Iron Mountain Inc IRM
Q4 2012 Earnings Call Transcript
Transcript Call Date 02/28/2013

Operator: Good morning. My name is Bonnie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Iron Mountain Fourth Quarter 2012 Earnings Call Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

I would now like to turn the conference over to Ms. Melissa Marsden, SVP of IR. Please go ahead, ma'am.

Melissa Marsden - SVP, IR: Thank you, Bonnie, and welcome everyone to our 2012 fourth quarter and year-end 2012 earnings conference call. As Bonnie, I'm Melissa Marsden, Senior Vice President of Investor Relations and I just joined the Company's IR team a few weeks ago. This morning we'll hear from Bill Meaney, our new CEO, who will discuss highlights and his early focus areas; followed by Brian McKeon, our CFO, who will cover financial results and guidance. After their prepared remarks, we'll open up the phones for Q&A.

Per our custom, we have a user-controlled slide presentation at the Investor Relations page of our website at www.ironmountain.com. Referring now to Slide 2, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for our 2013 financial performance. All forward-looking statements are subject to risks and uncertainties. Please refer to today's press release, the Safe Harbor language on this slide, and our most recently filed Annual Report on Form 10-K for a discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements.

In addition, we use several non-GAAP measures when presenting our financial results and the reconciliations of these non-GAAP measures as required by Reg G can also be found at the Investor Relations page of our website in addition to today's press release.

With that, I'd like to introduce our new CEO, Bill Meaney.

William Meaney - President and CEO: Thank you, Melissa. It's great to be here today. I have had the opportunity to meet with several of you since joining the Company in January and I look forward to getting to know our investors, analysts over the coming months. Before I get started, I would like to just take a minute to welcome Melissa Marsden to Iron Mountain. Brian and his team have been working with Melissa as a consultant for some time and she officially joined us in her current capacity as Senior Vice President of Investor Relations earlier this year.

Melissa brings more than 25 years of Investor Relations experience across a range of industries and most recently, she served as Managing Director of IR of ProLogis, which as some of you probably know, is the global leader – the largest global industrial REIT where she was named the top REIT IR Officer by Institutional Investor. So, we are very pleased to have Melissa here and the capabilities that she brings to our team as we work to expand Iron Mountain's investor base.

Now that as the introduction to Melissa, let me just kick off with a couple of comments on our performance and then Brian will cover the details in a few minutes. Iron Mountain wrapped up another solid year with revenues of $3 billion and adjusted OIBDA of $912 million and adjusted earnings per share of $1.21, all in line with our expectations.

In the fourth quarter, we continued to achieve strong constant dollar storage rental growth of 5% underscoring the long-term durability of our business and providing a sturdy foundation for our overall financial performance. Our storage rental revenue growth reflected both healthy increases in our international business as well as steady growth in our North American business and offset a modest decline in our total service revenue, which was driven mainly by lower recycle paper prices.

These stable fundamentals are what attracted me to Iron Mountain, namely, a track record of durable growth, strong cash flow generation, high return opportunities in the international market, and a great franchise with a strong culture.

While companies experience wild swings in revenues as global economies peak and trough, Iron Mountain has the unique ability to sustain its growth rate throughout business cycles due to the attractive underlying stability of our storage business. I did my due diligence and I believe we can sustain the durability of the business through opportunities in both mature and emerging markets as well as potential adjacencies.

Be assured that as we pursue these opportunities, we will continue to view them through our capital allocation approach which focuses on maximizing cash flow, generating strong returns, and supporting the steady long-term growth of our core business.

My near-term focus upon joining the Company has been to spend a god deal of time with customers, investors, and our associates around the globe. I came away with a sense of opportunity related to the significant amount of unvended records that remain in the mature markets in both private and public sectors.

One way in which we are addressing that is organizing our sales efforts into vertical segments, such as healthcare, financial services, energy, and government, and a closer alignment between our sales and product management groups. It is early in the process, but we are pleased with the progress to-date.

This sector focus and Iron Mountain's strong customer relationships should in time give us permission to handle more data and record management processes for our customers and provide some higher value-added services. Additionally, Iron Mountain is an internationally recognized brand, yet only about a quarter of our revenues today are generated outside of North America.

Overall, many of the emerging markets are still early in the records outsourcing process, supporting our continued expansion in international markets, which is a great fit with my background. I've spent the last 27 years running multinational businesses from outside the United States, and I'm very comfortable with the process. To be clear, in my view, in the view of Iron Mountain, international expansion is not about putting pins in the map. We will pursue entry into additional markets with an aggressive yet disciplined approach that is consistent with our focus on return on invested capital and where we can develop leadership positions over time.

We are on track to achieve our goal of 700 basis points of international margin improvement by the end of 2013. Entry into new markets may slow further international margin expansion slightly in the early stages of market penetration, but as we've demonstrated in the past, once we achieve market leadership, our international margins are very consistent with those of our developed markets. Lastly, we look to invest where we can leverage the brand and build off our strengths, but in areas that are adjacent to or directly tied to our core operational expertise.

