鐵山公司 (IRM) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Iron Mountain third quarter 2003 earnings conference call.

My name is Carol, and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question and answer session towards the end of this conference.

If at any time during the call you require assistance, please press star followed by 0, and a coordinator will be happy to assist you.

As a reminder, this conference is being recorded.

I would now like to turn the presentation over to your host for today's call, Mr. Richard Reese, Chairman and CEO.

Please proceed.

Thank you.

Good morning, everyone.

Welcome to our call for the third quarter 2003.

I do remind you, if you go to www.ironmountain.com, you'll see some user control slides on our investor relations page, which may be helpful, particularly during John's discussion.

As you know, today's earnings call and slide presentation will contain a number of forward looking statements, most notably our outlook for the full year 2003 financial performance.

All forward looking statements are subject to risk and uncertainties.

Please refer to today's press release or the safe harbor slide at the beginning of the presentation on the web, which is available on our web, for a discussion of the major factors and risks that could cause actual results to differ from the forward looking statements.

This morning -- and I'll discuss it a little later -- I'm going to let John start and go through the numbers.

We're going to attempt to keep this call a little shorter than the past and I'll talk to you about that based upon feedback from most of you.

And, frankly, we're going to try to focus on where there have been major changes in business.

Business is running well.

There's not a whole lot to talk about.

We'll see if we can meet our goal.

With that, I'll turn it to John, and I'm I'll come back and give you some brief remarks, and then take your questions.

Thank you, Richard.

For those of you who know us well, this promise of brevity is probably the biggest challenge we'll face in this call today.

In any event, as Richard mentioned, we are looking to shorten the call.

So to that end, I'm going to assume that you are looking at the slides and I'll just address the salient issues in each slide without doing a detailed review of each number.

At the end of this presentation, the news section called supplemental data, where we present additional data we believe will be useful to you.

We may add data to this section from time to time.

Slide two is a safe harbor language to which Richard referred in his opening remarks.

So we'll move quickly past that.

To my agenda slide.

This morning, we have reorganized our presentation slightly to provide a more efficient and effective flow for the financial review.

First, I'll present the quarter and year to date results for revenue through operating income.

Then I will discuss the quarterly and year to date results from operating income through net income.

The remainder of today's agent is really the same as for previous calls.

So slide four takes us from revenues through operating income for the quarter versus last year.

As you may have seen in todays earnings press release, we are introducing a new metric today.

Operating income before depreciation and amortization.

This is the closest metric to our old adjusted EBITDA, which we were unable to continue disclosing given the requirements of S.E.C. regulation G governing the use of non GAAP measures.

Now, operating income before D and A currently differs from adjusted EBITDA only by the gains and losses on asset disposals or write downs that are now included in operating income, and which are small numbers.

Prior to 2003, merger related expenses and stock option expenses had also been excluded from adjusted EBITDA, but those are no longer issues.

We don't consider this as a significant change, as we have been guiding on operating income and D and A throughout the year.

We believe this will make the conversation surrounding our results more efficient.

Those of you who are familiar with our company know that we consider this metric to be useful to investors because it's an important financial measure used in evaluating our performance as operating income before D and A is an internally generated source of funds for investment and continued growth and for servicing indebtedness.

Please keep in mind that operating income before D and A is a non-GAAP measure and is intended to be used in conjunction with, but not as a replacement for, traditional GAAP measures, such as operating income, net income, or cash flows from operating activities.

Additional information in the reconciliation of this non-GAAP measure to the appropriate GAAP measures as required by REG G can be found at slide 16 in the supplemental data section of today's presentation.

So back to slide four, Q3 results, total revenue for the quarter was $381.8 million, an increase of 15% over 2002.

Hayes Europe contributed 10.7 million of revenue to the quarter as its results were included for only one month.

Even though the transaction closed in July -- and that's due to the differences in fiscal periods between Iron Mountain Europe and the Iron Mountain parent company.

For the quarter, the business ran well, and our operating income before D and A margin of 28.9% of revenue represented a 40 basis point improvement over Q3 of 2002.

Gross margins expanded 130 basis points.

Mostly from improved labor management and reduced product cost of sales.

These gains were partially offset by higher facility costs due primarily to the opening of our large new facility in London.

As has been the case for some time, we are investing more heavily in sales and marketing and IT efforts, which have been drivers of higher SG&A.

These increases were partially offset by lower incentive compensation and bad debt expense in the quarter as compared to 2002.

Also included in operating income before D and A is a loss on asset disposals of 1.9 million for Q3 2003 compared to a loss of only $100,000 for Q3 2002.

Which negatively impacted margin by 45 basis points.

Slide five is the year to date version of the previous slide.

The dynamics here - at work here are very similar to those I described for the quarter.

Gross margin expansion was 205 basis points year to date, with the recharacterization of our real estate term loans in Q3 2002, and at year end contributing 54 basis points to our year to date gross margin expansion.

As a result, operating income before D and A has grown 17% on a year to date basis, reflecting a margin increase of 140 basis points.

At slide six looks at our Q3 results for the P&L line items below operating income compared to 2002.

