Iron Mountain Incorporated Q1 2009 Earnings Call Transcript

| About: Iron Mountain (IRM)
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Iron Mountain Incorporated (NYSE:IRM) Q1 2009 Earnings Call April 30, 2009 8:30 AM ET


Stephen Golden – Vice President, Investor Relations

Robert Brennan – President, Chief Executive Officer

Brian McKeon – Chief Financial Officer


Andrew Steinerman – J. P. Morgan

Andrea Wirth – Robert W. Baird

Vance Edelson – Morgan Stanley

Ashwin Shirvaikar – Citi

David Gold – Sidoti & Co.

Kevin McVeigh – Credit Suisse

Edward Atorino – Benchmark

Scott Schneeberger – Oppenheimer

Franco Turinelli – William Blair & Co.


I would like to welcome everyone to the Iron Mountain first quarter 2009 earnings conference call. (Operator Instructions) Now I would like to turn the call over to Mr. Stephen Golden, Vice President of Investor Relations.

Stephen Golden

Welcome everyone to our 2009 first quarter earnings conference call. After my announcements this morning, Bob Brennan will give his state of the company remarks followed by Brian McKeon who will deliver the financial review. When Brian is finished, we'll open up the phones for Q&A.

Now that spring has officially sprung, we'll be getting out just a bit. We'll be appearing at the Bank of America One on One Conference in New York in about two weeks followed by the Citigroup Conference One on One in Boston at the end of the month. In June, we are presenting at the William Blair Conference in Chicago.

On the credit side, we'll be presenting at the Deutsche Bank European Leverage Finance Conference in London in mid-June. We're looking forward to seeing many of you at these events.

Per our custom, we have a user controlled slide presentation on the investor relations page of our website at www. 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 2009 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 10-K 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, operating income before G&A or OIBDA and free cash flow before acquisitions and investments are metrics we speak of frequently and ones we believe to be important in evaluating our overall financial performance. We provide additional information and the reconciliation of these non-GAAP measures to the appropriate GAAP measures as required by Rate G at the investor relations page of our website as well as in today's press release.

With that, I'd like to introduce our CEO, Bob Brennan.

Robert Brennan

Good morning everyone. I hope you're doing well. Since we just recently had our year end call, this call will be more of an update on our performance than it is a revisit of our long standing strategy.

I'm going to highlight our business performance in Q1 and touch on our segments. Brian's going to cover our financial performance in detail, review our full year guidance and then afterwards we'll both take your questions.

A couple of key things I want to get across to you this morning. The first is, we're off to a very good start and our business is performing as expected. While reported revenues were down 3% including FX impact, on a constant currency basis, we're up a solid 4%.

Our core internal revenues were up a strong 7% and as a reminder; these are largely recurring revenues in our business that represent 88% of our sales. They are a key indicator of our business health and they're tracking well. These gains offset pressures that we expected on complimentary revenues which remain impacted by economic conditions.

The second key message I want you to hear is that the environment is tough. We are facing some unfavorable macro factors but we're managing well. We're delivering strong financial results benefiting from disciplined management and focused prioritization.

OIBDA grew 12% and we exceeded our Q1 expectations while strengthening our cash flow and balance sheet so we believe we're on tract to deliver against our full year financial objectives and we're raising our OIBDA guidance to reflect our strong Q1 performance.

I do want to pause though and reinforce that we manage to the full year, not quarterly results. While we're pleased with our strong profit performance in Q1, we intend to continue investing against our growth potential and believe our updated OIBDA outlook for the full year reflects an appropriate target range for Iron Mountain.

Before I review some key areas in our business, let me comment briefly on market conditions. It remains tough out there, but consistent with the expectations that we set for ourselves and that we've set with you, we're seeing pressures in the areas that we expected to see pressure. Special projects are pressured. Software license sales are pressured. Fulfillment services are pressured. We're also seeing pressures from factors such as foreign exchange and low paper pricing.

We expect these impacts to continue and will continue to manage them in a disciplined way, prioritizing our focus, prioritizing our investments, but we're managing them well. And despite these pressures, I just want to reinforce that we have a highly resilient business. We're performing well and we're very focused on the right investments.

Our customers, it's also worth noting, need us whether times are good or bad. We're in the business of providing information management services, and the mega trend that we follow is one of information growth. Information growth doesn't go on recession and all of our solutions, every one of our solutions across all of our businesses focus on lowering costs.

So our business remains strong. Let me just review our progress across the business segments starting with our biggest and best business, North America. North America as you know is strategically driven by both growth and returns. The team continues to improve their execution. They had solid core growth in the quarter and exceeded their bottom line targets.

We also had some key wins that are worth noting. One was one of the largest transportation companies in the world that wanted to really look at their rich heritage and all of their files that went back to 180 year history and how we could help them convert those back files and also manage their records on a go forward basis so that we could capture them, convert them and store them appropriately for their most vital records.

And the decision to work with us on this massive project really came down to the chain of custody in the investments we've made in security over the years, that you can see us getting value for throughout the business today.

