Iron Mountain Incorporated (IRM) Q1 2012 Earnings Report, Transcript and Summary

Good morning. My name is Anita, and I will be your conference operator today. At this time, I would like to welcome everyone to the Iron Mountain Q1 2012 Earnings Call Webcast. [Operator Instructions] Thank you. Mr. Golden, you may now begin your conference.

Thank you, and welcome, everyone, to our 2012 First Quarter Earnings Conference Call. Joining me this morning are Richard Reese, our Chairman and CEO; and Brian McKeon, our Chief Financial Officer. After their prepared remarks, we'll open up the phones for your questions. Per our custom, we have a user-controlled slide presentation at 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 2012 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 would like to introduce our Chairman and CEO, Richard Reese.

Thank you, Stephen, and good morning. And thank you, everyone, for joining us. As you've seen from our press release this morning, our business performance is really pretty clean and as we forecasted, and since we spoke about our business to you only about 2 months ago, maybe with a little luck, this call may be shorter than usual. But we'll get started, and let's see where it takes us. But before we get started and deep dive into the business, I want to update you on the status of our special committee work. The progress is ongoing, and we will meet our commitment to report the Board's conclusions and rationale for its conclusions no later than June 9. Since we're close to reaching a conclusion, we will not be entertaining any questions on this topic today or in any future meeting until we come forth with the final answers. So having said that, I realize that may disappoint some of you, but we are getting down to the short strokes, and we're going to have to keep anything close to our vest, and I realize many of you will try to ask questions or want to ask questions to try to get some insight to how we're thinking about it, but we're just going to have to be pretty disciplined and basically, we're not going to answer them. So just be prepared for this. One year ago, I returned as CEO, and we announced the new 3-year plan, which was focused on driving returns on capital and returning capital in excess of that required to operate our strategy to you, our shareholders. We have made excellent progress in all fronts. At the time, I committed to giving you a report card on our progress against our plan, and since we are one year from announcement and nearly halfway through execution, I'll review our progress on this plan and its impact on our business. But before I do that, let me make a few comments on the quarter. As I said in the beginning, performance showed consistent trends. We operated as planned. Total revenue on a constant dollar basis grew at 1%, and adjusted OIBDA grew at 2%. Without the impact of the declining in recycled paper prices we've been speaking to you about for a couple of quarters, total revenue would have been up 2%, and adjusted OIBDA of up 4%, as paper is a 1% drag on revenue growth and a 2% drag on adjusted OIBDA. FX is a 1% drag on both of those, by the way. Our team is executing well, and the underlying business trends are consistent with what we've seen over the past several quarters. We continue to focus on sustaining our annuity revenue stream driven by storage over the long-term and believe that we can maintain a low single-digit growth rate in annuity revenues over the long-term even in the face of the secular trends on the activity and use of physical information. Storage growth was up 3% in constant dollars for the quarter. This is 2% coming out of North America. International had a very strong 7% constant dollar storage growth. And as you know, storage is the annuity flywheel. It is the foundation of our business. It is -- out of that is what's all good things are derived because it's the beginning of the relationship and the center of the relationship with our customers and then also drives the majority of our margins. Storage gains were partially offset by a service revenue decline of 2% in constant dollars. Activity trends remain the same. Our core service where these activity trends are shown, though was a positive 1% in constant dollars. Activity-based core service revenues were down moderately in North America and consistent with the past. But this impact was offset by strong international gains and by strong global growth in hybrid revenues. Comp services were down 9%. This is driven primarily by paper, which was down 31% on a price basis for the quarter from last year. And paper is expected to remain a headwind throughout the year. Paper -- the impact of paper though, is partially offset by some improvement in project revenues and some of our other core service lines. Profit's performance was strong for the quarter. Adjusted OIBDA margins were up 40 basis points. International adjusted OIBDA increased 15% on constant currency basis with margins up 200 basis points. And I'll talk more about this later. North America did as we asked and sustained their strong margins even in a headwind of some mix of businesses and recycled paper prices being down. As you know, it's a very strong margin business, at 41% adjusted OIBDA margins. So Q1 was a good start for the year and in our business, if you start behind in the beginning, it's almost impossible to make it up, but if you get off to a good start, the year looks pretty good. And we remain optimistic for the year because we've had a good start. So now let me shift gears and talk to you a little bit about this strategic plan and where it's leading us, and so forth. As I said one year ago, we announced the 3-year strategic plan and made certain commitments to you. 2011 was the first year of the operating plan, and it runs through 2013. And the strategy featured 3 key elements: First is a refocus on our traditional physical storage and services business, which was primarily impacted in North America. And as you know, we sold our digital services business to Autonomy for $390 million last year. In North America, which is our largest business, our plan is and remains to be to build out on our market leadership position and to invest to sustain this business for the long term. It has a consistent storage growth of about 2%, sustained strong margins of 41% and good capital efficiency delivering an after-tax return on invested capital of about 15%. This is a high return business and our goal is optimize it by investing for sustainability. Continuous margin expansion is offsetting service headwinds and funding incremental investments in support of the annuity. In 2011, we increased sales and marketing investment by about approximately $20 million. It takes time for an increase in investment of this type to share results, but we believe we're seeing a return on investment in excess to 15% on our sales and marketing investments. We're seeing a slight uptick in unit growth, the storage on the margin and expansion of other services helping offset the core service trends. We've shown that if we can increase the input investment, we can get a good return. And we'll likely make several investments from time to time in the future where we see a clear path to returns. Additionally, one change we're seeing in North America since we announced our plan is an increase in acquisition opportunities that we may take advantage of from time to time. We have a particularly strong network to acquire into and realize significant synergies from and therefore, great returns on invested capital. We will be disciplined as we look at these opportunities, and they will all be return on investment capital-focused, not "strategic". Now let me shift and talk about the second leg of our strategy, which was our International business, where our focus is on driving returns from our previous investments. We have the leading information and management services company internationally. The business has good growth, currently 7% storage, and which is the foundation and 5% total. And our portfolio as a whole, achieved good returns beating our hurdle rates through our work we did last year. We built this business using footprint strategy to acquire critical mass for customer coverage and to expand our access to future high-growth markets. In doing so, we have a mix of businesses on our portfolio with varying levels of performance, and as part of our strategic plan, when it took -- undertook a strategic review of all of our business units and developed strategies to drive returns based upon certain criteria. Our analysis show that being a market