Iron Mountain Incorporated (IRM) Q2 2010 Earnings Report, Transcript and Summary

Good morning. My name is Bonnie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Iron Mountain Second Quarter Earnings Webcast Conference Call. [Operator Instructions] I would now like to turn the call over to Stephen Golden, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and welcome, everyone, to our 2010 Second Quarter Earnings Conference Call. After my announcement this morning, Brian McKeon will review our financial results, followed by Bob Brennan's CEO remarks. When Bob is finished with his comments, we'll open up the phones for Q&A. Per our custom, we have a user-controlled slide presentation on the Investor Relations Page of our website at www.ironmountain.com. Referring now to Slide 2. Today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for our 2010 financial performance. All forward-looking statements are subject to risks and uncertainties. Please refer to today's press release, the Safe Harbor language on this slide and our most recently filed annual report on Form 10-K for a discussion of the major risk factors that could cause our actual results to be materially different from those contemplated in our forward-looking statements. As you know, we use several non-GAAP measures when presenting our financial results. Adjusted OIBDA, adjusted EPS and free cash flow before acquisitions and investments, among others, are metrics we speak to frequently and ones we believe to be important in evaluating our overall financial performance. We provide additional information and the reconciliations of these non-GAAP measures to the appropriate GAAP measures, as required by Reg G, at the Investor Relations page of our website as well as in today's press release. With that, I'd like to introduce our CFO, Brian McKeon.

