Melissa Marsden - Senior Vice President of Investor Relations William L. Meaney - Chief Executive Officer, President, Director and Member of Risk & Safety Committee Roderick Day - Chief Financial Officer and Executive Vice President.

Keen Fai Tong - Piper Jaffray Companies, Research Division Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division Andrew C. Steinerman - JP Morgan Chase & Co, Research Division Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division Dan Dolev - Jefferies LLC, Research Division.

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?.

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..

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..

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..

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..

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..

Got it.

And you're still expecting cash tax savings of about $120 million per year?.

Correct, yes..

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..

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..

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..

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?.

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..

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..

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..

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..

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..

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..

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..

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..

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..

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..

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..

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..