鐵山公司 (IRM) 2002 Q3 法說會逐字稿

Good day and welcome everyone to the Iron Mountain third quarter 2002 earnings conference call.

Today's call is being recorded and simultaneously broadcasted on the Internet at www.ironmountain.com and click on the investor relations site.

With us today is the Chairman and Chief Executive officer, Mr. C. Richard Reese and the Chief Financial Officer, Mr. John Kenny.

At this time for opening remarks, I would like turn the call over to Richard Reese.

Please go ahead, sir.

Thank you and good morning everybody.

As in the past, we will follow the general guidelines we have in prior calls.

I would add that if you go to web looking for the slide, if you will click on investor relations space as he told you, the next will come up an icon that says a live webcast, click on that and then you will go down and you will find the slides in a couple of different formats.

I will, as I have in the past, offer brief commercial for those first-time participants and then John and I will comment on the quarter and the outlook for this year and balance of this year and next year, and then we will come back and take your questions.

Before we do that though let me turn it over to John for a Safe Harbor notice.

Thank you Richard.

This conference call will contain certain forward-looking statements that involve the number of risks and uncertainties.

Forward-looking statements include our full year 2002 and 2003 financial performance outlook and statements regarding our goals, beliefs, strategies, objectives, plans and our current expectations.

You should be aware that certain factors may affect this in the future and could cause the actual results to be materially different from those contemplated in the forward-looking statements.

Such factors are numerated in today's press release, which is available on our website and in our self-prospectus dated February 11, 2002.

Iron Mountain undertakes no obligations or release publicly the results of any revision for these forward-looking statements that may be major reflect events or circumstances after the day here of, also reflect the occurrence of our anticipated events.

You can see our Safe Harbor language as well on slide 1.

Thank you John.

As most, but maybe not all of you know that Iron Mountain is a global leader in records and information managements services.

We have operations in 81 US markets, 9 in Canada, 25 in Europe and 10 in Latin America.

We have consistently managed the three-stage strategic plans set over six years ago.

The first stage involved establishing leadership in broad market access in each of our core business lines.

We've accomplished those goals.

In our second phase, our objective is market penetrations through aggressive direct selling to new customers to convert primary demand and capture share, and in the third phase, which we are now beginning to execute upon, we seek to penetrate these customer relationships to expand revenue and drive margins.

We are successful in executing against this plan and have established clear global leadership.

Our services continue to become more important to our customers as we have placed ourselves in the middle of three significant market trends, which are, first, better control of risk through records management, and this is addressed by our Records Management and our Digital Archive businesses.

Second is disaster recovery protection, which is addressed by our Off-site Data Protection services including our new electronic vaulting initiatives, and then third is information privacy, which we address through both Records Management as well as our Secure Shredding services business.

We've built a valuable franchise and positioned ourselves to address this robust set of related records and information management services opportunities.

Now, I would like to turn it over to John and let him go through the numbers and his discussions; then I'll come back with my comments.

We have, as Richard mentioned, we've posted a brief slide presentation of the financial highlights for the quarter on our website.

I am going to work on the assumption that most of you will not be viewing these slides in real time, and so I'll do my best to describe them fully in my remarks.

Now, turning to slide two, slide two is a comparison of revenue and adjusted EBITDA for the third quarter of 2002 versus the third quarter of 2001.

So, total revenue for the third quarter 2002 was $328.6 million, an increase of 13% over 2001.

Adjusted EBITDA before development expenses for our digital services for the quarter was $94.1 million, an increase of 23% over 2001.

Our adjusted EBITDA margin before digital expanded by 240 basis points to 28.7% of revenues.

This is primarily due to a 150 basis point improvement in gross margin and also due to overhead leverage.

Slide three is the year-to-date version of the second slide, and you see a similar dynamic driven by margin expansion.

Slide four details are internal growth rates for the third quarter of 2002 and the preceding 14 quarters.

Total revenue growth for Q3 was 12.7% of which approximately 87% was generated internally, or putting it another way, the internal growth rate came in at 11.1%.

Our internal growth rate for the year-to-date is 9.7%.

This is as compared to a six-year average internal growth rate of about 11.4%.

Having never run our business at this scale through a down economy, recent performance is confirming that while we are not entirely bulletproof, our business is highly resilient.

Storage revenue internal growth for the quarter was 8.6%, in line with the second quarter growth rate.

The internal growth rate for service revenues was 14.9%.

Now, two-thirds of our service revenue arises from normal, recurring activities.

We call this core service revenue, and it grew 13.1% in Q3.

The remaining third of our service revenue is more discretionary to our customers and therefore more episodic and this is what we call complementary service revenue, and it grew at 19.1% in Q3.

Let me try to shed some light on both those growth rates.

As expected, core service revenue growth rate enjoyed a favorable comparison with the prior year quarter as normal service activity was disrupted to some extent last year following the events of 9/11.

Also in the quarter, we saw a confluence of special project activity, particularly in the U.S. and in our U.K. paper businesses that drove complementary service growth.

One such project in the U.S. delivered about $3 million of revenue in the quarter, which alone accounted for about 7 percentage points of complementary service revenue growth.

Given the magnitude of one-time projects that may arise from time to time, this category of services, again complementary services, is inherently lumpy.

So, we can expect more volatility here than in our core revenue categories.

Over the longer term, we would expect service revenue growth to outpace storage growth, as has been our pattern in three of the last four years.

We have a lot of new service offerings to present to our large customer base and a selling organization, increasingly enabled and structured to pursue that revenue opportunity.

Another way to look at revenue growth is by major business unit.

The growth rates of each of our major business units have been fairly consistent throughout the year.

Our North American paper business is growing at 8%.

All other major business units are growing faster with our Off-site Data Protection unit growing in the low teens and our businesses in the Latin American and Europe growing around 20%.

We will discuss the growth dynamics of each of our business lines in more detail at our Investor Day, which is being held this year in New York city on Thursday, November 21st.

Looking forward, we have tightened our 2002 full year internal growth rate forecast to a range of 9-10%, which is in the middle of our original range of 8-11%.

We expect storage growth in the fourth quarter to be roughly in line with the year-to-date rates.

And service growth rates will, in all likelihood, come in below 10% as some of the large special projects I referred to earlier come to an end, also affecting service growth rate.

And as we discussed in the last quarter, we are faced with a difficult year-over-year comparison in the upcoming quarter due to the uneven nature of the service revenue stream last fall.

Essentially, some revenues that would ordinarily have occurred in the second half of September got pushed into the fourth quarter last year due to the events of 9/11.

This fact exacerbated by the uneven pattern of special project revenue last year, effectively masked the fundamental underlying seasonality that's inherent in our service revenue between the third and fourth quarter.

Slide 5 is a more detailed comparison of some of the major P&L line items for the third quarter of 2002 versus the same period in 2001.

Please note that for the purpose of this slide we are comparing reported results without any adjustments for revenues and expenses associated with our digital services development efforts.

As I mentioned earlier, gross margins expanded by 150 basis points for the quarter versus Q3 2001 primarily due to improved facility cost, better labor management and transportation efficiencies.

These gains were partially offset by increases in our property casualty and healthcare insurance costs.

