Iron Mountain Incorporated (IRM) Q2 2014 Earnings Report, Transcript and Summary

Good morning. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Iron Mountain Q2 Earnings Webcast. [Operator Instructions] Thank you. Ms. Marsden, you may begin your conference.

Thank you, Kimberly, and welcome, everyone, to our second quarter 2014 Earnings Conference Call. I'm Melissa Marsden, Senior Vice President, Investor Relations for the company. This morning, we'll hear from Bill Meaney, CEO, who will discuss highlights for the quarter and progress toward our strategic initiatives, followed by Rod Day, CFO, who will cover financial results and discuss elements of our new supplemental reporting package. After prepared remarks, we'll open up the phones for Q&A. Per our custom, we have a user-controlled slide presentation available at the Investor Relations page of our website at www.ironmountain.com. Today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for 2014 financial performance. All forward-looking statements are subject to risks and uncertainties. Please refer to today's press release, Slide 2 of the supplemental reporting package, 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 on our forward-looking statements. In addition, we use several non-GAAP measures when presenting our financial results. The reconciliations to these non-GAAP measures, as required by Reg G, are included in these supplemental reporting package. With that, Bill, would you please begin?

Thank you, Melissa, and good morning, everyone. This was a good quarter for the company, highlighted by the receipt in late June of the favorable private letter ruling from the IRS and our conversion to a REIT. As we've said from the beginning of the process, we believe we fit well as a REIT due to our sizable real estate portfolio. We have a very attractive business model, through which we incur occupancy costs on a square foot basis and generate storage rental revenue on a cubic foot basis. This significant spread between our cost and our return on investment generates high net operating income per square foot and is core to how we create value for our stockholders. We also distinguished ourselves through low turnover costs per square foot. We have no TIs, or tenant improvements, required if a customer terminates and we bring in another customer's records. We also have a low customer churn of less than 2% per annum as well as maintaining high quality receivables giving our service to 950 of the Fortune 1,000. The REIT structure complements our strategy whilst enhancing payouts and it highlights our highly disciplined approach around asset allocation. As a REIT, we expect to continue to generate the cash flow necessary to support attractive stockholder return and to invest -- to sustain the durability of the business while continuing to identify opportunities for enhanced growth in line with our long-term strategic plan. We also see the potential to purchase a significant portion of our leased real estate over time, thereby reducing our cost of debt and enhancing residual values. The recent roadshow presentation available on our website addresses many of the common questions related to our conversion. So we're not going to spend a lot of time on that in prepared remarks today. Rather, I'll focus on what we're seeing in the business and the progress on our strategic plan and then Rod will cover financial and operating specifics whilst directing you to the relevant sections of our new supplemental reporting package. Turning now to financial highlights. Total revenue for the quarter was $787 million, up 4.4% on a constant dollar basis, with adjusted OIBDA of $242 million and adjusted earnings per share of $0.41 per share, up roughly 5%. These results were in line with our presentation during our Investor Day in March and demonstrate the same growth rate on a like-for-like basis, both as a C-corp as well as now as a REIT. We maintained our high adjusted OIBDA margins for the total enterprise of roughly 31% during the quarter, with consistent performance in our North American segments and international margins in line with our targeted level in the mid-20s percent range. In addition, we achieved solid operating results and are making good progress on our strategic plan to sustain the durability of our high return business in developed markets, having added a net 1.3 million cubic feet of internal growth in the first half of the year in North America. Moreover, having reached 12% of our sales coming from emerging markets by the end of Q2, we are on track to our goal of having 16% of our sales from this high-growth segment by 2016. Finally, we continue to identify and test new and emerging business opportunities as well as further scaling of our data center opportunity. Total storage rental revenue, the key economic driver of our business, was up 5.7% in constant dollars, driven by strong growth of 14% in our International business and constant dollar growth of 3.3% in North American Records and Information Management, or RIM. Storage rental internal growth of 1.6% for the quarter reflected solid growth in Records Management volume of 1.7% in terms of internal growth and 7.6% if we include acquisitions year-on-year. We continue to see improvement in retention in North America, where a total records management storage volume outflows dropped to 6.6% from 6.8% in the first quarter and 7.1% in the fourth quarter 2013. We are pleased with this progress, as the reduction and terminations supported by our first quarter of net positive volume growth in North America Records Management since 2011. Importantly, we maintained strong North American Records Management margins of more than 38% during the quarter through ongoing productivity enhancements whilst continuing to invest in strengthening customer relationships and product development. In our internal -- International business, constant dollars storage rental growth was about 14% overall, with 32% constant dollar growth in emerging markets. These emerging markets, which, as I mentioned, represent just 12% of our total enterprise revenues today, have very favorable growth dynamics. Emerging market storage rental internal growth was 12% in the second quarter whilst volume expanded by 10% excluding acquisitions, or 33% in total, reflecting the successful integration of acquisitions completed in 2013. Acquisitions continue to be an integral part of our strategy overall, with a particular emphasis in these high-growth markets. We have a strong pipeline of opportunities in emerging markets, with more than 3x the coverage needed to achieve our goal of growing this part of our business to 16% of total revenue by the end of 2016. We evaluate acquisitions in terms of how they can both further our market leadership and sustain the durability of our business after first establishing that we can exceed our cost of capital and achieve our targeted returns. During the second quarter, we completed a few small customer acquisitions in the U.S., as well as tuck-in -- a tuck-in acquisition in Brazil and closed the previously announced transaction in Poland, bringing us to about $60 million of company acquisitions and another $10 million of customer acquisitions year-to-date. Within our emerging business opportunity area, we are pleased with the early interest in our data center operations. We have booked more than 70% of the inventory space we developed in our underground facility and are kicking off our next phase of development there. Additionally, we have signed our first few small deals in our data center near Boston, which we just completed last month. It is early days, but we have a good pipeline building up. Our targeted segment of the data center market has good growth dynamics and the potential to generate very attractive returns, and we will continue to employ a success-based approach to investment as we look to scale this business. For the remainder of the year, we anticipate continued solid constant dollar storage rental revenue and adjusted OIBDA growth in line with the 4% longer-term goals we've discussed in the past. We expect consistent trends with what we're seeing for durable storage rental revenue in developed markets and a moderation in the rate of activity-based service revenue declines. We are on track to make emerging markets, which achieve low-double digit internal storage growth rates, a more significant portion of our overall sales mix. And in our emerging business area, we continue to identify and test opportunities which are complementary to our core business and resonate with our customers. Overall, Q2 was a very solid quarter, anchored by our favorable REIT news and further progress on our strategic plan. We believe we are on track to deliver against our 2014 goals, as well as our longer term objectives. As a reminder, those are to: deliver shareholder total shareholder returns in the range of 8% to 9% in line with the S&P 500; provide predictable earnings and dividend growth with low volatility; and generate further upside over and above the 8% to 9% returns from our investments and additional emerging business opportunities. Currently, it is interesting to note that we are well on track with this overall goal given our current dividend yield of approximately 6%, combined with our growth in OIBDA of 5%, or what translates loosely into a total shareholder return, or TSR, of 11% plus any upside from emerging businesses. The REIT supports these goals as the yield component is now a bigger contributor to our targeted returns and supports our capital allocation approach. Now, I'd like to turn the call over to Rod.

