life of box in our facilities.

Our business has a very low volatility as highlighted by our track record of 26 years of consecutive growth and storage rental revenue even throughout the recent recession. Like self storage we have a service component to our business that is inextricably linked to our customers' underlying storage needs.

We also compare very favorably with the industrial sector with the major difference that our real estate costs are incurred by the square foot but we generate storage rental revenue by the cubic foot yielding a very high net operating income per square foot. Similar to the industrial sector we have a low maintenance CapEx requirement but our turnover costs are even lower on a per foot basis. When we invest in incremental racking structures within an existing industrial shell, we generate very strong returns due to the leverage associated with this volume achieved with reduced growth CapEx.

To wrap up, we are excited to be announcing the proposed transaction with Recall and reporting a quarter of strong operating performance. Our results were in line with or ahead of expectations and we remain on track to achieve our long-term goals.

Our business is durable and generates strong cash flow that more than covers our dividend and provides a portion of growth CapEx. As we look at our longer-term growth potential, we have multiple capital allocation opportunities to invest in attractive returns that exceed our cost of capital and support long-term growth in our dividend.

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

Thanks, Bill. We're pleased with the momentum we continue to see in our business and the strong operating performance we saw in the first quarter of 2015. Our results continue to demonstrate the durability of our storage rental business and the benefits of acquisitions we made in developed and emerging markets in prior periods.

Before I begin I'd like to note that our outlook for 2015 doesn't contemplate potential contribution or impact from the proposed transaction with Recall. As noted by Bill we have yet to reach a definitive agreement, we are just embarking on the due diligence process.

To frame my remarks I'll begin today with an overview of our first-quarter performance including a review of our new segment disclosure. I'll briefly touch on our outlook for 2015 which remains unchanged since our update in February of this year. Finally I will address other metrics through a REIT lens.

Let's turn to our worldwide financial results for the quarter. Referring now to pages 8 and 9 of our supplemental, supported by strong storage rental growth total reported revenues were $749 million, up approximately 2.2% compared with Q1 of 2015 on a constant dollar basis. Reported revenue for the quarter declined by 2.7% year over year as a result of the continued strengthening of the US dollar which impacted total revenues by approximately 5% or $37 million.

Adjusted OIBDA for the quarter was $231 million compared with $229 million in 2014, up 1.2% on a reported basis and 5.7% on a constant dollar basis. Adjusted OIBDA increased year over year due to improved storage profits somewhat offset by a reduction in service profits.

In addition overhead expenses declined partly as we are seeing the benefits of our efficiency initiatives. To illustrate the 4.5% year-over-year improvement in normalized adjusted OIBDA we've included a bridging schedule on page 20 of our supplemental package.

Normalized funds from operations or FFO per share was $0.50 for the quarter while adjusted funds from operations or AFFO was $128 million. The year-over-year decline in AFFO was driven by variances in deferred tax expenses.

Adjusted EPS for the quarter was $0.32 per diluted share compared with $0.35 in the first quarter of 2014. The decline in adjusted EPS year over year is driven by a 10% increase in share count related to the special distribution we made in the fourth quarter of 2014.

In addition adjusted EPS was impacted by an increase in interest expense related to higher levels of debt and a slightly higher structural tax rate. The increase in borrowings was driven primarily by REIT conversion-related expenses such as E&P purge and the D&A recapture payments. Our structural tax rate for Q1 2015 came out to 16.2% as a result of a slight mix change driven by higher income from foreign jurisdictions.

It's important to note that adjusted EPS for 2014 was restated to be on a comparable basis using our structural tax rate of roughly 15%. We continue to believe that our tax rate will be approximately 15% to 16% over the longer term. To illustrate the changes to adjusted EPS we've included a bridging schedule on page 21 of our supplemental.

The fundamentals of our business remain strong as evidenced by solid storage rental growth of 5% offset by a decline in service revenue of 1% on a constant dollar basis. As Bill mentioned in an effort to more closely tie our leadership structure to the strategic plan we have broken out the former international segment into two segments, Western Europe and other international, to facilitate managing the business along the developed emerging lines we've talked about in the past.

I will now discuss records management or RM volume trends across this new segmentation. As you can see in the supplemental on pages 10 and 11 we've expanded our disclosure while illustrating records management volume trends by segment. As you can see we've achieved positive volume growth of 1.2% in North America, 5.4% in Western Europe and 12.9% in the other international segments supporting global records management net volume growth of 3.5%.

