鐵山公司 (IRM) 2002 Q4 法說會逐字稿

Good day ladies and gentlemen and thank you for joining your Iron Mountain fourth quarter earnings conference call. My name is

and I'll be your coordinator today.

At this time, you are all in listen-only mode. There will be a question-and-answer session to follow your presentation. And you will receive instructions on how to ask questions at that time.

If at any time during the call you require assistance, please key star-zero and an operator will be happy to assist you.

As a reminder, this conference call is being recorded for replay purposes.

And at this time I would like to turn the program over to your host for today's call, the CEO of Iron Mountain, Mr. Richard Reese. Mr. Reese, please proceed.

Thank you. Good morning everybody, and thank you for joining us this morning.

Today's call is not only for fourth quarter last year, but also we're going to talk about the year in total. And so we'll change the format only slightly from what we've done in the past. Most specifically I'm going to dispense with the commercial that I usually run, so that we can not chew up too much time.

I will remind you that if you go to www.ironmountain.com you'll find the slides under the Investor Relations tab. If you want to follow on, particularly the comments that John will be making after I make a few comments of us.

As you know, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for the first quarter and full year of 2003 financial performance. All forward-looking statements are subject to risks and uncertainties, please refer to today's press release or slide number one of today's presentation, which is available on our Web site, for a discussion of the major factors and risks that could cause actual results to differ from the forward-looking statements.

Before John gets into lots of detail on the year and the quarter, I thought I would do a little bit of review with our major business units for the year and give you a little sense of what we think about them, and talk a little bit about where they're going and so forth.

So why don't I run through that. As a total company, 2002 was a great year. The business performed as we planned, and we've been saying all along, each quarter, as you know, revenues were up 11 percent for the year and the quarter and internal growth for the year at 9.5 percent, sort of the middle of the range we'd expected.

Adjusted EBITDA was up over 20 percent and that's just as EBITDA margins expanded impressively and we're 27.6 percent overall and 28.2 percent excluding our investments and our digital services. This represents a 210 and 230 basis point increase over 2001 levels respectively. We're clearly seeing the return of our acquisition integration and other investments and infrastructure that we've been talking about for a long time and we invested the money and we're seeing the payback.

We generated and I think this is key in 2002, for the first time, we generated $57 million of free cash flow for four acquisitions and financing activities, and an $8 million even after funding our acquisitions last year. It's clearly an inflection point for the company, and as we said at our analyst day, we expect to continue generating increasingly larger amounts of free cash flow in the future, barring, of course, any significant events in terms of acquisitions or otherwise.

BUT you know, it's nice to see the company is doing exactly what we've been saying for some years. I think we're through the capital consumption phase of the business, as now, getting more and more positive free cash flow as we go forward.

Now, talking about each of our business units, frankly all of them operated as we projected, which is good news during the year of 2002l. Our North American box business, or what we call IMREM, Iron Mountain Records Management. The business had a good year. The growth held up reasonably well in a difficult environment. Our

or that is unit growth from existing customers appears to have stabilized in storage and internal growth rate increased modestly in the fourth quarter.

We expect continued improvement in growth in this business. By this we've said many times it's the large fly wheel and is a fly wheel, as you know, like a large battle ship, you don't turn it fast, so nothing will happen quickly, but we believe we've hit the bottom in the

trend and we believe it's stabilized and so forth.

Our sales force was rebuilt last year and is starting to mature. For the year they hit 91 percent of quota. The good news is is this, on top of that is that the large backlog, we talked about it at analyst day in November, that it continues to grow of sign business, yet to be moved in, what we call roll, that is business that was signed in '02 that is yet to be realized in '03. In fact, today in that business unit is nearly 25 percent of the quota for the entire sales force for the year.

And that backlog exists because it takes a lot of time for customers to assemble their records and get them ready for our copying and frankly for us to move them in. So we will see this and that will contribute to our, what we think is increasing positive trend in that business this year.

The integration of our major merger with

in 2000 is completed, as we said before. We completed it mid-year in terms of system conversions. Our team did a great job by completing it in about six months early and they did it for less money than we projected. And that's one of, but not the only reasons that your margins have been improvement significantly and we will think we will continue on a nice margin path through the next few years.

We've also been streamlining our administrative processes and other things and that's helped improve our operations and our margins and one of the things we did is improved our collections, our accounts receivables by consolidating and centralizing them to a common technology platform and to a professional staff, and that's also helped our strong free cash flow for the year 2002.

Our off-site data protection business had a very strong year in 2002, which frankly they're unlikely to repeat. We are seeing some tightness in tech spending and is ultimately being felt even in the backup disaster recovery arena, as everybody's scrubbing everything that they're trying to do.

Whereas the off-site data protection business was considerably higher, their long-term trend line and growth rate last year, the wind was at their back, some related to the 9-11 events and so forth. They were a couple hundred basis points over their long-term trend in '02. We project in '03 that they'll fall back, you know, to trend very, give or take a little bit.

We're excited in that business about some new product offerings, particularly in the electronic vaulting services. They are beginning to take hold. The opportunity's real. We think that that will help us continue driving growth in that business in time. And in fact, last year, '02 was the beta marketing year for our services, which we call live-vault. And that was a service, if you remember aimed at network or NT servers that allows us to back up data in a real-time fashion, online through the Internet.

We had success in that and we are really changing our approach and frankly increasing our

. They are natural extensions to our traditional services. We have seen that this clear market interest and acceptance and it really represents nice incremental revenue growth for us.

In fact not only are we increasing our focus of that and we're doing it in a variety of ways, we've expanded through our technology partner live vault to add to product line related to Unix servers, so expanding beyond the NT world, and we've added additional services in the electronic vaulting space by partnering with a company by the name of

and we will use their technology for the backup and recovery of laptops and PC desktops, using the Internet. And this is a market that we've not tapped before, but it's the same traditional corporate market, but it's a technology and a pool of data that we've really, totally haven't dressed in the past. And we're pretty excited about what we see the opportunities there. In fact we're adding some significant number of new sales specialist and system engineers in that business unit to help our sales force drive the revenue as this really turns mainstream as part of their product kit of the

sales force.

In addition to the good year at

and revenue side, their operational people did a great job on margin, and they had significant margin expansion in '02, which contributed to whole business margin expansion substantially.

Our European businesses, we're pleased with where they're, where they were in '02, and also where they're heading. It's good evidence of a strong turnaround in UK and Europe. As you know we had to do a lot of work over the last couple of years investing and really cleaning up the business, getting the systems integrated and getting them to operate to our standards, both of service and of management, and we've got a strong team over there, that's doing a good job. We see continuing growth in the mid to high teens in revenue and margins, up another four to 500 basis points.

We believe the margins can reach and be sustainable up into the mid 20's or better, and growth rates can be maintained in these levels for the foreseeable future.

In addition to all that hard work, we expanded our platform some in Europe last year, and particular, strategically we found the entry point to France. We had a very nice

business in France for a few years and now we also have a nice paper or records management business in France. So a relatively small, but I think a good platform we can work from in French markets. And the French market is the second largest market in Europe behind the UK.

