鐵山公司 (IRM) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the first quarter 2005 Iron Mountain Incorporated conference call.

My name is Liz, and I will be your coordinator for today.

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

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

If at any time during the call you require assistance please key star, followed by 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, sir.

Thank you.

And welcome, everyone, to our first quarter 2005 earnings conference call.

Today’s call will again follow our regular pattern.

After I’ve completed the announcements, John will discuss the Q1 financial results.

He’ll then turn the call over to Richard for some state of the Company remarks, followed by q and a, and brief closing remarks.

Before we get started, I’d 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 relation section of our web site at www.ironmountain.com.

As is our custom, we have a user controlled slide presentation on the investor relations page of our web site.

Please, if you will now turn to slide two.

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 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 have provided additional information and the reconciliation’s of this non-GAAP measure with the appropriate GAAP measures as required by Reg G at the investor relations page at our web site, as well as in today’s press release.

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

Thank you, Stephen.

And welcome, everyone, to the call.

Slide three is my agenda for this morning.

It’s the same lineup we normally follow, but obviously without a YTD component given that we’re in the first quarter of our fiscal year.

So, we should get through this fairly quickly.

Before getting started, let’s move on to slide four and really review the headlines for today’s call.

Here are, on slide four, the important takeaways from this call.

The overarching message is that everything in the quarter was as expected.

We beat our financial performance targets.

Our margins and cash flow were at or above our expectations.

And we are raising the low end of our full year guidance modestly, as you’ll see at the end of the slide show.

Now, let’s move on to slide number five, and begin to look at the details.

Slide five compares the results for this quarter to Q1 of 2004.

Revenue was up 16 percent to $501m, and that marks the first time we have surpassed the half billion dollar mark for revenue in the quarter.

It’s sort of a milestone for IRM.

Internal growth was 6 percent, acquisitions contributed another 7 percent total growth.

Favorable foreign currency exchange over the last year make-up the balance of the total growth in the quarter.

I’ll discuss revenue growth in greater detail later in my remarks.

Our consolidated gross margin was in line with the first quarter of 2004.

Labor productivity gains offset increased energy costs.

Business mix issues cut in two directions.

Our rapidly growing shredding business has a higher labor content than our storage businesses.

Our digital and software services businesses are less labor intensive, and obviously Connected business, falls into that second category of digital, hosted digital services and software, and that acquisition closed November 1 of last year, so this is the first quarter we have a full quarter of Connected.

With respect to depreciation and amortization it is important to note that the Connected acquisition had a higher level of intangible assets than our typical acquisitions and, therefore, generates higher amortization.

Absent the Connected impact, the depreciation and amortization grew in line with revenues for the quarter.

In anticipation of a recurring question, depreciation for the quarter was 41m and amortization was 4m.

Let’s move on to slide six for a discussion of our, really our SG&A line items drive a difference in OIBDA margin for the quarter.

Slide six highlights the margin dynamics at work.

We posted an operating income before depreciation and amortization margin of 27.1 percent for the first quarter of 2005, which was right in line with our expectations.

This is down 130 basis points from the first quarter last year.

As we discussed at our Investor Day and, again, on our last conference call.

Several factors are at work.

Those issues are listed here, and they played out exactly as we anticipated.

First, as a result of the significant ramp in investment 2004, our sales and marketing expenses ran 110 basis points higher this year compared to the first quarter of last year.

It’s important to note that in absolute dollar terms sales and marketing costs are flat through the fourth quarter of last year, so a consecutive quarter, no increase.

A meaningful ramp, though, in our sales and marketing investments incurred during the second half of last year.

We continue to invest in sales and marketing, but we’re doing so at a much slower pace than in 2004, and we expect this margin difference to narrow over the remainder of the year.

We also expect that with the maturation of sales force and frankly this whole thing settling in and improved management we should go forward and be able to get more productivity out of the same sales and marketing dollar.

Second, our digital services, which performed well in the first quarter, nonetheless, put approximately 130 basis points of drag on our overall consolidated margins.

And that’s up from about 110 basis points in the first quarter of 2004.

While the absolute dollar losses were lower this year than in last year and continued to narrow in the business, the margin drag increased slightly due to the much larger increase in the revenue base.

Again, our goal is to drive this business toward breakeven which will benefit our margins going forward.

Finally, consistent with our prediction bad debt is returning to normal levels in 2005.

We recorded 20 basis points of actual bad debt expense in Q1 of ’05 versus zero in the first quarter of last year.