At Investor Day, Richard Reese talked about the opportunity for wholesale data centers where we can provide the secure space and customers bring in their own technology. He highlighted that we are already doing this in our underground data center operations where we're approaching a run rate of some $20 million in annual revenues, with substantial space to further expand. This is just one example of where customers came to us and asked for a specific product or service, and we'll continue to look at additional opportunities consistent with our core business.

The combination of our durable leadership position in developed markets, emerging market opportunities, and close-in adjacencies provide a very solid foundation. I'm very confident in our ability to build on this position and to maintain steady, stable growth and strong cash flow. In short, I think we've got a great base from which to continue to drive sustainable value.

Beyond the opportunities to sustain the durability of the business, I was really attracted by the nature of the organization. It's not often that one gets a chance to lead a company that has the kind of franchise that Iron Mountain does. The strength of our brand and the depth of our customer relationships in my opinion are unparalleled. The culture is refreshing and apolitical, something that is exceedingly rare in a global company. There is deep operational knowhow, what I like to call the secret sauce, and its customers trust us with their critical documents and it's what enables us to innovate and discuss with our customers how we can do more to improve the efficiency of their records management.

There's also an overarching objective of driving returns through smart and disciplined capital allocation with a focus on long-term and sustainable growth. Assuming that we are successful with the private letter ruling or the PLR, the REIT will complement our core strategy and provide further certainty in our investment focus, resulting in a source of stable and growing shareholder returns. Financially, we will have the flexibility to fully support high return investments to expand our network capacity, pursuing tuck-in acquisitions, and geographic expansion opportunities as well as acquiring real estate. We'll also retain the flexibility within the REIT test to expand closely related service opportunities as well. As we move through the PLR process with the IRS, we are working hard to advance our preparedness to operate as a REIT. We have invested heavily in people, processes and systems to enable us to be ready for conversion at beginning of next year and are targeting the third quarter to have our REIT critical systems in place.

This aggressive timeline results in additional investment which Brian will review, but this is the right time to invest to ensure we are dotting our eyes and crossing our tees. We are making a significant investment but one that tails in comparison to the incremental shareholder value we expect to be able to deliver as a REIT.

As we continue to work on the REIT conversion we have been familiarizing ourselves with various REIT sectors and the characteristics in terms of the nature of our business. We believe that Iron Mountain is most like the self-storage but with an important difference. We are enterprise storage, serving 94% of the Fortune 1000 as opposed to consumer self-storage which has a very different credit profile. In terms of other characteristics of the business, I think we believe we compare favorably with an attractive cash flow characteristics, low volatility and low risk. For example, in terms of cash flow we have a much higher annual return – rental revenue per square foot roughly two times that of the self-storage sector where we’re approximately $27 a square foot versus $13 to $14 for self-storage. We also have similar low maintenance CapEx to self-storage at roughly 6% of our storage rental gross profit. And we have similarly low tenant improvements required when a new customer moves in.

If we look at in terms of volatility in comparing ourselves to the self-storage market, we have a very stable storage rental growth of plus 4% to plus 7% versus self-storage which is ranged anywhere from minus 5% to plus 9% over the past several years. We also have very high customer retention rates of 98% compared with only about 55% of self-storage customers who stay more than one year. On top of that the average life of a box in our storage rental business, as most of you know, is about 15 years.

In terms of the risk profile of Iron Mountain's business versus the self-storage business, we have a very high quality diversified customer base, serving 94% of the Fortune 1000 and we have more than a 155,000 customers globally whereas self-storage has retail or individual consumers as customers with variable credit quality. So, we look forward bringing you the specifics of these and other metrics as well as our thoughts on Iron Mountain's valuation as a REIT over the coming quarters.

In summary, we are executing against our business strategy and are well positioned to deliver against our financial objectives in 2013. Our storage rental business is strong. We have meaningful growth opportunities available to us to extend the durable storage annuity and we are making good progress towards delivering the REIT.

Before I turn it over to Brian, I'd like to take this opportunity to thank Richard Reese for his numeral contributions to Iron Mountain. Many of you have come to know his candid and thoughtful style and I believe the culture of the Company is due to his influence and leadership over the past 30 years. As we met with investors over the past month, many of you expressed your thanks to Richard for his stewardship of the Company and his willingness to return during a difficult phase in the Company's history. He will be missed and I have truly appreciated his insights in the short time that I've gotten to work with him here. I know you'll all join me in thanking him and wishing him well.

With that, I'd like to turn it over to Brian.

Brian P. McKeon - EVP and CFO: Thanks, Bill. Let's turn to Slide 3, which highlights the key messages from today's review. We delivered solid operating performance in Q4, driven by consistent storage rental growth. Storage rental grew 5% on a constant dollar basis in the quarter, supported by consistent gains in North America and 12% growth in international, including benefits from our 2012 acquisitions in Brazil and Europe.

Overall, growth trends were similar with reported results constrained by lower service revenues. As expected, we saw about $3 million of negative impact from lower year-on-year recycle paper pricing. However, the impact was less than we've seen in recent quarters and we work through the lapping of the significant price declines that began in Q4, 2011.