Thanks, Stephen. Slide 3 highlights the key messages from today's review. We continued to drive strong financial performance in the second quarter. Adjusted OIBDA came in above the high end of our guidance range, driven by strong cost management and benefits from productivity initiatives that supported better-than-expected gross margin gains. Adjusted OIBDA increased 8% percent in Q2 and 10% year-to-date versus the prior year, and is on track towards our full-year growth targets. Adjusted EPS for the quarter was $0.28 per share, an increase of 13% compared to the same period last year. Our reported EPS was $0.20 per share including one-time impacts on other expense and our effective tax rate related to the strengthening of the U.S. dollar within the quarter. Revenue growth for the quarter was 5%, aided by favorable year-over-year changes in foreign exchange rates. Internal growth was 2% with consistent trends in core revenue growth. Revenue gains continue to be moderated by economic trends, which have pressured core service activity and storage growth. FX revenue benefits for the quarter were also about $9 million less than originally forecast given the recent strengthening of the U.S. dollar. Looking forward. We're maintaining our outlook for strong adjusted OIBDA growth this year, consistent with our prior guidance. We are adjusting our full-year revenue outlook to reflect recent changes in FX rates and consistent internal growth trends, which are below our original goals for improved 4% to 6% internal growth this year. Let's now turn to Slide 4 and begin our review of the second quarter results. Slide 4 compares our results for this quarter to the second quarter of 2009. As noted, Q2 was another strong quarter for financial performance. Enterprise revenue growth was a solid 5%, supported by favorable year-on-year currency rate changes. From a segment perspective, North American Physical posted 3% internal growth, supported by 3% storage internal growth and strong complementary service revenue performance, including benefits from higher paper prices and DMS revenues. Overall gains continue to be constrained by economic trends contributing to soft core service activity levels. Our International Physical segment reported 2% internal growth, supported by solid 6% growth in storage revenues. These gains were moderated by tough comparisons to prior-year project revenues. In our Digital segment, reported revenue growth was 5% in the second quarter, including benefits from the Mimosa acquisition we completed at the end of February. Internal growth for the segment was minus 1%, reflecting the impacts of lower subscription sales in 2009 and moderated growth in eDiscovery consistent with broader market trends. Our positive momentum on the new sales front, as illustrated by our stronger license sales, supported our Q2 Digital results. We continue to translate moderate overall revenue growth into strong gross profit gains. Gross profits increased 9% versus the prior year, reflecting a 230 basis point in margin improvement. Continued benefits from productivity initiatives and disciplined cost controls are supporting these gains and driving higher service margins. Storage gross margins also improved, aided by pricing gains. Adjusted OIBDA grew 8% to $236 million. This increase was driven by gross profit gains and lower incentive compensation expense, offset by Mimosa integration costs and investments in growth initiatives including the development of our international Hybrid Records business. Below the adjusted OIBDA line, depreciation was $75 million and amortization was $10 million in line with our forecast. Other expense for the quarter was $4 million primarily related to foreign currency rate changes. Adjusted EPS for the quarter was $0.28 per share, an increase of 13% compared to the prior year, reflecting strong operating performance combined with relatively flat interest expense. Reported EPS in Q2 of 2010 and Q2 of 2009 were impacted by discrete effects related to FX rate changes. Reported EPS for the second quarter was $0.20 per share. The reported earnings were impacted by a higher effective tax rate reflecting the impact of discreet items which more than offset higher operating income. The structural tax rate for the second quarter was 39%. The impact of discrete tax items, primarily related to foreign currency rate changes in the quarter, added 15 points to the effective tax rate. Reported EPS for Q2 of 2009 was $0.43 including the benefits of $18 million of other income and a 14% effective tax rate due to FX rate changes in that quarter. We expect the structural tax rate for 2010 to be 39%. Let's now take a closer look at our revenue growth on Slide 5. Slide 5 breaks down our overall revenue growth. It shows internal growth by major service line as well as the impact of acquisitions and foreign exchange compared to our 2010 full-year target growth ranges. Total internal growth for the quarter was 2% reflecting consistent core revenue growth trends. Economic factors continue to constrain service activity levels and storage growth. Core activity correlates with employment and general economic trends and has remained soft in recent quarters. We've seen significant pressure in vertical segments such as Legal Services, which have been particularly hard hit during this downturn. The internal growth rate for core storage revenues continues to trend at 3%. While we're making positive progress on the new sales front, overall volume gains continue to be constrained by softness in general business activity and sustained higher levels of destructions. We're seeing some moderation in net pricing benefit in areas like U.S. box storage as well, towards the 2% range, due primarily to business mix and lower CPI levels. Revenue gains in International Physical and Digital remain primarily volume driven. Core service internal growth was down 1% in the second quarter, consistent with recent trends. Growth in our complementary services revenues, which face a difficult comparison to Q2 of 2009, was supported by higher recycled paper prices and strong gains in growth areas such as DMS. We continue to see benefits from our focus on expanding our hybrids records management services, and Bob will have more to say on this shortly. Overall, while core growth trends remain consistent, and we're building momentum and strengthening new sales and growing a hybrid records services, we are trending below our goals for improved 4% to 6% revenue growth this year. These consistent trends will be reflected in our updated full-year outlook, which I'll discuss more fully later in the presentation. Foreign exchange increased reported revenue growth by 2% in the quarter, reflecting the year-over-year weakening of the U.S. dollar. At recent exchange rates, we expect the FX impact on revenue growth to be about minus 1% for the second half of the year. The Mimosa acquisition added under 1% to our reported revenue growth in the quarter. Let's now turn to Slide 6 to review our year-to-date performance. Slide 6 looks at our year-to-date operating performance compared to the first half of 2009. The key take-away from this slide is that, despite the ongoing economic factors that are moderating top line growth, we continue to drive very strong financial results. Our continued focus on operational improvement is driving substantial gains in gross profits, leading to a 220 basis point increase in gross margin for the first half of 2010 compared to the same prior-year period. These improvements are sustainable and position us well for flow-through benefits from higher growth when economic conditions improve. For the first half of the year, we achieved 10% growth in adjusted OIBDA. Strong operating gains, combined with a relatively flat interest expense, drove a 16% increase in adjusted EPS compared to the first half of 2009. Our focus on disciplined capital allocation continues to drive improvement to our capital efficiency. Combined with operating profit gains, this progress drove a 17% increase in year-to-date free cash flow compared to the same prior-year period. Let's move now to Slide 7 for a year-to-date review from a segment perspective. Slide 7 shows key metrics for each of our four segments compared to the first half of 2009. Our year-to-date financial results reflect solid execution across our business. North America, our largest segment, continues to drive higher profits, cash flows and returns. We continue to push our optimization agenda while expanding our business foundation through a targeted