鐵山公司 (IRM) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the second quarter 2004 Iron Mountain Incorporated earnings conference call.

At this time, all participants are in listen-only mode and we will be facilitating a question and answer session toward the end of today's conference.

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

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

I will like to turn the presentation over to your host for today's call, Mr. Stephen Golden, Director of Investor Relations.

Thank you and welcome everyone to our second quarter 2004 earnings conference call.

Today's call will follow our regular pattern.

After I have completed some announcements, John will discuss the Q2 financial results.

He will then turn the call over to Richard for some state of the company remarks, followed by Q&A and brief closing remarks.

Before we get started, I would like to let everyone know that our annual Investor Day will be held Thursday, November 18th at the Waldorf Astoria in New York City.

Please mark your calendars accordingly.

Details to follow.

As is our custom, we have a user controlled slide presentation on the investor relations page of our website at www.Iron Mountain.com.

Please turn now to slide 2 of that presentation.

Today's earnings call and slide presentation will contain a number of forward-looking statements.

Most notably our outlook for the third quarter and full year 2004 financial performance.

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

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

As you know, operating income before D&A or OIBDA is a metric we speak to frequently and one we believe to be important in evaluating our overall financial performance.

Beginning of this quarter we will providing additional information and reconciliation of this non GAAP measure, the appropriate GAAP measures as required by Reg G at the investor relations page on our website, as well as in today's press release.

With that, I would like to introduce John Kenny, our CFO for the financial review portion of today's call.

John Kenny, Jr.: Thank you, Stephen.

Slide three is my agenda for the morning.

Looks like my standard agenda with one small change.

Rather than reviewing revenue through operating income for the quarter, and then for the year to date, and then repeating the process for the balance of P&L, I will be focusing on the quarterly results in their entirety with a cursory review of the year to date.

The dynamics at work here for the quarter are similar for the full year.

So let's proceed.

Slide 4, takes us from revenue through operating income for the quarter versus Q2 of 2003.

As we will see throughout this presentation, the business performed in line with expectations in the second quarter of 2004.

As with any portfolio of businesses, some units performed better than others.

Total revenue for the quarter was $445 million, an increase of 24% over the same quarter in 2003.

Internal growth contributed 7% while acquisitions, primarily the Hayes acquisition contributed 14%, and favorable foreign currency fluctuations added the final 3% to the total growth rate for the quarter.

Gross margin was flat to the second quarter of 2003.

There is nothing remarkable happening here.

Improvements in occupancy costs were offset by modest increases in labor costs driven largely by the full quarter impact of the Hayes business in the second quarter of 2004.

This is a business that was not in our results during the same period in 2003.

Keep in mind that IME, that is to say, Iron Mountain Europe, which has doubled in size since this time last year has margins that are still below those of the United States.

While we fully expect to increase IMEs margins over time to levels consistent with those in the U.S., until that time, they will dampen consolidated margins a bit.

Also our digital business generates higher levels of IT compensation and cost of sales.

As this revenue mix is currently weighted heavily more toward labor intensive services such as back file conversions.

Our operating income before D&A or something I will refer to as OIBDA, that margin on OIBDA of 28.6% of revenue is up 90 basis points from the same period in 2003.

However, included in the OIBDA margin for 2004, is a gain on the disposal of fixed assets of about $1 million which represents a 70 basis point increase over 2003.

Otherwise our OIBDA margin was up just slightly versus last year.

Increases in our sales and marketing investments are being offset by lower levels of IT and bad debt expense.

As we discussed on the Q1 earnings call, our digital spending will likely increase throughout the second half of the year as we staff up to handle the increased revenue levels we are now seeing in that business.

Meanwhile, D&A for the second quarter was in line with expectations.

Now slide 5 looks at our Q2, 2004 results for the P&L line items below operating income compared to 2003.

Interest expense is up 17% over 2003 primarily due to the increased borrowings for our acquisitions.

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

Moving to the other income or expense line, you can see a negative swing of $10 million year-over-year.

That is to say in 2003, on a net basis, we had other income of $5 million, or a positive 2 cents per share.

And for 2004, we recorded net expense of $5 million, or a negative 2 cents per share.

To be more specific, in 2003 we recorded gains of $19 million due to foreign exchange rate movements as we mark our foreign debt and intercompany balances to market.

These gains were offset by $14 million of debt extinguishment charges.

In 2004, foreign currency exchange rate movements resulted in $5 million of net losses.

There were no debt extinguishment charges in Q2, 2004.

With respect to the British pound, our hedging strategy is in place and working well.

IM, Iron Mountain Europe's credit facility allows us to borrow locally and Iron Mountain Inc.'s Sterling denominated bonds offset gains and losses associated with our intercompany debt.

