Melissa Marsden - Senior Vice President-Investor Relations William Leo Meaney - President, Chief Executive Officer & Director Roderick Day - Chief Financial Officer & Executive Vice President, Iron Mountain, Inc..

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc. George K. F. Tong - Piper Jaffray & Co. (Broker) Andrew Charles Steinerman - JPMorgan Securities LLC Justin P. Hauke - Robert W. Baird & Co., Inc. (Broker).

Good morning. My name is Andrea and I will be your conference operator today. At this time, I would like to welcome everyone to the Iron Mountain Q2 Quarter's Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

I would like to now turn the call over to you host Ms. Melissa Marsden, Senior Vice President of Investor Relations. Please go ahead..

Thank you, Andrea, and welcome everyone to our second quarter 2016 earnings conference call. This morning, we'll hear from Bill Meaney, our CEO, who will discuss highlights and progress toward our strategic initiatives; followed by Rod Day, CFO, who will cover financial results. We also have Stuart Brown our incoming CFO with us on the call today.

After our prepared remarks, we'll open up the phones for Q&A. And as we've done in the past several quarters, we have posted our earnings commentary and supplemental disclosure package on the Investor Relations page of our website at www.ironmountain.com, under Investor Relations/Financial Information.

Referring now to page two of the supplemental, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for 2016 financial and operating performance. All forward-looking statements are subject to risks and uncertainties.

Please refer to today's supplemental, the earnings commentary, 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 to these measures, as required by Reg G, are included in this supplemental reporting package.

With that, Bill, would you please begin?.

during the quarter, we continued to advance each of the three pillars of the plan, as well as the foundational elements that support it.

I will quickly highlight progress in each of the three pillars, namely, getting the most out of our developed markets, increasing our presence in the fast-growing emerging markets, and expansion in faster-growing adjacent businesses.

In developed markets, which includes both North America RIM and our Western European segment, we had 3 million cubic feet of internal volume growth during the quarter. In emerging markets, our goal is to expand our presence and leverage our scale driving these markets to 20% of our total revenue by 2020.

Recall's footprint in emerging markets supports that objective and has helped drive our emerging market business to 16.4% of total revenue on a constant-dollar basis as of the end of Q2. Additionally, as our visibility on closing of Recall transaction became clearer, we resumed acquisition activity and moved into new emerging markets during the year.

Earlier this week, we announced plans to acquire the Information Management operations of Santa Fe Group in 10 countries, mainly in Southeast Asia for approximately €27 million.

The deal also marks our entry into four new emerging markets, Macau, the Philippines, Indonesia and South Korea, as well as further bolstering our already strong positions in Hong Kong, Singapore, India, Taiwan and Malaysia, providing a great foundation for further expansion in this dynamic and higher-growth region.

We continue to nurture a deep, diverse pipeline of accretive M&A opportunities in emerging markets where we can leverage our global footprint and deep customer relationships to capture the initial wave of records management outsourcing that is in the early days within these faster-growing markets.

Before turning away from our international operations, I should comment on Brexit. Importantly, we don't expect to see a significant impact. We have built scenarios related to the potential implications of the decision with particular focus on our customers, our supply base, our staff and the regulatory and fiscal frameworks in which we operate.

We will continue to monitor developments closely and watch for any shifting legal obligations governing the management of information, but as other multinationals have acknowledged, it will be some time before any meaningful movement toward an exit from the EU gets underway.

In terms of our core business, it is unlikely to have much impact from a constant-currency perspective, we're generally naturally hedged. As for adjacent businesses, we are on track to achieve our stated goal to generate 5% of our total worldwide revenue from adjacent businesses by the end of 2020 up from just 2% at the end of 2015.

In our data center business, we had several recent big wins, bringing us to 80% committed in our first phase building in our aboveground facility in Boston.

Combining our Boston facility with the undergrounds in Boyers, Pennsylvania and Kansas City, Missouri, our data center space is greater than 90% committed and we are on track to achieve internal growth approaching 20% in this business area.

In our Art Storage business, we are making good progress and acquired another small business, a good example of what we believe will be a long-term consolidation play.