Additionally, we re-engineered for the future, our cost structure, particularly for our London business by adding a new facility that has expansion capabilities that will allow us to double our London-based business at substantially lower costs to you. And on the way by, to make that even better, we were able to acquire a very large tuck-in acquisition, that requires us, we are in the process now of moving out of facilities, the company that sold it, wanted to reuse their real estate and we're moving about a million cartons into this, mostly into this new building, which allows us to absorb some of the capacity and frankly anchor this very large facility that we built there.

In Latin America, we will like the businesses there. They're doing fine operationally. They're doing a great job, as you know, the, some of the operating environment, sort of depends upon the country, but in general, particularly Argentina, they're difficult there, but they had good growth on a local basis, which didn't translate, unfortunately, into U.S. dollar growth, because of negative effects fluctuations.

Mexico, it continues to grow well. In Latin America, we did a little more acquisition work. We expanded in Lima, Peru, to be the largest operator there. Got a nice business, but we really remain cautious in terms of additional acquisitions of that area of the world, and so we see more clarity about where their markets and currencies are going to go and so forth. On the other side, it's pretty interesting opportunities that become available. So we'll wait one against the other there.

Our last business,

, which is our sort of initial fulfillment business that deals with, primarily with marketing departments and some with employee benefit operations of insurance companies and so forth, and what we call literature product fulfillment. This business saw a significant reduction in demand for their services from their primarily significant part of their business is high-tech based, particularly in Northern California and as you all know, what those companies are undergoing, they just did not ship a lot of literature and do a lot of things as they were cutting back and so forth.

But the team did a good job and in fact, as they saw demand, weak demand from the existing customer base, the team actually sold though it and in terms of new customers to come up with flat revenue, a basically flat revenue and did a great job of holding their margins in line.

And frankly the outlook for this business, and strong growth as the economy hopefully rebounds, so we are seeing signs, certainly stronger customer interest and new customers, are attracted to us, because of the quality of services this operation provides. So we look for this to rebound pretty well as the economy comes back.

Now last in terms of reviewing our service lines and our businesses, and our new additional services, last year, just as it was in our other side of our additional services, our electronic vaulting, our digital archive business within the incubation stage and looking to make sure there was market demand there to prove or not whether our investment was going to make sense. And although, the whole world is not clear, and the world is not without uncertainty, we believe and we're very comfortable that we were able to prove that demand was there and did we have a product that's a significant number of customers are going to want and in fact it's becoming extremely important part of the dialogue that our largest customers are, we're trying to deal with issues related to electronic records, particularly e-mail these statements and so forth.

So we did learn what we hope to learn and did it in the time frame we expected and for the basically the money we expected. So now we're into the next phase of the business, and we have to come out of incubation and try to take it prime, time live. And that's what '03 is about.

So we are, this year, integrating those services into our mainstream businesses, both operationally and in terms of our sales channels. On the operational side, we have opened the new underground data center that we've spoke about a few times. And in fact you'll see a little a spike in our digital cap ex in Q1 of '03, as we finished outfitting it and in fact, we're pumping data through there as we speak today.

It's a great place and a great market place differentiator. It's a great host for our, not only for some of our mountains applications, it also serves as a backup site, a redundant site for some of our applications, as well as a site for our digital services.

So we've got that pretty much behind us and now it's a matter of filling it up and continuing growing the business.

As part of this, we made some changes in our sales recovery strategy, which we announced to our organization about a month ago, and had a kick-off in Orlando. We had about 1200 people in Orlando about two weeks ago. There was an enormous amount of energy in the meeting and in fact, it was probably just you know, energy doesn't always translate, but I've never seen a group so excited and the good news is they were excited when they came into Orlando. And the better news is they were twice as excited when they left, when they really got to see some of the new things and new products that we've unfolded in front of them.

As part of what we're doing is we are adding another organizational piece to our business or enterprise, selling resources and these enterprise selling of resources will be there to focus on a growing number of the very largest customers to deal with our services across all business units, and it's the ultimate ability to cross sell, which we've been working on for a long time at different levels.

But what we've done is we have created a market coverage strategy by market segmentation and gone in to segment all our markets and customers and got very specific strategies of how we sell to them and what we sell. And we've done it, not just at the enterprise account level, but we've done it all up and down all segments of the customers, which we think will make us even more effective. This is an evolving strategy. It's nothing, we're not doing anything radical to try to upset the sales force. In fact what' we're trying to do is offer more opportunity to the existing people and so forth.

We will spend, between this and what we're doing in the electronic vaulting services, we will spend an additional seven, $8 in '03 as we put this organization and these resources in place to try to do this.

And in fact, the other thing is, is starting in '03 and Q1 of our next time we talk to you in the first quarter of '03, we will no longer report our digital business results separately from our core fiscal businesses, because as we've taken these services into our mainstream operation, it's just impossible to be precise about the exacting costing when we're starting to use cross distribution sales channels and when sales people are carrying multiple products and so forth. Although it's a little easier, but we don't think it's worth the brainwork to do all the details between operations when we have one data center operation staff running internal as well as external applications and so forth.

And John will discuss in more detail with you sort of what this means and you know how we're going to portray the business going forward.

And, as I've said earlier in '03, dealing with these, you'll see it reflected in our guidance and so forth as we're choosing this year in '03 to invest what would have otherwise been expected margining expansion that we could and expect to achieve in this year. Therefore, we're not forecast meaningful margin expansion for this year as we have done in the last couple years, but we're really trying to invest it in a higher growth, to set ourselves for higher growth up in '04, and hopefully this will come to pass and this investment will pay and be worth it.

So, in all the businesses have done exactly as we've said, that's the beauty of our business, they don't move around too much, and also in a little modest, it's also the strength of the management team and the people involved and our employees, they've done a great job in '02 and I think we're all pretty excited looking forward to what '03 brings for them.

Now with that, let me pass it to John, who's got an enormous amount of detail and data and information, I have a couple other comments at the end, and then we'll take your questions.

Thank you. I would really urge those listening if possible to try to access the sixteen slides that we've posted on our website because my ability to describe them fully and

my remarks, would take too much time... So I apologize to those who don't have access to them in the interests of getting to Q&A, I'm going to move at a reasonably brisk pace.

Slide 2 is my agenda this morning. As you can probably discern from our press release, we have a lot of good results to discuss, and also a lot of some more complicated things to discuss. I will begin with my standard review of our financial results, and then next I will spend some time talking about our free cash flow for the year, our capital spending, and our current debt situation. I will then present the changes we will be making to our standard reporting package, as we move into 2003 and then finally, I'll finish with a review of our 2003 guidance, and the effect of the reporting changes on the guidance we provided at Investor Day last November.

Let's get into it. Slide 3 is a comparison of revenue and adjusted EBITDA for 2002 versus 2001. Total revenue for 2002 was 1,319 million dollars, an increase of eleven percent over 2001. The revenue amounts for both years include the offsite data protection product cost reclassification. In order to provide a more appropriate presentation of our offsite data products sales, which had previously been presented net of cost, the company decided to reclass the cost of these sales from revenue to cost of sales.