Thanks, Bill. In keeping with our conversion to a REIT, we have begun to transition our financial disclosure to provide information that we believe will be useful to both current investors, as well as potential new investors. Going forward, rather than issuing a standalone press release and posting slides, supplemental debt statistics and GAAP reconciliations on the website, we will provide all these disclosures in 1 comprehensive supplemental reporting package. We anticipate enhancements to this package over time and would welcome your feedback. With that, let me direct your attention to the financial highlights on Page 7. We delivered solid results in Q2, which were supported by strong storage rental growth, good profit performance and the benefits from recent acquisitions in emerging and developed markets. Total reported revenues were $787 million for the quarter, up more than 4% compared with $754 million in 2013. Both gross margin and adjusted OIBDA were up approximately 4%, in line with our strategic planning goals. Year-to-date, adjusted OIBDA in 2014 includes $3.6 million of costs associated with the company's 2013 restructuring and $3.9 million of ongoing REIT compliance costs. Adjusted EPS of $0.41 increased by about 5% from $0.39 in the second quarter of 2013, which was restated to be on a comparable basis using our current structural tax rate of roughly 15%. For both the quarter and the year-to-date, we booked sizable discrete net tax benefits associated with the reversal of deferred tax liabilities and assets related to our conversion. Just a bit more color on this. Tax accounting for C-Corps requires the recognition of deferred tax liabilities and assets for the future expected tax impact of temporary differences between our tax basis and our financial reporting basis. As a REIT, instead of that booked to tax difference being reflected at our U.S. federal tax rate of 35%, it is now being reflected at 0% for the portion of the business that is included in the REIT and the QRS, or qualified REIT subsidiary structure. This is effectively a onetime reset of our deferred tax liabilities and assets and resulted in a large noncash benefit. While we no longer -- while we'll no longer be taxed at the U.S. federal level on our QRS income, we will continue to pay local tax on our international operations, including in those countries that were converted to the REIT structure. And of course, we'll continue to pay taxes on our global service operations and certain state taxes. But the REIT structure allows us to effectively repatriate storage-related income from the REIT countries and distribute it to stockholders without double taxation. While our structural rate for year-to-date came out to 15%, we continue to believe that a rate in the 17% range over the long term is about right. For the full year in 2014, we expect the structural rate to be between 15% and 17%. We have normalized FFO to adjust for these one-off tax effects as well. Another highlight from this page is our summary of our investments in capital expenditures. As you can see, due to the nature of our storage rental business, maintenance CapEx per foot is very low. Maintenance CapEx of roughly $30 million year-to-date is running slightly behind the $90 million midpoint of our full year guidance, as we typically see in the majority of CapEx improvement projects undertaken in the latter portion of the year. Other CapEx is right in line with the $50 million midpoint of the full year guidance, and real estate investment, including racking, is on pace with our full year expectation of around $200 million. Turning to components of revenue growth on Page 8. On a constant dollar basis, revenue is up 4.4%, reflecting solid storage rental revenue gains of 5.7%, while service revenue growth of 2.7% was driven by recent acquisitions, as well as fees from new inbound volume and increases in imaging projects and shredding activity. On a constant dollar basis, first half total revenue growth was 4.6%, driven by storage rental revenue gains of 5.5%, and service revenue growth of 3.3%. Also on this page, you can see that we continue to demonstrate improvement in net volume growth in Records Management, with total year-on-year volume growth in the quarter of 7.6% including acquisitions, or 1.7% excluding acquisitions. As we've noted previously, despite secular trends in the use of paper, we continue to see very consistent trends in the amount of incoming volume from our existing customers. In addition, we had increased contribution from acquisitions year-over-year and further improvements in the level of terminations and withdrawals, particularly in North America, as Bill highlighted earlier. On Page 10, we present components of growth on a segment basis. As you'll recall, in the first quarter, we amended our reporting structure to align with the way we manage the business. We broke down our North American segment into North American Records and Information Management, or RIM, North American Data Management or DM, an emerging business, which are currently a component of the corporate and other segments. Q2 segment results were generally in line with our expectations and consistent with recent trends. North America Records and Information Management delivered positive storage rental internal growth and maintained strong adjusted OIBDA margins of about 38%. We also improved capital efficiency, with spending at 4.3% of revenues, excluding real estate. North American Data Management storage rental was flat. Service declines continued to reflect the trend towards reduced activity and related transportation revenues as the business becomes more archival. However, we maintained strong adjusted OIBDA margins of more than 60% in this segment despite the reduction in revenues. The International segment continues to generate strong growth, with 14% constant dollar storage rental and 11.6% constant dollar growth in services, driven by recurring imaging projects. International business continue to deliver profitability on a portfolio basis, in line with our mid-20s target, with adjusted OIBDA margins of 23.8%. This is slightly down on the previous quarter, as a result of phasing of acquisition integration spends. Finally, corporate and other revenue was up 9%, reflecting growth in data center service revenues. As Bill noted, we're building out our pipeline in the data center business, so these comparisons are on a