鐵山公司 (IRM) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Iron Mountain first quarter 2003 earnings call .

My name is Rob.

I will be your conference operator.

Throughout the entirety of this call your phone will be on listen-only.

If you need an operator, press star zero.

I would like to turn the call over to Richard Reese, Chairman and CEO of Iron Mountain.

Mr. Reese, You may begin

Good morning.

Thank you for joining us this morning.

As we've done in the past, we'll follow a format.

I'll speak a little bit about the business and give you some of my over-top comments and John will go into detail.

We'll open up and take your questions and answers.

For those that don't realize this, if you go to www.ironmountain.com, and go to the investor page, you will find the slides that John will be referring to, as well as a lot of the data in press release that went out this morning..

We will attempt shorten this call.

Because They have gotten long in the past few quarters.

We'll strive for brevity.

Bear with us.

We hopefully won't speak too fast.

Before I get into that, I would like to go into my tradition for a brief commercial for first-time listeners that may never have been on call with us before.

Iron Mountain is the global leader in records information management and services.

We currently operate in 82 U.S. markets, 9 in Canada, 28 in Europe and 10 in Latin America.

We have consistently managed a [3 stage] strategic plan set over 6 years ago.

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

We’ve accomplished those goals.

Our second stage objective is market penetration 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 [inaudible] in some of our business lines we seek to penetrate these customer relationships to expand revenue and drive margins.

We’re successful executing against this plan and we’ve established clear global leadership in our lines of business.

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; better control of risk through records management, records management and digital archives address that, disaster recovery protection or business recovery protection, our offsite data protection business including some of our new electric ton initiatives drive that business, and, of course, information pricy in which we deal with in our Secure Shredding services and some other ancillary businesses.

We build a valuable franchise and position ourselves to address this robust set of related records and information management service opportunities.

Now, let me comment briefly on the operations of the business.

For the first quarter, the business has performed -- I've been saying this for a lot of quarters -- as we expected.

That's the beauty of the business.

It does tend to perform in a narrow range.

Margins were strong at 29.6, EBITDA margins vs. 25.2 of Q1 last year.

John will get into more detail.

Not all of that growth is sustainable, and so we want to caution you.

We don't expect to creep margins significantly through the rest of the year, as we continue to invest in our new sales and sales support positions, the support of our new services and enterprise accounts segments.

John will go through that later.

Revenue growth for the quarter was in line with our forecast.

The North American paper business storage growth continued its past trend line, and the growth rate remained in line with the past few quarters.

The booked backlog, or roll as we've been speaking of, is moving in, but rather slowly.

As of the end of the quarter, we have a back log of signed customers representing 22% of that business unit's annual storage quota.

Currently, the sales force is at about 73% of budgeted storage quota, as measured on a bill revenue basis.

In other words, what they brought in and billed, they're running about three-quarters of their plan.

They have roughly a quarter of their plan booked but on a backlog.

We do expect that backlog to be realized by year end and the sales force to be on quota on a bill basis, which is what counts by that time period, too.

Our international business has performed well.

Europe remains strong.

We see improvements in certain Latin American economies.

In general, we saw slow growth in the complimentary services.

They grew 4% from 12% same quarter last year, or all of last year, actually.

Product sales and discretionary project revenues were flat to last year. customers are holding back and delaying discretionary expenses.

We think that's a general sense of the economy.

Our OSDP business saw its growth lower than Q1 last quarter.

We expect it to pick up thorugh the balance of the year.

The sales force is running 90% of budgeted quota.

We remain optimistic they will see an upper trend through the balance of the year.

We are optimistic about the mid-term growth prospects for all our businesses and we believe future quarters of the year will see growth over where we are today.

We believe we'll operate in our annual forecast for revenue.

On a business development side, fairly light quarter in terms of acquisitions.

We acquired three companies, spent about $17m.

As you know, that's not one of the key focuses.

We do continue to expand our geographic footprint where it makes sense as well as do tuck-in acquisitions where the economics are attractive.

In particular, we bought a small Records Management paper storage business in France.

We had a strong offsite data protection business there, and we wanted to get a foot in the paper business, and found a small, but good entry into the marketplace that allows us to not only address the French market, which is a good and growing market, but also helps fill out our pan European footprint for our pan European customers over there.

We did a tuck-in acquisition in the paper storage business or a small one and also acquired in our shredding business.