For those who wish to update their models, a summary of the quarterly reclassifications for the last eight quarters, 2001 and 2002, can be seen at slide number 15. However, let me remind you that this reclassification has no impact on absolute dollars of gross margin, operating income, EBITDA, adjusted EBITDA, earnings or cash flow.

Adjusted EBITDA before digital expenses for the year was 372 million dollars, an increase of 21 percent over 2001. Our adjusted EBITDA margin before our expenses in digital initiatives, expanded by 230 basis points to 28.2 percent of revenues, primarily due to 140 basis point improvement in gross margin, and continued overhead leverage.

Slide 4 is our fourth quarter version of the previous slide, it shows a very similar dynamic, and as we look to the full year, revenues increased 11 percent and margins expanded significantly. Slide 5 details internal growth, and internal growth for the year came in at 9.5 percent, right in the middle of the range of 8 percent to 11 percent that we had provided as guidance throughout 2002.

Also, as we had predicted, the gross rates for the second half, at 10 percent, was higher than that for the first half, which came in at 9 percent. Let me remind you that the third and fourth quarters need to be looked at together to compensate for the uneven pattern of revenue arising from the events in the fall of 2001. Notice, please, that service revenue growth, at 11 percent for the year, exceeds storage revenue growth of 8.5 percent. We expect this trend to persist as we continue to expand and successfully sell both storage-related and complimentary services.

You may notice a minor downtick in the quarter's internal growth rate of storage. As Richard discussed, the North American records business unit,

, as we call it, continues to see modest acceleration in storage growth, while the years highflyers, Data Protection International, saw storage growth rates abate a bit in the quarter.

Lastly, the results of the last eight quarter incorporate the effects of the reclass of data products expense, which does not have a material impact on these results.

Let's move to Slide 6. This is a more detailed comparison of some of the major

line items for 2002, versus 2001. Please note that for the purpose of this slide, we are comparing reported results without any adjustment for revenues and expenses associated with our digital services development efforts.

Gross margins expanded by more than 140 basis points for the year, versus 2001, primarily due to improved facility costs, transportation efficiencies and better labor management. These gains were partially offset by increases in our property casualty and health care insurance costs.

Moving down the income statement, SG&A expenses as a percent of revenue decreased by approximately 70 basis points from last year's levels. The decrease was primarily due to the leverage of overhead and improved telecom costs, which more than offset an increased investment in sales, marketing and IT.

The growth of depreciation expense was higher than all other expense items due to elevated levels of capital spending over the last three years, especially in IT assets and in our digital initiative to have shorter lives. We take a very conservative stance with regard 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. The return on these investments is becoming clear in the form of higher margins.

And again, let me reiterate that our digital initiative has caused depreciation to rise faster than other line items. Depreciation arising from assets in our digital business added about 400 basis points to the year over year growth in this line item.

Reported amortization changed meaningfully due to the adoption of the new regulations regarding treatment of intangible assets. Lastly, interest expense is relatively slack the last year. Over the last year and a half, we've engineered a number of refinancing events in which we were able to meaningfully extend debt maturities while reducing our weighted average interest rate by more than a hundred basis points.

Also, as expected, our business has turned free cash flow positive, so net debt levels are down slightly from the beginning of the year, before giving effect to the synthetic leases we recently brought on to our balance sheet. I will speak more about this point later in my presentation.

Moving to Slide 7, Slide 7 again is just the quarterly version of Slide 6, and it depicts a very similar dynamic at work across the board in the fourth quarter as the one that appeared for the full year.

Slide 8 shows the various components of other income expense. There's a lot going on here and we've been asked by people to provide this level of detail, we're happy to do it. As you can see, there have been some large fluctuations in these line items, particularly with respect to foreign currencies. I remind people that we have intercompany loans and some public debt in other countries denominated in different currencies, and we have to mark those to markets each quarter.

This year we had an FX gain of five million dollars as compared to an FX loss of ten million dollars last year. I will remind you that these are all non-cash, this is a non-cash item, but that's a big swing of fifteen million dollars. Our definition of adjusted EBITDA excluded all these other income or expense items, as they are either non-cash or non-recurring.

Slide 9 provides net income and per share data for Q4 and the full year 2002. For 2002 we reported income from continuing operations before extraordinary items of 67 million dollars, or 78 cents per share on a diluted basis. And this is compared to a net loss before extraordinary items of 32.2 million, or 39 cents per share in 2001.

This improvement is attributable to revenue growth, increased margins and a change in accounting rules relating to goodwill and other intangible assets. As a result of these new rules, we stopped amortizing goodwill effective January 1, 2002. Included in our 2001 results is 59.2 million dollars of good will amortization that would not have been recorded had these rules been effected January 1 of 2001.

Getting us back to the change in accounting rules and the resulting income tax

, net income before extraordinary items for 2001 would have been 15 million dollars, or 18 cents per share on a diluted basis.

You'll notice that we take a charge in this quarter of 2.7 million dollars for debt extinguishment costs. This relates to refinancing we did where we issued high-yield bonds at a lower rate and retired older high-yield bonds, saving us a lot of interest. These were treated in 2002, as you can see, as an extraordinary item. In 2003, the rules for recording these items changed, so our Q1 results will include another expense item of about two million dollars related to this very same financing. We tended for these bonds, 60 percent of them came in in 2002 and have the treatment you see in Slide 9, and the rest, which will give rise to a charge of two million, came in at the end of the year.

Also, you can see in the quarter a one million dollar gain from discontinued operations. This relates to the final settle-up on the sale of the

Staffing business unit that we sold three years ago.

Let's move on to Slide 10, and here we organize our presentation of capital spending into two major categories, capital use to drive the internal growth of the business, and then more discretionary expenditures we've made in the areas of real estate and in our digital initiatives.

Capital spending for 2002 was 181 million dollars for our core businesses and

million dollars for our digital initiatives. So their cap ex spending for the year came in at lower end of our forecasted range for our core businesses of 175-200 million.

We anticipate that 2003 cap ex will be in the same range as 2002. That is, 175-200 million for our core businesses and at least 15 million dollars for digital. The forecasted digital spend is based on our forecasted revenue plan and may increase as opportunities arise and revenue comes in.

As we have projected in the past, our long-term view continues to be for total cap ex to flatten and remain in the same absolute dollar range over the next 2-3 years as the business continues to grow. This has obvious and important implications for accelerating levels of free cash flow going forward.

Moving on to Slide 11, Slide 11 is the summary of debt capitalization table as of the end of 2001 and 2002. Our total net

outstanding at year-end 2002 stood at 1,676 million dollars, which includes 203 million dollars associated with our three synthetic lease facilities. As you know, we voluntarily consolidated our two remaining synthetic lease facilities onto our balance sheet at December 31. These facilities will appear in our financial statement disclosures as real estate term loans.

Also at year-end, we had a total of 75 million dollars drawn under our 400 million dollar revolver, and we had a cash balance of about 56 million. I'll remind you that approximately 85 percent of our debt is fixed with respect to interest rates, and also that our current bond leverage, which is total debt divided by EBITDA, is 4.8.