Later in this presentation, I will discuss a refinancing event that will allow us to implement a hedging strategy for our Canadian Dollar exposure.

As a reminder, all of our per share amounts reflect the 3 for 2 stock split that became effective July 1 of this year.

I am going to move very quickly now, slides 6 and 7 are the unidate versions of the previous two slides.

As I said earlier in my remarks, they depict the same dynamics as those that were at work in the quarter.

Let's then move to slide 8 and talk about revenue growth.

Total revenue growth rate as reported for the quarter we reported total revenue growth of 24%.

Internal growth was solid for the quarter coming in at 7% with acquisitions, primarily the Hayes transactions, contributing an additional 14 percentage points to overall growth.

Finally, favorable foreign currency fluctuations added about 3 percentage points.

Moving to slide number 9, we can take a closer look at internal growth.

Slide 9 displays our internal revenue growth rate for the quarter from a core and complimentary revenue perspective.

Core storage representing 58% of our total year to date revenues grew at 9% in the quarter showing some improvement over the past two quarters.

The storage growth was led by modest improvements in our North American paper business and continued strength in Latin America.

As they gain traction, our digital services continue to have a modest positive impact on storage revenue growth.

Core services, representing another 29% of total revenues, grew at 7% down slightly from the growth rate of the first quarter due to softer results this the North American paper business, offset by continued strong performances in Europe and shredding.

Total core revenue internal growth was 8% for the quarter.

As in Q1, complimentary services revenues were roughly flat to last year.

Primarily due to the absence of large special projects such as the multi-year Canadian government special project that came to an end in the fourth quarter of 2003 and also due to lower product sales.

We remain confident that the total internal growth rate for the year will be in the previously announced 6% to 9% range.

Slide 10 is titled capital spending and investments.

This shows our CapEx spending on a year-to-date basis relative to the prior 3 years and also to our 2004 full year projections.

Spending in the second quarter of 2004 included $51 million for growth and maintenance CapEx in our core businesses, $6 million for the acquisition of real estate, and $2 million for our digital initiatives for a total CapEx spend of $59 million.

This was fairly heavy CapEx quarter in the wake of a relatively light Q1 and is not necessarily indicative of a run rate spending level.

We still expect to finish the year within our previously announced range of $210 million to $240 million.

I should add that the positive momentum we are seeing in digital might result in modestly higher CapEx spending in the third and fourth quarters for that line of business.

Included in the year to date 2004 CapEx numbers, approximately 7 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.

Please recall that we expect the restructuring of the Hayes acquisition to require about $20 million of CapEx in total in 2004.

Slide 11 looks at free cash flow before acquisitions for the first half of 2004 versus the first half of 2003.

As we have consistently stated, free cash flow is best evaluated on a full year basis as the timing of normal periodic events can skew interim period results.

At the 6 month mark, we are right in line with last year's levels as we had expected to be.

The $28 million use of working capital that's depicted here, is the product of several factors.

Many of which are timing issues.

By year end, we believe that working capital will be neither a meaningful source nor a meaningful use of cash.

Our expectation is that we will end the year with free cash flow in the same range as that which we generated last year.

Again, please remember that this free cash flow burden - - the number is burdened with a $20 million of Hayes restructuring CapEx.

Slide 12 entitled debt statistics.

This shows the progression of certain debt metrics over the last 2 1/2 years.

As many of you know, we have been fairly active in the high yield markets over the last 2 years, and even into the beginning of 2004.

In addition to being net present value positive, our refinancing activities, along with the general decline in interest rates have lowered our weighted average interest rates by 80 basis points to 7.8% since 2001.

We are currently 95% fixed with respect to interest rates and have a debt portfolio maturity of more than 8 1/2 years.

Our most recent financing activities involved the repricing of our $200 million of term loan B. We just closed that transaction reducing the interest rate on that debt by 25 basis points.

Thereby saving a half a million dollars in annual interest.

As I said earlier, the percentage of our debt that is fixed with respect to interest rates has increased from 85% at year end to 95% at the end of Q2.

This move is almost entirely due to an interest rate swap on the 100 million pounds of Sterling - - pound Sterling of borrowings under Iron Mountain Europe's credit facility.

Our bond leverage ratio, defined generally as total debt divided by EBITDA, is currently at 5 times, due primarily to the borrowings for the acquisition of the remaining 49.9% of Iron Mountain Europe.

Remember, the bond ratio is fully charged for the domestic debt associated with this transaction, but does not receive any credit for the foreign operating income before D&A.

Slide 13 is our debt capitalization as of June 30 and details the components of our debt structure where you can see here the effects of the last 2 years of finance - - re-financing activities.