And, by the way, offsetting all of these factors going the wrong way is an improvement in other overhead through overhead leverage of approximately 40 basis points.

Slide seven looks at our Q1 2005 results for the P&L line items below operating income compared to Q1 of 2004.

Interest expense grew only 5 percent in Q1 versus last year, and this reflects two things, increased borrowings for acquisitions, primarily our buyout of our Iron Mountain Europe partner, and the investment we made in the Connected transaction.

These increases were partially offset by a $1.4m reduction in interest expense due to the mark-to-market of our interest rate swap that was formerly attached to the real estate term loan that we paid-off in the third quarter of last year.

We’ll be repeating this process until the swap expires in just under three years, so we may see some slight variability in our interest expense over that time period.

Moving to other expense line, you can see that we had other expense of $5m or 2 cents per share for Q1 2005 versus $2m or 1 cent per share in the first quarter of 2004.

All of the $5m of expense in 2005 was due to foreign currency exchange rate movements as we mark our foreign debt and inter-Company balances to market.

In Q1 2004 last year the entire expense was comprised of debt extinguishment charges.

As a reminder, all of our first share amounts reflect a three for two stock split that became effective in the second quarter of last year.

Slide eight speaks to total revenue growth rates.

For the quarter we reported total revenue growth of 16 percent.

Internal growth was as expected for the quarter, coming in at six percent.

Acquisitions primarily the [Dicsos], a big acquisition in Germany we did last year, [Pro Shred], the Pan-Canadian shredding platform acquisition, and Connected which we’ve talked about, those all drove most of the acquisition contribution to growth, and in the aggregate was 7 percentage points to overall growth.

And, finally, YOY favorable foreign currency fluctuations comprised the balance of our total revenue growth.

Acquisitions will become less of a factor as the year progresses, since our largest acquisitions in 2004 were all completed in the final three quarters of the year.

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

And slide nine is a familiar slide. it displays our internal revenue growth rate from the quarter from both a core and complementary revenue perspective.

Our results fall right in line with the ranges we’ve put forth at Investor Day and reiterated on our last earnings call in March.

The storage which represents 57 percent of total revenues showed consistently solid growth of 8 percent for the quarter.

Strength in our digital services offset the impact of the slower growing [Hayes] business entering our internal growth base.

Storage growth in our core businesses remained stable.

Core services, representing another 30 percent of total revenue, grew at 7 percent for the quarter solidly within our guidance.

Secure shredding remains strong, and we saw strengthening in our offsite data protection business.

Core service revenue in our North American paper business was flat to last year, primarily due in part to lower destruction and terminations which also impacted retrieval revenue.

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

In Q1 complementary services revenue declined 5 percent versus the first quarter of 2004.

This is primarily due to the large onetime license sale of nearly $4m reported by Connected in the first quarter of last year.

Also, as expected, lower revenues from our public sector business in the U.K. compared to last year’s record levels contributed to the decline in complementary services revenues.

Absent these issues, complementary services would have grown in line with core revenue for the quarter.

As a reminder, 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 for 2004.

Our electronic [volting] sales forces and customer bases have been integrated and both the Connected group and the legacy Iron Mountain group will sell all digital data protection services.

So, that’s why we’re talking about it all together, it’s impossible to pull apart at this point, and it’s good business to put it together.

The addition of Connected and Hayes to our internal revenue base in 2005 means that 96 percent of our revenue is included in the internal growth calculus.

Connected should add modestly to overall internal growth for the year, and as we have discussed adding Hayes will result in about 100 basis points decrease in our internal growth rate due to a slower growing storage base and the unrepeatable public sector revenue of 2004.

Said differently, the absolute dollars of growth that we’re generating in the business are in line with an increase by the size of our Company.

We’ve got two technical factors that are moving the calculus of internal growth rate.

Slide 10, capital spending and investments, shows our CapEx spending YTD relative to the prior three years, and our 2005 projections.

CapEx in Q1 2005 included $47m for growth and maintenance CapEx in our core businesses, $9m for real estate, and $2m for our digital initiatives for a total CapEx spend of $58m.

It is important to point out that about half of the capital expense on real estate in the quarter related to the acquisition of an enterprise customer’s in-house record center as part of an overall consolidation of their records under a renewed, very favorable 10-year contract.

We continue to see, as you can see by the percentage of revenue the last line on the slide, we continue to see a favorable trend in CapEx and percent of revenue, and that metric has declined by more than 300 basis points since 2002.

