Iron Mountain Incorporated (IRM) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Iron Mountain Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I'll now introduce your host for today's conference, Melissa Marsden. You may begin.

Thank you, and welcome, everyone, to our third quarter 2013 earnings conference call. I'm Melissa Marsden, Senior Vice President of Investor Relations. And this morning, we'll hear from Bill Meaney, our CEO, who will discuss highlights for the quarter and strategic initiatives, followed by Brian McKeon, our CFO, who will cover financial results and guidance. Rod Day, acting CFO, and Stephen Golden, VP, IR, are also with us today. After prepared remarks, we'll open up the phones for Q&A. 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 of that presentation, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for 2013 and 2014 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 differ from those in our forward-looking statements. In addition, we use several non-GAAP measures when presenting our financial results and the reconciliations of those non-GAAP measures as required by Reg G can be found at the Investor Relations page of our website, as well as in today's press release. With that, I'd like to turn the call over to Bill Meaney.

Thanks, Melissa, and thank you to everyone for joining us this morning. Before we begin, I wish to congratulate the Red Sox. Sorry for those of you that aren't fans, better luck next year. It was a great season and a great win. I couldn't ask for more after being out of the country for 27 years and coming back home to see the Sox win the World Series. So let's just hope that the other Boston teams do as well this year. Now back to business. During the third quarter, we continued to work on advancing our strategy by sustaining the durability of our business through attractive core acquisitions and supporting the long-term growth through expansion into fast-growing emerging markets and selective investment in emerging businesses. Our financial results were in line with our expectations, with a total revenue of $756 million, adjusted OIBDA of $240 million and adjusted earnings per share of $0.31 per share. We did incur some costs related to the implementation of our strategy, although our underlying performance remains solid and consistent with the recent trends. I'll cover these charges at a high level, and then Brian will have more on how they impact our outlook, as well as the impact from recent acquisitions on our guidance for the remainder of 2013. The changes we -- the charges we took in the third quarter and expect to take in the fourth quarter relate to some realignment within our organizational structure, with a view towards speed and simplicity. These changes will help fuel our growth strategy by consolidating activities, both within and across units, thereby eliminating duplication, increasing spans and reducing layers throughout the organization. Additionally, these changes will reduce operating costs to mitigate anticipated core service revenue declines and cost inflation, and will provide the financial resources for investment in new areas that are adjacent to our core activities. We also booked early debt extinguishment charges related to our successful August refinancing activities, which we undertook to align our capital structure with our long-term strategy in order to both lower our cost of capital and extend maturity. This was a tremendous accomplishment, particularly as our treasury team was amending and upsizing our senior credit facility at the same time. Setting aside the charges for a moment, it was a good quarter, which we continued to build on the core strengths of our organization and enhance our platform for long-term growth and sustainable returns. And we continued to make good progress with initiatives that support each of the 3 main pillars of our strategic priority. As a reminder, those priorities are: driving continued profitability growth in our mature markets; further penetration in the emerging markets; and identifying, incubating and scaling emerging businesses. Earlier this month, we gathered the senior leadership of the company to sharpen our focus on the strategic priorities that will drive our business in the future and to ensure that our plans for execution are closely aligned with those priorities. We have more detail -- we will have more detail on the specific initiatives at our Investor Day in March. And as we refine our execution plans, we will continue to pursue opportunities that align with the 3 pillars I just described. For example, you saw our announcement a couple of weeks ago about our acquisition of Cornerstone Records Management for a total consideration of USD 191 million. Cornerstone has a good business, with storage representing more than 60% of its revenues, and a strong presence amongst small and mid-sized customers in the U.S. We expect the transaction to yield attractive fold-in economics, with ROIC of the 10% plus range, above our cost of capital, which translates into mid-teens equity returns. We do expect to incur some incremental capital and move costs as we realize real estate synergies over time. And OIBDA from this transaction should reach USD 30 million on a fully integrated basis. We were also active with acquisitions in the international markets during the quarter. In August, we announced the acquisition of the Colombian records management and data protection business of G4S, the market leader in Colombia, for USD 54 million. The acquisition represents our entry into Colombia, one of the fastest-growing economies in Latin America, and is consistent with our objective to grow our presence and achieve market leadership in attractive emerging markets. Additionally, we completed the acquisition of File Service in Peru, valued at USD 16 million, which advances us to the leading position in that country as well. These transactions offer the potential for future benefits as we integrate them into our existing Latin American business, which includes operations in Argentina, Brazil, Chile and Mexico. Also during the quarter, we acquired a small data protection business in France. In total, we have completed acquisitions totaling approximately USD 320 million thus far in 2013, with roughly $220 million of that in the mature markets of the U.S., France, and $100 million in emerging markets. Growing our presence in emerging markets is an important part of our long-term growth strategy, as constant dollar revenue growth in emerging markets during Q3 was 23%, with 15% internal growth. In addition, we continue to evaluate the potential of emerging businesses, with data centers representing our most significant investment to date. During the quarter, we broke ground on our first regional data center in Northborough, Massachusetts, just outside Boston, at our existing campus for record storage. This data center is being built to satisfy stringent security and compliance requirements that we believe will be attractive to many highly regulated organizations in industries such as health care, biotech and financial services. We are making good progress with building our base from which to scale this business. And in total, we expect to invest roughly USD 40 million in the data center business in 2014. As we were considering frameworks for enhancing our focus on emerging adjacent businesses, we noticed a common construct and best practice amongst leading innovative companies. To help support leaders with launching and running their new businesses, they typically appoint