Looking forward to the third quarter.

We plan to pay off our last real estate term loan using our revolver.

Not only will this reduce interest expense, it will also allow us to implement the final phase of our hedging strategy and to reduce our Canadian tax expense going forward.

These moves are part of the strategy we contemplated when we refinanced the parent company senior credit facility earlier this year.

Now as a result of this re-financing, we would expect to take a one-time non-cash accounting charge of approximately $8 million during the third quarter due to a recharacterization of the interest rate swap associated with the real estate term loan.

Although the charge we expect to record in Q3 is non-cash, it represents the current fair market value of the swap or that is to say the net present value of the expected monthly cash payments over the remaining 3-plus year term of the swap.

Just to be clear, we are leaving the swap in place at this time, and it is important to note that we will continue to enjoy the economic benefits of fixed rate debt in a rising rate environment over the life of the swap.

Unlike the many early extinguishment charges we have taken through other income or expense over the last 2 years, this one time charge will be recorded in interest expense.

Going forward, proper hedge accounting also requires that the changes to the fair market value of the swap be recorded against interest expense.

I wanted to alert you to this circumstance so that you could better assess the pro forma financial impact as you update your financial models.

Slide 14 is guidance for 2004.

Today, we are raising our full year 2004 guidance primarily to reflect our recent acquisition activity.

That guidance along with our view of Q3 2004 is depicted on this slide.

Thank you.

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

Thank you John and good morning everybody.

I'm a little stretched today to find a heck of a lot to talk to you about that probably a theme of the future.

As I reflect, it's almost got to be ho-hum to grow a business 24% year over year and sit back and we take it for granted.

So I actually don't want to do that and I would like to start by thanking everybody in this Company who is working pretty hard.

But sometimes they make it look pretty easy to keep a business growing like we are.

And we are fortunate to be in the business we are in.

The business is running well.

It's a solid quarter.

Some things are up and some thing down but a good portfolio and I think by and large a business is running well.

The revenue grew 24%.

Margins are doing fine.

Our sales force, our effort we continue to invest in it and are growing our head count.

We are running right on plan pretty much on our expenses here and there.

And they are running ahead of their plans in terms of their performance.

We are gaining the momentum we'd hope to gain.

We will keep doing that as I said many times until we find the point of no return.

We are on the path, as I've said many times, to build a world class selling organization and we got a ways to go.

Not that we don't have a great one, but not just the organization itself that is out on the front line, but all of the support functions.

And we've made a lot of progress and headway, and a lot of things like that but it's probably not worth me going through every little detail for you.

As John said, the storage which is the driver of our business is going the right way, but I want to caution you it will move around.

But we see it going in the right way.

It's gotten to be so large though nothing will move the dial.

So don't anybody get to excited.

But the good news things are moving in the right direction.

Digital services continue to grow and we see the backlog increasing.

As we've said last quarter, we are expanding our capacity to deliver.

That means spending a little more money than we expected because we see even bigger backlog.

And we will hopefully continue that trend, because we hope to adding to the backlog and start bringing it through the bottom line which we - - is beginning to happen.

So all in all, we've got good outlooks for the business.

The only thing sort of remarkable for this quarter was the large number of M&A transactions in total including and a few that closed right after the end of the quarter were 13 transactions, across 4 countries and 4 lines of business in the total cost of $106 million.

A little higher than our normal activity in this space as we've said many times.

Some of that had some of the larger transactions that we've talked about before.

Particularly the major German transaction closed much earlier in the quarter.

But, you know, these transactions not only are good economic transactions, but they also have helped enhance our strategic footprint in certain cases, particularly the German acquisition gave us market leadership there.

That business is running well since we've owned it, a few months.

Just recently, in fact just last week we closed a nice transaction in Canada.

And that actually gives us a full footprint across Canada, across the whole country in our secure shredding business, which, as you know, is a business that's growing well with us and a business that we continue to expand now throughout North America.

We got full North American footprint in that business and this acquisition in Canada is really helped jump start, although we had business up there already, it's really just solidified our position in that marketplace.

And then last of the transactions, the balance were folded in across the multiple business lines and multiple geographies which, as I say, continue to help drive the economics of the business.

One thing I do want to talk a little bit about was, about this time last year we announced the acquisition of our largest competitor in Europe, Hayes Information Management Services.

And I should tell you that the integration of that business in Europe is substantially completed.

And when I say substantially completed, there are a few little things left to be done here and there.

But the major work and the heavy lifting is over.

Not all the costs have come through the income statement yet, but will do so in the next few quarters because of the time lag in our reporting between Europe and the U.S.

The team over there did a great job.