Slide 11 looks at free cash flow before acquisitions for 2005 versus 2004.

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.

However, you can see the cash flows from operating activities was up 21m or 50 percent over 2004, and that we finished the quarter with positive cash flow before acquisitions of $2m, versus a negative $4m for the same period in 2004.

As you can also see we consumed $23m of working capital in the first quarter of 2005 compared to 34m for the same period in 2004.

Historically, we have not been a significant consumer of working capital.

That being said, we typically use working capital in the first quarter due to the payment of annual incentive compensation, and the fact that it is our highest revenue growth quarter of the year.

Looking at the cash paid for acquisitions, you’ll note that Q1 of 2005 total of 33m is well below last year’s level. 14m went to acquire five small shredding businesses in the quarter, and the remaining 19m was used to acquire additional equity in our Latin American operations.

And those partner buyouts or buyouts, we took our ownership of those Latin American operations from less than 50 percent to more than 75 percent.

Please note that on our balance sheet that our minority interest declined to less than $5m from a peak of $76m five quarters ago.

Said differently, we own over 98 percent of our international operations as measured by revenue or operating income before depreciation and amortization.

Again, while we continue to do modest acquisitions as an integral part of our overall strategy, our spend will be modest compared to prior years in this area.

Slide 12 shows the current status of several key debt statistics, as well as a progression of our two major leverage ratios since the end of 2001.

Our net debt stands at 2.47b, up 1 percent from yearend due to borrowings for acquisitions.

Our weighted average interest rate remains stable at 7.6 percent, and we are currently 88 percent fixed with respect to interest rates, and so we have limited exposure in a rising interest rate environment.

Our debt portfolio has a maturity of just under eight years, so we’re long and fixed.

Our bond ratio remained flat the last year, even though we borrowed 19m to fund our Latin American and minority partner buyouts.

Remember the bond ratio is fully charged for the domestic debt associated with these transactions, but does not receive any credit for the foreign operating income before depreciation and amortization.

Our consolidated leverage ratio remained at 4.7 at March 31 of 2005.

And barring extraordinary events and unforeseen events, we’ll de-lever the business in 2005.

Slide 13 is our debt capitalization as of March 31, and details the components of our debt structure where you can see the affects of the last two plus years of refinancing activities.

Of note here is the fact that none of our subordinated notes become due before the year 2011.

We have plentiful access to capital from revolving credit facilities, both at the parent company level, and then our Iron Mountain Europe subsidiary level.

About half of each of these credit facilities are over $250m and are currently undrawn.

To wrap-up with slide 14, that speaks to 2005 guidance, and today we’re raising the bottom end of our revenue and operating income guidance for the full year.

As we go through the year expect storage revenue internal growth rates to trend modestly upwards over the course of the year.

Expect service internal growth rates to be inherently more variable but to strengthen going forward.

Continue to expect the growth rate of service revenues to lag that of storage revenue primarily due to technical factors.

As concerns our go-forward service internal growth rate compared to what we just posted we have an upwards bias in Q2 and beyond, and in part that’s due to the fact that that Connected large revenue event will be behind us and wasn’t repeated last year.

As regards operating income before depreciation and amortization margins, the business continues to produce very predictable results quarter over quarter as the vast majority of gross margin is derived from storage.

The revenue and cost characteristics of which cannot change quickly.

And changes in overhead spending are deliberate and evolve over time.

We continue to expect OIBDA margins of between 26 and 27 percent for the year with any given quarter’s margins running plus or minus 100 basis points around that range.

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

Our second quarter guidance is for revenue of $497m to $507m, and operating income of $86m to $91m.

And depreciation and amortization coming in at approximately $46m.

Our full year guidance is for revenue of $1.98b to $2.03b, and OIBDA of $530m to $545m.

Thank you.

And with that, I’ll turn it over to Richard.

Thank you, John.

And good morning, everybody.

As you can tell by John’s conversation, he’s been through all of the numbers, and so forth, so I’m not going to repeat them all.

There’s really not a lot of news, and so I’m going to uncharacteristically brief.

The business is performing well and performing as we projected it would perform, but I would like to remind you it’s just the little things that we’re focusing on, and that we are making significant progress.

What you’re seeing is what we’ve been projecting for some time, as we get beyond a few things the business will start to just crank in.

I think we’re starting to see that happen, but nothing, as I’ve said many, many times that happens rapidly in this business.

We are focusing on internal growth in the business, both in our core services which remain in line, as well as new services which are doing very well for us.

