鐵山公司 (IRM) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen.

Welcome to the Iron Mountain 2003 year-end earnings conference call.

My name is Amanda 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 at the end of this conference.

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

As a reminder, this conference is being recorded.

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

Please proceed, sir.

Thank you, Amanda, and good morning, everyone, and welcome to our Q4 conference call, Q4 2003 and, frankly, for the full year, 2003.

Today we will generally follow the same format we've had in the past but with one exception.

I'm going to introduce Steven Golden, who is our Director of Investor Relations.

And beginning today, I'm going to ask Steven to do a little of the work and introduce our calls and make general announcements and generally keep John and I on the line because we want to also make certain that we continue on the pattern that we started last quarter which is our goal of doing this in under an hour, and at the same time, leaving ample time for your questions.

So having said that, let me turn it over Steven.

Thanks you, Richard, and welcome everyone.

Today's call will follow our regular pattern.

After I've completed the announcements, John will discuss the 2003 financial results.

He'll then turn the call back over to Richard for some state-of-the-company remarks followed by Q and A and brief closing remarks.

As is our custom, we have an user-controlled slide presentation on the Investor Relations page of our website at www.ironmountain.com.

John will feature these slides during his remarks.

As you know, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for the first quarter and full-year, 2004 financial performance.

All forward-looking statements are subject to risks and uncertainties.

Please refer to today's press release or the Safe Harbor language on slide two of our slide presentation for discussions of the major risk factors that could cause our actual results to be materially different from those contemplated in our forward-looking statements.

As this is the year-end earnings call, John will focus his remarks on the full-year results referring to the fourth quarter as appropriate, to fully explain the year's outcome or to highlight meaningful differences in the fourth quarter dynamics as compared to the full year.

For your reference, slides containing our Q4 results can be found in the supplemental data section of our presentation beginning at Slide 14.

As a reminder, operating income before D&A, or (inaudible), a metric we will speak to frequently on this call, is one that we believe to be important in evaluating our overall financial performance.

Please keep in mind that operating income before D&A as 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 and reconciliation of this non-GAAP measure to the appropriate GAAP measures as required by Reg.

G can be found in today's press release and also in Slide 16 in supplemental data section of today's presentation.

With those announcements completed, I'd like to introduce John Kenny, our CFO, for the financial review portion of today's call.

Thank you, Steven.

Thanks for the introduction.

I'm going to just move through the slides that are posted.

Slide 2 is the Safe Harbor language to which Steven referred in his opening remarks.

Slide 3 is my agenda for this morning which is identical to agenda of the past few calls.

So let's get into the meat of it.

Slide 4 takes us from revenue through operating income for the year 2003, versus 2002.

The business ran well in 2003, both from a top-line and bottom-line perspective.

We surpassed a significant revenue milestone and continued on track toward our goal of margins in excess of 30%.

Total revenue for the year was $1.5 billion, an increase of 14% over 2002.

Hayes Europe, which was acquired in 2003, in July of 2003, contributed $46 million of revenue to the year.

As its results were included for only four months due to the differences in fiscal periods between Iron Mountain Europe and the Iron Mountain parent.

I'd speak more about revenue in a moment.

Our operating income before D&A margin was 29% of revenue and it represented a 160 basis-point improvement over 2002.

Comprised primarily of operating efficiencies and significant improvements and our allowance for doubtful account positions.

From an operations perspective, gross margin expanded by 190 basis points, mostly from improved labor management and reduced product cost of sales.

As has been the case for some time, we are investing a significant portion of our gross margin improvements in sales and marketing and IT efforts for our physical businesses and for our digital initiatives, all of which has been higher drivers of SG&A.

In the aggregate, spending in these categories was up about 110 basis points of revenue, versus 2002.

Now offsetting those higher overhead expenses was a meaningful reduction in bad debt expense for the year.

As part of our standard year-end closing process, we analyze our reserve for doubtful accounts.

Due to the success of our centralized collection efforts over of the past two years and resulting improvements to our accounts receivable aging, we were able to significantly reduce our reserve for doubtful accounts in 2003.

Said differently, for the year we recorded negative bad debt expense or contra-bad debt of $2 million, versus an $11 million expensed in 2002.

This improvement in our bad debt expense added approximately 50 basis points to our margins.

Going forward, we feel that the volatility in our bad debt expense over the past several years, caused first by the high level of acquisition activity then turned around by our recent collection process improvements, is behind us.

And that we will return to more stable levels of bad debt expense that run at approximately 50 basis points of revenue.