very small basis. On Page 17, we provide reconciliations from net income to FFO and then show further adjustments for noncash items to arrive at AFFO. Our FFO and AFFO figures reflect the deferred tax benefit resulting from the flushing entry that I mentioned earlier. If you were to use the Q2 normalized FFO as the run rate for the second half, or $118 million times 2, and add it to the year-to-date FFO of about $225 million, you will arrive at about $460 million of FFO, consistent with our full year guidance. A similar approach to AFFO revealed about $600 million for the full year. As mentioned on our reapproval call, with our projected ordinary dividend of $400 million to $420 million, we have strong coverage for our dividend relative to AFFO. Turning to some of our new disclosures. On Page 18, we present storage net operating income to provide a closer look at NOI from our records management and data management storage operations. We have also added a summary of our global real estate portfolio on Page 19 to show owned versus leased buildings and the associated facilities counts in square footage by major region. And on Page 20, we provide square footage of racked space by product type: records management, primarily the bulks business, and data protection or tapes. NOI per racked square foot, on this page, highlights the attractive economics that we derive from our real estate, which Bill mentioned earlier. On Page 22, we provide utilization for our records management and data protection businesses. The top portion of the page shows the trailing 5-quarter trend in both cubic feet of records and data protection tapes stored, as well as year-over-year growth. The bar charts towards the bottom of the page show the total amounts of installed racking we have in these 2 businesses and the capacity we have for racking, assuming our buildings were all fully racked. The utilization numbers below are the cubic feet of records or number of DPUs stored, expressed as a percentage of the racking we have in place and as a percentage of what our maximum rack capacity could be. As you can see, our utilization rates are quite high. We believe that due to frictional vacancy, our maximum utilization is in the mid-90s percent. Bear in mind that in the new facility, we would generally target to achieve stabilized utilization in about 3 years. We have some upside here, as we enhance the utilization through acquisition integration and facility consolidation over time. On Page 23, we show service business detail. This presentation has been updated from what was provided in our recent roadshow presentation. Effective July 1 of this year, we established CRS service entities in each of our identified REIT countries, which included transferring the designation of some employees who perform services in our warehouses that were previously categorized as storage-related. The transfers of these of these employees in REIT countries resulted in a shift of about $7 million of labor expenses, previously categorized as storage rental labor to services labor. We expect similar minor transfers of storage rental labor costs in the future, as we establish CRS service entities in any future REITs countries. So the basis for year-over-year comparisons will generally not be the same. We have provided a look at our customer base on Page 24. This highlights our StrongBox retention of around 93%, as well as the diversification of our large global customer base. We also provide sales, marketing and account management and customer acquisition costs, which we think of as similar to typical REIT turnover costs. Shifting to the balance sheet. Pages 25 and 26 present our debt maturity schedule and related metrics. Solid cash flow generation enables us to maintain a sound balance sheet. At quarter end, liquidity was virtually unchanged from Q1 at about $536 million, with $170 million in cash and $390 million in additional borrowing capacity. Our total lease-adjusted leverage ratio of 5.1x, which is at the high end of our targeted range, has increased over the past 3 years, as planned to support shareholder payouts, expenditures in connection with our proposed conversion to our REITs and recent acquisitions. We expect leverage to temporarily exceed our target range of 4x to 5x in the short term, due to costs associated with the REIT conversion. We do have extraordinary expenditures remaining in the first year of conversion, including: about a $130 million of cash associated with a special distribution, assuming the midpoint of our range and today's share price; another $85 million representing the bulk of the remaining tax recapture payments, due to the change in our depreciation schedule; and another $30 million of REIT conversion costs. If you were to look at 2014 on a normalized basis, absent these costs, and grow the components of free cash flow into 2015 at our expected growth rate and adjusted OIBDA, our excess cash available for investment, after paying our ordinary dividends, more than covers core real estate investments, including racking and leasehold improvements. Should we be more opportunistic about acquiring buildings outright or buildings associated with business acquisitions, we would look to borrow at our targeted leverage ratio or, perhaps, use equity to fund such investments. Given the returns we can generate from leveraging our scale and global platform, such financing would be a good use of capital. Lastly, on Page 28, we have provided components of value, which is a summary of the various parts of our business to facilitate valuation. A couple of things to note. We present storage NOI and service OIBDA, excluding rent expense, in order to present storage economics on a consistent basis, whether leased or owned. We also provide our total rent expense in the liabilities area. We are currently showing investment in buildings, racking and acquisition at book value, but it's our intent to -- ultimately, to provide a schedule of these investment categories with our expected returns. This schedule is followed by comprehensive definition of terms, which we believe will be helpful to investors to adjust to our new disclosure. In summary, Q2 was a good quarter, supported by sustained storage rental performance, continued high levels of profitability in our North American segments, and strong international and emerging market performance. And with that, operator, we're ready to take questions.