We have seen these efficiency gains throughout the year, as on a year-to-date basis our gross margin is up by 130 basis points.

Moving down the income statement, SG&A expenses as a percent of revenue decreased by approximately 90 basis points from last year's levels.

The decrease was primarily due to the leveraging of overhead and improved telecom costs, which more than offset an increased investment in sales and marketing.

In addition, this quarter we benefited from the increase in the high margin complimentary service revenue I spoke of earlier.

Complimentary service revenue doesn't really drive any increase in overhead.

So, like in most businesses incremental revenue begets incremental margin.

Growth of depreciation expense was higher than all other line items due to elevated levels of capital spending over the last three years, especially in IT assets, which have shorter lives.

We take a conservative stance with regards to writing off these assets as the vast majority of them are depreciated over 3-5 years.

These investments were made to build the infrastructure needed to support a larger enterprise and to accomplish the integration of our many acquisitions.

But further spending for our digital services initiatives consists mostly of investments in hardware and software.

Depreciation arising from assets in our digital business contributed about $1.2 million to depreciation expense this quarter, or said differently it added about 500 basis points to the year-over-year growth in this line item.

We will discuss all aspects of capital spending more fully in an upcoming slide.

Reported amortization changed meaningfully due to adoption of the new regulations regarding treatment of intangible assets.

Lastly, interest expense is lower this year in absolute terms versus last year.

Over the last year and a half, we have engineered a number of re-financing events in which we were able to meaningfully extend the maturities on our debt, while reducing our weighted average interest rate by more than a 100 basis points.

Also, as expected our business has turned free cash flow positive, so debt levels are down from the beginning of the year.

I will speak more about this later in my presentation.

Slide 6 is the year-to-date version of slide 5 and shows similar dynamics right up and down the P&L.

Slide 7 provides net income and per share data for Q3 and year-to-date 2002.

In the third quarter of 2002, we reported income before extraordinary items of $16.4 million or 19 cents per share on a diluted basis.

Compared to a net loss before extraordinary items of $15.8 million or 19 cents per share loss in 2001.

This improvement is attributable to revenue growth, increased margins and a change in the accounting rules related to goodwill and other intangible assets.

As a result of these new rules, we stopped amortizing goodwill effective January 1st of this year.

Included in the results of Q3 of last year is $14.7 million of goodwill amortization that would not have been recorded had these rules been effective January 1 of last year.

Given effect to the change in the accounting rules and the resulting changes in the calculation of the income tax provisions, net loss before extraordinary items for Q3 2001 would have been $6.1 million or a loss of 7 cents per share on a diluted basis.

In slide 8, we organized our presentation of capital spending in to two major categories.

Capital use to drive the internal growth of the business and discretionary expenditures in real estate and our digital initiatives.

Capital spending for the second quarter of 2002 was $35 million for our core businesses and $3 million for our digital initiatives.

On a year-to-date basis, these investments total $132 million for our core business and $3 million for our digital businesses.

CAPEX spending for the quarter was lower than in either Q1 or Q2 and as we forecasted last quarter, second half capital spending will be lower than that of the first half of the year.

Having said that we anticipate Q4 CAPEX will be somewhat higher than Q3 levels just based on timing of certain project activity and real estate transactions.

We expect that for the year total CAPEX will come to fall into the lower half of our forecasted range.

You may notice an uptake in digital spending about which Richard will speak in a moment.

As we have projected in the past, our long-term view continues to be for total CAPEX to flatten and remain in the same absolute dollar range over the next 2-3 years as the business continues to grow.

This has important implications for accelerating levels of free cash flow going forward which is the topic of my next slide.

Slide 9 looks at free cash flow for the year-to-date period versus the same period last year.

You can see that cash flow from operating activities is up over last year driven primarily by revenue growth, margin expansions, and lower levels of interest expense.

At the same time, investments in CAPEX and customer acquisitions are just coincidently identical to last year's levels.

The bottom line is that for the year-to-date, Iron Mountain has generated $29 million of free cash flow before acquisitions.

We expected to be free cash flow neutral to slightly positive before acquisitions this year and we will be.

We also have said and continue to believe that the business will generate increasingly higher levels of free cash flow going forward.

In addition to our flat CAPEX outlook for the next 2-3 years, the forward dynamics of the other major drivers of cash flow support that projection and are as follows.

EBITDA should grow over 10% per year adding $35-$50 million per year into cash flow.

Interest expense should trend flat-to-down over that timeframe; cash taxes should stay at very low levels as we work through our NOL of over $250 million.

By the way year-to-date cash taxes are less than $2 million.

And obviously an important observation is that we are funding our internal growth with cash flow from operations.

We are not reliant on the capital markets to pursue our core business strategy.

Regarding acquisitions, we have closed four deals since the end of Q2 as Richard will discuss, total consideration was $21 million, only the smallest of these a transaction involving less than $1 million in considerations closed within the quarter.

So, there was no -- the others closed just after the quarter.

So there was no meaningful revenue booked from these deals in Q3 and $20 million of considerations will be reflected in our next quarter's statement of cash flows.

The pro forma revenue adjustment for Q3 had all four deals closed at the beginning of the quarter is about $3 million.

I would remind you that we do not have arbitrary goals for acquisition spending and we will not forecast acquisition spending.

We have strategic plans that include modest levels of acquisition spending, and then we otherwise opportunistically seek transactions in our existing lines of business that create immediate shareholder value.

We are fortunate to have a target rich environment of acquisition prospects and the access to the necessary capital to pursue those transactions.

Moving on, slide 10 is the summary of debt capitalization table as of the end of 2001 and Q3, 2002.

Our total debt outstanding at September 30, 2002 stood at $1.5 billion.

We had only $100 million drawn under our $400 million revolver, and we also had a cash balance of $28 million at quarter end.

I'll remind you that approximately 85% of our debt is fixed with respect to interest rates.

Also it's important to note that our current Bond leverage ratio is 4.4, that is, the ratio of total debt to EBITDA.

This ratio is down nearly 80 basis points from the beginning of the year and is at the levels we were operating at prior to the Pierce Leahey merger 21/2 years ago.

We are comfortable operating the business in our target leverage range of 4.5-5.5 times EBITDA.

This business will naturally deliver each year in the absence of extraordinary investment activity.

Perhaps most importantly, net debt is down from the beginning of the year.

Bear in mind that we have financed internal growth of almost 10%, invested $17 million in our digital initiatives both through -- the combinations of through the P&L and through capital spending, and we have paid $23 million in acquisition consideration through the first 9 months of the year without increasing net debt.

Slide 11 provides financial modeling guidance for the full year 2002 as well as our first projections for 2003.

As a reminder, these projections do not include any revenues or expenses associated with the development of our new digital service offerings.

Based on our year-to-date performance and stable outlook, we have again raised the low end of our range for revenue and meaningfully increased our range for EBITDA as follows.

We expect our revenue to be in the $1.285-1.305 billion range.

And for adjusted EBITDA, to be in the $354-360 million range.

We expect our capital spending to be between a $175-200 million for the year, not including CAPEX associated with future acquisitions and digital initiatives.

And as I stated earlier, our internal growth rate for 2002 is expected to be in the range of 9-10%.