It's, looking back, it's hard to understand how much work it takes to integrate something of about equal size together and do it as smoothly as they've done.

So I really take my hat off to the European team.

They have done a great job on this.

Besides by the way not only completing the transaction and integrating, we bought some other companies in Europe.

Part of that transaction, we had to pick up and move 100 computer servers out of a Hayes data center into a new data center that we didn't have and therefore had to open, and in fact relocate it at the same time our accounting group out of London as well as the Hayes accounting group into a new one opened and in operation in Scotland.

It wasn't just we took the business and put it together.

We actually been doing not only integration but some fairly fast rationalization in this business.

As I've said, they are doing well.

Their tongues are a bit hanging out and now, just as soon as getting these accounting moves going they have us focused on the Sarbanes-Oxley certifications over there which is, you know, the hard part of just making sure everything ticks and ties and it's a lot of work left.

But it's a good job for the group over there and I think the high risk period in the Hayes transaction, as it would be in any large transaction, is pretty much behind us.

So as I said in the beginning, not much else to say about the business.

I guess that's the good news about the business.

We just continue chugging along, staying focused on our strategy.

We continue to enhance our sales force and continue to enhance our service delivery as we go out there and we continue to see good activity and what's going on.

It's summertime and the Democratic National Convention is in Boston and for those who are not here the Mayor scared everybody out of town, and it's an absolute ghost town.

It's just as dead as I have ever seen the city.

So we are all kind of relaxed here and we will stop and take your questions and answers.

Operator, do you want to prompt Q&A?

Certainly, sir.

Ladies and gentlemen, at this time if you wish to ask a question, please key star, followed by 1 on your touch tone phone.

If your question has been answered or you wish to withdraw your name from the queue, you may key star, followed by 2.

Again, star 1 for questions.

It will begin with your first question which comes from Arnold Ersener of CJS Securities.

Please proceed sir.

Good morning.

It actually, it's Mike Rouse for Arny.

John or Rich, could you talk a little bit about maybe the pro forma impact or the first half from the number of transactions that took place maybe more towards the end of this quarter?

Yes.

John Kenny, Jr.: Stephen Golden is poised to answer that question.

That's the sound of me being poised.

The actual revenue realized year to date from these transactions is approximately $8 million.

And the pro forma adjustment for all the transactions closed year-to-date, including those closed post end of the second quarter, would be approximately $25 million.

All tolled, the acquisitions we completed, all 16 of them year to date, we acquired annual run rate revenues in the neighborhood of $66 million.

And any sense of the OIBDA impact?

The OIBDA impact, we acquired approximately $20 million of OIBDA through these acquisitions and the pro forma adjustment year to date would be about $7 million.

John Kenny, Jr.: Bear in mind that $20 million on $66 million is pretty fancy margin.

We will not achieve that margin until we have restructured those businesses in the interim, we will be taking through the P&L certain charges related to re-structuring like re-imaging the businesses.

Paying pay-to-stay consideration to people who are redundant, but are there for an interim period to provide services, paying the sellers for interim technical support services and the like.

Great.

Thanks.

Your next question is from Harry Blount from Lehman Brothers.

Please proceed.

Hi guys.

Hope all is well.

The questions I really have are around kind of the shorter term and longer term future.

I think on the cash flow side, you guys have been facing tough comparison in '04 versus '03, partly because you had pretty meaningful working capital improvement in '03, and then also because what you mentioned on the Hayes side.

But as we start thinking about some of the puts and takes for '05, can you kind of run through of the - - at a high level for us?

John Kenny, Jr.: Well, we would think that this is early, so I will reserve the right to change my view.

Not that you will let me get away with that. [laughter] I would think that CapEx will not rise at the same rate of revenue growth.

When you normalize this year's expected CapEx for the Hayes restructuring, you get a number that's pretty much in line with '03.

And I wouldn't imagine that '04's number or '05's number would diverge that meaningfully from that number.

We would expect that while we had meaningful improvements in 02' and '03, levels of working capital, we would expect to hang on to most of those improvements.

That is to say we expect our DSOs to trend down creating a source of working capital.

We do become a taxpayer out in '06, so that's not an '05 event, but the harbingers of that are things we can see while our federal cash taxes are zero to - - low to zero, about 2 million a year.

This year-to-date, we've experienced $6 million in cash taxes versus $2 million in the same period last year.

The $4 million delta is higher state taxes.

They are extremely aggressive in a down economy.

And then the rest is evenly split between Latin America and Europe.

We can do a better job reengineering all of our legal entities and licensing agreement - - internal licensing agreements to try to minimize the taxes.

Some of that is going to be unavoidable.

So I think - - I don't see us being a large consumer nor source of cash due to working capital either this year or next year.