We continue to experience strong organic growth with first-quarter total year-on-year volume growth of 1.9% excluding acquisitions. Underlying this growth is the stable incoming volume from existing customers who added approximately 30 million gross cubic feet of storage in the last 12 months which is consistent with prior periods.

Let's now turn to our financial performance by segment. North America records and information management or RIM delivered positive storage rental internal growth and expanded OIBDA margins by more than 300 basis points during the first quarter. This expansion in adjusted OIBDA margins was driven by a decline in overhead costs as we continue to execute on our speed and agility efforts.

North American data management or DM delivered storage rental internal growth of 5.2% in the first quarter. However, service declined by 5.9% as DM tape management becomes more archival.

During the first quarter DM adjusted OIBDA declined to 52.7% partly as a result of the new product launches related to our restoration assurance program and other initiatives that Bill covered in his remarks. We believe these will prove very positive investments for the longer term.

The Western Europe segment generated solid results with 3.7% storage rental internal growth which was partially offset by a decline of 2.6% in internal service revenue. The Western Europe business is similar to North America in its level of market maturity. However, there are certain countries within this segment where we don't have a strong leadership position which in turn results in profit margins that are lower than North American margins although returns are still well above required hurdle rates.

In addition, it's important to note that the Western Europe segment includes head office costs which reduces our adjusted OIBDA margins. Excluding the head office costs the margin in this segment would be in the mid- to high 30% range. Adjusted OIBDA margin percentages remained stable in the first quarter despite the decline in service revenues although absolute dollar adjusted OIBDA fell primarily as a result of FX headwinds.

The other international segment which is made up of emerging markets in Australia drove strong growth in both storage and service revenues. Storage rental internal growth was 11.1% and service internal growth was 6.8%. We expect adjusted OIBDA for the segment to deliver profitability on a portfolio basis in the high teens to low 20s range as we continue to expand our exposure in these fast-growing markets.

Adjusted OIBDA for the first quarter was impacted by FX headwinds and integration costs. Historical data for other international on a full-year basis will be available in our amended 10-K which will be filed in the short term.

As I mentioned at the outset, our outlook for 2015 remains consistent with the guidance we provided in February during our fourth-quarter earnings call. In addition, at this time our guidance doesn't reflect the benefit or impact of the potential Recall transaction.

Business trends and operating fundamentals remain consistent. Operationally, we remain on track to deliver our long-term financial objectives given the durability and strong fundamentals of our business. That said, the strengthening of the US dollar continues to impact to our reported results; however, we believe that we will remain within the ranges of our guidance.

As a reminder, our guidance includes an expectation of roughly 12% decline in reported non-US dollar-denominated revenue for 2015 relative to FX rates in place in 2014. Revenues outside the US make up 40% of total worldwide revenue.

As a result, we expect the FX impact on total revenue for 2015 to be 4% to 5%. Lastly, although there is no seasonality to our quarters there is typically a moderate ramp in revenue performance as the year progresses.

Our strong cash flow continues to support our dividend at current levels and we expect our dividends to grow in line with operating performance. Our estimate for cash available for distribution and discretionary investment for 2015 remains $470 million which gives us ample dividend coverage and the ability to fund a portion of our core growth investments. As we've previously said, we expect to fund discretionary investments including real estate and acquisitions through external funding whether through equity or borrowings.

Shifting to the balance sheet, at quarter-end we had a liquidity of more than $780 million. At quarter-end our lease adjusted ratio was 5.5 times as planned. At Monday's stock price our debt to total market capitalization is roughly 38% in line with major REIT averages.

Turning now to REIT-specific metrics as we begin to accelerate consolidation of facilities and execute on our real estate purchase plan we expect to increase a portion of owned facilities by square footage. We continue to achieve strong storage NOI of approximately $27 per rack square foot worldwide which compares favorably to NOI per square foot for most property types within the REIT sector.

Our racking and building utilization rates are high at 91% and 83% respectively for the records management portfolio. We believe that due to frictional vacancy our maximum racking utilization is in the mid-90s. When we enter into a new facility we generally target to achieve stabilized utilization in about three years time.

