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Iron Mountain Incorporated (NYSE:IRM)

Q4 2009 Earnings Call Transcript

February 25, 2010 8:30 am ET

Executives

Stephen Golden – VP, IR

Brian McKeon – EVP and CFO

Bob Brennan – President and CEO

Analysts

David Gold – Sidoti

Andrew Steinerman – JPMorgan

Scott Schneeberger – Oppenheimer

Ashwin Shirvaikar – Citi

Justin Hawk [ph] – Robert W. Baird

Operator

Good morning. My name is Taylor and I will be your conference operator today. At this time, I would like to welcome everyone to the Iron Mountain Q4 2009 earnings 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. (Operator Instructions). Thank you. Mr. Golden, you may begin.

Stephen Golden

Thank you and welcome everyone to our 2009 fourth quarter earnings conference call. After my announcement this morning, Brian McKeon will review our financial results, followed by Bob Brennan's CEO remarks. When Bob is finished, we will open up the phones for our Q&A. Following today's earnings call, Brian and I will be presenting at the RW Baird Business Solutions Conference here in Boston.

As you may have seen in today's earnings release, we introduced two new metrics, adjusted OIBDA and adjusted EPS as part of our ongoing effort to enhance our investor communications. The year-over-year growth in these metrics is an important measure of our performance. As such, we believe that excluding certain components of these results will be helpful with respect to comparability.

Adjusted OIBDA is operating income before depreciation and amortization, excluding asset gains and losses. This metric more accurately reflects how we plan, forecast and evaluate the performance of our business. Adjusted EPS is reported EPS, excluding asset gains and losses, other income expense, the tax impact of these reconciling items and discrete tax items and net income loss attributable to non-controlling interest. This metric more accurately reflects how we forecast our earnings. Both metrics also facilitate the comparison of our results for the current periods and guidance for future guidance with results for past periods.

Per our custom, we have a user controlled slide presentation on the Investor Relations page of our website, at www.ironmountain.com. Referring now to slide two, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for our 2010 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 current report on Form 8-K filed on March 8, 2009 for a discussion of the major risk factors that could cause our actual results to be materially different from those contemplated in our forward-looking statements.

As you know, we use several non-GAAP measures when presenting our financial results, adjusted OIBDA, adjusted EPS, and free cash flow before acquisitions and investments among others are metrics we speak to frequently and ones we believe to be important in evaluating our overall financial performance. We provide additional information in the reconciliations of these non-GAAP measures to their appropriate GAAP measures as required by Reg G at the Investor Relations page of our website, as well as in today's press release.

With that, I would like to introduce our CFO, Brian McKeon.

Brian McKeon

Thanks, Steve and good morning, everyone. We've got a lot to cover today, let's go right to it.

Slide three highlights the key messages from today's review. Q4 wrapped up a strong year of financial performance for Iron Mountain as we continued to deliver strong year-on-year profit and cash flow gains despite economic impacts that are constraining top line growth.

Revenue performance in the quarter was as expected. Storage internal growth was a solid 5% with gains moderated by the impact of constrained new sales and higher destruction we've experienced in recent quarters reflecting recessionary impacts. Service revenues were flat overall as continued pressure on activity levels offset solid gains in areas such as eDiscovery services.

Despite economic impacts, we continue to deliver strong profit and free cash flow performance. This is a result of our focus on operational excellence including productivity initiatives, pricing program improvements, and overhead and capital spending controls. This focus enabled us to drive almost 300 basis points of improvement in our adjusted OIBDA margin this year with solid gains across each of our major business segments.

For the quarter, we delivered adjusted OIBDA growth of 14% on a reported basis and 12% excluding the impacts of foreign currency rate changes. About 2% of this growth is due to the initial re-characterization of vehicle leases discussed in prior conference calls. We also continued to improve our cash flows and strengthen our balance sheet. Free cash flow for 2009 reached and all-time high of $336 million, driven by strong profit performance and controlled capital spending.

Looking ahead to 2010, we are targeting improved revenue growth and strong sustainable underlying operating performance. Today, we are raising our guidance to reflect recent performance, changes to macro factors, and the impact of the Mimosa acquisition.

Today, we also announced that our Board of Directors has approved a $150 million share repurchase authorization and a dividend with an annual rate of $0.25 per share. These actions are a direct result of our strong cash generation performance and reflect our confidence our long-term growth potential and our commitment to delivering long-term shareholder value. I'll talk more about this later in my remarks.

Let's turn now to slide four and begin with our review of fourth quarter results. Slide four compares our results for this quarter to the fourth quarter of 2008. Reported revenues for the quarter were up 4% to $779 million.

From a segment perspective, North American Physical posted 2% internal growth, supported by solid 5% storage internal growth. Storage gains and improved paper prices offset soft service revenues, resulting from lower core service activity levels.

Our International Physical segment reported 4% internal growth, supported by solid 7% growth in storage and core services. These gains were moderated by declines in complementary revenues, due primarily to lower paper revenues and project activity.

In our Digital segment, growth improved to 5% in the fourth quarter, driven by continued strong performance in our eDiscovery business. These gains more than offset storage weakness, resulting from lower subscription sales.

Benefits from operational excellence initiatives drove higher service margins in our North American Physical segment, supporting a 340 basis point improvement in our consolidated gross margin. Higher storage gross margins, aided by improved pricing in North American Physical and solid gains in our International Physical business was also a key contributor to gross margin gains. As a reminder, gross profits for the quarter also benefitted from the $5 million in rent expense, resulting from the re-characterization of certain vehicle leases.