This ratio is down forty basis points from the beginning of the year, and even that year end number is somewhat inflated because not all of our notes for which we've tendered had come in by the end of the year. We are very comfortable operating in our target leverage range of 4.5 to 5.5 times EBITDA. This business will naturally delever each year in the absence of extraordinary investment activity and 2002 clearly shows that.

Perhaps most importantly, net debt is down from the beginning of the year before giving effect to the synthetic lease facilities that are now on our balance sheet. Bare in mind that we have financed internal growth of 11 percent, invested 24 million in our digital initiatives, purchased 22 million dollars of real property and conveyed 49 million dollars in aggregate acquisition consideration this year, and we did not increase on net debt.

Speaking of free cash flow, let's move to Slide 12. Slide 12 looks at free cash flow for the year 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 and margin expansion. Another important factor driving the increase in cash flow from operations is the benefit we received from our newly centralized collection activities. We were able to reduce our account-receivables day sales outstanding by about five days last year. So we had positive working capital events.

At the same time, investments in capital spending and customer acquisition costs are slightly down from last year's levels. The bottom line is that for the year, Iron Mountain has generated 57 million of free cash flow before acquisitions and as I stated earlier, we were able to fund our acquisitions program with cash flow from operations in 2002.

So, whereas we turned cash flow positive before acquisitions in 2002, we expect to remain free cash flow positive before acquisitions from this point on. We continue to believe that the business will generate increasingly higher levels of free cash flow going forward. However, I caution you not to extrapolate significant increases in 2002 cash flow, they include some one-time working capital improvements about which I spoke earlier.

In addition to a flat cap ex outlook for the next 2-3 years, the fuller dynamics of the other major drivers of cash flow are as follows: EBITDA should grow over 10 percent per year, adding 35-50 million dollars per year in cash flow. Interest expense should trend flat to down over that timeframe. Cash taxes will stay at very low levels as we work through our net operating loss carry-forward of over $250 million. In fact, in 2002, cash taxes were less than $5 million. We are clearly not reliant on the capital markets to pursue our business strategies. Regarding acquisitions, we have closed seven deals since the end of Q3 of 2002. Total consideration was approximately 36 million.

Let's move on to slide 13. We want to discuss changes we'll be making in our financial discussions and forecasts. First, we will be reporting our results on a consolidated basis without excluding the revenues and expenses associated with our digital services initiative as we have in the past. As Richard mentioned, this business is becoming increasingly intertwined with out other lines of businesses, both from a selling and operating perspective. The near term impact of this decision will be to raise internal growth rates modestly into depressed margins by about 50 to 100 basis points, given that the digital business is not yet break-even.

We will no longer discuss adjusted EBITDA in our disclosures. Adjusted EBITDA contains recurring adjustments which will no longer be permitted under new SEC regulations. Rather, we will speak to both EBITDA and operating income. Adjusted EBITDA was consistently defined to exclude certain merger related and non-cash or non-recurring events. We thought this was a helpful measure to give stakeholders a more clear view of our underlying business progress and it was also designed to closely parallel the definition used in our public bond instruments for calculating leverage ratios. Some of the non-cash items that were excluded, like foreign exchange gains and losses, will be recurring. Now having said that, the merger related items that had been excluded under our definition are no longer relevant given that all our major integration work is behind us. We will discuss and forecast operating income, which is essentially EBIT, as it is immune from the potential volatility of other income items. Further, by adding back depreciation and amortization to operating income, one can get back to a form of EBITDA that closely parallels our traditional adjusted EBITDA.

So let's move on to slide 14. As you can see, we are revising our guidance to include our digital business estimates and the effect of the new data product sales expense re-class. What that means is roughly 18 to 20 million of the increased--of the increase relates to exchange in data product sales accounting. Also we are updating for the impact of a few small acquisitions that closed since our last guidance at Investor's Day in late November. Generally, our view of our expected performance in 2003 has not changed. We have raised the lower end of our EBITDA guidance due to strong margin trends that have persisted through year-end. Likewise, we have raised the lower end of our internal growth guidance to a range of 9 to 11 percent to reflect the expected contribution from our digital services. As in 2002, we expect our internal growth rates will increase over the course of the year as sales momentum in our

division is realized and as interest in our digital services translates into online customers and reported revenues. With respect to EBITDA versus adjusted EBITDA, the only difference is the $5 million of minority interest that is forecasted in EBITDA for 2003.

I'm going to close now but I'll remind you that the next slide, slide 15, is an aid in adjusting your models for the quarterly impact of the data products cost reclassification in 2001, 2002. Thank you all. I'll turn it over to Richard now.

Thank you, John. And before we take your questions, just a couple of other brief comments. 2002 was the year where we saw a lot of things external in the business and particularly in the environment of regulation and corporate governance. Sarbanes-Oxley and other related and similar kind of regulations have actually increased the focus among our customers on records information management services and we think this is very good for our business long-term and we are certainly seeing the activity levels and the levels of interest and the levels of dialog change substantially. On the other hand, we ourselves have to make certain that we are paying attention to these issues and we believe we have all along, but I want to give you a couple of comments on our posture.

We have operated for a long period of time, even before a public company, with a strong audit committee. It's now a committee that has been meeting for the last few years for at least eight times a year and paying a lot of attention and making sure that we and other parts of management pay attention to the issues of good reporting, as well as the fundamentals of our business. A particularly important issue; build through acquisitions to make sure that you don't get yourself in trouble. And they've done great work for us and we expect they'll continue putting a lot of time in. And we actually appreciate, you know, finding directors who will put in that kind of energy and who've got the intelligence and the ability to do it is not easy and we have found some; hope we can keep them doing that work for some time. We also have established a governance and nominating committee of the board last fall which will address some of our board openings. It's not something we are in a hurry to do, but we are going to do it in due course and so forth.

And then last is we as a company are considering our approach to expensing stock options and will announce in the next couple of months in our Q1 earnings call exactly how we think about this issue and plan to deal with it. We've always prided ourselves on our detail and insightful disclosure. Although some of our calls get rather long, we believe that you would prefer to have the details rather than have it quick. In business this complicated and turning into sound bite is not always easy. But we urge those of you that are new to our story to review our Investor Day slides on our Web site; there's 173 of them. We think you'll find them pretty--reflective and pretty deep in terms of analysis on the business and plan, of course, to attend our next Investor Day this coming November. We don't expect this business to change from here except for just to continue. We believe it's more likely we have positive trends than negative trends all in all in business and, as I said earlier, we in the organization are pretty excited about what's going on in the business.

So with that, why don't we stop and take your questions and then we'll come back and wrap up and get off.

Thank you, sir. Ladies and gentlemen, if you wish to ask a question at this time, you may do so by keying star, 1, on your touchtone telephone. If your question has been answered or you wish to withdraw it, please key star, 2. Questions will be taken in the order received. Please key star, 1, to begin.

And your first question, sir, comes from

from Bear Stearns.

Good morning. Hi, there. Just a couple of very quick questions, if I may. You know, based on your guidance in terms of cash flow for the year, you know it looks like, you know, you could end up with something like, you know,

80 million in free-cash flow. When does the actual debate as to buying back stock or paying debt--paying down debt become really meaningful?