Another key win for us was the Principal Financial Group. Like many customers, Principal is an existing customer, but they chose to in source some of their records management. Having worked with us over the years, and spending a lot of time with us in Q1, we were able to convince them that what they were doing in house, we could do for them less expensively and more securely, resulting in an awful lot of business coming from them both in terms of recurring revenue and special projects.

We also made progress in the government sector during the quarter. This is something that we've been signaling for a few quarters now, because we anticipated changes in regulations as to how you store federal records whether you're a government agency yourself, or you do business with the government, there are deadlines that are approaching around you have to store that.

We anticipated that and have built nearly two million cubic feet of space that is under development. We've got over a third of that space already booked and we expect to add more facilities as that market demand reveals itself.

So a lot of good wins during the quarter from a growth perspective. As you know this is a balanced agenda that we have with North America so we remain focused on productivity, the same productivity initiatives that we've been talking about for years.

So when we talk about work flow optimization internally, we refer to it as record center optimization. Think of that as to what we do inside the building to be more productive. Transportation optimization, think about that as what we do outside the building. We do a lot of management training, but it's all focused on moving from market to market and we're realizing big savings as we move from market to market.

We also chose to work with some best in class partners from an infrastructure perspective during the quarter, having reached an agreement with Jones, Lange, and LaSalle to help us with real estate administration and to help us with our sales force automation.

The most important thing I want to get across to you is that we continue to improve in how we invest capital and it's showing in our results, but we're being very sharply focused, a little more centralized than we have been in the past, and again, it's showing in our results.

Bottom line though is North America is doing a great job.

So let me move to International. Brian and I actually just came back from a review of our international businesses and the team is executing well on the strategy of driving a North American like return in established markets like the U.K., investing in sales and facility capacity in expanding markets like Latin America and continental Europe, and co-investing with JV partners in emerging or nation markets like Russia and Turkey.

During the quarter core revenue grew 6%, supported by solid storage growth in Europe and continued gains throughout Latin America. International leads our DMS innovation and has moved further up the value chain with our customers taking over processes that range from credit card applications, to cell phone activation, to invoice tracking systems.

Overall during the quarter, international progress was constrained by the expected end of a big project and the foreign exchange pressures you're aware of. I am pleased however with the momentum that's building between and amongst the leaders and their businesses in the international segment and I expect that our investments in selling resources and management capability will result in continually improving performance with returns that approach those of North America.

Let's move to digital. This is a business where we're focused on growing the business and building out a platform as a long term driver of growth. Our digital business made a lot of progress in Q1 mainly through new product releases, new partnerships and the continued strong performance of Stratify.

New bookings are down and big license deals are off as we had expected them to be. It's harder to sell technology and it takes longer in this time. Having said that, new product releases, we did release a product that we first signaled to you on investor day last year, Virtual File Store which essentially stores inactive digital data in our digital vaults.

Think of it like it's really the box business for digital data. We announced a partnership with Micro Soft around cloud recovery. When you're using Micro Soft's data protection manager, and you want that information protected off site, it comes to Iron Mountain's digital vaults.

A key win during the quarter was with one of the top financial institutions in the world, and this was really a function of our stratify solution where they were faced with a tremendous amount of litigation around their stock cropping, around sub prime litigation, disputes with counter parties and we were able to provide them a solution that gave them a single master repository with attorney/client privilege maintained across all these matters, applying a combination of people, technology and process like no competitor can, across nearly 20 million documents on multiple concurrent matters, saving our customer a lot of time, a lot of money and dramatically improving the likelihood of their success in litigation.

So that's a review of our segments and our business. Before I turn it over to Brian, a couple of key points I want to reinforce, really where I started out. We are performing as expected. We've had a good start and I'm confident that we'll achieve our targets.

Most importantly, I want you to know that we are determined to extend our leadership for providing information management services and are of course committed to extending that leadership within the context of delivering our financial objectives.

We appreciate the support of our customers, our employees, and of course you, our investors. And with that, I'd like to turn it over to our Chief Financial Officer, Brian McKeon.

Brian McKeon

Good morning everyone. Q1 was a solid quarter for Iron Mountain. Our results were highlighted by sustained core revenue, internal growth and strong year on year OIBDA margin gains which reflected favorable business mix shifts and benefits from our enhanced focused on disciplined execution across our business.

Core revenues which represent 88% of total revenues in the quarter and are a key indicator of the health of our business, grew 7% organically. These gains offset expected weakness in our complimentary service revenues.

The strengthening of the U.S. dollar against our major foreign currencies lowered reported revenue and OIBDA growth in the quarter by 7% and 9% respectively. Similar to Q3 and Q4, 2008, exchange rate changes during the quarter required us to recognize charges in other expense and our book tax provision which lowered our reported EPS by about $0.06 per share.

These factors however don't alter the fundamental of our business. Our Q1 performance provides a solid start to the year and based on these results, we're raising our OIBDA outlook for the full year. We're also making favorable revisions to our CapEx forecast.

Today we'll review our quarterly results and provide an update on our cash flow performance, capital spending and our current debt position. We'll also provide an update on our perspective on our 2009 guidance.