We are acquiring footprint in the Secure Shredding businesses.

We acquired one of those business in Houston during the quarter.

Our additional businesses continue to gain momentum.

We do remain sales coverage limit and are working hard to overcome that.

We're investing in a new enterprise sales and support structure to sell both additional products, and to cross sell all of our services to our larger accounts.

This investment in sales and marketing is the reason we've said we will not expand margins as we otherwise could for this year.

During the quarter, we staffed at a pretty fast pace, but the full quarter costs were not reflected in the quarter as people came in throughout the quarter and will continue to ramp up this area and expect to see a good return on this investment towards the end of the year into next year .

So, with that, let me turn it over to John for questions and answers.

Actually, let me give a couple other comments now before I do that about -- I got off script for a second.

We recently mailed out our annual report to you, and as we said in the annual report, beginning this quarter we have begun expensing the impact of stock options granted during the quarter.

For this quarter, the actual impact on the financial statements was minimal, but this will grow over time.

We debated the issue and decided it was appropriate to expense options and while no valuation method or accounting method is perfect, doing so is more accurate than not doing so.

So we put a stake in the ground.

We've done it and will continue doing going forward.

This will try co communicate accurately with the shareholders so you can judge our performance.

Concerning the annual report, we strive to use the annual report to share with the shareholders how we view your business.

So as in the past, we would invite your comments and or criticisms so we can do a better job in the future.

With that, let me turn it over to John who will get into details and numbers.

We'll come back and take your questions.

Thank you, Richard.

As Richard mentioned and strived to be brief, I will, uncharacteristically, be brief this morning .

We have the slide presentation for you to view on our web site.

I'm assuming most of you may not see the slides in real-time.

I will try to describe them fully as I can without bogging down.

Much of the important information on the slides is in the press release.

I assume you are all looking at that.

In any event, slide 2 is my agenda for the morning.

I'll begin with a standard review of the financial results, and then I'll discuss capital spending, our current debt situation, and our cash flow.

I'll finish with a review of the 2003 guidance and how it compares to the guidance we gave on the Q4 earnings call in February.

So let's move into it.

Slide 3 is a comparison of revenue, operating income, and EBITDA for the first quarter of 2003 versus the same period in 2002.

Total revenue for the quarter was almost $352m, an increase of 11% over same period in 2002.

Operating income for Q 1, 2003, was $72.2m or 20.5% of revenue, up from $57.2m, or 18% of revenue for Q1 of 2002.

The increase was due primarily to gains in our gross margins, lower rent, improved labor management, and reduced product cost of sales were the main operational drivers of the expanded margins.

These gains more than offset increased insurance costs and higher weather related utility costs.

In addition, operating income benefited from the re-classing of rent to interest expense related to our real estate term loans, and a $1.7m gain on the sale of some real estate .

EBITDA was $104m, an increase of 30% over 2002.

Our EBITDA margin expanded by 440 basis points to 29.6% of revenues, primarily due to the increase in operating income I just discussed, and $3.3m of other income, which is detailed in the next slide.

Let's move to the next slide.

This is slide 4.

It is a reconciliation of operating income to EBITDA.

EBITDA includes a $5.1m FX, foreign exchange gain this quarter, which more than offset a $1.8m charge related to debt extinguishment on the redemption of our 91/8% notes in January.

According to new accounting rules, these debt extinguishment charges are recorded as other expense, which is a component of EBITDA rather than as an extraordinary item as had been the case up to December 31, 2002.

As we'll discuss later, this change, along with other episodic or non-cash issues that arise from time to time in other income make operating income a more meaningful metric than EBITDA to measure our margin performance.

As a matter of fact, we have something else coming in other expense in Q2.

We will be recording debt extinguishment charge of approximately $14m in Q2 related to the redemption of the 83/4% notes in April and May of this year.

And more on that refinancing event later .

Slide 5 depicts internal growth, which, for the quarter, came in at 7.9% with storage revenue growth of 8.2% generally in line with 2002.

In storage, we are seeing continued strength in Europe, positive trends in Latin America, and stability in the North American paper business where [Crete] held steady at about 31/2% for the past three quarters.

The Off-site Data Protection business is feeling the effects of tighter IT spending throughout the industry and difficult comps in the prior year.

The service revenue gross number is a product of weak complimentary services growth, particularly in the North American businesses.

