Iron Mountain Incorporated (IRM) Q2 2011 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 Q2 Earnings Call Webcast. [Operator Instructions] I would now like to turn the call over to Mr. Stephen Golden, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and welcome, everyone, to our 2011 second quarter earnings conference call. Joining me this morning are Richard Reese, our Chairman and CEO; and Brian McKeon, our CFO. After their prepared remarks, we'll open up to questions for your 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 2011 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 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. Also, please note that all of the financial results presented in today's materials reflect discontinued operations treatment, the digital businesses we sold and the expected sale of our New Zealand operations. All historical results have been restated to conform to this presentation. With that, I would like to introduce our Chairman and CEO, Richard Reese.

Thanks, Stephen, and good morning, and welcome to our call. This morning, I'll be intentionally brief in that it's summer time, we've had a good quarter, but there's nothing really extraordinary to talk much about. So I'll kind of run through it fairly quickly, then Brian will go through the numbers and some of the details. And then, of course, we will take your questions and answers. Q2 was a good quarter, in line with our expectations. We're on target for the year, and frankly, on target to -- it's a good start for our 3-year plan in terms of the financial performance that we laid out a few months ago. The trends are pretty much in line with Q1, so there's not -- as I said, not a lot specifically to talk about. Reported revenues were up 5% in total that were led by International, internal growth at 4% and North American internal growth at 1%. Our storage trends remain stable at internal growth of 3% on storage. As we've been talking about for quite some time, we've seen a moderation in our storage trends. Some of that is economic, and some of that is continued secular pressure. But we've seen stabilization, and that stabilization trends have continued into the quarter. Churn, it's sitting around 7% in organic additions, in the same range of the last 7 quarters, in fact, in around 7%. New sales at about 2% up of -- which is a moderate improvement, and been improving slowly over the last quarter 2. As you know, we've focused our business since the sell of our digital business on our core business and that we are seeing some benefits of focus and some benefits of getting the sales force really focused back into these core services. As we've said many times, there's a lot of open market opportunity for us, and we've probably diluted our focus a little too much, having too broader product line and too many shiny objects for the sales force. And I think, although we've still got some pretty interesting shiny objects in our core business, getting them focused back on the core seems to be working for us. Core service continued to remain soft for the same trends we've been talking about for some time as we've not seen a pickup in retrieval activities and other core activities. Overall service dollars were up, but that was driven primarily by paper prices for our Shredding business as well as fuel surcharges related to the price of fuel rising over the last few months really kicking in and starting to flow through. But as I said, the core service activity remains soft and remains a drag, not an increase or anything in the trend, but just remains the same trend line and a drag on our overall growth rates. Financial bottom line performance adjusted OIBDA was, on an operating basis, was up 2%. But that $227 million, that excludes about $10 million of onetime costs. If you will remember, I've been saying for the last quarter or 2 that as we are exiting digital and shifting our strategy to focus on the core and focus on driving returns that you would see some noise in our reported numbers for a couple of quarters. This is sort of some of that noise, and Brian will go through it in details. But it's primarily related to some of the proxy cost items and some other things like that, and you will see in future quarters some onetime costs finishing those things out as well as the special committee process we've talked about and as well as reduce of some of the strategic assets as we go along. So this under the category we've been telling you was coming, and Brian will get into details as we get there. So as I said, it was a good quarter. The organization and the business are performing well. It's performing in line. I think the execution of our team is quite outstanding, and we're not only making good financial progress, we're making good progress of transition our business in terms of our mindset, in terms of our strategy, in terms of dusting off out products a bit, and really focus ourselves back into the core markets. And we expect that, that will pay good rewards over the coming years. So I'd like to review quickly, as I will tend to do in the next few quarters, if not years, is just to keep you up to date on the 4 stages or components of the 3-year plan that we've put forth so everybody understands where we are. And I think one of our commitments was to make sure that we were very transparent and very clear about the progress we're making and so forth. So as you remember, our plan is driven by 4 components. First is our North American business, and that is the business that's -- it's the strength and the backbone of our core services. It's a business over the last few years we've optimized dramatically by taking about 850 basis points of margin improvement in it, as we really went through that business with a fine-toothed comb. So the strategy here is to continue driving revenue and looking for the point at which we can increase more revenue by investing some of our margin back into it and basically keep the business at flat margins. This quarter revenue was up about 1% and margins on an operating basis with some onetime noise in their numbers, but on an operating basis it's basically flat, so it's in line with our expectations. It's a business that's got to work hard to maintain flat margins, because they do have some headwinds in terms of service mixes. Some of our core services are growing quite fast. We have our hybrid lines growing in the 20% to 30% range internally. They are good businesses but with much lower -- different margin characteristics and different capital characteristics and so forth. Whereas the soft revenue we're seeing in our core retrieval refile business, which is coming down on us as the higher-margin mix. So they've got have some headwinds there, but they'll work through it. We're pretty confident that the team can work their way through that and keep the business on line with what we expect to happen. International business, as you know, a couple of things, I mean, our strategy was to look at the business from a different strategic lens, and that is as a portfolio businesses, and we've been going about doing that. As part of that, or in addition to that, I should say, our International business has -- have committed to driving margins by 700 basis points, and this is by running the same playbooks by and large that we ran in North America in terms of just driving efficiency, investing in processes to improve our cost as well as our service delivery. And they're off to a good start. You saw in this quarter a flow-through of 150 basis points and margin improvement out of our International portfolio. That's 150 out of the target of 200 that we will see coming this year, and that's 200 for this year out of the 700 total over the 3-year period. So as I said, we're off to a good start there. Growth remained good in the markets, particularly led by some of our developing markets, as well as some good growth in our leadership markets and otherwise on the continent. And they maintain a 4% internal growth rate. Plus absorbed -- continue to absorb an acquisition, which added another 3% to their growth rate or total growth rate in constant dollars of 7%. FX had a much more positive benefit for them, but we really think about the business in constant-dollar basis. Part of our strategy was in addition to driving the 700 basis points of margin and trying to continue getting access to the higher growth rates that we could see in quite a few of our International markets was to analyze our portfolio of businesses and making sure that we had strategies to drive appropriate returns on invested capital market-by-market. And some of those strategies would include tactics such as driving more revenue to drive to scale, such as reducing cost and overhead, such as freezing the business and just stopping the investment if we couldn't find a better thing to do with it or disposing, divesting in the business and get out of it. This morning, we announced, are, in fact, stating that we are exploring the sale of one of our businesses, that's our business in New Zealand. This is a result of this process. The process is an