Adjusted OIBDA grew 14% on a reported basis and 12% excluding the impact of FX changes. This improvement was driven by gross profit gains and controlled SG&A growth of 7% as we continue to focus investment on initiatives aimed at driving growth and gross profit improvements. For the quarter, depreciation was $74 million and amortization was $9 million, slightly below our forecast.

Finally, adjusted EPS for the quarter increased 23% to $0.27 per share, reflecting strong operating performance and interest expense that was flat to last year. As a reminder, the reconciliation of adjusted EPS to reported EPS can be found in today's earnings release or at the Investor Relations page of our website.

Let's now take a closer look a tour revenue growth on slide five. Slide five breaks down our overall revenue growth, shows internal growth on major service line, as well as the impact of acquisitions and foreign exchange. As noted, our total internal growth for the quarter was 3%. Storage growth though still solid, moderated to 5% as expected. These gains were offset by continued pressures on service revenues.

Storage revenues, which represent more than 56% of total revenues, continue to provide and expanding foundation for overall revenue performance. Storage internal growth for the quarter was supported by solid performance in North America and strong growth in international expansion markets, particularly Continental Europe. As expected, we saw some moderation in storage revenue growth, reflecting impacts from longer sales cycles and continued higher destruction activity.

Core service internal growth was 1%. Gains were constrained by lower service activity levels in the handling and transportation of records and secure shredding services, areas that continue to be impacted by economic conditions.

Complementary service revenue internal growth was minus 1% for the quarter. The decline in complementary service revenues was less than in recent quarters due to continued strong performance in our eDiscovery business and improved recycled paper prices. While recycled paper revenue gains were limited in the quarter due to economic pressures on recycling volumes, this is no longer a negative factor impacting our growth performance.

Foreign exchange increased reported growth by 1% in the quarter as trends in this front improved. We should see moderately positive effects at current exchange rates as we moving forward.

Let's now turn to slide six to review our full year operating performance. Slide six looks at our full year operating performance compared to 2008. Reported revenues exceeded $3 billion, down slightly versus the prior year as unfavorable foreign currency changes reduced reported revenue growth by 4%. These impacts offset positive internal revenue growth gains of 3%. As we'll discuss in our guidance review, we expect to see improvements on both of these fronts in 2010.

For the full year, we achieved a 10% improvement in adjusted OIBDA, which was a 14% gain on a constant dollar basis. As a reminder, gross profit and adjusted OIBDA, each benefitted from a $20 million decrease in rent expense, resulting from the re-characterization of certain vehicle leases.

These results reflected a 300 basis point improvement in both our gross margin and operating OIBDA – and our adjusted OIBDA margin, supported by our focus on operational excellence including sustainable gains from productivity and pricing initiatives. These operating gains and a 4% decrease in interest expense drove a 22% increase in adjusted EPS.

2009 was also a year of improved capital efficiency, which combined with our strong profit performance, drove record free cash flow before acquisitions and discretionary investments of $336 million.

Let's move now to slide seven for a review of the full year from a segment perspective. Slide seven shows key metrics for each of our four segments compared to 2008. As we discussed at Investor Day last October, each of our major business segments plays a distinct role within our integrated strategy.

In north – in the North American Physical segment, we are focused on capitalizing on our core opportunities to drive growth and returns, demonstrating the power of the Iron Mountain model. In the International Physical segment, we are building up the global foundation through a balanced approach, driving growth and higher returns in developed markets, while developing the next generation of file rooms [ph] in expansion markets. In the Digital, we are extending our capabilities in high-growth incremental markets.

We've already discussed our revenue performance for 2009 and I will have more to say on this when we are reviewing our 2010 outlook. A key takeaway from this slide is that despite top line pressure, each of our major business segments is reporting improved operating performance and capital efficiency.

North America, our largest segment, continues to drive higher profits, cash flow, and returns. We continue to drive our optimization agenda, while expanding our business foundations through a targeted growth strategy. Significant growth opportunities exist in the unvended storage and DMS markets for this segment and we are evolving our go-to-market capability and strategy to capture this potential.

Our International segment continues to improve as we develop scale in our expansion markets and drive higher growth and profitability in our larger established markets. Due to the significant year-on-year strengthening of the U.S. dollar against all major currencies in 2009, our reported results were reduced by approximately 16%. As noted, at current rates, FX should be a positive factor moving forward, allowing us to benefit from the momentum and performance for driving in this business.

Finally, our Digital business continues to make progress against its strategic agenda, while delivering solid profitability even in this difficult economic environment. Our eDiscovery business had a very successful year and we are excited to add the Mimosa acquisition to our portfolio.

Let's turn to slide eight for a more detailed look at our capital spending and free cash flow. Slide eight summarizes our capital spending and our free cash flow for the year, performance that drove record results for Iron Mountain. Total capital spending was $321 million for 2009 including $36 million for real estate. This represents a 14% decrease from our 2008 levels, reflecting continued focus on the capital allocation process and lower-than-forecasted real estate spending.

Our capital efficiency continues to improve as capital spending excluding real estate decreased to 9.4% of revenues in 2009 from 10.8% in 2008. We expect to build on this progress in 2010. This reduction in capital spending, combined with our increased profitability, drove free cash flow before acquisitions and discretionary investments to a record $336 million.

Our sustained strong profit and cash flow performance was instrumental in our Board's decision to advance payouts to shareholders. I'll speak more to this in a moment. But first, let's turn to slide nine to review our debt statistics.