Overall, between the progress we're making in emerging markets, as well as adjacent businesses, we are well on track to achieve our combined goal of having the expansion of our emerging market presence and adjacent businesses yield 25% of our total revenue mix by 2020, which is up from about 17.5% of our total business mix today.

In terms of supporting foundations for the plan, we continue to make progress on our transformation initiative to remove $125 million in SG&A. Also as previously disclosed, the remaining $25 million of overhead savings will be actioned in 2017 and the full amount for the transformation program will be reflected in our 2018 adjusted OIBDA.

Given the timing of Recall synergies, our transformation program and expected ramp in the business, we remain confident that cash flow will be in line with the growth expectations we highlighted during Investor Day, and again on our April 1 call, which provides the foundation for our expected dividend growth.

As a reminder, we expect to grow dividend per share by about 13% in 2017, as the synergies and transformation benefits flow through our results, and by an additional 7% in 2018 and 4% annual growth thereafter, whilst also funding core growth racking, M&A and overall investments in support of our previously-presented 2020 plan.

As we progress this plan, we'll have more cash available to support discretionary investment, which means we'll borrow less to fund our growth plan and continue to de-lever. And at the same time, we'll reduce our payout ratio as a percentage of AFFO.

Our operations are underpinned by our very durable, growing business that performs consistently throughout business cycles.

In addition, we're extending that durability through solid execution of our plan in developed markets, identifying capturing opportunities in both emerging markets and adjacent businesses and continuing to enhance our cost structure in both service and overhead.

Our durable storage business generates roughly $1.9 billion of annual storage net operating income, which exceeds that generated by leaders in both the industrial and self-storage sectors.

What distinguishes our business is its inherent durability, and it is this durability that delivers consistent levels of operating performance in both good and bad times. With that, I'd like to turn the call over to Rod..

Thanks, Bill. I'll begin today with a high-level overview of our second quarter and year-to-date performance, which included a two-month benefit from the Recall acquisition compared to the prior year.

In addition, I will review our results by segment, provide an update on our transformation initiative and summarize our successful bridge loan refinancing. Lastly, I will touch on the strong progress we're making integrating Recall into our business, as well as our outlook for 2016, which remains essentially unchanged since April.

Let's turn to our worldwide financial results. Consistent with prior quarters, we've provided bridging schedules for total revenue, adjusted OIBDA, adjusted earnings-per-share, and FFO per share to explain key variances in our year-on-year performance. These schedules can be found on pages 21 through 24 of the supplemental.

Let me briefly walk you through the highlights. For the second quarter, total reported revenues were $884 million compared with $760 million in 2015. Excluding the year-over-year negative FX impact of approximately 2% or roughly $17 million, on a constant-dollar basis, revenues grew by 18.6%.

For the first half of the year, reported revenues were $1.63 billion compared with $1.51 billion in 2015. Excluding Recall and other smaller acquisitions, total internal storage rental revenue was up 2.1% for Q2, consistent with the growth we saw in Q1. In contrast, internal service revenue was down 2.1% compared with growth of 1.6% we saw in Q1.

As we noted on our last call, service revenues are more project-based, which have more volatile growth rates on a quarter-on-quarter basis. Based on a review of our service deal pipeline, we continue to expect internal service revenue growth to be positive for the full year.

Total adjusted OIBDA for the quarter was $261 million compared with $223 million in 2015. We grew adjusted OIBDA by 17.1% on a reported-dollar basis and by 18.8% on a constant-dollar basis. Year-to-date, adjusted OIBDA grew by 9.3% reported dollar, and by 11.6% on a constant-dollar basis.

As we noted on our Q1 call, Recall is a lower-margin business than Iron Mountain, therefore, as expected, our adjusted OIBDA margins were lower relative to the first quarter of the year. This impact flows through to our adjusted EPS, FFO per share and AFFO results. As synergies build in future quarters, this picture will be reversed.

Adjusted EPS for the quarter was $0.24 compared with $0.28 in 2015. Year-to-date adjusted EPS was $0.55 compared with $0.60 in 2015. In the second quarter, adjusted EPS was impacted by the amortization of Recall's customer relationship values and the increased depreciation expense of Recall's legacy racking structures.