Spending through the P&L on the development of our new technology based services, net of recorded revenue should be about $8 million for the year.

And capital spending in this area should fall between $14-16 million for the year.

For 2003, we forecast revenue to fall between $1.405-1.445 billion, reflecting internal growth of 8-11%.

And we also expect capital spending to be in line with 2001 and 2002 levels, and coming in the range of $175-200 million.

We are forecasting adjusted EBITDA for 2003 to be in the range of $385-405 million.

This implies that adjusted EBITDA growth will be in line with revenue growth without meaningful margin expansion.

We prefer instead to reinvest next year's margin opportunity in the business and Richard will elaborate further on this point in his remarks.

Thank you and for now I will turn it back to Richard.

Thank you John.

I will just try to comment -- I have got about 6 topics to talk about and I am going to run a little bit of free form.

I have got a script, but I will move around a little bit.

I will also try to speak slowly because we've heard from you that I have a tendency to talk too fast which is no surprise to anyone.

But it's hard to talk slow when you are pretty excited by what's going on because our business is running well and we are pleased with everything that is happening around us.

As you understand and as John said, the business is performing right in the line as we forecasted with revenues up nearly 13% for the quarter, but the real story here is margins.

They were obviously very strong for the quarter with adjusted EBITDA excluding digital expenses, wrote 240 basis points of the same period last year.

And although this will move up and down a bit as we've said over and over, you know, we remain extremely confident in our 30% margin objective over the next four years.

And as John also mentioned, we're not likely to drive them up dramatically, if at all next year, but we're pretty happy with what's going on at the margins.

And really what's going on is we're seeing the return from the investment of capital we've been making both in our system conversions post Pierce Leahy merger.

As you know, that's something we completed mid this year ahead of schedule.

As well as other operating efficiency investments we've been making, they started to pay off.

These margins are solid.

Like I said, they'll move some here and there, but we're starting to ramp up as we fully expected, we would do.

Now as we're seeing this come in, we will look for some -- take some of these margin enhancements and reinvest it in some more growth initiatives.

And I'm going to talk a little bit later about some of that, but we see some changes in the business, all over to be very positive.

And we're going to gear up and take advantage of them.

Speaking of growth revenue, internal growth a little over 11%.

I would want to caution you to look at Q3 and Q4 together, because of that the comps have an easy comp in Q3, it will go with a tougher comp in Q4, you know, because of the events of September 11.

It's better off if you look at the second half in whole and John gave you the numbers on what we think is going to happen in Q4.

Core services continued to lead storage, which has been historical pattern and core services are those that are highly recurring in nature.

They also were benefited a little bit by a weak comp on, you know, Q3 of last year, but they still are pretty strong running at a little over 13%.

Component primarily services those that are discretionary, we still see customers hanging back on spending money on the margins, but they are coming up.

And we had some couple of big projects in Europe and in the US.

One point of which was over $3 million.

That really won't come in next quarter, but you know, we're pleased with what's going on there and we're pleased with the margins we're seeing there.

As you might remember, our off-site data protection business, we talked a lot over the last few quarters about their complementary services trend, and its continuing to rebound.

Their comp services growth is about 12%, versus the same quarter last year.

But this quarter last year, they were off 30%, they weren't negative.

So that makes for very easy comp obviously.

And although this component is rebound and it's still not back to normal, and IT spending is still not back up where it historically has been.

But all the trends are in the right direction, so, you know, we're feeling good there.

Europe, I want to comment little bit about their sales operation.

And you know, my basic comment is it's really humming.

In past conference calls, I made the comment that we were doing well in Europe in spite of our sales, meaning that we really didn't have our sales organization organized, and we didn't have our sales management in place.

And I think, I've told you last time that we had sales management placed and they thought it was taken whole.

And that trend is really not only continuing, but escalating and they're not going to cover off the ball.

They are significantly ahead of their quotas and targets, and I would tell you that it's an emerging market, which means that quota proportion over there is double the US.

So we are getting tremendous productivity, and we are feeling good about what we're doing over there, and continue to see more and new opportunities.

On the US sales force performance side, we had talked before about the sales force rebuild.

It is working, and we see in a lot of ways.

But I will tell you, we still -- we haven't yet seen the true return of that investment flow to our statements yet.

But if you look at all the leading metrics, our pipeline is up substantially, you know, with the signed versus build, it says we are in very good shape for the year.

In fact we have an enormous backlog of signed contracts that are going to take -- they are so large -- many of them are going to take, some of as much as a year to move in.

And you know, Boeing actually recognized a revenue, but the units are coming in.

And really -- probably one of the most encouraging statistics is what we call the roll, which is what we've got signed already this year that will come in next year, and for that matter looking at the projected pipeline there, the sales force is in very good shape having a significant piece of their quota in the bag going all into next year.

And because of the turmoil we've had, post the merger integration, our roll into this year and '02 was almost zero.

So what we've done this year, we've done from scratch.

But what we are going to do next year, we've got to head start.

And that's obviously sign of a good healthy selling operation where you've got -- you need a significant piece of it in the bag, to be able to make the targets and we're in good shape there.

So we're really confident about our forecast for the balance of year that John gave you and we do expect actual improvements of above our levels today.

But as we've said many times, this is the flywheel business and it rolls down the hill at its own pace, no matter what you do, you just want it to make sure it doesn't roll over you.

And that's the good news about the business.

The flywheel is rolling and in fact, it's speeding up a little bit in our mind, but it will do it slowly.

On the business development front, we did do four small transactions, which John spoke about.

They do represent our strategy.

They are all relatively small.

They are spread out by business line, and little bit by geography, one of them in Peru, two in the US.

And then we did one kind of unique one in the United Kingdom, which I do want to talk a little bit about.

We completed it in August.

It's a large what we call PUMVE, which is our acronym for pick-up and move, which really means we have bought a company and we've got to move all of their boxes, about 1.2 million all of them, out of their facilities into our facilities.

And because of that the dynamics of the purchase price and the accounting part -- sometimes looks a little odd, you know, I'll take you through that.

First thing to realize is, we actually won't see the financial results consolidated in direct numbers, except the beginning in October the 1st, because there is a difference in fiscal periods between our European subsidiaries and our US.

The company we bought called TDG, has a run-rate revenue of about $10 million US dollars, and we paid about one times revenue for the acquisition.

But because it is a large pick-up and move, over the next 18-months, we'll spend another one-times revenue or so, moving and racking, constructing the racking and the fixed assets and related items to move those 1.2 million cartons.

We're moving them into existing facilities, we have capacity there.

And normally that investment of the move, there wouldn't be a move -- but the investment of the racking and other things would be part of the purchase consideration.

And in this case, it really will come flow through our statements as CAPEX over the next 12-18 months.

Also, as I said, most of these cartons will go into new facilities we already have and, in fact, we just opened a new facility that has 5 million of capacity for 5 million cartons.

And we'd have significant excess space.

The timing of this acquisition was perfect, because it allows us to go right in to the space we're already paying for, which means incremental margin in the next couple of years on it will be phenomenally good.

So, you know, we'd like to do deals like that because of their street value overnight.