Our focus on cash flow improvement is supporting continued strengthening of our balance sheet and liquidity. Our debt portfolio at the end of 2009 remained in a very strong position. Our weighted average interest rate is 7% and were 87% fixed. Maturity is now at 8.1 years with no meaningful repayment obligations until 2014.

Consolidated leverage at the end of the year was 3.3 times, benefitting from our strong operating cash flows and limited acquisition activity over the last two years. The acquisition of Mimosa is expected to increase our leverage ratio by only about 10 basis points.

Our liquidity position has also improved to more than $1.1 billion with $447 million in cash and $700 million in additional borrowing capacity as of year-end. Currently, we have a very strong balance sheet and we are well positioned in terms of our cash and financing capacity and we are making comfortable operating at or below the low end of our target leverage range of 3.5 to 4.5 times in the current environment.

This concludes our review of Q4 2009 results. In summary, revenue performance was as expected. We are driving strong sustainable profit and cash flow performance through our focus on operational excellence and we remain committed to strengthening our business foundation globally while delivering strong financial performance and believe we are well positioned to build on that progress in 2010.

Let's now turn to slide 10 to discuss today's shareholder payout announcement before concluding with our updated 2010 guidance. As Bob will discuss in his remarks today, we announced the advancement of program supporting shareholder payouts as part of our financial approach.

As context, over the last two years, Iron Mountain has generated more than $400 million of free cash flow after $700 million of capital expenditures including real estate. This performance has resulted in a substantial lowering of our leverage ratios as we've expanded our business. We intend to build on this progress and are targeting sustained strong free cash flow and expanding profitability as we move forward.

Our strong cash flow performance, combined with the strong balance sheet, gives us substantial capacity to invest in our growth agenda, including targeted acquisitions, while supporting payouts to shareholders. The shareholder payout approach we are advancing reflects our confidence in our long-term growth outlook and our commitment to delivering value to our shareholders.

The quarterly dividend, which we intend to grow over time, will serve as the foundation for shareholder payouts. Based on the closing price of our stock at February 19th, this represents a 1% dividend yield. The share repurchase program will serve as an additional vehicle for capital deployment. The $150 million authorization represents about 3% of our outstanding common stock based on the closing price on February 19th. All share repurchases are subject to stock price, market conditions, corporate and legal requirements and other factors.

The Board has granted the authority to establish trading plans under SEC rule 10b5-1. This will allow us to repurchase shares in the open market during periods in which the stock trading window is otherwise is closed to the company. The advancement of payouts to shareholders is a significant milestone in the evolution as – of our company and we are excited to announce this today.

Let's now review our 2010 outlook. In terms of our guidance for 2010, there are three key messages you should hear today. The first is that we are targeting improved revenue growth in 2010, supported by 4% to 6% internal revenue gains. While we are planning for continued headwinds from economic factors heading into 2010, we are committed to driving improved growth as we move forward and expect a benefit from more favorable macro factors such as improved – improvements in FX and recycled paper pricing.

We also intend to drive strong adjusted OIBDA growth, supported by a continued progress on our North American productivity initiatives and improved profits in our International business segment. Our objectives in 2010 call for 7% to 12% reported growth in adjusted OIBDA, building on our solid 2009 results. These objectives reflect the solid progress in operational improvements we continue to drive across our business.

Finally, we are adjusting our guidance for the impact of our recently announced acquisition of Mimosa. For 2010, we expect Mimosa to add about $20 million to our annual revenues. This deal will be modestly dilutive to earnings in 2010 due to current operating losses and integration costs. Based on expected synergies and strong revenue growth, however, Mimosa is expected to generate positive adjusted OIBDA beginning in 2011.

Let's review our outlook in more detail, starting with a breakdown of our revenue growth guidance. The table on slide 12 shows our expectations for internal growth and total growth in 2010 including impact from FX and acquisitions. As noted, we are targeting internal growth in the 4% to 6% range. While below our long-term target rates, in the high-single digit internal growth trends seen just before the financial crisis, this outlook reflects an improved growth trajectory that should put us on track for higher growth as the economy recovers.

We continue to expect storage growth to be in the mid-single digits, reflecting current trends and impact from 2009 activity. The storage costs will be more difficult early in 2009, particularly in Q1, given the carryover effect of softer new sales and higher destructions through 2009. These comparisons will improve as we work through the year.

We are planning for continued softness in core service activity levels until we see clearer signs of improvement and expect this revenue growth to be between 1% and 5% in 2010. With respect to our complementary revenues, we are expecting a significant improvement over 2009, which will support our overall internal growth rate of 4% to 6%. The increase in complementary revenue growth is 8% to 15%, is driven by continued strong performance in our eDiscovery business, easier comps, and higher paper prices. These gains are being mitigated as the demand for special projects remain soft.

We also expect the impact of the recent increase in recycled paper prices to be partially offset by volume and activity pressures. Please note that complementary revenues due fluctuate in our business and historically are more vulnerable to general economic conditions, but they also represent a smaller part of our revenue base.

As I mentioned earlier, the Mimosa acquisition should add just under a point to our revenue growth in 2010. Combined with the estimated 1% benefit from the recent weakening of the U.S. dollar, we are projecting reported revenue growth to be in the 6% to 8% range for 2010.

Let's turn to slide 13 for a look at revenue growth across our segments. Slide 13 highlights our expectations for internal growth rates across our three major business segments. For our North American Physical segment, which finished the year with a 3% internal growth rate, we are expecting 2010 internal growth to move up to the 4% to 5% range. This outlook reflects mid-single digit storage revenue growth gains, supported by improved complementary service revenue growth. These gains will be moderated by lower service activity levels and expectations for constrained shredding growth in the current environment.