Again, CapEx growing but not growing anywhere near the growth rate in operating income from - - cash flow from operating activities.

And -- I talked all around and I hope --

The one area that you didn't touch on, John, and Richard, I would love you to give more color on is the overall opportunity for operating leverage in '05 now that - - based on Richard's comment that the integration is largely done with Hayes.

Where are some opportunities for operating margin leverage?

We are on - - just to be clear and understand how we run the business.

We are on the path until we hit 30% OIBDA by '06.

And when we get there, I'm not going to give you any more for awhile.

I going to spend it.

So I'm going to keep reinvesting it in the marketing and sales as long as we see opportunities.

There is more margin in our pocket?

Sure.

How much more?

I don't know yet.

But we will hit our 30% by '06.

John Kenny, Jr.: Yeah.

The thing that's gonna get us there is Europe is running 23 to 24% which us up from recent years, but doesn't fully reflect Hayes integration nor the attainment of scale economics on the continent of Europe.

We also have digital which is a drag on margins right now, which drag will diminish and eventually it will break even.

So those two thing along with solid continued performance in the more mature businesses should get us to our goal.

Then my last question is on the complimentary services.

You anniversary on the Canadian contract, I believe here at the end of this year.

Could you help us think about the next few quarters, what some of the other issues are and then should we not see that grow based on what we are expecting in '05?

John Kenny, Jr.: The Canadian special project, government special project, you referenced was a source of revenue in the first half of '03 of little over $3 million.

And year to date in '04, well it ceased in the fourth quarter last year.

So it, by itself, represents almost 300 basis points of year-over-year change and the level of complimentary.

The rest of the shortfall in Q2 is mostly data products related.

I don't think our comps get better here, meaningfully better until 05.

I don't see anything in coming out the rest of '04 that will cause our complimentary growth results to diverge from our investor day guidance of negative 5 to a positive 5.

Year to date, we are around zero so we hit the birdseye.

Harry, unfortunately we have to cut you off.

We give an list of, much to my surprise, there's a lot more people on the phone.

So we want to get to as many as we can.

Thank you.

Gentlemen, your next question comes from Pak Chung of Search Light Capital.

Please proceed, sir.

Hi, guys.

Just a question in terms of, can you tell us roughly what multiple revenue in EBITDA that you paid for acquisitions this year?

We don't divulge that.

You can figure it out anything out you want but it's not helpful to us in the acquisition of the market to talk about that.

That's fine.

But then my other question has to do with how that relates to your guidance.

You said I think you are including acquisitions in your full year guidance?

We have changed our guidance to reflect the revenue we expect to realize from those acquisitions that were announced subsequent to our last conference call.

We expect that the revenue we will realize in this fiscal year from those acquisitions is about $12 million based on the timing of close of them and recall that European acquisitions have a 60 day lag in terms of their fiscal cycle.

In the face of that, expected $12 million of realized rest of year revenue from those acquisitions we've increased revenue guidance of 15 and reflecting not only those acquisition but our confidence in our original guidance in the core business.

Right.

But then you had upside of about roughly $10 million in the second quarter.

That means that you will only increase the second half revenue by about $5 million.

Upside from what?

Your second quarter guidance, you guys came in about almost looks like - - you came in 4 - - 46 -- that's about 6 or $7 million above the midpoint.

We had a -- our guidance was 435 to 450.

The midpoint of which would be 422.5.

And. 442 1/2.

Excuse me.

We had about $2 million of revenue from acquisitions that closed after - - in the quarter that closed after we gave last guidance.

So backing that off from our 445, we are at 443, I would say bullseye in the middle of the range.

You are saying it's 12 million.

But I guess I'm saying you paid $106 million.

And even if you paid 3 times revenue, I guess that should contribute about - - over 30 million for the full year?

I guess half of that - - I guess it's about - - it should be about 15, $16 million or so?

We said earlier that we realized to date this year it was $8 million of revenue and the balance of the year would be about 12.

That's $20 million of revenue out of $66 million would be bought in this year.

The reason for that is that we bought much of it in - - after the Q3 - - the Q2 fiscal period.

Many of the deals closed late in July and the ones in Europe that closed in April didn't make a full second quarter.

Okay.

That's fine.

I mean just in EBITDA, you know you guys had upside of about a couple million in the second quarter from your guidance.

Your full year guidance really didn't go up.

You kept it roughly flat.

I guess I'm just trying to wonder what about the EBITDA from the acquisitions that you just done since the end of the March quarter?

We raised the low end and the top end by a couple million.

We expect rest of year realized revenue from those acquisitions to be $12 million.

We've stated earlier in the first six months to a year of an acquisition like those you have meaningful restructuring charges that can't go through purchase reserves but hit the P&L.