There is a lot of physical work involved in it, but it works well for us and it worked well for the seller, because they had real estate that was too valuable to keep boxes in and allow them to unlock that value in the real estate.

Another topic to talk about, John mentioned, free cash flow -- we've been saying for sometime and many people looked at our business.

As you know, over the last so five or six years, we've been on the strategy using external capital from the capital markets to build footprint and to build scales and we did that.

And we were lucky enough to get that done before the capital market lenders got worse or tightened or close to how are you going to look at it.

And then we've been focusing in our second phase of our strategy, we've slowed the growth down but we were focused on the margins and on penetration and on internal growth.

And that is the point, which after we cleaned up all of that acquisition work, and it is almost all behind us.

What really we've been saying for some time is you will see the free cash flow coming.

Well it has started and we will be increasingly free cash flow positive.

But like a lot of things I want to caution you that quarter-to-quarter, there will be fluctuations.

But you can see it and, you know, we see it now on a year to date basis, and you will see it moving forward.

And in fact, over a few quarters forward, we can expect that free cash flow growth curve will start to resemble the storage growth curve and have traits of constant predictable growth.

It will take a few quarters to grow beyond our appetite to reinvest on the margin of free cash flow.

Some of it in as we expect to generate overtime, more free cash flow, then if we can reinvest.

And we think that this is a good thing.

The company will generate more free cash flow then we can intelligently use and, of course, strategically we will have to figure out what to do with that.

Many of you have spoken to us before about what we will do with it?

The answer is now that we are beginning to see it, we will start planning and figure out the right thing to do for shareholders to deal with it.

But this is just a beginning.

There would be fluctuations up and down, but it's real clear to us that the free cash flow up period of this business is now started.

Now let me change gears and talk little bit about what's going on in the market place, because it's really been interesting.

I have in the business 20 years and sometimes beat my head against the wall to convince customers to do the right thing and its been the most amazing thing, just a couple of little events convinced everybody at once.

As we have looked at the market place and you look around, as I said, we use to go out and try to sell our customers and convince customers that better risk management could be had through better records management and the investment records management will payoff through risk management.

And in fact, we would find customers from time to time who have understood that and internally we speak with customers based upon of sort of their needs.

Their needs are storage that is a better, faster, cheaper use of our assets on our infrastructure in our technology store or their needs of records management, not only storage, but the ability to manage retention and manage risk and manage access.

And what we would find is customers would over slowly, overtime kind of wake up to the difference between the two and it would start converting them to records management and that stage is when they really start to get the power of Iron Mountain.

When they really start to use our technology and they really start to make it go throughout the organization, they can get tremendous value out of us.

And our whole business strategy was really designed around these customers waking up a few at time and us going out and talking to them and dealing with them.

And what we found is, though, the cause of things like the Anderson Enron scandal followed, you know, by reinvigorated regulatory enforcement and, of course, followed by some Soben's Auxley.

The motivations of our customer have dramatically changed and the market has shifted and it's really instant.

All our customers and prospects, as if they woke up all at once.

And we are running and running and running just to keep up with the customers who did want to talk to us about our solutions.

Now -- and I have actually personally spend a lot of time out with some large customers and it's very interesting to hear what they are saying and the truth is they are serious and they are going to deal with these issues and it's now more than storage this is about information management, which is what we have been saying for lot of years.

But know its not convincing customers.

It is a matter of responding to customers.

Also, interested in a 100% of the conversations, we go to move quickly beyond the physical records which they have a lot of work to put in shape, but move into the digital services needs which are dramatic, as we have been saying for long time.

The difference is it's not us talking to ourselves, it's our customers talking to us.

We are the only company in the world that has a comprehensive data solutions that will apply consistent management records practices for retention access management across all media formats.

And we plan to move faster than ever to catch this wave, for we see the wave coming at us.

This will require some further investment in sales and marketing and other things.

We are making plans now to invest further into our digital service marketing, which I will speak about it in a second.

And we are making plans to invest more in -- in greater numbers of people and greater other programs related to dealing at the sea level of these companies because that's what we are talking now.

And we need people to get in and answer questions and help companies design their programs and so forth.

So now that we are seeing the margin expansion coming and we are seeing the free cash flow -- we're going to reinvest some of that into these areas of the business because the time is here and it is the time to go for it.

We still believe we can do that within the financial guidance that we have given and we'll continue to give but you can look for us to put some more money in these areas.

This is all really good for us in the business.

It really causes us to run hard, which is great.

But I also want to caution you that this is a business where nothing happens overnight, nothing changes overnight except the fact that this is the biggest change I've ever seen in the business in 20 something years.

I will say, this radical shift in the market.

But taking advantage of it, turning that into revenue will come month-by-month and quarter-by-quarter, not overnight.

So don't -- anybody go out and pencil up your forecast because you will be wrong.

Now, let me switch and speak briefly about the digital businesses.

I do from time to time.

We continue to learn a lot and the businesses continue to progress along a good path.

As you know, our strategy has been to control our spending as we develop the products as well as have the markets develop and we are going to ramp our spending to build revenues in the face of seeing the markets develop and the strategy has not changed.

However, we can now -- we are at a point where we can see the transition coming.

And I am not sure its like looking down the tunnel.

I am not sure if the train is coming at us or what, but I can see the light coming and it is coming fast and so we have to get ready.

Revenues in that business for the quarter were nearly doubled.

Last quarter well over $450,000, but still a small number.

But the activity is tremendous and we are working hard now to go from a concept to go to business.

These changes in the market forces is changing the market demand and as I said we are going to increase our selling coverage in this business because we are no longer opportunity limited we are sales-coverage limited.

We have more leads than we can follow up and, therefore, we are going to -- we are making plans to go out and try to deal with these and see what we can do turn them into revenue.

Both in the digital space itself, as well as related consulting and professionals services.

As John said, we are spending a little more into business then we had forecast, particularly in the CAPEX side of business.

And this is the result of our seeing the train coming and making sure we don't get run over by it.

Our confidence level is high on the business and, in fact, as many of you know, we been operating additional business, out of some the existing data centers.

We now have the confidence in the business that we have started and in fact we have almost completed the construction of our long-term permanent facility, which is a high security underground operational center for this business.

And we have gone ahead and invested a significant amount of capital in doing that because -- if you projected out you can see it coming in and you want to make sure you get ahead of the game.

And in fact you would expect to be occupying that on a live basis sometime in first quarter next year.

As I said, we see the transitional strategy coming and it still requires to increase our investments to build revenue generating capacity in face of the opportunity, and as in any case of investment, the spending will precede the returns.

But we are feeling better than ever about the opportunity.

We will remain prudent to not let investments get out hand.

But the reasons for starting down this path is now staring us right in the eye and it's time to go forward and we plan to do that.

However, you know, the good new is the company and you will notice that we've actually been able to be free cash flow positive this year not only funding the internal growth of our core business, but that's even after funding our digital investments to-date.

And I think it's more than likely that we will be able to continue on that path, but it does depend upon on how fast, if the business were really ramp take-off in hurry.

We will give you a better view of this whole business.

As you notice John did not forecast the digital business as he gave you a '03 forecast.

His '03 forecast were excluding the digital business.