ongoing process, not that we haven't pretty much finished the analysis because we have, it's just that we're not going to make a big-bang announcements as to our execution. But this is a first-stage execution of that strategy, and so we're exploring the sale of the business in New Zealand. The way we look at that business, it's a great business, but it's small, about $8 million in revenue. It came along with an acquisition of Australia, which is a much larger business, and New Zealand, in itself, is a smaller market. And we're not the leader. In fact, we're like #3 or #4 in the market space. And therefore, we think that our New Zealand business folded into somebody else probably has more value to them than it does to us. And we're going to test the market and see if we can come to understand that. We obviously won't sell it if we don't get a fair price for it to get return for shareholders, because it's not putting a drag on us. It's a profitable business. But on a return basis, we think we can probably take the capital out there and put it somewhere else and have a better return. As I said, this is the first such announcement. I don't expect a long list of announcements, but -- and the lot of what we're doing in the International portfolio is not the kind of thing you'll announce. It's just about how we drive the business, how we allocate capital. But again, we're off to good start there. The third element of our strategy was to sell our Digital software assets, or what we so-called our Digital business, and focus back on our core business. During the quarter, although we announced this some time ago, it's easy to make an announcement. We actually had to do the work, but we closed on the sale transaction in the quarter and, in fact, had to split the business apart. There was a lot of integrated support and staff issues that we worked through with Autonomy. And the transition is not 100% done, but I'd put it in the category as mostly done. I think the heavy lifting is pretty much behind us there, and we are all looking forward -- I know that Autonomy, I think, views it as a successful and good transaction from their perspective as well as we do. And along the way, as we had hoped, we entered into a partnership with Autonomy that gave us access to a lot of their technology on an attractive partnership basis, where we will cross-sell and support, which allows us to continue in the market space, ramping technology services in our portfolio where it's appropriate, and allows us to continue to solving certain customer problems without suffering the development cost and the heavy capital investments that we were having to put back in the Digital business to maintain our software assets and platform. So all in all, we think it was a good move for us, and we hope and believe that it was a good move for Autonomy. And we think, as we said in the very first place, that they would do a better job with those assets than we could do. And so we hope and believe they found a good home and that the relationship between us and Autonomy will continue to blossom and bear fruits for both parties. So that stuff is easy to talk about. I just want to stress to you shareholders that you can't even imagine the amount of work that a lot of people have put into over the last 2 or 3 months just making that short soliloquy I just went through come true. Okay? And so it's good work, and the good news is that now, some of those people, we'll give them about 5 minutes rest, and they'll go back to work on some other good stuff. And we'll get our organizational focused on some other future things that are real positive for us. The fourth element is shareholder payouts. The reminder is our commitment is $2.2 billion of distributed cash to our shareholders over a 3-year period and $1.2 billion off of that within the first year. And we are on track to do that. We are in the middle of executing that strategy. We increased our quarterly, or what I call foundational, dividend by 33% during the quarter to $0.25 per quarter. I would encourage you to view that as a increase to a foundational level and view that more of the dividend that's likely, not necessarily, but likely to grow as we grow our cash flows in the future or some related metric. Okay? In other words, as business performance continues to do well, I would expect the dividend to rise. But these are all expectations, not commitments in terms of dividend futures. But that's what I would expect to happen. And then, of course, as you know, what we said over and over, our second strategy for distributing capital and preferred strategy is to buy in our stock. Our strategy for buying in our stock is buy it at or below fair market value based upon our best judgment and our best view of the models at the time and not to be necessarily a trader in the market, because we don't expect that we can out-trade the market. And so, we've executed the first leg of that with a $250 million prepaid variable stock purchase plan. That is almost completed. It should conclude itself sometime in August. We don't have final numbers. I can tell you that our best estimate, and it is only an estimate, is somewhere between 7 million and 8 million shares will have been purchased. And our best estimate at the average price is an acceptable number to us, okay? In the future, just so long as we can buy stock at or below the fair market value from our perspective, we will continue doing that as a way of distributing cash. Obviously, if the stock were to get substantially above what we think are a comfortable position, we would have to use a third alternative, which would be a special dividend, but as I've said over and over, that's not our preferred route, but of course a route we would use if we had to. Because we have made these commitments, we will find one way or other to make those commitments come true. So all in all, I think we're off to a good start in the a shareholder payout plan, and we're going to continue moving forward. The last quick element to update you on before I turn over it over to Brian is we've made a decision not to hold our Annual Investor Day in 2011, which we would typically hold in the October timeframe. So from a planning perspective, people have been asking what's the date? Have we nailed it down? And the answer, we decided not to. The reason we decided not to is a couple, or mostly -- I mean, I could whine and argue as we're awfully busy, and it does take a lot of time. But you don't really care about that, and that's not the main reason. The main reason is, as you know, we've kicked off our special committee process to the Board, where we're looking for strategic alternatives. And we believe that so long as we're in the middle of that special committee process, if we would have a large meeting like an Investor Day, you would all come away very unhappy with answers to your questions, because you would all be asking questions about what's the special committee doing? What are they learning? When are they going to learn something? When are they going to tell us something? And our answer to that question will always be, we're not going to tell you. We try to say it more politely than that, but that would be the answer. We just don't really feel like bringing you in and bring ourselves in and having everybody feel pretty uncomfortable at the end that we didn't tell you anything. So I'm telling you now, we're not going to tell you anything, because we're not going to do differential disclosure to anybody. We're going to work through the process. It will be as transparent as possible when a decision has arrived, that if ever there is a decision, we will tell everybody at the same time, and we will tell them broadly and very deeply and very thoroughly. And so, we just felt like take the noise out of the market and the speculation out of the market, we're not going to do an Investor Day. We will resume Investor Day on a normal pattern in 2012. Obviously, if the special committee comes to conclusions that have radical changes in our business, a pretty good chance we'll do some -- we will find lots of ways to do broad communications, and we may even have an in-person meeting if it needed that level of detailed discussion. But we will find the right way to make sure it's communicated and make sure you all understand it if anything happens. And I stress the big word, if anything happens. I should also tell you, though, that one of the other things we typically accomplished at the Investor Day was a discussion of our preliminary forward-year outlook at that day -- at that meeting, and we will do that in our Q3 earnings call. So you might expect our Q3 earnings call to run slightly longer, because we will make sure that we go through a full discussion of our 2012 outlook -- preliminary outlook on our Q3 call. So that's about the only news for the day. As I said, it's a good quarter. I think we're off to a good start executing all our plans, and we'll continue doing that and continue trying to communicate with you. With that, let me turn it to Brian, who'll go through the details, and then we'll see.