Also including in operating income before D&A is a loss on asset dispositions of $1 million for with 2003, compared to a similar loss for 2002.

Slide 5 looks at our 2003 results for the P&L line items below operating income and compares those to 2002.

Interest expense is up in absolute dollar terms due primarily to the recharacterization of our real estate term loans in 2002, and 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.

The line item other income has seen lot of action in each of the last few years principally in two areas.

First, we have taken advantage of very favorable credit markets and refinanced a lot of our long-term debt result in some early debt extinguishing charges.

At the same time, we have experienced large gains due to foreign currency rate movements as we mark our foreign subsidiary debt and inner-company balances to market.

Coincidently, in each of the last two years these gains and charges have roughly offset each other.

To be more specific, on a net basis we had other income of $3 million, or two cents per share, for 2003.

And for 2002, we recorded a net expense of $1 million, or 1 cent per share.

Slide 6 shows total revenue growth rates.

For the year we reported total revenue growth of 14%.

Obviously acquisitions, most notably the Hayes transaction, accounted for a significant portion of that amount, contributing about 6 percentage points to overall growth.

In addition, favorable foreign currency fluxuations added about two percentage points to growth.

Lastly, internal growth came in at just over 6% for the year, which brings us to our next slide, slide number 7.

Slide 7 displays our internal revenue growth rate for the year from a core and complimentary revenue perspective and compares our results to the 2004 estimates we discussed in depth at our investor day last November.

In both with 2002 and 2003, the internal growth rate for storage came in at just over 8% and the growth rate for total core revenues, which comprises about 87% of our total revenue, rounded to 9% in each year.

The big difference is between the two years was a reversal from 12% positive growth in complimentary services revenue in 2002 to a negative 7% growth rate for complimentary services in 2003.

For the year 2003, when we take complimentary services together with core services, the internal growth rate for all service revenue was 3%.

In the quarter, our storage revenue internal growth rate was 8%.

As we saw slightly lower rates of growth, principally in North America.

For the year, our storage unit volume growth remained stable.

The internal growth rate of core services revenue was strong in the quarter, driving the full year's results to 9%.

Lastly, and as expected, complimentary services which represent approximately 13% of total revenue, remained weak at negative 10% growth in Q4.

This is in the face of very difficult comparisons from 2002.

In the second half of 2002, we produced record complimentary service revenue internal growth that was about 18%.

This class of services has seen meaning variability in growth rates since we began tracking it 2.5 years ago.

I guess I'll sum up this slide by saying we remain confident in our overall expectations of internal growth rates for 2004 as displayed here.

Moving to Slide 8, Capital Spending and Investments.

In 2003, we spent $188 million for CapEx in our core businesses including real estate.

And $17 million for our digital initiatives for our total CapEx spend of $205 million.

This is nearly at the middle of our range of $190 million to $215 million, even after including approximately $5 million of CapEx related to the Hayes acquisition.

The 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 2004.

Slide 9 is a graphical depiction of our reported cash flows from operating activities for the last three years.

You can see a steady upward trend driven principally by revenue growth and margin expansion.

Slide 10 looks at free cash flow before acquisitions for each of the last three years.

As we have consistently stated, we fully expected the combination of growth and margin performance in conjunction with nearly flat interest and capital spending to yield a powerful trend of increasing levels of free cash flow.

That dynamic is clearly at work and will continue for the foreseeable future.

Please note that excluding the extraordinary Hayes transaction, our free cash flow more than covered the consideration paid for all other acquisitions over the last two years.

While we fully expect increasingly higher levels of free cash flow going forward, let me remind the listeners that the Hayes transaction in combination with the buy-out of our Iron Mountain Europe partners, are expected to be free cash flow neutral to the company in 2004 as we have restructuring CapEx requirements and a higher interest load to contend with.

In 2005 and beyond, realized synergies and growth in Iron Mountain Europe will contribute positively to free cash flow before acquisitions.

Moving to Slide 11, Debt Statistics.

This slide shows the progress of certain debt metrics over the last three years.

As many of you know we've been fairly active in the high yield markets over the last two years and even into 2004, particularly since last December.

In addition to being NPV positive, our refinancing activities, along with a decline in variable interest rates, have lowered our weighted average interest rate meaningfully.

We are currently more than 80% fixed with respect to interest rates and have a weighted average maturity of almost eight years in our portfolio.

Giving effect to the 2004 financing transactions already underway, our weighted average maturity will increase to almost nine years.