The amortization expense of customer relationships flows through to FFO per share; however, the increased depreciation does not because real estate depreciation is excluded from FFO per share. FFO per share was $0.47 for the quarter compared with $0.49 in the year-ago period.

Year-to-date, FFO per share was $0.98 compared with $0.99 in the year-ago period. AFFO was $159 million compared with $131 million in the year-ago period.

Importantly, AFFO was not impacted by the increased depreciation and amortization expense in the second quarter, as these are non-cash items and do not impact our AFFO or cash available for distribution. Year-to-date, AFFO was $301 million compared with $259 million in 2015. AFFO for the year-to-date is at the high end of our expectations.

However, we expect to remain within our ranges for the full year. Similar to prior quarters, on page 20 of the supplemental, we are providing a reconciliation between AFFO and cash flow from operations as presented in our GAAP cash flow statement. So you can more readily see the cash items that are not typically of a recurring nature.

Our structural tax rate for this quarter came out to 17.2% compared with 13.9% in the prior year.

Expected year-over-year increase in our structural tax rates was mostly driven by the legacy Recall business, which has higher exposure to international markets with their respective foreign tax rates, and which do not have the same tax efficiency as we do in the U.S. with the REIT structure.

Also, the tax rate this quarter is below the previously-communicated run rate expectation of 20%, as our pre-tax income was impacted by Recall integration and deal costs. For the remainder of 2016, we expect our tax rate to be approximately 18%, as a result of these Recall costs. However, beyond 2016, we expect the tax rate to be closer to 19% to 20%.

Let's turn to our financial performance by segments, in North American Records and Information Management or RIM, internal storage rental revenue increased by 0.7% for the second quarter. North American RIM internal service revenue declined by 1.2%. Growth in shredding and scanning was offset by declines in core transportation.

North American Data Management or DM delivered storage rental internal growth of 1.3% for the second quarter. Internal service revenue in DM declined, as we continue to see reductions in the frequency of tape rotation and related transportation activity, partially offset by strong growth in new Data Management offerings.

In addition, we had a large project which benefited the prior-year period. After normalizing for this, DM service revenues performed in line with prior quarters. DM adjusted OIBDA margins improved year-over-year due to a decrease in overhead costs as we continue to realize transformation benefits.

The Western Europe segment generated 0.1% internal storage rental growth and internal service revenue declined by 4.6%, primarily as a result of lower activity in transportation-related revenue and lower project revenue.

The low internal storage growth in Western Europe was due to a large customer win in the year-ago period and certain contract renegotiations that occurred this quarter. Adjusted OIBDA margins improved year-over-year in Western Europe due to lower G&A expenses.

The Other International segments, which is made up primarily of emerging markets and Australia, showed strong growth in both storage and service revenues. Internal storage rental growth was 8.6% and internal service growth was 5.3% for the quarter. Other International adjusted OIBDA margins were 25% for the quarter, in line with our expectations.

We're pleased with the progress we've made with our transformation initiative. During the second quarter, we did not incur significant costs related to transformation, as the focus was not head count related; rather it was on streamlining business processes.

Year-to-date, we've actioned $28 million of the $50 million exit rate savings and have line-of-sight on incremental $22 million to be implemented by the end of this year. Our overall savings outlook for transformation remains consistent with what we laid out at our Investor Day in October, with $125 million of cumulative savings by 2018.

Let me now talk about the Recall integration progress and provide details on the costs we've incurred so far in 2016 to achieve synergies and integrate Recall within our business. As Bill explained, the synergy program is ahead of schedule.

As you can see on the supplemental on page 25, we expect to exit this year having already achieved more than 80% of the total synergies originally anticipated for 2017. Our expectations of total cost to achieve the target synergies are still consistent with prior projections.

Because we're accelerating synergies to set us up for a strong run rate for 2017, we expect to incur roughly $10 million more in costs in 2016 than originally contemplated. Year-to-date, we've incurred $37 million of integration costs, $32 million of deal close costs. Additional details can be found in our 10-Q, which will be filed later today.