Thanks, Richard, and good morning, everybody. We'll be going through the slides as usual. Slide 3 highlights the key messages from today's review. Our continuing operations delivered solid performance in Q2, keeping us on track towards our full year goals. Results were supported by solid storage revenue growth and improved profit performance in our International business. The quarter revenue growth was 5%, with business trends largely consistent with those that we discussed last quarter. Storage revenues increased 6%, or 3% on an internal growth basis. Global record management net volume was 2%, supported by solid gains in International markets and positive growth in North America. Service revenue internal growth was 1% as strong gains in hybrid services as well as benefits from higher paper prices and increased fuel surcharges offset continued weakness in core service activity levels. Profit and cash flow performance was solid and in line with our expectations, supported by strong gains in our International segment. Adjusted OIBDA was $227 million, up 2% on an operating basis excluding $10 million of fees associated with the recent proxy contest. Adjusted EPS was $0.29 per share, including the $0.03 impact of the $10 million in proxy fees, and free cash flow was $140 million on a year-to-date basis. Our full year guidance for our continuing operations is very similar to the outlook that we shared in our Q1 conference call. We are revising our guidance to reflect the discontinued operations treatment resulted from the sale of our digital businesses and the expected divestiture of our New Zealand operations. The results of these 2 businesses have been removed from our P&L results and collapsed into a single line, labeled income or loss from discontinued operations. All of our historical information has been restated to reflect this presentation. Attached to this presentation is an appendix that contains a table which lays out the impact of discontinued operations in our previously reported Q1 results. In our full year guidance, we've also refined our outlook to reflect current commodity price levels as well as impacts from stranded costs related to the digital divestiture. Let's now turn to Slide 4 and begin the review of our financial results. Slide 4 compares our results for in this quarter to the second quarter of 2010. Please note that all the periods presented have been restated to reflect our discontinued operations. Overall, Q2 was a solid quarter, with performance keeping us on track towards achieving our full year financial goals. Enterprise revenue growth was 5%, supported by internal growth of 2% and benefits from favorable FX changes and recent acquisitions. Enterprise revenue gains reflected sustained storage revenue internal growth of 3% and global expansion of hybrid services. Higher fuel surcharges and recycled paper prices also supported revenue growth. These gains offset continued softness in core service activities. From segment perspective, North America posted 1% internal growth, supported by consistent 2% storage internal growth. Service revenues were up slightly in Q2 in North America. Service growth continues to be constrained by softness in retrieval and refile transportation and data protection handling activity. These impacts offset strong gains in hybrid revenues and benefits from higher commodity prices. As noted in today's press release, our Q2 results, specifically North America, include a $6 million revenue adjustment for the estimated cumulative impact of complex retroactive pricing adjustments involving a unique 5-year customer agreement. We've excluded this adjustment from our internal growth calculations as it relates primarily to prior periods and doesn't accurately reflect the current trends in our business. Our International segment generated 4% internal growth in Q2. Storage internal growth remains strong at 5%, supported by solid gains in Europe and sustained double-digit gains in Latin America and Asia Pacific. These gains were augmented by expansion in hybrid service revenues. Total service growth was constrained by lower complementary service revenues, due primarily to the winding-down of a large European contract. Reported revenues for this segment were 19%, including benefits from favorable foreign exchange, rate changes and recent acquisitions. Overall, we continue to post solid comparable profit gains in line with our expectations. Gross profits grew 5% in Q2, yielding a gross margin of 59.2%, consistent with Q2 of last year. Both storage and service gross margins were flat compared to the prior year. With in-service gross margins, gains from factors such as higher recycled paper prices were offset by the business mix impacts and declines in core service activity. Adjusted OIBDA was $227 million, up 2% excluding $10 million in costs associated with our recent proxy contest. Gross profit gains were offset by planned year-on-year increases in North America sales and marketing expense and normal incentive compensation accruals compared to low prior year levels. Below the adjusted OIBDA line, depreciation was $73 million and amortization was $7 million, and other expense for the quarter was $3 million. Adjusted EPS for the quarter was $0.29 per share, including a $0.03-per-share impact of the proxy cost recorded in the quarter. Reported EPS for the quarter was $0.32 a share, reflecting the benefit of a lower effective tax rate and fewer shares outstanding. Structural tax rate for the quarter was 39%. Expect the structural tax rate for 2011 as a whole to also be about 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, divestitures and foreign exchange. Also presented are the revised Q1 and full year 2011 growth rates reflecting our discontinued operations. As noted, overall revenue growth was 5%, on track with our full year growth outlook. Storage internal growth was sustained at 3%, reflecting consistent