senior, seasoned executives to lead these efforts. In keeping with that best practice, we are creating a new executive position with Harry Ebbighausen, who's currently President of North America, taking on formal responsibility for emerging businesses effective the beginning of next year. Harry has the track record and respect within the organization to champion these efforts and make sure we are leveraging our resources and capabilities wherever possible. We are splitting Harry's current role into 2 areas: 1 focused on physical records management and another focused on data protection and recovery. This separation of roles will align responsibilities with our growth strategy and provide more discrete focus on product lines. John Tomovcsik, or JT, will take on responsibility for records management, DMS and shred for North America. JT, currently Executive Vice President and Chief Operating Officer for North America, has been with the company for more than 27 years in various operations and sales roles, spanning multiple product lines. He also leads North American operations as one of the primary leaders behind the group's continuous improvement model, which drove significant profitability increases between 2007 and 2010. In addition to this focus around product lines, we will be leveraging our global capabilities in a more coordinated way, in areas such as product management marketing, for example, with the goal of maintaining continuity and exploiting our global scale and knowledge whilst operating more efficiently. We may have further realignment of our organization as we continue to refine our execution plan. We'll have more color on this in March. Turning now to our progress with preparations for REIT conversion. We successfully completed the integration of REIT-critical IT systems on July 1. We are continuing the internal work necessary to ensure compliance with the REIT tests, even if we don't have final written rulings from the IRS on our outstanding PLRs, or private letter rulings, prior to January 1. However, we won't be disclosing REIT-related metrics or reporting externally as a REIT until such time as the IRS's final decision is rendered. As I noted on last quarter's call, we aren't providing interim updates as we move through the process with the IRS. As most of you are aware, we have several PLRs in the queue. To the extent that we were to receive verbal indications of rulings throughout the normal give-and-take review process on some of these PLRs, it could be misinterpreted if we were to disclose partial information prior to having formal confirmation from the IRS on all matters necessary to convert. Although we don't yet have clarity on our outstanding PLRs, we plan to move forward with our plans to convert. The REIT structure does not impact our strategy or execution plan. It simply enhances returns. Our strategy is focused on sustaining the durability of the business, maximizing free cash flow and supporting attractive stockholder returns, regardless of whether or not we ultimately convert to a REIT. Our free cash flow before discretionary investments, which we define as M&A, real estate, emerging businesses and dividends, is roughly USD 300 million to USD 340 million, based on our anticipated CapEx included in 2014 guidance, which includes about USD 50 million of CapEx related to acquisition integration and consolidation of facilities in Latin America in order to drive additional synergies. With regard to discretionary spending, we have a pipeline of attractive acquisition opportunities, as demonstrated by our recent transactions in both mature and emerging markets. Generally, these transactions are accretive fairly quickly due to our ability to integrate them into our existing infrastructure and consolidate facilities. We also have opportunities to invest in emerging businesses, similar to the way we are growing our data center business. As always, all our investments are made through a clear capital allocation approach to deliver long-term sustainable returns to shareholders. With respect to new adjacent businesses, we will start small with some interesting new opportunities, assess them, and either scale them or scrap them. Further, to our capital allocation approach, we know some of you have questions about what our dividend level and/or share repurchase program might look as a C-Corp. I would just like to reiterate that we are committed to enhancing shareholder payouts and will strive for a dividend level and/or share repurchases that allow for consistent growth over the long term, in line with growth in the free cash flow of the business, whilst allowing the flexibility to pursue high-return investments that support growth. Again, Brian will have more details, but with regard to our preliminary view on 2014, we are projecting solid constant dollar revenue growth of 2% to 4% and constant dollar adjusted OIBDA growth of 2% to 5%, consistent with the long-term goals we've referenced to in the past. Our guidance incorporates any efficiency benefits from our organizational realignment. As I noted earlier, some of this will help offset pressure from expected continued declines in core service activity, while some will be reinvested to advance our strategy, which we believe yield attractive returns in excess of our hurdle rates. Moreover, in the future, you can expect that we will engage in the organization a continuous improvement approach focused on enhancing profitability to offset headwinds in the service side of the business, provide for some profit growth and provide resources for investment in future growth. Before I turn over the call, I want to sincerely thank Brian for his contributions as CFO over the last 6.5 years. He's added a great deal of value for both the company and our investors, and he will be missed. Brian is not just a great professional, but he's been a great colleague, and I am truly thankful for his help with my transition over the past year. Brian is moving to a new opportunity at the beginning of next year and we wish him all the best. He'll be working with us through the end of the year to transition the role. I wish also to introduce Rod Day, currently CFO of International, who has been with us for 5 years. Rod is very knowledgeable about our operations and emerging market strategy. He was instrumental in driving the 700 basis points of profit improvement achieved in our International business over a 3-year period, and achieving this against a backdrop where he helped add a number of new emerging markets to the portfolio. He's been a good steward of capital, having allocated resources amongst numerous international markets whilst deploying more than USD 0.5 billion for acquisitions and capital expenditures during that same period. He has also been involved from the start with the changes we need to make our International business, to ensure compliance with REIT tests. We'll be in good hands with Rod as the acting CFO of the enterprise while we consider both internal and external candidates. In summary, we had a solid quarter punctuated by several major accomplishments related to the execution of our plan and further progress towards REIT preparedness, including alignment of our capital structure. We are making some changes to the organization to support our strategy and speed of execution. And we believe our plan sets us up well to sustain the durability of the business and support long-term growth. Additionally, our outlook for 2014 is solid and in line with our expectations for the business. With that, I'd now like to turn the call over to Brian.