In both IMREM, our North American paper business, and OSDP, our data protection business, product sales and other nonrecurring services were flat to last year's results.

We do expect each of our major lines of business to post higher growth rates in total revenue for the full year than those we experienced in this quarter.

Let's move on to slide 6, which is a more detailed comparison of some of the major P&L line items for 2003 versus 2002.

You will note that SG&A expenses grew in line with revenue in the quarter, at 11%.

We expect SG&A growth will exceed revenue growth in coming quarters, as we increase our investments in sales and sales support, as Richard mentioned, to take advantage of market opportunity, particularly those we see in the digital and enterprise customer arenas.

As was the case last year, growth and depreciation expense was higher than all other expense line items, and this is primarily due to elevated levels of capital spending over the last three years, especially in IT assets and our digital initiatives.

These assets have shorter lives.

We take a conservative stands with regard to writing off these IT assets as the vast majority of them are depreciated over either three or five years.

Slide 7 provides net income and per share data.

For the quarter, we reported income from continuing operations before extraordinary items of $21.3m, or 25 cents per share on a diluted basis.

That compares to $12.5m of net income or 15 cents per diluted share in Q1 of 2002.

This improvement is primarily attributable to revenue growth and increased margins.

I should mention, however, that a gain on the sale of the -- of some real property and the positive other income events discussed previously combine to add 3 cents to earnings per share.

Let's move to slide 8.

Slide 8 we have our traditional organization of capital spending into two major categories, capital used to drive the internal growth of the business on the upper half and discretionary expenditures in real estate and our digital initiatives below.

Capital spending for Q1 was $42m for our core businesses and $8m for our digital initiatives.

These levels are right in line with our expectations and guidance .

Digital spending was front-end loaded as we outfit our data center and begin engagements with new customers.

We reiterate our previous guidance and anticipate the 2003 CAPEX will be in the same range as 2002.

That is, $175m to $200m for our core businesses and $15m or more for our digital business.

The digital spend is based on our current revenue plan and will only increase as we see revenue coming in.

Moving to slide 9.

Slide 9 depicts our debt capitalization.

As many of you know, we've been fairly active in the high yield market since mid-December last year.

Last December we refinanced 75 million of 91/8% interest bonds through issuing a new 12-year bond at a rate of 7 and 3/4% .

Simultaneous with issuing that bond, we tendered for the 9 and 1/8% bonds and at year end 22 million remained outstanding, all of which was called in January.

Earlier this month we sold more of these bonds to raise an additional $312m.

These bonds were priced at a premium to produce a yield of 7.07%.

The proceeds are being used to redeem our 8 3/4% bond and to term out approximately $75m of floating rate debt under our revolver.

Now, the slide you're looking at has three columns.

The first one is actual debt capitalization as of year end.

The second, or middle one, is actual debt capitalization as of the end of Q1.

The one on the right shows Q1 on a pro forma basis given the effect of the last issue issuance and the related redemption.

In addition to being MPV positive and, therefore, creating value immediately for shareholder, these refinancings extended the company's overall average maturity of debt portfolio by almost two years.

After completing these transactions, our weighted average cost of debt will be approximately 8.06%, and we will be about 90% fixed with respect to interest rates.

So we're, obviously, going fixed, long-term, and locking in what we view as attractive rates.

We'll wind up with good access to capital as our $400m revolver will be untapped.

Slide 10 looks at free cash flow for the quarter versus the same quarter last year.

The dynamics we have been discussing all along are clearly at work here.

We have growing EBITDA in the presence of flat interest expenses and capital investments that will drive a powerful and growing level of discretionary cash flows.

However, in this quarter we did see a swing in working capital consumption driven by timing issues related to cash receipts from customers and payments of accounts payable and accrued expenses.

It is important to remember [inaudible] that working capital is best evaluated on a foul-year basis as the timing of normal periodic events can skew interim period results.

Bottom line, we believe working capital will come into line for the full year.

We've -- we continue to believe the turn to cash flow positive before acquisitions that we experienced in 2002 will continue , will remain free cash flow positive befoe acquisitions on an annual basis from this point on.

We continue to believe this business will generate increasingly higher levels of free cash flow going forward .

Let's go to slide 11 for our forecast.

Just a few explanatory notes before launching into our forecast.