For our International Physical segment, we are projecting internal growth in the 4% to 6% range. 2009 was a good year in the International segment, supported by solid growth rates in core revenue, partially offset by pressures on our complementary services. We saw a solid revenue performance in our expansion markets and expect this to continue in 2010. For 2010, we are targeting continued solid core revenue growth rates in our International business, building on our momentum in these markets.

Finally, with respect to our Worldwide Digital segment, we are targeting an internal growth rate of flat to 10%. We expect continued solid growth from our expanding eDiscovery business as we – but we will be working through the impacts of recent lower subscription sales in our storage growth. While it’s still too early to call – to plan for a turnaround, we have seen some positive factors with respect to Digital sales and remain confident that we can get this business on track towards strong long-term growth as the economy recovers.

Slide 14 incorporates these projections to our overall guidance for 2010. Slide 14 summarizes our full year 2010 and Q1 outlook. Overall, we are now targeting 6% to 8% growth in reported revenues, including benefits from the Mimosa acquisition and a weaker U.S. dollar.

We are raising our guidance in dollar terms and now expect 2010 revenues of between $3.185 billion to $3.255 billion. With respect to adjusted OIBDA, we are targeting 7% to 12% reported growth or $930 million to $975 million, reflecting continued margin gains and additional benefits from higher paper prices. These gains are partially offset by the dilutive impact of the Mimosa acquisition.

Our capital expenditures of approximately $320 million include $30 million for real estate. The decrease from our preliminary forecast given on Investor Day last October is due primarily to lower expected real estate spending, benefits from our procurement initiative and refined spending plans in the context of the current growth outlook.

In terms of free cash flow, we intend to build on our strong 2009 performance with goals for free cash flow before acquisition and real estate investments of $330 million to $370 million. The year-on-year growth rate for free cash flow is constrained by increase in cash taxes that we expect to be about $110 million in 2010. As you know, we've utilized nearly all of our U.S. federal NOLs and our cash tax rate is now approaching our book tax rate.

For the first quarter, we are projecting revenues of $770 million to $790 million and adjusted OIBDA of $210 million to $220 million. This outlook reflects Q1 internal growth in the 3% to 6% range. As noted earlier, we expect our storage growth comps to be toughest in the first quarter, but these impacts should be offset by favorable comps on factors such as recycled paper revenues.

Turning to slide 15, you can see our expectations for the P&L below the adjusted OIBDA line for the full year 2010. D&A expense is up modestly, reflecting the Mimosa acquisition and interest is flat compared to 2009. We are expecting our structural tax rate to be 40% for 2010. This rate is 2% higher than our 2009 structural rate, due primarily to the exploration of certain tax loss related to R&D credits and foreign income at December 31st, 2009. This 2% increase in our structural rate has a projected $0.04 impact on earnings for the full year. It's possible that this loss would be retroactively reenacted during the year. If that happens, we will adjust our structural tax rate accordingly.

As Steve described earlier, adjusted EPS assumes asset gains and losses, other income expense and non-controlling interest to be zero. This will allow for greater year-on-year comparability. Our adjusted EPS calculation assumes 205 million shares outstanding.

In summary, 2009 was a solid year as strong execution drove record profitability and free cash flow. Our business fundamentals are solid and despite the current economic headwinds, we remain confident in our long-term growth potential and expect to make progress in improving our growth trajectory in 2010. Our balance sheet remains strong and we are very well positioned financially to fund our growth agenda and support shareholder payouts.

Thanks and now, I'll turn the call over to Bob.

Bob Brennan

Thanks, Brian and good morning, everyone. As Brian explained, our financial results for the quarter came in as expected. We had a good quarter, we had a good year, and we've done well.

Our revenue growth was moderated by the economy and factors we've discussed on previous calls. But despite a tough selling environment, we managed well, applying discipline and focus to operating Iron Mountain with excellence. We advanced our strategic position and I'm very proud of the way the team delivered strong profit and cash flow gains across all segments of the business.

On this call, I want to shed light on the current trends in our business and emphasize some key areas of focus for the year. I also, of course, will provide more detail on two strategic fronts, both announced in just the last two days. First, the advancement of our Digital business through the acquisition of Mimosa and second, our shareholder payout approach. Both are right up the alley of our strategy and I'll share those details in a few minutes.

There are three things I want you to hear today. The first is about growth because while we are working through some economic headwinds, we are targeting an improved growth trajectory in 2010 and remain optimistic about Iron Mountain's growth potential going forward. The second key message I want you to hear is that we remain focused on managing our business with discipline and intent to leverage continued gains from our operational excellence initiatives to drive strong profits and cash flow this year and in the years that follow. The third message is that we are advancing our long-term strategic agenda, demonstrated by our investments in technology services.

So let's go to the top of the agenda. Let's talk about growth and the trends in our business where we experience the most impact. Current growth trends are what we expected. You've heard me tell you on the recent calls that we anticipated pressure from the economy on our near-term growth rate. The economy took us from high-single digit growth to where we are now. You can see from our forecast that we expect improvements in our growth rate, but not a turnaround in 2010. As the economy improves, revenue should improve.

In the meantime, we are aggressively getting after revenue growth with the same focus and discipline we applied to expanding margins in the last few years and I'm optimistic about our growth potential. A few things. First, there are positive factors on the growth front. Next, we are taking the right proactive steps to get after revenue. And third, we continue to expand our capability on a permanent basis. Let me cover all three.