leader is the key to driving great returns. In our International markets, where we have a leadership position, which is the majority of our markets, our margins and return on invested capital are in line with those of North America. Our analysis also showed that in 8 markets where we are not leaders, we need to develop plans to improve performance and drive returns up. For 6 of those 8 markets, France, Germany, Spain, Australia, Hong Kong and Singapore, we have plans that are already bearing fruit, and we'll be bringing them in line with our expected returns by 2013. And in 2 markets, New Zealand and Italy, we decided to exit, and we're executing on that strategy, one we've completed and the other, we've almost completed. The last category in our portfolio is the BRIC markets, where we currently have small but fast-growing businesses. We expect to invest to achieve market leader position where we can do so at attractive prices. More on this in a minute. The International business portfolio performed very well with strong margin accretion of 200 basis points in Q1. This is on top of 220 basis points of margin accretion last year, and puts us on target to get the 700 basis points of improvement we planned for by 2013. Last year, the focus and the margin accretion came primarily, the 220 basis points, out of the optimization of our biggest International business, the U.K. This year, the focus is in Western Europe and Latin America, where we're taken the same playbooks we used in North America, and exported those to the U.K., and now exporting those into LatAm and Western Europe, and it's already showing great results, as I said it, 200 basis points in Q1 of this year. So we're off to a good start on the International, and we're on track for the full year there also. As I've said, investing in high-growth markets to achieve market leadership is a key component of our International strategy as market leadership drives returns. Consistent with this strategy, we acquired Grupo Store based in São Paulo, Brazil in April. The purchase price is approximately $80 million, and this is a business with approximately $30 million in revenue growing at double digits. It's a good, solid, clean business with great fold-in synergies with our existing platform in Brazil, which we will realize over time. We're breakeven for -- on this on this business on a contribution basis in 2012 due to integration costs, but we expect over the 24- to 36-month timeframe to see this to drive great returns. It has strong revenue growth, and expected post-integration margin expansions will help us drive both strong continued growth and returns beyond this year. When combined with our existing business in Brazil, we will become the market leader in this important emerging market. It's a large market, already estimated to be approximately $1 billion market potential. There's a very active group of competitors pushing the outsourcing conversion trend. We estimate that even with this consolidation of these 2 businesses and the market leadership position, that we have less than 10% share of market, so there remains lots of room for us to continue double-digit growth. And as the market leader, we expect this trend to double-digit growth to continue for quite a long time, and we expect to generate the kinds of returns that the market leadership generate for us and the rest of the world and Brazil over time. You are likely to see us do more international acquisitions of this nature. As I said, the goal is where we can find good, clean businesses and strong growing markets and help us solidify -- based upon our past work, consolidate and solidify the #1 market leadership position and drive returns. We will take the opportunity to do so. So again, great progress on the strategy and a really good move on the part of our International team. And I think you're going to like what happens there over the long period of time. The third element of our strategy was a focus on capital allocation. We've committed to return $2.2 billion over 3 years with $1.2 billion coming in the first year. We met that first $1.2 billion commitment with April's dividend payment. This first phase was -- consisted of $1 billion of stock buybacks that we executed, as well as about $200 million in dividends. We are committed to strategy to return the excess capital to shareholders as efficiently as possible, and through the special committee, the Board process, we examine most effective ways to do so. And as I said, we will have more to say on these subjects before June 9. So in summary, we're off to a good start on our 3-year plan. But as with most plans, this one will not exactly unfold as expected. Lower paper prices, some divestitures and lower service revenues will reduce our expected revenues and OIBDA in 2013 versus the plan. Acquisitions and other positive trends will likely add to the plan. But we expect that the fundamentals of improved operating margins internationally and greater capital efficiency will remain a core part of our plan and our reported performance. So let me reflect for a second. As I said, we introduced this 3-year plan, approximately a year ago now. It was last April when, as you know, I came out of semi-retirement and came back to the company. And we looked to refocus the company back to its core. And so let me reflect a little bit on that job. I'm very pleased how the business and the organizations have responded in the last year. The business is becoming more and more focused on the core, and more and more focused on driving returns of invested capital out of those core businesses. We have significant opportunity ahead of us. I mean, it's not for a lack of opportunity that we're doing this focus. It's to make sure that we can really be disciplined to execute against this opportunity. And I personally remain very optimistic about the future, which I predict will be dominated by 2 key themes, one is investments to sustain this wonderful annuity business, which has a great return on capital, and to do so over a long period of time. To me, the key is durability or sustainability of the business, and we believe that we have the tools, the capital and the opportunity set to do that. And if we do that well, we will be returning significant capital with our shareholders on a very consistent basis, over a very long period of time. So as we've shifted our focus on returns, it is clear that though that we should fight the urge to be too greedy. Our market leader businesses are all great return businesses that we want to optimize for the long-term. By driving to even higher margins -- but driving for even higher margins is really not the answer. We need to continue to drive costs down and reinvest those savings for long-term sustainability, and we have an opportunity set that will allow us to accomplish that if we invest correctly. And I think we have the talent to be able to do so. The emerging market businesses and even the non-leader markets that we now remain in, will improve out over time and produce a balance of more growth and better returns. Personally, I wish I were younger and had the opportunity to play off the next phase of the life of Iron Mountain. I see nothing but great opportunity in its future. But of course, I'm not. We have an active search for CEO. We're getting great candidates, but it's not a process to be rushed. This is a great opportunity and we want to find the right leader that can balance the needs of all of our constituents, you, our shareholders, our customers and of course, our employees over the very long period of time. As I have often said and many of you shareholders said, one of the real great things about Iron Mountain is not only the annuity business model but this ability to drive this annuity and sustain it over an extremely long period of time. As you know, we spent a lot of capital to build the flywheel, to build the annuity. As I said, this next phase is about having net capital come back out of the business and back to our shareholders. And of course, the longer we can foresee doing that, the much more valuable the company is. When I returned last year, I did state that I expected to be here for 12 to 24 months. We're about halfway through my estimated timeframe, and I expect that I'll meet my original target. But I want to make sure you all know that I remain committed to the company until we find the right leadership for the long-term. But stay tuned as we get closer, we'll talk to you more about where the next phase may be in that area. So with that, let me turn it over to Brian and then we'll take your questions and answers.