As we previously discussed, we will no longer-- as we previously announced, excuse me, we will no longer discuss adjusted EBITDA.

As recurring adjustments will no longer be permitted under the SEC regulations.

That is to say, we backed out of a EBITDA calculation on a consistent basis things that were non-cash or episodic and didn't speak to the true underlying performance of the business.

We're no longer able to do that.

Rather, we will speak to both EBITDA and operating income.

We will discuss and forecast operating income as it is unaffected by fluctuations in other income items, such as foreign exchange related issues or refinancing.

Further, by adding back depreciation and amortization operating income, one can get back to a form of EBITDA that closely parallels the adjusted EBITDA we've traditionally used.

Bottom line is our view of our expected performance in 2003 has not changed, and we have not had any acquisition activity in the two months since we last provided guidance.

So, namely, revenues and operating income show no change.

The midpoints of those two forecasts are $1.46b for revenue and $280m for operating income .

Capital expenditures, likewise, no change.

Internal growth expectations, no change.

The range remains 9 to 11%.

As in 2002, though, we do expect the internal growth rates will increase over the course of the year as IMREM sales momentum is realized and as interest in our digital services translates into online customers and recorded revenue.

To reconcile operating income guidance to EBITDA, we have a new slide, slide 12.

We are required to do this any time we cite or forecast a non-GAAP measure such as EBITDA.

What this has caused us to do is, in order to complete the reconciliation, we obviously forecast D&A.

My only comments on this slide relate to other expense, namely, that it embodies $2m and $14m for the two previously mentioned refinancing events in Q1 and Q 2 respectively.

We have not included any foreign currency effects, actual or forecasted in any of our guidance.

I guess I should point out that for those who you who are looking at and are modeling earnings, the $14m in other expense related to the recent refinancing amounts on an after-tax basis to 10 cents per share.

Thank you.

With that, I'll turn it back to Richard.

Thank you, John.

Why don't we open it up and take your questions.

Thank you, sir.

Ladies and gentlemen, at this time, if you wish to ask a question, please key star one on your touchtone phone.

All questions will be taken in the order in which they have received.

Once again, star one if you have questions.

Give me a moment while I gather your first question.

Your first question comes from Thatcher Thompson from CIBC World Markets

Morning, guys

Hi, Thatcher

7.9% organic growth in Q1, and you're still talking 9 to 11% projected for full year '03.

Give me some of the data points that give you lots of confidence that we see acceleration throughout the year.

Well, we expect the IMREM role to materialize.

For them to have inclusive of that a good new sales year.

And we believe the role will be in by the end of the year, so that is what gives us confidence that that business will have increased internal growth for the year relative to the quarter.

We also have unleashed -- we also have unleashed much of our IMREM sales force in the shredding arena where we have done start-ups and we have more than of that sales force sell shredding.

We see momentum there and expect strong growth in shredding.

In OSDP, two things are combined to create very difficult comps this quarter that will improve throughout the year.

They have some pricing action last year, and recent cutbacks by a few key customers in trying to do things on a back-up side more efficiently.

Those coincidentally converged at the same time, so the outlook for their internal growth pattern over the year is very positive.

Other businesses that I have not mentioned here should continue to grow at the same levels.

There are no extraordinary issues with those businesses.

So the confluence of all that encourages us that things will turn up.

I guess the wild card is comp services.

I mean, bear in mind, Thatcher, comp services grow at 12% last year.

It is 14% of revenue.

It only grew 4% in the quarter.

If it had grown in line with last year, we'd have 110 basis point more and looking at a 9 and we wouldn't have this conversation.

Okay.

So, you know, comp services is a wild card.

We do believe, to some degree, it is linked to the economy.

It is-- candidly, the thing we have the least visibility on by its very nature.

I'm surprised at the strength of the margin given what's happening in services, which is very profitable business for you guys.

Even your adjusted EBITDA margins are well ahead of our expectation.

You suggested we shouldn't project an improvement this year, but if you see services come back, I assume it would impact the margin result.

Yeah.

Make sure you back out of your old adjusted EBITDA margin the $1.7m gained from the sale of the building, and make sure you are aware of the fact that versus last year $14m -- $3.5m of rent in the quarter became interest expense with the re-characterization of certain lease arrangements

Okay.

But even with that, it is a strong margin quarter, and I think our field is performing well

I think our businesses are performing well.