And we've also said we would increase our spending in digital due to - - in the face of excellent market demand.

We put that all in the soup and mix it up and we come out with our guidance and that's where we are.

Okay.

Great.

Thank you.

Your next question comes from Thatcher Thompson of CIBC.

Please proceed.

Good morning Richard and John.

Just a quick point of clarification.

On the presentation you said year to date CapEx of - - or cash paid for acquisitions of $182 million, which - -

John Kenny, Jr.: That includes (INAUDIBLE) where we got no incremental revenue.

We bought out our partner.

John Kenny, Jr.: We were consolidating the full results of that.

And (INAUDIBLE) was $112 million of that that went out in the first quarter?

John Kenny, Jr.: Yeah.

There was $106 million of acquisition in the second quarter?

John Kenny, Jr.: $106 million of acquisitions is --

Oh, through today.

Including significant deals that closed after the quarter.

So there is roughly $40 million post the quarter.

John Kenny, Jr.: Exactly $40 million post quarter.

Okay.

All right.

And then, Richard, you spent less time on digital today than you ever have and yet John, for the first time you said it impacted the growth rate.

John Kenny, Jr.: Modestly.

Okay.

Can you give us a little more insight into what's going on?

There was a lot of excitement last quarter.

We were plenty excited.

The truth about it is I get tired of saying the same things over and over.

So I just decided this time not to say much of anything.

It's summertime.

Give me a break.

Business is doing fine.

We are excited.

But come on, it's a lot of hard work and there is a time gap between excitement and revenue.

But we are doing fine.

And we are pleased on it.

But we said before, look, be clear.

We said before we think digital is going to ramp pretty good through the year but the actual realized revenue through this year is not going to move the dial at all, okay?

But we are looking for it to good year next year and we are hiring people to build organization and just growing things so we can take care of the demand we hope and expect to see and will deal with for next year.

Thanks.

I don't mean to be totally asleep on you.

As I said, Boston is dead and I'm sort of half dead with it.

Next question?

Next question comes from Tim Byrne of Robert Baird.

Thank you for taking my question.

Sure Tim.

Richard, can we talk a little bit about Europe?

You have spoken in the past that it feels like the U.S. did in the mid-80s.

Which leads me to ask, have you seen any kind of anecdotal indications in the first half of this year that that market is beginning to accelerate?

And if not, when would you and what kind of indications would you be looking for?

We see a variety of things, but it's -- the indications you see are the couple of things.

And the market dynamics over there are shifting for a lots of reasons.

One is they have not outsourced as much and they are.

It will go a little slower at first and then, I think, it will accelerate.

The slowness has to do with big macro economic trends of different - - you guys know better than I do what's going on in the European economy and the outsourcing trends.

That we see a lot.

The anecdotes we see are the conversations we have, the access we are getting at major European based companies.

The brand is starting to coalesce, and we are learning to do things in different ways over there to meet the bare challenges of outsourcing buildings, and peoples, maybe you have to play the game a little bit different than here, and I think we will.

But we are seeing a lot of that sort of stuff.

The business is growing fine right now.

I will continue to tell you our biggest issue over there is building.

Just as we were building a more complex sales force over here, we have to build a more complex sales force over there.

And we are out in the market hiring people.

It's -- that piece is going slower than I would like.

And the management team over there knows that and they are working hard on that.

And those are the kind of things that are going on.

The other impact on the European business and the worldwide business is what's going on in the U.S.

The Sarbanes-Oxley, I know you know all those trends are rolling into Europe.

They are rolling into even some of the Asian countries.

And even in the South America.

Their regulations which you might call almost piggyback regulations, and so forth sort of coming out and you can see the trend.

If you are going to have a world competitive financial market, you will have to - - everybody has got to be roughly equally transparent.

You see the laws being drafted and see the companies reacting.

And then you see the results of particularly U.S. based global multi-national companies worrying about their information management around the world rather than just in the U.S. so much.

And that’s starting to drive people to behave differently.

And what that means is the top of the Company, it's at sea level is more worried and interested in this issues.

And we bring a lot to the table to these people when we get to them in terms of breadth of services, knowledge and strategy of how to go about solving some pretty complex problems.

And that's having an impact on Europe too, as we are actually driving, you know, and getting better at driving new business out of the U.S. into Europe and we think those are long trends that will go for a long time.

John Kenny, Jr.: Just to put some numbers to that, Europe was growing storage in the high teens last year.

We foreshadowed an investor day that's doubling the business inheriting a Hayes customer base that was a little less robust than legacy IME customer base.

And also bringing in Hayes which had a no meaningful selling effort would cause our growth rates to slow down there.