Thanks, Richard. Slide 3 highlights the key messages from today's financial review. We delivered solid performance in Q1, in line with our plans, reflecting consistent business trends. Our financial results were again, supported by solid storage revenue growth and strong performance in our International business. Reported revenues for Q1 were $746 million, up 1% on a constant currency basis as 3% storage gains were offset by moderate service declines, including the impact of lower recycled paper prices. Profit performance was in line with our expectations, with results supported by strong gains in our International segment and sustained high margins in North America. Adjusted OIBDA for the quarter was $221 million, up 2% on a constant currency basis. International adjusted OIBDA margins increased by 200 basis points to -- compared to Q1 of 2011, keeping us on track to achieve our margin improvement goal of 700 basis-point improvement by the end of 2013. Adjusted EPS was $0.29 in Q1, and reported EPS was $0.35 including the impact of foreign exchange gains and discrete tax items. We continue to expand our International business while driving higher returns, consistent with our 3-year strategic plan. Adjusted OIBDA in the International segment increased 15% on a constant currency basis in Q1, supported by strong growth in emerging markets and benefits from cost improvement initiatives in Latin America and Western Europe. As Richard noted, we recently acquired Grupo Store in Brazil, which will position us well to build on this momentum. We're off to good start to the year and are on track towards our full year financial goals. Today, we're reiterating our full year 2012 outlook and adding the impact to the recently completed store acquisition for the balance of the year. We continue to plan for 1% to 3% internal growth excluding the effect of lower paper prices and constant currency adjusted OIBDA gains of 1% to 5% x paper impacts. The store acquisition will add $25 million to revenues and $5 million in CapEx for the remaining 3 quarters of 2012. Adjusted OIBDA gains from this acquisition will be offset by integration costs in 2012. Let's now turn to Slide 4 and review our financial results in more detail. Slide 4 compares our results for this quarter to the first quarter of 2011. As noted, Q1 results were as expected and consistent with recent operating trends. Enterprise revenue growth was flat year-on-year as 1% constant dollar gains were offset by unfavorable year-on-year foreign exchange impacts. Overall revenue performance reflected sustained storage revenue internal growth of 3%, global expansion of hybrid services and higher project revenues. These gains were offset by moderate declines in North America, activity-based core service activities and lower recycled paper revenues. From a segment perspective, North America posted flat constant currency revenue growth. Consistent 2% storage internal growth was offset by a 3% decline in service revenues, including the impact of lower paper prices. Service growth continues to be constrained by reduced retrievable and refile, transportation and data protection handling activity. These impacts, along with lower recycled paper revenues, more than offset strong gains and hybrid revenues, increased project revenues and benefits from higher fuel surcharges. Our International segment posted 5% revenue growth on a constant currency basis, supported by a 7% storage growth reflecting sustained growth in Europe and continued double-digit gains in Latin America and Asia-Pacific. These gains were again augmented by strong hybrid revenues which offset impacts from lower paper prices and lower revenues from product sales and shredding services. Gross profit was $431 million in Q1, yielding a gross margin of 57.8%, up slightly compared to the same prior year period. Storage gross margins increased 240 basis points driven by lower occupancy costs. Service gross margins were down year-on-year due to decreased recycled paper revenues, the previously disclosed reclassification of certain overhead expenses to cost of sales, and the growth of relatively lower margin businesses including our hybrid services. Adjusted OIBDA was $221 million or 29.5% of revenues, up 40 basis points compared to Q1 2011. Sustained high margins in North America and continued strong performance in our International business were key components of the year-on-year margin expansion. Included in adjusting OIBDA is approximately $2 million related to the work of the special committee of the Board. Adjusted EPS for the quarter was $0.29 per share. Reported earnings per share of $0.35 include a $3 million of other income and the impact of a lower effective tax rate due to foreign currency gains and discrete tax items. Our structural tax rate for the quarter was 39% as expected. 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 a major service line, as well as the impact of acquisitions, divestitures and FX, compared to our full year expectations. Our internal growth rates for the first quarter were within our expected full year ranges supported by consistent 2% core revenue internal growth. As noted, storage internal growth remains solid at 3%. North America reported consistent 2% internal storage growth, and International storage internal growth remained strong at 6%. Net global Records Management volume was up more than 1% on a year-on-year basis in Q1, reflecting continued strong gains in International and flat year-on-year growth in North America. Pricing trends remain consistent. Total service internal growth was minus 2% or down about 1%, excluding impacts from commodity changes. These results are also consistent with underlying trends in recent quarters. Core service internal growth was flat in the quarter, as strong growth in hybrid services and benefits from higher fuel surcharges offset moderate declines in activity-based core service revenues. Complementary service revenues, which represent about 11% of total revenues, decreased 9% internally. Results were impacted by, as expected, by declines in recycled paper revenues reflecting substantially lower recycled paper pricing, as well as lower revenues in our fulfillment business. Let's now turn to Slide 6 to review our segment results. Slide 6 shows key metrics for each of our 3 segments