Please note, these expenses are excluded from our adjusted OIBDA calculation as they are one time in nature. Let's turn to our outlook for 2016 on page 12 of the supplemental. Business trends and fundamentals remain consistent, given the durability of our business. We remain on track to achieve our short and long-term financial objectives.

Please note that although our guidance assumes divestitures would occur on day one, the benefit from businesses yet to be divested that are running through our operating results is not significant. Some legacy Recall assets were sold to Access nearly at the same time as the close, so they are not reflected in our results.

The remaining legacy Recall assets to be sold are included in discontinued operations, therefore not flowing through our operating income. Lastly, the remaining Iron Mountain assets to be disposed of are flowing through our financials; however, with an immaterial benefit for the quarter and full year.

Overall, our core Iron Mountain business is performing to plan. Recall contribution is tracking in line with our previous expectations, and we have accelerated the realization of net synergies for the year, which is why we brought up the lower end of our adjusted OIBDA guidance by $5 million.

Let me now refer you to the table at the bottom of our guidance page, on page 12 of the supplemental, to follow our expectations for full-year adjusted OIBDA. We thought it'd be helpful to cover how results track against our original expectations.

But please note, we will be not reporting actual results separately, given our financial statements are now fully integrated. Our standalone expectation for Iron Mountain's core business remains $950 million to $970 million, consistent with what we previously communicated.

And our performance in the first half of year is tracking right in line with our expectation. For the second quarter, excluding Recall's base and synergies less divestitures, Iron Mountain's standalone adjusted OIBDA was in line with Q1 results at $235 million. So year-to-date, Iron Mountain standalone adjusted OIBDA was roughly $470 million.

In the second half of the year, we expect to realize $7 million to $10 million of transformation benefits to offset costs associated with that program in the first half. We also expect a ramp in the business as our storage base continues to expand.

This ramp is consistent with 2015, during which second half-year results were $10 million higher than the first half on a reported-dollar basis. If you annualize the first half actual run rate, our transformation benefits and a similar ramp to last year, standalone expectations are in line.

Now let me address the second line related to Recall's contribution for the year. Prior to divestitures, we expect the Recall business to contribute $115 million of adjusted OIBDA at the midpoint.

This reflects eight months of Recall contribution, and our range implies $13 million to $15 million per month of contribution prior to synergies and divestitures. Lastly, we are expecting $18 million of adjusted OIBDA synergies, net of the impact of the divestitures for the year. As Bill noted, this is up from our initial expectation of $15 million.

As a result, our adjusted OIBDA guidance range for 2016 is now $1.075 billion to $1.110 billion. For adjusted EPS, our guidance remains unchanged, although our expectations for the structural tax rate are lower than previously anticipated. This benefit will likely be offset by the accelerated depreciation of Recall racking structures.

Although our total normalized dollar AFFO guidance remains the same, we changed our FFO per share guidance to reflect where we expect the final weighted average share count will settle for the year. We did not update adjusted EPS for this impact because the benefit is offset by the incremental real estate depreciation expense mentioned earlier.

Please also note that on a constant dollar, guidance remains close to reported dollars. Assuming current rates hold, we do not see a downside from FX in our guidance. Moving to our expected cash available for distributions and investment for 2016, we continue to estimate that it'll be roughly $600 million.

This provides ample funding for dividends and core growth racking investments. Our capital deployment plans for 2016 are unchanged.

We continue to expect capital expenditures, which include real estate and non-real estate maintenance and non-real estate investment to be in line with the figures we provided on our last earnings call, and to total $170 million for the year. Our expectation for total real estate investment spend remains $320 million.

This includes $70 million in core growth racking investment and the remainder of our real estate spend is expected to be in real estate consolidation, development, data center and some lease conversions. As we've said in the past, we are focused on consolidating facilities, particularly given the Recall transaction.

We expect real estate consolidation will provide upsides to synergies in the long-term, but it's too early for us to quantify the exact benefit at this time. For M&A, we continue to expect to spend roughly $150 million, with approximately $100 in emerging markets, $50 million in developed markets.

Dividend expectations remain consistent with our previous guidance for 2016. Our dividend per share is expected to grow from $1.94 this year to a minimum of $2.20 in 2017 and $2.35 in 2018, as we realize the majority of benefits, transformation savings and Recall synergies. Beyond 2018, we expect to grow dividend per share at roughly 4% per year.