Adjusted OIBDA was in line with our full-year guidance. Our profit results continue to be supported by international margin gains. As reviewed in our Q3 call, we saw impacts in Q4 from cost associated with accelerated facility transactions and realignment within our sales and account management organizations, as well as from the true up of accruals at year-end. Overall, we finished the year on-track with our expectations, supported by solid storage growth, strong international gains and continued deficiencies in capital investment.

Today, we are reiterating our full-year 2013 financial outlook for revenues, adjusted OIBDA and free cash flow. We are increasing our CapEx guidance to reflect the recent facility lease buyout and the relocation of our Boston headquarters that was announced after Investor Day. Additionally, we are updating our preliminary outlook for our REIT conversion costs to reflect a more informed view of the expenditures required to complete the project particularly with respect to the international convergence.

We are investing to ensure that we meet the January 1, 2014 deadline, including having our pre-critical systems operating in the third quarter of this year.

Let's move on to Slide 4 to review our financial results in more detail. Slide 4 compares our results for this quarter to the fourth quarter of 2011. As noted, Q4 results were as expected, supported by 5% constant dollar storage rental growth. Enterprise revenues grew 2% on a constant dollar basis as our international segment continued to drive strong performance.

International posted 10% constant dollar revenue growth, supported by 4% internal growth, and benefits from our acquisitions in Brazil and Switzerland. North America posted flat constant currency revenue growth as lower service revenues offset 2% storage rental gains.

Forex changes had a minimal impact in the quarter.

Gross profit was $420 million in Q4, yielding a gross margin of 55.4%, down 210 basis points compared to the same prior year period. Storage gross margins decreased 120 basis points reflecting costs related to accelerated facility transactions in the U.K. and then in the Southeastern United States. And service gross margins were down year-over-year due to decreased recycled paper prices and impact from lower core service activities. Mix impacts from 2012 acquisitions were also a contributing factor.

Adjusted OIBDA was $207 million or 27.2% of revenues in Q4. Our underlying profit performance remained solid supported by continued improved in our international segment. In Q4, this improvement was offset by the negative impacts from the costs associated with the facility transactions I just described, the realignment within the sales and account management teams in North America, the integration of our 2004 acquisitions, and the impact of year-end cost (indiscernible).

Lower paper prices and lower service activity were also contributing factors to the year-on-year decline in adjusted OIBDA.

Adjusted EPS for the quarter was $0.20 per share compared to $0.33 in Q4 2011. The decrease was primarily related to lower adjusted OIBDA and increased interest expense related to our recent debt financing transactions in support of shareholder payouts and the REIT conversion. Adjusted OIBDA and adjusted EPS exclude the impact of costs associated with the REIT conversion. These costs reduced 2012 reported EPS by $0.07 per share.

Reported earnings per share of $0.15 includes $18 million of REIT costs, $6 million of losses in asset dispositions, and $2 million of other expense. These impacts were partially offset by the impact of a lower effective tax rate due to foreign currency losses and discrete tax items. Our structural tax rate for the quarter was 40%.

Let's now take a closer look at our revenue growth on Slide 5. Slide 5 shows the components building to our overall revenue growth. Q4 and full year growth rates were in line with our full year expectations. For the quarter, constant dollar growth was solid at 2.5%. Overall, constant dollar growth for the year was at the midpoint of our 0% to 2% range, including the impact of lower paper prices. Excluding these effects constant dollar growth for the year was a solid 2%.

In Q4, storage rental grew 5%, driven by consistent performance in North America and continued strong growth in our international segment. North America reported 2.4% constant dollar storage rental growth, reflecting relatively flat records management volume and consistent pricing trends in the 1.5% to 2% range, with some additional benefit from solid data protection storage rental growth.

International storage rental constant dollar growth was 12% for the quarter, reflecting sustained double-digit growth in Latin America and Asia-Pac and benefits from the 2012 acquisitions.

Total services decreased 1% as expected headwinds in North American activity-based services and lower paper prices more than offset solid DMS growth and benefits from our 2012 acquisitions. Overall, North American service revenues declined 4% in the quarter with 1% of that decline related to paper.

Gains in DMS revenues were offset by decreased core service activity levels and lower revenues from special projects in ancillary service lines including Film & Sound and Fulfillment Services. The international segment posted 8% service growth supported by acquisitions.

In terms of components building to overall growth, storage rental internal growth at 3.2% for the quarter showed an improvement as expected compared to Q3. Net global records management volume was up 1.8% on a year-on-year basis. Service internal growth was minus 2% and total revenue internal growth was roughly 1%. Acquisitions and foreign exchange changes combined to add about 1.5 to our reported growth results. Overall, our storage rental business remains durable, providing consistent results and a solid foundation for overall revenue performance.