Slide 4 highlights the key messages from today's review. As noted, Iron Mountain delivered strong financial results in Q1, supported by healthy core revenue performance. Core internal revenue growth was 7% with solid gains across our major business units.

As expected, pressure on complimentary service revenues and impacts from the substantial strengthening of the U.S. dollar over the last year, constrained reported revenues. Despite these impacts, we drove strong OIBDA performance ahead of our expectations benefiting from year on year gross margin gains and overhead costs leverage in Q1. We delivered solid OIBDA growth despite negative impacts from FX which reduced reported results by 9%.

We also continued to improve our cash flows and strengthen our balance sheet. We're on tract towards delivering record cash flows this year which is supporting continued improvement in our liquidity and leverage ratios.

In terms of our outlook for 2009, we're reinforcing our full year revenue guidance. As a result of our strong Q1 performance, we're raising our full year guidance for operating income and OIBDA. In addition, we've refined our capital spending plans for the year and now expect CapEx to be about $380 million for 2009 in line with controlled 2008 spending levels.

Let's move on to looking at the details of our revenue performance on Slide 5. Slide breaks down our overall revenue growth. It shows internal growth by major service line as well as the impact of acquisitions and foreign exchange. Form an internal growth perspective, our first quarter performance was as expected with results reflecting some of the toughest comparisons this year.

Based on our current forecasts, we continue to expect full year internal growth of between 8% to 9% for core revenues and between 5% to 7% for total revenues. As noted, we drove solid internal growth of 7% in our core revenues for the quarter.

Core revenues which are comprised on storage revenues and core service revenues are key indicators of the health of our business. These revenues are recurring and predictable and represented 88% of total revenues in Q1.

Overall, internal revenue growth was impacted by a 15% decline in complimentary revenues. As expected we saw pressure in Q1 due to the completion of a major European public service contract last year that resulted in a $5 million reduction in quarterly revenues.

Lower recycle paper prices also impacted complimentary service revenue in the quarter by approximately $13 million. Together, these factors caused a 16% negative impact to Q1 complimentary service revenue growth.

We've also seen lower growth in areas such as special projects, fulfillment services and software license sales, which are the areas most likely to be impacted by economic conditions.

As we've noted in the past, complimentary service revenue which represented about 12% of total revenues in the quarter can vary over time given fluctuations in demand and timing for special project activity as well as variation of factors such as recycle paper pricing.

Based on these factors, our total revenue internal revenue growth rate was 4% for the quarter. As previously discussed, reported revenue growth was impacted by the year over year strengthening of the U.S. dollar against all foreign currencies. Our three largest currencies, the British pound, the Canadian dollar and the Euro weakened by 26%, 19% and 10% respectively over the last year leading to a 7% negative impact on reported revenues for the quarter.

Let's now turn to Slide 6 to review our P&L performance. Slide 6 compares the results for this quarter to Q1 of 2008. Overall, our revenue performance was as expected with solid core revenue internal growth offset by a decrease in complimentary service revenues and further reduced on a reported basis by the strengthening of the U.S. dollar.

Our largest segment, North American physical, posted 4% total internal growth supported by 7% core revenue internal growth. Core revenue gains were offset by a decline in recycle paper prices which along with lower project revenues contributed to a 17% decline in complimentary service revenues. The weakening of the Canadian dollar further reduced reported revenue in the North American segment.

Our international physical business obviously felt the largest impact of the strengthening of the U.S. dollar as the segment's internal growth rate of 3% was reduced by more than 20% points due to FX changes.

That being said, we did see solid core revenue performance supported by strong performance in Latin America, and consistent growth in Europe. As expected, the total internal growth rate was impacted by decreased by complimentary service revenues including meaningful impacts from the completion of a large European project in 2008.

Finally, our digital segment posted 6% internal growth supported by double digit growth in core revenues and continued solid performance from our Stratify acquisition. As discussed on our last earnings call, this is a difficult environment for selling technology and we're seeing the expected pressure on our complimentary revenues particularly with respect to software license sales.

Productivity gains, particularly in our North American physical business helped drive strong year on year improvement of 260 basis points in our gross margin. The higher storage gross margin and the sale of our low margin data products business were also key factors supporting gross margin gains.

Our gross profit and gross margin also benefited from the $5 million reduction of rent expense due to the re-characterization of certain vehicle leases from operating leases to capital leases.

SG&A growth was 1% in the quarter compared to prior levels excluding the impacts of FX changes. This modest growth rate reflects the benefits of overhead cost controls we've advanced as well as some shifts in the timing of planned initiative investments.

OIBDA was $197 million for the quarter, up12%. Included in OIBDA for Q1 2009 is $2 million of asset gains compared to losses of $4 million in Q1 of 2008. Excluding asset gains and losses, OIBDA increased 9% on a year over year basis including 3% of growth benefit from the re-characterization of certain vehicle leases.

OIBDA growth was reduced by 9% due to the strengthening of the U.S. dollar in Q1 2009 compared to Q1 of 2008. Depreciation was $68 million and amortization was $9 million, slightly below expectations, reflecting continued capital spending controls.