Importantly, our dividend payout ratio as a percent of AFFO is in line with prior expectations and should reduce to 70% by 2020, which underscores the strength of our dividend coverage. In addition, we're targeting a leverage ratio of 5.0 times by 2020.

Shifting briefly to the balance sheet, at the quarter end, we had liquidity of approximately $580 million and our lease-adjusted debt ratio was slightly up at 5.8 times as expected. Our leverage ratio increased primarily as a result of the timing of Recall integration and deal costs discussed earlier.

We expect to end the year at a leverage ratio at 5.7 times as we start realizing synergies and transformation savings. As many of you may already know, we refinanced the $850 million bridge facility associated with Recall transaction, primarily with long term debt.

We raised $750 million in aggregate principal amount and senior unsecured notes, which included $500 million at 4-3/8% due in 2021 and $250 million at 5-3/8% due in 2026.

Our unsecured debt was prices at spreads similar to business services issues rated two notches higher than Iron Mountain, and at the top of the spread range for our investment grade issuers, which reflect debt investors' favorable view of our predictable cash flow. In addition, we also amended our credit agreement and extended its maturity to 2019.

So overall, we are pleased with the performance we saw in the second quarter and year-to-date. Our results are driven by the durability of our business and execution of our long-term plan. We're excited with the progress we've made so far in integrating Recall, and pleased that we will be realizing synergies earlier-than-expected.

Looking ahead, we're confident that we're well-positioned to deliver on our long-term goals. We remain highly focused on extending the durability of our storage rental business, which drives growth in cash available to fund dividends and core growth investments. I'll now hand the call back to Bill..

Thank you, Rod. To wrap up before going to Q&A, just to summarize, we're off to a very successful start after closing Recall and having accomplished what we set out to do in the first three months since closing. We made great progress on integrating Recall's people, platform and portfolio.

We're on track with our financial expectations for the year, and in fact, slightly raised the lower end of our range for the full-year guidance. And additionally, we like what we see as we look at our exit rate from 2016 and our entry into 2017.

Overall, we are excited about the potential we see to realize the benefits of combined scale with Recall and look forward to updating you on continued progress next quarter. Before I turn it over to questions, I should say that I think our transformation program probably has reduced the caffeine in my coffee in the morning.

So I did, I think, misstate that Access – we sold 23 U.S. markets to Access, I meant to say 13. So, 13 is much better than 23 and I will talk to the transformation folks to kind of put the caffeine back in my coffee. But any way, with that, operator, I'd like to turn it over to Q&A. Thank you..

Your first question comes from the line of Shlomo Rosenbaum with Stifel, Nicolaus..

Hey, It's Shlomo Rosenbaum over here prior to the name change I guess..

Hey, Shlomo, I was wondering who is at Stifel's these days..

A couple things I want to ask. One of them is around the – what looks like the destructions and the out-perms. If you look particularly at the out-perms in Western Europe International, it looks like in the last couple of quarters you are seeing some acceleration over there in terms of volumes.

Can you give us some color on what exactly is going on there?.

Yes, sure. Sure, Shlomo.

So first of all, let's look at the absolute net volume, right? So if you look at Q2 2016 this quarter, you'll see that out-perms and destructions, if you subtract that from new sales and organic growth, you have a net before acquisitions of 3.8% (sic) [3.7%] growth versus a Q1 of 3% growth, so the net growth has actually increased.

But coming to specifically your question about what's going on with out-perms is, the 2.3% in Q1 of 2016 is not out of norm.

So if you kind of go back and you look at the supplemental on page 11, you'll see that over the last 12 month – or less, say, even more than 1.5 years or so, you'll see going back into Q3 of 2014, it goes somewhere between 2.1% and 2.3%.

Where you really see the spike is in the Q2 2016 number, where you see that go up to 2.6%, so it's really a Q2 issue. But as I say, the net volume is positive. And for those that followed Recall, there was a program that Doug would euphemistically call Close the Gap.

And the two things he referred to was the 700-or-so basis points lower gross margin that their business yielded in terms of their overall business. And the other thing is, he highlighted that the level of out-perms that they had relative to ours.