We added a new page to the supplemental, page 32, which highlights our investments for racking projects in process, building developments and building acquisitions by major geographic region, their total expected return and anticipated returns. We will continue to enhance our disclosure as we move forward through the year.

Lastly, similar to prior quarters we are providing components of value, a summary of the various parts of our business to facilitate evaluation. As a reminder, we present both storage NOI and service OIBDA excluding rent expense in order to present storage economics on a consistent basis whether leased or owned. To balance that we provide total rent expense in the liabilities area.

In an effort to ensure transparency to our shareholders we will continue to enhance our supplemental disclosure and provide more details to help you better understand our business and its underlying fundamentals. As always we welcome your feedback.

Operator, with that we will now take questions.

(Operator Instructions) Kevin McVeigh, Macquarie.

Hey, congratulations on Recall and actually the results just a great outcome and obviously with the REIT just very good execution. My question was more along the lines of what does the organic growth look like at the combined entity post the deal? And then just and I know it's probably a little bit ways out but how does that impact the dividend and just leverage ratios on a pro forma basis to the extent you can give us any color?

Good morning Kevin. I think you can appreciate that we haven't done our due diligence at this point so to give you specific guidance we're just not in a position to do that. I think you can probably get a sense of it in terms of we're looking at something that synergizes in the 7.5 to 8 times range based on the $125 million to $140 million worth of synergies we've guided.

So it is clearly very accretive on EPS, FFO and AFFO which obviously drives to deleveraging and dividend growth. But at this point we haven't done the due diligence on the companies, so we're not in a position to guide for that.

Okay. And then just those synergies, Bill, they assume any potential divestitures you might have to do to the extent there is any trust concern?

You can probably appreciate that we had taken counsel on the antitrust side. And we feel that you know there's a very good and beneficial path through any of the hurdles that we may meet in terms of regulatory.

Super. Thanks.

George Tong, Piper Jaffray.

Hi, thanks, good morning. And I'll also extend my congratulations on your agreement to acquire Recall.

You've outlined cost synergies between $125 million and $140 million. Can you discuss your confidence around achieving these synergies and provide some thoughts on how much tax synergies you might achieve from the transaction?

Thanks, George. I think that first of all the synergies include both tax and operational benefits. It's probably fair to say we've been a little bit conservative because we've just been relying on really public information and we haven't been able to do due diligence.

So we feel very confident that we can deliver those numbers but you'll notice we are probably less bullish than some of the analyst reports that a been written previously on it. So we're pretty comfortable and that is -- that's including all the regulatory aspects, tax aspects and operational aspects built into that number, the puts and takes associated with that.

Maybe just to build on that Bill and George as you know we've done hundreds of acquisitions over the year, obviously not on scale. But we try to use that experience to come to bear in sort of calculating what we think is a sensible range for (technical difficulty)

That's helpful. And I can you walk through your expectations for the regulatory approval process including timing and your expectations around marketshare discussions?

Again we've taken counsel on that. In other words we've been in consultation for a period of time now with external counsel that specializes in that area and we think we can achieve a satisfactory outcome.

But we haven't finalized the proposal, we haven't done any filings. So at this point to speculate on that I think it would be pure speculation. But we do feel that based on the studies that we've done so far with external counsel that we will achieve a satisfactory outcome.

Great. Then last question, can you talk about how this transaction impacts your ability to continue to operate as a REIT?

Again that was one of our key pieces of analysis that we did when we looked at the acquisition is to determine our level of confidence that we could both acquire it and absorb it into our REIT structure, in other words convert the Recall assets into a REIT. And again we will confirm that through the due diligence process but we're highly confident that we can do that. So we wouldn't do it otherwise unless we could convert the Recall assets into the REIT.

Great, thank you.

Andrew Steinerman, JPMorgan.

Hi, it's Andrew. Just tell me if I missed this. Again I would like to know the question asked before out of the $125 million to $140 million, how much are the potential tax savings from REIT conversion?

I can give you a sort of approximate number, Andrew, based on our analysis so far. We think it's around $10 million. It could be slightly more but clearly that's one of the elements that we'd hope to get a better handle on through due diligence.

So you're only assuming $10 million. So that could be a conservative estimate?

Well, you have to look at the size of Recall's business in North America that is storage related. So don't forget their business is not that large in North America.