[Operator Instructions] Your first question is from the line of George Tong with Piper Jaffray. Keen Fai Tong - Piper Jaffray Companies, Research Division: Bill, internal growth and storage rentals this quarter increased about 1.6%, which is up from the prior quarter's growth of 1.4%, but still is below historical 2% growth levels. Can you discuss your outlook for internal storage growth and what potential catalysts that you can see that can drive further acceleration?

No, I think that, as we said last time, we weren't guiding for an immediate rebound to what we saw last year. But I think you have to look at the total picture in terms of the volume growth that we generated. Let's say, this is the first quarter since 2011 that we had a positive volume growth in North America. So there is a balance to get in terms -- because what we're looking for is total revenue, not just on the pricing front. I think, in terms of -- on the price, I think the -- it's an area in a low-inflation environment that we continue to work on and optimize further. But, I think, we're still where we were last quarter, which we are slightly improved from where we were 3 months ago. But we're saying it's more of a gradual improvement to expect rather than a rapid rebound to the 2% that you referenced. Keen Fai Tong - Piper Jaffray Companies, Research Division: Right. And turning to services. Internal growth this quarter reflected some lower project fees in customer terms in North America. Do you think this is a secular trend, or do you expect a rebound in internal growth and services next quarter?

I think there is 2 bits, as you know, on the service front. There are things that are, what I would call, core services that related to our records management and data management business, and then there is the project side. And the -- I wouldn't say they're secular. You're right to call out that the change in trend on the service revenue side is driven by a drop-off in some project -- large projects that we had last year. But projects in their very nature are lumpy, and it's not -- the fact that some of those haven't been replaced at the same level in this quarter is not a trend, it's rather just the nature of that part of the business. In terms of the other part of the business that we've been calling out as having headwinds, which is related to our core services around data management and records management, there we do see a flattening out of the headwinds, if you will. But, I think, in terms of the thing that was driving the major change in this quarter was the lumpiness of some of the specific projects that we do to service some of our customers. Keen Fai Tong - Piper Jaffray Companies, Research Division: All right, makes sense. Rod, you've indicated you expect an effective tax rate of about 17% on a go-forward basis. Can you detail how taxes will play out in the remainder of the year and what you expect cash tax savings to be taking into account differences between book and cash taxes?