underlying trends. North America reported 2% internal storage growth, and International growth remains solid at 5%. Net global records management volume growth was about 2% year-on-year in Q2. I'll break down key drivers of this change as part of today's review. Pricing trends also remain consistent, with net pricing gains of about 2% in North America Records Management. Total service internal growth was 1% compared to 0% growth in the first quarter. Core service internal growth was flat in the quarter compared to down 1% in Q1 as higher fuel surcharges and strong growth in hybrid services offset continued weakness and core service activity levels. Complementary service revenues, which represent about 12% of total revenues, increased 4% internally in the quarter. Results reflected benefits from higher recycled paper pricing, which offset lower fees from customer terminations, and lower project revenue. Let's now turn to Slide 6 to review global volume growth trends. Slide 6 shows key drivers of global records management volume for the last 3.5 years to give you a sense of volume growth dynamics following the financial crisis. The chart shows annualized changes in quarterly record management's volume as a percentage of beginning cubic feet, related to new sales and volume growth from exiting -- from existing customers, offset by outgoing volume, or churn. Overall, global records management volumes have stabilized following impacts from the economic contraction. Global volume growth was about 2% year-on-year in Q2, similar to trends in recent quarters, with gains supported by growth in International expansion markets. By region, North America volume was up modestly year-on-year. We're seeing the benefits from our increased focus on new sales supported by targeted investment. We're also seeing moderation in factors such as permanent withdrawals and terminations. On balance, volume is solid in North America, and we're making progress in building new sales momentum that will offset secular impacts and sustain the high-return North America annuity over the long term. International growth is continuing at a solid pace, with volume up nearly 6% year-on-year. We saw year-on-year volume gains across all regions, with overall gains supported by strong growth and expansion markets like central Europe and Latin America. On a global basis, total churn remains stable. We expect quarterly fluctuations on this front, driven by episodic customer actions, and overall, these impacts have settled into a stable range. In some, our storage annuity is solid and growing, and our investments and long-term strategy are aligned with expanding this annuity, driving attractive incremental returns. Let's move now to Slide 7 and review our results on a year-to-date basis. Slide 7 looks at our year-to-date operating performance compared to the first half of 2010. Again, all periods presented here have been restated to reflect our discontinued operations. As we noted, our Q2 results keep us on track to achieve our full year financial goals. For year-to-date, revenue increased 4% to $1.5 billion, gross profit increased 4% to $882 million, yielding a modest improvement in gross margin. Adjusted OIBDA were 2% year-on-year, excluding the $14 million of costs associated with the proxy contest. Adjusted OIBDA growth was also impacted by planned investments in North America sales and marketing, the higher levels of incentive compensation compared to last year. Adjusted EPS was $0.56 per share, including a 4%-per-share impact from the $14 million of costs related to the proxy contest. Excluding these impacts, adjusted EPS is up 7% year-to-date. Capital spending was $73 million, including $9 million for real estate, in line with our full year plans. Free cash flow for 2011 is $140 million year-to-date, down slightly from last year's levels due primarily to timing impacts on working capital items, including taxes and prepaid assets. These impacts more than offset higher income from continuing operations and lower CapEx. We remain on track for a strong free cash flow performance this year. Let's now turn to Slide 8 to review our results by segment. Slide 8 shows key metrics for each of our 3 segments for the first half of 2010. Consistent with our plans, we're sustained high returns in our North America segment as we build momentum in our International segment as a driver of profit and cash flow gains. North America continues to deliver high profits and strong cash flows. Reported revenues year-to-date have increased 1%, supported by 2% storage revenue growth. Looked at the North American results, we're impacted by the $6 million revenue adjustment described earlier. Adjusted OIBDA margins in our largest segment were strong at 42% on gross margin gains and controlled support overhead spending, which offset planned investments in sales and marketing. As noted earlier, these investments are key to sustaining the high-return storage annuity which drives North America returns. Capital efficiency continued to improve, with CapEx as a percentage of sales decreasing to below 4%. Our International segment continues to post solid revenue growth and improved adjusted OIBDA and cash flow gains. External growth for the first half was 4%, driven by continued strong storage internal growth of 6%. Year-to-date adjusted OIBDA exceeded revenue gains, growing 17% on a reported basis or 10% excluding FX impacts. Q2 International adjusted OIBDA margins increased 110 basis points compared to prior year levels. These gains were driven primarily by realized benefits of operational excellence initiatives in our U.K. business. We continue to target strong improvement in International margins in 2011, supported by operational improvements in the U.K. and profit gains in expansion markets. Finally, the increase in corporate expenses primarily reflects $14 million of onetime costs associated with the proxy contest. Let's