鐵山公司 (IRM) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2004 Iron Mountain Incorporated earnings conference call.

My name is Carlo, and I'll be your coordinator for today's presentation.

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

If at any time during this call you require assistance, feel free to press star zero, and a coordinator will be happy to assist you.

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

Please proceed

Thank you; and welcome, everyone, to our fourth quarter 2004 earnings conference call.

Today's call will follow our regular pattern.

After I've completed the announcements, John will discuss the Q4 financial results.

We'll 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 we will be making presentations at several equity and high yield conferences over the next few months, the dates of which are available on the calendar of events page of the Investor Relations section of our website, at www.ironmountain.com.

As is our custom, we have a user-controlled slide presentation also on the Investor Relations page of our website.

Please turn now to slide 2.

Today's earnings call and slide presentation will contain a number of forward-looking statements; most notably, our outlook for the 2005 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 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.

We are now providing additional information in the reconciliations 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.

Thank you, Stephen, and welcome, everyone.

I have eleven slides today, and if we're going to get to -- I know Richard has some extensive remarks.

So if we're going to get to Q&A I'm going to move a little bit faster than normal.

This is the same lineup we normally follow; and usually at this point I say, for those of you who can't see the slides, I'll describe them in detail so that you know what the numbers are I'm talking about.

I'm afraid I can't do that -- it makes it tedious and long.

If you've seen the press release, you've got the most important financial highlights of the quarter.

Before I get started, let me give you the headlines for today's call.

These are our three important headlines: We made our numbers for the year; we had a very strong fourth quarter; and we are modestly raising our guidance for 2005 full year.

So with that, let's go to slide 4.

In slide 4 here I'll be discussing revenue and gross profit primarily, and I'll save my comments on margin action and SG&A for the next slide.

So slide 4 compares the results of the quarter to Q4 of 2003.

Revenue is up 17 percent to $479 million.

Internal growth was 9 percent across the board in Q4, while acquisitions contributed 5 percent, and favorable foreign exchange fluctuations netted about 2 percent to the total growth in the quarter.

Storage internal growth was at the upper end of the range, and we saw an improvement in service revenue growth rate as well.

I'll elaborate on the revenue growth later in my remarks.

The fourth quarter also saw a rebound in our gross margins, up 90 basis points over Q4 of 2003 and 80 basis points from the sequential quarter Q3 of 2004.

This was due primarily to improved labor management, lower occupancy costs and the impact of the high gross margin Connected acquisition.

As we have previously discussed, service gross margins in our U.S. paper business were soft in Q3.

In the fourth quarter, we asked our field managers to implement managers to implement cost control measures to bring -- to begin to bring our service margins back in line, and they responded well.

These efforts, along with higher than expected service revenues in the quarter, led to the improved gross margins reported today.

Looking ahead to 2005, we continue to focus on labor management, and expect to see additional improvements in this area over time.

While we do believe there is ample opportunity for improvement, that improvement is also impacted by service revenue growth patterns, which can vary from period to period.

Therefore, it is unlikely that the improvement will be straightlined in nature.

Let's move on to slide 5.

Slide 5 looks at the change in our operating income before depreciation and amortization margin.

That's the last time I'm going to say that -- I'll say OIBDA moving forward.

So it just looks at it both on a quarterly and full year basis versus 2003.

First, focusing on the full year, there are no new themes here.

As we've been saying for quite some time, our increased investment in sales and marketing is driving these margin results.

The quarterly comparison obviously diverges more significantly.

In Q4 of 2003, we recorded record OIBDA margins of over 30 percent of revenue.

As you will recall, Q4 2003 was the first time we meaningfully reduced our allowance for doubtful accounts.

The $6 million reversal recorded in that period contributed 140 basis points to margins in that period.

We believe that our allowance now reflects the improved state of our consolidated accounts receivable aging position, and expect that in 2005 our bad debt expense will begin to trend back to more historical levels of about 30-40 basis points of revenues.

Slide 6 looks at our Q4 2004 results for the P&L line items below operating income compared to 2003.

You'll notice that interest expense grew only 14 percent in Q4 versus last year, reflecting increased borrowings for acquisitions, primarily our Iron Mountain Europe partner buy-out and Connected transaction; and this was partly offset by a slightly reduced weighted average interest rate.

Moving to the other income expense line, you can see we had other income of 12 million or $0.05 per share for the quarter in 2004 versus income of 5 million or $0.02 per share in 2003.

Virtually all of the 12 million of gains in 2004 was due to foreign exchange rate movements, as we mark our foreign debt and inner company balances to market.

In Q4 2003, foreign currently exchange rate movements resulted in gains of 11 million, which were poorly offset by 7 million of debt extinguishment charges.

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

Slides 7 and 8 are the year to date versions of the quarterly slides we've been through.

And I'm going to move quickly here.

The important take away from these slides is that the full year results were within or above our targeted range as we forecasted them throughout the year.

Although there were some quarterly fluctuations, the year's results were as expected.

For the year, we reported 1.8 billion in revenues, an increase of 21 percent, or more than $300 million, over 2003; and this was the largest annual percentage increase we've experienced since 2000.

As concerns the lower half of the P&L, let me remind you of the $9 million non-cash interest charge we recorded in Q3 related to the payoff of a real estate term loan.

And then lastly, I would point out that net income for the year was up 11 percent.

To move to slide 9, we -- to start the discussion of revenue growth, slide 9 shows total revenue growth rates; and for the year, we reported total revenue growth of 21 percent.

Internal growth was solid for the year, coming in at 8 percent, with acquisitions, primarily the Hays transaction, contributing an additional 11 percentage points to overall growth.

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

The 11 points of acquisition growth we experienced is the most we've seen in several years.

Given that our geographic footprint is virtually complete, we expect acquisition activity to fall well below that of the previous two years, and for our total growth rates to return to levels more in line with those years.

Internal growth should again exceed acquisition revenue growth going forward.

Moving to slide 10, we can have a closer look at internal growth.

Slide 10 displays our internal revenue growth rate for the quarter from a foreign complimentary revenue perspective.

Storage representing 57 percent of our total revenue -- of our total year to date revenues -- showed consistently solid growth of 9 percent for the quarter and for the full year.