Interest expense is up in absolute dollar terms due primarily to the increased borrowings for acquisitions, primarily Hayes IMS.

However, as an upcoming slide will show, we have reduced our weighted average interest rate meaningfully through various refinancing activities.

As you can see other expense net was 10.3 million, or seven cents a share for Q3 2003.

And this was comprised of the debt extinguishment charge we spoke of on our Q2 earnings call related to the partial redemptions of the bonds held by our Canadian subsidiary and also foreign-exchange related net losses.

Other expense, net for Q3 of the prior year was 2.7 million, or two cents per share, and was comprised entirely of foreign exchange losses.

Slide seven, again, this slide is the year to date version of the prior slide.

The item to note here is the other income or expense net line item.

In 2003, we have a year to date loss of 2.4 million, or two cents per share, versus a gain of 2.3 million, or two cents per share for 2002.

In 2003, the foreign exchange gains were more than offset by the debt extinguishment charges related to our significant refinancing activities, which was not the case in 2002.

Slide eight looks at total revenue growth rates.

For the third quarter we reported total revenue growth of 14.6%, giving us 11.7% total reported revenue growth for the year.

Obviously, the Hayes acquisition was a major driver of total growth, contributing 4.4 percentage points to the third quarter growth and 1.5 personal points to the year to date growth.

In addition, favorable foreign currency fluctuations added 1.5 to 2 percentage points to our overall growth.

Slide nine provides detail on our internal revenue growth rates for each quarter of the year.

The important results here is that storage revenue internal growth continued to show improvement, coming in at 8.6% this quarter, to increase the year to date growth rate to 8.5%.

Our U.S. paper business remains solid and we saw some additional growth in Canada.

Total volume growth improved modestly as creep remains stable and new sales volumes improved.

Our international businesses continue to grow in the high teens.

With respect to service revenues our core service revenue grew inline with storage.

This has been our historical pattern as core services are those used regularly by customers in the Normal course of business dealings.

Core services represent about two-thirds of all non-storage revenue.

Our outlook for Q4 is for internal growth in storage and core services to grow in the same range that they have year to date.

Unfortunately, we continue to see weakness in our complementary services revenue, particularly in special projects and product sales.

Complementary services saw a 9% negative growth rate in this quarter.

This class of services has seen meaningful variable growth rates since we began tracking it nine quarters ago.

It is important to note that in Q3 of last year, we saw a record complementary revenue internal growth of over 20%.

Taken together with core services, the internal growth rate for all services in the quarter was 2.3%, yielding a year to date growth rate of 4.1%.

Slide ten shows the sources of the variance in complementary service revenue for Q3.

Had complementary services revenues grown in line with storage revenue, we would have expected to see approximately 9 million in additional revenue.

As you can see special projects were 4 million, or more than 40% of the issue.

As we discussed last quarter, these very large projects are episodic in nature and have a large impact on the complementary services line.

You can also see that product sales, particularly in our OSDP division were another significant contributor to the variance.

The silver lining here is that we are selling products with much higher margins than in the past, and even with the decline in revenue dollars that we have experienced this year, our total gross margin dollars for OSDP data product sales are slightly up over last year.

The outlook for complementary services in Q4 is likely to be similar to what we have seen for the past two quarters.

Again, we are up against tough comparable revenue results in this area as complementary services grew 16% in Q4 of 2002.

We enjoyed a number of large projects last year and managed a special program for the government of Quebec over the last two years that is currently winding down.

Lastly, the fourth quarter of 2002 saw a record data product sales for OSDP.

Slide 11 is capital spending and investments.

In Q3 we spend $38 million for CAPEX in our core businesses and $4 million for our digital initiatives.

These levels are right in line with our expectations.

Our current expectation is that we will finish the year near the middle of our $190 million to $215 million range, and that is before including approximately 8 million of CAPEX related to the Hayes acquisition.

This Hayes spending consists primarily of storage systems for the first of the mandated building moves associated with this transaction.

Also recall that the total restructuring investment for Hayes will require approximately $20 million in additional CAPEX that we expect to spend in our fiscal year 2004.

Slide 12 looks at free cash flow for the first nine months of 2003 versus the same period last year.

We remain free cash flow positive through the first nine months of the year although we did consume working capital of approximately $20 million in the third quarter.

International operations, particularly Europe, accounted for about half of the increase in working capital due to the increases in prepaid expenses and reductions of accounts payable.

In the U.S., we saw an increase in accounts receivable as DSOs expanded by one day and our crude expenses also declined.

It's important to remember that working capital is best evaluated on a longer-term basis as the timing of normal periodic as well as episodic events can skew short term results.

We generated free cash flow before acquisitions in 2002 and we intend to remain free cash flow positive before acquisitions on an annual basis from this point on.

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

Slide 13 shows some summary debt statistics, and it shows the progression of certain debt metrics over the past 21 months.

As many of you know, we've been fairly active in the high yield markets over the last two years and particularly since last December.

In addition to being MPV positive, our refinancing activities, along with higher levels of floating rate debt and a decline in interest rates, have lowered our weighted average interest rate.

However, we are still currently more than 80% fixed with respect to interest rates.

A complete table of debt capitalization is included in the supplemental data at the end of the slide show.