G&A grew $6 million versus prior year levels in Q1, reflecting the additional depreciation associated with the re-characterization of the vehicle leases.

Operating income was $121 million for Q1 2009, up 14% versus the prior year. Excluding asset gains and losses, operating income grew 9%.

Moving on with a review of our Q1 P&L performance, Slide 7 bridges our Q1 operating income to net income attributable to Iron Mountain and EPS results. Included in today's press release is a brief note on our adoption of SFAS-160 regarding among other things the presentation of non controlling interests and our consolidated financial statements?

Going forward we'll be using the new term net income attributable to Iron Mountain, formerly net income as required by the new announcement. We'll include a more detailed discussion of this change in our first quarter 10-Q.

As discussed, operating income for the quarter was up a strong 14% to #121 million on a reported basis. Our Q1 interest expense decreased compared to Q1 of 2007 driven primarily by lower debt levels and reduced interest rates.

These gains were offset by impacts to other expense and our effective tax rate from changes in FX rates since the end of 2008 which reduced net income by $12 million or $0.06 per diluted share in Q1.

As a result, we reported net income attributable to Iron Mountain for the quarter of $29 million or $0.14 per diluted share.

As we've discussed in our last two earnings calls, large fluctuations in foreign currencies during a quarter can result in meaningful accounting impacts as we mark our forward contracts and debt to market and record the appropriate tax effects from these changes.

In Q1 FX drove a net $7 million charge in other expense. We also recorded a $5 million tax provision on these amounts reflecting both foreign currency gains and losses incurred in different tax jurisdictions. Note that these changes are one time and primarily non cash in nature.

In Q1 the impact of foreign currency rate changes increased our effective tax rate by about 13 points. Other discrete items such as spin 48 interest, additional tax reserves and other adjustments also added a net 2% to our effective tax rate in the quarter. For the quarter, our tax rate before the impact of foreign exchange rate changes and other discrete items was 39% as expected.

We're currently forecasting our tax rate before the impacts of foreign currency rate changes and other discrete items for 2009 to be approximately 39%.

Let's turn to Slide 8 to look at our capital expenditures. Slide 8 summarizes our capital spending for the quarter. It highlights our year to date results compared to the full year 2008 amounts and our current 2009 outlook which we're lowering today.

Our Q1 2009 CapEx was $51 million including $2 million for real estate. Traditionally the first quarter is a light CapEx quarter as some projects are scheduled later in the year and many require time to plan and source before the significant expenditures are eventually made.

We scrutinize our capital spending on an ongoing basis and since our last earnings call, we've refined our full year CapEx estimates and now expect to spend approximately $380 million in 2009. This amount is consistent with 2008 levels in both dollar terms and as a percent of revenues. We're currently spending to our revised plan and expect to finish the year on target.

We remain focused on aggressively driving efficiencies in our capital spending while also supporting key growth initiatives and projects that help drive long term return improvement.

Let's now move on to Slide 9 and look at free cash flow for the quarter. Slide 9 highlights our year to date cash flow performance compared to the same period in 2008. For Q1 2009, free cash flow before acquisitions and discretionary investments in real estate was $57 million. The year on year increase in free cash flow is supported by higher OIBDA and disciplined control of capital expenditures.

Also included in the cash flows from operating activities is a $15 million realized cash gain on a British pound hedging contract that rolled over in the first quarter of 2009.

For the full year 2009 we now expect free cash flow before acquisitions and discretionary investments in real estate to be approximately $210 million to $240 million. This will result in a strong improvement over record 2008 levels, reflecting continued benefits from our efforts to improve profitability and capital efficiency.

Now let's turn to Slide 10 to review our debt statistics. Our focus on cash flow improvement is supporting continued strengthening of our balance sheet and liquidity. In terms of our debt portfolio, we ended the first quarter of 2009 in a very strong position. Our weighted average interest rate is down to 6.9% and we're 81% fixed.

Maturities now at 6.9 years with no meaningful repayment obligations until 2012. Consolidated leverage at the end of Q1 was 3.6 times, below the low end of our target range of four to five times OIBDA and well within our 5.5 times covenant limit.

As we've discussed in the past, our business will naturally de-lever in the absence of meaningful acquisitions pending. With limited acquisition activity over the last year, and benefits from our stronger operating cash flow, we've seen significant improvements in leverage ratios and liquidity.

We currently have over $270 million and $560 million in additional bond capacity. We have a very strong balance sheet and we're well positioned in terms of cash and financing capacity. While we maintain a solid operating outlook, we anticipate maintaining a more conservative approach to cash management in the current environment.

This concludes our review of the4 Q1 2009 results. In summary, we're pleased with our results this quarter both operationally and financially. Operationally, we continue to make progress in strengthening our core North American business which is the engine for our financial performance while expanding our international and digital growth platforms.

Financially, we delivered financial results that met or exceeded our targets in a tough environment while strengthening our balance sheet and cash flow performance.

Let's now turn to Page 11 to review our updated financial guidance for Q2 and the full year 2009. Slide 11 summarizes our full year 2009 and Q2 outlook.