Yes. So in terms of the rate that we expect, we had 15% in Q2, as I said earlier. The range that we expect for the remainder of the year will be between 15% and 17%. The reason for the slight level of uncertainty is that we obviously still pay tax on our overseas operations within those countries and also within -- on the service activity that we have within North America. So depending on the mix of the business, that will drive some small variation in the amounts of tax that we have to pay. So therefore, we do see a range, if you like, between 15% and 17%. In terms of the cash tax saving, I'd say the sort of simple way to think about that would be, if you say historically we used to pay 39% and we're now down in the sort of 15% to 17%, that would be sort of the ratio to take as the kind of key driver of change. We will, as I was saying though earlier, have to pay additional tax associated with the slowdown in the depreciation of our racking, and that will come through this year. It's not part of our normalized tax rate, but it will impact our numbers this year. Keen Fai Tong - Piper Jaffray Companies, Research Division: Got it. And you're still expecting cash tax savings of about $120 million per year?

Correct, yes. Keen Fai Tong - Piper Jaffray Companies, Research Division: Okay. And then lastly, you've indicated you're accelerating your acquisition plans and plans to own more strategic real estate over time. Can you detail how you plan to finance these growth plans and if there will be a need for capital raises near term?

We are still working through the details of that, because the key thing for us is, obviously, to finance these in the most effective way. The likelihood is that we will finance some through debt and some through some level of equity, but we will structure this in such a way that we can generate the maximum level of returns for our investors. And we'll provide more details of that, as we work our way through that later this year.

Your next question comes from the line of Scott Schneeberger with Oppenheimer. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Just following-up on one of George's questions, special project activity in the service area. There has been a belief in the past that, that can be an indicator that business is picking up or slowing down. And you mentioned it's been lumpy. Do you guys take any readthrough from what you're seeing right now, or do you just stick more with the view of the lumpiness and it's not really a foreshadowing of things to come?

No, I don't think it's a very good leading indicator for, Scott, on the activity levels. So the nature of these things, for instance -- I think one of our larger projects last year was for a mortgage company, because they had certain things that they were actually selling and repackaging to someone else and we had to go in and help them, which both scan and organize a number of these documents. So it's that kind of lumpiness of activity. It's usually related to either a on-boarding of a major customer that has some specific needs or a major customer doing some kind of transaction that requires special services. So it tends to not have a very good correlation with, I think, any leading indicator. So it really is a one-off type project. Now given the -- it's even probably more lumpy than you see, when you look at our business from an analytical standpoint, but given the scale of our business, some of those lumps smooth out, but it really is of that kind of nature. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Great. And then with regard, primarily in core storage and we'll group shredding in as well, could you discuss the pricing environment and the competitive environment, and what you're seeing out there?

I think that the -- I think it's fairly stable. I think that, if anything -- if you look at -- I think it was on Page 8. If you look at the trends in what's happening, I think that we don't see, I think, additional pressure on that. I think what we see now is, what we euphemistically call the power of the mountain, is we've got a lot more focused in honing our commercial skills. And as a result we are doing better both on defense and offense. So if you look at the trends from a year ago until today, you'll see that we've done better both in terms of sales, so out there winning by about 300 basis points over the whole period that we've got graft, and we've improve our defense by about 80 basis points. So I think that the -- I wouldn't -- and if you look at that in an environment where we're still pushing revenue -- positive revenue growth, are we making some trade-offs? Maybe, but a lot of it is also the segments that happen to be addressing, both in terms of the countries we're going after and the customers that we're going after. So I think, net-net, I don't see a major change in the competitive market other than we're using the power of the mountain or the scale that we have for the benefit of our customers, I think, much more fuller or much more comprehensively. I think the only thing that's a challenge in the low-inflationary environments that we have is price is always a challenge. Because most of the countries that we operate in, at least ones that we have any significant size, are in low inflationary environments and putting price increases through, and those types of environments is always difficult. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: And just you cited that chart on Page 8. I'm curious, over the coming year or 18 months, where do you think -- excluding acquisitions from the discussion, which of the buckets there do you think will show the most change? I can tell ideally which ones you'd like to move the most, but which do you think will have the most significant moves?