They have.

They're in the low teens now, which is cutting against strengthening in North America and little kick out from digital.

We would expect though in - - over the long term for that business to be a solid double digit growth.

Yeah.

Absolutely.

Thank you.

And last question I will get off.

Richard, you have really changed your sales force go to market here in the U.S. in the paper business by giving those hunter sales people, if you will, access to existing accounts to further penetrate those.

Can you talk about, qualitatively, the progress on that front in the first half of the year?

Yeah.

It's actually quite good.

That sales force - - it's interesting.

I actually talked to the man, the EVP of that sales force last night, who called me to ask me about some dispensation on a special deal which I helped him with.

They are just shooting - they're just having a hell of a time.

It’s just that simple.

They are doing a very good job against their targets.

And in fact, as a total sales force, I'm just grabbing some numbers here, I think for the quarter here they're north of 20% over their plan of what they expect to bring in and so forth.

And they are selling multiple product lines with great success.

So they are doing well.

And by the way, I should tell you, and I want to stress to everybody that when I talk about building a world class selling organization, that's a multi-year long-term thing.

We've made changes, there will be additional changes, there will be a variety of things going on.

But it's working and we are comfortable with what we are doing and we will keep doing it.

Thank you.

And your next question comes from Edward Atorino of Fulcrum Global Partners.

Please proceed.

Digital, but I guess we could pass and move on.

Thanks.

And your next question does come from Adam Stanovlovsky (ph) of John Levin and Company.

Hi, it's Gary Brode.

Just a couple of quick questions for you guys.

The first one.

John, you had said you pointed out that working capital was a use of cash of $28 million, and you had said that a lot of that was due to some timing issues.

And you expected that to be flat during the year.

I was hoping maybe you could elaborate on some of those timing issues that led to that, and as well as the apparent increase in accounts receivable.

John Kenny, Jr.: Yeah.

The $28 million use of working capital comes from several factors.

Some of it is the timing of AP payments, which is - obviously is just a timing issue.

I talked about the $4 million year-over-year increase in cash taxes paid and a little higher purchase reserve spending.

In addition, our collection activities slipped a bit in our (INAUDIBLE) and European operations.

In Europe it was the result of Hayes integration.

You know, in the last four months, we converted the majority of the business over to [safekeepers] and changed the billing platform, and then we set up a shared services center in June, i.e. moved the back office accounting up to Scotland.

It's inevitable that in that process you can't just collect as efficiently and you are going to slip a few days.

That's the principle driver on the AR side that will reverse by year end.

That was the issue in terms due to the change in systems in the Hayes acquisition?

John Kenny, Jr.: Yes.

Okay.

And then my second question is, you were talking about if I heard you right, becoming more of a significant cash payer in 2005 which - -

John Kenny, Jr.: 6.

2006.

John Kenny, Jr.: We have 200 and some million dollar NOL, Federal U.S.

NOL that will - -

It will run into '06.

John Kenny, Jr.: It's down about $150 million.

So at 6/30, so it will - - our projection is that we will consume it sometime in mid '06.

And absent other actions to do so will become a more meaningful federal cash income taxpayer.

Okay.

I misheard you guys before.

That 2006 is what you've been talking about all along.

John Kenny, Jr.: Correct.

So that's consistent with what you always said.

Thanks a lot.

And your next question is from Chris Gutek of Morgan Stanley.

Please proceed.

Yes.

Thank you.

Could you guys please give a little more color or flavor of the core storage business drivers in terms of gross addition from existing clients and the addition of new clients relative to terminations and disruptions.

John Kenny, Jr.: Do you want any more detail than that?

Neither gross additions - - first of all we have a portfolio of businesses and Europe is doing well in core service.

Latin America is not.

Just a, you know, smaller volatile business.

Shredding is doing well.

You seemed to focus your question entirely on the paper business, but (INAUDIBLE) activities you select in the paper business, that majority of core service is transportation and retrieval refile activity.

Additions from new customers is meaningful to growing our annuity, but not meaningful in service dollar terms.

So they are meaningful to storage annuity.

The storage trend is up, I think destructions are down a little bit.

Transportation and retrieval refile are moving around.

Obviously, the same 7% core service growth number in the first quarter was 10%.

We didn't think we did anything better in the first quarter than we did in the second quarter.

It's hard to influence routine records access and transportation so we are kind of riding the - - riding our customer's behavior.

Continuously examining it and trying to spot trends and so forth.

But right now it's just - - it just moves around on us.

Last quarter's conference call you guys mentioned the sale of new empty boxes was looking pretty strong.

As a possible forward-looking indicator, is there any change there?

Gross ads are flat to slightly up.

Okay.

And then one more.