We continue to target 5% to 7% internal revenue growth overall for the year with flat to moderate declines in reported revenues reflecting an estimated negative 7% impact from FX changes. With respect to OIBDA based on our Q1 performance, we're now targeting 11% to 16% constant currency growth.

As a reminder, included in OIBDA for 2009 is $21 million of reduced rental expense related to our re-characterization of our vehicle leases from operating leases to capital leases. This change adds about 3% to our 2009 OIBDA growth rate. Offsetting the reduction in rent expense are increases in depreciation and interest expense and as such, there will be limited impact on this change to net income. As we noted, we're reducing our capital expenditure forecast by $40 million to approximately $380 million for the year.

For the second quarter, we're projecting revenues of $730 million to $750 million and OIBDA of $210 million to $220 million. We expect continued pressure on reported results from foreign exchange and year on year complimentary pressures in Q2 which is factored into this outlook.

Turning now to Slide 12, you can see our updated projections below the OIBDA line for the full year 2009. As we just discussed, our new outlook calls for OIBDA in the range of $820 million to $860 million with expected G&A down slightly to $135 million.

We also expect our interest to be moderately lower based on our existing debt levels and the lower interest rates in the current environment.

As a reminder, we don't forecast other income and expense or non controlling interests. The amounts you see here are the Q1 actual results. Likewise, with respect to our tax position, we've assumed that 39% structural rate plus the actual impact of discrete items reported in the first quarter.

These expectations yield EPS in the range of $0.81 to $0.91 per diluted share, assuming $204 million shares outstanding.

As a reminder, our first quarter results included one time impacts to other expense in our effective tax rate from changes in FX rates since the end of 2009 which reduced net income attributable to Iron Mountain by $12 million or $0.06 per diluted share. Overall, we believe we're on tract to delivering solid financial results this year.

That concludes my opening remarks and we'll now open the lines for Q&A.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Andrew Steinerman – J. P. Morgan.

Andrew Steinerman – J. P. Morgan

I want to ask about core storage growth, the tick down to 7% after the previous six quarters have been 8%, but you chose to keep your targets for the year to 9%. Could you go over your thinking there? What do you think slowed it one tick in the quarter and what might keep it a slightly upward bias for the year?

Robert Brennan

It's really tough for comps early in the year. That's the punch line for this issue.

Brian McKeon

We did have some tougher comparison. We had some impacts from larger destructions in 2008. The public service contract that we've been talking about in Europe actually had a storage component that impacted it a bit.

We are seeing some impact from the economy on storage in the sense that customers have been looking at destructions as a way to save overall costs and that is putting some pressure on the number at the margin but we're continuing to target, as we work through the year, we think we'll be looking at some more favorable comparison and should be able to improve that growth rate.

Andrew Steinerman – J. P. Morgan

Could you give us a word on how volumes are doing in shedding?

Brian McKeon

The shredding is one area that I think I was just mentioning the impacts of the economy that we are seeing some factors impacting core revenues and I think shredding is one of those areas. The activity levels has been soft and we still posted solid growth in shredding excluding paper, but it was down from the much stronger growth rates we saw last year, and that is an area that we're monitoring closely. It is an area where we're seeing some pressure.


Your next question comes from Andrea Wirth – Robert W. Baird.

Andrea Wirth – Robert W. Baird

I wonder if you could talk a little bit about the SG&A. You obviously did a fantastic job of controlling the cost there but I believe you also mentioned that you saw a little bit of a shift in cost this quarter. I wonder if you could detail a little bit more what that shift was and maybe event quantify what it was in the quarter and when we should expect to see that actually make up later on in the year.

Robert Brennan

I just wanted to highlight. We obviously had quite a bit of cost favorability in Q1. It was the key driver of our B versus our guidance. That's principally related to the strong cost management practices we put in place over the last year. We had some select deficiencies in Q1 I just want to highlight.

We substantially scaled back our national meeting this year. We were able to execute an excellent session but that was done at a much reduced cost and that gave us some benefits. We have some select initiative investments that we are prioritizing. They are focused in the areas like advancing our DMS growth strategy that we will be initiating as we work through the year.

We don't have that quantified specifically. I think what you should take away is that we will maintain a control over cost growth, be very focused and prioritized and for the full year we should have SG&A growth relatively in line with revenue growth. That's our business plan.

Andrea Wirth – Robert W. Baird

Could you give us an idea roughly where you're at right now in terms of capacity utilization, comparing both North American and international?

Brian McKeon

We typically just focus on the North American number because we have a lot of variability depending on our stage of development in different international markets. Our building utilization remains in the 85% range. We're actually improving our utilization in much of our system where as Bob mentioned, we've been adding some capacity related to compliant federal records ahead of growth which is constraining the overall gains, but we're hoping to move that number up over time to the 90% range.

Robert Brennan

The thing I want you to hear is that we're being very careful to invest in growth opportunities and we're being very prudent on all of the costs.


Your next question comes from Vance Edelson – Morgan Stanley.

Vance Edelson – Morgan Stanley

Could you give us a feel for the conversations you're now having with customers in terms of their appetite for complimentary services once the economy improves? So in other words, are they saying we like the idea, just not now? Call us in six months. Is there any of that which would suggest the possibility of stronger growth at some point down the road?