compared to the first quarter of 2011. Consistent with our 3-year strategic plan, we're sustaining high returns in our North America segment and building momentum in our International segment, as a significant driver of profit and cash flow gains. North America continues to deliver high profits and strong cash flows. In Q1, our North American business segment reported revenues of $552 million and sustained adjusted OIBDA margins of 41%. While storage revenue gains remained solid at 2%, overall North America growth was constrained by lower service revenues including the impact of lower recycled paper prices. We continue to drive operational improvements in North America to offset these impacts and maintain our high returns in this business. Our International segment continues to post solid constant dollar revenue growth and strong adjusted OIBDA and cash flow gains. As noted, adjusted OIBDA increased 15% excluding FX impacts, yielding 200 basis points of margin expansion. We're benefiting from the expansion of operational excellence initiatives in markets like Latin America, and from cost improvement initiatives in Western European markets as part of our portfolio improvement plan. Benefits from these initiatives and from continued solid growth across our International business is keeping us on track towards our business plan goals of 25% margins in 2013. Corporate expenses were consistent with prior year levels including $2 million of costs related to the work of the special committee. Overall, we're delivering consistent solid operating performance across our business, which is driving sustained strong cash flow. This performance is supporting significant shareholder payouts. Let's turn to Slide 7 to review our stockholder payout program. Slide 7 shows the substantial progress we've made in returning funds to stockholders over the past 2 years. Since first announcing our plans to return cash to shareholders in February of 2010, we returned $1.4 billion to stockholders through $300 million of dividend payments and the repurchase of 38 million shares for more than $1.1 billion. In Q1, we acquired 1.1 million shares for $35 million. Share repurchases to date, through this program, represent more than 18% of the shares we had outstanding at the end of 2009. As part of our 3-year strategic plan that we presented in April of 2011, we committed to $2.2 billion of payouts through 2013, including $1.2 billion by May 2012. We've completed our initial $1.2 billion commitment and we're well-positioned to continued advancement of shareholder payouts supported by our strong operating performance. We remain committed to driving strong cash flows and driving an optimal approach to our capital structure to support shareholder returns. Let's now turn to Slide 8 to review how we're managing our balance sheet to fund our business and drive our strategy. Strong consistent cash flow generation has enabled us to maintain a strong balance sheet while supporting substantial shareholder payouts. As planned, we recently increased our leverage by approximately 1/2 a turn in support of our payout program. Currently, our consolidated leverage ratio is 3.5x at the midpoint of our target 3x to 4x leverage range. We remain well-positioned in terms of cash and financing capacity. At quarter end, liquidity was more than $700 million with $178 million in cash and $529 million in additional borrowing capacity. Our debt portfolio at March 31, 2012 also remains long and fixed. Our weighted average interest rate was down to 6.7%, and we were 80% fixed at quarter end. Maturity is more than 6 years with no meaningful repayment obligations until 2014. We're managing our balance sheet consistent with our 3-year plan, and we're well-positioned to fund our business strategy. That concludes our review for Q1 2012 results. Overall, we continue to drive solid financial performance, and we're on track to achieve our goals in 2012, as we continue to advance our 3-year plan. Let's now turn to Slide 9 to review our 2012 outlook. Slide 9 summarizes our current 2012 outlook. Today, we're reiterating our full year 2012 financial guidance and adding the impact of the store acquisition in Brazil. As a result of the store acquisition, we're increasing our revenue outlook by $25 million. There will be no impact on adjusted OIBDA as operating profits will be offset by integration expenses in 2012. As noted, we're planning for consistent revenue growth trends excluding impacts from recent declines in recycled paper prices. Supported by consistent storage internal growth of about 3%, we're expecting constant dollar revenue growth of 2% to 4%, excluding paper. As noted, our internal growth outlook x paper impacts remains at 1% to 3%. A 30% decline in paper prices compared to the average for 2011 and negative year-on-year impacts from foreign exchange is projected to reduce our reported growth to a range of minus 1% to plus 2%. Our outlook for constant currency adjusted OIBDA growth, excluding the impact of lower paper prices, remains between 1% and 5%. At current levels, lower paper prices are projected to have a negative 5% impact on our adjusted OIBDA growth this year. Adjusted EPS is expected to be in the range of $1.20 to $1.36 per share. Our calculation of adjusted EPS assumes the structural tax rate of 39% and 172 million shares outstanding. We're planning for capital spending of $220 million including $5 million associated with the store acquisition and about $25 million of spending for real estate. Our outlook is for free cash flow performance -- our outlook for free cash flow performance remains in the range of $320 million to $360 million including about $20 million of negative impacts this year from higher prior year capital spending accruals. Finally, based on our outlook for 2012, we expect our return on invested capital to be in the range of 11%. In summary, Q1 as was another quarter of solid financial performance and we're on track to achieve our financial goals for 2012. We continue to execute against our 3-year plan, completing our $1.2 billion payout commitment, sustaining high profits and cash flow in North America and driving strong growth and higher returns in our International business. And we're well-positioned to build on this progress. Thanks, and we'd now be happy to take your questions.