Looking at the leverage ratios, it is important to note that the business continued to deliver in 2003 as evidenced by the senior credit ratio in the face of increased debt, primarily related to the Hayes acquisition.

The reason that the bonds ratio increased in 2003 is that it was charged fully for the Hayes-related debt which was taken on at the parent level, but did not receive any credit for the acquired OIBDA.

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

For the finance group, 2004 is picking up right where 2003 left off.

In January we successfully completed our first Sterling denominated high yield debt offering raising 150 million pounds sterling, of ten-year money at a rate 7.25%.

The offering was very well received and represents an important expansion of Iron Mountain's investor base.

This transaction will also provide a natural hedge for a portion of our expanding investment in Europe.

Earlier this month we called the remaining $20 million of the outstanding eight and one-eighth percent Canadian bond.

This transaction will give rise to a $2 million debt extinquishing charge in Q1 of 2004.

In the senior credit market we are about to close Iron Mountain Europe's debut syndicated bank facility.

The loan is non-recourse to Iron Mountain Inc., the parent, has been fully syndicated and represents total commitments of approximately 210 million pounds sterling.

Once established, Iron Mountain Europe will use this facility to repay a significant portion of the bridge financing we provided for the Hayes acquisition.

In addition, we will soon launch the refinancing of Iron Mountain Inc.'s senior credit facility.

This facility matures in January 2005, and we are already in productive discussions with our lead bank, J.P.

Morgan, towards acceptable renewal terms.

I should mention at this point that after the various financing activities I've described above are completed, we will have an immaterial balance drawn on our revolver.

Moving to Slide 12, let me review 2004 guidance.

Today we are reaffirming the full-year 2004 guidance originally issued at Investor Day in November of last year and most recently affirmed in an 8-K we filed on January 9, 2004.

That guidance, along with our view of Q1 2004, is depicted on this slide.

Now we obviously exceeded our own expectations for operating income and OIBDA levels and margins in the second half of 2003, yet we are not changing our guidance for 2004.

I would like to remind you that the bad debt levels booked last year will not recur in 2004, and are likely to return to historical levels of about a half a percent of revenue.

Putting our implied OIBDA margin guidance of 28% to 29% for 2004 right in line with our normalized results for 2003.

We also expect in 2004 to reinvest efficiencies we harvest in the business to fund further expansion of sales and marketing efforts, aimed at increasing long-term growth rates.

One last word with respect to Q1, 2004's other income/expense outlook.

As I mentioned, we will record a $2 million debt extinguishment charge related to the final core of our Canadian bonds in Q1.

We're expecting some of this year's foreign exchange volatility as we complete the international financing events I've outline above.

It is impossible to quantify the impact at this time, but the effect is not expected to be material.

Before I turn the call over to Richard, I would like to provide you with an update regarding the Pierce and Sequedex legal matters.

The arbitrator in our action against Peter Pierce for breaching the terms of his employment agreement recently issued his ruling.

In that ruling he found that Iron Mountain did not provide sufficient evidence for him to rule in our favor and awarded Mr. Pierce his fees and expenses specifically associated with this arbitration proceeding.

The amount of these fees and expenses is yet to be determined, but in any event, they will be immaterial to our results or financial position.

Needless to say, we are disappointed with this finding.

We brought this arbitration against Mr. Pierce because we had a reasonable basis to believe he was violating the terms of his employment agreement.

During the time he was also a member of the company's Board of Directors.

We felt we had an obligation to protect the interest of our stakeholders and employees by pursuing our legal rights against Mr. Pierce, and we continued to believe in the accuracy of our claims and the facts we presented.

We have filed a motion to vacate the arbitrator's decision in Middlesex County, New Jersey, where the pending action against Mr. Pierce and others is currently stayed.

We intend to prosecute for motion to vacate and litigation vigorously.

Consistent with our policy, we will not comment further on any on-going legal matters beyond what is included in our SEC filings.

Thank you.

And with that I will now turn it over to Richard.

Thank you, John.

Today I'm going to, since it is our year-end and Q4 call, reflect a little bit on Iron Mountain as it stands today and what we really accomplished last year from a strategic perspective.

I'll try to be mindful of the time and move on fairly quickly if I can.

2003 was a solid financial year of our results were strong as John went through it but we made major strategic progress.

Our core businesses remain solid.

Our investments in additional growth areas are making good progress and we like what we see and we see good opportunity there.

We also have had good progress in developing our world-class selling organization.

And as you have heard us say before and you'll hear again today, we're really on a two-prong approach of really turning this away from the acquisition strategy-driven business to one that is a world-class selling organization as well as a selling culture supported by what we internally call it, TCS, or Total Customer Satisfaction-driven service delivery organization.