Core services, representing another 29 percent of total revenues, grew at 9 percent for the quarter and 8 percent for the full year, solidly within our guidance.

Secure shredding remains strong, and we saw a bounce back in activity levels in our North American paper business.

Total core revenue internal growth was 9 percent for the quarter and 8 percent for the year.

In Q4, we also saw a rebound in complimentary services revenue, led by increased product sales.

Our sales force aggressively sold high volume accounts, particularly in the data products area.

And while we don't expect data product sales in Q1 to reach the levels of Q4, we do expect them to improve over Q1 of 2004.

Total internal revenue growth for the quarter was 9 percent, and we finished the year at 8 percent.

For 2005, we are including the Connected acquisition in our internal growth rate calculus by making the appropriate pro forma revenue adjustments based on their audited financial results of 2004.

Our electronic growth in sales forces and customer bases have been fully integrated; and both the Connected sales group and legacy Iron Mountain sales group will sell all digital data protection services.

Connected will add modestly to overall internal growth for the year; however, the contribution to revenue from Connected in Q1 of 2005 is likely to be flat to slightly down from Q1 of 2004.

In the 2004 period, Connected landed a single, nearly $4 million license sale, which is unlikely to be repeated.

I think Richard will mention later -- and I should mention now -- that Connected has performed well since the acquisition was consummated in November of last year.

As we have also discussed, adding Hays to the growth calculus will result in about a 100 basis point decrease in our internal growth rate.

A slower growing storage base and the unrepeatable public sector revenue boom that Hays enjoyed in 2004 are behind this impact.

As a result of the inclusion of both Hays and Connected, our internal growth calculation now includes well over 95 percent of our total revenue.

Move to slide eleven, capital spending and investments.

This shows our Cap Ex spending on a year to date relative to the prior two years and to our 2005 projections.

Cap Ex in 2004 was within our range.

Spending in 2004 included 187 million for growth and maintenance Cap Ex in our core businesses, 29 million for real estate and 16 million for our digital initiatives, for a total Cap Ex suspend of 232 million.

We continue to see a favorable trend in capital efficiency, as Cap Ex as a percent of revenues has declined by more than 200 basis points since 2002.

For 2005, we're projecting Cap Ex spending to be in the same range as 2004.

Slide 12 looks at free cash flow before acquisitions for 2004 versus 2003.

We finished the year with $64 million of free cash flow before acquisitions.

Operating cash flow before changes in assets and liabilities in 2004 was up $50 million, or 17 percent over 2003.

For the year, we consumed $32 million of working capital, primarily related to the increase in accounts receivable.

Our DSOs increased by four days in 2004, due largely to slower collections in our European and digital operations.

SafeKeeperPLUS conversions in Europe, and the relocation of the Iron Mountain Europe Credit and Collections function from London to Scotland late in the fiscal year led to the slowdown in Europe.

We have seen this phenomenon before as we convert large acquisitions, and expect Collections to improve going forward.

Slide 13 talks about debt statistics, and it shows the progression of certain debt metrics over the last three years.

We have lowered our weighted interest rate 100 basis points to 7.6 percent since 2001.

We are currently 89 percent fixed with respect to interest rates, and have a debt portfolio maturity of eight years.

Our bond ratio was -- as defined by total debt to adjusted EBITDA in the in venture -- was five times at year end, due primarily to borrowings for the acquisition of the remaining 49.9 percent of Iron Mountain Europe.

Remember, the bond ratio is not fully charged for the domestic debt associated with this transaction, but does not receive any credit for the foreign OIBDA or adjusted EBITDA.

Our overall leverage ratio was 4.7 times at year end.

We spent $176 million buying in joint-venture partners, and still maintained our leverage ratio.

Barring extraordinary events, we will delever in 2005.

Slide 13 is our debt capitalization as of December 31, and details the components of the debt structure, and where you can see the effects of the last two years' refinancing activity. 2004 was an active year for us in the capital market.

We raised or refinanced approximately 1.5 billion over the course of the year in five transactions.

Highlights for the year include our first fully denominated and high yield bond for 150 million pounds, which we sold last January, and the completion of two senior credit facilities.

Now these transactions were designed to naturally and cost-effectively hedge our significant investments in Europe and Canada while creating significant tax benefits.

Lastly, we refinanced our $200 million senior term loan in July at a lower interest rate, and raised an additional $150 million senior term loan in November.

Okay, let's go to slide 15, guidance.

Today, we are raising our guidance for internal growth rates to 5-8 percent for 2005, based on the strength of services revenue in Q4 and our outlook for the same.

This is the same range we forecasted and operated within in 2004, adjusted down a bit for the expansion of the European revenue base.

Investors should expect mid-single digit internal growth in Q1, with storage down slightly as the slower growing Hays customer base enters the equation.

The growth rate of service revenues will lag that of storage revenue in Q1, due to difficult comparables.

We should also expect storage growth rates to remain stable to modestly upward trending for the year.

We should expect service internal growth rates to be inherently more valuable -- variable -- but to strengthen after Q1.

As regard OIBDA margins, this business produces very unpredictable results quarter over quarter, as a vast majority of gross margin is derived from storage.

The revenue and cost characteristics of storage can not change quickly.

And then, the other thing that impart change are changes in overhead spending; but these are deliberate management decisions, and they evolve over time.

Expect OIBDA margins for 2005 of between 26-27 percent for the year, with any given quarter's margin running plus or minus 100 basis points around that range.

Expect lower margins in the first half of the year and higher margins in the second half of the year.

These margin outcomes represent the net of productivity improvements, offset by the expected margin swing from bad debt, the year over year increase in sales and marketing from the full year effect of the buildup in that area, and some margin dilution from our expanded digital operations.

Our first quarter guidance is for revenue of 485-495 million, and OIBDA of 123 to $130 million.

Our full year guidance is for revenue of 1.97 billion to $2.03 billion of revenue, and OIBDA of 525 million to 545 million.

Thank you; and with that, I will turn it over to Richard

Thank you, John, and good morning, everyone, and welcome.

As historically has been my custom in the Q4 call, I generally spend most if not all my time reviewing the year, and I will basically do that today.