We will go into more detail on the digital business, our spending and some of our expectations in our investor day, next month in New York City.

So we hope you will join us there.

Having covered my six items, it's now time to open up for questions and answers.

So it's time to hear from you a little.

If you would like to ask a question today, please press the "*" key followed by the digit "1" on the touchstone phone.

Once again, to ask a question, please press the "*" key followed by the digit "1".

We will pause a moment to assemble our roster.

We'll go first to Harry Blount with Lehman Brothers.

Congratulations on a quarter, gentlemen.

Quick question, John, I may have missed, I didn't hear it - hear it in your comments, at least of my note.

Could you provide a breakdown of the internal growth between creep versus price versus new customer adds?

No, we -- we often announced about that in the North American box business, the storage part of that business is growing just over 7%, about 3.5 of unit volumes coming from creep, about 3% is coming from new sales, and we're getting something less than a point in price, on the service side of that business, we think, we're getting a substantially more price, in our Off-Site Data protection business we are getting 2-3 in price, most of the growth in that business comes from new relationships.

Internationally, creep is probably about twice -- twice the levels -- in our paper business internationally about twice the levels as of in the U.S. and -- we're matching that with a robust level of our new sales.

So that's the -- that's the sort of the overall picture of component of growth.

We go next to Alexie Cascaras with Bear Stearns.

Thank you, congratulations on the quarter.

Just a couple of quick questions, if I may.

Just on the acquisition front, you mentioned that in $23 million year-to-date, just for housekeeping versus that's not a matter of assets sales and I was just wondering whether you could just repeat how much you expect to spend in fourth quarter from pending acquisitions and then I have a couple of follow-ups.

The only thing we are willing to comment on is deal is closed, we do not forecast acquisitions pending. $20 million of consideration was expended just after the end of our fiscal third quarter.

So you can count on $20 million more shown up on the year-end statement.

And there will be some other acquisitions, but -- I don't -- and based on our pipeline, there are no -- there are no very large acquisitions, we'll close more, I just don't know what the timing and magnitude -- aggregate magnitude of this.

Sure, I mean in terms of looking at it, you know, last year you spent about $71.4 million, this year decidedly lower, is there any you comment at all on -- how we should look at it, I know, you don't want to give any guidance on that perspective, there is a big dispatch between what you spent in these two years.

Well, we were $23 million year-to-date, another $20 million spent, that's 43.

We are probably -- we have a pipeline, it'll up that number and, you know, it probably won't be a number that is dramatically different than last year, it will be lower, but not dramatically lower.

But our general strategy is -- our strategically acquisition is different has been historically and we're transitioning it off of the growth from acquisitions.

So, it would not surprise us that you will see new acquisition spend lower.

Because, we are not out chasing anything accept for transactions that make sense for everybody.

Sure, in terms of your real estate strategy, just wondering, you know, how that sort of comes out right now in terms of owned versus leased, and how'll you see that progressing going forward, and my last question is, on a sequential basis it seems as if services slow down a little bit.

Is that just due to lumpiness and seasonality or is there something more we should read in that, you know, going into the tail end of the year.

Let me take the real estate finance question first.

We have about a 30 percent of our portfolio real estate is owned and 70% is leased.

A very -- a major portion of that 70% leased is controlled by us through purchase options or other off-balance sheet financing.

I don't know how our real estate finance will go forward.

We continually seek the lowest cost pool of capital for our real estate assets.

We can do sale lease-backs and lighten up on owned real estate or bring more on the balance sheet.

We will -- we view it as a -- an investment that can be unlocked because there's a ready and willing liquid market out there for people that want to own real property and lease it to us.

I know that's a squishy answer, but it's, you know, we have always been opportunistic to find the lowest cost capital for our real estate asset, we'll continue to.

In terms of service revenue, it's up about 0.5% from Q2, that's actually a very strong performance.

Normally, the seasonality is such that the doldrums of the summer and for that matter the holiday season provides a less robust service activity.

And, it was, you know, typically service revenue was down in Q3 of last year, even adjusted for our estimate of what we lost after 9/11.

So, it is other seasonality, so, consecutive quarter analysis is trickier than it might appear.

Great, thank you very much.

We go next to Carey Callaghan with Goldman Sachs.

Good morning, Richard and John.

Hi, Carey.

Hi, Carey.

Could you comment a little bit more specifically about the profitability of Europe, it sounds like growth is terrific and I am just wondering how -- I was thinking about how much is coming to the bottom line, and whether margins are going to expand?

And similarly, you made a comment that on the special revenue side, a lot of that falls to the bottom line, but I wish you got some cost to put against that, if you could comment on the relative profitability of that activity as well?

Yeah, Europe last year had margins of about 16% and most recently they're running right around 20%.

They may take a little half step backwards because we --brought that big building online, and it's still not a big enough business to absorb a huge building like that, but it's strategically a tremendous move for us to support growth and get great -- great space economics.

The -- our special project that comprise the bulk of complimentary revenues are -- usually are 40 -- around 40-50% gross margins.

So that all moves the dial much on gross margin because, you know, our overall gross margin is about 50%.

They just don't simply -- they don't require meaningful additional overhead, often just the sales commission.

So it does -- it do leverage overhead.

Okay, great.

And then, a bigger picture question for Richard on what you're seeing Richard as you talk or you think about competitors in the storage space more broadly?

Are they coming around to thinking of you guys as the best back end long-term storage option?

I think it's a little early for me to make that claim, but I -- we are getting, you know, credibility and traction.

Understand it, you know, Iron Mountain is not known as a technology company nor do we probably ever think we have the will be or expect to be, but we are known and we do have tremendous knowledge about records management and retention, and this is an issue of how to apply it to a business.

You know, you can do a lot of things in technology, but if you can apply it to business problem is, there're a lot of practical issues to make it work, and that's where we are trying to make our name, and I think, we are getting some good recognition in that side, and that's base of the business.

But it would be early for me to tell you that we are the accepted or the premier solution.

The truth is though, they aren't meeting good alternatives, and we see customers struggling with figuring out what's the right way to go and some people, of course, end source, and some people will out source.

We are talking to some very large opportunities for customers to outsource and -- but you know some these will start small, some of them we are going to prove to them that we can do it, if the kinds of volumes they are talking about.

I am talking about people who do 10 million e-mails a day.

Okay, that's a lot of data and so forth.

So, but the good side its our knowledge and our business logic that I think in long run will win the day or not, for that we are technically better or differ to unique or anything else.

Last year at your investor day, you're talking about this potentially being at $250 million business, although I think you're little vague as to exactly when you got there, but it sounds like you would still be supportive of that statement, is that fair to say?

Yeah.

I think, we haven't -changed our minds, when you know its whether we are talking 4 years, 5 years, or 6 years, I guess its a good argument, but yes we see the opportunity and I will tell you this is a multibillion-dollar market.

There is no doubt in my mind about that at all.

There is a lot of doubt as to how much that we'll get, but there is no doubt that this is a multibillion-dollar market opportunity.

What's really changed is, it was a market just like a lot of others where customers had to have a reason to change behavior.