Thanks, Bill. Given that we've got a lot to cover today, including our preliminary outlook for 2014, we moved a few of our regular year-to-date slides to the appendix for your reference. Let's turn now to Slide 3, which highlights the key messages from today's review. We delivered solid results in Q3, reflecting strong operating performance supported by consistent storage rental growth, International profit gains, as well as benefits from recent acquisitions. Storage rental grew 4% on a constant dollar basis in the quarter, supported by consistent 2% gains in North America and 10% growth in International, including benefits from recent acquisitions in Latin America and North America. Adjusted OIBDA performance was in line with expectations in Q3, driven by continued International margin gains and sustained cost controls. As we deliver solid operating performance, we continue to advance our strategic plan, supported by core acquisitions and investments in our data center offerings and capabilities. These investments are intended to sustain the durability of our core business and provide a platform for future revenue and profit growth. For the full year 2013, the core business is on track to achieve its financial goals. Today, we're updating our 2013 outlook to reflect recently completed acquisitions, including Cornerstone, and the impact of the restructuring charges of about $30 million we expect to record in 2013. Looking ahead to 2014, we expect constant dollar growth of 2% to 4% in revenues and 2% to 5% in adjusted OIBDA, supported by continued strong operating performance and the benefits of our 2013 acquisitions. Although we continue to pursue REIT conversion effective January 1, 2014, our preliminary 2014 outlook assumes C-Corp reporting. Let's move on to Slide 4 to review our financial results in more detail. Slide 4 compares our results for this quarter to the third quarter of 2012. Q3 results were in line with our expectations and consistent with recent trends. Enterprise revenues grew 2.2% on a constant dollar basis, as our International segment continued to produce strong results. International posted 7% constant dollar revenue growth, supported by 10% storage rental growth, including benefits from our recent acquisitions in Colombia and Peru. North America posted flat constant dollar revenue growth as 2% storage rental gains were offset by lower complementary service revenues. FX rate changes reduced revenue growth by approximately 130 basis points in the quarter. Adjusted OIBDA was $240 million, up 0.4%, excluding the $5 million restructuring charge. A key driver of profit performance was the continued improvement in our International segment, consistent with our plans. International adjusted OIBDA increased 18% year-on-year in Q3, reflecting strong top line growth and continued margin gains. Year-to-date, our International adjusted OIBDA margin is 25%, in line with our 3-year improvement plan to increase International margins by 700 basis points. We expect the underlying margin to exceed 25% for the full year, though the reported numbers will be slightly lower due to the impacts of recently completed acquisitions and related integration costs. Adjusted EPS for the quarter was $0.31 per share, compared to $0.34 in Q3 2012. The year-on-year decrease was due primarily to 19 million additional shares outstanding, including those issued as part of our special dividend last November. Adjusted OIBDA and adjusted EPS exclude the impact of costs associated with the REIT conversion, which reduced reported EPS by $0.08 per share net of tax. GAAP earnings per share of $0.03 included $21 million of REIT cost and $46 million of other expense, including $44 million of early debt extinguishment charges in connection with our Q3 refinancing activities. Our structural tax rate for the quarter was 38%. Let's now take a closer look at our revenue growth on Slide 5. Slide 5 shows the components building to our overall revenue growth. Q3 growth rates showed some improvement compared to last quarter and were in line with our full year outlook. For the quarter, consistent storage rental growth of 3.6% on a constant dollar basis drove overall revenue performance. Year-on-year global net volume growth was 3.2%, including a 2.2% benefit from our 2013 acquisitions. North America posted 1.6% constant dollar storage rental growth, reflecting relatively flat records management volume, pricing of 1.3% and the benefits from our recent acquisitions. North American pricing gains were consistent in Q2 (sic) [Q3] reflecting impacts from prior year comparisons. For the full year, we expect pricing gains to be approximately 1.5%. International storage rental growth was 9.5% in constant dollar for the quarter, reflecting 24% growth in emerging markets, supported by strong organic gains and benefits from acquisitions. Internal storage rental growth remained strong in International, with a 6.5% gain in the quarter. For the year, we expect overall storage rental growth to grow about 4% on a constant dollar basis. Total services were flat on a constant dollar basis in Q3, as International service growth, supported by acquisitions, was offset by North American service declines driven by lower complementary service revenues. Higher incoming volumes and related transportation revenues helped to offset these impacts in the quarter. Average paper prices declined 19% year-on-year, resulting in $3 million less revenue in Q3, compared to the last year. At current paper prices levels, which are down about 15% versus the 2012 average, we will see some pressure on this front moving forward, which will constrain overall service gains. Overall, total internal growth was 1%, as 2.3% gains in storage rental more than offset modest service declines. Let's move now to Slide 6 and review our 2013 acquisitions in more detail. As you know, acquisitions are an important tool we use to execute key components of our stated business strategy to drive continued profitable growth in our mature markets and to further penetrate attractive emerging markets. To date in 2013, we've completed 6 core acquisitions for a total consideration of approximately $320 million. This includes our most recent acquisition of Cornerstone Records Management here in the U.S. for approximately $190 million. Excluding Cornerstone, which was a unique opportunity, we spent approximately $130 million on core acquisitions so far this year. This aligns with our projected average annual deployment of $50 million to $150 million presented at Investor Day last October. In the mature markets, the goal is to optimize the storage network we've built through fold-in acquisitions and extend the durability of these high-return businesses. Although Cornerstone is certainly larger than the typical business we're likely to acquire, the fold-in economics of this transaction are attractive and will support future revenue and profit growth. Post acquisition, we generally realize the benefits of operating efficiencies within the first year or so. Benefits derived from rationalizing the real estate portfolio in an acquisition may take up to several years, depending on the size of the business, lease expiration dates and the volume that needs to be moved. All of this is factored into our valuation models as we make our investment decisions. We continue to acquire businesses in high-growth emerging markets to build market leadership and position ourselves to capture the first-time outsourcing wave taking place in these countries. In June, we acquired Archivum in Brazil, building on last year's acquisition of Grupo Store. In September, we acquired File Service, the leading records management company in Peru, and entered a new market with the acquisition of the records management division of G4S in Colombia. Our acquisition pipeline remains robust, and we'll continue to evaluate these opportunities through a disciplined capital allocation and ROIC lens, ensuring we create value for our shareholders. Let's now turn to Slide 7 to look at our balance sheet metrics. As previously announced, we completed several financing transactions that sustained our sound balance sheet. First, we amended our senior credit facility, upsizing it to $1.5 billion with a syndicate of 21 banks. The new facility is composed entirely of a revolving credit facility with no term loans. Pricing under the credit facility didn't change as a result of this amendment and is based on our choice of interest rate and currency options, plus an applicable margin, which varies based on certain financial ratios. We also took advantage of attractive market opportunities to lower the cost of our fixed debt and extend maturities by issuing $600 million of 6% senior notes due 2023 in the U.S. and $20 million of 6 1/8% senior Canadian dollar notes due in 2021. The net