[Operator Instructions] And your first question comes from the line of Andrew Steinerman with JPMorgan. Andrew C. Steinerman - JP Morgan Chase & Co, Research Division: I want to ask about core services. We're flat now. We've been flat for 2 quarters. The forecast for the year is unchanged at negative 4 to 0. I surely heard that you had a couple of things moving around there and that activities, meaning moving boxes around, is still dead, at least in North America. But why after being flat this quarter and flat in the fourth quarter, is the forecast for the year kind of unchanged to be -- being 0 to minus 4? The very least, you would feel better about the high end of that.

Well, as you know, it's early in the year, Andrew, and we are within the range. I think there is always noise on those type of numbers at the margin. As Richard said, we're off to a good start to the year. We feel good about the track that we're on and...

We don't like to predict things we don't see for sure either, Andrew, but basically, we didn't focus on making a change there. It's in the range. Andrew C. Steinerman - JP Morgan Chase & Co, Research Division: Right. And maybe let me just ask the question one more time. Is the flat, the 0, more a function of how strong hybrid is? Or has there been some improvement, meaning less negative in terms of moving stuff around?

A couple of things. We're getting about 1 point benefit from fuel surcharges. It helps a little bit. The -- it's more similar trends than different trends. I think our International business is doing well, and I think the activity trends in International are relatively stronger than what we've seen in North America. I think North America has been a very similar place. We do record, as you know, some of the hybrid revenues through the -- we record some of that in our core service, the more recurring nature where we have more recurring projects, and that's a double-digit growth. We're doing very well on that front. So that's [indiscernible]. But on balance, more similar than different, but I think we do have some positives.

And Andrew, the International business is much less of its portfolio has any in healthcare in it. And healthcare is the major drag factor in North America.

Your next question will come from the line of James Samford with Citigroup.

I just wanted to, I guess if I could just follow-up on that a little bit. If you could just sort of frame the activity cycle in terms of the macro environment, I'm just sort of curious whether activity internationally is a function of -- if there's a lot of changes going on there and that's sort of driving activity levels. I just want to sort of frame it on from a macro perspective.