And we made significant progress there, but it's an on-going challenge as we keep working forward.

The forth major area in '03 was about Europe.

It was clearly, if you look back in 2003, at the activity and the results, 2003 was the year of Europe for Iron Mountain.

Additionally, on operating side, our margin accretion was strong and we remain on path to hit our long-term margin targets of 30% as we've been saying for some time.

Strong free cash flow from operations and a good control of capital investments, as John said, we generated $83 million of free cash flow and covered all of our acquisitions, except for Hayes for the second year in a row, and with excess cash flow in addition to that.

Good financing activities that put us on a very solid financial footing.

We increased our average maturity and lowered our interest rate significantly by taking advantages of very strong capital markets and our reputation in our performance with those markets.

So all and all, I think the company's financially well set and strategically well set.

Each of our business units, some made more progress than others and I'll speak of it quickly.

Our North American paper storage business, better known as Iron Mountain Records Management, had a good selling year.

It had good performance in their core services and the growth is stable, but they also created a national business in our new secure (inaudible) product line service and drove good margins on the performance all at the same time.

Our off-site data protection business, it was a great margin year but a difficult revenue year for them.

The comp services off and also some core services.

On the other hand, the the sales force created good selling momentum through the year and I think we're looking for them to actually have a better year in '04.

Additional services or activity built through the year and continues build and we expect '04 to be the year in which we recognize some good revenue momentum and get some traction in that business.

Iron Mountain Europe was having good margin performance and good revenue performance and, for that matter, integrating some small acquisitions when, as we say, along came Hayes, as you know, in the middle of the year.

We were lucky to be able to purchase our largest competitor in Europe.

It's a major strategic move for the company because it not only doubles our size and gives significant business, but makes us by far the largest player through Europe and gives us a strong position now to build our sales and marking as well as to expand our product lines and so forth.

Obviously today that organization is still working very hard on integration and are doing a lot of work, but I would tell you it is on-plan and they're doing a good job.

You may have noticed that our partner, (inaudible), our partner in Iron Mountain Europe, earlier announced that they had received shareholder approval to continue the transaction.

So tomorrow we're on track to complete the purchase of our remaining 49.9% equity interest in Iron Mountain Europe (inaudible) for about $154 million, U.S. dollars.

We originally announced the transaction in December, and this represents our final phase in the joint venture strategy in Europe and gives us full strategic and financing control of what has become our second largest vision.

This was a successful joint venture.

The termination of it is approximately five years from the date it began, and it's been a good journey with our partners and they have been very well good partners.

It was successful both for us and for them and I want to publicly thank our partners because they were good partners to work with.

This is a bit of a trend, if you look at what we're doing in buying in other joint ventures and so forth.

Probably today, we will buy in the balance of our of the partnership we have in the Netherlands.

The transaction has been agreed upon and the paperwork is being done and I've been told it should be signed today.

In Mexico, we've actually increased our positions from 50%, approximately, to 75% and so we will continue doing that over time as our shareholders are looking for liquidity and as we get very comfortable with a given business and a given area to make sure we can go it alone.

As you remember, our strategy was to expand with partners internationally so we weren't alone and businesses and cultures and markets we didn't understand, but with a view long term to take a hundred percent control as we learned and so forth and that we are now limiting implementing the second phase that strategy.

Other international expansion as we completed an acquisition, actually February this year, of a company called Store Box and (inaudible), gives us an increased presence.

We we're already strong in Santiago, but now I guess we're super strong, is the way to say it.

Acquisition activity in general, outside of Hayes last year, were about seven transactions for about $48 million and, to remind you, that's roughly equivalent to what we did the year before.

And we see an outlook of the business in that same range. '04 may actually and little stronger, but it's not going to be a Hayes year all over again, and so forth.

So with that, let me summarize and then we'll go on and take your questions.

As we said, at our Investor Day earlier, I think the major theme here is that in '03, we sort of hit the turning point.

The major investment to build our footprint and our services and (inaudible) product line is largely behind us.

And so you see that in our CapEx, our reductions or acquisition appetite reduced and free cash flow increasing.

The challenge remains to align our organization to capitalize on these investments, to maximize the revenue growth and, therefore, shareholder value.

In '03 we started down the path to (inaudible) our markets and account management groups to do this, we were pleased by the results but know that we have a ways to go.

Recently we took the next major step to align ourselves with the common goal of maximum revenue generation coming from a professional sales team supported by customer satisfaction driven service delivery organization.