Let's take a look at our storage rental performance over the last 12 quarters on Slide 6. Slide 6 shows our constant dollar storage rental growth over the past 12 quarters for the enterprise as well as for our two operating segments. The stability and durability of our storage rental business drives the economics of our business. We've now reported 24 consecutive years of storage rental growth. As you can see in this chart, since 2009, our constant dollar enterprise storage rental growth has averaged 4% per quarter, while ranging between 2.5% and 5%. North America; which generates approximately 75% of our storage rental revenues continues to deliver stable growth of 2%. Our strategy here is to sustain this level of growth by capturing opportunities in the unvended market and underserved verticals such as government. As we outlined at Investor Day, our target growth rate for North American storage rental is between 1% and 3%.

Our overall storage rental growth is enhanced by our fast-growing international segment, which has averaged 9% constant dollar growth over the past three years. This performance is supported by strong organic growth, and more recently, additional growth through acquisitions. In the more developed international markets, we'll continue to support the growth of the annuity as we are in North America. In addition, we'll look to expand in high-quality, high-growth emerging segments. Over the next three years, we expect to drive 5% to 9% storage rental growth overall in international.

Our long-term focus is to sustain the durability of our storage rental business as the key driver of our overall economics and the foundation for the long-term growth of our cash flows.

Let's now take a look at our full year profit results on Slide 7. Slide 7 looks at our full year performance for 2012 compared to 2011. In terms of our key financial metrics, we delivered results that reflect consistent business trends and the achievement of our financial goals.

Reported revenue for the year was $3 billion up 1% on a constant dollar basis as solid storage gains offset impacts from lower recycled paper prices and declines in core service activity in developed markets.

Adjusted OIBDA was down 3% year-on-year on a constant dollar basis. Lower paper prices pressured profits by about $30 million in 2012. As noted, at current prices, we worked through these tough comparisons. Year-on-year results were also impacted by discrete costs in Q4, including facility moves, costs associated with the realignment of our sales and marketing organization and the year-end true-up of accruals. These impacts offset gains driven by strong underlying international profit performance.

Adjusted EPS was $1.21 per share, down 11% compared to 2011, reflecting lower adjusted OIBDA and higher interest expense incurred to support shareholder payouts and costs associated with the planned reconversion, which more than offset the benefits from fewer weighted average shares outstanding for the full year. 2012 capital spending was $182 million, including $54 million of acquired real estate and $13 million of reconversion CapEx. As a percentage of revenues CapEx excluding real estate and REIT CapEx is 6.1%, in line with our capital efficiency goals.

Free cash flow for the year was $347 million, solidly within our guidance range compared to $467 million for 2011. The year-on-year decrease was as expected reflecting lower adjusted OIBDA combined with higher cash taxes compared to low 2011 levels, higher interest expense in support of our shareholder payout program and the lapping of lower cash incentive compensation payments in 2011.

The 2012 adjusted OIBDA and adjusted EPS shown here exclude $34 million of costs associated with the REIT conversion. These costs reduce 2012 reported EPS by about $0.14. Note that 2011 adjusted OIBDA and adjusted EPS excludes $16 million of these costs and reduce reported EPS by about $0.05 per share.

In addition to the $30 million of REIT related CapEx I just discussed, we paid $80 million taxes towards our D&A recapture liability. All told, these items would have reduced free cash flow by about $116 million year-to-date. We've included a slide outlining the actual and expected REIT costs and related expenditures in the appendix of this presentation.

Let's now turn to Slide 8 to review our full-year results by segment. Slide 8 shows key year-to-date metrics for each of our three segments compared to 2011. Consistent with our business strategy, we're sustaining high returns in our North America segment while continuing to build momentum in our international segment as a significant driver of profit and cash flow gains.

North America continues to deliver high profits and strong cash flows. For the full-year, our North American business segment reported revenues at $2.2 billion, supported by consistent 2% constant dollar storage rental gains. Despite the impacts of lower recycled paper prices, we sustained adjusted OIBDA margins of 42%. Adjusted OIBDA in North America was down year-on-year due to a decrease in paper revenues of $23 million, lower core service activity levels and costs associated with the facility transaction and the realignment in the sales and marketing organizations.

We also sustained capital efficiencies in North America this year. We are spending at 4.5% of revenues excluding real estate. Our International segment continues to post strong constant dollar revenues, adjusted OIBDA and cash flow gains. Adjusted OIBDA increased 10% on a constant dollar basis. We are benefiting from cost improvement initiatives in Western European markets and strong profit performance in Asia Pac. Excluding acquisition integration costs and the accelerated facility transactions in the U.K., international adjusted OIBDA margins expanded about 150 basis points this year.

Benefits from productivity initiatives and from continued solid growth across our international portfolio have us on-track towards our business goals of approximately 25% margins in 2013. Finally, corporate expenses were consistent with prior year levels, reflecting benefits from the overhead cost control initiatives. Overall, we continue to drive strong operating performance across our portfolio.

Let's now take a look at our debt statistics on Slide 9. Strong consistent cash flow generation enables us to maintain a sound balance sheet. We're currently operating with a consolidated leverage ratio of 3.9 times within our targeted 3 to 4 times leverage range. Our leverage ratio has increased over the past two years as planned to support shareholder payouts of $1.5 billion and expenditures in connection with our proposed conversion to a REIT over that period.