proceeds of these transactions were used to redeem all our 8% senior subordinated notes due 2018 and 2020, to redeem our outstanding 7 1/2% Canadian dollar senior sub notes due in 2017 and to fund a cash tender for $138 million of our 8 3/8% senior sub notes due in 2021. Through the amendment to our credit agreement, we changed our consolidated leverage ratio for compliance purposes to a lease-adjusted consolidated leverage ratio, which is an EBITDAR-based calculation that adds leases to our total debt. This better aligns with how rating agencies view our leverage and recognizes that leases are a form of financing. At the end of Q3, that ratio was 4.9x, with a requirement not to exceed 6.5x. This compares to 4.2x calculated under the prior credit agreement, which excluded the impact of leases from the calculation and had a requirement not to exceed 5.5x. To align with this new calculation, we're establishing a target lease-adjusted consolidated leverage range of 4 to 5x. This equates to our previous range of 3 to 4x excluding lease financing. As I just indicated, we're currently operating with a net total lease-adjusted leverage ratio of 4.9x, which is just below the high end of our targeted 4 to 5x range. Our leverage ratio has increased over the past 2-plus years as planned, to support shareholder payouts of $1.7 billion, expenditures in connection with our proposed conversion to a REIT and recent acquisitions. The costs associated with REIT conversion, including tax payments, will temporarily push our leverage to or just above the high end of our range. We're well positioned in terms of cash and financing capacity. At quarter end, liquidity was more than $1.1 billion, with $172 million in cash and $975 million in additional borrowing capacity. Our strong cash flows support continued advancement of our capital allocation strategy and our REIT conversion. Year-to-date, we paid $155 million in cash dividends and $130 million of REIT costs, including REIT-related CapEx and tax payments related to depreciation recapture. We're managing our balance sheet consistent with our strategy, while advancing substantial payouts to shareholders and we remain well positioned to fund our business plan. That concludes a review of the Q3 2013 results. Let's now turn to Slide 8 to review our 2014 outlook -- or excuse me, our 2013 outlook. Slide 8 summarizes our updated 2013 operating outlook. As I mentioned earlier, our business trends and operating fundamentals are consistent and we're on track to achieve our financial goals for 2013. Today, we're upgrading our full year 2013 guidance to reflect recently completed acquisitions, including Cornerstone, and the $30 million of restructuring charges Bill discussed in his comments. For ease of discussion, we're presenting our updated outlook for the underlying business excluding the $30 million of restructuring charges separately, and then layering in the charges to show their impact on our expected reported results. We're now expecting full year revenues to be between $3,025,000,000 and $3,050,000,000 and adjusted OIBDA ex restructuring to be between $905 million and $925 million. Our expectations for adjusted EPS, CapEx and free cash flow remain basically the same as last quarter, with the exception of $5 million of data center spending that will now take place in 2014. The impact of the restructuring charge will be to reduce adjusted OIBDA by $30 million, adjust EPS by $0.10 per share and free cash flow by $18 million. As we've been highlighting, we anticipate significant one-time operating capital costs associated with our potential conversion to a REIT. These costs relate to system investments, legal and tax work, advisory fees and other miscellaneous costs to implement the proposed structure. We're investing to ensure that we meet the January 1, 2014 deadline and several of our REIT-critical systems are now operating on a test basis. For the year, we expect to incur between $65 million and $95 million of incremental expense. The impact of these costs will be a reduction in reported EPS of $0.26 to $0.36. These costs are tracking consistently with previously disclosed estimates of total conversion costs. Slides laying out our outlook for line items below adjusted OIBDA, as well as the REIT-related items, are included in the appendix. Let's move now to Slide 9 to begin our review of the preliminary 2014 outlook. Slide 9 highlights key factors supporting our preliminary outlook for 2014 performance. First, let me remind you that we continue to -- although we continue to pursue REIT conversion, our preliminary 2014 outlook assumes C-Corp reporting. As such, there are approximately $10 million to $15 million of ongoing REIT compliance costs that are not included in our operating forecast for 2014. These costs are currently being categorized as REIT costs and being reported separately. If and when we successfully convert to a REIT, we'll update our guidance accordingly. As noted earlier, our outlook is for 2% to 4% constant dollar revenue growth and 2% to 5% constant dollar adjusted OIBDA growth in 2014, supported by sustained performance in North America, solid revenue profit growth in our International segment and benefits from our 2013 acquisitions. We expect to realize $30 million to $40 million in annual cost savings from our restructuring plan. These savings will offset cost inflation and pressure from continuing service activity declines and fund investments to support our growth strategy. Our International business, excluding the impact of acquisitions and their related integration costs, will continue to accrete margin of about 50 basis points next year, building on the 700 basis point improvement we achieved over the last 3 years. Assuming FX rates remain at recent levels, foreign exchange will not have a material impact on our reported growth rates in 2014. The 6 core acquisitions completed to date in 2013 will build on sustained operating performance and set a solid foundation for future revenue and profit growth, consistent with our long-term strategy. Overall, we expect these completed transactions to add 2.5 percentage points to our constant dollar revenue growth in 2014, along with $20 million to $25 million of incremental adjusted OIBDA after initial integration costs. Additional efficiency and operating gains will be realized over time as our real estate consolidation plans are implemented for these businesses. Our CapEx and free cash flow will be impacted by our recent acquisitions and investments in our data centers. We targeted nearly $40 million of CapEx for acquisitions, primarily Cornerstone, and about $10 million to support real estate consolidations, especially in Brazil and Argentina. These investments will drive future profit growth. We also expect to about -- to invest about $40 million in data center build-outs, including our first aboveground facility in Massachusetts. Let's turn to Slide 10 to summarize our 2014 outlook. Again, on a constant dollar basis, we're targeting 2% to 4% revenue growth and 2% to 5% adjusted OIBDA growth. On a reported basis, this outlook supports our preliminary revenue guidance of between $3,090,000,000 and $3,170,000,000 and adjusted OIBDA of $930 million to $960 million. Our outlook for adjusted EPS is to remain in the range of $1.03 to $1.14 per share, as adjusted OIBDA gains are offset by higher depreciation and amortization and increased interest expense. Our adjusted EPS calculation assumes 193 million shares outstanding and a structural tax rate of $39 million -- of 39%. Our outlook is for consistent underlying free cash flow to reflect solid operating performance and consistent trends. The year-on-year decrease in expected free cash flow is primarily due to higher capital expenditures of $245 million for the year, driven by approximately $50 million in acquisition integration and real estate consolidations designed to drive future profit gains. This outlook for 2014 is preliminary and is based on current FX rates, paper prices and shares outstanding, any or all of which can change materially in short periods of time. We'll update our outlook again on our Q4 earnings call to reflect changes, if any, in these variables. A slide laying out our outlook for line items below adjusted OIBDA is included in the appendix. That concludes our review. In summary, Q3 was a quarter of solid financial performance, and we're on track to achieve our 2013 financial goals. We continue to execute against our business plan, sustaining high profits and cash flow in North America and driving strong growth and higher returns in our International business. We continue to advance work in connection with the REIT conversion as part of our long-term approach to enhance value creation for stockholders. Thank you, and we'd now be happy to take your questions.