Lastly, slide 14, 2003 guidance.

Today we are reaffirming the guidance originally provided on our last conference call back on July 31, 2003.

That guidance is depicted on this slide.

Although we haven't changed any of the ranges based on year to date results and our view of the balance of the year, we have a bias to the high side for revenue and operating income.

As previously announced, we will issue our 2004 guidance at our Investor Day, which is scheduled for Thursday, November 20, in New York City.

We look forward to seeing you all there.

Thank you.

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

Thank you, John.

As I said in the beginning, we're going to try to be brief today.

We recently did a survey of our investors and analysts concerning our communications and got some good feedback, but the overwhelming feedback was that we be briefer in our prepared remarks and get on to your questions.

We're attempting to do that.

We're experimenting with format, which we will change from time to time.

Our goal is to put more data on the web, not read it to you, assume that you can read and you have access to it, and try to focus on major news and changes and really what's going on in the business.

Hopefully, John, as he just did there, will be a little shorter.

Although looking at the clock, I'm not going to meet our goal because I'm already right up against it.

Our goal is for us to talk about 20 minutes and leave 40 minutes for Q and A. As I said, we've got more work to tweak that to make it work.

But bear with us as we change over the next few quarters to try to do that.

In terms of my remarks, I will, instead of repeating numbers and so forth, I will focus on if there's major news, major change and things I see, and sometimes a few things that are on my mind that I think you may be interested in, and today there's a little more in that category because frankly there's not a lot of major things going on in the business.

The business is running as usual and generally running well.

As John covered in his remarks, our margins are doing well and continue to expand.

They will move around from quarter to quarter, as we have said every quarter.

You can expect that.

But they continue to move up, and you can remain confident that long term we'll hit our margin targets.

Obviously, it's all about revenue on a sales focus front.

So I want to give you a sense of what's going on there.

All of our sales teams are focused on new storage and core service relationships.

That's what we pay them to do.

That's what we drive them to do.

And that's what they're doing.

And their sales performance is continuing to improve quarter over quarter and again in this quarter, and we continue to see the momentum in storage rate growth.

I'm not promising this is going to March up every quarter, because nothing works that perfectly.

They are doing what we ask them to do, and we feel good about their performance on those front.

And by the way, think they can continue adding to it, and we can continue to improve.

I don't think we're perfect.

Complementary services, as you heard John talk about -- I won't go in great detail -- is still a wild card for us.

And it's a wild card for a lot of reasons.

One is it's not something we focus on.

The things we focus on in the business are working fine.

We focus on margins and driving storage and core relationships, and that's what's happening and those trends are doing well.

Comp services by and large -- I won't say they just happen.

Sometimes we sell some of it, but it's not where the core focus of the business nor what we want to do is.

And I'll give you an example.

And the two biggest areas that are off that John said, is so-called large special projects.

Some of the large special projects that are making us wiggle are things that you cannot make happen.

You cannot make a major company go bankrupt or go out of business and spend $4 or $5 million helping clean it up.

You just got to be there when it happens.

You can't make a Province, provisional government, decide to take on a major project in land title record, you can just be there and hopefully bid on as we have, and make it happen.

We've got major things like that that have been going on in the past periods but are going away on us.

In general, though, we do have account managers who sell routine special projects, and they're doing that.

That's moving on, and they're doing fine at that.

It's the big stuff that's just not reoccurring.

As I said, in many cases, you can't stimulate the demand on that.

So we're not trying, quite frankly.

We just want to be there when it happens.

One of our advantages as a company is we have so many broad relationships that, when stuff like this does happen, we are generally the company they call upon, and we get the opportunity.

We want to continue to do that.

And the data products side, same thing.

If we were driving them for revenue, we would change our margin structures and we would probably have better revenue, but we would have lower margin.

And we're driving for bottom line, and we are actually paying for bottom line in that product segment, not for revenue, and we're getting what we're paying for.

Our sales force is selling a different mix of product for better bottom line.

But it does make the comp service numbers wiggle around.

I'm not sure there's anything we can do about it, and quite frankly, I'm not so sure, if you go to think about allocating effort, it's where I would put number one effort.

Even though it's something we have to whine about a lot the last few quarters.

The things we put our effort on and the things that drive the foundation of business are being successful, and that's what we're trying to do.

Now let me comment briefly for you, if I can, and quickly looking at the clock -- I just don't want to let time go by without commenting a little bit on a major milestone that occurred in July in the company.

That was the acquisition of Hayes IMS in Europe.

We had a conference call to describe it.

I want - want to go through that all, but I want you to understand a little bit about the progress on it.

It's the second largest acquisition we've ever done in our history.

We're a much bigger company now than sort of the last time we did a big one.

It still doubled our presence in Europe and really lays the foundation for significant growth and value creation there in the future.

So far, the company has proven to be as advertised, and there aren't any surprised.

The integration plan is on target.

We have already identified our required call Synergies we modeled into the transaction, and they'll be realized, as we anticipated they would, over about two years coming up.

And the organization is playing nice together.

We've combined the two.

We've made some changes, and it seems to be working.