They had a need -- need is always been, the regulations has always been there, the litigations always been there, they had to have a reason to change behavior, used to be the reason once you get sued you loose, it didn't feel very good, it cost a lot you go back and look at why, and you realize that you weren't prepared and then I won't go into this deeper underlying trends that I won't go through whether you have guys don't have time to listen to it.

But what happened now is the underlying change agent is there its called Soben's Auxley, because we are not talking about fines now, we are talking about your reputation and we are talking about to move with your stocks and you are talking about my personal and other peoples personal liability that is an enormous motivator for people to do things that in the past just didn't get taken care of.

By the way that is still strong, there what's interesting edge is we've written some papers and it is a great way to think about it, but records management has now moved from backroom to the boardroom.

These initiatives are coming out of the board.

They are not coming out of the administration they are coming out of the board.

Thanks guys.

We will go next to Amanda Tepper with J. P. Morgan.

Hi.

Good morning, before noon I guess.

Thanks for taking my question.

I just want to follow up a little bit still on the digital theme, if you could.

What is the competitive landscapes that you are seeing now, I understand how you are positioning yourself, but who you seeing that you are positioning yourself against and, you know, what do you think its going to take to close some of these bigger opportunities?

Well, there is a variety of competitors, there is a company that has gotten some press release called Zantaz.

It was a venture back to start up.

There is Ivault, which has chased J. P. Morgan's in-house solution going out.

There are people using backup recovery processes in odd ways to get there.

There has been -- there are just people gluing together systems using IBM's hardware or Compaq's HPs hardware, you know so forth, so on, but primarily in-house.

And right now just like in, you know, the records, which they buy a long shot, the number one competition is people trying to figure how to do it themselves.

Okay.

So it's still an outsourcing cell more than anything else?

Well, its an outsourcing cell, but it is also when you got to figure how to do it yourself, its -- storing data is one thing, storing data with the right logic to do the record's management retention and meet amenability compliance standards is another thing and that's what we are bringing into the table.

Okay

Anybody can write things to disc.

Okay, and if we can stick with the competitive landscape for a minute and moving back to the traditional records storage business, when you walk through the organic growth a few minutes ago.

The pricing was a little bit lower then even the low end, I had been looking for, so I am wondering what your seeing there because I know that was supposed to be part of what you would reap from a stronger sales force to get -- have a little more pricing power there.

So, do you think there is upside the commerce economy strengthens or what are you seeing competitively?

Well, what we are seeing mainly is a result of...it's a combination of two things go on a routine price increases, inflation based price increases which we are implementing in total with or contrasting with rationalizing the customer base and what we are seeing is more and more big customers offering us more and more volume in return for some cut price rationalization, you know, and what we are also seeing is a trend where customers will now understand greater than they ever did by putting all of their information particularly with one type like their boxes with one vendor has value to him because they can then be consistent in their application, they have record's management rules and so forth and so on.

So, we are having customers literally look around the organizations and realize they are dealing with 10 vendors here and so forth and dealing with us with half a volume offer us double the volume, but they are looking for price, you know, and deserving it, given you know, the volume right prices to bring into table.

So we are going through that and I think that's going to speed up a little bit.

So, although we are raising prices, like I said inflation based price increases across the board, it doesn't take one or two very large customers, when a customer who has a 0.5 million boxes whether he wants to offer you another 700,000 boxes, but you have to do so on the price, you know, that impaction.

As the economy comes back, do you think there's upside to the 1-2% price growth?

I think, it all depends upon inflation and rationalization.

When we get finished rationalizing and all of this, which will take a few years, there is tremendous subside.

But the truth, no matter is that I want to go back to say for over and over is we are not in this business to stick our customers with price increases.

We could raise prices 5% and make it stick, but we don't do that.

We are in the business for a long haul to give a good service and to deepen our relationships with them and some other things like making this digital business bigger and so forth.

You don't do that unless your price increases are balanced and fair and the truth is we are growing margins without it, we are not relying upon price to do so.

Okay, and then finally just on the debt plans going forward, I guess, you know two parts; one as you said you'll deal with your high class problem of excess cash flow as it comes in and after you reinvest it, but John when you talked about staying in the range of 4.5 to 5.5 debt to EBITDA as your target, you are already below that.

Would you look at lowering that range perhaps?

Hope not.

Well, this is -- the high class problem is what do you do with the excess capacity of cash and debt and you look, you do two things, you pay down debt in the short term obviously because you now have considerable amount of cash that is not earning a lot, but you really don't want, you do want the government as your partner.

You don't want to pay a lot of taxes and this is the business that needs to run leverage.

So that gives you some other strategic alternatives to deal with and, you know, it ranges from buying in stock to doing other things.

Our only commitment at this stage of the game is we would do what we consider in the best interest of our shareholders creation because we are large shareholders and we won't do stupid things with the cash.

We won't let it go to our head.

Okay.

Thank you very much.

We go next to Patrick Thompson with CIBC World Markets.

Great quarter guys.

Thank you.

John what's the highest level of creep, Iron Mountain has seen in its US box business in, you said last seven years being a public company?

I would say, you know, you could see a spike to 7, but over you know over a multiyear period we were seeing something just over 5 and it was typically ranging between 4 and 6.

So we are down, you know, current creep levels are down about 200, 150-200 basis points from, you know the average.

Okay, and the attributed, you know, there's all sorts of factors -- the economy may be the maturity of the US market, may be slower performance in new sales.

How do you, what comes back first and what can it do for that creep number?

What better -- let me just say that its hard to know with certainty, there are 100,000 relationships and you don't even know who to interview there because nobody spends their waking hours figuring out how many boxes are going out the door.

Right.

But having said that -- there has to have something to do with the economy, you seeing people laid off at banks and that affects the legal community -- and the service economy have to drive production of new information, so we are certain that's part of it and we expect when that comes back, so does creep.

The other issue is that historically, our youngest customers have had higher levels of net editions of boxes, because we really penetrating them after they get comfortable with the service and for a couple of years in a row here, we have been selling 3% new customer relationships as opposed to our average of five and a second order affect of lower new sales is the factor here.

Richard in additional business you mentioned all sorts of opportunities.

What's the biggest single opportunity out there in terms of dollar signs?

Sorry but for competitive reason and I can't tell you.

Okay.

Cost a lot of money to know the answer of that.

Alright

We don't give it away.

We don't learn on the 21st either I assume.

Yes, you sure won't.

And then last question, you guys mentioned last quarter that you are going to hold CAPEX relatively flat in '03 and '04.

Your operating I think around 75% capacity right now and your -- in your facilities.

Does that number change when you hold CAPEX back?

The -- well actually -- we're probably up around 80% CAPEX utilization, that's combination of selling buildings and then having some redundant buildings we got through acquisition coming offline.

We are -- there's not as direct a relationship between CAPEX utilization and capital spending as you might think.

We don't open a new building and store it up with steel and then -- but rather fill it with steel as we see the boxes coming in.

So still a major portion of our capital spending will be linear -- will be right in line with unit growth -- with almost without regard to what we do with utilization.

Okay, alright, thanks guys.

Okay.

We got our next from Andrew Steinerman with Bear Stearns.

Hi there, good work on learning the cash on flow.

My question is actually -- actually I wanna point to slide # 9, it is a great addition to the pack, and I want to focus on the line this is cash flow from operation, $172 million?