[Operator Instructions] Our first question is from George Tong of Piper Jaffray.

I want to get a sense for what your outlook is for organic storage volume trends in North America. How much has your sales force verticalization and sales and marketing investments contributed to capping the un-vended storage opportunity?

George, it's Bill. I think right now we're still seeing continued traction on the verticalization, but again, as I said last time, it's still early days because we stood up a number of the verticals. I think right now, in terms of volume growth, is we're flat, trying to trend upward in some of the markets that we've applied it to. But I think in terms of revenue, we're still seeing the 1%, 1.5% revenue growth, if we look at the North American business.

Got it. And within International storage, can you talk about whether you're maintaining share in the countries where you have a leadership position and what your progress is in taking non-leadership countries to leadership positions?

Well, I think on that, we're actually gaining share in the markets where we have leadership positions and we're, in some countries where we've been at it longer than others, in spots in South America, for instance, we're mimicking margins that we see in North America, in the most mature markets. So that's progressing very well. I think that the -- overall, I think if you look at the countries, Peru, we did an acquisition which puts us into a strong leadership position now in Peru this year. Last year, through our acquisitions in Brazil, we achieved a market position, but we've done now an even more recent acquisition in Brazil, which furthers the distance between ourselves and our next competitor. So I think with the targeted acquisitions we've done is we've continued to build market-leading positions. So if we kind of look at in Latin America right now, in Chile, Brazil, Peru and Colombia, because the acquisition we did in Colombia was already in a leading or pole position in that market, we have clear market-leading positions in all those countries.

That's helpful. And can you talk a bit about the progress you're making and additional color in scaling your wholesale data center business and any other diversifying growth initiatives you have beyond wholesale data centers?

It's too early for us to comment on it. We have a pipeline in the emerging business, which Harry is now taking over. And there's a number of things that are building up in that pipeline, and we're screening those to figure out which ones will go to the testing phase. And as I said, we'll test, and then based on those tests, we'll either drop or we'll scale. So we're in the process of that. In terms of the wholesale data center space, we are making some real progress. And in fact, we're starting to see more and more synergies between the wholesale data space and our data protection business, because many customers like the continuity in terms of what we can do for them vis-à-vis their tiered archiving strategy, so it's more of a continuous product. So again, early days, but that's why we were encouraged to go ahead to start the construction of the aboveground facility in Northborough, Massachusetts.