We're going to take some of the money and keep pushing it to the market.

We're still bullish about opportunity

Thanks, guys.

Thank you, sir.

Your next question is from Arnie Ursaner from CJS Securities

Hi.

Good morning.

You have about a $28m swing in use of cash and working capital.

I know you mentioned a few broad observations, John, as to what impacted that.

Can you give us more specific information as to what caused the swing?

Yeah.

If you look at slide 10, we intentionally put a subtotal in before putting the change in assets and liabilities, which is, really, fundamentally changing working capital.

It is about a swing in working capital.

It is driven off of two items.

We paid $17m more in accrued expenses in this quarter than last first quarter.

That mostly relates to a timing shift of incentive compensation payments from April to -- of last year, to March of this year.

So that's a timing issue.

For that reason, we should have a favorable comp and better working capital attributes in the second quarter.

The other issue is that we had a small increase in day sales outstanding.

We had less lower cash receipts from customers than we normally would.

This is not -- does not pore tend any bad debt issues.

Our aging did not deteriorate.

Our AR balance is higher, all in the 60 day.

One factor that could have influenced that is in February this year we did change -- we reengineered our lockbox system and give remittance advice to our customers.

I think we were aggressive last year to manage this number.

We don't believe we'll give up any of the gains we made in day sales outstanding.

If anything, that number will be flat on the full year or down.

So we also think this reverses.

a quick question for Richard.

Richard, you mentioned 22% of the role of your annual expected was roll on backlog.

Can you put 22% in some perspective?

On the assumption it is higher than normal, were there any specific factor that is cause td to be higher than normal?

I'll quote it a slightly different way.

We had about three months worth of quota which is about 25 or 22% in that range.

In fact, I think we mentioned that at Investor Day.

The roll builds up.

When you sign new customer and they take time to come in.

This roll is as big as I’ve I seen in—- actually since I’ve ever paid attention to it.

But it’s substantially higher than the year before when we came in the year with little to no backlog.

The frustrating side to sales force is they get paid and judged from quota by billed.

They only get paid for the billed not booked.

Some people are sitting out there who have signed big customers and big contracts, but until the bill revenue comes in, they don't get a check.

You have to imagine that frustration.

But bascically When they're large it takes a while to, -- customers, by the way, the motivations are different than they used to be in the past.

They are paying more attention to the quality of the Records Management program and more people involved in the committees and more planning and everything else.

It is good long-term but slows things down.

So the planning cycle seems to be slower.

Frankly, some amount of this volume is coming out of competitors who are relatively slow as you might imagine to let go of the boxes.

The last is, when -- we're talking millions of boxes when you do that.

It takes a while to get it organized, picked up and moved.

All of the dynamics were in play here.

We have a customer forecast which tells us at the rate things are coming in; it will get done by the end of the year

It is not a capacity issue?

No, no.

Believe me, we can get the trucks to the people.

And we have the buildings.

It is getting other people to turn loose or get organized on their side

I guess we take for granted your great quarters.

Let me congratulate you on another one

Thank you.

Your next question is from David Gold from Sidoti & Company

Hi.

Good morning.

Richard, can you give us -- I'm not sure how to do it.

Quantification for the ramp up sales force for the quarter .

Would it be easy to give an idea of headcount so we can see how things transition from the beginning towards the end of the quarter to get some idea of how the quarter benefited from lower expense as things progressed there.

Yeah.

Rather than giving you headcount, I can tell you , in the sales force side alone, the spending under plan -- I got it somewhere.

Let me find it -- represented, in terms of margin, about -- you can call it about a third of a point.

Okay .

That’ll give you some sense of that

That's helpful.

Thanks.

I think that's what you're trying to shoot for, right?

That is.

But this plan assumes the addition of more bodies throughout the year.

There will be more coming, exactly.

Also , just a little bit of an update on what's going on overseas?

The last we heard there was an auction going on by way of Hayes?

It is public knowledge that Hayes is planning to auction their business.

I guess it is public knowledge we look for companies for sale.

Beyond that, I don’t think it’s appropriate nor would it be reasonable to expect I could comment even if we were involved.

I guess we'll wait and see what happens

Fair enough.

Thank you

Yeah.

Thank you.

Your next question comes from Tim Burn(ph) from Robert Baird & Company.

Good Morning and Thank you for taking my call.