As we previously stated, the cost associated with reconversion, including tax payments will temporarily and modestly push our leverage over the high end of our target range. We're well positioned in terms of cash and financing capacity. At year-end, liquidity was more than $900 million, with $243 million in cash and $667 million in additional borrowing capacity.

Our strong cash flow support continued advancement of our shareholder payout strategy. During the fourth quarter, we paid $47 million in regular quarterly cash dividends at a rate of $0.27 per share, in addition to the $140 million cash portion of our $700 million special dividend. For the stock portion of the special dividend, we issued 17 million new shares.

As we discussed on the Q3 call, management recommended and the Board at its regular schedule meeting in December agree to maintain the $0.27 per share quarterly cash dividend rate rather than reduce it based on the new higher number of shares outstanding. This resulted in an increase to our dividend payout levels of nearly 10% over prior years.

We're managing our balance sheet consistent with our strategy while advancing substantial payouts to shareholders and we're well positioned to fund our business plan.

That concludes our review of our Q4 2012 results. Overall, 2012 was another good year in which we continued to drive solid financial performance and position ourselves well for continued success in 2013 and beyond.

Let's now turn to Slide 10 to review our 2013 outlook. Today we're reiterating our full year 2013 revenue, adjusted OIBDA, and free cash flow guidance, while updating our outlook for CapEx, adjusted OIBDA, and REIT costs. As we first presented at Investor Day last October, we're projecting 2013 reported revenues to be in the range of $3.020 billion to $3.100 billion or zero to 3% constant dollar growth. We're maintaining our outlook for adjusted OIBDA to be between $905 million and $935 million on an operating basis.

Storage rental growth is expected to remain strong at 4% on a constant dollar basis, consistent with the past two years. Service revenue growth is expected to be down moderately, driven by consistent trends in developed markets. Based on current prices, recycled paper should have a limited impact on 2013 growth.

Adjusted EPS for 2013 is now expected to be in a range of $1.13 to $1.24. The change from Investor Day is primarily due to some additional D&A and interest expense as well as to formally update for the number of diluted shares outstanding that we have after the E&P distribution. We provided some estimates at Investor Day, and this formally builds in the actual 17 million shares distributed. The calculation of adjusted EPS now assumes 190 million shares outstanding and a structural tax rate of 39%.

We're increasing our full year capital expenditures to be approximately $290 million, including an estimated $75 million for real estate. The increase reflects the addition of $22 million for the relocation of our Boston headquarters that was announced in Q4 as well as about $11 million for the (buy out) of a lease in Dallas we completed earlier this year. The $75 million we expect to spend on real estate this year includes $30 million for the expansion of our data center capacity in our Pennsylvania underground facility that we discussed at Investor Day. Our outlook for operating free cash flow continues to be in the range of $320 million to $360 million as we expect cash tax efficiencies that will offset the net cash impact from the office move.

As we've been highlighting, we anticipate significant one-time operating and capital costs associated with our potential conversion to a REIT. These costs relate to substantial system investments, legal and tax work, advisory fees, and other miscellaneous costs to implement the proposed structure. Total operating expense and capital costs are now estimated to be in the $150 million to $200 million range, up about $50 million from earlier estimates. We expect the majority of these costs to be incurred in 2013.

We've increased our preliminary outlook in this area to reflect the informed analysis of the conversion project, particularly with respect to the scope and timing of our international conversions. We are investing to ensure that meet the January 1, 2014 deadline including having our REIT-critical systems operating on a test basis by the third quarter of this year.

For 2013, we expect to incur between $65 million and $90 million of incremental expense between $30 million and $45 million of CapEx and to pay $105 million to $115 million in additional taxes related to the depreciation recapture, all in connection with the REIT conversion. The impact of these items will be a reduction in reported EPS of $0.26 to $0.36 and a use of cash of $185 million to $230 million. We'll continue to track and report these costs discreetly from our underlying operating results. Slides laying out our outlook for line items below adjusted OIBDA as well as for the REIT related items are included in our Appendix.

That concludes our review. In summary, Q4 was a quarter of good financial performance, and we're well positioned to achieve our financial goals in 2013. We continue to execute against our business plans, sustaining high profits and cash flow in North America and driving strong growth and higher returns in our International business. And we continue to advance work in connection with the proposed REIT conversion as part of our long-term approach to enhance value creation for stockholders.

Thanks and we'd now be happy to take your questions.

Transcript Call Date 02/28/2013

Operator: Kevin McVeigh, Macquarie.

Kevin McVeigh - Macquarie: Brian, just as we think about the uptick in the taxes related to the REIT, the $105 million to $115 million, up from $80 million, what was the reason for that in terms of – was it just a tighter discussions with the IRS or just any thoughts around that?

Stephen P. Golden - VP, IR: Kevin, this is Stephen. No, this is just a schedule of payments over the course of time. There were – there's more than one layer to it, and there's a small second layer coming in in 2013 that wasn't there in 2012. So this has got nothing to do with conversations with the IRS. This is all fixed payments that just happened to be in bulk in 2013.