turn to Slide 9 to review our progress with respect to our debt portfolio. Our balance sheet remains strong, reflecting the improvements in our cash-generating capacity and debt portfolio. Currently, our consolidated leverage ratio was 2.8x, at the low end of our target 3x to 4x leverage range. We're well positioned in terms of cash and financing capacity. At quarter end, liquidity was approximately $1 billion, with $271 million in cash, $718 million in additional borrowing capacity under our revolver. This includes the benefits of the net proceeds from the digital sale. During the second quarter, we refinanced our senior credit facility, securing a $725 million revolving credit facility, $500 million in term loans. These facilities mature in June of 2016. Our debt portfolio remains long and fixed. Our weighted average interest rate was just over 7%. We're 83% fixed at quarter end. Maturity is nearly 7 years with no bond prepayments due until 2014. Strength of our balance sheet reinforces our confidence in advancing the shareholder payout commitments outlined in our strategic plan. Let's now turn to Slide 10 to discuss our progress on this front. A key component of our midterm strategic plan is our commitment to significant shareholder payouts. As a reminder, we've committed to $2.2 billion of payouts through 2013, including $1.2 billion by May of 2012. In Q2, we advanced key elements of our plan to meet those commitments. In June, we increased our quarterly dividend 33% to $0.25 per share, or $1 on an annual basis. The quarterly dividend is the foundation of our payout approach. It's now at an appropriate level, and we expect to increase it over time as our earnings and free cash flow grow. In Q2, we also increased our share repurchase authorization by $815 million to an aggregate total of $1.2 billion. As of the end of Q2, we've purchased a total of 5.1 million shares for an aggregate of $122 million. Although we do not repurchase any shares during the second quarter, we did implement a $250 million prepaid variable share repurchase program. This program is expected to be concluded in early August, at which time we will receive and retire the shares acquired on our behalf. We expect to retire between 7 million and 8 million shares through this program, which represents about 4% of our total shares outstanding. At the completion of the prepaid repurchase plan, we will have $828 million remaining under our existing share repurchase authorization. At current prices, this represents about 12% of our market cap. We also have significant incremental borrowing capacity as our leverage ratio stands at 2.8x at the end of the second quarter. Over time, we intend to increase our leverage at the midpoint of our target 3x to 4x range, consistent with our strategic plan. Strong cash flow and financing capacity has us well positioned to deliver substantial payouts to shareholders. Let's now turn to Slide 11 to discuss our full year outlook. Slide 11 summarizes our full year 2011 financial guidance. As noted, we're revising our guidance to reflect the discontinued operations treatment of the sale of our Digital business and the expected divestiture of our New Zealand operations. We're also making a modest revision to our revenue guidance to incorporate current commodity price levels. Let me take you through the components of the outlook. We expect our full year revenues to be in the range of $3,040,000,000 to $3,090,000,000, up 4% to 6%, or up 2% to 4% on a constant currency basis. The outlook results in a reduction of $188 million at the midpoint of the range from our last guidance, primarily reflecting the elimination of the Digital and New Zealand revenues, partially offset by modest positive revisions reflecting the higher commodity prices. After adjusting for discontinued operations, our outlook for adjusted OIBDA is to be in the range of $916 million to $944 million. This range represents reported growth of minus 2% to plus 1% and includes planned incremental sales and marketing investments and a return to normal incentive compensation levels, compared to low levels in 2010. Our outlook for adjusted OIBDA from continuing operations is consistent with our last forecast shared in the Q1 call. Modest positive impact of higher commodity prices on revenues is being offset by stranded costs in connection with the sale of the Digital business as well as higher fuel costs. Included in our adjusted OIBDA outlook is $15 million of advisory and onetime fees associated with our recent proxy contest or reduced overall growth by about 2% this year. Our current outlook is for adjusted EPS to be in the range of $1.19 to $1.27 per share. This is an increase of about 3% from our prior guidance, reflecting accretive benefits from the digital divestiture. This outlook also includes the $4 million -- $0.04 negative impact from proxy-related cost. The forecast assumes 202 million shares outstanding. This reflects the level of shares outstanding at the end of Q2. It does not include the impact of the $250 million prepaid variable share repurchase program, which was not completed in Q2. Adjusted EPS would benefit by about $0.01 to $0.02 per share if we receive the 7 million to 8 million shares we're expecting at the completion of this repurchase program. G&A is expected to be approximately $324 million, and interest is expected to be approximately $199 million. The CapEx outlook of $230 million reflects the impact of discontinued operations and includes about $20 million for real estate spending, an increase of $5 million related to a new opportunity. Our free cash flow outlook remains strong, with projections in the range of $370 million to $405 million. In summary, Q2 was a solid quarter, and kept us on track towards our full year goals for improving revenue growth, continued strong profit and cash flow performance. Thanks, and we'd now be happy to take your questions.