But I don't want to let this quarter go by without just a couple comments, all of which is just -- echoes what I think John said.

It was a great quarter, combined both great cost performance controls, as well as strong revenue growth.

And our business unit responded well.

As you know, in Q3, we saw little weak revenue and got caught a little bit in terms of cost control, and they came back with a vengeance, did a fantastic job.

It really made everybody proud of what they did out there.

The business ran well and it reminds us -- which is, I think, a theme you hear from John -- you heard from John, and you'll hear it from me is -- and we've said this many times, and even we forget sometimes -- that the revenues and margins growth rate percentages will fluctuate [INAUDIBLE] on a quarter to quarter basis.

But when you look at it annually year over year, it's a very consistent performer.

It's a steady performer, and it will stay a steady performer, and perform in a consistent manner.

And we're seeing that again this year, as 2004 was a great year.

So let me move on and talk about 2004.

It was a great year for us in all material respects, both financial and strategically, and we accomplished an awful lot, and I want to give you just some of the highlights, so -- if I -- if I may.

We met or exceeded our financial targets for -- both for revenue, OIBDA and capital spending.

Or said another way, the business performed as we expected and as we projected it.

We grew faster last year than in any year since 2000, and I'd remind you that 2000 is the year in which we merged with our largest competitor, [INAUDIBLE].

So this was a major year -- over 21 percent growth rate on top of the [INAUDIBLE] revenue.

Our internal growth rate increased, even in all of this going on over 2003.

And in fact, the growth rate of storage, which is -- you know, is the key driver of our business -- and margin, for that matter -- remained between 8-9 percent, the same range it's been in the last twelve quarters.

All of this was in spite of the fact that over that same time period, the size of our storage has increased 50 percent.

So we've increased the scale of business significantly and maintained, you know, our growth -- storage growth rates and return rates in the same range, and we continue to do that this year.

We continue to improve our capital efficiencies.

Capital expenditures in relationship to total revenues and new revenue growth continued to decline; and we achieved our margin targets, despite the fact that we ramped up our sales activities substantially and continued to invest in the development of our new digital services.

The increased investment in new selling costs -- or that is, the with the larger sales force and other marketing support -- is bearing fruit as new revenue generated was an all-time high and exceeded our internal targets as well as our performance in all prior years.

On a financial basis, any way you look at it the business performed as we expected, but performed very well.

On the strategic front, we made a lot of head way, as we try to do at all points of time, and marched this business forward.

And I want to talk a little bit about what we did here, and then come back and summarize and give you a sense of where I think we are as a business.

We made a significant move in advance on our digital services strategy with the acquisition of Connected Corporation.

We integrated the Connected organization with our digital services group within Iron Mountain, and they now operate as one business.

And as John said earlier, the acquisition is performing well, as we thought it would; but it's nice to know after not too long a period that it 's performing quite well.

This group gives us control over the technology and related intellectual property for our electronic vaulting services, which we had already proven to ourselves was a great market opportunity for us.

It also strengthened our organization in some key areas that will enhance our future success.

These include product management and product development.

We expect to hasten our drive to profitability in our digital business, as we have now combined these and built substantially more scale, and we will continue to drive significant revenue growth of this business.

As yet, we can now look forward and see the profitability coming.

Digital services generated approximately $25 million of revenue this last year, and we expect them to be approximately $75 million this year.

In addition, we expanded our secure shredding business through acquisition and very strong new sales and revenue performance, and we became the largest integrated service provider in North America in this service line.

We also entered Canada through a single acquisition that gave us a national footprint; and we can now say that we're providing shredding services in every city, both in the U.S. and in Canada that we also provide storage services.

So the footprint build out is basically over.

On the international, front we continue to do a lot of work, and we focused on both market expansion, infrastructure buildup, and sales force development.

In Germany, on the continent, we expanded our German business significantly to become the leader in that key market through one acquisition.

And I should say that now at this point, as we look at Europe that the major expansion work is basically complete.

There will continue to be in-market and tuck-in small acquisitions.

And then there's still always a city here and there, but there's nothing major to be looked at.

I think the heavy lifting is done over there.

And therefore, we -- as I said, we focused on building out infrastructure, which means some increased overhead, which we will absorb and grow on through and increase our selling organization so that we can capitalize on all the hard work there.

And in fact, we introduced our first digital service offering in Europe late last year, and already have started to realize new revenues from that, and we expect good things in the future.

In Latin America, we completed our -- we have completed our footprint expansion; but last year, we added to scale both in Brazil and Chile with two end market acquisitions.

And in both Europe and Latin America, we took advantage of the opportunity to execute the second phase for our international expansion plans by buying out most of our partners.

As you may remember, we were successful in executing a rapid international expansion agenda that reduced the risk of investing in new markets by joining partners on a local basis.

For various different reasons, we were presented with opportunities to buy out all of our partner relationships in Europe.

We were able to execute the buy-outs before we had realized the bulk of the margin accretion that expect in the U.K. post the large Hays acquisitions that we consummated in mid-2003; and therefore, we believe we were able to get these buyouts at very attractive terms for our shareholders.

In Latin America, we were also lucky to be able to buy out the majority of our partner relationships at a time in which the current exchange rates also created a very attractive price for us.

This all required an investment, including some that we consummated after the year out of $175 million; but this will not be repeated, and we now own 97% of our international businesses' revenue strength.

On other fronts, there were a lot of other things that happened John mentioned, but I'll highlight a little bit.

Our finance group was active in capital markets -- as he said, five transactions, $1.5 billion of a refinancing, which resulted in lower interest costs, longer average maturity and currency matching of liabilities and assets to reduce risks from currency fluctuations.

So we accomplished a lot last year, and I think this is a real inflection point for the business.

And I want to talk about Iron Mountain, the business, today just a little bit.

As I see it, 2004 and moving into 2005 is an inflection point in which we are changing how we focus on our business, because we've done a lot of heavy lifting in assembling the business, assembling the strategic footprint, assembling the product line and assembling the organization and the customer base; and that's about really taking full advantage and maximizing the returns from them.

So it is an inflection point in building business over the long-term, and therefore how we're investing capital in the past will be different for -- or said another way, how we invest capital in the future will be different than how we invested capital in the past.