First, the positive factors on the growth front. Our international expansion markets have been posting solid gains. We see signs of improvement in technology sales. Now, it's still tough, but it's improving. And our DMS pipeline is growing. And although the sales cycle for DMS is a long sales cycle, this clear customer interest, which reinforces the fact that this is a big growth area where we have a unique value proposition.

In addition to these positive factors, we are applying aggressive tactics to get after revenue now. We are not sitting back waiting for the economy to improve. The team that brought the operational excellence and the margin expansion that came with it, they are running well, we are pivoting our leadership into the – on to pursuit of our biggest revenue opportunities.

We continue to get better at selling by aligning our sales force with key vertical segments to capture more opportunity within our existing accounts and we are supporting sales with targeted programs such as teaming with our real estate partners to get after net new business through that channel and others. These positive factors and proactive steps support my confidence in an improved growth outlook for 2010 and beyond.

As we move forward, we'll also continue to improve our capabilities in areas that will drive strong long-term growth in our business. These include capturing large unvented opportunity in our core Physical business; growing new services, particularly DMS and Digital; and continuing international expansion in growth markets like Continental Europe, Latin America, and Asia. These areas of focus position us well for a return to our target growth rates as the economy improves.

We are confident that we can improve our capability to sell in market just like we have improved our capability to operate the business in the last few years. So the first message is one of an improved growth trajectory. It's our top priority and we are getting after growth in an aggressive way.

The second message that I want to reinforce today is one of operational excellence. As we advance our growth strategy, we will leverage the benefits of our operational excellence initiatives to drive continued strong financial performance. In 2009, despite revenue pressures, we achieved 14% growth in adjusted OIBDA on a constant currency basis with record capital efficiency and free cash flow. The team did a great job.

Our goals for strong profit gains and cash generation in 2010 reflect that these gains are driven by sustainable initiatives and enhanced organizationally capability. I want to know we have substantial room to drive continued improvement.

It's indicated in our operational priorities this year, which include the continued rollout of existing initiatives such as our transportation improvement and record center optimization programs to new markets; the expansion of our operational initiatives on a global basis, supported by a global – supported by a strengthened global support structure that we've put in place; and the rollout of new initiatives such as global procurement, which is supporting gains in areas like capital efficiency and operational uniformity further down into our business.

This focus gives us the ability to invest against the initiatives, while we deliver strong financial results. So the first message is to reinforce our bias for growth, the second message is operational excellence bring sustainable benefits. Now, I want to talk to you about major advances to our strategy that we've been signaling for some time.

As you know, our growth strategy is to focus on organic development of the core Physical business, complemented by the expansion of services, tied to the rapid growth of digital and hybrid records, all in the context of delivering strong financial results. The strategy has been on track for years and our conviction only grows as we extend our leadership in the market, as evidenced by this week's acquisition of Mimosa.

We are really excited to have Mimosa – the Mimosa team join the Iron Mountain family. They are a great company, they complement our growth strategy and they fit well into our overall approach to M&A. Mimosa is a leader in enterprise-class content archiving. They have more than 1,000 customers and they are recognized by industry analysts as the fast-growing visionary archival solution. This solution complements our growth strategy. Their product works at the customer's site to provide storage of and access to e-mail and share point files.

With Mimosa, Iron Mountain can now manage enterprise information wherever it resides, with the customer at their site or in our cloud. Mimosa is a great example of the type of acquisition that fits well in our growth strategy. The last major acquisition was Stratify in late 2007 and Mimosa is a technology acquisition similar to Stratify, Connected, and LiveVault in the following regard. They are leader in their segment, highly complementary to our existing business, they are moderately sized, meaning that we can integrate them well and it represents next-generation technology, giving us the ability to leapfrog in the marketplace.

We continue to be very thoughtful as we add businesses to our portfolio, complementing our internal development efforts and our partnership initiatives. So that's Mimosa and I would like to welcome Ravi and his team to Iron Mountain.

This morning, we also announced that our Board approved a new program to being returning capital to shareholders, comprised of $150 million share repurchase program and Iron Mountain's first ever dividend. These programs underscore the power of our business model and the confidence we have going forward in our growth agenda.

Our profitability and cash generation has improved at an impressive rate. Strong cash flow gives us a strong balance sheet and we have the financial flexibility to initiate periodic share repurchases and pay quarterly dividends while continuing to invest in our growth agenda and pursue strategic acquisitions like Mimosa. We are here to drive strong growth over time. These actions by our Board demonstrate our confidence in the long-term growth prospects of the company and our commitment to delivering long-term value to our shareholders.

So let me sum up. We are focused on strengthening our growth trajectory as a business. It's reflected in our goals for 2010 and the substantial long-term growth opportunity for our business. We intend to build on our increasing profitability and cash flows, leveraging sustainable gains in operational excellence as we go. And we are here to constantly advance our strategy as an information management services leader, positioning Iron Mountain for short, medium, and long-term success.

So with that, I'd now like to ask the operator to open the lines for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of David Gold of Sidoti.

David Gold – Sidoti

Hi, good morning.

Bob Brennan

Good morning.

Brian McKeon

Good morning, David.

David Gold – Sidoti

Couple of things. First question, on the organic storage growth, as we start to think about that, it sort of sounds like feeling better and the guidance sort of brings up the lower end of maybe what you were thinking three or four months ago by a point. I guess, last year at I Day [ph], you spoke about three disparate trends, increased destructions, delayed sales, and reduced activity. And I guess just wanted to get a little bit of a better there for sort of which of them are either rolling off of change and enough to give you the extra little bit of confidence.