So, where we see the roughly the 30 bp increase in out-perms from Q1 to Q2, that's driven by Recall's – emerging Recall's business into ours, which we knew was a – had a less – had a higher volatility or a higher turn in that.

But you'll see that come down over time because obviously, we're wrapping the same customer loyalty program, which I think we've spoken on previous calls where we have – we built a – with outside help, we built an algorithm that helps predict 6 months to 12 months ahead of time certain customer issues that prevent the out-perms..

So, they had a higher out-perm. Was it the nature of their business? Or based on what you are describing, it sounds like they didn't have as effective a customer outreach as what Iron Mountain core had.

Is that the way to think about it?.

Yes, it's the latter. So and Doug used to comment on his calls, I guess, they only did half year results. But it's exactly that they didn't have the same tools. And in fact, three years ago, we basically introduced the tools – I can't take credit for it, they started the work before I came in, but we started ramping up just as I came in.

And you would've seen the same decrease in Iron Mountain's business. And one of the things that Recall had is, they couldn't afford to take the investment that we did. I mean, we brought in some outside help and advisers that know how to build these tools, and it looks at a number of different things. It looks at volume through the call center.

It looks at number of boxes coming in. It looks at the types of complaints that we're getting from a customer, and there's a number of different things that you pick up. The last time we gave them a price increase.

And you look at those different pieces of data, and it's pretty accurate in terms of predicting when you're heading for a crisis with that customer and then you can intervene. And I forget exactly what their number was, but it was significantly – it was at least a full point higher than ours in terms of the out-perms.

And you're seeing that averaging in when we go from the 2.3% to 2.6%. So it is something – it isn't structural in the Recall business. It was much more they just didn't have the same tools and sophistication that we introduced, say, three years ago..

Bill, did you have a chance to go back, now that you own the company, and a look at how many of the out-perms that they were experiencing actually were incoming to you guys and kind of do an analysis on that?.

A great question and I wish I could've gotten the DOJ – the DOJ asked the same question. I wish I could have gotten them to be data-driven. Actually, the loss ratio between – the win and loss ratio between us and them was actually much smaller than you would think, right? I mean, we'd like to say we competed against each other and we did.

But actually, generally, they lost to somebody else, and we lost to somebody else. And that – I think we've talked about it previously where they have – they did – they have taken business from us. There was no question about that.

But where they were much more present was in that middle market and SMB space, so they were winning and losing against much more the smaller players. And we're actually quite excited about it, to be honest with you. So their head of sales for North America now runs our whole mid-market SMB segment.

And that business is, I think, approaching almost $800 million. I think $750 million of sales, if we combine the two companies. So, it's of the same size of what Recall was globally just in North America, and we think we can to a better job. So, they were losing typically to other people, and we were losing to other people for the most part..

All right. Thank you..

Your next question comes from line of George Tong with Piper Jaffray..

Hi, thanks, good morning. You're substantially pulling forward Recall synergies, about 80% of total synergies previously expected by the end of 2017. That said, OIBDA guidance for the full year is not meaningfully increasing.

Can you discuss what incremental headwinds you expect in the back half that are reflected in guidance?.

It's a good question, George, but it's more the math. So the part – it's not as big a delta as you think because you have to look at what the translation of the $15 million, because of the way the synergies flow in during the course of the year, what we get for impact in 2016 leads you to a very high – which is small, leads you to a very high exit.

So, I'm trying to remember the number, but I'll ask Rod to comment. I think we were before the $15 million translated into around $60 million, $65 million. And the $18.5 million translates into around $80 million.

But it's not a – it's 80% – we were always going to achieve a very high percentage; just we weren't going to achieve 80% before in terms of going into 2017..

Yes, George, our exit rate is 80% of next year as opposed to the in-year being 80% of 2017. So in-year, we're sort of net $3 million higher, but actually that translates into quite a significant improvement in the exit rate that we have for next year and sets us up really nicely for 2017.

So it's not that the number's gone up and we're using that to cover for other things. That's not the case at all..