We've substantially completed in terms of our new market investments.

I'm not telling you we're at zero, because there are parts of the world where things will be done; but I do not see significant large amounts of capital going out in the future.

Our product line expansion build out is basically complete.

That does not mean we won't continue to invest in products -- we will.

But they will more be in the line of product line extensions and new features and so forth, not major categories and not new lines of business.

The sales force build up will continue, but in line with performance.

The big ramp is over -- except, frankly, in 2005.

Since we created the ramp in 2004, you didn't see the full year effect.

We'll see it wraparound in '05.

But the basis [PHONETIC] growth is basically behind us and we will absorb that through increased margins over time and continue going forward.

We have grown and changed from 25 U.S. cities; and looking back to four or five years ago, where -- which what we do was store boxes of paper and computer tapes and physical facilities -- today to be the global leader in information storage and protection, operations in 148 city markets in 22 countries, two major businesses -- record storage and management, and data protection services.

Both of these businesses are now set to serve customers as their needs evolve along a broad information management landscape to combine physical storage and digital storage.

We are the only vendor in the world that can do the things that we do.

We have lots of competitors that can do any one thing that we do.

We have no competitor in the world that can do all that we do.

We service a large trend-favored market, with significant untapped opportunities to penetrate and cross-sell existing relationships among the major enterprises we already serve.

We also serve a large unvended market among small and median enterprises, where we sell about 15,000 new accounts a year.

And we've positioned our organization for the next phase.

We've achieved better utilization of existing talents by changing our organizational structure, and we've strengthened the senior team in several key positions with new talent from the outside.

We are now focussed on internal growth from opportunities to help us accrete margin, while we continue to improve [INAUDIBLE] efficiency, and therefore, we derive return on invested capital.

So as I've said, we accomplished a lot last year.

It didn't come without a lot of hard work from a lot of people, and I want to slow down and make sure that we thank them all for their efforts and their dedication and success.

It's a great group of people.

One other thing that deserves particular mention is our Sarbanes Oxley 404 certification process.

It was broad, comprehensive and effective.

We managed to [INAUDIBLE] with our own team, led by our accounting group.

Although we augmented our staff with selective outside experts, we did most of the work ourselves.

We did so because it was substantially cheaper than the path that many others have chosen, and also because we wanted to make sure that the work that we perform had lasting value.

To achieve that goal, we wanted to make sure that the knowledge we gained stayed inside the company and did not leave with consultants when the project was over.

The project is not totally over until our 10-K is filed in a few weeks, since the control processes involved in filing the K is part of the scope of the process.

However, John and I expect to sign the certification and believe that our auditors will support our conclusions.

The process was instructive, and although we've done -- we did not find any material weaknesses -- we did find processes that did not meet our own standards, and we found opportunities to improve processes for better control and more efficiencies.

In particular, our European accounting operations have undergone significant changes, starting with the Hays acquisition, and leading to the consolidation of two accounting operations group, and the relocation of the entire function from England to Scotland just four months before we started this process.

We have more work to do to get them up to our standards.

Accounting functions in many companies are often overlooked for the critical support they provide for their businesses.

And the recent Sarbanes-Oxley process has been a good reminder of the critical contributions they provide, and I want to publicly thank all of the members of our team for their hard work and dedication.

The last comment I'll make before we go to question is a little bit about our compensation programs.

We believe that aligning interests in view of our shareholders [INAUDIBLE] a company that can impact performances is in everybody's best interest.

We have used stock options and cash bonus plans as key tools to do that, and we believe they have been successful.

We are nine years old as a public company, so some of our outstanding stock option grants are beginning to age to the point that many of the optionees will need to exercise them or lose them.

Therefore, you should expect to start seeing more activity among members of management, as they exercise options and sell stock to cover taxes [INAUDIBLE].

This will be a shift from the past, where the majority of our optionees have held their options for as long as possible, which a strong statement of their commitment.

I'd also remind you that I personally have never taken stock options, so this discussion does not include me.

Now with that, I'd like turn it over to questions and answers.

Thank you, sir.

Ladies and gentlemen, at this time, if you wish to ask a question, please press star one on your touch-tone telephone.

If that question has been answered and you would like to remove yourself from the queue, you may then press star two.

Once again, star one for any question at this time.

One moment, please.

Our first question is from the line of Andrew Steinerman with Bear Stearns.

Hi, it's Andrew.

Could you just talk about shredding profitability.

You know, where are we in that evolution?

I know we're the largest in the country, but what does that mean in terms of where we are now, where could we be and has that revenue turned out to be as sticky as you hoped -- meaning, you know, competitive landscape type of things?

Yes, Andrew, we have some visibility to our shredding profitability down to the gross gross margin line, and then it gets blurred below that, because we have aggressively leveraged management in our paper records business to run both lines of business.

There are also some transportation synergies.

For example, in your more dense urban areas, you would have dedicated shredding routes that are separate from vehicles that carry records or paper records to and from customers.

However, in less dense rural routes, you might use a given vehicle for box and bins.

So with all those caveats out of the way, let me say that our best estimate is, right now we are running gross margin in that business in the 40-50 percent range, and we see opportunity to improve that through route density and plant utilization.

Obviously, that margin is also somewhat affected by the price for recycled paper, which is an important revenue stream there.

Recycled paper is running sort of roughly in line with the long-term averages.

So I think there's upside by -- from scale.

We clearly aren't using any of our major plants on a -- more than a one shift basis, and our route density and synergy between the two different fleets can improve.

Right.

So right now, do you think it's below the corporate average and could get up to the corporate average, or do you think it could get above the corporate average when you got it running right?

It's slightly below, and it should long-term be accretive to margin

Okay, thank you so much.

You're welcome.

Your next question is from the line of Henry Naah with Lehman Brothers

Hi, guys.

Nice quarter.

Thank you.

Thank you.

You said you guys have been talking about leveraging the cross selling capabilities, you know, of your different businesses, as well as the revamping of the sales organization, which has been going on for a couple of years now.

Yet, your guidance calls for more of the margins to be 26-27 percent in '05, versus down from '04, and you guys had previously guided for a 30 percent number by 2006.