Second question just from a housekeeping perspective, in terms of the synthetic leases, these synthetic loans you have on the balance sheet right now or real estate loans, have you actually decided in terms of what permanent financing, is this exactly permanent financing? Can you give us a sense as to what that looks and how that debate is going?

And lastly, you know, with the security issue becoming a lot more real over the past two or three months or so, especially in everyday life, could you just give us a sense of, you know, tangible examples as to how I would imagine this is beginning to benefit your business in quite a real way. Thank you.

, in the first part of your three-part question, what was the number you cited as your expectation for free-cash flow?

I'm sorry, I didn't catch that?

I didn't hear what number...

It worked out--it worked out--I mean, if you took the high end of your guidance, you know, with the low end of cap ex and interest expense, about 80 million or so.

Before acquisitions?

Precisely.

For 2003?

Yes.

That's a low number. Did you say 18 or 80?

80.

That's a high number.

OK. OK, great.

We would put the number somewhere in the $40 to $80 million range. Pretty much in line with this year without the benefit of the working capital...

Perfect.

. We're in--no intention to stonewall whatsoever, but we're still focused on making the free-cash flow and not so much with what we're going to do with it. We have a set of opportunities to invest that we think will largely consume it, as was the case in 2002 where our acquisition spending and digital spending consumed it. So keep asking, we'll keep thinking about it. We're not opposed to the question, we just don't know.

OK.

On synthetic lease, permanent financing, synthetic lease financing right now represents variable rate money, some of which has been fixed out, with remaining tenor of anywhere from two to five years. And to us it's entirely fundable with other senior shorter term variable rate credit. So as those credit arrangements related to those real estate term loans mature, we'll either take them out with high yield financing or tap our senior credit lines based on our view of the appropriate capital structure at the time.

This is Richard. Your other question was what are we seeing related to the security environment and what it does to business, and the answer is--although there's a few anecdotes I could tell, but if I did, I'd have to shoot you--other than that, we don't really see--we don't really see the increased security driving our business. The trends that are driving our business is the increased exposure in regulations such as Sarbanes-Oxley, HIPAA,

Act and the Patriot Act and so forth, all of which are really focusing on information from all kinds of different angles and basically are creating more liability for companies to manage information, to have it available, and greater penalties, including jail time, for executives for, you know, premature destruction and so forth. And what that translates to is the companies are paying a whole lot more attention to how they manage, what they manage, what they keep and what they destroy and who does it, and that it is done in a consistent and reliable way.

Well, to do that you have to, for a major company who has multiple geographies, you want to do it the same way in all geographies, which is the strength of Iron Mountain, you want to do it in a systematic way, which is the strength of Iron Mountain because we have technology to control the process, and you want to do it in a correct way, which is the strength of Iron Mountain because we have the consulting and the other knowledge bases to help you build such a program. And in that arena we are seeing significant interest, both in terms of existing customers who are now have the impetus to increase their business with us, that is to give us the business not just in the three or four cities we may currently deal with them, but to add all their other geographies and so forth, as well as seeing customers use our technology more deeply. And we will continue to see those patterns and those patterns are going to be very good for all of our businesses over time.

Great. Thanks very much. Congratulations on the quarter.

Thank you.

And your next question, sir, comes from Harry Blount of Lehman Brothers.

Hi, guys.

Hi, Harry.

Harry.

How're you doing? A couple of different questions, one of which is related to a comment Richard made on the HIPAA side of the equation. Those regulations were just finalized, I believe, last week or earlier this week. Any thought on that? And then on the financial side, a couple of housekeeping things, John, just want to clarify, is the--it looks like synthetic lease went up about $10 million in the quarter. Was that included in the cap ex or is that exclusive?

Yes, there was three synthetic lease--we had three synthetic lease facilities, the last of which we called synthetic lease 3; it is the one that came on our books in the end of the third quarter. It had not been fully utilized, so it had $10 million left and a single transaction after the end of the third quarter completed it. That expenditure is not reflected in cap ex.

OK. And then going forward in terms of the guidance that you guys are giving for cap ex, does that includes these contemplated, you know, additional real estate term loans

?

Yes, our go forward cap ex assumptions are inclusive of any activities we need in terms of securing real estate to continue to fuel, you know, to support the growth of our business.

OK. And then two other quick financial questions before I let Richard answer on the HIPAA side is, any impact from currency and how much of the change in working capital is probably related to acquisitions?

While they're thinking, I'll answer your other question.

Uh-uh...

OK.

... cash flow statement, our changes in working capital that runs the cash are exclusive of acquisitions. Acquisitions are shown as--entirely as investing activity.

OK, so as I look at the 3Q to 4Q change in working capital, those are all based on internal numbers?

Right. But if you go balance sheet to balance sheet, you're not going to get to the same answer as in our cash flow statement because we have to go through the agony of extracting all the working capital that arises from those acquisition transactions.

Got it. OK.

And Harry, your question about HIPAA, I don't want to sound like a broken record, but it sort of fits in my earlier answer, it--what it's done is it's causing customers to be more precise about management of data and as I said, more precise about who sees it, who touches it, who controls it. And, you know, that plays specifically to our strengths of having more systematic control and more geography and more knowledge base to help manage it.

Great. Oh, and the currency question?

The currency question? What was--maybe better repeat it.

Just was curious as to--if there was any impact on the European numbers or currency.

The currency, other than marking inter-company debt to market which...

Right.

... non-cash, the exchange--the translation of our pound sterling-based European revenue on expenses obviously is adjusted based on the average exchange rate to the U.S. dollar in the quarter. I don't know what the pounds--how the pounds moved quarter to quarter to convert pounds sterling into dollars.

That's fine; we can circle back offline on that one.

Yes, we can get you fixed later.

Alright, thank you.

Actually got it, but in Q--the pound strength in the fourth quarter and the--due to the strengthening of the pound versus the dollar, which was about three percent, there was another million six in U.S. dollar denominated revenue than there would have otherwise been.

Great. Perfect. Thank you.

Recall, Harry, if you will please, that our internal growth rates adjust for foreign exchange so truly look through that--didn't get the benefit of that, if you will. Look through that to the actual local economic dynamics of the business.

Great. Thanks.

You're welcome.

Your next question, sir, comes from Patrick Thatcher of CIB World Market.

Hi, it's Thatcher Thompson.

Hi, Thatcher, how're you?

Good. Patrick Thatcher?

I've heard you called a lot of things, but not that one.

It's not a bad name. The storage growth in the fourth quarter of eight percent is probably the lowest we've seen--well, certainly the lowest of the four quarters of '02. Can you explain a little bit more about what's happening there? Was it a tough comp? And there seems to be a lot of backlogs signed in '02 and coming into '03. Tell us how that is expected to play out throughout the quarters of '03.

Yes, well, first and most importantly, in our minds at least, is that the North American box business storage revenue internal growth rate has moved up every quarter this year and it moved up in the fourth quarter. The growth rates in Europe and in our data protection business came in a bit in the fourth quarter and it's hard to analyze that with precision because what we're talking about here, a difference in 50 basis points in a single quarter for storage, internal growth is--amounts to $800 thousand.