Yes. Look, no. I think International is more driven by the 7% storage growth, and that drags along with it more services. Newer records are far more active, and they age fairly quickly in terms of activity patterns. So the faster you grow on them, the greater the amount of newer records you got, and therefore the more active they are. And plus part of that activity is the charges of bringing things in, so if you're growing faster, you got more service activity to assess or bring things in. No, I don't think it's an economic impact. Although services have -- do respond to the economy quicker than storage. Storage growth is a real lag on an economic rebound. And like in North America, we've seen no real clear trends in the economy. And we expect to be an 18-month or so lagger there. On services, we would pick up a little faster.

What's tough for us parse, too, is just obviously, the first quarter in North America, you had better weather. And I think when weather is bad, you hear about the negative side of it. When it's good, no one's saying that's helping to support performance. But that could be at the margin. Something is helping us a bit. I don't -- to Rich's point, I don't think we've seen kind of a change in the economic environment. It's more reflective of kind of what's going on underlying it.

And just a quick follow up on -- it looks like volume growth picked up a little bit here. You got stabilization on the output and distractions. I think the organic piece, is that International organic? Or how should we think about sort of the mix of volume growth on the Records Management side?

It's very, again, very similar. I think you're looking at our encashment where we show kind of the quarterly numbers annualized. It's very similar in the U.S., kind of flat volume trends. We're seeing benefits from the sales and marketing initiatives that we advanced and that's helping us to stabilize the incoming volume, which was down a bit. And now, it's more in the stable zone in which we feel very good about. And international is in a similar zone of solid growth. There is some seasonality in the quarterly numbers. We do tend to see more add lots in the first quarter, and so when you seasonal-ize those numbers, that's part of the dynamic you see there, but it's a similar trend. We feel good that we've moved from where we had more pressure on our growth to where we're more stable and seeing positive flowthrough from some of the investments, and looking forward to building on that.

And that we spoke a little bit about the investment sales and market. It's a long cycle to see it come through. But we're seeing better performance. We're seeing better pipeline growth. We're seeing better conversion ratios. We're seeing a variety of things that make us feel like we've kind of pulled out of the bottom and we started back in another direction. But it's very, very slow cycle. And I really caution people that this is not a business that you can take sort of a data point and sort of draw line up or line down. It's a flywheel, it takes a while that move either way. But I think we feel like it's moving in a better direction now than it was moving in say, a year's plus or so ago. But I would -- again caution you, don't go re-forecasting things. You'll be absolutely wrong.

Your next question will come from the line of Kevin McVeigh with Macquarie.

Richard, did you tend to talk about a kind of a longer-term trend on the storage side in terms of revenue growth? And was it low single-digits, or was that within storage itself? Or just -- can you put some context around that?

Yes. What I'm really saying is I think we can keep our business overall growing in those ranges but build on a foundation of storage, annuity-based kinds of businesses in effect. And we're going through some shifts and changes. We've talked about healthcare restructuring itself. Look our healthcare business is growing, but the big service component is coming out of it, it was our most active business. It will take a while take for them to absorb. I know people believe that, that foreshadows what's going happen in the rest of the market. They're wrong. Not that -- we have records aren't going to get less active. Like we've announced, we have been doing that for 30 years, and they will for over the next 30, 40 years. But not at the same pace as healthcare. But we've got those headwinds, and those headwinds of healthcare will take a while for us to eat through, but we've got a bunch of other positive things and we got some new things in the hopper. And if we look out over the long haul, and we've done quite a bit of work on this and look at a very long period of time, what we're saying is we believe net-net, we have the opportunity set, and we have the tools, staying within our core business, not going throwing big, long passes or anything. Staying with that core business to keep the core -- keep our business, all annuity-based by and large, growing in the low single-digits. And that's why we talk a lot about confidence around the ability to sustain the flywheel and sustain the cash generation capabilities of the business.

Understood. And then just -- it seems like on a relative basis, acquisitions are starting to pick up a little bit. Is that just purely opportunity? Kind of how you're feeling about the business overall? Or just any thoughts on that?