Brian McKeon

There is, I think you should remember we approach every conversation from the standpoint of lowering costs. All of our solutions are focused on lowering costs. The issue that we run into in this environment is that when the costs are going to be saved over a longer time, in other words, we're asking the customer to deploy money and people up front in anticipation of long term cost savings, they're deferring in a lot of those cases.

And as things improve, I expect them to defer less. But fundamentally what we're seeing is that big deals are getting smaller and taking longer and whether it's a special project or software license or in our fulfillment business, and I would expect that to improve as conditions improve. Fundamentally we feel good about the business simply because our value proposition is driven around saving money.

Vance Edelson – Morgan Stanley

Any updates that you can provide on the uptake of complimentary services, the percent of customers now taking two services, the percent take three for example?

Robert Brennan

Don't have an update for you on this call.

Vance Edelson – Morgan Stanley

On real estate acquisitions, are you getting noticeably better deals now than you would have a year ago or are you still holding off on the expectation that prices could fall further?

Brian McKeon

Our real estate strategy is driven much more by the need for capacity rather than try to time the market. I would say that the key trend that we're seeing is more related to our international markets that we are seeing more favorable economics for us to own real estate versus working through leasing partners.

That's why you see some increase in our forecast through the level of real estate spending this year, and obviously market conditions are more favorable than they were. So that should benefit us over time.

Vance Edelson – Morgan Stanley

You mentioned the ability to naturally reduce leverage in the absence of significant acquisition activity so perhaps you could update us on the M&A outlook. Is there a pipeline so to speak or is the conservative balance sheet approach that you referenced an indication that we shouldn't expect much in that regard?

Brian McKeon

There's a pipeline. It's the same pipeline that we've had for a few quarters now. We're being very careful to make sure we form commercial partnerships where we would want to think about acquiring. It's primarily focused on digital and selective international expansion.

But we're being very prudent right now and we don't feel the market running away from us by any means.


Your next question comes from Ashwin Shirvaikar – Citi.

Ashwin Shirvaikar – Citi

With regards to margins, obviously a good performance but I wanted to ask about the sustainability of the SG&A leverage and the productivity gains as internal growth ticks back to the 8% plus range that you're still projecting.

Brian McKeon

Let me differentiate. On the SG&A front just to reinforce our response to the earlier questions. You should expect SG&A to be roughly in line with our revenue growth this year. We're managing that business in a way that we're prioritizing the investments we're making and trying to control that growth. So I wouldn't project SG&A, a negative impact from SG&A or significant leverage. Kind of balance that.

The productivity gains that we're driving are principally supporting the gains that you see in gross margins. There are number of other factors that are also supporting that. We've seen some favorability in areas like business mix, the pressures that we're seeing in the business are more on lower margin project sales while our higher margin storage services have sustained.

We've improved our storage margins. Some of those are supported by improved trends in pricing over the last year and obviously the biggest factor is that we're driving strong productivity improvement in areas like the North American business, the initiatives that Bob was highlighting in his speech.

Those factors all should sustain, so we're continuing to focus on managing the business with strong emphasis on execution. We're seeing good results from that and we should be able to sustain those improvements as we move forward.

Obviously the year on year gains will moderate. We've been doing this for the past few quarters and so we'll be up against some tougher compares, but we should be able to sustain solid gross margins moving ahead.

Ashwin Shirvaikar – Citi

One question on CapEx, it's I believe the third quarter in a row that you've defined CapEx, is there any geography specificity or any particular kind of project that are not making the cut here? What are you preferentially investing in versus not, if you can talk on that.

Brian McKeon

It really just reflects controlled phasing of capacity additions. I would highlight that we have scaled back some of our cost estimates for elements of the U.K. expansion. We're still moving forward with that but we've just refined those estimates in how much racking do we need to bring on when, and that's a meaningful efficiency for us. It's roughly $10 million efficiency. But it really just an extension of good capital controls.

Robert Brennan

It's also just the disciplined approach to how we manage and how we evaluate these things where we're getting better and better. It's just fundamentally improving execution.


Your next question comes from David Gold – Sidoti & Co.

David Gold – Sidoti & Co.

Following up on the CapEx question, presumably on the pieces that we cut back on, should we view that more as a delay of something that will be invested in next year should the climate pick up or how is it best to think about it?

Robert Brennan

The way to think about it is that we are concentrating our investments on the biggest growth opportunities that we see around building out our digital platform, around building out our DMS business and select international expansion.

As things improve, we will continue to look at those investments and how they can pay off but we feel like we have a very resilient business and we're managing well through this environment. We don't expect our management profile to change as conditions improve.

Brian McKeon

I think that's exactly right. We made good progress getting our efficiencies down. We're actually right now in line with our longer term goals for capital efficiency excluding real estate. I think this isn't about taking a project that we're going to do this year and pushing it into January. This is about being disciplined about when we need to bring on new capacity.