What was the foreign exchange impact from the top-line revenues?

Given the positive foreign currency translation in Europe, do you know what that is?

Yeah.

From last year had foreign exchange rates in this quarter been the same as they were last year, we would have $3m less revenue.

However, foreign exchange rates have not moved nearly that meaningfully since we gave guidance less than two months ago

So it's baked into your guidance?

There is no -- our internal growth calculus ignores foreign exchange rates and goes to local currency

Okay.

And, Richard, just going back to the sales force shift going on, can you talk about , qualitatively, where you stand relative to expectations, not just in terms of the bodies, because it sounds like you haven't been able to ramp up quickly as you would like.

In terms of the transition, IE, are you getting people ramped up to sell shredding as quickly as you wanted?

How is the relationship between the core sales force and the national sales force working?

Some comments on that would be helpful

I don't want to stick my neck out.

Some people may shoot me.

On the shredding side, it is doing well.

You know, we went through the early stages of, well, what is this.

Now we're in the stages of, my goodness, I can sell this.

This is interesting.

Our customers need it and want it.

I think that's going to do well.

On the enterprise account, the way we've structured it, everybody in our business line sales force should view this as more help rather than somebody poaching territory.

Part of that is the way we structure and they work together, and part of it is because we're operating what I call everybody gets paid philosophy.

So we're not trying to take money out of their pockets and so forth.

It’s a little early to tell on that front.

We're still ramping, training , building infrastructure and, by the way, doing that as a -- at a fast pace.

It is a hands-on deck getting out and talking to customers.

They have a high level of interest.

In the last 48 hours, I personally have talked to senior management and senior people at three very large customers.

The problem with doing that is, I have no problem getting people wanting to talk to us and hear the messages.

The problem with doing that is you have to follow up.

You leave a wake or a trail of great opportunity behind you, and what we're trying to do is bill that follow up stuff.

We're a ways away from having that humming as a fine engine.

In fact, people would tell me we're a couple years away from having the humming as an absolutely team selling selling wall-to-wall machine.

I think we're making good headway.

A little disappointed at the speed, because I'm impatient as much as anything, just the speed of hiring and ramping.

It's not because people aren't trying or we can't find people.

It takes time and energy to do it

Last question going back to the internal growth rates at 7.9% in the quarter.

Is it fair to say that you were a bit surprised by the lower service growth rate or, I should say, it was a bit less than you expected but was storage as expected in the quarter?

Storage was more as expected.

On service, yeah, we would have loved to have seen it at the high end of the guidance, which is another three million.

There is a possibility, by the way, that bad weather in many regions in the country hurt us in February and, you know, but it's hard to know precisely.

It could have been a million to $2 million.

The other thing I would point out is people ought to be aware that last year, on more than one occasion, we saw an opportunity for complimentary service projects that arose, were executed and billed inside six months that were mult-millions of dollars.

In fact, one was $4 or $5m.

That single event, which can occur, and it's hard to predict and it is episodic, [Break in audio] or not occur, the single event like the one I just cited is 40 basis points on the whole business and, certainly , 100 basis points on service.

I'm talking on a full-year basis, much less than a quarter basis basis.

This is a very stable business, but, you know, we don't get too excited about 50, 100 basis point swings quarter to quarter for the reasons I just cited

The under line storage trends we are comfortable now.

I feel better it than I did a year ago.

How's that?

On the service large discretionary projects, do you have a backlog specifically for that?

Does it look as it did last year, somewhat better, somewhat worse?

Other than occasional large projects, our special projects, which probably represent, on an annual basis $25, $30m, are composed of lots of projects of average size, eight figure size

They're executed all over the world.

We don't have the ability to track.

It is not worth the energy on a pipeline basis to figure those out

Great.

Thank you.

Okay.

Thank you, sir.

Your next question is from Franco Turrinelli of William Blair & Company.

Can you talk about the facility outside London and what is happening in Europe from a business and margin point of view?

Yeah.

The new Belvedere facility we built -- let me refresh.

We went outside of London, let me get my geography right to the east side of London and bought a nice piece of property along the Thames and built a substantial built-to-suite(ph) [inaudible] facility in London that I won't say unusual for the market but unusual for our portfolio that gives us tremendous capacity and tremendous economics.

When we get the entire complex built, it will double the London market at cost or half of our average.