Brian McKeon

Yes, I think David, why don't I take initial cut on this? I'm sure Bob can add. The – we are in a similar place to where we were a few months ago in terms of our outlook and the trends, the improvement in the internal growth rate and some of that's driven by the favorable changes we've seen in factors like recycled paper pricing gives us more confidence at the low end of the outlook, but we are in a similar kind of growth range to where we were a few months ago.

The destructions have, I would say, stabilized, but remained at relatively higher levels than historically. So some of those carryover impacts that we saw from the growth in destructions here during 2009 will put a little more pressure on the growth rate early in the year, but we think we will be looking at some better comparisons as we work through the year on storage.

New sales, it takes awhile for any changes in our sales to work through our business and has continued to be a challenging selling environment, but as Bob noted and I'm sure he can add more to this, we are getting after that aggressively and hopefully, we can improve on that front going forward. So I would say the – in the immediate term, the – those trends are similar, we do think we can do some things to influence that positively as we move forward and obviously, if the economy improves, that will be a big help as well.

The activity piece, David, is I would say is really less related to the – there is some impact on storage than it tends to have impact on our service revenues, but the economy continues to be soft and we factor that all in, we think we can still deliver solid growth and relatively improved performance and position ourselves well for when those economic factors improve.

Bob Brennan

Yes, I agree with you. I think the activities are tied to the economy. We are very much focused on improving our selling organization and they are doing a good job reacting to the current situation to drive more depth out of the accounts we have and get net new accounts and I had mentioned that in my comments. That's an area where our – I just – I like the way we are reacting, I like the way we are getting after it.

David Gold – Sidoti

Perfect. And then just one other, if I might. You had also mad some comments on the newer initiatives for the – in the record center optimization, et cetera and I was just curious, I know a few months ago, the comment was you are about halfway through. So just curious on update there or – so have we made any progress there in sort of what's the time frame for completing North America and, say, moving on to overseas?

Bob Brennan

So we've put in a global support structure so that we can export the North American playbook, and we've done to do – we have begun to do that in our larger markets and we take a market-by-market approach with each of these initiatives and it is – it's rolling thunder, right?

So like global procurement is just starting, transportation improvements started, you heard me talk about that years ago and sort of pretty far along with transportation improvement, we are in the middle stages with the record center optimization, we are just beginning with global procurement. We see these as sustainable opportunities to continue to drive our profit performance out of the core Physical business.

David Gold – Sidoti

Got you. So just a time frame maybe for at least completing the North American portion?

Brian McKeon

I think we've got – we are well along with the North American initiatives, but we are obviously looking to – for a significant benefit on that front this year and we can – and we've got new wave of initiatives that I think will help us going forward. As Bob mentioned, procurement, we are looking at our go-to-market capabilities and think there is opportunities to be more effective and efficient on those fronts. And so we have additional ideas that we can apply. And so I think we are well along with some of the things we talked about, but we've got new things in the pipeline that should sustain these improvements going forward.

Bob Brennan

In other words, you don't see a completion date, David.

David Gold – Sidoti

Okay. It's a moving target.

Brian McKeon

It's how we are running the business. I think it's the key thing to understand.

David Gold – Sidoti

Got you. Fair enough. Thank you, both.

Brian McKeon

Thanks.

Bob Brennan

Thanks, David.

Operator

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

Andrew Steinerman – JPMorgan

Good morning, gentlemen. Good job. I want to talk about the implied EBITDA margin, middle of the range. In the first quarter, I think it's 27.6% compared to the just reported 29.5% and I just wanted to know what would be driving factors between first quarter EBITDA margins and fourth quarter EBITDA margins.

Brian McKeon

That's – it's principally seasonality. So if you look at – that would imply OIBDA growth ahead of revenue growth in the first quarter. So that would imply margin improvement and so – year-on-year. And so the difference is between Q4, we just have –there are some seasonality differences in our business, I'm just thinking offhand, in places like our Digital business, fourth quarter tends to be a high licensed software sales quarter, just energy – Steve is giving me some notes here. There are payroll taxes, there are some recognition of expenses and timing of when you – so there are some seasonality differences in our quarterly flows, but this is not a indication of a change in kind of our trajectory towards sustaining our margin improvements and building on them.

And we did try to reinforce today, Andrew, some heightened disclosure on our segment performance and I just want reinforce, if you look at how we are performing by segment to where we are driving performance on a full-year basis improvement across our business. So we think we can build on these strong trends we've been driving.

Andrew Steinerman – JPMorgan

Right. And could you comment on first quarter implied internal growth? Would FX be about 1% and Mimosa would be less than 1% and so you've got to net those out from the middle of the rate to 8%?

Brian McKeon

Yes. No, the – I did mention in my comments that it implies internal growth of 3% to 6% and FX is a little more favorable in Q1, I think it's closer to 3% I believe, in just 2% to 3%. So it’s a little more favorable and there is limited impact from Mimosa in Q1 just given the timing of the close. So it's – 3% to 6% is the internal growth and I just wanted to highlight the – we will see our toughest comparison in storage comps in Q1 just given kind of the cumulative effect of what went on in 2009.

So that growth rate will probably be a little bit below our full-year goal and – but we will see favorability from things like recycled paper, we will – their most stable compares we will see on that front in Q1. So net-net, it – we should have a good internal growth quarter.

Andrew Steinerman – JPMorgan

Right. And how do you see core service so far in the quarter?