Well, let's look at the chart. If we look at Q2 '14, just so we're just looking at the same numbers. So let's look at the charts by color chain [ph]. So if you look you look of the dark blue block just above the line and the right red black just below the line, I think those things are going to tend to run in similar trends. Although the light red, to me, also tends to have some lumpiness, some of that is to do with legal holds coming on or off, so you can have some movement around that 4.7. But I think, generally, that's what we would call the organic growth of the business. So I think, as I've pointed out previously, that independent of everything else, even though paper itself is in decline, document growth -- new document growth from existing customers tends to be in the 6% to 7% range, which is the dark blue block, and I expect that to stay in that range. That gets netted out, because customers are going through different life cycles with their inventory and that's been bouncing around the 4.5% to, say, 4.7% range. And I would expect those -- so I expect those 2 to be relatively stable going forward. I think the -- lets leave the acquisitions out, because that is -- we do have an acquisition strategy, biased more towards the emerging markets. But I think what you're really referring to is: what's the organic growth health of the business in terms of things that are -- that's more incremental? So I think then it really comes down to you asking, are we going to do better or with the trend in terms of new sales, which is the lighter blue or the kind of medium blue bar, 2.2%; and our defense, which is the out perm, so where we are actually are losing business, which is dark red, of minus 2%. To say that we're going to continue on a certain trend line, I'm not going to guide for that. The only thing I would say is that, I think, the improvement that we've highlighted, I think we should be able to hang on to in that order of magnitude of where we're taking is -- we're quite encouraged by a couple of things that we've done with our commercial operation, both in terms of the way that we develop products now and take advantage of our global scale, not just local scale, in terms of getting insights in terms of what customers find helpful in terms of our product and solution delivery. And then the other part of it is, is that some of the reorganization of our sales force that we've talked about a few quarters now, both in terms of the verticalization, which again, gives us better insights in terms of solutions that our customers are looking for. And that seems to be resonating where you see in both the better -- in trend both in new sales, as well as defense. And then the last aspect is, is that we are boosting our presence in the middle market. Our presence in the enterprise part of the segment has been strong for many, many years, but we're now also trying to have a similar representation in the middle market. So again, I think there is lots of things that underpin that we should be able to maintain those kinds of trends, but I'm not guiding for major increase in either of those.

Bill, it's interesting points you make there. One sort of addition I just want to add is that we have service revenue associated with our perms and terms. And as they've decreased in the quarter, that actually had impact to our service revenue in the quarter. And it's a negative as it were on service, but it's a positive for the longer term of the business. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: And, Rod, just one other thing. And I like the new presentation, by the way. On Page 24, where you show North America revenue by vertical, that pie chart, what is that? Is that the end of 2013? Is that as of June 30? And could you give us a feel for, maybe over the past few years and maybe looking forward to some activity you're seeing in the verticals, how might that pie chart change?

Yes. So the numbers refer to sort of year-to-date '14, so it's kind of the latest view. I think what you'll see is that, as we sort of develop out our vertical strategy and really look to drive specific areas, we would expect some shift in this chart, although it's likely to be slow, just kind of given the annuity basis of our business. So the kind of areas where we do see potential, for example, would be federal, which is one area where there's plenty of unvended [ph] activity for us to go after, the whole area, the life sciences, energy and business services, very interesting new areas for us to be getting after. Legal and financial insurance, historically, we've been very strong in those segments. We'd expect to continue to bolster our presence. But in terms of potential relative to some of the other segments, it's probably less. So I would suggest. But would you agree with that, Bill?

Yes, I think that's a good summary. The only thing I also would add is in the other category, a lot of that is the middle market. And we have roughly 20% share of wallet in the middle market where we have, say, 60% share of wallet in the large enterprise market. So I'm not saying that we're going to get to the same share of wallet. But we do feel, like the federal market, that we're underrepresented in others. So how those things move out? But I would say that -- I agree with Ron saying as we're well represented in kind of the Big 3, so to speak, legal, financial and insurance, not that we wouldn't want more business there. We are constantly pushing. But we do have some areas like federal, and, I would say, the middle market, and other where we're underrepresented and we think there's real opportunity. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: One more, if I can sneak in, then I'll turnover. Just the one topic you didn't hit in that category was healthcare. I'm curious if you're seeing anything changed on that front?

It's a good question. We do normally talk about healthcare, so I'm glad you brought that up, Scott. We have -- we continue to be pleased with what we are seeing the swap-out, or the change. Because, obviously, the electronic medical records has affected our service revenue in healthcare probably more than any other vertical, as more and more of the healthcare records have gone online. That being said, we've been able to increase our storage revenue in healthcare by taking in more records. So we have year-on-year storage growth of almost a little less than 1%, which goes to that trend. So they're not destroying the records. In fact, we're getting more records as they're cleaning out the hospitals as well. In storage, as you recall, has about 2x the margin that service. So healthcare continues to be a major focus for us. We are also finding through these conversations, which goes back to Rod's comment about the verticalization, is we're gaining further insights on how we can service them even beyond the traditional, what I would call, medical record area. So it is an area where, I think, innovation is actually helping us, especially shifting us to higher-margin work.

Your next question is from the line of Andrew Steinerman with JPMorgan. Andrew C. Steinerman - JP Morgan Chase & Co, Research Division: You talked about the activity service revenue declines narrowing. I remember this activity-based moving boxes around, moving tapes around being a drag for many years. I think it might have started in 2009. My question is: why do you feel now is a time where these activity service revenues are starting to even-out, and do we think that's kind of sustainable?