OK. Fair enough. And then you raised revenue growth guidance nine to 11 percent to reflect the digital business. That implies the digital business, it'll do somewhere in the neighborhood of 14 million in incremental revenue in '03. You still loose or it'll cost you roughly 9 to 13 million on EBITDA line. One, you must have a lot of confidence in that business in order to include it in the overall business and the boost your revenue. Tell us what gives you the confidence. How that'll play out and where you have to be before that business start break even.

The confidence comes from, you know ---- our ---- where we have been in the marketplace and talking to customers and looking at pipeline and so forth and so on. And look, I'm being candid with you. The market is there. None of us have any doubt about it and you know, I think we feel now's the time to chase it a little bit. I don't know that we have an extremely high level confidence on the timing and so forth, so we're still kind of holding on to the money. We forecast it, we projected it, we budget it, but we're still holding it a little bit and want to see some of it come in. But the business is building and I think it is going keep building. The break even hitting about 50 million, give or take, in revenue, so we have got a ways, a couple years to get there.

But when we talk to customers throughout the market its real clear, the need is there. Your knowledge base is useful, our technology is useful and it's either, now all the investments we made is to be prepared for now. And now is sort of that you have got to roll the dice point, which is the most uncomfortable place to be in starting a venture like this. But I think it's where we are and its time to roll the dice a little bit. Having said that, we're not going to roll too big a dice nor throw them too hard or too far. We'll keep control of the money and make sure we turn this into a back hole. kenny: Is that your ---- by the way, as concerns the Matthew bid, which was pretty reasonable deductive logic, bear in mind that the 13 million of net negative EBITDA from digital carries the burden of some of this new enterprise selling initiative we have---- reese: Which is going to sell more than digital services.

OK. Got you. kenny: And what real happens, there is a heck of a lot of influenced revenue that goes into our physical businesses along with these sales and because all of that is difficult to parse, that's why we're reporting this consolidated.

Okay sounds good, thanks, guys. operator: Your next question, sir, comes from David Gold of Sidoti & Company. gold: Hi. Good afternoon. Richard, can you speak a little more on the enterprise sales team? It sounded like you ---- the thinking there is to invest this year, but you don't expect to really see any benefit through '04. Do you think that's probably a reasonable assumption for the sales process there or might we see something sooner? reese: Well I think, we hope we'll see something sooner because we're expecting some revenue out of the group. But it'll come more in the second half. You know, like everything, you got to build up and there is a long decision cycle. But I think '03 is the year to build it, to get it settled in, and generate some revenue and '04 is when we will hopefully be able to forecast it a little better and so forth.

But what we're doing is we are promoting some and hiring some to build a pretty high level sales team because when we talk to our customer, what they are telling us is they want one point of contact and they want to buy more things from us across the board, if we can deliver those in a more integrated fashion, which we can do. So, you know, it'll take a while to hire, train, close, get up and get the business on board but we are starting to spend some of the money to do it an we organize that as part of our digital team and integrate our digital selling team to it and so forth which is as John said is hard to parse out everything going forth. gold: And can you maybe give a sense for how much investment you think you might do there? reese: And on the selling, both on all of our things, as I said in my opening remarks, I think it's about 7 to 8 million dollars. That's actually going to be spent on this. gold: Okay. And then, John, on the reclassification of I guess, rent interest with bringing the off balance sheet kind of on balance, would it be fair to say about 3 and a half million dollars for the quarter? Is that about right? reese: Yes. gold: Okay. Fantastic, thank you. operator: Your next question, sir, comes from Carey Callaghan of Goldman Sachs. creedin: Hi, it's

, actually, in for Carey with just a couple quick questions. One is we were wondering if you could comment on whether there were any special projects or consulting work in the quarter that might have impacted the margins all and whether you expect to see that going forward in '03 and then second, if you could just remind us of what the sensitivity is on an EBITDA basis to the move in paper prices? I guess we're just thinking, you know, commodity prices being down in the paper market and whether that will have any impact in '03? reese: There were no extraordinary special projects in the fourth quarter either with respect to size or margin characteristics. With respect to paper prices, over the last 8 quarters you have seen paper price go from as high as 145 dollar as share down to a nadir of about 75 at the end of '01. And then actually back up over the course of '02 to their current levels, which is about 125 dollars a ton. Last year we saw an average price of about 90 bucks a ton. And so, prices are up in this market an particularly up for our grade of paper, which is high quality, clean office weight as opposed to cardboard.

Lastly, the long term average for paper of that quality is anywhere, it was 100, 110 dollars a ton, so a little bit above the long term average and every 10 bucks to us there means about a million and a half dollars incremental revenue and obviously pure EBITDA. creedin: Great. And John, was the creep at about 3% in the quarter? kenny: 3 and a half. creedin: Okay, great. Thank you. operator: And your next question, sir, comes from

of Robert Baird. burns: Yes hi, guys. I was wondering if you could talk a little bit with this new enterprise sales overlay what that means for the current reps and how you are going to work things like, for example, how are quotas going to work? Are you going to provide double compensation, if you will, for the new enterprise sales rep as well as the existing rep? Just talk through the mechanics of how you are going to roll out. reese: Well, first is for competitive reasons, I'm not to give you all the details of mechanics. But let it be said that we thought long and hard about it and there is a couple philosophies that are there that work. It's a career path enhancement for existing people, some of whom are already taking advantage of it. It is a team selling concept and everybody gets paid. I'm not necessarily saying double, but everybody gets paid, nobody gets cut out, and this is just the next step in the evolution of a more sophisticated approach to the business.

And we have tied that market segmentation strategy as we have gotten more sophisticated to make sure people have different core products and market segments that they own and so forth and so on. Basically we're adding more help to the sales force and our existing sales force will have more resources to help close business that's more complicated in a larger nature and so forth. burns: Okay. And then I guess the related question, the sales force going into 2003, has their quota structure or the magnitude of quotas changed appreciably? reese: To some people it's up, to some people it's not. It sort of varies all over the map and quite candidly, its part of getting this new business or this new group off the line although, they have got some substantial quotas as a group and as individuals since a lot of that revenue will wind up in existing core business units, this business units get what you might call free advantages. That's so everybody is incentivized to play well together and I think we all do that.

We have also done some other things going in; we started this in certain geographies in '02. But going into '03 in our market segments, we have actually combined our spreading selling operation and our shredding and our

recording management operation. That's already been done so this is an evolving strategy and we really get ourself focusing on the customer. Understanding how they want to buy and behave and make sure we're aligned to deal with that better and bring the power of the enterprise straight to your customer's office. burns: Right. And then picking up on a theme that's been throughout some of your comments as well as the questions. When I think about as customers are trying to grapple with things like Sarbannes-Oxley, et cetera, do you foresee a increase in the amount of consulting work you do or maybe even more moving up the value change the more outsourcing around recording management? reese: Absolutely. burns: And can you talk a little bit about what role you might play as you are moving up the value chain? reese: No. I don't mean that to be offensive. No, but this, for competitive reasons, no. Sorry. You heard me say we got things going on. We have already closed business in new arenas. We got a lot of interesting things going on. burns: And then two very quick questions. You mentioned that this was going to be 2 million dollars charges for

extinguishment. Did you say that was going in the first quarter or sometime in 2003? reese: That's in the first quarter. That's a free tax number and that's simply the dribble in of our bond redemption effort over the new year. burns: That's it then, thank you. operator: Your next question comes for Franco Turinelli of William Blair and Company. terinelli: Good morning. reese: Good morning. terinelli: Richard, the question is I think primarily for you, is there is still a lot of the partnering going on in the digital services side and it looks as though that partnering is still primarily to establish product capability. I was wondering if you saw in the near future the opportunity to actually get more sales lead or more revenue from some of these partnerings? reese: these kinds of partnerships are, if you go into these kinds of partnerships with a view that somebody else is going to sell for you, your going to fail. And that's not our view, nor is it the view of our partners. But what you're seeing is that we are getting deeper into the marketplace and then as a technology marketplace and of being recognized by other companies who want to tie to our brand and our technology to help them and help us.