That struck me as -- as a large number.

I'd looked back at your second quarter queue and six months number was $98 million so sort of netting up a nine month number of $172 versus $98, its seems like that cash flow from operations in the quarter was $74 and then I was really bored while listening, I looked into second quarter number netted it out and it seems to $47 which would mean that cash flow for operation you know basically jumped up 50% sequentially and we easily say nothing happens quickly at Iron Mountain but it seems kind of quick.

I agree.

No, there are a number of factors obviously you know interest is flat, EBITDA is going up, CAPEX is -- was down dramatically and then I think our capital spending pattern for the year is sought of $58, $48, $37 million in each quarter and then we had working capital fluctuates here for a couple of reasons -- the most important trend there is our DSO's are coming down so we are collecting money better and everyday we collect better is about $5 million and we've taken a couple of days off that and its happened reasonably recently because we were in a process of centralizing our collections.

The other thing is we do get -- weird things going on in working capital as we move money between our -- the parent and Europe that -- because they have different reporting cycle, we can create a fable by loaning money to Europe but it doesn't show up its on their balance sheet in the same fiscal period.

So there are things like that at work.

Right so you don't think there is anything's so unusual that, you know, what you listen to you know the operating cash flow number of $74 million in the quarter, its sounds like that's where we're at.

Yes, right...It's not a number you want to multiply times four and extrapolate for it Andrew.

Alright, so far so good thank you.

By the way Andrew if this performance in this economy gets you bored, I guess I'm going to add to the strategic goal, to have you bored all the time.

Oh Rich, you know I say boring is good that's my mantra

That's what I agree.

Thanks.

We go next to Gary Dean with Robert W. Baird.

Yeah hi, two quick questions.

Good morning, one going back to Patrick's question I know you won't comment on the largest digital deal you have ever seen but I'm just -- I'm curious if you give you any commentary on just know what these deals look like, you commented on obvious obviously the e-mail types of deal but are they -- are they going to be, you know, long-term deals 3, 4, 5 year type deals or they are going to be typical sizes of $5-10 million -- what exactly is it you're pursuing in the pipeline?

Any comment there at all?

Well, there are different markets -- different market segments.

What I can tell you is they typically come with some professional services, you know, or some cleanup or project work to help the customer to get ready and be able to do things which gives us a little revenue and but then they are sort two different flavors.

They either start "de novo" and you connect them up and they start -- information starts to follow in.

So every month, it just growing, growing and growing but starts of very, very small base, or they run a model like this Paper storage business where you have a bonus back pile, old stuff that you want to give in to the infrastructure, and we are finding a little both frankly but we're finding some customers after they started slowly have come back and asked us to put more of the back pile end because of the value of the system to them and so forth.

In terms of revenue size, they can be relatively small, you know, a few dollars a month to they could easily be $200,000-300,000 a month and growing counts of numbers and we talking to them you know in all ranges.

It is a little early for me say where you know where the sweet spot in all this is and if I knew I would probably tell you anyway, but what I can say, we are trying to build a recurring revenue model and majority of revenue will come out of much like the box business.

So more storage per month and, you know, month-in, month-out sort of thing,

Well, that was my question is so the revenue recognition model be kind of a just like the cartons like model.

Absolutely, we won't recognize revenue till the work's in house and done.

And it will be a function of how much information we are dealing with gigabytes or items or revenue.

Okay and then just a second question just go back and revisit that issue.

Are there any additional refinancing opportunities given way the coverage ratio is up to where interest rates are?

Now I don't know, I heard, you know, bonds rallied, and we continually look at bonds that are callable and consider whether its NPV positive transaction to pay issuance cost and call premiums to replace them.

We haven't done that math in a while but we'll probably revisit it.

Okay thanks, great quarter.

Thank you.

We go next to Walter Adams with [John McFane Investment Capital].

Richard, it's great to hear how excited your customers are for your basic product.

Could you tell us what you plan to reinvest and to top that, is it a larger sales force or what are you going to spend the money on?

Yes.

We can't tell you, we're still building plans Walter, but the concepts are -- is to add more people and promote some and do a variety of things oriented towards more conversations at the higher level -- the so called sea levels of our customers and also to enhance our -- consulting business and our professional services business.

We are finding more and more need to go in and help customers develop a strategy and then help them implement a strategy and it has a lot of elements, including reducing some of their cost with us, which is fine, doing some back file conversion work and help them destroy stuff they haven't destroyed for years and then help them build an ongoing program.

They are really talking about building people at the higher level in effect of the companies, because we now have easier, better access at those levels than we've ever had in the past.

So it's mostly selling talent tied with some consulting and program implementation talent with professional services type talent.

Great.

Thank you.

Just one other question.

In view of your comments about how strong the pipeline is in the North American Box business, and how productive the sales force is.

I'm trying to reconcile that with the internal growth forecast through next year which really at the low end is less than '02.

Is their something else going on?

Yes -- I mean -- we would expect the sales force to contribute more next year to growth than this year because of the -- role we are going to have into the year.

So that's upwardly positive.

We're still sorting through price and opportunity and risk there, that's a question mark.

Creep is a question mark and it's economically dependent as our ancillary services -- so we are just putting the range out there.

I can make a better case for things going north and south, Walter, but you know, I'm not going to stick my neck out and say we got a hard flow at 9 or something when it may not be that.

Okay, just trying to understand.

Thank you.

Sure

You're welcome

We go next to [Harvard Wilsoncram] with HD Brew.

Hi guys, thanks very much.

I -- just, a couple of things on the balance sheet.

The other current assets, can you just give me the break up in that line if you have it and the other non-current assets, if you could just break it down into the categories, you subsequently break it down to, in the queue?

Yes.

We're working on it...

Do you have another questions while we pull it or we'll come back to you, we'll answer it later, is that fine?

No that's going to do it.

Okay.

We'll answer towards the end, while we talk it up for you.

Thank you very much.

Let me go on to the next one.

Thank you.

We go next to Franco Turrinelli with William Blair.

Good morning Richard and John.

Hi!

Frank.

Need to be faster with that "*" "1" in future.

Couple of questions for you.

Going back to Patrick's question and Walt's, which I think is really going to - hit the nail on the head in terms of the creep.

What is the creep from the oldest customers?

I mean, kind of what's your absolute rock bottom expectations through the oldest customers?

That's probably a question we'll be able to answer in three weeks.

It's not because, we're not willing to right now.

It -- it's given all system conversions we've done to find a group of customers that had reliable volume data that was you know, commemorated in legacy systems we can get at and make that specifically significant sample requires a lot of pick and axe work.

We only, therefore, have a look at it once a year.

The last time we looked at it the good news was customers net additions don't trend downward and keep going downward.

They level off at a level that's below the average, but not meaningfully below the average and we promise to address that to the extent we can in three weeks.

Be there or be square, right?

Right.

I mean -- it sounds more like a 3% might be a good flaw for us to start thinking about.

Your words, not mine.

Okay.

One other question, then Richard are you -- getting dragged back in to the Professional Services Consulting business that you've kind of shied away from historically with this greater sea-level exposure?