Kevin McVeigh - Macquarie: And then, Bill, it sounded like you've had a wonderful transition so far. One thing you mentioned were potential adjacencies. Was that kind of primarily related to data storage or anything else in addition to kind of the traditional services past data storage? And would you do that organically or inorganically?

William Meaney - President and CEO: I think – right and the only thing that we've come out public on is the wholesale data center as a potential area for adjacencies, so there's a number of things that we're looking at that across all those spectrums. But I think the way to think about it is, is that things we are looking at is similar to when we went into the tape business. So, in 1995, I think, roughly is when we really got going in the tape business and it was less than a $15 million business. And today, we've turned this into a $400 million, $500 million business. So, I think that the question for us is, what is the next natural adjacencies just like we added tape alongside the box, what's the next one? And there's a number of things we are looking at and the one that we've highlighted or have come a little bit more public about is the wholesale data center is the potential area.

Operator: James Samford, Citigroup.

James Samford - Citigroup: Bill, welcome onboard. Just wanted to ask you quickly on the REIT conversion and where we are in terms of the next stage of E&P Distribution and timing or any (slides) as far as anything that you guys have come with so far this year?

Brian P. McKeon - EVP and CFO: Jim, this is Brian. Why don't I try to take that on? The next E&P Distribution assuming we are successful with the feedback from the PLR, which we don't have anything new to announce on that front. But assuming we're successful would be in 2014, so we are not anticipating an E&P distribution beyond the one that we did at the end of last year into 2014 and that's consistent with normal timing on these types of things we have until the end of 2014 due to formal distributions as a part of the conversion process.

James Samford - Citigroup: Just a quick follow-up on the tape backup and data protection segment. What's the overall mix today? I think you said $450 million to $500 million. And is that segment growing or any metrics on either growth or margin expectations on that part of the business?

Brian P. McKeon - EVP and CFO: Again, this is Brian. The facility transactions; there were two large ones; one was in London. It's basically closing one facility and consolidating into another. And we had one in Nashville, Tennessee in the U.S. And we'll see returns from those quickly. So, those are basically payments we're making to get lease facilities and some other costs and we'll consolidate it to other buildings, and so that's factored into our 2013 outlook. It's a very quick payback. We do this all the time. So this is nothing new. We had some other impacts in the quarter. The sales and marketing realignment was about $4 million. We highlighted paper being an issue year-on-year about $3 million. And there were just a variety of things that kind of all went in one direction on the year-end accruals. So we had some litigation accruals. We're still incurring some cost to finalize resolution of the government contract matter, which is progressing well, but there's a lot of money being spent there just to resolve that. We had some adjustments to stock programs. We moved to a world where we're paying a lot more in dividends and we made some adjustments to how that impacts the stock incentive programs for employees to basically give them credit for dividends in the future and just some other normal malaise. But those sum total were several million dollars of impact. So, a lot of noise in the quarter. When you cut through it, it was – we expected a bunch of this, and so it's right in line with our guidance, and operationally we feel good about the underlying performance; the international business is on track, good profit improvement in North America, sustained margins (that have) endured, some of the paper price swings that we've worked through that. So, we feel like we're in a good position to deliver the objectives that we outlined at Investor Day.

James Samford - Citigroup: How much specifically was the cost of those facility closure charges?

Brian P. McKeon - EVP and CFO: (7) combined.

James Samford - Citigroup: And then a little more color on the sales. I know there's been talk of investments in sales beginning a year ago or so. Is this incremental on top of that in terms of a bit different strategy, or is this just continuing to execute what you've been working on for a while? And do you have any tangible sense yet how the verticalization, if that's a word, is actually working?

William Meaney - President and CEO: It's Bill. I think that it's early days, but what we did before is we did a very strong focus in verticalization around the health care segment. And based on that, we were getting some good traction and gains against the headwinds that we were experiencing in healthcare with the drop in service revenues as people go into the electronic records. We saw that that actually really worked to have people, to have sales teams that were specialized around certain vertical sectors. So what we've done at the start of this year is we've launched a number of different sectors, which I mentioned, including government, oil and gas, financial services, and doing exactly the same thing. So it's early days, but it was based on the success that we had in healthcare in terms of rejuvenating that business. We thought that this really is the thing that makes sense to try to go after some of that unvended business and get more, especially in the mature markets.

Operator: George Tong, Piper Jaffray.

George Tong - Piper Jaffray: Bill, could you talk a bit about the customer traction you're seeing with wholesale data centers, how much this contributed to 4Q results and how much you're expecting this to contribute going forward?

William Meaney - President and CEO: Well, I think that we're approaching a run rate of $20 million for 2013, and we have a number of clients or customers that mainly came to us that we're hosting in that wholesale data center. So we're in the process as part of this realignment of the sales force is to actually be more proactive in terms of bringing in additional revenue, and that's where the investment that Brian highlighted, the $30 million that we are budgeting this year to expand that, is based on sales volumes. So we're not going – we are spending that money hoping that people come. It is based on our expectations in terms of generating additional customers for that facility, and that's the amount that we've budgeted to actually build out the facility to serve them. So, right now, it's early in the year but we're sticking by our guidance, that we're – that's what we expect based on the pipeline that we're building.