I think f John didn't mention, we have mentioned before, we will experience a slowing in growth rate in Europe.

It's an artifact of math a little, and something I think we can do something about over time.

But since we have overnight doubled our business and Hayes had no effective sales and marketing program, they were basically on defense, we are working hard.

And I think we are in the position of turning that around.

Once we do that, we will increase the sales resources, and I think still be able to drive additional growth.

When you -- in this transition period, when our current sales team is out selling new business and you double the denominator, the percentage comes down.

So we will see a growth rate slowing there for a while.

But we do expect it to say in the low to mid-teens, by the way and we think we can improve that over time.

As I said, the business is running operationally and we are accomplishing what we want to accomplish in most, but quite frankly, not all areas.

There are things that aren't working as well as they should, but that's why we get paid to go out and fix them and make them work better.

The business has gotten bigger, boarder, more geographic span, more product span.

In any day of the week or month of the year, there's always something going on, and there's always something for us to do.

As you know, for some time, we've been talking to you about the gradual shift in our strategy, which was a shift in our focus on how we focus our energy and talent, our investment and organization away from -- you know, if we talked before to you about three-phase strategy, but away from acquisition growth model to one driven by internal growth.

In doing that, the sales of our core products is improving, as I said, and we have taken major temperatures steps to continue to bob our organization towards internal growth.

We've significantly expanded our product offering.

That's one of the things we've been working hard on.

Our core business, if you go back three, four, five years ago we had two or three core businesses.

We still have them.

They're still great businesses.

They still grow, and that's where we've still put most of our time, energy, money, and most of our revenue and revenue growth comes from.

As we start to think about how do you want to expand the business further, obviously, there was geography, but there was also product line.

The last few years, we've invested significantly in expansion of the product line.

New digital services and new physical services, and in doing so, we've proven to ourselves that significant market opportunity exists in these new lines.

Now we need to make some other changes.

We need to complete the steps of the transition away from being acquisition driven and making sales of the broader services more ingrained in everything we do, and also to become more externally focused.

When you're acquisition driven as an organization, you're very internally focused.

You have to be to keep the wheels from falling off.

We've been making gradual shifts and making sure our employees understand that and the management understands that.

We're now going to push that even further.

And we're starting to work on things like enhancing our customer experience through a programmed approach of customer satisfaction, and programmed versus just everybody working hard to make it work.

We've set two high level goals for ourselves to complete this transaction as an organization.

The first is to become a world class selling organization.

We're about defining that, so we know when we get there, we'll know what it looks like.

But it's a manner of planting the flag on the top of the hill and getting everybody to run up the hill together in that direction.

The other top level goal we set is to be an organization that's focused on total customer satisfaction in all of our service lines.

That means doing it, as I said, in a programmed fashion.

This quarter, we made some moves in those directions for all of those goals.

One of them was we actually have reorganized our self organization and changed the reporting relationships of each of our three North American sales teams.

Away from reporting to operating product divisions.

Heretofore, they were buried within product divisions, and now they're into one unified sales organization.

This is to stimulate cross-selling, to stimulate lead sharing, and to frankly bring more professionalism to it and more tools and more accountability to what we're doing.

And so we're also realigned our marketing resources or beginning to do that around our distribution channels and getting more in line.

Beginning in '04, we will modify our sales and account management coverage models even further.

We're going to make them richer and deeper.

Which means some more resources and more focused resources on different segments and different products to make sure that everything is covered correctly.

And I'm not going to go into great details now, but left over from the acquisition days, and as we shifted strategies, we did things that were successful.

But in the new world, as we went forward, we want to expand it.

As I say, we want to sell more than core products, and we want to do so in a more successful way, and that means changing some compensation plans or adding components to it -- not taking money away from people, but adding opportunity to it and changing accountability for certain segments and certain products.

Other things we'll be coming for the organization, including realigning the incentive compensation for all management and employees in our company, to include more revenue focus and eventually more focus on quality.

As we make these changes, we are mindful of the change in itself can be disruptive.

So we'll attempt to control the pace of change so as not to introduce disruption.

But on the other side, if you drag your feet too long, you won't maximize our long term internal growth rate, which is one of our goals.

We see tremendous opportunity around us.

We've been seeing it for some time.

And we are doing a better job in almost every front.

But now it's time to really speed it up because we see the opportunity to make it happen.

So it's a matter of moving the organization.

By the way, for those of you who are afraid of comments like this that think that moving an organization is impossible, I'm going to tell you it's difficult.

But the organization itself is telling us they want to be moved.

This is not something we're sitting in Boston and saying, we've got great new ideas.

I've been out talking to employees, they're ready and eager and see the opportunities.

They want to be turned loose to go out and get them, and that's what we're going to do.

For those of you who build models, I want to caution you that doesn't mean anything's going to happen next quarter or the quarter after.

All of this takes time.

Those are things we're focusing on.

We've missed our goal of 20 minutes.

We're now in total talk time of about 30.

With that, I'm going to stop, and let's take your questions, and then we'll come back and wrap it up.

Thank you.

Ladies and gentlemen, if you wish to ask a question, please press star followed by 1 on your touch tone telephone.