Can you kind of give us some sort of sense as to when you guys expect to see, you know, these moves pay off and when we can start seeing margins expanding a little?

First of all, I guess in '02 if you backed out our digital business -- in '03, if you remember how our digital business grew -- more or less hit 30 percent margins in the physical businesses.

We were talking about the physical businesses when we set that -- when we set that objective back five years ago.

We have a much larger digital business right now, which even though the losses in that are naturing and we expect we may see break even -- we may approach break even toward the end of the year -- the digital business as a whole is -- depresses margins by 150 basis points or so.

The other thing that we've seen of late is bad debt in the last two years contributed to earnings and to margin to the tune of about 20 basis points of revenue.

We expect bad debt will return to normal levels of 30-40 basis points.

And we -- I guess the full year effect of sales and markets next year is probably another 40 basis points.

Embedded, therefore, as you can see, if you do that math, is real productivity improvement expected on the order of 50 basis points next year.

I guess the long-term view is that digital will break even and then enjoy margins at or in line with our physical businesses -- that will be a big turn around, move us up; and we do believe that both at the gross gross line and at the -- in the overhead categories, we have room for margin improvement.

The last thing I'd mentioned is that 20 percent of our business is in Europe -- it's got margins in the low 20s.

We expect those margins to rise to the high 20s. 500 basis points on that would be whole point on the company.

So while the 30 percent, which was based on the physical businesses back at the turn of the century, was real and we believe is still real, the agenda changed in the middle.

We're doing some, obviously, investment spending in a broader and more robust business line.

But I think we can still achieve those margins despite the change of mix in the business But I guess the question is then, you know, do you expect to see margins expand possibly in '06 or '07?

Yes.

All right.

Thanks, guys.

Your next question from the line of Lionel [INAUDIBLE] with Goldman Sachs

Hi, good morning.

First of all, internal growth in the comparatory services business was reasonably strong -- it was 10 percent. and it's a sharp acceleration from what you had in the third and second quarter.

What happened here?

I understand you invested probably a little bit more in terms of sales and marketing.

But is it just an increase -- a little increase in demand -- or were you able to secure some relatively large projects that contributed to this quote?

Well, the two most important drivers of the quarter to quarter change are that product sales were very robust in Q4.

Our data product sales in particular were about $6 million out of a total year achievement of 17 million.

So they ran well over the average.

Our sales force did a good job there.

And the second issue was that in the prior year, in 2003, we had the big project for the Canadian government which ran its course in Q4.

So the -- we had an easier comp in the quarter.

The -- but, you know, just sort of across the board, in our hard copy business, we had more project work than we had in previous quarters.

This is an area that is event-driven.

Some of it can -- you can simulate demand for some of it.

But some runs to corporate mergers and acquisitions, some runs to litigation support, and just -- we just are there when our customers need us; and it will be lumpy, and we should expect it to be lumpy going forward

And your guidance for this business for '05 is still in the range with a decline of seven percent to a growth of three percent. [INAUDIBLE] In that in line for '05?

Well, the break down to 5-8 percent, storage will be 7-9;

Investor Day, we had said 3-2 -- 3-2 -- or 3-10 for core services.

The bottom end of that range we now think is up from that point; and for complimentary services, we had negative 7 percent to plus three.

The bottom end of that range is coming up.

So we generally have a more -- slightly more optimistic view about service revenue next year

Okay.

And then in terms of leverage, you want to lever 4.7 or 4.8 times at the end of '04.

Could you give us guidance for '04 on Cap Ex?

I mean, what is your objective by the end of '05, taking into account the acquisition of [INAUDIBLE]?

We don't project acquisitions, but we think they'll certainly moderate from the level of the last two years.

If you go back four years, you've got acquisitions in 48, 75 -- and then including joint-venture buyouts and big deals like Hays -- high 300 millions in the last two years -- we will most likely delever because we'll be free cash flow positive before acquisitions.

Our acquisitions will be done at multiples that don't diverge meaningfully from our overall leverage ratio, and -- and then -- and we think they'll be modest -- and along the way, our EBITDA will expand, you know, 5-8 percent according to our guidance.

So -- and absent extraordinary events, we should delever 30-40 basis points

Okay, and last question.

I think when you refinanced the [INAUDIBLE], when you added the new term loan, you know, some of the [INAUDIBLE] covenants, some of the bank covenants, particularly the leverage ratio. what is your covenant for '05 -- the new covenant?

Right now, we're 50 basis points, which is -- it's on the headroom inside our revolver It's 475 versus 525.

Okay, great.

Thank you very much

Your next question is from the line of Thatcher Thompson with CIBC World Markets

Congratulations on a great quarter, guys.

Thank you.

Thanks.

I think the thing that surprised me the most was the services growth.

Can you -- because the third quarter had been weak, and even at Investor Day, you'd talked about the departure between the box-related services and the boxes that was hard to explain at the time.

Can you tell us what you saw happen through the quarter?

Yes, activity levels in the box business got better, particularly in the area of transportation, which is almost half of core services.

Okay.

Shredding continues to be strong, so -- and leverage the same relationships -- so that helped as well.

There are certain parts of core service that just move around, like destructions and what not, but fundamentally, retrieval refile and courier got stronger

And retrievable, refile, tends to be stronger in the first half of calendar years for you guys?

Yes.

But when you're talking about obviously quarter over quarter in terms of growth rates, seasonality is -- it normalizes for seasonality.

Okay.

And then --

This was just a better -- we had a better fourth quarter than usual; and particularly the -- you know, the latter part of the quarter -- maybe it had to do with holidays falling on weekends, or maybe it had to do with pent up demand, or it would have to do with -- you know, with just customer activity

Okay.

And Richard, you -- there's a pretty steep ramp in digital that we're looking for going from $25 million this year.

I know Connected boosts that, but even so, it seems to be gaining momentum.

Can you discuss some of the things you've seen on that front, just in terms of size and scale and opportunity in the last couple quarters?

Yes, it is gaining momentum, you know, and I want to be careful for competitive reasons not to get too much in different product lines.

But some of them are just -- are cooking along just really well, and there's a good roll in business from '04 and '05.