We believe that this step will produce higher revenue growth and increase customer satisfaction which, in turn, creates more revenue opportunity.

This is an exciting time at Iron Mountain.

A time for us to reap the rewards of the investment and the hard work of the past year of an acquisition driven strategy.

And although this next phase as challenge, it is a fun one and we remain excited about the future.

With that, we will stop and try to take your questions and see if we can't maintain our time line.

Operator, if you would please take questions.

Ladies and gentlemen, at this time we will conduct a question and answer session.

If you would like to ask a question, or comment on today's topic, you may do so by keying star followed by 1 on your touch tone telephone.

To withdraw you question from the queue, please key star followed by 2.

Please hold for the first question .

In our first question comes from David Gold of Savadai and Company.

Good morning.

That was pretty close.

Hi, David.

There we go.

Just a couple of quick questions for you.

John, I think you mentioned storage growth in the quarter was about 8%.

Was that about right?

Did you give a number for service?

Total service was 3, comprised of core service at 9, offset by complimentary at negative 10.

Okay.

And then if you can just for a second go over I guess the bad debt reversal in the quarter.

Number one, I guess how much of that came into the fourth quarter?

It sounded like I guess the year we had a swing of about $13 million.

And then, kind of, if you can go through what the thinking was how that kind of developed I guess as late in the year as it did, or is that something that just naturally is just re-evaluated at that point?

I think it was about $6 million in the quarter, first of all.

And the -- you know, we constantly look at the balance sheet and try to improve our analytics, continuously on judgmental items like allowance for doubtful accounts.

We looked carefully at the two-year results of our centralization effort.

And we looked at the improvement in aging and the -- by buckets.

And found that the appropriate thing to do was to reduce our allowance and brought that down to a level that we think is appropriate for our improved collection operations now.

We expect, therefore, there is unlikely to be meaningful movements in our bad debt going forward, which before all this activity, both acquisition and then work flow changes, was about a half a percent of revenue.

Is that responsive to --

One other thing I might add, Dave.

This is Richard.

As we saw the pattern of it over the quarter getting better and then at the year-end you do your analysis and see what it means, we also in terms of our internal budgeting and it's important right here because it has to do with a lot of people's compensations, for '04, people are budgeting their bad debt down significantly over the history.

Meaning we think it brought it down, and we're only going to pay people to keep it down, and so, you know, this is all part of just cleaning up the world and we think cleaning up from the acquisitions and so for the so we think it's behind us.

Gotcha. (Inaudible.) John, when you say $6 million is that correct a $6 million credit in the fourth quarter?

Yes.

Okay.

Perfect.

Thanks a lot.

Your next question comes from Kim Burn of Robert Baird.

Thank you for taking my question.

I guess just first to follow up on the prior question.

John, were there any other one-time items in SG&A aside from the bad debt reversal?

No.

Okay.

And then Richard, maybe you could comment.

We're approaching's deadline on Sarbanes Oxley requirements here for people.

Have you seen any incremental pick up in the amount of intensity put towards that, special projects, et cetera?

No, and we wouldn't see it in special projects.

What we are seeing is in consulting and our consulting business today actually has more demand than they can fill in terms of, you know, of customers wanting to fix and, you know, their programs on a go-forward basis.

But it wouldn't typically, at least in this stage of the cycle where they are, result in special projects.

It may in time as customers organize and have a real program, then they'll go back and clean up past of their past sins and that would result in special projects, but I think we're a ways away from that is I guess.

The first phase is they have to do their planning, and we're seeing that in the planning cycle side.

Right.

And then, can you give us some kind of sense for 2004 how you see the pricing environment?

You had historically over the last 18 to 24 months written a number of contracts for larger clients that had some volume incentives on the price side.

Do you think we've grandfathered that, and as you kind of work through the various segments in your business, do you begin to see a help here on the internal growth rate from pricing in 2004 or is it still in that net neutral to maybe a bit negative?

Well, I think really where we are is we started with our very largest customers and yet some of those are grandfathered and starting to kick in as they should, but we're working our way down through our customers.

And what's happening is, as we segment our accounts and our sales force and put more feet on the street and go out with customers.

Two things.

We're waking up customers and offering them the opportunity to rationalize their pricing in return for more volume and so forth.

I think we got another few years of that have as we rationalize these 150 acquisitions.

So I think we got another couple, three years of it at least.

But we're also seeing in return for that, good upside opportunity.

It will more than pay for itself.

Great.