The thing that could swing our numbers, it's more factors like if we had a significant new business opportunity to bring capacity in house. That could drive the number. Some elements of our capital additions are lumpy by nature. We're adding data center capacity or as we highlighted this year, we had a big opportunity to improve returns in specific markets by rationalizing real estate.

It would be a big thing. But the underlying efficiencies should be sustained.

David Gold – Sidoti & Co.

Presumably one thing that we're hearing from everybody out there consistently across the board, obviously not specific to your business is the environment lends itself to customers coming back and looking to renegotiate particularly on price. Can you give us a sense for what type of conversations are ongoing if you're seeing some of that pressure and basically how the trends are going, how you answer these calls, because presumably you're getting the same calls as everyone else is.

Brian McKeon

We're fortunate in that we're able to approach each conversation with our customer around lowering their total cost of their program around information management services, what they're outsourcing with us. We can give them very practical advise about how to lower their total costs which is not euphemistic with lowering their price.

There are many things that they can do around which information they choose destroy, how they choose to retain it, what form factor, and so we're actually able to come out of nearly every conversation saying here are practical ways you can lower your cost which allows us to successfully manage the price issue.

David Gold – Sidoti & Co.

On that basis, presumably, I think last quarter your commented on maybe 3% year on year price increases of growth?

Brian McKeon

We think that's appropriate given the investments we've made in the business and the level that we operate at compared to our competitors and we're committed to helping our customers lower their overall costs so that's baked into that on a sustainable basis.


Your next question comes from Kevin McVeigh – Credit Suisse.,

Kevin McVeigh – Credit Suisse

I wanted to follow up on the question a little bit. As you think about the competition, have they become much more aggressive not necessarily from your client to client discussions but some of the competitors out there and how you're thinking about that.

Robert Brennan

It's always been an aggressive set of competitors that we deal with and when we look across the network and we look across Iron Mountain we feel very comfortable with our competitive position. If I were answering that as the General Manager in a local market, I'd say oi, it's very difficult. There's a lot of competitive pressure.


Having said that, we have a value proposition that we believe is unmatched by our competitors from the smallest account to the largest and we feel very comfortable with that position. There's business where we're getting picked off based on price but we're okay with that. It's not something that's adversely affecting our overall business.

Our value proposition stands alone and we're going to get the value that we think it deserves.

Kevin McVeigh – Credit Suisse

The reduction in the CapEx of the $40 million, the $10 million on the racking that was helpful. The other components, was that on the digital side or real estate? Could you help us understand what that was a little bit more?

Brian McKeon

It was a variety of factors. Just to give you some context to try to see this in the year end call, but we build a plan as we enter the year based on what people believe, within our business we believe we need to execute against our growth agenda. We obviously get updated estimates and refine those as we look at the projects on a more detailed basis.

Part of our process now is we have a disciplined capital committee approach where we go through and really question when do we need to bring some things on line and that creates some efficiencies. We had some contingencies in for some new business opportunities on acquiring some business that we think are going to be somewhat lower than we had earmarked, and we had some efficiencies as we looked at areas like the U.K. expansion.

So it's not one thing specifically. I would say the principal throughout our approach has been we're not going to back off on our growth agenda. Let's just be as efficient as we can on how we fund that.

Robert Brennan

The think I want you to hear is we're getting better at this and the way that we think about this. We're better at it.

Kevin McVeigh – Credit Suisse

The margins look really strong with seasonally quarter, so nice job on the margins.


Your next questions come from Edward Atorino – Benchmark.

Edward Atorino – Benchmark

On the CapEx, I believe CapEx had been running at 12% to 13% of sales. Is that going to trend down normally as you exercise your discipline? And second, could you talk a little bit more about the acquisition landscape? I can't believe there are a lot of opportunities is storage but in the digital arena, the size of deals you might be looking at, can they be handled without necessarily ratcheting up debt?

Brian McKeon

On your first question, there are factors that should naturally benefit our capital ratios over time. One is the strategic to grow our services revenues at a faster rate than storage. That should create capital efficiency and we're seeing some of the benefit where in the past we were really 100% volume driven, now we're getting relatively more of our growth still within a modest range, but relatively more of our growth in factors like pricing.

So those factors should benefit us over time and we feel good about the progress that we've driven. We think we can at least sustain that and that's our intent as we move forward.

Robert Brennan

From a digital M&A perspective, remember there are three platforms that we have; data protection, archival and E discovery and we see opportunities to add to those platforms. Fundamentally the market right now, if you're a small venture backed start up trying to sell technology into the enterprise is really tough. We think that that will favor us as we look at those opportunities.

Brian McKeon

In terms of the financing, I think we start by looking at what we think is a reasonable leverage range for our company and we've historically been in the four to five times range and now we're obviously below that. We think actually in the near term it's probably proven to be in a slightly lower range, perhaps 3.5 to 4.5 and we'll look at any acquisition in that context and we believe that's the right capital structure for the company so we'll look at our deployment for a specific acquisitions in that context.

Edward Atorino – Benchmark

On natural deleveraging would result in a trend down ward of interest expense I would guess and G&A might start to level off and you get some interesting bottom line dynamics out of that I suspect.