Yes, it's just we're getting it faster. It's just – it is a speed, but it gives you an idea that when we get into 2017, we're cracking the back of it. We're always going to crack the back of it in 2016. We are even cracking a bigger part of it in 2016 than we originally thought..

Can you remind us what the 80% previously was in terms of exit rate?.

I think, it was around 70%, right? I think, it was about 70% – we'll give you the exact number. I think it was about 70% because it was 60% on 90%, right? So I think it was about 70%..

It was of that order, George, 65% to 70%..

Got it. Okay. That's helpful.

Can you provide some additional details around how records management volumes performed in Recall's business compared to recent historical trends and expectations?.

Say it one more time..

Basically, how Recall's volumes performed relative to your expectations and relative to their....

Okay, all right. Yes. Okay, so in terms of their historical trend, so pretty much as we expected, other than – we expected, as I answered to Shlomo, we expected that the out-perms would be higher and that pretty much translated straight across because we could see that in the results.

The growth and opportunity we see in the middle market is pretty much what we expected. I think that the – so the trends of merging their business into ours, we're pretty much on track. The margin that both I commented on and Rod commented on, we commented on last quarter before we closed. We knew that, that was the case.

I think the one thing that has been the – so it's been more of an upside, and I think the upside has been more around the people. Not that we expected to get bad people. But I think when you buy a competitor, you always kind of think that they're different than you, and when you're talking to customers, you typically demonize the competitor.

And guess what? They have blood flowing through their veins just like us, and we've gotten some really good people as a result of it. And they had almost identical values and code of conduct as we had. In fact, you lay the two slides up next to each other, we did it at a town hall, and they're virtually almost the same.

So I don't know who copied from who? So we've actually, probably, if anything, have integrated the people much quicker. And when I say integrated, not just get them into slots, but people feel like they've been around a lot longer than they have, if you know what I mean.

In other words, they didn't spend a lot of time trying to figure stuff out or adapt to a new culture. So that part has been better than we thought. But in terms of the way the numbers have flowed in, we haven't found any surprises..

Got it, helpful.

And then, lastly, could you provide an update on services trends, if you're seeing continued signs of stability or any potential risks to growth ahead?.

No, it's a good question. So I think we also pretty – kind of foreshadowed at the last quarter that we thought we would see a drop in service revenue, that the next – Q2 wouldn't be as strong as Q1. And so obviously, we could see the pipeline, and we knew how that worked.

The one thing that I think again we commented last time is that as we shift more to project-based rather than transportation-based service revenue, we do expect it to be pipeline-dependent and, therefore, more project-dependent and, therefore, more lumpy.

So it's much easier to predict that if you look over a 12-month period than if you look at it on a 1-month or even a 3-month period. So if we – as that as a backdrop, if we look forward to the rest of the year, we like the pipeline, the booking pipeline – the bookings and the pipeline that we see for the rest of the year.

So we're very confident that for the total year, we will see positive service revenue growth, which obviously means that the new services are offsetting the declines that we talked about in the transportation, which has driven to the structural shift in the way that the information is being used.

So we feel very good that for the full year, you'll see a trend that's consistent with Q1 as the pipeline turns into bookings and turns into projects that we see in front of us..

Very helpful. Thank you very much..

Your next question comes from the line of Andrew Steinerman with JPMorgan..

Hi. If it's okay I'm going to dive back into tapes – North American tapes decline. I just don't quite get how the minus 13.5% organic services decline in North American tapes has to do with a large project from a year ago.

The decline in that business is 7 points worse than the first quarter decline, but the comp year-over-year is only 4 points, let's call it, less easy. And so, when I kind of see this 13.5% decline versus a year ago, minus 1.7%, it just doesn't seem like the year-over-year comparison explains it all..

Yes, it's a good question, Andrew. So first of all, our – so that business also includes film and sound, right, which is very project-dependent. So a year ago, we had a very large project with one of our film and sound customers, and that project fell off.

So if you normalize for that, what you see is roughly the 9% to 10% reduction in transportation that we've been calling out quarter-by-quarter. And the new services have been offsetting that between 40% and 50% of that decline.