Brian P. McKeon - EVP and CFO: And George, it wasn't a major driver of our economics in Q4, and in 2013, we're investing in the front-end capability to continue to build out this business which we think could be a couple of hundred million dollar business over time. And so you'll start to see the benefits of that flowing through more in 2014. And in terms of the profit results, well, right now, it's not a major driver of our profit growth, but we feel very good about the investments we are making. The incremental returns on this are very attractive. It's a great space and good execution and high end customer interest. So we feel very good about this, and I think to Bill's point, it's a business that we can meet quite well. We basically invest capital after we got commitments and long-term contracts and so that it's a good business all around to invest behind.

George Tong - Piper Jaffray: As a follow-up, could you give us some color on what kind of customer activity you're seeing in the healthcare space particularly with regard to the computerization of the health records?

William Meaney - President and CEO: I think that first of all, with the computerization of healthcare records, we're getting a lot less service revenue which I think goes without saying. So, it's becoming much more archival. So they are still retaining the It's becoming much more archival. So they're still retaining the paper records, because they need that proof. But in terms of the access to the information on those records is that's been – more and more of that's been scanned which is helping our scanning business, and it's then – once it's electronic, they don't need to bring the records back and forth. Where we're were finding some new storage opportunities are things that – which I discussed with some of you is for instance in the pathology segment, and it's an area that's been overlooked by a lot of the healthcare providers in the sense that they just stacked up these paraffin slides everywhere and also in terms of some of the tissue sample. And that's a business that we're seeing some decent growth, which is pure storage but needs to be stored under special environmental conditions.

Operator: Andrew Steinerman, JPMorgan.

Andrew Steinerman - JPMorgan: Brian, I know we are increasingly talking about constant currency growth, but I appreciate the reference back to internal growth. So when we look to 0% to 3% constant currency – constant dollar growth for 2013, I wanted also a conversion back to organic growth, is there any acquisition that have occurred since Analyst Day? Is FX still a very modest change and so is internal growth going to be close to 0% to 3%? And the second question is within that 0% to 3%, how should core service fair?

Brian P. McKeon - EVP and CFO: Yeah. So breaking that down a bit for you, if you're just looking it internally, Andrew, we expect storage to be about 3%, so consistent with where we are and services to be down modestly, so it's sort of the flat to minus 2 range I think would be a good estimate there. And that is basically reflecting the activity base pressures we've talked about in more developed markets. In the emerging markets we're internationally seeing very good service growth. But still a significant part of our business is U.S. and U.K. So, that's the breakdown. Right now, we've got about a point of growth in our outlook related to acquisitions and that just reflects what we've completed today, right? So, if we do more that there would obviously be some accretion to that, but that's our current outlook.

Andrew Steinerman - JPMorgan: And FX?

Brian P. McKeon - EVP and CFO: FX limited impact at this point.

Andrew Steinerman - JPMorgan: Also, when you said 3 for storage and zero to 2 for services, is that constant dollar is that internal – zero to minus 2. I am sorry.

Brian P. McKeon - EVP and CFO: I was referring to internal.

Operator: Shlomo Rosenbaum, Stifel.

Shlomo Rosenbaum - Stifel: I just want to follow up on Gary's question in terms of the one-time-ish type cost that came out in the quarter. You talked about facility costs in the SG&A realignment. Can you just give us the dollar amount, if there are kind of one-time (news) things that can pull them out and see what the underlying margin is for both North America and international?

Brian P. McKeon - EVP and CFO: So, I walked through some of the details with Gary. The latter part of your question, Shlomo, just want to clarify if you're trying to understand what was international versus U.S.?

Shlomo Rosenbaum - Stifel: Yeah. And just a total dollar number. In other words, is it – I think you said $7 million for facilities and then $4 million for the realignment. Is the total one-time-ish type cost $11 million and how are they split? I just want to confirm that and see how they are split.

Brian P. McKeon - EVP and CFO: Right. In addition to that, you had year-end accrual impacts which are in a range of $10 million actually. In terms of – if you sum total all of the impacts, so we had a fair amount of year-end accrual activity as well. Keep in mind that you have the paper year-on-year headwind of about $3 million as well. So, combined, that was the key drivers of the performance. I don't have the breakdown between North America and international in front of me. I'm sure we can follow up on that for you. We did try to normalize the international margin growth, so I'm sure you can do the math on them.

Shlomo Rosenbaum - Stifel: Then just going forward for 2013, it looks like kind of an $8 million OIBDA improvement in margins that go down about 30 basis points. Is there going to be a continued improvement, should we think in the future that OIBDA should continue to gradually go up and is the margin going down because you're getting better growth on international, is that the way we should think of it?