And then in the final question and I'll get off here.

Can you give us a sense of the update on the Hayes acquisition, still going well?

Oh, yes, we're very pleased with the Hayes acquisition and the team, both the management team that joined us and our team in terms of how they're going forward with integration.

It is doing fine.

Thank you.

And our next question from Brad Suffelo of J.P. Morgan.

Good morning.

I want to talk about some of the pipeline you have in terms of flow.

Do you see anything in terms of the types of business that you're winning that suggests you could see a significant pickup in complimentary services this year?

We see, first, as we've said many times about our comp services, that a good part of it is background noise, it's a lot of small projects and we don't really have visibility to it.

In terms of large projects.

Look, it's a wild card.

We see some stuff out there and if some of it comes in typically coming off lower comps the year before, you absolutely could see stuff, but I'm not going to sit here and forecast anything, okay?

Our guidance in general implies a bit of a uptick so we are betting on a bit of a uptick in general.

We may be wrong, but that's how we're biased and that's how we're betting.

Okay.

And then on the secure sheadding side, in terms of the distribution and kind of the platform you have in place now, do you feel that you're's somewhat done with acquisitions on that front, or are you still out there looking fairly -- ?

No, we're still aggressively looking in the acquisition space.

We are -- we now are able to provide the services and about every city if not every city we're in and in our storage businesses, but we're looking to fill in in certain cases when we provide the services we're doing it with just a mobile truck and we want to fill in start-ups with more scales through acquisitions if we can.

So no, we're still actively looking for acquisitions.

And, Brad, even when we have our footprint complete, we'll continue to acquire a shredding businesses I would think because the fold in economics are compelling.

Yeah,, but I still want to make sure that you and everyone understands that the level of acquisitions that we're talking about don't fall in line historically in the last couple of years of what was spent because these are pretty small deals and pretty small companies.

Sure.

And I guess this leads to my next question.

Looking at the free cash flow generation you've had this year and kind of the outlook you provided over the next five years, it would seem that if there really aren't that many more large properties out there for you to look at and you continue at an acquisition pace of let's call it at around $50 million a year, that you will be able to pay down a significant amount of your debt at least maybe some of the bank debt in the next several years.

You know, I'm just trying to understand the rationale of pushing out the high yield maturities to 2015, 2016, when five years from now you may be in a position to pay those down with a lower cost of debt.

Well, a couple things.

You're right in terms of the acquisition targets out there.

I would tell you that internationally, there's not another Hayes or so forth, but internationally, there are a few other deals that we might pop here and there, but nothing's going to change the dynamics you speak of.

And the dynamics you speak of is, which we said over and over, we can see it coming, the days where we have significantly more annual cash flow than we have the ability to invest intelligently.

And so the question that always ask is, and I think I can be quoted from one of these conference calls, when someone asked me about paying down debt.

My knee-jerk reaction is why would you ever want to do that?

And I guess my answer is still the same thing.

Why would you ever want to do that?

We believe in keeping, I would say, a prudent amount of leverage and that prudent amount of leverage is defined to the total amount of leverage relative to our predictable cash flow.

And average--obviously the company will keep delevering itself so that prudent leverage target will go lower and lower because you just won't be able to keep the leverage higher.

And our strategic dilemma, which is not a tough one, but we're just not ready to declare (inaudible) is exactly how we will give the cash back to our shareholders in the future but that would generally be our goal.

Okay.

I guess we'll stay tuned for a few more years and see what happens.

Sure.

Yeah.

And your next question comes from Harry Blout of Lehman.

Hey, guys.

Couple of questions.

Really related to as you complete the European acquisition.

Just some expectations in terms of opportunities for either improvements in the tax rate or impact on the tax rate, broadly, and then also, any commentary around working capital efficiencies and any other efficiencies we might see?

I am speechless on the topic of--

That's a first.

Of cash taxes.

I think we're trying to balance the issues of hedging our investment exposure with having adequate debt on our foreign subsidiaries for minimize cash taxes.

That's a bit of a puzzle, particularly as your investment changes over time and becomes increasingly multicurrency.

So I don't think we expect to see any change in our statutory tax rate, any meaningful change in our meaningful tax rate.

As concerns capital and CapEx, we certainly viewed one of the attractive things about Hayes was that we were going to be able to amortize required IT investment in multicurrency and multilanguage systems over a much larger revenue base.

With respect to another point in your question, working capital.

I think that the working capital attributes of our business in Europe are likely to be similar to those in the U.S. because the billing patterns are the same.

Okay.