[Operator Instructions] Our first question comes from Kevin McVeigh of Macquarie.

Brian, could you give me -- remind us of the split of the Digital impact between the Storage business and service? Is it all in storage or service, or is it a combination of both?

It's a combination of both, Kevin. So we had -- keep in mind that the -- there certainly was a storage component to it, but particularly for the backup businesses, the archiving business, but the eDiscovery business was -- much of that would be under flow through or competitor -- complementary revenue line. So it was a mix.

And was it kind of 70:30, 60:40 in terms of percentages, or...

Why don't we get that for you, and we'll comment on it in a moment. We'll just look that up for you.

Super. And then I just wanted to spend a minute, if we could, on kind of the capital structure. Given the strength of the balance sheet on a go-forward basis, it still seems you're pretty well geared towards fixed debt, things like that. And just given the strength of the free cash flow, is there any difference in terms of approach as you think about uses of free cash flow on a go-forward basis or the leverage on the balance sheet? I mean, I know you've tweaked that the leverage ratios a little bit more recently, but just given the strength of the free cash flow on a go-forward basis, how are you thinking about that capital structure?

Kevin, this is Richard. I think when we put forth our 3-year plan, you'll note that we -- that part of that plan is increasing our leverage to the midpoint of our range, to approximately 3.5x from about 2.8x, a little under 3x now. And I think that's a comfort level we have to operate the business, and that's the level in which, between that increase in the level and our free cash flow, we're going to distribute the $2.2 billion of cash over the next 3 years. And so, I think we're sort of set for how we're going to use free cash flow and leverage for that timeframe. Having said that, we'll always reevaluate, and we do reevaluate our capital structure from time to time. We are a business that, if you look out in the future, should generate substantial free cash flow and should continue to be able to distribute substantial cash to our shareholders over a long period of time. We've also spoken that we would be -- have interest in acquisitions in our core space, and there are acquisitions out there. By and large, they're relatively small, and by and large, we will do them if they make sense to us from a return on investment basis to help accrete returns, so it's if there are very good financial attractions. They're not things that we would consider to be strategic, okay, so to speak. And there's a couple of larger relative to the physical business that are rumored hanging around out there, and we don't know if they're out there or not, and we would have to see what our appetite would be for pieces or parts or all or none of still some kind of things. But net-net, none of those, nothing we would think about will get in the way of our commitment to distribute the $2.2 billion nor should it get in the way of our ability to distribute significant cash flow beyond the 3-year time period.

Then, Kevin, let me -- I just have a couple of comments on. First, answer your question, it's a 70:30 split, 70% storage. And I think at the beginning of the question, you asked about fixed and variable interest. We're a bit higher than our ideal range. I think over time, in terms of fix floating, we've got a very annuity-based business that aligns well with the fixed commitment structure on debt, but I think over time we probably will be looking to have our fixed component more in the 70% to 80% range, but I think we're comfortable what we are currently, and that's an opportunity for us over time.

Our next question comes from Andrew Steinerman of JPMorgan. Andrew Steinerman - JP Morgan Chase & Co: You did start talking about core service, and we're back to flat, and I definitely heard the fuel's charge is helpful here. Could you just go over the trajectory for core service, and is this something that it's pickup and delivery we can't really influence, or is this something that we can influence?

Andrew, it really was more similar than different. Fuel gave us about a point in growth on the -- actually 2 points of growth on the core service line in the quarter, it was 1.5. So if you adjust for that, it really was very similar to the numbers we had in Q1, so I wouldn't point to this as a change...

And Andrew, by nature, the we separate our services for communication purposes between core and complementary is the things that we put in the core are services that we cannot influence. These are specifically demand-driven by customers' activity. You can't make them retrieve a file or box or tape or call us to shred a bin or so forth. That's totally related to their activity. The kinds of revenues we put in the complementary services category are the kinds of things we can go out and stimulate the sale process and so forth. And that is in fact why we define them that way. Andrew Steinerman - JP Morgan Chase & Co: But Richard, I've heard you say new boxes are more active, and so as you're able to ramp up, new boxes, they should influence core.

I think that's true. But remember, the denominator is so big, and there's always a time lag thing kind of thing, we haven't seen it yet. I fully expect, to be clear, that the core service softness trend we see will change. And I expect there are 2 or 3 things going on in it, and they'll change, and I expected it'll at least flatten and maybe rise a little bit off of a so-called new normal in a certain position. We just haven't found it yet.

Our next question comes from Gary Bisbee of Barclays Capital.

I guess, just first, what were the tax consequences of the Digital sales? Is there a big tax hit, or is most of that proceeds flowing through?

Yes. No, we did have a tax impact. I think the cash tax payment was over $50 million, and that's reflected in the discontinued operations.

Okay, and then with the International, I think I heard you say volumes were up 6%, but the internal growth was up 4%. Is that, that part of the volumes were from the small M&A activity, or is it more just that the service areas were weaker than the core storage?

I'm trying to follow your question. The difference between the 6% to 4%, or are you trying to get color on the 4%?

No. Difference the 6% and the 4%.

We did have some acquisitions. We had Poland in there, and some [ph] acquisition in Greece as well. So it was acquisitions, and the overall numbers, they were solid. We had a 5% storage internal growth. The service number was down a bit. We were lapping the high project revenues in Europe, specifically in Italy last year, and that was constraining the number a bit.

We had a major project in Italy that wound down. That's the kind of revenue that will show in our comp services stuff, which, as you know, can be pretty lumpy at times.

And then just the last question, I guess, any commentary on why you didn't repurchase stock? Was it just sort of when you were -- when you either had...

We entered into this prepaid variable repurchase program, and the way that works is we do an upfront payment commitment with banking partners, but it doesn't get -- until it gets completed, it takes 2 to 3 months to complete the program, the shares don't get delivered. So effectively, we did repurchase $250 million, and it will be done in the coming days.

We just haven't gotten the final accounting and delivered the shares. Therefore, we don't reflect it through our numbers.

Right. So it doesn't show up in Q2. But that was what the 7 million to 8 million share reference was, that's effectively what was repurchased in the quarter.

And if we enter into such a transaction, which we did, we are otherwise not trading in the market around it.

Yes, okay. But some of the volume in the quarter was them buying the stock on your behalf. You just haven't shown that in your numbers yet?

Yes, that's correct.

And by the way, it's a little bit of a black-box process. They don't really tell us what's going on. You don't really know till the end. So we're making estimates.

Our next question comes from Andrew Wittmann of Baird. Andrew Wittmann - Robert W. Baird & Co. Incorporated: Just to, I guess, jump on that last question a little bit more, still there's, I'd say, kind of a fair ways to go until getting to the $1.2 billion first hurdle here. You guys are saying you're generally on track, but it looks like things are going to need to accelerate. Can you just talk about, I guess, your plan from here? And would you consider another one of these accelerated share repurchases again? Or are you able to tack on another one of those again after this first $250 million is done?