growth strategy. Significant growth opportunities exist in the unvended storage and DMS markets for this segment, and we're making solid progress in advancing our growth strategies on these fronts. Our focus on operational excellence will allow us to build on the very attractive economics of this business as we continue to expand. Our International segment also continues to expand and is well positioned to continue delivering strong profit gains. Internal storage growth is 6% year-to-date in this segment, supported by gains in expansion markets. While year-to-date revenue and profit growth have been constrained by some tough comparisons and early investments in expanding our Hybrids Records business, we remain on track for solid profit and margin improvement in our International business this year. Our Digital business continues to work through economic impact that have pressured subscription revenues in recent quarters, as well as impacts from cost pressures in the Legal segment, which have contributed to a softer eDiscovery market. Integration costs associated with the Mimosa acquisition are reflected in the year-to-date profit results of the segment. Bob will discuss in more detail the progress we're making in advancing our new sales and product initiatives to position us for strong long-term growth in Digital. Let's now turn to Slide 8 for more a detailed look at our capital spending and free cash flow. Slide 8 summarizes our capital spending and our free cash flow on a year-to-date basis. Total capital spending was $107 million for the first half of 2010 including $4 million for real estate. We remain focused on driving efficiencies in our capital spending while supporting key growth initiatives and projects that help drive long-term return improvement. For the first half of 2010, free cash flow before acquisitions and discretionary investments in real estate was $141 million, a 17% increase over the same prior-year period. The year-on-year increase in free cash flow was a result of higher operating profits in 2010 compared to 2009. Included in the $141 million of free cash flow is $8 million of net insurance proceeds associated with the Chilean earthquake. For 2010, we're revising our expectations for free cash flow before acquisitions and discretionary investments in real estate to approximately $330 million to $360 million. This reflects estimates for higher cash taxes, which are offsetting additional capital efficiencies. As we announced in our Q4 earnings call in February, our board approved a $150 million share repurchase program. In the second quarter, we acquired 1.8 million shares for approximately $44 million. Combined with our first quarter purchases, we've acquired 2.2 million shares for approximately $54 million year-to-date. This leaves us a balance of $96 million for additional share repurchases under the existing plan. Let's now turn to Slide 9 for a review of our key debt statistics. Our strong financial performance and disciplined cash management has resulted in a very healthy balance sheet. Our debt portfolio at June 30, 2010 remains long and fixed. Our weighted average interest rate is 6.9%, and we're 87% fixed. Maturity is 7.5 years with no meaningful repayment obligations until 2014. Consolidated leverage is at 3.1x, benefiting from our significant operating cash flows while reflecting the $112 million we paid for the acquisition of Mimosa in Q1. Leverage is just below the low end of our target range of 3.5x to 4.5x, and we're comfortable operating at this level given the current economic environment. We're also well-positioned in terms of cash and financing capacity. Liquidity is nearly $1.1 billion, with $340 million in cash and $750 million in additional borrowing capacity as of quarter end. This concludes our review of the Q2 2010 results. In summary, we continue to drive strong financial performance despite the economic impacts moderating revenue growth. And we remain committed to strengthening our business foundation globally while delivering strong financial performance to position the company to capture increased benefits when economic conditions improve. Let's now turn to Slide 10 to discuss our financial outlook. Slide 10 highlights the key factors impacting our revised outlook for the balance of the year. As noted, we remain on track for strong financial performance in 2010. We are updating our revenue outlook today to reflect recent changes in FX rates and ongoing pressures on general business activity. Our current outlook is for 4% to 5% reported revenue growth this year, down from our prior goals for 6% to 8% growth improvement this year. The recent strengthening of the U.S. dollar has reduced our full-year growth outlook by nearly 1%. We've also adjusted our full-year internal growth forecast of the 3% range, incorporating year-to-date trends and expectations for continued soft economic conditions. While we are seeing signs of improvement in complementary services, and we continue to make progress in strengthening our sales pipeline, economic trends are limiting core revenue growth. Our outlook reflects projections for full-year storage growth in the 3% range, consistent with recent trends, and for flat to modest growth in core service revenues. While macro factors continue to constrain our revenue growth outlook, our progress in driving operational excellence across our business and improving our international profit trajectory is keeping us on track for significant profit gains this year. This progress enables us to maintain our outlook for 7% to 11% adjusted OIBDA growth, double-digit adjusted EPS gains and strong free cash flow in 2010. Let's now turn to Slide 11 to review specifics related to our 2010 guidance. Slide 11 summarizes our full year 2010 and Q3 guidance. For 2010, we now expect revenue to be in the range of $3.12 billion to $3.16 billion. This represents reported revenue growth of between 4% and 5%, including internal revenue growth of approximately 3%, and 1% to 1.5% of combined acquisition and growth in FX benefit based on recent foreign currency exchange rates. Our profit outlook remains strong, with expectations for 7% to 11% growth in adjusted OIBDA and 10% to 20% gains in adjusted EPS. Our adjusted OIBDA at outlook remains at the midpoint of $945 million, as productivity gains and benefits from cost management initiatives and lower incentive compensation accruals offset negative impacts from factors such as FX. We're lowering our expected capital expenditures for the year to approximately $280 million, reflecting refined spending plans. Included in our capital expenditures is $20 million for real estate. As noted, we're adjusting our free cash flow outlook to $330 million to $360 million, reflecting a higher outlook for cash taxes. For Q3, we're projecting revenue of $780 million to $800 million, reflecting internal growth of 3% to 4%, supported by approximately 2% core revenue growth and improved complementary revenue gains. We expect Q3 adjusted OIBDA in the $236 million to $246 million range. Let's turn to Slide 12 to put this performance in a longer-term context. Slide 12 demonstrates the long-term record of strong financial performance we're building at Iron Mountain. Over the past four years, we've been executing consistently against key financial objectives for our company: to drive consistently strong revenue and adjusted OIBDA growth; improve capital efficiency to support higher incremental return on invested capital; and to advanced strategies to optimize our capital structure, drive cash flow and maximize investor returns. While the impacts of the economic slowdown have pushed our recent top line performance below our long-term goals, we continue to execute with discipline to deliver strong financial performance. Over the past four years, while continue to expand our business foundation and capability, we've driven consistently strong adjusted OIBDA and adjusted EPS growth well ahead of revenue gains. Our disciplined approach to capital allocation has supported a 500-plus basis point improvement in capital efficiency, record cash flow generation and the substantial strengthening of our balance sheet. These improvements are sustainable, and reflect the strength of our business model and our growing capability as an organization. These factors will enable us to deliver continued strong performance and position us well to realize the benefits of strong incremental profit and cash flow from future revenue growth as the economy improves. Thank you. I'd like to now turn the call over to Bob.