You know, we're starting to develop the characteristics that we like in the business, and that is, we sell hard now and we recognize revenue not so much in one year, but it just keeps rolling and rolling and rolling, and that's what an annuity business is about.

And we start to see it start to roll, and it's -- and it is picking up momentum.

In terms of size, yes, there's been a large -- we've landed good sized contracts, and they can range from half a million to a couple million kinds of numbers, and we've even seen some opportunities bigger than that -- substantially bigger than that.

I think what's driving it is -- besides the classic drivers of the market which are there -- more regulation, more litigation and so forth -- and that -- that hasn't slowed down.

In fact, it's going to get worse in my opinion -- is that we've said before, we saw customers react, particularly the financial services customers, react to the trends by trying to do it themselves instead of getting help, and it's just hard to do.

It is very hard to do.

And more of them are coming to the conclusion that it is very hard to do on their own, and they're looking to outsource it.

And so we think we'll continue to see that kind of stuff happen

Okay, thanks, guys,

Yes.

Your next question is from the line of Chris Gutek with Morgan Stanley

Thanks, guys.

Good quarter.

Thank you.

Thanks.

A couple questions.

John, I think you said that the -- if you include it on a pro forma basis, Connected with the new organic growth calculations, that would boost the reported organic growth.

What is the actual impact there on the '05 organic growth?

Since it's such a small -- you know, it's just -- the business tends to go from mid-30s to mid-40s million, so it's about 20 basis points

Okay, okay.

And then, in terms of the overall sales force restructuring and sales force productivity, can you guys just elaborate a bit from a qualitative perspective on what's happening in both North America and in Europe?

I know in Europe in particular, I think you guys have been a little bit behind the buildup where you like to be.

Can you talk about where you are now?

And also, in North America, what's happening with the structure in the number sales people, and how many heads you're going to have this year?

Yes, I can give you some of that -- some of it I don't have in front of me.

But I'll give you the qualitative view a little bit.

Look, our sales force did a bangup year last year.

On a worldwide basis, we were ahead of our plan substantially.

In North America, even more so.

And so, you know, 2005 is a little stop along the way.

We're not doing any major restructuring work.

We're absorbing some of -- all the growth we've done.

And you know, it's about absorbing training and letting it mature a little bit, and we expect to have some -- you know, we'll expect to see some even better performance out of it as they mature.

So that will show up late in the year, we would hope.

And let me talk about Europe a bit.

Europe, as we've done some management changes over there and we've hired some people that we have got great hope for, and early signs are good.

And so I think we are pretty much on the right track, and so, you know, we've just got to let that proof out and see what's going on there.

In terms of head count changes, not big changes this year.

We ramped some late -- you know, all through last year and some late in the year; and so as we've said, you'll see the full year effect cost of that, but you won't see a lot of bodies, per se, in that respect.

And then having said all that, I've got to caution you.

It's interesting when you do the math and you look hard at these kind of annuity businesses, you know, what you sell this year, you only see on average about half of it coming through your income statement; and you know, the other half rolls forward to the next year and so forth.

But we are seeing the momentum grow

And another question, one of the things you guys have touched on in recent quarters is with your large corporate accounts, especially North America, some consolidation in the average pricing as you consolidate those contracts.

Is that still a theme?

Is it --

Yes, that's going to be a theme for a long time to come.

The good news is, is we've been studying and looking deep into some of this stuff, and I think the strategy is working.

You know, it is a strategy of quid pro quo.

We do something, you do something, you do something for me, and the do something for me is working. and those companies on average grow.

What we've -- we've gone back and looked and said, those on average grow -- it's double -- it's double the growth rate of the average or the base.

And, you know, we are getting from it what we expect to get from it.

It's just -- all this stuff comes through.

Like I say, it takes time to go through.

And then the other theme we're pushing -- and in fact, we're pushing and doing well at -- is cross selling.

When you think about our big customers, there's penetration opportunity -- which is what we're talking about -- you know, doing more of our core services a little bit, and then there's cross selling of doing more renew services with them, and in both of those we're [INAUDIBLE] we're pushing to be successful in.

You know, we're learning how to do that, and I think it's a matter of learning to scale it, which we will start working on some.

But we also a broad market.

As I said, in the SMV [PHONETIC] market, where we've closed so far about 15,000 customers.

That's a major new customer acquisition machine, and it's quite good at it.

And there, you're selling typically a single product, at least up front -- or in certain cases, bundled services.

So you know, we're just getting better at it.

We're getting more sophisticated and we're getting better at it, and that's one view.

Another view is, boy, we've got a long way to go, okay?

Meaning there's a lot of opportunity upside -- and then I think that -- I think both views are right.

We're getting better at it, and we've got a long way to go

Okay, and then one more real quick one for John.

Bad debt expense is up a lot year over year in the fourth quarter, but did I hear it correctly that you're still slightly below what you're normalized in the fourth quarter?

Bad debt expense in this fourth quarter was negative $1 million, so it was -- I don't know how many basis points that is.

It was, you know, a two basis points contributor to margin; and long-term, it's going to be 30-40 dips real expense

Okay, great.

Thank you.

I want to be mindful of the clock; and we have a list of people, so we're going to try to shorten some of the answers, or maybe limit you to one or two questions if you don't mind.

And we have a question from the line of Edward Atorino with Fulcrum Global Partners.

Good morning.

John, can you review your debt outlook, number one, and can you talk about pricing.

You've been focusing on market share and customer stuff.

Are you looking at pricing as an option going forward?

Pricing -- we have tremendous price flexibility with respect to the vast majority of our revenue.

That which we don't have price flexibility -- total price flexibility with respect to our large customers -- is where we have multi-year agreements that specify CTI-type inflators.

Eventually those inflators and our actions will be such that they will overwhelm any remaining price rationalization we will get in net price in the business going forward.

In the absence of big acquisitions you can look for debt to be flat

Okay, and could you -- in other words, you'll -- are you including price adjustments going forward in your new business?

We're always mindful of what is going to happen to net price.

When people focus on price in the business, they are often narrowly focused on the U.S. boxed storage rates.

Those comprise about 30 percent of total revenue.

We will get positive price out of that business and other businesses

Thank you very much.

You have a question from the line of Eric Sledgister with CSFB.