And then last question, excluding special charges this quarter, OIBDA was -- margins were flat from the prior year. What are the drivers for continued margin upside? Any specifics you have, especially on the International front?

I think on the International front, I think Brian highlighted, and he can go into more specifics, is a modest gain. But I think again, I think I said this last time on the call, you need to think about International as a portfolio play. And that's why I highlighted in my remarks that Rod, with his leadership in International, achieved 700 basis points whilst adding a number of emerging markets. Because when we buy these emerging market plays, it takes us a while to get them to the margins that we get as we fold in and rationalize the real estate. And so our view is that if you start seeing a major ramp-up in the overall International margin, it's saying that we're not finding places that are good opportunities to start building market-leading positions in other geographies. So next year, I think Brian highlighted it, it's a fairly modest improvement in terms of our OIBDA margin on International. It's not saying that the business isn't growing in value. It's just saying that we see an acquisition pipeline, which it takes time to actually bring those things up, both to a market-leading position, and to actually consolidate the operations so that we start mimicking the margins. So we have countries in South America that, as I say, are at the same or actually even slightly higher margin than the United States. And we have others that are further back on the development curve that are growing. So it is really a portfolio play.

Yes, that's exactly right. I think in North America, we're trying to sustain very high returns, where we have, in 2/3 of our portfolio internationally, where we have leadership and very good returns, we're trying to sustain those as well and drive additional margin improvement overall as we continue to scale out the International portfolio and control our overhead costs in corporate and drive efficiencies that enable us to reinvest selectively against new growth opportunities. So in balance, right now, we're in a zone where our profit is projected to grow at or slightly above our revenue growth rate. And I think over time, as we continue to be successful advancing growth opportunities, I think that will give us greater chance to kind of leverage our cost base and produce some margin gains.

Yes. And one thing on that, just to add to Brian's comment, is the thing you should keep in mind, that we're always doing these things above our hurdle rate. So yes, we want to actually make even higher returns on equity, but these acquisitions that we're doing in these emerging markets typically are plus-20% return on equity and have very attractive, obviously then, returns on invested capital. But as they grow, then of course, the returns grow even more.

Our next question comes from Shlomo Rosenbaum of Stifel. Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division: Bill, I want ask you a little more about Cornerstone. The acquisition, is this, would you say, more of a real estate consolidation play? Or is this more of a play where you have a much better entree into this mid-market, where you guys typically haven't played that much?

Good question, Shlomo. It's both. I think that, first of all, to your first question on the real estate side, the reason why the returns look so attractive, as we say, it's mid-teens in terms of return on equity and 10%-plus return on invested capital, is going to your real estate question. It's almost like a pickup and move because there's such an overlap in terms of their real estate and ours. So it takes a little while because I think some of the leases go out to 5 years, where we won't be able to consolidate the real estate overnight. But we're going to be able to consolidate a lot of it fairly quickly. So it is, to your point, a real estate operations consolidation move, is what's in our acquisition model driving the value, first and foremost. So that's what we based our modeling on and that's what we're banking the returns on. So it's something that we're very comfortable with. I think the potential upside to outperform, that's very difficult to quantify. Is your comment about their presence on the middle market? In some of the organizational changes I alluded to is also helping us get at that. So we are looking to get some D&A from Cornerstone and doing -- being more aggressive in the middle market, where we may not have been as present in the past. And we think there's some interesting opportunities there. Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division: Do you think you're going to need to stand up a separate sales organization? Because I mean, typically the typical account that they went after has really, has a different parameter than the kind of national or even international accounts that you typically go after.

Shlomo, I'd rather get into that on Investor Day in March because -- I'm not trying to be coy, but the announcement that we've made in terms of the reorganization of the alignment and restructuring that we're taking is going -- part of that is addressing your question. And as you can probably appreciate, we're in the process of communicating that throughout the organization. So I don't want to really get ahead of myself in terms of our announcements internally. But part of our restructuring is to actually address the question that you're asking. Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division: Okay. I'll move on from there. I appreciate that. The core service decline was kind of the lowest we've seen since 1Q '12. Just from what you guys talked about in terms of expectation that service to continue to weigh, do I assume that you guys view this as an anomaly as opposed to a bottoming?

I think there are similarities in the trend, Shlomo. We are seeing benefit as we're acquiring businesses and integrating them. The related transportation activity and things of that nature, there's a benefit that flows through core service. We are seeing some leveling of the service trends. I don't want to make too much of that at this stage, but I think some of the flattening we're beginning to see, it's still down, and we're still anticipating a level of pressure there. And we also just have some more favorable compares year-on-year. We worked through some of the tougher comparison areas, like our Shredding business in International. So on balance, it's somewhat better and we've got some discrete things that are helping us, but I would reinforce, we still expect to have a level of pressure on just the really, the key impact of technology, which is not on our storage business, but more on how paper records are used in business operations. We do anticipate some level of pressure going forward. Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division: And then Brian, maybe you could just walk us through the difference between the OIBDA and the free cash flow this year and the OIBDA and the free cash flow of next year. I mean, how much of it is the difference of interest expense? And how much of it are relating to some of the other efforts that you guys have, maybe in data center and some of the other things?