Thanks, Brian, and good morning, everyone. As Brian mentioned, we delivered strong financial results in Q2 with adjusted OIBDA results exceeding the high end of our expectations. And we continue to deliver strong performance despite economic factors that are moderating our revenue growth. Today, I'm going to discuss how our business is doing in the current environment, such that we continued to deliver positive financial performance and position ourselves well for when the economy recovers. I'm also going to provide an update on our growth agenda, highlighting the progress we're making in key areas such as hybrid service expansion and go-to-market strength, as these are fundamental enablers of our long-term success. There are some key messages that I want to emphasize today. First, Iron Mountain's business continues to deliver strong financial results despite consistent macro impacts that are moderating our revenue growth. Second, we're making good progress on our growth agenda, positioning ourselves for strong long-term performance by focusing on areas we can control. Let's talk about our financial performance in Q2. We continue to demonstrate the attractiveness of the Iron Mountain business model as reflected in today's results. And as Brian pointed out at the close of his remarks, profitability and cash flow are all up significantly in the past four years. This performance is the direct result of our base business model, as well as our determination to implement operational excellence and process discipline across our company. We continue to strengthen the management of pricing, transportation, workflow in our record centers and the way we procure services. These actions support strong gross margin gains, and as you know, we're extending this capability globally, which along with our growth initiatives will help grow our international returns. We believe that being able to continue delivering strong financial performance will serve us well as we make progress with our growth agenda, and it'll also position Iron Mountain to take advantage of the economy as it improves. So let me talk now about the current trends and how we're managing them. In terms of Core business trends, we're experiencing the same softness that many of our customers are. Specifically, core service activity levels are down. This correlates with continued high unemployment in our customer base and the general sluggish business environment. Certain segments, like Legal, are seeing significant pressure in terms of their cost and litigation activity. This puts pressure on our services in that segment. The continued economic weakness has also constrained storage volume gains in developed markets like North America and the UK. Customers are focused on cost controls, which leads to sharp control over their inventories. Now we see these trends as principally related to the soft economy, and until we see evidence to the contrary, we're planning for these trends to continue and have updated our growth outlook accordingly. We know our business is a great business and has great potential, and we'll continue to manage through this impacts and deliver strong financial results. We intend to grow profits faster than revenue, translating mid-single digit revenue growth into strong adjusted OIBDA, earnings per share and cash flow gains. We continue to focus on those things that are within our control to improve our growth rate and position ourselves to take advantage of any recovery that occurs in the economy. So let me talk about Iron Mountain's growth. I'm pleased with the progress we're making on our growth agenda because, as you know, our customers need to reduce their costs and risks, know what information they have, manage it appropriately, realize greater value from their information and have confidence that it is guarded safely. That's Iron Mountain's value proposition, and we're excited about the traction we're getting with more and more customers. And because we've built a business that runs effectively, we can focus on our customers' critical information needs as they evolve. In terms of core growth, we continue to make good strides globally, with solid 6% storage internal growth internationally in Q2, supported by continued growth in expansion markets like Continental Europe, Latin America and Australia. And having established a foundation and a culture of operational excellence in North America, we're now in a position to really aggressively pursue revenue. And I'm confident that we'll be equally successful in this endeavor as we were in establishing operational excellence. We've made steady progress in building the sales pipeline this year, and I'm pleased with our new sales performance. To give you a better sense for this momentum, let me highlight some of the deals that we won in our Core business during the quarter. Berkshire Hathaway awarded us preferred vendor status, meaning they recommend Iron Mountain records management to all of their operating units. This is a relationship we've been cultivating for some time, where we advised Berkshire Hathaway to consolidate their efforts and where we won their business over time. Also during the quarter, one of the largest commercial real estate companies in the world signed a master agreement to bring Iron Mountain's records management, shredding and data protection capabilities downstream to their tenants on a worldwide basis. One of the world's leading professional services firms signed a ten-year contract with us to outsource all of their records management program in the Netherlands. And with this win, we now serve all of the big four accounting firms in that region. During the quarter, two of the leading pharmaceutical companies and the largest tax advisory firm in the world awarded us their Shredding business. As you know, this is a competitive business. However, the competition for shredding gets a lot easier for Iron Mountain when we're dealing with large firms that have multiple locations where they're demanding an unbroken chain of custody, operational uniformity and certifiable destruction of their information. And as you might imagine, you can't risk destroying the wrong tax return or lab notebook. Iron Mountain remains very well positioned to capture these clients as we deploy the right capabilities and have the scale necessary to service their needs. Also in our Core business is our Hybrid business, which you've heard me refer to as DMS, where there are both physical and digital properties to protecting the asset. But this also involves the capability of converting from physical to digital, where we have a unique value proposition. Hybrid services support our complementary revenue growth, and I'm quite pleased with our progress during the quarter. During the quarter, we won CitiFinancial, where we're working with them on a project where we get their records from 1,800 branches and move them to our storage and from there, we will then image the loans for their -- for Citi's review. One of the largest technology companies in the world chose Iron Mountain to replace their existing partner for imaging services into their customer base with our DMS capability. This a very big competitive victory for us, and it reinforces our credibility as best in class. During the quarter, a major government agency co-awarded us a project to retrieve, organize and transport records from hundreds of banks around the country and image those documents at our imaging centers for the purpose of long-term preservation. And also during the quarter in our core, a major Hollywood studio chose us to transcribe their vial [ph] (27:45) film and sound assets throughout the continent of Europe. I highlight these wins because they're all expected to scale meaningfully, and there are common requirements around winning them which are unique to our value proposition. And an unbroken chain of custody around physical assets, the facilities and the people to convert those assets and the ability to store them digitally so that our customers can take action on the information. These wins reinforce our momentum in the marketplace, demonstrating the linkage between our businesses, and underscore our value proposition, reminding us that we're on the right track strategically, and that we continue to earn the confidence of some of the premiere names in business as we refine our offerings into the marketplace. Let me talk about the Digital business. Our current growth in digital is constrained by softer subscription sales in the past few quarters and recent pressure on eDiscovery. We are taking action to address these issues and are positioning ourselves for long-term success in this business. We've significantly increased the capability of our technology services, having recently increased the amount of data that can be handled in our server protection product, added discovery capability to our PC protection product and successfully integrated the business of our Mimosa acquisition within the first 100 days they were in Iron Mountain. We've won several technology service deals during the quarter, including an agreement with Hitachi Densa to resell our server protection in Japan. One of the world's largest energy companies, during the quarter, chose us to protect the data of all their remote workers. And another one of the big technology giants chose our PC protection solution for downstream sales to their customer base. We're seeing the results of rallying our company and marshaling our operational discipline around the pursuit of new revenue. As you know, it takes time to see those results flow through in an annuity-based business model. I also want to mention one other thing on the growth equation. We've significantly strengthen our leadership team, and during the last quarter, Jerry Rulli joined us as the Executive Vice President of worldwide sales at Iron Mountain. I've known Jerry's work for some time and believe that he can really bring a system of selling to our sales force and improve our capability as it relates to generating new revenue. The bottom line for all of this is that Iron Mountain is making clear progress both in helping to mitigate the near-term impacts of the economy and position our company for long-term success. We'll continue to focus on and strengthen our capabilities in the areas that drive long-term growth for our business, which include capturing the large unvended opportunity in core physical, expanding our high return model and international expansion and growing new service capabilities. I look forward to sharing more on these fronts during our upcoming Investor Day. And before I take your questions, I want to remind of you the key messages that we started with. As illustrated in today's positive results, our business is performing and we're successfully navigating through the current economic environment and its continued impact on our business. Additionally, we're making significant progress on advancing our growth agenda to be ready to take advantage of the economy when it improves and to position Iron Mountain for the long term. I'd like to now turn the call over to the operator and take your questions. Thank you.