And then couple other just quick points on the churn side of the equation.

I was wondering if you could give us a little more granularity on that side of the equation as well as perhaps some commentary about sales force productivity?

It's generally been ramping up.

Is it continuing to ramp fairly steadily or are you starting to see plateauing out here in the next few quarters?

I'll take the first part of the question.

Cubic footage lost due to terminating accounts ran around 1.5%, it's run between 1-2% pretty consistently for the last few years.

You know, it was right around 1.5 I believe.

On the issue of sales force performance.

Sales force performance, it did ramp through last year and I think they've got some ways they can continue going up some.

But it's not quarter-over-quarter.

It's salespeople because of incentive plans and everything else and there's a little bit of seasonality to our selling as to when people make decisions.

You know, summertime is a bad time to sell or get decisions because everybody's gone and so forth.

But yeah, we think we will continue to see productivity gains which is basically the same thing throughout this year and that's what we're counting on, and we're adding some headcount substantially because we think the formula is working.

So we're going to keep adding headcount until we find the end point.

We don't think any of our markets are saturated or territories are saturated and I think anybody looking out on the outside would say we're still underinvested in that area and that's what we continue to do.

And lastly, on the tough compares on the services side.

I think, if memory serves that analysts, you said probably late second half of '04 is when the compares will start turning favorable.

Has there been any changes either on the positive or negative side, based on your backlog and visibility to that?

No, no, I think we would still stands by those comments.

Okay.

Thanks.

Your next question comes from Franco Turinelli from William Blair and Company.

John and Richard, good morning.

I have several questions, but let me start with a couple of key ones.

On the cash flow front, John, I remember that in '02, there were some significant working capital, you know, benefits, but not artificially but kind of boosted that $57 million of cash free before acquisitions and investments.

I assuming we should similarly adjust the 2003 by the bad debt changes.

Bad debt is non-cash.

So, so and our working capital was flat, I mean, we were -- it was a source of cash of only $2 million.

But your prior observation is accurate.

The $57 million we generated in '02 had one-time benefit of an improvement in working capital, $28 million.

So normalized for that, it would have been a $29 million free cash flow year.

So the $83 million we posted this year, which only had the benefit of $2 million, is a meaningful move up in free cash flow, normalized for working capital.

But the bad debt wouldn't have -- doesn't factor into the cash for the year.

And in hindsight, you're right.

I need to go back to take more accounting classes.

Having said that--

I wish I had more people helping me around the table.

So, Richard, you said that you were limited in your ability to intelligently invest as cash flow.

Can give us an update on the digital services businesses?

You know, kind of how the business is going and investment outlook for that is?

Well, I haven't hit my intelligent outlook yet, but I can see it coming.

Look, as you know the digital services is taking longer and cost more than we projected, which means that we were wrong or stupid.

And we were probably both.

But we are not stupid in terms of what we still think is the outlook and the opportunity, and we have -- our sales force in that arena, it's catching hold.

The customers are catching hold.

And, you know, we were landing some significant business, and churning up.

I think, just as a general sense, if you ask the people whose incentive plans are tied to, and there are a significant number of people, that are incentive plans are tied to hitting the digital revenue targets, they would tell you they're worried less about it than they, frankly, are the hard work coming at them because it's a significant increase.

So I think we're feeling positive now.

I realize that doesn't give you a single number and I'm not planning to, but I think we're feeling pretty positive about the space right now.

Not even a tied up digital services contribution to your 2004 revenue?

No, no.

It was worth a shot.

You mean you can try, but no.

I've tried that before and have been wrong too much.

I like being right, so (inaudible) anything.

One final one and then I'll hand it back.

It's always my responsibility to ask you about Europe and immediately after Hayes, you had talked about sensing a shift in the marketplace as a result of your increased visibility and presence in Europe.

And in particular, you were optimistic about that creating new opportunities for joint ventures or acquisitions in previous -- in new markets.

Any kind of thoughts on that?

Yeah, absolutely.

In fact, I don't think we bothered to announce this, but we now are, or shortly, and maybe they don't want me to announce it.

Maybe I better shut up.

For competitive reasons, I'm not going to tell you what I was about to say, sorry about that.

But we're doing interesting things in Europe.

Let's say that.

But yes, we are seeing that, we're seeing the doors open big.

We're seeing, and in fact, we're going to accelerate the learning (inaudible) from the U.S. into Europe.

For instance, we're building the equivalent of an enterprise or high level sales force quicker than we did in our strategic path and march along in the U.S. because there's not only global business, there's just tremendous opportunity in in-country business and there's tremendous opportunity in pan-European business.