I think that the -- well, there is kind of a couple of things. One is that we're still seeing -- if we look at the 2 businesses, Andrew, I think it's worthwhile to look at records management versus data management, because data management, we still are seeing probably stronger headwinds in terms of getting to a, what I'll call, a stable floor than we are in records management. And the reason for that simply is that we're still finishing up the transition from tape being for backup and recovery to tape being an archival product. Right? So our storage volume, it continues to grow in the DM business, but how tape is being used is different. So as a result, we're doing this transition to a different service model, which happens to have a lower activity associated with it. And the thing I should highlight is, we are able to maintain our margins pretty closely during these drops in activity. So it's important to understand that it's an activity-driven. Whereas on the records management side, the data that we're looking at, we are further down that cycle, if I will, that transition to a more archival nature. So things like I was highlighting in healthcare, healthcare traditionally was a high-service business because it had a lot of, what we call, active file with medical records going backwards and forwards between the hospitals and our facilities. That obviously is gone away, or going away, fairly quickly in most locations. So I think in records management, that trend to archival nature of our services is further ahead, and we see that decline flattening out. So that's what we're really -- where we're looking at. At some point, it does get to the transition from active to archive you get through 80%, 90% of the transition, and I think that's where we're at with the records management. And we are -- I think we're well down that journey with data management, but we're not as far down the journey as we are with records management. Andrew C. Steinerman - JP Morgan Chase & Co, Research Division: Great. And do you think we'll ever get to a point where the service revenue, activity-based service revenues, could be flat?

I think, relatively, it's -- I think that it's probably going to kind of go up and down a little bit. I think the -- and it depends on what we replace some of that service revenues. So some of it is where we're replacing -- we're cannibalize our own backwards and forwards transportation, if you will, by providing them scanning and online options to retrieve data as well. So the part of it is, is we're also providing different ways for the customer to get the information back that's more efficient.

[Operator Instructions] Your next question comes from the line of Shlomo Rosenbaum with Stifle. Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division: I wanted to ask a little bit about some of the real estate side of things. In terms of potential lease buyout, does your portfolio have any particular amount to favorable purchase options versus market value? Is there anything in there that's particularly attractive if you go through the portfolio, like a certain percentage of them?

Yes. I mean, actually on Slide 27 of the supplement, so it gives you a sort of the profile of how our leases look to expire. And what this shows -- if you look at the top chart, it shows when the leases come up, the sort of first expiration, as it were, and then the bottom is what would happen if we were to extend our leases into the longer term. And so the reason why there is such a difference is that when we've taken out lease agreements, we have typically looked for very long-term leases. So we've always kind of had that option in there for us to be able to extent. So the first point, I guess, in terms of our ability to buy, is we are long-term tenants. People see us as long-terms tenants. And we try to sort of structure that within our lease arrangements. And so then the second thing we try to do, not with all leases, but with certainly a significant number, is indeed to incorporate elements as sort of buyout clauses within there, which should work to our advantage. So we have a purchase option immediate -- so a good approach is an option of around sort of 6 million square feet, and that should be at good terms for us. And we would look to move forward on -- so any elements of that. We will always do this in a way that creates value for shareholders, but that's kind of where we stand today. Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division: So is there an arbitrage opportunity in your portfolio, your lease versus buy, in terms of market value? That's just what I'm trying to get it

Yes. No, for sure. So if you think of it, typically we might borrow around 6% -- the lease rate, if you like, would be around 8%. So you've got a 200-basis-point spread as a sort of general rule. Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division: Basically, let me just restate what I'm trying to get at it, is there -- I'm saying, in terms of the purchase options, will you be buying real estate at below-market prices when you exercise those options? That's an actual, but more what I'm getting it.

I think the way to think about it is just reemphasizing what Rod is saying. Because we have fair market clauses in most of our leases, virtually almost all of our leases when we renew, that allows -- so the way you have to think about it is it's the cost of financing is how you create value, it's not the arbitrage in terms of being able to get something at a lower price. So I think the better way to model it or to think about it is that 200-basis-point spread, which is around the financing cost of 8% to lease, 6% to own, right? Because I wouldn't try to build in us being able to buy at a better price. I think where the arbitrage comes in, potentially, is on the residual values. Because what we're capturing, especially in the emerging markets which we are -- in my previous life, I played this out a number of times where we used to buy real estate purposely because we could capture, in 15 or 20 years, the urban growth to capture additional residual value. So that's a longer-term capture. And I think you have to also do it as a backdrop. When we say leases is that a number of our leases -- as I say, these typically are very long leases. So it -- in fact, if you look in places like Asia, you typically can only buy leaseholds, but you are able to get, effectively, the full economical ownership. In fact, in some markets, you can even get this part of the residual value because of your ability to trade leases. That's not in very country, but in some countries you can do that. So that's what we're really talking about is how do we actually take some these long-term leases where we have a lot of the economics of owning, and how do we further capture it? And I think the best way to think of it is the 200 basis points of potential spread between cost of ownership. Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. So if I just take that further, so to the extent that you will issue equity in order to affect either lease buyouts or property's M&A, the immediate impact on a lease buyout would be the 200-basis-point spread and that should be accretive to investors on a cash flow basis? Is that the way to think of it?