And the way it really works is when you have a customer who wants to use application x, but wants to use one of our services tied to it basically needs to partner with a company that makes x so that we can produce a seamless, more integrated approach to our customer. It's really taking the customer's perspective and making sure we're dealing with some of the best of breed stuff out there so that we can go in and solve their problems and you know, and we don't always have the total solution to everything they want. But we want to make sure that we have partners and the people that can come in with us so that we can give them a total solution and we have been doing that through best of bread and getting great recognition.

You have seen some announcements with

. You saw some stuff about the

recently. Some of their back up software being compatible with our operations. We're working. Its just part of our marketing strategy to get deeper and get broader out there with our brand and with our capabilities and its working. terinelli: To what extent do you think that you're actually locking up potential market share by partnering up with

and having fully integrated seamless solution?

I don't know. Look, I don't want to promise, that, I don't think there's any one thing that causes you to sort of the grab a market and everything else and sometimes we'll be, we'll cooperate with them and sometimes you will compete with them in arena. You have to you know, you got to work on behalf of the customer. But these are new things for us just like learning----and by the way, we have been selling enterprises for years but doing it in the organized fashion an increasing the number of people and the size and scale of what we're doing. These are all sort of new things for us as we grow up and become more of a sales and marketing driven business. And this is all part of our strategy shift as we move away from acquisitions.

And having said that, we will continue buying companies. So that ought the make sure not only the financial markets but that the timing acquisition markets here that statement. We bought a significant number of companies last year and we will buy a significant number this year, but they just become, because of their size they become less impacted on our growth an our----so forth. But that doesn't mean we're still not interesting in them, because we are. But this is just part of the our evolution shift of the company and what we're doing is giving you a sense of how we're taking additional steps and so forth.

Richard, on that point and looking at your acquisition strategy, it continues to be opportunistic and it continues to be primarily, I would say, outside of a core box business. Any thoughts on likely acquisition focus for 2003 and beyond? Is there anything in digital services for example, that's meaningful enough for you to take a look at and what about Europe? reese: We're surveying the digital landscape as much to understand the emerging competition as anything else. We have no current plans there. The rest of the our agenda, your right, while its outside, it has in the recent past been less focused on North American box businesses, we are very much interested in those because they do have

economics and we have access to capital. On the shredding side, where a lot of the activity has been, we're doing as many or many start ups as we are buying companies but we're also buying companies at a good clip. To date, in the last 2 years, we've bought 16. kenny: And in fact, our approach in the shredding business is we surveyed cities and markets and if we can buy a good quality company to enter, we will, but if we can't, we do a start up and we're doing both of the those right now so that completes our national footprint fairly quickly. reese: Then lastly in Europe, we have a little platform work and we were successful in France as Richard mentioned. There's problem many to go there. terinelli: No one's ever successful in France gentlemen. Congratulations on a great year. I mean I think we're not; maybe the questions haven't quite brought out what a great performance that was relative to everyone else around you in this very difficult environment. reese: Thank you, appreciate it. operator: Your next question, sir, comes from Andrew Steinerman of Bear, Stearns. steinerman: Great job guys. reese: Thanks, Andrew. steinerman: My question is about these new sales people and the business development people that are focused more on selling to executives and, obviously, you have mentioned some of the records management is becoming bigger and more complex and of the interest of the c level professionals. My question has to do with, is this an incremental opportunity or some of the more mundane opportunities that was handled by the normal sales force, the guys that worked, you know, IMac after all these years and now its sort of beyond their reach and we have to hire these people just to capture some of the more mundane opportunities or is this pure incremental business? reese: No. If we were not adding the technology component and the professional services consulting component, it would not be, and I wouldn't characterize it as out of the reach of our existing sales force. This is some additional capacity and some of our additional sales force are joining this. But this is also broadening the scope in complexity of the problem set that we are dealing with customers. Because you cannot separate your physical records and your electronic records. Records are records. Law is the law. You know, jail is jail. And you know, customers think about it that way, correctly, so and they're looking to have somebody deal with it that way and we can do that. steinerman: Any trends in sales cycle lengthening? reese: In trends and sales cycle lengthening? No. Save that these big things, you know, I don't particularly say they have lengthened. What I can tell you is there is more of them on horizon than there have been for a few years and they generally are fairly long. The sales cycle in some of our businesses like shredding is shorter. So it varies all over the map. But we don't see anything that will make----the real key to understanding about this and when we talk to you about opportunity is, this is a business that changed glacially and we have told you two years ago, I think, that the internal growth rate was going to sink a little and it did and now we are telling you its going, has flattened and is going to come back and we think it will. That is a glacial move in the face, by the way, and that these gone to the dogs and if that comes back, that's just even better. But if it doesn't, I think we'd feel okay. terinelli: Sounds good to me, thanks. operator: Your next question, sir, comes from Lily Johning of Kaniko Associates. house: This is actually

. Had a couple of follow up and I guess clarifications from earlier questions and then a couple other questions. When you mentioned the synthetic lease program added about 10 million in the quarter, I think that number was 50 million of the year end finance through that vehicle. Is that, I think you mentioned that those numbers or whatever is comparable kind of spending is in your p p and e, your cap ex guidance for next year, right? It would obviously be financed another way? reese: Yes, and let me correct your interpretation of my previous answer. The question was, did you do, did you add 10 million dollars of properties to synthetic

after the end of the third quarter and the answer was yes. But the other important thing to note a that roughly half of all the properties we have ever purchased through synthetic lease facilities were properties we already leased from somebody etc. and had no obligation rather on openings to buy. So we didn't spend over a four year period 203 million buying net properties. Half of that we already leased from a different landlord just looking for a better lower cost landlord. house: So when I look at your cap ex for this year, I can't add the 50, you're saying, to the 190 to get a 240 for what you really spent, because you're saying...

No, we just changed landlords in a lot of cases.

That's just opportunistic.

Right, that's just like refinancing debt.

OK.

By the way, just so you understand how we used to take leases as the ability to, if we had a good opportunity to buy properties, where the economics made a lot of sense, we do it, to reduce our cost of financing. Otherwise we use the third party landlord market, it's there, it's readily available, and we can always lease. So this is just pure on the margin using finance to lower costs, not a necessity.

Going forward, if you opportunistically want to do that, then you would have to actually buy them, in which you'll

cap ex.