Good morning, guys.

Good quarter.

Thank you.

In terms of the digital services business, I think you talked about break even by the end of 2005.

What level of profitability can we expect in 2006?

I don't think we are prepared to disclose that at the moment.

We're still focusing on getting to the break-even point, and it really depends upon the 2006 revenue level.

We do believe over a few years, but I don't know if that's 2-4, that -- that there's profitability -- that business will equal or exceed our core business and so forth.

But you know, we still -- that's a business where, quite frankly, by combining the Connected in our organization, we are getting good scale and that sales force -- the additional sales force.

And we've got, hopefully, the right feet on the street.

But there may be some other sales and marketing investments we would make if we ramp coming.

And as John's comment about break even in '05, I think our goal would be is that sometime during the year to cross over that point, and that's likely to be in the last, you know, third or fourth quarter.

Something like that.

Okay.

And what tax rate should we use in 2005?

Low 40s

41-42

41-42.

Okay, thanks a lot.

We have a question from the line of Jack Salzman with King Point Partners [PHONETIC].

Hi, Jack

Yes, hi guys.

Nice quarter.

Thank you.

I just have two questions.

Just to -- you know, a little bit more granularity on the average pricing.

Would you say average pricing is going to have a tendency to be up year to year this year, or is there a crossover where the average pricing for your contracts or for your customer base will start rising on a year to year base?

And then the second question is really on the SG&A.

You know, SG&A was up around 35 percent in the quarter -- fourth quarter.

And if you assume that G&A was up a more normalized 4-6 -- 4-6 percent, it would imply really quite a dramatic increase in selling expense.

Can you give us a little bit more granularity on how you're going to reign in this selling increase?

It's quite substantial.

Are we going to see sequential improvements in that rate of change, you know, beginning in the first quarter?

Right.

Reigning in is pretty easy.

We just stop hiring people, which we've already done in terms of the sales force.

We ramped up the hedge to fill the positions we needed to fill by and large.

So you know, we're not -- it's not an expense out of control.

It was a conscious move we made to do what we did, because we saw the opportunity and it's paying and it's going to pay.

We're not particularly worried about that.

I think the question about price is we're just not prepared to get down in the weeds, for all kinds of reasons, on what's going to happen on price.

I would tell investors that, you know -- and maybe you don't like this answer -- but I might as well tell you how I think about it -- you know, we're not going to screw any customers.

We will fairly price.

We also have an obligation to our shareholders to manage the fair return on capital, and that's how we think about it and that's what we're about.

I would say, t hough, it's no longer just market share for market share sake.

It is about doing the right thing.

There's a lots of moving parts going on -- the rationalization, some things going up, some things moving, some things swapping price on this for more business in that.

It's about the total relationship with the customer, and so it's just too complex to even think about dealing with.

In terms of our forecast the way we budget for '05, I think that the answer is, you know, net price about 0 in '05, because we've still got a lot of moving -- moving things going on in the storage business, which is only, as John said, in the U.S. is about 30 percent of our revenue.

That doesn't mean there won't be price on other elements and other things.

And you know, we're out selling value and we're getting that -- we're getting the value.

And you know, I'm happy to trade something in my left pocket for something in my right pocket, as long as both pockets are bigger than they were at the end.

And the return on capital is better than they were where we started.

But Andrew -- Jack, that reminds me of a piece of Andrew's question I didn't answer.

The shredding business is very sticky.

So it's a lower -- less capital intensive, good annuity stream that we like to cross over.

Okay, another real quick question, is there any chance over the next two to three years you guys can get the corporate tax rate below 40?

You're one of the high ones out there, still

Maybe.

I -- you know, one thing I'm not sure -- we actually -- we actually push forward our year -- projected year -- of the coming tax flow.

The Connected acquisition had kind of a nice feature of about $50 million NOL, which we knew about, obviously, going in, which will push forward our year [INAUDIBLE].

So our total NOL is about 271 -- 271 million, and we're not going to be taxable for U.S. income tax purposes probably until '08

And so the answer is, you're looking at a book tax rate, which I know is important to people, but we focus on cash taxes, and basically it's not significant and more in line with country taxes, local taxes and AMT type things.

And we -- you know, paying some amount of cash taxes, but not -- nowhere near what you're talking about.

But having said that, when we start to face significant cash taxes, we will look for appropriate strategies if they exist, and we're beginning that planning now

Okay, thanks, guys.

Your next question is from the line of Doug Stratt with Wells Capital [PHONETIC].

Hi, thanks very much.

A quick follow-up on your -- the comments you made early on in terms of currency impact.

It looks like -- and I guess that's the currency, just the translation on the top line -- you're [INAUDIBLE] is in -- I mean, I'm lower down.

Tell me if that's correct, it sounds like it was about $9 million give or take addition of the top line.

If that's correct, could you give us a sense of how much that flowed to gross margin?

Is it 100 percent down and then down at the operating line?

Yes, the -- all of our revenues and expenses outside the U.S. are denominated in local currency.

Our big expenses are labor and space, so it really doesn't have any impact on margin -- it just -- it flows through in the same percentages as overall margin

Okay, so there are no transfer pricing issues?

Well, in fact -- and since, you know, Europe, which is 20 of the 27 points of international revenue running below our average margins, it's less meaningful in the gross margin line and the operating margin line

So, if you're in a 38 percent or whatever it is gross margin overall, it will be 38 percent of the revenue would then come to the gross margin line in [INAUDIBLE] part of the business?

Is that what you're saying?

No, actually most of the currency action is between here and euro and [INAUDIBLE], their -- their OIBDA margins are in the low 20s.

So yes, it would -- whatever increase from translation on top line, say 10 million, would translate to 2 million on the OIBDA line.

Okay.

So probably diluted OIBDA percentage in 2004.

Okay.

There's a point I hasn't thought about

And when you're -- the guidance you've given us in terms of operating income for an extra 340 bucks, 360, does that assume any currency stance, either in terms of the top line or on your hedging that come through then -- operate on the operating top line?

No.

It's -- we forecast based on what we know and when we know it, and assume no movements forward [INAUDIBLE].