[Operator Instructions] Our first question comes from Andrew Steinerman of JPMorgan. Andrew Steinerman - JP Morgan Chase & Co: You mentioned North American price is plus 2%, and I heard the comment that CPI is tied to some of your contracts, so that could go up if CPI goes up. But my question is, we basically raise the overall margin for the year even though pricing is now, in North American box, plus 2% opposed to plus 3%. Does that mean that we're getting a lot more balance for productivity gains? And then my question is do you have any change of view on what your kind of long-term value, meaning price advantage, could be?

The point you raise is regarding the benefits that we're seeing, broad benefits that are helping to drive the gross margin gains. It's more than a pricing-only strategy. We've got benefits in terms of higher service margins from the productivity initiatives that we've advanced. On storage margins, we've had some benefit from pricing. But we've been very aggressively managing our facility utilization as a key initiative that's supporting that as well. Higher paper pricing is helping us. Energy, to a smaller degree, on a net basis has been a positive factor recently. So there're a number of factors that are helping us on that front, and we believe we can sustain that. And as we're extending many of these initiatives globally and heightening the focus on international margin improvement, we think that can be a -- this is clearly part of our long-term strategy. As far as your questions on pricing, our strategy has not changed. We continue to look to get a reasonable increase in pricing for the value of the services that we provide. We are reflecting some moderation. As you noted, for some customers, CPI-based escalators are built into their long-term contracts. That's moderated somewhat. We've seen some net business impacts. It's not one thing, but several factors and -- so that has moderated a bit. But our strategy is the same, and we delivering the same type of value and think we can sustain this as a economic driver over the long-term. Andrew Steinerman - JP Morgan Chase & Co: And you think you have more productivities to be gained even past 2010, right?