It's principally capital. So if you took our numbers next year, Shlomo, we try to highlight that there's roughly $50 million of investment in integrating the acquisitions, as well as including some discrete investments we're making in Latin America to capture -- to get more efficient real estate operations. If you adjust it for that $50 million number, I think you basically see very similar trends year-on-year in adjusted OIBDA. We'll have somewhat -- we have low cash taxes this year, driven by the timing of some payments. But next year, that will be more normalized as well.

Our next question comes from Andrew Steinerman of JPMorgan. Andrew C. Steinerman - JP Morgan Chase & Co, Research Division: I'm sorry, I can't resist. I'm going to ask another core service question, if that's okay. So in the quarter, there's language in the press release that says new incoming volume related to transportation. So could you just be specific? You definitely have been very clear that there's a long-term trend to less retrievals, but in the third quarter, was there some recovery in that retrieval piece? And then looking at 2014, do you feel like core service internally could be flattish?

Andrew, it's add lots [ph] is where we're seeing some benefit. There is some acquisition benefit as well. But the add lots [ph], it's an area of focus in terms of selling force effectiveness, growth in international markets. We're seeing -- we saw better trends on add lots [ph] or new incoming volume in Q3. And I think your outlook overall next year for services is in the ballpark. Kind of, I think overall, our underlying growth on an internal basis, we're looking at 2% to 3% storage and relatively flat service numbers. And obviously, paper and things like that will have some impact on that. But given our current view, that those are reasonable estimates. Andrew C. Steinerman - JP Morgan Chase & Co, Research Division: Great. And that flattish comment about service for 2014 was an internal comment, right?

That was internal, that's right. So there's about 2.5% benefit overall from the acquisitions.

Our next question comes from Andrew Wittmann of Baird. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: Wanted to ask first on kind of the data center strategy, Bill, and maybe Brian as well. Just kind of, can you help us phase in what you think kind of what a reasonable capital outlay for that business is? And then more strategically, can you just talk about how, as kind of a real estate play here, Iron Mountain is going to differentiate in the marketplace versus some, already some pretty good competitors? And then maybe lastly, if you haven't already, can you comment on if this data center that you're currently starting construction on is spec or if it already has some tenants?

I think, first of all, this is -- the reason why we have an emerging business, this is a step-by-step approach, as we said it is. We invest capital based on where we see that this potential demand is the way to test it out. So right now, our plan is the $40 million that we've discussed, that we've earmarked, which is both expanding our operation in Boyers in the underground facility, as well as building the aboveground facility at our campus in Northborough, Massachusetts. I think that the other part of your question is how do we compete against the other players in this space, is the feedback -- and I was actually with a customer last week, the feedback we're getting is that because of our strong customer relationships on the data protection side and our understanding in terms of what CIOs and data center infrastructure people understand what their business is about, is that they're very comfortable talking to us, especially when they start thinking about their archiving strategy in a more continuous method. So what we're finding is that we actually do have a differentiated brand. And in fact, we've hired a couple of people who used to be in what are competitors to us today. So early days still, but we felt confident, enough based on the lead generation and customers that we're starting to sign up, that this was, is definitely a business that we should pay attention to and continue to test and develop. So I think right now, I think that's where we are. I think in terms of customers signed up, as you probably can appreciate it, is that it's chicken and egg. In other words, to sign somebody into a colo or a wholesale data center contract, and the Northborough facility is more about colocation, is that the facility has to be done or nearly done. But we didn't break ground until we had a robust enough pipeline of leads that we felt comfortable that this was a very low-risk opportunity to, or a low-risk investment in terms of to start the construction. And at this point, we haven't signed anyone for the Northborough facility, but we have a strong pipeline that we feel pretty comfortable with that we'll be able to get traction relatively soon when the facility is completed. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: Got you. That's helpful. And then I wanted to just dig in on some of your comments. You kind of mentioned that there are several PLRs with the IRS. As we look at the 8-K from the summer, it really seemed like that the racking was the one that was specifically called out there as kind of the main issue. Not looking for any insight as to where we are in the process, but just to understand the scope and the number of issues in front of the IRS, should investors be thinking about that summer 8-K on racking as really the kind of the crux of the issue? Or are there other, in these several PLRs that are out there, that also we should be thinking about or contemplating as we think about the company here today?

So Andrew, there are a range of topics that we sought clarity from the IRS in terms of REIT conversion. Just going back to what we said in the past, there are, in our lens, a few key issues. Racking is one of them. Goodwill is another topic. There's some specifics related to our business model on how we store items that results to something that we wanted to clarify. The issue of racking was specifically what the IRS had highlighted when they informed us about the formation of the working group and the delay in the process. And so that was the issue that they were centered on, related to whatever it is they're sorting out through the working group. There are other topics that we need to clarify. And consistent with what we've said all along, going back in time, and as we've said, we feel good about our arguments. And it's not certain, the outcomes are uncertain here, but we feel good about our arguments and positioning, and we'll continue to work to be ready to become a REIT, assuming we can get favorable clarification on that over time. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: Okay. So is it fair to say that just because these other issues weren't mentioned in the 8-K that you filed this summer that, that does not necessarily mean that they're fully addressed or signed off on by the IRS?

Trying to answer that question, though -- we haven't referred to getting clarity on other issues with the IRS.

Our next question comes from Kevin McVeigh of Macquarie.

Bill, in terms of the search, what are you looking for in terms of CFO? And as you think about that, just any characteristics you're looking for. I mean, Brian has obviously done a wonderful job operationally. What are you focused on as you think about the next candidate in that seat?