It's a global business but it's in North America where you have the tax benefit. So their tax liability in North America is not as big as you may think.

Yes, so we don't get -- there wouldn't be savings on the shredding business as an example.

Well said. So if I can get one more question, so let's assume low tax benefits be conservative there. You're talking about still a 4 times turn pre- to post-synergies.

If you look at Iron Mountain's history it's really been 2 to 4 times so this would be towards the high-end of the synergies. And when I look at Recall's racking utilization of about 90% that's really close to Iron Mountain's racking utilization. What other things do you know again from the public that makes you feel like you can get towards the high-end of pre- to post-synergies synergization multiples?

Andrew, the thing that's a little bit unique about Recall it is at the higher end but we have achieved that before as you pointed out. And the reason why we feel that it's at the higher end and maybe it exceed some of our best integrations is that Recall is one of the few out there that runs an international platform.

So they have a lot of if you look at their SG&A it's very different than the SG&A of a small regional player. Because they are actually running a global company with all the costs that are associated with that albeit they are doing it at a scale that's one-fourth our size. So if you look at their SG&A I think you can get a handle on why we feel that the $125 million to $140 million is actually conservative or we feel very confident about that number.

Okay, that was a good reminder. Thank you.

(Operator Instructions) Shlomo Rosenbaum, Stifel.

Hey guys, thank you for taking my questions. Bill, could you talk a little bit about the realistic time frame, the first year you talked you mentioned maybe half the synergies.

What's a realistic time frame to get the balance of the synergies? Is there something that facility consolidation really takes two to five years or how should we think of that in terms of conceptually and potentially modeling it?

Shlomo you've been around a long time so you've answered the question for me. But I think it's a good question. So just to clarify it's in year two that we think we will be halfway through the synergies.

So the first year we're assuming is 2016 just for people to be level set, so year two would be 2017. So we think 2016 is a lot of the heavy lifting in terms of the restructuring. Then in 2017 is when you start that cost starts falling away and you start seeing the benefits bleed through.

So year two 2017 we see about half the benefits coming through and exactly as you say. And we will get a better handle on it through due diligence but the rest of it comes through, a lot of it is driven by the real estate consolidation and that generally takes the time frame you're talking about two to five years. It depends on the nature of their leases and our leases in the areas that we're overlapping.

Okay. And then just from a fundamental perspective, how is the volume growth in North American records management this quarter over second half of last year you guys generated positive growth through talk about would the trend continue, was it up, down, the same?

I'm sorry. I didn't get the question.

I heard the beginning of it. You were referring back to the continued growth, the internal volume growth in North America but what did you say at the end?

Did the trend -- we had for years seen volumes be down but revenue be flat to up a little bit because of pricing. The second half of last year we saw North American volumes get to be positive. Could we in this first quarter what was the trend in North American volumes?

I see. In the supplemental on page 10 we've broken our Q numbers out in more detail than we've done historically.

And what you can see if you were to strip out business acquisitions and just sort of look at the underlying there was 0.5% growth year on year in Q1 2015 which actually compares quite consistently with the previous three quarters. Then if you go back further in time looking at this chart so the beginning of 2013 you can see that to your point was when we were at zero or negative growth.

One thing I want and this was feedback that we received from a number of analysts and investors. So hopefully if look in the supplemental on pages 10 and 11 I'd direct you to those and part of the organizational shift I'm putting all of the developed markets under a single leader is we've broken out and built a lot more transparency in terms of how our volume works. And so hopefully you'll start -- you can see how that trend has been building as you say, as Rod pointed out Q1 we maintained the same 0.5% positive volume growth as we did in Q4 just in the North American business.

You have to remember you can say those are small percentages but it's off a very big base. So in North America alone we have over 370 million cubic feet. So it's significant.

Okay and if I just want to look ahead a little bit into the future in terms of the REIT structure, what happens if paper pricing bounces back to where it was 3, 3.5 years ago? Do you have enough room in the REIT structure that you're not worried about coming close to any of the restrictions that there are over there in terms of assets and income?

I will let Rod answer it in detail. But the one thing I think we covered this on previous calls you need to keep in mind is that there's at some point actually increasing profitability in our shred helps us the way the test works. Because there is a back-and-forth, in other words we have to get shred to a certain level of profitability.