That's right, but our cap ex forecast assumes a certain level of opportunistic things already.

So that...

It's already in there.

It's already in there. So then the working capital quesion, I understood you were talking about, you can't look at the balance sheet it's in your cash flow, but since we don't have those numbers, did you give whether or not working capital was in that pile or was it a drag on...

This past year net working capital improved meaningfully as our accounts-receivable day sales outstanding decreased by five days and so it was almost a 30 million dollar assistance to overall free cash flow.

And was that sequentially, what was that, because I think in the data it's been a big benefit in the third quarter and you said it might actually be a drag in the fourth. What was it?

We'd have to get back to you on that, we haven't crunched that.

OK, and that kind of segues into the next question. When I run the numbers for your guidance, your

point of EBITDA should be up about 39 million, cap ex about 13, so a net, 26 million bump and I add that to your free cash flow for this year of 56.5, I get 82.5. Is the reason why your free cash range is lower than that when we should be reaching that point where we continually...

So you're math is perfect, it just happens that working capital picked up roughly 30 million, it's sustainable but will not recur in the same quantity.

OK, so we take the 30 out and we're starting with...

Take the 30 out, put your 26.30 in and get to the same number year over year.

OK, and then one last question, the free cash flow this year we got, you said you paid less than five million in cash taxes this year, is that right?

Yeah, and that's been the case for each of the last, it's 3.1 million and it's been run between 2 and 4 million for each of the last four or five years.

OK, and as you get more profitable here, I mean, the difference between your provision and the cash pay is about 45 million, or 80 percent of the free cash flow, when do you think you might actually have to start paying more, or is it some things in depreciation that you're doing that you think it's many years out before you worry about that?

Well, obviously, it's a function of our growth rate, because that'll cause more depreciable assets to come on to our books. But, our current view is that we have three more years of no meaningful cash income taxes, and that's assuming we delever, a lot of business delever in that timeframe. It's my charge to figure out how to properly finance the business and make it most tax efficient, but three years of...

So in the near term as this cash, free cash flow ramps, I don't have to worry about that as being a drag?

Not for three years.

OK, thank you.

And your next question, sir, comes from

.

Good afternoon, gentlemen. I was wondering if your existing records management customers and the new customers coming, looking at you guys, you mentioned the various laws that have been past last year and regulations that are now making them look more closely at their document retention. Has this been translating to any increase in time that companies are now saying to maintain their records, the existing companies that you have, and the new ones, and is it meaningful, in terms, too, the numbers, or is it likely to be meaningful, and do you incorporate these numbers in your 2003 projections?

Well, as I've said earlier, this business is like a glacier, and what it is, it's much more positive, which is, we've had positive outlook as long as I've been in the business, but I've never seen the environment more positive than it is today, but it'll fold in slowly overtime, and it, like the variety of other things we do, will be one of the things that help us to sustain and/or increase our total growth rate we'd expect to happen. But nothing happened overnight, you can't say what quarter's going to happen, the fourth quarter it did happen.

But you're not getting a slew of companies saying, hey, we were just scheduled to destroy these documents next year, we're keeping them for two more years now...

Oh, we're getting all kinds of stuff.

OK, but are you getting any meaningful numbers in terms of additional revenue that you didn't expect.

No, but we will, we expect to have increases in our new selling and other things because of customers need to consolidate their open system programs, but it'll come in kind of slow. Some of the stuff you sell, it takes a year plus just to move it and to recgnize it, so it takes a while.

Lou, John Kenny here. We haven't seen any meaningful change to the average retention period. We're seeing the same percentage of existing items seem to be getting destroyed, that's just probably because some people are waking up and realizing they have to keep things longer, and some people are waking up and figuring out they should destroy things that...

I was wondering if you had a bunch of customers already who all of the sudden the phones started ringing, "saying listen, don't destroy these documents yet, we gotta keep them longer."

We are having it happening, but it isn't showing, it's not measurable right now.

OK, thank you.

Your next question, sir, comes from Arnold Ursaner of CJS Securities.

Good morning. Two very quick questions. It

he's fully integrated. Could you give us a feel for your capacity utilization and for pricing trends you're seeing with larger customers?

The capacity utilization is right at 80 percent...

And pricing trends are, I sound like a broken record, street prices have risen, and I think will continue to, existing customers, there's all kinds of things going on, but when customers, as we rationalize them, when, some of these customers came to us from 15 different acquisitions and have 15 different prices, we continue the rationalization process, but we also continue to negotiate contracts that have escalators in them and so forth, so we're still going through that and I think we'll go through that for a while.

And a financial question for John. You're already towards the lower end of you coverage and you're starting to generate more material free cash flow. One question I had is have you in any way lowered your hurtle rate on acquisitions, or could you, acquisitions again are, you can comment on how your viewing your free cash flow relative to your

.

We haven't changed our view of what companies we may acquire of worth. If anything, our cost capital has gone down so we're equally interested in acquiring businesses as we have been in the past, our hands our more free with some of the integration behind us. Some of our people don't know what to do with themselves if they're not converting something, so no, we're still in the acquisition arena, it's just unlikely to move the dial on leverage ration, meaning

because the targets are small, and we tend to buy them at multiples that are rational and don't diverge that meaningfully from our leverage ratio.

And go back to your guidance for the upcoming year, I may have misheard you on one of those numbers, but I think you said you paid 36 million for the deals you've closed so far year-to-date?

That's since the end of the third quarter, only 2 slopped into this year, so I don't, it's a much lower number on a year-to-date basis.

OK, that answered the question, I thought you had dramatically increased the multiple you were paying...

No no no.

I think so far it's 14 million, of the 36, 14 is going to hit our Q1 cashflow statement.

OK, great job on the quarter.

Thank you. In the interest of time, we've been here an hour and a half, and I hate to keep people so long, so I'm going to, if I may, operator, draw a close?

We're just working on the assumption that people are waiting for his close.

No no, I'm suspecting he already left, so if I may, we appreciate you coming, but after an hour and a half, if you're still there, you've got lots of patience. It was a good year and I appreciate some of your comments to that. Simply given this environment we feel very good about it and we feel, as I said, much more positive even about the future. We are going to be out here for a while, John and I, or John or I, is gonna be a combination of things but it should give you a sense that we'll be presenting a few upcoming conference on April 9th at New York City at the Sedoti Company conference. I will be in Phoenix with

and company's small cap equity conference on March 10th, some of us will be at the Lehman high-yield conference in Orlando March 19th, some of us will be at the Bear Sterns credit conference in New York City on June 3-4, and I think John and I probably will be at the Bear Sterns business service conference in New York City in June 11-12.

And of course, as is our custom, from time to time, we'll get on the road and visit many of you in cities nearby, and hopefully, if you do want to chat with us, you'll have an opportunity to do that. We do appreciate your continued to support, it's, as I said, been a good year, but we don't rest on our laurels, we expect to have even a better year in hopefully every year in the future, that's what our goal is and I think we've got that opportunity to keep doing that.

So we'll talk to you in about two months when our first quarter results for '03 are ready if we don't see you beforehand. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program for today, you may now disconnect.