I think two conference calls ago you guys talked about a few percentage of your big corporate accounts each year there was a consolidation of contracts leading to some price declines with a small percent of the big corporate accounts.

Can you give us an update there?

Yeah.

That's a continuing trend that will go for some years as we rationalize the customer base.

Every quarter there is some of it going on.

John Kenny, Jr.: As our global accounting executives are called in at the C level or penetrate to the C level, we were making a judgment to give some concessions to get strong mandated relationships across multiple product lines.

That activity is offsetting other routine price increases such that we think price is roughly zero.

Alright.

Thanks.

And the next question is from Bradley Safalow(ph) of J.P. Morgan.

Please proceed.

Hi.

Good morning guys.

Thanks for taking my question.

Just on Europe, I just wanted to see if you guys had seen any changes in the pricing environment this quarter as relative to last quarter and maybe the prior quarter.

We heard some talk of some of your competitors trying to be more competitive on price in the last 6 to 9 months.

No, we haven't seen anything - - any change.

The market is - - there are some aggressive pricing in the market in different places.

There has been no shift and no change.

That we can see.

And I think just on a digital side, I think last quarter you actually gave us an 80% number as far as the pipeline being filled.

Would you care to share where you guys stand today on that metric?

That business was budgeted to do a little less than 1% of revenue.

And based on our current pipeline we think we will modestly exceed our target for the year.

Okay.

And then just last question and just in terms of your pace of sales force hiring.

I think in the first quarter, just by the nature of things some of the activity slowed a little bit.

Did you guys increase the level of hiring in the second quarter?

Is it consistent with revenue growth?

We have actually -- let's find the number.

While Rich is looking for that.

I will give you the long view.

From Q2 of '03, so one year ago we had 530 people in our total selling organization, and now - - Okay.

I'm sorry.

Richard has got better data than me.

No.

He's looking at the wrong data.

Sorry.

We hired 54 new people.

This is a North American report, and we'll give you worldwide.

Heck with it.

I will give you North America.

I don't have worldwide in front of my hands right now.

We hired 54 people in North America in the quarter.

Ended the quarter at 502.

Began the quarter at 493, something like that.

We forecasted to hire 59 and we hired 54.

We are running 4 or 5 people behind, but that's an increase actually over - - we were running further behind than that than in the past.

But that's still was still growing faster than growth rate revenue.

For internal selling revenue.

So in terms of looking at - - obviously I assume your guidance, does your guidance imply that you are going to increase the base of hiring in the back half of the year to get to plan?

Yeah, oh, yeah.

John Kenny, Jr.: Brad, the sales force is contributing about 4 points to total revenue, 3 to 4 points of total revenue growth, so partial year hiring whether is a 6 month - -

The sales force new sales performance from new sales people is not going to - - doesn't matter to the last half of the year, frankly.

But to the expense it does and we are planning to keep hiring.

I was actually thinking on the cost side.

Yes, we plan to be on plan.

We have a time for operator for two more questions and then we will have to cut it off.

Certainly, sir.

And your next question comes from Lionel Gilovet of Goldman Sachs.

Please proceed.

Good morning guys.

Just a quick question.

You announced earlier today that you would refinance the (INAUDIBLE) term loan with your revolver.

Any thoughts on the refinancing of the 8 1/4 senior sub notes which are currently callable?

I would have thought that the related term loan at a lower rate than these notes.

John Kenny, Jr.: You know, but as a premium to pay on those, we haven't disclosed any plans with respect to those bonds at this point.

Okay.

And just quickly - -

John Kenny, Jr.: And we have a strong preference in this interest rate environment to stay highly fixed as you can see.

Of course.

Just quick question on the OIBDA, you mentioned the margins are lower in Europe than in North America.

Could you break down the OIBDA by country or just give us the OIBDA for Europe?

John Kenny, Jr.: The North American businesses all run in the same zip code in the 29% range, - - 28, 29% range.

Europe's around- - Europe and Latin America are in the low 20's.

Okay.

Thank you very much.

And gentlemen your final question comes from Andrew Steinerman of Bear Stearns.

Please proceed sir.

I'm going to let you guys off the hook.

John Kenny, Jr.: Thank you.

You got it.

Have a good summer, Andrew.

Well, this is the end of the call.

We do appreciate you coming and I don't mean to be too flip here.

As I said in the beginning, the business is running fine and we continue to work hard.

For some reason today it's a good day just to take it easy, I guess.

We do look forward to seeing you all at our investor day on November 18th in New York City.

So I would hope you put it on your calendar.

We will send out invitations, but we will keep reminding you of that.

And after that we will tell you thank you very much and see you later.

Bye.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect your lines and have a great day.