Brian McKeon

I think you're seeing some of that. We took up the EPS number.


Your next question comes from Scott Schneeberger – Oppenheimer.

Scott Schneeberger – Oppenheimer

Could you speak a bit to your largest vertical, financial services, core and potentially complimentary I think you alluded to, what type of activity you're seeing good and bad there.

Robert Brennan

Good goes back to my opening comments so in the litigation associated with everything that's going on in that sector, we have services through our Stratify acquisition that we're able to offer that we're actually doing quite well and we're helping our customers quite a bit.

There's also as consolidation occurs in that space, helping people rationalize retention programs, helping them understand what can be destroyed. So we're able to give them some practical advise which allow us to sustain our business in that sector despite everything that they're going through

Brian McKeon

I would say it's as expected. We expected to see pressures on the discretionary front and that's what we've seen and I think we expected to sustain our strong storage relationships, customer relationships and that's been the case as well. Obviously some consolidation going on, but we're managing through that well.

Scott Schneeberger – Oppenheimer

Any interesting developments in other verticals beyond that?

Robert Brennan

We've actually put a lot of focus into health care and you've heard me talk about our medical imagery archive offering, and there's a lot of attention coming from the stimulus package into that so I think the natural dynamics of moving electronic health care records, the fact that we can help them with that with out sourcing, we feel very good about the way that vertical is building.

We feel very pleased with the investment that we made over the last year and a half in government. As I mentioned in my remarks, we've got a third of that capacity already booked, more than a third and we believe that as contractors to federal government start to realize the constraints that they have to face around how they store things, that that will be a larger and larger business for us.

So those would be the two that I'd call out that we feel real good about.

Scott Schneeberger – Oppenheimer

Are you doing any partnerships on the health care front with regard to capturing stimulus money or is that something that's a really big opportunity independently?

Robert Brennan

I don't know. We're just looking at that. There's just a lot of attention going into that sector right now, but it would be premature for me to talk about. We're just looking at that in terms of capturing part of that package, but it's very early.

Scott Schneeberger – Oppenheimer

Could you give us any insight into how April is progressing or the progression through the first quarter on a monthly basis of just the business activity that you saw? You alluded to litigation activity in Stratify, with specific to that and then broader.

Brian McKeon

Just as a matter of policy, we don't comment on in quarter trends but we were comfortable with our outlook and I think we're on track for a good year this year.


Your next question comes from Franco Turinelli– William Blair & Co.

Franco Turinelli – William Blair & Co.

You were talking about the leverage continuing to come down and it is now below what you've historically indicated as your level of comfort. I understand all the reasons for doing that in the current environment, but nevertheless it's not clear to me with just letting cash build up on the balance sheet is the right approach here. Is your thought maybe to pay down some of the debt or is something else in the capital structure point of view, but it might be important for us to understand as we think about the future here?

Brian McKeon

I think picking up on the theme that you mentioned, this is obviously impacted by the current environment and we do think it's prudent to maintain flexibility. So we're operating in a way that's a little outside of our normal and we think that's okay just given some of the uncertainty.

We're not changing our strategy in terms of acquisitions. We want to maintain flexibility on that front. I would highlight that we will consider actions to strengthen our financial position as appropriate so where there are opportunities to extend our debt maturities and revisit the right balance in terms of our debt structure, we're going to take advantage of that.

Over time, we've said that we intend to drive our cash generation capacity as a company and look at other options as well as returning cash to shareholders. We're not anticipating any announcements on that front in the near term given the current environment, but that's obviously an option that we'd certainly consider in the context of being appropriately balanced from a value creation point of view.

So right now we think we're okay in terms of how we're managing it and we're certainly considering the factors that you're highlighting.

Franco Turinelli – William Blair & Co.

As I look at that 7% core internal growth rate, M&A factor in what you said on pricing around 3% then 4% is left for growth from volume. Can you help us think through a little bit about what's going on in this current environment? Are you in fact seeing fewer records coming in to the facilities but maybe lower destructions? Just give us some help on the volume side as well.

Brian McKeon

I just want to clarify one thing. The 3% that we refer to is the North American storage growth rate. It's not the simple math to go from the 7% for the company to that. There's obviously business mix impacts. It's more complicated. So I just wanted to highlight that.

Robert Brennan

We see some pressures. If one bank acquires another, and there's a lot of layoffs, those records may lay dormant for awhile. As Brian said before, there are customers that are looking to save over the long term by doing more distributions and we're seeing some higher distribution activities.

So there's more variability on the margin, but we feel very good about the business in general and our ability to drive to the projections that we've made. There were tougher comps.

Brian McKeon

Our own projections for storage gains are primarily driven by volume gains, so we feel quite comfortable with the volume trends.

Franco Turinelli – William Blair & Co.

That seems like an important comment. You're saying that the projections for internal growth are primarily driven from volume gains with price being helpful but not a necessary factor?

Brian McKeon

I would say that our projections for storage gains globally are principally driven by volume.

Robert Brennan

Thank you everybody. We appreciate your time and attention this morning and we look forward to speaking to you again on July 30.

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