Absolutely.

Our next question comes from the line of Vance Edelson of Morgan Stanley.

So it sounds like the economy is still weighing on the business despite a general sense that there's been some improvement out there for most companies. How much of this would you chalk up to Iron Mountain's later cycle characteristics? And based on what you're seeing in the broader economy, is it reasonable to expect some top line acceleration over the coming year?

Well, I think what we tried to point out, Vance, was the work that we're doing on what we can control, right, which is the pursuit of new sales. And I tried to bring that to life in my remarks, that I'm very pleased with the progress that we're having there. As you know, it takes a while for it to flow through in an annuity model. At the same time, I spend a lot of time with our biggest customers, and I'm not seeing the general improvement that I read about sometimes. But fundamentally, our business correlates to the number of people that are in offices and cubes. And we're not seeing employment return into our customer base. Now that's somewhat anecdotal, but we spend a lot of time with our customers, and the fact is, I don't see a general improvement. I don't see it in the comparables that would point to either, where there's a big uptick in employment. And that's the biggest corollary for our business, as it relates to core volume growth and core service activity, is employment. And we're not seeing much of an improvement.

Yes. Vance, I'd say we're not implying that it's worse. But I think the improvement is something that we've yet to see flow through. And so right now, we're planning for consistent trends. It's below the goals that we had this year to improve, but we think we're well-positioned to have excellent performance and flow through when the economy improves. And we're looking forward to seeing the broader improvement.

Yes. That is to say that as employment improves, we expect service activities and volume to improve. And in the meantime, we're getting after what we can control through new sales performance. And again, while it takes a while for it to flow through in our model, we're pleased with the wins that we're generating in the marketplace.

And then on Legal. It sounds like that's been particularly weak. Any feel for when Legal, when that vertical turns around in relation to the broader economy? Is that going to be even more late-cycle than other verticals for you?

Feels that way. The thing I would tell you is that the way we're getting after it is to really increase our capability as it relates to discovery, because we already have the intellectual property in our other products. So that, in essence, we're making it easier for people to do that with us than with others. There is compression on the number of matters and the price per matter. But we think we're well positioned from a product perspective. And then if you look at it over the course of time, I don't expect litigation to go down.

More on the costs side. It sounds like there's more productivity gains ahead on the OpEx side. Can you say the same about CapEx, which has also been trimmed? Is there more to go there in terms of capital efficiency?