We're not able to do anything until it's done. And we have considerations on what we've got to do next, and shortly, we'll be discussing that with our committee and our Board as to the next step. And there's other backup plans in place and so forth. It's a fairly complex process you have to go through. As you recognize, we can't do anything until we get on open window of clear sky, blue sky insider knowledge perspective whether we can put a program in place or not. So I don't think we can comment on exactly which tools we will use, except to say that it's our expectation to continue and stay in the market on a fairly regular basis. And your comment that we might be behind, we don't see it that way. When we map it out, I'd say we're right pretty much on plan and trying to do this on a fairly consistent, steady basis.

Out of the $1.2 billion, you've got about $200 million covered by the dividend and the variable program, and the first step was $250 million...

So we got $750 million to go.

And we feel we're on good track.

And recognize, I know this is obvious, but I have to -- I want to continue to repeat it, is the $1.2 billion is an artificial date that we agreed to, and we will commit to doing it. But we've also agreed and committed to another $1 billion to find it. So we're not trying to push to a first year date and then wrap it up and walk on. This has got to be a continuing way of life for us. I just threw this 3-year period because we said earlier, we expect to have significant free cash flow in the fourth, fifth, sixth, seventh, eighth, tenth, and twentieth year. And in all scenarios, we can see a substantial amount of cash flow excess of the business needs. In other words, we're not starving the business. We want to make sure the business is well taken care of, but in excess of the business need, we will be returning cash to shareholders. And therefore, when you've got that significant amount of capital, we're trying to do this in a pretty programmatic basis, trying to make sure we don't make any big mistakes. But you know, we're not just trading in and out and so forth. So you'd expect to see a lot of steady distribution here. Andrew Wittmann - Robert W. Baird & Co. Incorporated: And just then just on the view of International disposition potential, you kind of mentioned, Richard, that the process of evaluating what might go and what might stay is done. Can you give us maybe a bit more insight, not specific markets, obviously, but maybe in terms of maybe a range of total capital proceeds that you might expect to see with which you've identified so far?

Well, the process -- I wouldn't want to say we made final decisions. I guess what I'm saying is I've seen enough analysis. They have a pretty much gut for what's going to happen, how's that? And in fact, we're going to review a lot of that with our board coming up, so we've got some final work to do. But the short answer to your basic question was, is this going to be a significant series of capital-raising events? The answer is no. There's more opportunity in our portfolio to focus the strategies and drive improvement, and we're going to, by and large, continue doing that.

[Operator Instructions] Our next question comes from Shlomo Rosenbaum of Stifel, Nicolaus. Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.: I just want to ask, it's been about 3 months since you laid out the targets as to what I think you'll do over the next 3 years. I was wondering from an operational perspective, internationally, do you guys feel better about the opportunity to increase the profitability of that business, or do you feel the same or do you feel worse? In other words, after 3 months of review, where do you stand in terms of the confidence of being able to do that plan?

We feel very good about it. As we noted in the quarter, the International profit improvement was a key driver of our results. We had margins up year-on-year 110 basis points. We're on track for about a 200-basis-point improvement this year, which is consistent with what we talked about. That doesn't reflect changes in our portfolio. So there may be opportunities that emerge from that. We've continued to advance the plans with the team, we feel very good about it. The growth remains solid. The business is performing well. So I feel confident that, that's going to be a key driver of results, and we're on track for our plan. I'd also highlight just overall in the company, if you take out the proxy costs, at midpoint, our margins outlook for this year, adjusted OIBDA I think is just shy of 31%. So we're moving well towards the 32%. It was one of the benchmarks we put out there as a goal by 2013, and International's going to help us to achieve our goals in International that'll put us on good track for that objective.

I'd like to stress that your question is, we're into it 3 months, how do we feel about it? It leads me to believe that you might be thinking about it wrong, and so let me -- from our perspective, at least. And that is, it's not like we woke up 3 months ago and fired a gun and said you guys take a big right turn. We'd actually been working with International and developing the plans of that well before we made these announcements. And in fact, they already had a head start on a lot of the work, which is why you're seeing 150 basis points coming up this quarter. These are not the kind of things where you can just do them overnight. They take a lot of prepping, and if you go back and listen and look at our numbers, you'll see us talking about investment in International prior to this. As I said, their whole business plan for this year already had the 200 basis points in it, because we'd already started them down that strategy and that path. The other thing here that is the shift in International, though, is the International had some initiatives in the projects going partially related in the hybrid business and so forth, trying to drive and build some growth platforms for the future that were not panning out as fast as we thought. And we've asked them and refocus that, and they have, and that's part of and will help contribute to this sort of stuff. And it's part of just focusing international on, again, on the core business, just like we've done in North America. Let's look less at shiny objects and look more back at our core business, because the sense we have come to understand was that we are walking past the core business just a little too fast and leaving good opportunity, good return opportunity on the table and not going after it aggressively. And I think if you go out and talk to customers, if you go out and listen to the marketplace, I think you'll hear is Iron Mountain is awake again in the core business. And that's what I want them to hear, and that's what we want to do, because there's good business out there, and it's a big battleship, takes a long time to turn. But it's turning. Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.: And just in terms of the divestiture potential internationally, I wasn't clear as to whether you were saying that there are further potential divestitures or you're saying that New Zealand is pretty much it.

I won't say New Zealand is pretty much it. I won't be that definitive. What I am saying is anything would occur won't be significant, okay, in terms of financial impact.

The question was directed at is this going to be a major source of fund?

No, it will not. Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.: I'm looking besides source of funds in terms of just margin improvement potential.