Over time as we build it will continue to drive margins up.

The good news is, the building is beautiful.

Customers like it.

The bad news is, it's filling up pretty fast, okay?

The odds are we will not only fill the first and second phase faster than we thought, but we will have to build the last phase and keep on going.

Other than, that the UK businesses are doing well.

For that matter, most of our continental businesses are doing well.

We're making improvements on the continent, although they're relatively small.

We have some things to do in the UK.

We're getting high teens growth.

That growth is coming from a lot of places.

There's strong CREAP over there, which we don't factor into the numbers we tell you about.

There's some good new business selling.

I will tell you that we've made substantial headway in billing ourselves and marketing other there.

I think all the people on the team would agree that we've got a ways to go.

We are better than we were a year or two ago.

I made the comment on one call we were no where, basically.

We are somewhere.

We've got to find out exactly where.

Even being somewhere, we're doing a heck of a lot better job.

There is upside over there.

Margins are in the low 20% and climbing and will continue climbing.

The management team is doing all the clean up phasing and the messes.We’ve been through there and they're rockin' and rollin'.

I think service levels are good and we're competing successfully.

We're now looking at, okay, now we got things cleaned up.

What do we do next in terms of growth strategy?

Where do you expand in Europe, et cetera, et cetera, et cetera.

It is nice for them, and for the rest of us, for that matter, to be looking forward over there there not looking over our shoulder

I know a part of this was moving boxes from one facility to another facility.

You didn't say much about the cost of doing that.

The CDG acquisition, which was a pick up and move of nearly a million boxes is done.

There are remnants here and there, but, basically, done.

Is that meaningful in terms of expenses in the quarter that we should be aware of on a go-forward basis?

No.

The expenses associated with moving out of that facility were part of restructuring reserve set up when we bought the business.

It gave rise to a CAPEX that wasn't associated with growth

Richard, I'm going to push you a minute on the Hayes thing.

We're excited about that possibility.

It is clear that that business has not been growing very well, presumably, because you're beating them in the marketplace.

My question to you is, what is your thinking in terms of the advantage of scale versus the disadvantage of buying a lower growth rate business

Wonderful question.

I'm going to respectfully decline to answer that.

Okay.

We'll push you in the future.

Thank you .

Thank you.

Your next question is from Harry Blount from Lehman Brothers

Mostly a couple house keeping issues.

John, first question relates to the tax rate.

Could you give me a couple data point as to what is influencing the tax rate this quarter?

It looks like it is up a little bit?

Yeah.

It is up a little bit.

It will return to normal it is related to a Massachusetts state tax issue, which is -- it is a retro on 2002.

This state, like most, is having fiscal problems, and came back to us on an interpretation of a tax regulation.

We're assuming

General state strategy is pay now, arguing later

The rest of the year we returned to a 41.5 tax rate

What were the tax rates in the quarter?

$800,000

In terms of the breakdown of revenue between CREAP price and units, can you give us more flavor there?

The only business unit we have with any precision into on that basis by the business and maturity is the North American box business.

Volume from existing customers, 3.5.

Volume from new sales, between 2.5 and 3 and price about 1.

Okay.

And then, also, in terms of facility utilization rate?

I believe we're between 80% and 81%.

So no meaningful change from last quarter there.

That number is going to move slowly in the absence of big consolidation projects, none of which are on the horizon.

We did improve our rent economics meaningfully, in the wake of the Pierce merger.

We wind up with the same buildings.

They are bigger.

They have more rent per unit and so forth

Okay.

Then the next quick question relates to the roll.

Richard indicated in the prepared remarks that roll is slower coming in this quarter than anticipated.

Can you quantify how much business was scheduled to land in the first quarter that might have been pushed out to later quarters?

I don't have that data in front of me.

I'm not sure I can give you a good way to back into what I think you're looking for.

At least not on the fly

No problem.

The last question I had was on the cogs.

You did a fantastic job breaking it out between labor and transportation product.

Can you give us more flare on the cog side, what those looked like?

Yeah.

We had rent went the right way, 130 basis point. 80 is the accounting change on the synthetic leases.

That was pretty much offset by other facility costs where we had some -- where we had some tax insurance, and then utility related issues.

Labor management was the key to the quarter, and I don't want to give you basis points and be wrong, but directionally it was a pick-up in margin in that regard .