If your question has been answered, or you wish to withdraw your question, press star followed by 2.

Questions will be taken in the order received.

Please press star 1 to begin.

Sir, your first question comes from Andrew Steinerman of Bear Stearns.

Your question, please.

Hi.

It's on complementary services.

I know you broke out the special projects and product sales, but terminations are fees that are usually in there as well.

Maybe that's the other $2 million on slide ten.

Can you talk about trends in terminations and do you think the lower terminations might be leading to some of the storage increases here?

The other on that slide is made up of a number of things.

The largest of which is lower terminations, which would have made up $600,000 of that number.

In other words, they've continued trending down.

Which is a good thing.

Other service shortfall arose from our fulfillment division.

Oh, right.

Comac, which is obviously economically sensitive and so forth.

So there's a few things in that bucket, Andrew.

One is lower terminations, and, yes, that is one of the factors that's helping increase volume growth.

In fact, the two factors, destructions for this quarter, as you know, they were down last quarter.

Destructions actually came back pretty much more in line with sort of historical patterns.

I'd say the two biggest factors influenced in storage growth was terminations down and new sales up.

Right.

And then just a clarification on gross margins.

I know you keep on cautioning us they could dip down, and that's what you suggested last quarter.

Just what was the variance of why they picked up when we thought there was a decent prospect they would tick down?

This is gross margin in the third quarter versus the second quarter.

Gross margin -- I think we were guiding on total margin down, more from SG&A being up through the building of our enterprise sales force and our continued investment in digital.

Okay.

Thank you very much.

Thank you, sir.

Your next question comes from Arnold Ursaner of CJS Securities.

Your question, please.

You hit right into the question I had, which is your enterprise sales force.

Can you update us on the build up of that and what contribution you're seeing so far.

Well, we'll give you more details about in about three weeks, and that's unfortunately going to be a recurring answer to a lot of questions.

The Enterprise sales group we believe is doing fine.

We've learned a lot, including it takes longer than we thought, and we've learned a few other things about it.

We do believe -- and we are seeing -- look, they're closing in book and business, some of it's flowing through the P&L, but most of it really hasn't -- some will flow in Q4, but we'll see most of their results next year.

We do believe that on an FTE basis, by the time you hire them and get them on board, on an FTE basis, they will hit our targets which we set for them, which are pretty aggressive.

They'll be able to book this year.

Not necessarily realize their revenue in line with the targets we put for them.

Second question I have is your debt expanded this quarter.

I assume it's to reflect Hayes.

Can you give us a sense if you feel borrowing some again unknown acquisition that this should be the peek peak in your debt load?

Yes.

This should be the peak in our debt load.

Okay.

Thank you.

And cannot imagine any acquisition of the scale of Hayes out there.

In the world.

Thank you.

Your next question comes from Harry Blount of Lehman Brothers.

Your question, please.

Hi, guys.

Hi, Harry.

A couple questions.

I was wondering if you could maybe comment a little bit more detail on the progress of the Digital initiative.

Broadly defined -- I'm down here at storage network world, and everybody's talking about archiving and the growth opportunities there.

That's question one.

Question two relates to CAPEX.

Do you foresee anything going forward?

I know you're not giving specific guidance on '04, but do you see anything in '04 meaningfully different than what you saw in '03 other than the incremental 20 million, I think you mentioned, for Hayes?

Nothing meaningful, no.

I'll comment a little bit about the digital space.

As you know, we entered the digital business, I guess it's -- if I go back in my mind, three years ago when we started spending money on it roughly and maybe four years ago or longer when we started thinking about it and seeing a market opportunity.

We proved to be a little -- we saw the market opportunity, and as you know, the market shifted to the positive because of Sarbanes-Oxley, and digital storage and E-mail archiving is the rave among everybody.

Trouble is nobody knows how to do it very well policy-wise, which is causing people to go all over the map in terms of making decisions.

We are a closing business in this space and ramping up business in this space, and as I say, we'll go into more detail on that at analysts day.

For competitive reasons, we're very sensitive what we'll talk about there.

It's not taking off.

It's not going great guns.

We're seeing customers almost go into freak-out mode, which is why at Storage World you'll see more hardware vendors selling boxes that claim they can do archiving, and they can.

They can store data, but they're just not inexpensive ways of doing it.

What we're seeing is customers have gone from, yeah, we'll get around to it in time, we know we've got to do it, to, my God, this is the number one thing in my hit parade, and the Chairman says I've got to fix it now.

So they're spending money.

Some are doing it with us and some are doing it in house.

Even those who have made in-house decisions, they're coming to us and saying this is hard, this is a lot of work.

This is very difficult to do in scale, and this is expensive, which it is.

And starting to look at maybe the in-house decision was the wrong way to go.

Maybe we want to do something another way.

We still believe it's a good business.

I'll give you a little preview.

We think we built the product suite we need.

So therefore, we don't see the spending on the product and the development and all that stuff ramping up next year, and we're going to flatten out spending in it.

We are going to continue to build on the revenue side.

That is, on the sell side because we -- although it hadn't come to the income statement yet the opportunity is not only there, the bookings are there.

Or at least in the bookings and in certain cases pipeline.