Brian McKeon

I don't want to comment on in-quarter trends, but similar – we've seen similar trends in terms of pressure on activity levels. So it's – that's baked into our outlook for the full year and we haven't projected an improvement and we are working through that. It's the economy and hopefully, we will see improvement on that front as the economy gets better.

Andrew Steinerman – JPMorgan

Okay. It sounds like a great start. Thank you.

Brian McKeon

Thank you, Andrew.

Bob Brennan

Thanks, Andrew.

Operator

Your next question comes from the line of Scott Schneeberger of Oppenheimer.

Scott Schneeberger – Oppenheimer

Thanks. Good morning.

Bob Brennan

Good morning.

Scott Schneeberger – Oppenheimer

With regard to your comments just now, Brian, on storage being a little bit softer in the first quarter on the tough comp, should we see a significant variance in the internal growth rate, something perhaps outside of the 4% to 5% range for 2010 or are you going to be pretty tight quarter to quarter?

Brian McKeon

I would – I try not get into – trying – I'm trying not to get into like quarterly projections for components of our growth. I think we are – the – what we are trying to highlight is the 4% to 5% for the full year is obviously our goal. And I think in that context, Q1 is going to be tougher compared – I think we will have – hopefully – we will have easier comparisons as we work through the year.

So I really don't want to get into – I guess the key point I want to make here is this isn’t a change in our business, this is a – it's the flow through of the effects that we talked about in 2009 that really kind of started after the first quarter or kind of accelerated post of the first quarter that stabilized, we are confident on our full-year outlook for storage growth. This isn't projecting improvement, it's more reflecting that we are going to see a easier comparison as we work through the year and it's just – the first quarter – the way things flow through our business, kind of the buildup of things like softer new sales and higher destructions, we are – we've got our toughest compare coming out of the blocks, but we're confident in the full-year number and that's what we are focused on.

Scott Schneeberger – Oppenheimer

Thanks. That's helpful and I just wanted a sense of magnitude. How are destructions coming along? I mean, is it – do we see the end of that anytime soon? I got the sense from the call that that's feeling a little bit better incrementally, but if you could take us a little deeper there?

Brian McKeon

I – Scott, I think it's stabilizing, right? And customers forecast that for us and so we did see a bolus as things worsen, we see it stabilizing now. I don't want to forecast a change in it, but as the economy improves, I would expect that to become less of an issue.

Scott Schneeberger – Oppenheimer

Okay, thanks.

Brian McKeon

And we should – I just want to comment. We should see naturally some benefit over time and that – this reflects to a degree of pent-up actions by customers to look at cleaning up their records and recognizing some savings and we will hopefully work through some of that and the – it's not something that we would expect to be an accelerating trend or an ongoing trend. We think that we will see an end to this, moderation, I should say, at some point.

Scott Schneeberger – Oppenheimer

Thanks. And can we get an update from you guys on pricing, how customers are reacting? It's been in place now, but you've increasing that for awhile and obviously, embedded in the guidance into 2010, but just how is that progressing on the customer front? Thanks.

Bob Brennan

Well, I think it's – the way to think about it, Scott, is how it's progressing on our front. We are getting better and more disciplined and smarter about this as we learn and it allows us to take a more methodical, careful approach that we – where we can drive sustainable benefits over time. So I would say that we are developing muscle memory around it.

Brian McKeon

Yes, I think there has been positive reaction from customers on the use of list price methodology and a discount-off list. I think it's a very clear pricing approach and that's lead to the right kind of discussions. It's obviously a tough economic environment, so we have lots of dialog with customers about how to help them be more efficient and – but our focus is to maintain discipline in our pricing and focus more on how we can add value to how they manage their records programs and –

Bob Brennan

Fundamentally focus on driving out costs.

Brian McKeon

Yes, and we feel good about how that's progressed. So we think we've got a good system in place, we think we can sustain that going forward and look, there is always things that we are working on on the margin and – but we think we take – we took a big step forward and we are in a better place and we have something in place now that we can sustain our performance for a long period of time.

Bob Brennan

Yes. We have learned lessons, we are not really going to discuss those in great detail, but we've learned as we've gone.

Scott Schneeberger – Oppenheimer

Okay. One final one if I could. Within SG&A, some investments in growth and then obviously productivity related – and you touched on that a little bit already. The question here is how much flexibility – do you look at a year, start the year and say, okay, here is what we are going to spend and it's pretty fixed and firm as you do it or is there a good bit of flexibility on what you do with the gas pedal as you move through the year based on perhaps the macro conditions and how that's affecting your top line?

Bob Brennan

So the way that we think about it is that the pencils never go down in planning, right? While we work from year to year on operating plans and performance, we are always focused on being adroit in how we manage the business and we have the capability to invest within the context of the range that we've set for our performance and that's – the key is to be disciplined within that performance range.

Brian McKeon

Yes, the thing I'd share is one way to think about this, there are a couple of components to our costs. One would be the SG&A as you discussed, which is we have a degree of flexibility and we are – of course, we will always look at that in the context of our business trends. Actually, the bigger lever here is the – that costs are directly related to our business. It provides services in our business and – rather than the SG&A, but the costs that support service delivery.

And the thing I would highlight to you is just the capability that we've built in places like our North American organization. I mean, last year, we clearly had a big change in our growth outlook versus what we had expected given the economy and I think we demonstrated an ability to adapt quickly and adjust our cost structure to fit the new growth environment and deliver our profit objectives and so I think we have excellent capability to adapt our cost structure to changes in the growth outlook and we feel very confident in ability our – our ability to deliver our profit objectives because of that.