We also had a reversal of an over accrual of incentive compensation .

All will be laid out in detail the end of May

Great.

Thanks.

Okay.

Thank you, sir.

As a reminder, before your next question, it is star one for people in the audience who wish to ask a question.

Your next question comes from Cliff Greenberg(ph) Bear & Capital.

Can you give us flavor on your products you're selling, which ones are getting the best traction or feel the best?

On the shredding business, remind us how many markets are you now selling the service in and how are you going about adding additional markets and what is the long- term potential as far as revenues you see in that business?

I'll take the second half of the -- I'll take the second half of the question while Richard noodles on the first.

Okay.

We are in 27 markets in a full-blown way, meaning with offsite plant operations.

We're in 13 other cities, so 40 total.

We want to be every where, particularly our financial customers need us to be so we can give them unbroken chain of custody not only for their active sense of documents but their old boxes.

We will penetrate the country on a hub and spoke strategy and are figure out to leverage plant trade off between transportation economics and plant economics.

We'll fill out our platform through a combination of Greenfield start-ups because we have a big selling organization we did drive business out of and acquisitions.

We are active in both arenas.

It is a $50m business today.

Cliff.

Our apiriation is that it is a $150m business in three to five years.

I think the vendor market is half a billion now with latent unaddressed demand

Cliff, your question on the additional services, nothing has changed.

Obviously, the electronic vaulting services we still see good demand.

That's the first one to gain traction.

I think it's proven to be that, although it is interesting.

The average customer size is considerably smaller.

So you're billing it one at a time, in effect.

The additional archives and the E-mail archive, you brought up fewer customers.

The customer services were dramatically higher.

That would be the other product.

In fact, I think the Digital Archive revenues have passed the evolving revenues in this quarter.

In terms of number of customers, it is no where near equal.

The email and electronic vaulting are the one we see as the early ones and still see as the early ones for a while to come

Did you discuss how many sales people you have selling those services?

Where are you as far as adding bodies to have a bigger force?

Well, we've got -- both of those you take the sales.

We're doing this on some team selling basis with system engineers and so forth.

We're about to a level of 40 people, give or take. 30 people, excuse me.

Can't add on the fly.

Somewhere in that range

In time, how many will be much more than that?

I think we've got another, say, 15 or so bodies to add.

Let me look.

Another 15 bodies to add.

We're up part of the way.

We came in the year with some of those.

It is not all brand new

Much of the build-up to 30 happened, like, in the last weeks and month or two

By the way, I don't think that's the end point.

That's the budget for this year.

It is an experiment.

We're confident it is the right thing to do.

We have a lot of infrastructure development, a lot of train training, a lot of train tog do this in math.

We have to do it to get the cough ranl up there

thanks.

I think, given the hour, we'll take one more call, if you don't mind, and then we will meet our commitment of being brief, if we can.

Okay

If you consider an hour brief.

You have a follow up question from Harry Blount

Hey, guys.

Can't get enough .

A quick question on the breakdown between the internal growth and the reported growth.

It looks to me like if we include the foreign exchange in there, the acquisition impact might have been about $4.5m.

Am I doing my math right on that?

Yeah.

Go from 11 overall, roughly, to 8 internal.

There's three points in the middle, and one point is FX and two points are acquisitions.

You're coming off a base revenue last year of what's the base ?

About 317.

So more like $6m on the acquisition side, $5-$6m.

Just on the split between domestic and international revenues?

85/15

Okay.

Thanks .

Thank you .

Just a quick summary and a wrap-up.

Q1 was another good quarter, and we remain fortunate and thankful we have a business that performs with predictability in this economy.

I also would like to remind you our annual shareholders' meeting is coming up on Thursday, May 22, at 10: 00 a.m.

We invite any and all to attend.

John and I will be on the road at various investors conferences.

May 14, John will be presenting it Robert W. Baird in Chicago.

On the 14th he will be at the Bear, Stearns in New York.

On June 10th, John I and I both will be at the Bear Stearns computer business and conference at the grand Hiyatt in New York.

On June 25th, John and I will be at the William Blair stock conference in Chicago.

We look forward to seeing you out there as we hit the road.

We appreciate your support.

We will continue working heart on your behalf.

Thank you.

Thank you, sir.

Ladies and gentlemen, this brings your con conference call to a close.

Please feel free to disconnect your lines at any time.