So the net decline and you'll see that going forward as well is that the net decline as the new services replace some of the transportation as the tapes are becoming more for disaster recovery rather than for rotation, then you'll see that the typical 9% to 10% decline in transportation and being offset by 40% or 50% by the growth in new products.

But specifically, our Data Management business includes both the data protection and the tape business, as well as our film and sound business, which we had a very large project for a studio..

I got it.

I think what you just said was the transportation business was down about the same as first quarter, we had some more new services in the first quarter, expect more of it for the rest of the year, but not as much in the second quarter, with a large project a year ago?.

No, no, the only thing – the first part was right, but we had the same amount of growth in the new service products in Q2 as we did in Q1. So roughly, what I'm saying is that what you can expect is that, the underlying business in Q2 was like Q1 if you took out the large project.

So you had transportation going down to 9% to 10%, and then you had new services offsetting about 40% to 50% of that decline. So in other words, you end up net in the mid-single-digit decline in terms of the service revenue of that business. And we expect that trend to be similar in Q3 and Q4..

Yeah, it was at this time in Q2 last year, this film and sound project, so it screws up the comparisons, but Q3 should be about normal..

And that was just one quarter, right? We don't have any tough comps on the film project going into the second half, right?.

No, it was a Q2 issue..

Okay. Thanks for the time..

It was a nice issue to have last year, I should say. I'm not saying that having large project is an issue.

It's just explaining it a year later how they roll in and roll out?.

Yeah. No, I'm sure it was a fun project. I appreciate it, thank you..

Okay, Andrew..

And your next question comes from the line of Justin Hauke with Robert W. Baird..

Thanks, good morning guys. So I wanted to ask a little bit just for an update on pricing trends, particularly in Europe, given that the organic volume gains were up pretty nicely, but total organic was flattish. I think you mentioned some contract renegotiations.

So, maybe just an update on what's going on in the pricing environment would be helpful?.

Yes. In Western Europe, we had a couple of things, one affected last year, and then also impacting this year. So in Q2 of last year, we actually had a gain as a result of some renegotiations that went on at that point to do with a specific project and specific customer.

This year, we had a couple of customers that went the other way in terms of the renegotiations that we had, which obviously, you have a sort of strong quarter last year and a relatively weak quarter this year. So you got a double impact in terms of the growth rate.

I think in terms of overall, if you strip that out and then talk about overall pricing, in Western Europe, we do see a modest price erosion over time because we have quite high price legacy base.

So that's a phenomenon you'll see if you look in some of our historic numbers, that's not the case, say, for example, in North America, which is obviously a much larger business where the legacy base price is more consistent with the price that we get today..

Yes. And just to illustrate Rod's point, it's typically in the UK, you see prices in p that you see in cents in the U.S. Now that was even more interesting before the Brexit. But anyway, so you do see this range in terms of the high legacy pricing in Europe..

Thank you. That's helpful and that makes sense. And then my second question is really just a clarification just to make sure that we have the right numbers. With the accelerated synergy benefits, it looks like for 2016 now you've got $18 million in net synergy benefit versus $15 million previously.

But 2017 is still the same $80 million net synergy target, is that right? And then what's the ultimate synergy target? That still is unchanged at $105 million?.

Yes. What we've always said is that – that was a minimum synergy target and we'll see as we get closer to 2017 and into 2017 if that speed also translates into more. Right now, it's speed.

But I think we've always said that once we start really understanding the consolidation opportunity, that could be more, but right now, I would keep your $17 million guidance in the overall synergy number where it is. But yes, so the – you're absolutely right. It's about speed right now..

I think that's right, Bill. I think at this stage, it's sort of bit of upside this year, sets us up great for next year in terms of confidence around that number, but no change in the total yet for 2017.

The big item we're looking at the moment is real estate consolidation, which we've always called out as a potential upside further down the line, but it's still early days in terms of the analysis there. There will be an update in quarters to come on that..

Great. Okay, that makes sense, thank you..

Thanks a lot..

And there are no further questions at this time..

Okay, well, thank you very much, and I hope you all enjoy the rest of your summer. Have a great Labor Day and we'll speak to you on the Q3 call..

Thank you, ladies and gentlemen, this does conclude today's conference. You may now disconnect..