But the combined forecast says it's worth doing.

So it's a long answer, and I'm trying to save something to talk about in three weeks.

If we tell you everything today, no use to go.

Hope that will give you enough, Harry.

Okay.

Your next question comes from Edward Atorino of Blaylock.

Your question, please.

Two of my questions are answered.

John, would you repeat the contribution from Hayes.

You went in and out on my telephone.

Was it 10.7 in the third quarter?

That's correct.

I heard that.

My other questions were answered Arnie asked it and the other guy did.

So I'm okay.

Thanks.

Your next question comes from Chris Gutek of Morgan Stanley.

Your question, please.

Thanks.

Hi Richard and John.

Good Morning.

I think in the Q&A portion of the last call, you guys maybe suddenly suggested that you weren't quite as comfortable with the high end of your 10 to 12% organic growth target over the long term and maybe you were more comfortable with the low end of the target.

Is there anything you've seen in the business over the last three months that either makes you more comfortable or less comfortable with the long term growth outlook for the whole business?

We remain committed -- or it's our plan and it's what we're trying to do, drive this business north of 10%.

I don't know how further north of 10%, since we're under 10 today, substantially.

Our goal is to get to 10.

When we get to 10, we'll work on 11.

When we get to 11, work on 12.

When we get to 12, try for 14.

This is not a business that jumped straight up.

It's a business that will move incrementally.

But nothing has changed in our view other than that.

Great.

With the Hayes integration, could you be a little bit more specific.

My recollection was that the integrations of the corporate functions was expected to happen fairly quickly.

Is that, in fact, now done?

Yes.

Ok, and when you say that you're on track and you've identified the synergies, are you comfortable with the 6 to 8 million in synergies, or do you see incremental opportunity out there?

You're talking dollars.

I've got to do the conversion.

I think you're right.

I think pounds, but I think you're right.

Okay.

Finally, on the shredding business, could you give us a quick update there I know for example you did the shred-all acquisition in the quarter.

What’s the total run rate for that business Any other updated thoughts on how it's going?

Run rates around 60 million.

And yeah, we like the business, and we continue to have an active acquisition pipeline, but we also -- as you may or may not remember, we did a lot of greenenfield startups.

So we, in fact, offer shredding through a variety of methodologies, in effect, but we offer shredding in every city, think now in North America that we operate the storage business.

There might be one or two, but they would be minor, minor, minor cities.

And we like the business.

The internal growth rates are strong, and sales force is having a field day with it.

Have you seen Cintoss in the market for it?

Sure have.

They're an active player in the acquisition market.

Great.

Thank you.

Your next question comes from Thatcher Thompson of CIBC World Markets.

Your question, please.

Hi Richard and John

Hey, Thatcher

John, when does the Hayes acquisition begin to factor into your organic calculation?

Really after we've owned it for a full fiscal year.

That would be '05.

Okay.

And correct me if I heard this wrong, but you went through the variance in the complementary service.

If it had grown in line with the storage service, you'd have an additional 9 million in revenue, but your gross margin dollars in that business are actually up over a year ago?

The gross margin dollars in one piece of that, and that is the data product sales piece is actually up over last year.

And that data products piece contributed 2.5 million, I think, to the variance.

Okay.

By the way, the concept that I was -- and I'm not sure I got the point across -- is the complementary services are, in fact, complementary services, and in certain cases, we have complementary services where nobody's charged for selling them.

They just show up or commissions.

But where they are charged for selling them, it's not their number one focus.

In most of the cases, certainly the big numbers, like projects and data products.

People's compensations are designed around the margin, not around revenue.

If we were to design their compensation around revenue, we've had a higher growth rate there, okay?

We walk away from projects and some things unless we can get an acceptable margin, and that's we why we do it around margin.

It's not a core driver of the business, it's a nice incremental contributor.

But if it's going to be a contributor, you want to make sure it's generating margin.

Okay.

Thanks, guys.

Your next question comes from Teresa Fox of Salman Brothers.

Ma'am, please proceed.

Hi, I just want a clarification.

The $8 million CAPEX that you referred to for Hayes, that is going forward -- so that's including this quarter and next quarter?

Yes.

In fact, our European operations operate on an October 31 quarter end.

So immediately upon acquiring Hayes in July, we started to put in place storage systems in our facilities for certain of the records in buildings that the seller was mandating we moved out of.

So we expect that in the July to -- the July through October 31 period, we'll spend $8 million against that effort.

Okay.

And historically, your CAPEX this quarter seemed a little low especially given the Hayes acquisition.

Do you think you can clarify that for me?

Yeah.

I think things that move it around are timing of real estate deals, and this year in particular, we had front end loaded spending on the digital side because we built out our data center.

I think between the Hayes restructuring, CAPEX, and what we expect to be a more real estate CAPEX will see a higher CAPEX in the fourth quarter.

Thank you.

Your next question comes from Alexie Kokokora of Bear Stearns.

Your question, please.

Thank you.

With respect to Hayes, I just wanted to -- I was just wondering if you could give us the split between storage revenues and service and storage material and sales.

Just wanted to confirm that was really off purchase for the period of one month.