No, I don't think you'll see -- I don't think the portfolio view is going to have big shifts of margin. The 700 basis points we're going after is going to be the big shift in margin. I don't know that that's all, by the way, but for the next 2.5 years, it will be the big shift. Look, and I guess, I would tell you, though, that as much as I've said we've been working a lot on this before we announced it, I guess I would stress one thing. We didn't hold back anything. We don't have a lot of money in our pocket. Not a lot of -- we've got some reasonable cushion here, don't get me wrong. We're not totally crazy. But we came forth and said, "Look, these are the things you can do." And everybody stretched and feeling stretched pretty good. Everybody's saying they think they can do it, but there's nobody got a lot of sandbag, and I don't have a big bucket of capital of earnings in our pocket that we can dump out and protect ourselves with. We'll continue looking, and there may be some other good opportunities, we'll go looking for it. But this is the plan we expect to execute and we will execute, and we'll deliver the cash, and we'll still have a good business at the end and continue delivering cash after that. That's what we want to do, and I think we're pretty comparable we can do that. Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.: And then kind of a housekeeping. In terms of the share count for next quarter, should we assume the 7 million to 8 million goes out over the 2 months of the quarter? Is that a fair way to do it for weighted average?

Yes, well, we're expecting it to conclude in early August. So, that's midpoint, I guess, for the quarter. Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc.: Okay, and then in terms of the talk about strategically trying to monetize the real estate assets. I understand there's a special committee out there. I just want to know if there have been -- I'm obviously not looking for definitive answers on anything, but are there a lot more ideas beyond just the reconversion that have been coming up?

Yes. There is a variety of ideas and structures. They fall into -- they tend to fall in some very unique categories, which I won't go through with you, okay? But we're in a stage of value generation. I mean, we're actually running a formal process. We've had lots of meetings, interviewing lots of advisers. We started to choose advisers to help us. We are going to spend some serious money on this, which is why we're going to tell you about it each quarter for a couple, few quarters till it's done, because it is a onetime kind of event. But yes, there are some ideas, and they have -- as I predicted earlier, they all come with a range of benefit and range of complexity and a range of risk. But it tends to work out those with the highest risk -- generally those with the highest risk generally have the highest complexity and generally have the highest benefit, okay, as you might expect. But yes, there's a range of stuff that we're looking at. And we will narrow that down. We're going through a process of narrowing it down and then focus on a best view, if I might say. And I don't know how many will be in the best view category, and really try to drive them to the ground and see if they makes any sense. Unfortunately -- you can make a decision on some of them fairly quickly that don't make sense or that won't work or anything else. But some of them, the devil is absolutely in the details, and there's an enormous amount of assumptions and modeling and people to talk to and so forth, and we're going through that.

Our next question comes from Scott Schneeberger of Oppenheimer. Scott Schneeberger - Oppenheimer & Co. Inc.: A couple -- I'll try and be quick. The first one, just following up on the outsource share repurchase program. Do you guys intend, once that's completed in early August, to press release and mention your intention for what comes next? Or do we wait until the third quarter call there?

To a degree, it depends on what we decide to do. I would say that there's a few different tools here, and some things may result in a public announcement, but look, if we're doing things like open market purchases or 10b5-1 programs or things like that, our practice is not to comment on that. So I think what you should take away is that we've got a -- we are executing against the payout plan. We're making good track, and we're committed to delivering against it, and you should expect us -- the share repurchases, we said all along, is our preferred tool, and we'll continue to evaluate that. But we may or may not do a press announcement. Scott Schneeberger - Oppenheimer & Co. Inc.: And then 2 more, and I'll ask them both up front. In core storage, could you just comment on pricing, just the competitive environment you're seeing there and how that's evolving? I think you mentioned North America plus 2% year-over-year. Just thoughts there. And then the second question is, with regard to core services, I think you mentioned you have 2 or 3 things going on there. I'm particularly interested in destructions, I think you said, have stabilized. But if we can just go a level deeper on both of those topics.

Pricing, similar, plus 2%. As we mentioned, North America Records Management, that's where we've been. That's pretty much what we've got in our planned numbers as well, and so feel good about that. When you mentioned that churn has stabilized, that the combination of destructions, permanent withdrawals and terminations. Destructions are in a similar range. That will bounce up and down. It's driven by customer events. But it's been more in a stable range, similar range in recent quarters. We have seen some improvement on permanent withdrawals and terminations, reflecting we've got a real focus on customer service, and...

And that improvement, by the way, is a reduction in the rate of terminations and withdrawals, which the positive is, is your storage balances are higher. The negative is you don't recognize the service revenue in a fairly good service line.

It's about 7% globally, not all that different by region, to be honest with you. And it seemed to be in a similar range. So it's stable. I wouldn't be signaling improvement. Scott Schneeberger - Oppenheimer & Co. Inc.: And one more quick one, if I can sneak it in. The $6 million revenue impact from the complex repricing, is that -- any more color there? And is that something that we may see occur again, or is that really a onetime thing?

No, that absolutely should be a onetime thing.

So thank you very much. We appreciate your joining us this morning. As I said in the beginning, this was a good quarter. I do want to clarify a statement I made earlier, for those who haven't figured out, I don't really have too much of a script here. I'm pretty free-form, so I'd sometimes trip up in my words. As I was talking about the foundational dividend, and I made the statement that not necessarily grow with free cash flow, I don't want to imply that we're not intending to grow the dividend. We absolutely -- it is our intent. But you can expect that it's our intent that as our business continues to do well, our dividends will continue to rise. So I just want to make sure that nobody read that as a change in intent and change in the outlook and so forth. But other than that, as I said, it's a good quarter, and we hope and believe the rest of the year will show similar kinds of result as we go forward. Our business has stabilized, and we're now looking forward as we focus on the core to really making this thing hum, and I think we'll be able to do that. So again, thank you very much. I hope you enjoy the rest of your summer.

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