We are -- we believe we can sustain the efficiencies that we've driven. We'll -- our longer-term goal was to have spending in the 9% range as a percentage of sales, as you're aware. The -- we certainly believe we can maintain the efficiencies. The thing that will drive that number up, Vance, is volume growth improving. That's where our capital is very much aligned with our growth capacity. And so we think we can sustain those levels at good growth rates. And we're in the lower -- I think we're 8.3% in the most recent mid-point outlook. And we may see some increase in that over time as we see the volume improvements that we expect to drive.

Our next question comes from the line of Eric Boyer of Wells Fargo.

Bob, I think you referenced mid-single digit revenue growth, I believe for the longer term. I just want to make sure that is in line with the 6% to 10% you put forth at the Analyst Day. Or has the top end moderated a bit there for your longer-term outlook?

I'm talking more on a short-term basis than changing our longer-term outlook.

We're really enforcing the current environment that we're seeing. Our plans for 2010 and the comments today aren't a change in our perspective on the longer term potential of the business, but they're not intended to be a long-term forecast either.

Eric, it's more reacting to what we're seeing in volume as it relates to the employment picture. And we don't see that changing in the near term. So that's why we updated our guidance in the near term. It's only a near-term view.

Then International Physical. You had a tough comp in Q2. Can you give us an idea of what you're expecting in terms of the growth rate for the second half? Should we see that accelerate at all?

Q2 had an unusual lap in terms of a large project. So we should see more favorable compares on the complementary revenue side. The storage growth, as we mentioned, in our Q2 was 6% in International, and we're expecting consistent trends on the International business.

The internal core services growth. It hit -- I think it went negative for the first time. But do you think we're bottom out here? Or what are your expectations there for the second half?

I certainly don't expect it to worsen from here. We don't have any signs.

We're planning for a consistent trend. So I think it's -- we've seen this pressure, it wasn't a significant change quarter-to-quarter, obviously, we were flat in Q1. And we're planning for continued trends until we see changes in levels of business activity moving that -- moving the dial in a different direction.

Our next question comes from the line of Scott Schneeberger of Oppenheimer. Scott Schneeberger - Oppenheimer & Co. Inc.: Could you guys speak to what you're seeing out there with destructions? That had been elevated, and just curious how that's trending.

Similar trends. So it's remained at relatively higher levels. So a lot more of consistency in what were seeing than change. I think the -- we are making progress on the new sales front. That does take time to flow through. As we mentioned, we've seen some moderation at the margin on the pricing. And we've seen consistent trends in terms of destructions that reflect customers being very focused on inventory control, cost control in this environment. Scott Schneeberger - Oppenheimer & Co. Inc.: Could you speak to visibility? I know you've said in the past that you think the recovery in the business will come via complementary services to core services to core storage. Could you speak to that a little bit deeper? And then how much visibility into each of those that you feel you have?

We feel we have good visibility into the business that we're driving. And from a new sales perspective, a lot of what we're doing is an integrated value proposition. That's why I referred to some of the examples that I used where it's a combination of our digital capability and our physical capability. But we look at it by segment. We feel very good about the new sales performance as it relates to our core services, right, which is the majority of our business. And then building on that with the ability to convert the physical into the digital is -- it's a bourgeoning business for us, but it builds over time.

One thing I would highlight is that we're obviously having good growth in complementary revenues. Some of that's supported by the higher paper pricing this year. Some of that is also supported by service expansion, so its the DMS revenues growing. I, at this point, wouldn't highlight that as a change in sort of the economic environment. I think that's more things that we're driving within our control. We're successful in terms of providing services that are very relevant for customers right now. And so I know what your getting at. We expect the same kind of flow that we've talked about in the past, that we'd see the uptick on the margin and the complementary services first, before we'd see flow through in core services and then storage. That's sort of the timing of our business. But I wouldn't indicate that the complementary growth, right now, we see as being driven by improvement in economic conditions. It's more things that we're driving ourselves. Scott Schneeberger - Oppenheimer & Co. Inc.: And if you did see it, what would you think the timing, the lag on the others? Or really tough to say?

On something like storage. Clearly, it's a -- sale cycle takes time, and takes time for the boxes to flow through. So this is -- these are months, many months, and it's not something that's going to turn around quickly in terms of how that's going to flow through to the business. But obviously, it sustains for a long period of time too.