And to be clear, when we say hedging, we are not employing any paid for hedging strategies; what we are doing is getting local debt, you know, in the currency where we have the assets; so we're matching our asset base with our leverage base, so that -- you know, which also has some nice tax benefits, too

And obviously, we can't do that perfectly, which is why we have to supplement that with intercompany debt --

Yes.

-- and that is mark to market, and gives rise to non-cash other gains in the weakening dollar environment

Which is what we saw that was the $12 million this past quarter?

That's right

That's right.

And then finally, I'm doing the numbers here, my calculator just died on me as they always do -- it looks like that 360 million operating comp is a slightly lower margin net of sales than the current year, is that correct?

If so, what's -- is it just the fact that Connected and the Hays are more margin businesses that lead you in that direction?

Yes.

Okay, thanks.

So there's a question from the line of Clark Orsky with KDP Investment Advisors [PHONETIC].

Hi, I just wanted to follow up on your comment.

I thought you said you expected to delever in 2005, but then later on there's a comment about debt being flat

Yes, there's a difference between paying down debt and reducing the leverage ratio.

When we say delever, we can mean one of either of those things.

But in this instance, we meant reducing the relationship of total net EBITDA --

Having debt roughly flat to EBITDA

Okay, okay.

Appreciate that.

Sure.

So we have a question from the line of Theresa Bucks from Solomon Brothers Asset Management [PHONETIC].

Hi, two quick questions.

One clarification on what you were saying about your -- your destruction volumes have been lacking due to the industry rewriting of destruction guidelines.

Have you seen a pickup in that going forward?

And secondly, you're spending a lot of cash buying out partners.

I just was wondering what that potential cash outlay should, for example, all the partners come to you and say, buy us out -- or we want out?

Okay, well first is, that they can't go to us and say that, but the statistic [INAUDIBLE] insignificant, so I'll be careful.

But relative to what we've spent to date, very little.

It's only about 2-3 percent of the European -- or the international revenues now, not fully [INAUDIBLE].

So the big money is behind us in terms of corporate buyouts.

And your first question was about --

Destruction.

About destruction volume?

No, we have not seen it pick up. this year That is one of the things that quarter over quarter swings wildly for all kinds of reasons -- timing of, you know, when they put it in storage and how they did it.

And sometimes you see customers controlling their on budgets -- they don't want to pay for it in a given quarter, so they just let it sit there and so forth.

So it swings quarter to quarter.

But we see no were patterns of this picking up, and I don't -- I think it might take a while.

Corporate America -- it takes a long time to get these issues fixed, and they've done a lot of work.

Okay, thank you.

Mm-hmm.

So we have a question from Tim Byrne with Robert Baird

Thank you for taking my question.

Quick one question for you, guys.

At the Analyst Day in November, Richard, you showed a slide that showed [INAUDIBLE] internal growth rate of plus 4 year to date, which frankly was surprisingly low relative to my expectations.

Where did it end a year, and to what extent is that a function of transient issues with services and complimentary services versus the function of it being a mature market for records management, and what you'd expect the other markets to get to eventually?

Well, the storage business side of it was about 5 for total revenue and, you know, 6 overall for the division, which completes some other services and so forth.

Your question is, how much is this maturity of the market?

Look, the storage market matures every day, as every market does, okay?

But it's -- at a gradual pace.

We see, you know, customers continue to send us boxes.

The rate at which they come in are slower than they were, you know, three or four years ago, but they're just -- it's a very, very gradual sort of thing.

We also see a lot -- and we're still working on, you know, quantifying some of this -- but we see a lot of penetration opportunities.

Lots of our customers who -- who, you know, don't have all their boxes with us -- there's still some inside or other places and so forth.

So we think we've got quite a lot of storage growth ahead of us in that business, and because we're just well set to take advantage what their needs are

So if storage is 5 points, you know, the old rule of thumb ballpark was about four points of creep, four points of new customers, about two points of pricing.

And we know the two points of pricing isn't there, but, you know, how do you get from the 8 to the 5?

What else has been weaker?

And/or, has pricing actually been negative in North America?

Well, we don't separate creep and new, because some of the penetration that we got in the 90s as the service was being adopted is now being driven by -- now being driven by sales force allowed to reengage with those customers.

And so we've got between 6-7 percent -- we've had 6-7 percent volume growth consistently for the last -- for the last three years.

And had -- due to mix and price rationalization , had some negative price last year, so --

Yes, and I may have confused you, Tim.

When I say 5, that wasn't storage growth, that was total growth of the storage product lines, including all the services related to it

Okay, I understand.

And you're exactly right.

It's services -- in the comp services as well as the core services that's dragging it down.

Our storage growth rates as a company for twelve quarters overall have been 8-9 percent.

Now, the box business is a little slower than that.

It's at 6; and then some of our other businesses are higher than that

Great.

Thank you very much.

Thank you, everybody.

I think we need to end at this point.

We're about ten minutes over a prior commitment I made to you to keep these calls to an hour.

But given it was the end of the year, I thought I'd try to get all the questions it.

We appreciate your time, and we appreciate your coming.

As we've said many times, it was a good year for the company.

I really do want to stress that this company is no longer just about the box.

And I think it's a message you all need to understand, because we've spent a lot of your time -- your money and our time and energy -- expanding it to be a different business; but the characteristics of the business that we expanded to have all the same foundational characteristics about the box.

They grow, they're highly recurring -- highly recurring our revenue growth rate and will allow us to continue to drive return on invested capital.

So I want to leave you with a message that, you know, not that we don't like the box, because we love it, because it is the source of all greatness.

Things flow from it.

But it's not just whether you retrieve it or whether you store it -- it's also what else you can do around it and with that relationship, and that's what we're about as a business.

And so -- and the way we walk around here is to keep saying we're going to think outside of the box, and that's -- that's what we are attempting to do.

And I think for you to understand Iron Mountain going forward, it's important to understand we have two businesses: A records management services business that is physical and digital in the way we deliver services; and then data protection business, which is physical and digital in the way we deliver services.

And as our customers need, we are now positioned to shift with them.

So thank you for your support.

We appreciate it very much, and we looking forward to seeing you out on the road.

Have a good day

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

This concludes your presentation, and you may now disconnect.