So having higher price profitability in shred doesn't necessarily lead to the result that you think it does. So that's at a very high level way of saying we have plenty of headroom but Rod you may want to be a bit more specific.

Yes, there's actually a specific on shred as Bill says around the cross subsidization between the QRS and the TRS so that if we increase the profitability of shred it would actually work to the advantage of some of our REIT tests. But I think the broader point that you make Shlomo is around just sensitivity to issues within the business and do we have enough cushion within our REIT against the REIT test to be able to handle that.

We think we do. It's something that we are very conscious of and we analyze lots of different scenarios and sensitivities to try and ensure that that is the case.

And very specifically which is probably what's behind your question is if we look at the acquisition of Recall we don't envision a problem of combining -- Recall's business is quite a bit smaller, their strip is quite a bit smaller than ours in North America and we don't see a problem in terms of combining those two businesses.

Okay very good. Thank you.

Sachin Shah, Albert Fried.

Hi, good morning, congratulations on the Recall possible offer. I just want to make sure as far as risk to this transaction I know you're conducting due diligence but is there anything that you expect that you may uncover or something that may not cause this deal to move forward after you complete the due diligence?

We wouldn't be making a public announcement about the deal if we thought there was a high risk item that would crater the deal. I mean clearly we have to do the due diligence so we haven't made a binding agreement but we have an agreed proposal with Recall and we wouldn't do that if we expected to have a major hiccup in the process. So we don't see anything.

Okay. And in the presentation you mentioned the ratio is fixed and so in the due diligence process is there subject for another revision or the due diligence is just confirmation of what's the fixed exchange ratio of 0.1722?

It's fixed and it's subject to confirmatory due diligence. So there is no -- I mean there's no expectation or you'd have to renegotiate the whole term.

So it really is that we've done enough work on it that we're very comfortable that that is the right valuation. And Recall's board also feels that it's the right valuation for their shareholders. And now the next three to four weeks that we highlighted in the press release is about confirmatory due diligence.

Okay. Just one last question if you don't mind.

On the regulatory approvals you mentioned that you're not expecting any kind of essentially hiccups. Any idea what they may be? Is it just a US, Australia or is there any other jurisdictions that may be needed major jurisdictions?

I think you can understand at this point we're not going to comment on what the regulatory authorities in different jurisdictions may think or not think of it. The only thing I would just repeat is that we have taken extensive counsel from external advisors or lawyers on this point and we believe that we will achieve a satisfactory outcome in those jurisdictions.

Okay. So that's not part of the due diligence, that's already done. The due diligence is more operational?

We will also learn more about the regulatory aspects during the due diligence. Due diligence is primarily operational but we will learn a number of things during that period which will be helpful.

Excellent. Thank you very much. Have a great day.

Han Zheng, Churchill Capital.

Hi, good morning guys. Thanks for taking my question.

My question is you said you won't comment on what are the regulatory approvals you're seeking. But could you just tell me more about in which jurisdictions you're seeking those approvals? I mean US, Australia but for example is China involved?

At this point we don't expect an issue in China. Both of our businesses are very small in China. The Chinese government will take their own view I'm sure but both of us have -- it improves both of our positions but neither one of us are very large in the China context.

Okay. And can you tell me how many dividends would you expect to pay before the close of the deal?

Well, it depends on the closing of the deal. We pay quarterly so you can see that we expect this deal to close within 12 months so that would be the maximum you would expect.

But we can't guide on how long it's going to take us to go through the various regulatory authorities to consummate the merger. But we pay quarterly generally.

Hi, this is Ramesh, Han's colleague. Have you had any informal discussions with any regulators at this point in time?

No, we haven't.

(Operator Instructions)

Well, it looks like we are through the Q&A, operator. I just want to thank you for your flexibility and again apologies for the short notice but I think you can imagine that given the timing of achieving a positive result on the acquisition of Recall we felt it was important to combine that with our earnings call which was originally scheduled for Thursday.

So again thank you very much for your flexibility and just to reiterate that we're very pleased in terms of our results in the first quarter. It has continued to show real momentum in the operating performance and improvement in the business. And of course we're very excited to finally end the speculation around Recall and to have agreed a proposal to acquire the company.

So thank you very much. And have a good day.

Thank you. This concludes today's conference call. You may now disconnect.