Brian P. McKeon - EVP and CFO: We highlighted at Investor Day that we are advancing some new business investments in 2013, areas like wholesale data center that we talked about. We've got some other areas in beta in terms of new services around our tape business and highlighted there is about a $10 million of investment there. That is – our underlying outlook for the business reflects sustaining North America returns and following through on the margin improvement that we have in international and then having moderate margin improvement post 2013. So, really what you are seeing is just a reflection of – we are making some select new business investments in 2013 and that's mitigating some of the benefits from the international margin gains.

Shlomo Rosenbaum - Stifel: The second – this is the second quarter, I think, you guys have said that the storage volumes in the U.S. are relatively flat. Do you they fall into the relatively flat negative territory or relatively flat positive territory; I'm just trying to figure out is there any trend to be seen over there at all?

Brian P. McKeon - EVP and CFO: They were down 30 basis points year-on-year in North America.

Shlomo Rosenbaum - Stifel: Final question. What's the Plan B if PLR doesn't come back favorable?

Brian P. McKeon - EVP and CFO: We'll share more specifics with that if that's the case, but we would – our business strategy doesn't change. We're committed to growing the business and improving our (indiscernible) operations as we've talked about it and returning capital to shareholders. The REIT was a better way to do that and aligned with how we're managing the business. We'll bring some more specifics around that, but you should anticipate us just bringing clarity how we intend to return capital to shareholders in the context of our business strategy going forward. But we don't have anything specific to share with you today.

Operator: Andrew Wittman, Robert W. Baird.

Andrew Wittman - Robert W. Baird & Co.: So, I just wanted to get your thoughts, Brian, since you've been kind of leading the REIT conversion process. Is there anything to be read from the correction course and geo group approval process? Is there anything you can kind of take away (that) those offers; maybe confidence or less confidence in your conversion process?

Brian P. McKeon - EVP and CFO: I think they're all independent events. We don't have any insight into the dynamics in those discussions. I mean, we have our own set of facts and our own kind of proposals with the IRS. So, I can't offer any insight from what's going how with others. I mean, clearly, there are more companies looking at this area, and so I think this is an area that's getting a lot of attention in terms of review, and that's – there are other companies that are kind of non-traditional, if you will, in terms of proposing REIT structures, but our facts and circumstances are discrete and distinct, and I wouldn't read anything from other discussions into our situation.

Andrew Wittman - Robert W. Baird & Co.: Got it. On the government opportunity, as I think back about how you guys have talked about the government records and that they are – they outsource but internally. They have their own kind of document management facilities, something that has been a long-term opportunity, but probably one of the most difficult opportunities that you guys have had going after. As you re-verticalize here, are there any green shoots of success in capturing that government business? And I think in the context of austerity and fiscal cliff, maybe that's more relevant today. Is there anything to report there on early successes?

William Meaney - President and CEO: Look, I think I would put it in a bucket with all our vertical missions. Early days, but we are doubling down on that. And I think our view is net-net, if the government comes under tighter and tighter budget pressure, that's a net positive for us. We're in a lot of discussions at different – coming out from different angles with different government agencies, including their own internal storage people. And they are full and running out of capital, so I think that there the opportunity for us is growing, but it is an area where we're doubling down our efforts to see if we can get something to happen in 2013. It's early days, but we're optimistic. Otherwise, we wouldn't have focused on that as a separate vertical.

Andrew Wittman - Robert W. Baird & Co.: And then maybe one final question. It's really just around the M&A environment. There's been a bit of activity here in the last year or so. I think you guys kind of forecasted that that might be happening. Is there still more out there? And then with the balance sheet leverage at the high end and probably going over the high end of your range here with more of this conversion spend and what have you. Does that keep you maybe a little bit more conservative in how you would go after that M&A or do you feel unconstrained about doing what you'd see as a good deal?

William Meaney - President and CEO: We're comfortable with the strategy that we've outlined. The M&A activity that we're driving is within our core business and the businesses that we buy, the activity that you saw a fair amount in Q4 are smaller North American acquisitions. They tend to be highly accretive, bring very good profitability, and so actually in terms of when you think about our leverage structure where we've historically been kind of 3 to 5 times EBITDA, when you get these businesses, they fund – a significant amount of them fund themselves in terms of the incremental OIBDA. So we're comfortable with the acquisition kind of ranges that we've talked about and within the normal band that we've been functioning within. I think we had an estimate of about $100 million a year in our longer-term estimates and quite comfortably we can manage that.

Operator: At this time, there are no further questions.

William Meaney - President and CEO: Okay. Well, just to wrap up, I think we delivered on our expectations for the 2012 financial performance and looking forward to 2013, just to recap, we expect continued solid growth in the storage rental and further expansion into existing and new emerging markets on our international side. We don't see anything other than sustained high margins in North America and profit improvement, which we've already highlighted in the international business. And we'll continue to pursue these with a strong focus on prudent net capital allocation with an overarching goal for total returns and delivering sustainable value to our shareholders. So I want to thank you all for joining us today and we really appreciate your support.

Operator: Thank you. This concludes today's conference call. You may now disconnect.