Well I wouldn't say dragged back in to -- what we have historically done has been records management in retention consulting and we're going to expand that lookout.

You know, there is just more demand and so we wanted to expand that side of the business.

But the digital business we see the need and the opportunity for you know, customization or installation I should say, you know, of when you put in the processes and so forth which is so called professional services.

You know -- I don't -- right now those businesses on a global basis and by the way we've got customers in Europe asking us we've literally been shipping consultants from the US and from Canada and to Europe doing work over there and doing some great work.

That's where some of the special project revenue out of Europe came from and we've got some people in Europe who are building team there -- we have actually really had big customers ask us to put resources on the continent, so that they can get more access to them.

So those are the kind of things we're doing.

I wouldn't say we've been dragged back into it as much as I'd say in the past, I had viewed the consulting business as a bit of an R&D shop but in fact, it was very successful.

It's out of that that we really came to understand the digital requirement and the opportunity by working with customers.

But we kept it relatively small because we viewed it as much as R&D as anything.

And now, we view it as more than R&D.

There's an R&D component to it.

We're going to continue that.

We view it as a way to make some money and frankly it's needed by our customers to help solve their problems.

I've already offered my services worthily right, I think.

Okay.

But, I'd prefer to get told off by Amor for posing as what I am not.

One final question I'll shoot to John.

You said that the CAPEX, you know, basically flat, you know, for the next couple of years.

But there's about $20-$25 million of CAPEX in this years numbers that you previously characterized as, lets call it an acquisition bubble.

I have two questions is, is about -- well the question is, you know, what's going to replace that bubble?

What's, you know, kind of what's the next bubble so to speak?

Thanks.

You know, we said it's $20 million.

I think we're actually a little behind.

We probably won't spend all that this year.

Some of it has to do with upgrading acquired buildings to our standards and there's a pace at which you can do that with quality and not waste money.

So, there's a smaller bubble and it's, you know, this year and it probably pushes a little bit into next year.

But, said simply I guess the -- what would replace it is more unit volume growth of a bigger base by March.

So, you know, as the business -- over 3 years of the business grows 30% or more at the same growth rate, we'll just have more units and will be erecting more homes for physical...

Okay.

So the growth and maintenance CAPEX just, you know, progressively grows to...

Yeah.

The growth replaces the bubble as the bubble burns off.

Right.

And real estate compared to last stage approximately constant.

Yeah.

Let's say a little bit of wild card and, you know, you might see us bring real estate on the balance sheet and chunk it out and sell these packs.

So, I -- you know, but it happens to real estate.

It has been probably averaging about $30 million and I guess that's an embedded assumption.

That okay...

Don't use the s word on leases...

No.

No.

I wouldn't go there.

One final housekeeping question.

The UK facility that you talked about, is that $5 million?

Do I have that right?

Yes.

For phase 1.

Phase 1 and actually we bought the land to expand it and double it.

Okay, and how much do you have in there already?

How many boxes?

Yeah approximately.

It opened in July

Yeah I don't know -- going to be a wild guess.

But a few 100,000.

Okay.

So the 1.2, which you are going to pick-up and move really is the first phase of really using that facility.

Yeah.

That does not affect...

And we have got some large customers moving into it right now and of course there's growth there.

It's our major growth not only, but a major growth facility around London.

But do I know -- are you picking up on moving from other existing Iron Mountain facilities?

No, from the company we bought.

Great.

Okay.

Thanks.

Yeah.

I want to offer the answer to the previous question.

Am I live?

Yes.

The components of other current assets is largely pre-paids, for insurance and some you know rental agreements.

There are deferred taxes, that's a considerable number, as well.

Those are the primary components of that $65 million.

With respect to non-current assets, we have customer acquisition costs there, about $39 million.

And that's where we put customer-relationships when we buy, you know, boxes that we are moving.

That's a small number.

There is conveyance not to compete.

That are, you know, left over from our acquisition activities that fall into that number as well.

Can we go the next caller please?

Question.

We take our next question from Arnold Ursaner, CJS Securities.

Richard I have to say the fact that you speak slow, you double the lengths of the calls.

Well, people ask for slow.

They can have slow; they can have short; but they can't have both.

Okay.

I just want to follow up on one item.

It sounds like you -- you know very clearly going to reinvest your margin back in the business, I have known you a long time.

You always do what you think is right for shareholders and for growing the business.

But I want to be clear on one thing, you have talked in the past about a 30% EBITDA margin as a goal.

Absolutely, and that we are not wavering a bit from that.

We are going to invest some of this margin back in the business and still hit our targets.

Okay you've added a five-year goal I think back to your last road show when you did a public offering.

I am just trying to clarify will this slow down the ability to attain that goal?

We have said -- We have said pretty consistently for last two years by '06 and that number isn't going to move.

Okay.

Thank you.

Thank you again very much.

I hope you have something left to say on analyst day.

It's been a long call.

Sorry for the length.

And is that the last one?

Once again, if you would like to ask a question, please press your "*" key followed by the digit "1".

If there is no -- I will tell you I am going to take the prerogative and end the call, so people aren't bored.

A couple of concluding remarks though, this was a strong quarter for margins and revenue growth is performing as we have been predicting and we are pretty pleased with how the business is running.

We are also fortunate particularly in this economic climate to be in a business, which has a high rate of recurring revenue, predictable cash flow, and increasingly more free cash flow.

Additionally the market climate offers us more opportunities than we can handle, but we believed that we are focused on the right ones, and we are working hard to implement them effectively.

I am going to end with a little story partly knowing that we got some employees and I am trying to get this message out listening.

But I think, maybe some of you will find either amusing or interesting or a waste of time, but whatever.

As we were growing the business and doing acquisitions, as I tried to speak to employees and give them a sense of the strategy and give them some context on how to think about what we were doing, I used to describe the acquisition phase as a sprint, and what I would say is that it is a sprint, you can see the finish line, you run hard or you fall over, but, you know, you just run.

And then as we came off the acquisition phase, I got up in front of all of our employees many times and said, "Hey, we are in a marathon and the marathons are different, you have to pace yourself, it's no longer-- you can't even see the finish line when you start, you have to do it right the first time because during the sprint you just run, and you have to fix and re-fix.

And in the marathon, we want to invest and do it right the first time and build solid business and so forth.

But as of recently and because of the market fluctuations, I have had to change my tune, and I have realized that I was looking at it wrong and so the truth of matter is Iron Mountain has been running a Triathlon, and what I thought was a sprint, wasn't a sprint at all.

We were just doing the first leg in swimming and if we didn't get it to the end, we would have drowned.

But we got there.

We got on the beach and instead of running the marathon, we got on a bike, we rode up the hill and back down the hill.

So we had our rest.

So now we are going in for the marathon except unfortunately it may be 26 miles long, but it's a sprint.

So we're strapping on our sneakers because the market is coming at us and we are going for it.

So that's the way I have used to explain employees why I have changed my tune internally, and why we all have to go back to running hard and real hard, and that's what we are going to do.

Thank you for your support and thank you for your time.

I am sorry for so long, maybe in time I will go back to my normal pace of speech or just cut back to swift.

So have a good day, bye-bye.

That concludes today's conference call.

Thank you for your participation.

You may now disconnect.