So we're going about building a pan-European sales force and so forth, where as in the U.S., as you know, we waited quite a few years before we to tackle those kinds of opportunities and so forth.

And, yeah, Europe is a fun place to be.

It's where I spent a reasonable time of '03 and and probably '04 and maybe the next three or four years.

It's fun to go over there and I don't know for the food and wine, and it's fun to go over because of the business opportunities.

I have a saying that I suspect our management team in the U.K. is listening, and they'll throw up when I say it for the tenth time, it's like shorting fish in the barrel and every time they accuse me of undervaluing their interest when I say that.

But it is like shorting fish in a barrel and it's a lot of fun.

Franco, to your broader question.

There isn't a week that goes by that someone in the business in another part of the world or someone in a closely aligned business that involves logistics or something doesn't call us and ask us to become part of the Iron Mountain network.

They understand that we, that if they help us get into business in a new, immature marketplace for our services, that we can drive a lot of business to them.

So it'll be a Chinese menu of expansion but, the rest of the world, we've learned how to partner and be successful.

We've had lots of varied experiences there that have all, to this date, been successful and will probably continue that approach to the rest of the world.

I would presume, however, that in your guidance for '04 there is little incremental new market or other similar expansion other than the Iron Mountain Europe and Hayes transaction.

Correct.

Just like there are no acquisitions in our guidance, there is no geographic expansion assumed.

Thanks, guys.

Yep.

And your final question comes from Andrew Stearnarman from Bear Stearns.

All right.

Let's try to make this one count.

Hi.

Usually this is a seasonal time where people do housekeeping and send their boxes in.

I know my office is overflowing.

And I see a lot of Iron Mountain trucks on the road as people are cleaning things up.

My question is about acceleration of storage growth which you stuck to your 8-9% for '04 even though the fourth quarter of '03 was hovering only at about 8%.

My question is, you know, usually what you see here and seasonality sets the tone for the year for storage growth.

Are you already seeing the activity, your trucks on the road now that should suggest that you see an acceleration of storage growth for the year, or is it just in your backlog or what you call roll and do you expect it to come in?

With respect to existing customer volume activity, we get -- that is reported on monthly, we only have one month and it's unremarkable compared to other Januarys.

With respect to the new sales opportunities, I think we're feeling good about those, and -- but it's hard to move the dial here.

In a hurry.

In a hurry, and remember, the unsolicited defense I gave at the end of Investor Day to the 8-9% suggested that, while we were bullish in certain arenas, we do fully recognize that Europe is unlikely to maintain its recent past internal growth rates for storage which were 18 or 20% because they doubled in size and they no longer have the ability to steal business from their largest competitor.

It's a great reminder.

How about longer term 10+% on storage?

Do we strike stick by that still?

I'm not sure, obvious of granular storage, I think we still believe, and it is our goal, to drive this business more than 10%.

Internal (inaudible) over longer term.

That's our goal, that's what we're working for.

Thanks so much.

Good luck to you.

Yeah,.

And that concludes the question and answer session.

Okay.

We'll have a closing remarks.

Yeah, yeah.

I will thank you.

Thank you, everybody, and just in quick summary, 2003 was another good year for your company.

As you saw in our press release we started looking back, it was tenth consecutive year of rising revenues and operating profits.

Actually, it was higher than that in rising revenues, but if you put (inaudible) together, we had one little blip back there in operating profits, but we think (inaudible) much longer than that, but we think that's pretty remarkable particularly in addition to, I think, our 60th consecutive quarter which is a lot of years of storage revenue growth.

And that's the beauty of the business and we don't rest on our laurels.

Our whole goal is to change the trend line up and we look forward to extending that record and extending the trend line.

Let me just do a little housekeeping.

This is the season where John, particularly, and me some, go out on the road and try to meet with investors so either John, or John and I both, will be at the following places.

Mark your calendars at the (inaudible) Orlando Conference on the 24th of March, at the (inaudible) Growth Conference in Chicago on May 6th, the Bear Stearns Equity Conference in New York on the 15th of June, at the William Blair Growth Conference in Chicago between June 23rd and 24th and the is he (inaudible) Equity Conference in Boston between June 28th and 29th.

So we look forward to seeing many of you out on the road and having further conversations with you.

Again, we appreciate the confidence of our shareholders.

We work hard on your behalf and view you as our partners.

And we always look forward to your feedback.

Thank you, and have a good day.

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

This concludes your program.

Have a great day.