Yes. Maybe some backdrop on this. We -- the improvement that we're seeing from the new sales performance is a direct result of really driving the number of new deals that we have going into the proverbial top of the funnel. The cycle itself is not shortening. So we don't see improvement from that perspective. The cycle remains the same as it's always been. Scott Schneeberger - Oppenheimer & Co. Inc.: You cited Legal being weak. And just could you speak to other end market to -- Bobbie, you highlighted a lot of exciting new wins, it seemed, and you mentioned scalability. I guess just if you could speak to core verticals and how each of those are trending.

Financial services is doing very well and where we have a value proposition that can help drive their efficiencies and their costs. And they have -- I think that they're better positioned to spend in this environment. So we're doing very well with that segment. It's a very important segment for us. Healthcare, I don't seeing any significant change, although our value proposition continues to improve for that. I think that the big thing to remember here, Scott, is that our value proposition, that we continue to refine that by segment. So that we're becoming more vertically oriented in how we approach the market. And we expect that to drive gains over time. But you'll hear me become more vertical in my talk around how we're doing in performing against these segments. Financial Services continues to be our strongest segment though.

[Operator Instructions] Our next question comes from the line of Kevin McVeigh of Macquarie.

Brian, I wonder if you could give us a sense of how much of the CapEx adjustment related to elevated destructions as opposed to general macro activity levels? And then as you think about that longer term. How much longer, given the current client kind of average storage that you have, can those elevated destructions remain as you look out over the next couple of quarters or years, if you will?

So Kevin, just to clarify. Your question is about how it relates to capital spending?

Yes, that's right. So obviously, we took the CapEx down. Part of that was macro, part of it I'm thinking is elevated destructions stirring up some additional capacity. Is there any way to quantify if I'm thinking about that correctly, number one? And then number two. As you think about the average storage, how much longer can those elevated destructions remain?

Well, I think on the -- the way I'd suggest thinking about this is the net effect of higher destructions and economic pressure on just the general business activity is that the -- in the more developed markets, we're seeing limited growth on storage. So it's not as if that's freeing up space. It's just, it is putting less pressure on us needing to add, to the same degree, new capacity. It's not the same everywhere, so you always have investments in some markets that you're -- that are growing and may have more capacity needs. But that's the key dynamic that we've seen. So in terms of how it will play out I think is driven by a number of things. But economic conditions and net-net, right now we're planning for continued kind of modest volume growth. And I think our capital spending will be consistent with that. I do think over time that as volume growth improves, we still have plenty of room to run our business more efficiently in terms of our utilization of our facilities. And we think those kind of initiatives will enable us to maintain a good discipline over capital controls and hit our longer-term goals for capital efficiency. And I'm sorry if there -- I went on, I forgot the second part of your question.

It was -- they were both actually related to the capital efficiency, so that was helpful.

[Operator Instructions] Our next question comes from the line of Ashwin Shirvaikar of Citigroup.

This is Phil Stiller on for Ashwin. I just have a question related your margins. You guys have done a good job thus far in a relatively slow growth environment. As you look forward and contemplate growth improving, are there costs that are going to have to come back into the business? I.e. do you expect this kind of margin improvement in a better growth environment?

I think it goes back to what Brian was saying before, that we spend capital as volume improves. But in the cost of the business, we're -- we continue to drive operational excellence so that we can get productivity gains that are sustainable. We've demonstrated that over a course of -- Brian's last slide spoke to the last four years, two of which we actually had very strong growth. So we believe we can drive increased productivity out of our business regardless of the growth environment, notwithstanding the fact that capital does need to be deployed as growth returns.

Assuming business mix is constant, which is obviously a variable that could change over time, higher growth, I think, will be a positive margin driver in that we will get better leverage out of our business. And that as we drive scale, that creates some opportunities to get margin leverage. So I think in a higher growth environment, we would think that is a -- that would be a net favorable factor for margin improvement.

Yes, and I think that really -- in bringing us to the close of the call. It is -- it reinforces the strength of our business model that we're able to drive these kinds of financial results despite the macro impacts that we're experiencing, and that we're building this capability from a new growth perspective around what we can control. And we're pleased with the early progress that we have on that front. We appreciate your time and look forward to reporting on our results going forward.

At this time, there are no further questions. I would like to turn the call over to Mr. Brennan for closing remarks.

Again, thank you very much. We very much appreciate your time this morning, and want to remind you that our business is performing well and that we're getting after a new growth in a sustainable way around those issue that we can control. And we'll look forward to reporting on our progress in the fall. Thanks.

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