I have been saying around here for a couple of years that we're going to see -- if we're going to see another mini consolidation wave in North America and like everything else I predicted, it takes a long time for it to happen. That's our business. It's starting to happen. That is the nature in North America of just the -- the impact of the first consolidation wave was to consolidate the market, create a bunch of new competitors. Now, there's new competitors. We have a reasonable number of them. I have been out there a while, invested capital for a long time, and looking to monetize. It's just the cycle. I think we'll go through that cycle again. And we will play that opportunity cycle because unlike the last time when we were a driver of that cycle, we were building footprint. This time, we're not building footprint. We're building returns, and we're going to do it by -- if it's a great consolidation economics and it's a good, clean business, in a fair price to both parties, we'll do it. If it's not, we'll pass on it. And so on, okay? But we are in the market. But we want to make sure the market hears us that way, and if anybody's interested in selling, you can get my phone number, you know how to call, we'll talk to you. Now that's North America. International, although in certain parts of International, there's some of that same dynamic but a much smaller scale. The other part of International, it's about us being a bit more targeted around our strategy that says market leadership. Where we -- where there are great markets particularly those with lots of growth left. And yes, I've spoken before and now a lot of the emerging markets have a 20, 20 to 30-year cycle just like the North American and the mature European markets went through, of the one-time outsourcing decision that for customers to accumulate their existing records, to get it organized and move from inside to outside. That's the kind of a once-in-a-lifetime decision. And during that cycle, it takes a long time. It took us over 30 years in North America to physically move all those records and we only about halfway through it, okay. But that long cycle in the emerging markets and a good part of the International places like Eastern Europe, Latin America, Asia and so forth, is a very large business opportunity for us. And so we want to be market leaders in a good part of that space. We have leadership but quite a bit of it, but there are places where we don't. Brazil was a good example. And so internationally, we would be more targeted towards finding those place we can go ahead and achieve leadership, get to scale and ride that outsourcing conversion curve and then what we've been able to do on North America, build great returns and much bigger businesses. The International play gets a lot better over time. It just takes time for it to grow because each of those countries -- it's not like a foreign company -- country operation is not analogous to a city in North America. It's got a different overhead structure. It's got a different cultural bias. It's got a different way of selling. It's got variations. And the bigger you get, the better you get at adapting to those variations, the more efficient you get. There's just a lot of positive things come out of it. And like [indiscernible] fill out in our business, that takes patience. But now that we've done our portfolio review, we're in good shape. We're just going to keep adding to it. And so net-net, North America is more opportunistic strategy where the returns make sense. International is a more strategic M&A strategy where it is about driving leadership to drive returns.

Understood. And then just one final, if I could? Within the context of overall capital return, kind of M&A versus kind of dividend and buyback in aggregate, out of 100%, how would that play out over the next couple of years?

Well, you're really talking the capital allocation strategy going forward, and I'm not going to comment on that because that just gets wrapped up into the whole issue of what we do next. And so we'll talk about that sometime between now and June 9.

Your next question will come from the line of Gary Bisbee with Barclays Capital.

As I was going through the 10-K, one thing jumped out that maybe I'm making too big a deal out of. But it was interesting to me that on your cash flow statement, the portion of the customer acquisition costs that you capitalize, that addition to customer relationship/acquisition cost line, it was larger in absolute terms than as a percent of revenue, than any point is better in the last 10 years, and yet -- revenue growth is pretty slow. I guess I wondered, is this may be another sign that the sales investments you've done are working? Or is there something that's changed that would be driving that, maybe like higher customer turnover, but you're doing a better job of adding to offset that or something?

We have a lot of tools in terms of how we build new business and in some cases, we will acquire business, what we call a pick-up-and-moves. So basically, we're acquiring businesses from competitors without necessarily taking the real estate...

You'd be buying a portfolio of customers basically, and moving them into existing sites.

And that is an area where it's a similar judgment in terms of deploying capital and looking at returns, and we've had opportunities on their front, and that is an area that we'll continue to deploy to grow as well. And we understand the economics of those types of investments very, very well as you might imagine because it's clearly defined. And we can swab that into areas where we have excess capacity and help to manage our facility utilization. So that's what it's reflective of.

Okay. Great. And then, I was thinking back to, I guess now, 1.5 year ago, your last investor day, and I remember one of the themes of that, that was a focus on where you could be more targeted in trying to get pricing? Has there been any change in that? Or is it sort of the economy where it is, and not having gotten better enough, kept you from making any major moves towards that strategy you talked about?

Well, we restructured pricing in not all of our business, but a reasonable amount of our business in over the last say, 3 years or so, where we went to more list price and then discount off a list and try to rationalize pricing, and looked across the board at the value proposition, and so forth. That would be the sort of the, what you might call a big move in effect of things. And since then, if you think about it, we have a significant part of our revenue where it's a sort of on an annual cycle and we're going through those annual increases. But we also have a significant part of revenue that's on multi-year contracts that are indexed by-and-large, one way or the other inflation. But in the last few years, those indexes have been down and so that puts a limit on just the natural limit on price. The flip side of it is, if you believe we will see inflation in the future, we'll be well-protected on the way back up. So...

Strategically, we're increasing our focus on being more segmented in our offering by a customer vertical and looking across the scope of the services that we offer and linking that into our pricing strategy. So I think we're looking for ways to increase the value that we bring to customers and capture that through the pricing strategies. That's really the next wave. Building on what Richard said, I think we've got a very good foundational structure for how we approach pricing and are advancing the same strategy, and trying to look at ways to increase our value add through segmented approaches to growth. And that will be the next wave and where we might be able to get some incremental value out of our pricing approach.

Okay, great. And then just one last one. Everybody's noticed that Brambles didn't sell recall at the price or the timing they wondered -- they wanted to. I wondered if you had any comment if that would be something that might make sense as something for Iron Mountain to look at? Or maybe would be willing to say if you have not really been involved in that or not?