Scott Schneeberger – Oppenheimer

Okay, thanks.

Brian McKeon

All segments performed.

Scott Schneeberger – Oppenheimer

Excellent. Thanks, guys.

Bob Brennan

Thank you.

Operator

Your next question comes from the line of Ashwin Shirvaikar of Citi.

Ashwin Shirvaikar – Citi

Thanks. Good morning and congratulations on the good results and guidance.

Brian McKeon

Thanks, Ashwin.

Bob Brennan

Thanks, Ashwin.

Ashwin Shirvaikar – Citi

My question – my first question is on the CapEx outlook. Is it possible for you guys to break out the impact of higher shredding and destruction with freed-out space, because that might be viewed as sort of one-time in nature versus other initiatives which sort of have an ongoing benefit?

Brian McKeon

Yes. Let me try to tackle this. I – in terms of the reductions to our – we've obviously taken capital spending down a lot in the last couple of years. An element to that more recently has been a lower growth outlook and not having to add capacity. I wouldn't relate that, Ashwin, to destructions that really isn’t a material factor in terms of – it's more that as we look at our growth outlook and it's moderated, we look at the timing of when we need to add new buildings, add new racking, and we – we are not doing that at the same pace that we were before. So there is a benefit to that.

I would say, however, though our outlook for 2010, if you take out real estate, our capital spending as a percentage of revenues will be about 9% thereabouts. That's consistent with our five-year goal. We may have some variation in this year-to-year, but we are building the capability we think to sustain our capital spending at those levels. So we don't think this is one-time and think we can sustain lower spending as a percentage of sales. That's our intent and hopefully we can continue to demonstrate through that through our good management and good performance.

Ashwin Shirvaikar – Citi

Okay. Is it still a sort of 85-15 split, if you will, between growth and maintenance CapEx?

Brian McKeon

We – it's – we've moved away from percentage of total, because our total has come down, we've enhanced our disclosures around this a bit in our 10-K, we look forward to you seeing that. We estimate that maintenance capital is about 2% of our – 2% of revenues and that – we think that's the right way to look at it.

Ashwin Shirvaikar – Citi

Okay. And buyback, that's a good announcement there. But any thoughts on pace of buyback, guidelines around that? When do you intend to finish it?

Brian McKeon

We are not going to be giving any specifics on the details of the buyback program, but we do want to reinforce that this gives us a flexibility to advance shareholder payouts and buybacks should that make sense and we certainly have plenty of financial flexibility to support a buyback program. So – but we won't be disclosing specifics of the program.

Ashwin Shirvaikar – Citi

Okay. And last question on M&A. What should we expect going forward? Obviously, Mimosa seems to fit. But is there going to be a focus on specific verticals like public sector or maybe international markets or more digital, is it going to be more opportunistic? Can you – any – some thoughts on that would be great. Thank you.

Bob Brennan

Yes. Ashwin, it's – we focused on this from a strategic perspective and if you look at our strategy, it is about select international expansion and expanding our services specifically around Digital and DMS. And I think the past acts as a math, more than a compass as to what we will be doing, but the – Mimosa fits very well into our strategy and our M&A approach, to give you an example of the types of acquisitions that we think are appropriate from a Digital perspective. From a core Physical perspective in our North American markets, we feel that we have the footprint to execute.

Brian McKeon

And we will obviously be focused on making sure we integrate this acquisition well and demonstrate good performance to build confidence on continuing to deploy capital on that front.

Bob Brennan

And we are very excited to have the Mimosa team on Iron Mountain.

Ashwin Shirvaikar – Citi

Okay, great. Thank you.

Bob Brennan

Thanks, Ashwin.

Brian McKeon

Operator, we have time for one more question.

Operator

Your final question comes from the line of Justin Hawk [ph] of Robert W. Baird.

Justin Hawk – Robert W. Baird

Good morning, guys.

Bob Brennan

Good morning.

Brian McKeon

Good morning.

Justin Hawk – Robert W. Baird

A quick question on the EBITDA guidance for 2010 and it looks like it's about $30 million higher at the midpoint. I guess – I was wondering if you could quantify how much of that is from scrap paper benefit and how much of this just from margin benefit.

Brian McKeon

Yes, it's actually about $35 million higher and roughly, the net effect of the recycled paper improvement is – it's – I'm just doing on a percentage basis, probably in the $15 million-ish type range. Just want to highlight a couple of things on recycled paper. Keep in mind, we did see some – when we gave the guidance, we had seen some improvement on paper pricing, it's obviously improved since then. The – it is – part of the reason that paper pricing is up is because recycled paper volumes are down.

So there are some offsets to the revenue gains that we've seen just given – it’s a supply-demand imbalance, because recycled paper volumes are down, it is a key factor driving this, so there will be some offsets from the volumes being down. We do expect some pressure on service pricing that goes along with higher paper pricing competitively. Net-net, it is a positive factor, but it's – it's about 2 percentage points of a favorable benefit on the growth rate from where we were before.

Keep in mind, on the OIBDA guidance, we did have an offset with Mimosa. There is some dilutive effect next year. So that was moving the other direction. But to your point, we did raise it about $35 million and raised the growth rate about 1%. So we feel positive about that development.

Justin Hawk – Robert W. Baird

Great. Thank you.

Brian McKeon

Thank you.

Bob Brennan

Thank you, Justin and thank you, everyone. We will talk to you next quarter.

Operator

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

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Source: Iron Mountain Incorporated Q4 2009 Earnings Call Transcript
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