And if I've got a follow-up if I may.

Well, while we're looking, ask your follow-up question.

In terms of the growth behind storage, in terms of the organic growth that you've seen so far this year, has that really been a secular increase in the business in terms of the actual business itself, or really is it market share gains which are behind that?

If you could broadly comment on where you really see the enterprise market right now.

Have you seen budgets at least as far as companies are looking towards 2004 in terms of their budgeting right now.

Do you really see the tide is turning a little bit there?

Thank you.

If you're asking -- I think you're asking me the big question is how do we read the economy?

Yeah.

Broadly speaking, yeah.

You know, I've been accused of being a junior economist by John a couple times with no license to do so.

I don't know that we can read the economy, to be candid with you, because, look, 87% of our business tends to come in like a utility.

It has been off.

Incoming boxes are off, and I think the economy is part of that, and we don't see that picking back up yet.

But I also think that we would lag any return because of the information would have to age and come to us, if that is part of the impact.

So I don't think we have a good view in forward looking.

In terms of the enterprise market's willingness to spend money, look, I think they're spending money on things they have to, and they'll certainly spend money on things they have to.

Compliance is a big issue suddenly.

The trouble is it used to be, when we go to the enterprise market and say we want to consolidate your program, it would be about we'll consolidate and save you money.

You know, by better pricing over higher volume and so forth.

And although that metric, or that factor's still there, there's a whole other group of people on the table.

There's a lot of lawyers around the table now, a lot of IT people around the table, who are saying, well, let's don't do anything until we understand what this means to compliance.

Let's have a compliance strategy.

And they're still thinking that stuff through in a lot of ways.

I think some of that flows through decisions.

Having said all that, it doesn't take many big enterprise accounts for us to sell to move the dial on us, and we are focusing more resources to making sure we have that kind of coverage so we can make the dial move, and I believe we can.

And I think we can move outside, in terms of new sales, outside of the economy, in effect.

And just by good selling.

Let's say four or five good-sized customers of which we've got hundreds of opportunities, if we can get focused on them correctly, can move the dial for us in terms of consolidating programs and so forth.

Long answer.

You know, the business has gotten complicated, so it's gotten hard for me to give short answers, which I apologize for.

Alexie, the first half of your question is had the Hayes revenue come in?

Yeah.

Of the 10.7 Hayes Europe revenue, about 6 million was storage and 4.7 million was service.

So that's a mix of 56/44, which is pretty much right in line with the rest of our business.

And that was just for the period of one month in terms of how we look at the business in the fourth quarter?

That's correct.

Their month of July is equivalent to our month of September.

And I was just wondering whether you could give us the accounts payable numbers discrete from current liabilities.

In terms of the change in the year to date?

Just sequentially where the balance of the accounts payable were, just for good order's sake as discrete from the current liabilities that you report in the press release.

We'll get it for you in one moment.

If that's your last question, why don't we go to the next question, and we'll come back and try to answer it for you when we get it.

Great.

Thanks a lot.

Thank you.

Your next question comes from Tim Byrne of Robert Baird.

Your next question, please.

Thank you for taking my call.

I want to go back to one of the first questions a bit, John.

It was talking about would you reinvest any incremental accretions to the EBITDA margin?

We saw it pick up here almost 130 basis points sequentially.

Should we expect it to be stable at that now higher level, or was that kind of, to your comments, Richard, about it bouncing around a little bit, that may come back here?

I think -- look, there's a variety of factors going on.

We haven't finished our plans for next year, so we're not ready to forecast margins.

You know, so in general, it's the when and how fast it will rise, it's too early for us to tell you.

Second is we still believe in our '06 target of better than 30%.

You know, have a variety of tools and things to get there.

It gets harder and harder as you get closer because the easy work is done, but we still believe that that's durable..

And then, third, I think embedded is -- I think that margins do -- margins do own the margin, move around no matter what.

You know, something that happened this quarter versus last quarter, make it move a little bit.

But what we're after is that on an -- over a four to eight quarter period, we keep marching them up at a fairly reasonable rate, which we've done for as many years as I can think, back where I can look at debt.

And we'll continue that path to hit our target.

Richard, when you get the full quarter's brunt of Hayes in the fourth quarter, would you expect that to put downward pressure on your EBITDA margins?

Yeah.

Because their margins are pre-synergy, and we haven't done all synergy below ours.

And two more financially oriented questions.

Can you give a specific, John, around the bad debt charge in the quarter and maybe the year ago quarter and also talk about bonus accruals in the quarter versus what you had planned where they at, above or below plan

Yeah.

Bad debt in the quarter was $1.2 million, or about .3% of revenue which is where it's been running all year.

Bad debt last year was $2.9 million, or about 88 basis points, which is where it averaged for the year.

So we are seeing a year over year pickup in margin due to bad debt.

While we're on that topic, I would tell you that, if you look back over six or seven years at Iron Mountain, you'll find that our historical bad debt ran in the .4 to .5% of revenue range, and then there was a period of acquisition integration where it spiked up into the -- into the high double digits in basis points.

It's back down closer to where we think the business should be, you know, at steady stage.

We did a lot of cleanup of AR as we consolidated the -- our collections efforts from the numerous acquisitions.