I think -- I'll actually let Rod speak, but I think what Rod's saying, it will be a blend, most likely. I mean, that's the one thing that we're working out is the blend between equity and debt to do that. So it will be on a blended basis.

So that's right, Bill. But certainly, we aim for the -- I think to the point, we are aiming for the investments to be accretive. Correct.

Yes.

Yes. Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division: I mean, the other part of that in terms of, I think people are kind of getting to this, is in terms of potential equity issuances, is that how fast should you deploy or raise additional equity? How fast would you be able to deploy that in terms of being able to increase your FFO per share and AFFO per share? In other words, do you think there'll be a lag time of 6 months, or you'd be doing it kind of at the money as you need that type of stuff and so you'd make it immediately accretive?

I think it would depend on the speed with which we could effectively acquire the leases, if I'm answering the question. So it will be -- it will depend on that phasing. So we wouldn't -- obviously, we wouldn't be able to buy all our leases on sort of day 1, but we would have -- we would expect to have a program to do so over time.

And I think -- look none of these things -- it'd be wonderful if we could do something today, and it's absolutely accretive the next day. I mean, these things -- we look at allocating capital on net present value basis and an earning per shares basis over stabilized returns, and we look at how long it takes you to get there versus how much you have to take in early. I think that the ability for most companies to be able to time these things exactly is never there. But I think it's fair to say, emphasizing what Rod's point is, is that if we go out and raise equity, for instance, it will be with a clear visibility and understanding of how that becomes accretive for the shareholders. But to say that you can do these things matching on a one-to-one basis instantaneously, I think we're not saying it can't be done, but I would say right now that it's hard to see how to do that. That being said, whatever we do, we'd be -- we would have the transparency around it with our shareholders and investors that how that is accretive in terms of their interest in the company. Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. That's fair. And then just kind of a housekeeping question on Slide 28, in the annualized NOI. Could you just, maybe Rod, walk us through a little bit what you mean exactly for a stabilized portfolio versus the NOI that you would be reporting on a quarterly basis?

Yes. So the way to think about the stabilized portfolio is, is a kind of like-for-like. So where we -- so we're kind of excluding acquisitions and buildings that would have come out of that portfolio. It's just kind of like core, if you like, within that. Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division: So it's going to exclude racking that's not fully utilized? I'm trying to just...

No, it's the buildings as opposed to the racking. If we sell a building or acquire a building in the period, we wouldn't include that.

Your next question is from the line of Dan Dolev with Jefferies.

Just a really quick data point. Two questions on Slide 8. Sorry if I missed that. Are those LTMs or are those quarterly figures?

Those are LTM.

And I don't know if you've mentioned it already, but would you mind giving the data point on how this would look like on a North America record management, like you did in the last few quarters? Those same metrics, but on a North America basis?

Yes, I highlighted that in my remarks. If you go back -- I think you'll see that I went through. For instance, in North America, we added 1.3 million cubic feet of internal growth in the first half of this year.

Okay. So but you didn't specify those specific -- the things that make up the buyer [ph], you did not specify that specific what's organic versus disruption, et cetera, for North America, right? Like the equivalent of Slide 8 for North America?

Yes, what I can give you is, for instance, is that below the bar, for North America, was minus 6.6%.

Okay. And then the...

Which is a minus 6.7% in this one. And we can give you the numbers on above the bar. But what the North American -- so the North American below the bar is a little bit better than what it is on a consolidated basis. And then in terms of the net volume growth, before acquisitions, in North America, as I said, we added 1.3 million cubic feet.

Which is 0.3%. So you kind of got a minus 6.7%, you got a plus 7% on...

Right, it improved. On an LTM basis, it improved versus Q4 and Q3 of last year. It's an improvement?

Actually, yes.

This concludes our Q&A session. Presenters, I would now like to turn the conference back over to you for closing remarks.

Thank you, operator. To wrap up, we had a strong quarter that demonstrates the durability of Iron Mountain, as well as our renewed commercial focus in delivering, what we call, "the power of the mountain" to our customers through harnessing our scale in product development and solution delivery. We demonstrated progress with our strategic plan in several areas. We are getting more out of developed markets, with solid improvement in volume and improved trend in internal growth. We are building our business in emerging markets and continuing to drive strong organic growth there. And our conversion to a REIT is driving improved returns, enhanced disclosure, and we believe over time an expanded shareholder base. We feel very strongly as a real estate company, the REIT structure enhances the value to our shareholders. And we're committed to driving attractive returns through continued expected growth in OIBDA and, ultimately, FFO and AFFO of about 4%, and believe the durability and stable growth in our business will support growth in our dividend, in line with cash flow growth over the long term. Thank you very much for joining us today.

This concludes today's conference. You may now disconnect.