We have not been in the process. I think, it was Brambles' choice. It's not that we wouldn't have been interested in looking because we would have. If I think for their own reasons, and probably good reasons, they chose that -- not to bring us into the process. So we're are sitting on the sidelines and watching like everybody else.

Your next question will come from the line of Andrew Wittmann with Robert W. Baird & Co. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: I'm just curious on the pick-up-and-moves. I'm just curious if you can just talk about, quantify how much of the volume growth you're seeing is as a result that today, and given that it just sounds like this is a little bit of a shift there, and kind of what was it maybe a few years ago?

You said a relatively similar range. I think it's less than 1% on the margin. I do think we're increasing our focus across a number of areas, including acquisitions in terms of growth. But I don't think it's a fundamental change from where we've been. We'll take a closer look at that. But it does go up and down depending on the nature of the opportunities that are out there. And I think we've seen a better pipeline more recently. This just tie into some of the themes that's Richard's talking about with -- in North America, more things being available for sale. This is a -- in many ways, a different form of the sale for smaller businesses.

And we -- as we go forward, we will use various tools that keep the drive and the sustainability of the business. As a company, the theme we said is, for this year and for our 3-year plan, is to refocus back on our core physical business. The reason we stated it that way is, looking prior to that, and it's not that we lost focus on the business, but there's a few tools we had put down and just weren't using, and this is one of them. We just -- we were not looking at any form or fashion to speak of -- particularly North America, the opportunity set that came up. And so we're just opening up and looking at those sort of things. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: Makes sense. And just on the service business, Richard, are there any knobs that you have on your arsenal to maybe induce some level services there? Is there a pricing strategy that maybe lines up the marginal costs and marginal revenues there better? Or is there anything you're doing today to maybe offset some of the headwinds you're seeing there?

There are some new services that we have introduced, and they're getting traction. But like everything, they take a long time. I mean, that's the good and bad side of our business. What I'm -- for example in the healthcare space is an approach to pathology customers. It's -- we've repackaged and come up with a better value proposition, and we're getting good traction on it. But it takes a few years before you see any major impact under that. So we're doing things like that, and it's more about the theme of vertical-izing our services and being much more specific around specific industry needs. And we had some other new service programs or new product programs related to our core in what I'd call beta phases. We're not going to pound a table on them for a while until they turn real, but yes, some of them look very promising, and some could be substantial big businesses over time. And so rather than coming out and hyping them, what we're going to do is go through some betas and get into the markets a little bit. And when we have some real results that's significant, we'll come back to talk to you about them, and so forth. And that's all part of us maturing as a company, learning how to look across our own customer base, and we've been evolving those skills in project management-type skills, and so forth, to be able to verticalize, to be able to be more creative and look for opportunity sets and custom-design what we do and then repeat it over and over, and so forth. And we're getting better at that. We'll have to keep getting better at it, and that's where a reasonable amount of money has been invested in the last few years, and I think we'll continue doing that. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: And then just kind of another one, just touching on -- in your sales process here a little bit. On the digital business, it's been out of your portfolio now for a while. Can you talk a little bit about kind of how the new relationship with your digital vendors is going, maybe what you've learned from that process? And maybe Brian, can you give us -- or quantify how much of revenue we're seeing today from you selling digital services that are not assets or technologies that you own?

That's a small number.

It's a small number. We -- because we shifted 100% of the sales force that sold the technology services, and chose not to rebuild that sales force. Having said that though, we are selling a lot more connected [indiscernible].

It's a very small number. Immaterial.

And what we did was is -- frankly, at the request of my leadership in North America, they asked me to slow down on doing that. Not slow down on selling it per se, but on focus because what they found was that they really wanted to get their sales force refocused and requoted back towards the core business. We had -- the quarters in focusing on very much towards the new services side. And that's one of the reasons that storage started to come off and by refocusing and making people focused on going back and digging out the storage, they're doing it. We just didn't want to confuse people.

We continue to own in the intellectual property management business, which is a great business for us, and it's roughly $30 million of revenues. So that was part of the digital business that was doing well.

And we've -- look, we were coming back. Some of those the beta services talking to you have a strong partner technology component potential. But we're going to take our time, and we're not going to spend a god-awful amount of money trying to do this stuff. So I think that's the last question, operator, in my understanding. So -- hey, I was right, we finished 5 minutes earlier, so that's a record for me. So thank you very much. As I said, the business is performing as we expected. We're off to a good start for the quarter, and hopefully, the rest of the calls this year will be equally good if not better, and so forth. We are really busy though. There's a lot going on between, I'd like to say looking at an acquisition pipeline and looking at -- and so forth. But the real focus of the, some of the organization, is on being prepared to have a conversation with you prior to June 9. And I know everybody's eager to hear us talk and we will be prepared, and we'll let you know, probably the day of or some number of, when we come forth and talk. So we look forward to talking to you again in the next couple of months. Thank you very much for your support, and we will talk to you later.

Thank you for your participation. This does conclude today's conference call. You may now disconnect.