In terms of the -- in terms of incentive compensation, we -- based on weakness we've seen in service revenue and our current view of the full year results, we expect to pay less than 100% of the portion of our incentive compensation program that's tied to annual performance metrics.

So the incentive compensation expense in our P&L reflects that view.

Incentive compensation expense for Q3 and year to date 2003 is less than the expense for the comparable periods in 2002.

Great.

Thank you.

Your next question comes from Franco Turrinelli of William Blair and Company.

Your question, please.

Hey John, hey Richard.

You gave us Hayes Europe contribution.

The Hayes U.S. contribution, was that significant?

Should we back that out in our modeling?

Hayes U.S., which has been in for the full quarter -- that's sort of the odd thing given the 60-day difference in fiscal periods -- is that the little -- the smaller piece of the Hayes business in Texas is a full quarter in our numbers.

It's an oil and gas business, by and large.

It's contributed about $4 million in revenue in the quarter.

And it's more of a 50-50 split business, 2 million storage and 2 million other.

The other thing, on the core services revenue was the return to healthy growth primarily the return to normalized levels of document destruction?

Yes.

That was one of the drivers.

Other drivers, actually, we saw, which who knows why, we saw last quarter lower retrieval refile rates, and they're back up.

Last quarter was just an aberration for reasons we couldn't begin to tell you why.

Maybe, Richard, it had something to do with the weather will get you to forecast the weather on the next call as well.

Yeah, right.

Hey on the complementary services front, you've given us the variance year over year with the quarter last year, but I'm sorry.

You've really given us the variance relative to the storage revenue growth rate.

One thing that I'm trying to understand is how unusual, I guess, last year was.

You said that you've tracked this for nine quarters, John.

Can you just kind of give us the average growth rate in complementary services over that period.

Yeah.

The nine quarters we've been tracking complementary services, we've seen a pattern that goes -- that was in the low single digit for the first -- for the end of 2001, you know, the 9/11 quarter, we were negative 4%.

Then the fourth quarter of 2001, we were, you know, 3%.

We stayed in the single digits in the first half of 2002, and then in Q3 of 2002, as I mentioned, we had 20% internal growth in complementary services and then 16 in the fourth quarter.

So the year last year was 11.9.

And, you know, so that's been our -- and then the first quarter returned to low single digits, and we've had, you know, obviously, negative complementary service growth in the last two quarters and expect the same in Q4.

That's helpful.

Thanks, John.

And someone else had asked earlier the trend, I think, in trade payables.

We're writing them on a board so I can read them.

As of September '02, trade payables were 78 million.

As of September '03, they were 78 million, 8 of which was Hayes.

We're in '02 where Hayes didn't exist.

As of December '02, they were 76.

Hope that answers the question.

We are hitting upon about noon.

I'm not sure how many people left in the queue.

Maybe we'll take one more question and see if I can't make our commitment of stopping this in an hour.

Thank you sir.

Your next question comes from David Voit of Brown and Capital.

Your question, please.

Great.

Thanks, guys.

You provided pretty specific guidance for the rest of this year, and I know you didn't provide guidance for '04, but could you give us additional commentary on what you think free cash flow will look like for the rest of year.

Free cash flow will be up from its current level for the rest of the year.

It all has to do with whether the working capital turns around and the only piece of it that is easy to put your arms around is the U.S. receivables.

Each day there's $5 million, and we know we're up one day.

The rest -- I can't really know quarter to quarter what prepaid and payables are going to look like.

And we basically don't manage them to a number.

We just -- we try to pay on the time frames we're supposed to pay and go on with life.

But what about free cash flow guidance for the full year '03, just in a wide range?

We tend not to give guidance on that.

It will be up from -- we had originally said it would be in the same ballpark as last year because last year had the benefit of a big working capital boost through a four-day reduction in payables.

Four-day reduction in receivables.

Excuse me.

Okay.

Thanks.

We said we would try to meet our objective.

We've heard from many of you that said keep this under an hour.

I'm afraid we didn't meet our bargain of 20 minutes, but I'm going to try to at least get back to that schedule.

Hopefully, we're not leaving -- from what I can tell, we're not leaving too many on the call.

I would like to thank you.

We're going to wrap it up now.

I do want to remind you that our annual Investor Day is Thursday, November 20th, in New York City.

Hopefully, you've received invitations.

If not, you can call us, and we can certainly get you one, or you can show up for that.

As I said before, we will attempt to keep working on this call to reduce our comments, put more data up for you so that you can ask us, if you like, about what's going on, but in terms of why things are going on, in terms of the facts and the data.

We're trying to keep score of what you're asking, and we'll try to put that up for you and ask you to look at the web and get it yourself.

And then that will leave more time for people to ask good questions and so forth.

We appreciate your showing up.

We appreciate the hard effort of our employees and the support of our shareholders and employees.

Our business continues to run well, but as I said before, it's not perfect.

We've got work to do.

But we see paths to get it done, and I think feel pretty good about what we're doing.

So we will keep working on your behalf and our behalf and hopefully see many, if not most of you, at Investor Day New York.

Thank you

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a good day