Look, I think you can have a long list and it can be trying to identify purple squirrels, so to speak. I think that we feel pretty good that we have strong internal candidates. But it's like any of these situations, you need to go outside and look at the benchmarks. And we will look across both the REIT and non-REIT world. It's going to be important whoever is the CFO going forward has a strong operating bend as well as a good financial bend because we do have a fairly -- I wouldn't say complex business, but we have a lot of moving pieces and it's a very global business. So we think we have both strong internal candidates, but we also think it's important to benchmark those people against what the market also has available to us. So we'll see how we progress. But one other thing that I highlighted on the call, about Harry's move with JT coming in his place, Brian's moving out and Rod is coming in, it is a company that we take seriously succession planning and building bench strength. So we feel like we're in good shape. But at the same time, I think for good diligence, we should go out and see what the market has.

Got it. And then, kind of any sense on timing -- I know, when kind of Brian came in, John had transitioned before Brian came in. Any sense of timing on when we should expect an announcement?

No. I think we're in the process of appointing a headhunter to assist us with it, and we're going to go through as fast and deliberate as we can, but I don't think that we can be pinned down to a timing at this point.

Got it. And then just shifting gears, looking at kind of the storage internal growth. I mean, it looks like we're seeing a pretty consistent trend in terms of a slower rate of destruction, and obviously, the storage overall benefiting. That seems pretty consistent with past recoveries. As you think about the reacceleration and the internal growth in the core storage business, is this tracking pretty similar to past recoveries? And should we expect more organic sales as kind of -- overall, I know it's always a function of -- there's a macro component to it. But any kind of flavor on that as well?

Kevin, I think that I wouldn't, because I think that -- look, especially given a lot of the -- there's been a lot of legal holds recently as well. And some of it is just driven by legal holds. And as those cases get cleared, you can get some lumpiness in terms of the destruction. So I wouldn't, at this point, read too much into those trends. I think where some of the things that we're highlighting, which I discussed in an earlier question, about how we're making some realignments and adjustments in our go-to-market, that we think that we're going to get a better response and share of, say, the middle market, I think, is where the benefit is going to come from. At this point, I wouldn't start reading too much into trends around destruction. I think where our attention is focusing on much more improving the inbounding rather than thinking that we have a lot of control or see a different trend on the destruction side.

I would say I think the trends reinforce the durability of this business, and we're doing quite well in a slower-growth global economy, and I think have opportunities to build on that operationally. And if there's improvement in the macro economy, that can help us as well over time.

Great, and then just if I could, what percentage of the business now is kind of middle market versus larger enterprise, on the storage side?

Roughly half of our business is customers, larger customers with multiyear agreements, and roughly half are customers that are relatively smaller, that are on annual agreements, and that's in terms of revenue, not in terms of number of customers. Obviously, they'd be more smaller. But I think that the opportunity here is to not just increase the focus on the relatively small customers, but also to extend our reach a bit here and really fully develop that opportunity. And in terms of the un-vended opportunity, I think there's a lot of indications that there's still substantial potential there. So we have a good established base, but I think it's something that the company can build on.

Our next question comes from Scott Schneeberger of Oppenheimer. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: On the lines of the services, Brian, you answered Andrew earlier on, I believe it was core service as kind of an outlook for next year. And I just want to confirm that was core as opposed to overall service, because I noticed in the press release, complementary services decreased due to delayed timing in some document management services and special projects. And the second part of this question is, are you seeing a buildup now of special project activity and it's just delayed? Or is that a more broad, longer-term statement?

The special project was just a very specific reference to the quarter, just kind of near-term activity, just trying to highlight some of the drivers. And the reference was to core service. Overall service probably is going to be flattish as well, just because we do anticipate some pressure from -- given where paper prices are currently, offsetting some of the gains that we're making on other fronts. But I think overall, a relatively flattish core service outlook before acquisitions and internal growth of 2% to 3% storage. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Okay. And then my last question will be with regard to acquisitions, you guys mentioned, somewhere in the prepared remarks, that the kind of the long-term guidance for acquisitions was somewhere, domestic and emerging, $50 million to $150 million, and kind of near the high end of range of that, without even bringing Cornerstone into the mix. So I just want to get an update on how you're thinking about that longer term. Is there going to be a pause? Or is it a bit of a pedal to the metal from here?

Scott, I think that we have -- if we look at International, we've got a pretty strong pipeline, so I don't see much pausing, because we've got them queued up, to a certain degree. But it's opportunistic. We don't chase deals and we don't chase markets. But we are constantly scanning the horizon, and we see, especially in the International side, some good opportunities. We see some possible good bolt-ins in some of our core markets to keep those strong and healthy, and our cash flow going forward. But it's also opportunistic. We don't control the timing on these things. But we feel pretty good, for instance, with the International pipeline. I think we probably have to kind of close it and wrap it up then, if it's okay. We're a little bit over time. So I want to thank you, operator. And to wrap it up, just to emphasize, we had a good quarter, driven by consistent growth in our storage rental business and we made good progress on all 3 key pillars of our strategy, which is sustaining growth in the mature markets, growing our presence in the emerging markets and evaluating, incubating and scaling new emerging businesses. Our financial position continues to be strong and we feel good about the opportunities to grow the business at attractive returns on capital, based on what we see going forward. We've enhanced our focus on the key drivers of value for the business and are starting to realign the organization for maximum efficiency and to go after those opportunities. As we implement our plan, we will always continue to focus on improving capital allocation, maximizing the total returns and delivering a sustainable value to our shareholders. So I want to thank you all for joining us this morning, and let's hope the Sox keep it up.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.