And our sales force, as we’ve spoken many times, we increased its size and the investment is off to a good start, both in terms of performance as well as increased efficiency.

Margins are coming, as we expected, because of good operational efficiencies in our core businesses, as our service delivery organization has done a good job of managing the margins, and as we achieve scale in some of our new services.

And we’ve got some ways to go, particularly in the additional business, but even our businesses of new services like shredding in many cases are below scale, and there’s more margin we’ll get out of that over time.

And we will continue to work on overhead leverages to absorb the ramp-up in the sales force.

In terms of capital efficiency, we continue to get better through a variety of reasons, of partially a mix of new services being less capitalization in our base business, better processes and control, and the fact that we’re starting to see leverage of prior digital investments, you see the rate of investment in CapEx and digital versus the rate of growth of revenue are now coming in line to better numbers and so forth.

And our new services are, as I said earlier, starting to contribute well to our system business.

And all of that adds up to the thing that we’re focusing on, increasing our return on invested capital, on incremental investments, and we think that’ll happen.

The other element of capital efficiency, and John mentioned it, is the international buyout of our partners, joint venture partners are largely behind us, and as you know, over a period of the last several, about nine months, we bought out our European partners and the majority of our Latin American partners, and really got control of nearly 100 percent, not quite, on an international basis, of our revenue and cash flow.

So, you know, I think you will see that we’re now operating, and in fact in Q1 operated at what we would consider now the normal run rate of acquisitions.

In fact, we did five transactions in the quarter, so we are still doing acquisitions but it was for a total consideration of I think $14m or five deals.

And these are normally run of the mill tuck-in acquisitions by and large as we continue building out some of our footprint in the shredding business and also occasionally of the businesses we see good opportunities to do local market tuck-ins.

And I think you’re going to see that trend continue at just sort of the lower, or what we might now consider normal level of acquisitions going forward, so our capital consumption is going down as well as our capital efficiency, that is the capital per dollar of revenue is going up in our business, which is what we’re driving.

So, by increasing, both working at investing and internal growth which is a good return on investment, driving margins up, which will improve return on investment, and being more capital efficient, we’re working that at every angle, and that’s what we’re going to keep doing for a long time to come.

So, that’s the summary.

This quarter was just another good quarter in that process.

We would expect to see the year to unfold, as John told you, that we see no reason why it shouldn’t unfold and play out as we have been saying, and as John gave you sort of the details on how the year is going to come.

So, with that, why don’t we stop and take your questions, and then we’ll come back and wrap-up.

With a little luck, we may get you out of here at a reasonable hour today.

[OPERATOR INSTRUCTIONS.]

And your first question comes from the line of Andrew Steinerman of Bear Stearns.

Please go ahead, sir.

Hi, good morning.

My question is about core services margin, particularly shredding.

I think we had some challenges back in the third quarter, we were hoping to have them pretty much resolved by midyear.

Could you just give us an update on how far we’ve come in core service margins, particularly as shredding might have had some labor inefficiencies?

Yeah, the margins are up from Q3 and Q4, but have a bit of a ways to go, which I think we signaled last year.

No meaningful change in shredding margins.

We’re still in the expansion hunt there, a very good marketplace for us.

And, you know, the U.S., the North American paper business in total still run about 100 basis points below last year Q1.

Got you.

And could you just give us accounts payable as a separate item?

Yeah, let me take a second to…

Why don’t we go on, and we’ll give it to you when we find it, Andrew.

Got you.

Go on to the next question.

And your next question comes from the line of Henry Naah form Lehman Brothers.

Please go ahead, sir.

Hi, guys.

Nice quarter.

Thank you.

Just wanted to get your thoughts around OIBDA margins.

It sounds like you guys are making good progress in terms of improving the productivity from the sales and marketing investments you guys made over the last year.

Yet the OIBDA margin guidance for the year at 26 to 27 percent is a little bit below EI’s posted during the first quarter.

And I guess you would think if you see improved productivity, you’d see a little leverage there.

So, I was just wondering if I could get some of your thoughts around that?

Harry, I didn’t understand your question.

I think you were specifically driving at sales and marketing productivity?

Driving at, you know, your OIBDA margin guidance of the year is 26 to 27 percent.

And if you’re expecting to see improved productivity throughout the year from your investments in sales and marketing, I guess we would probably expect to see that OIBDA margin be up from the 27 percent we saw here in this quarter?

Well, I don’t think that sales and marketing as a percent of revenue isn’t the Holy Grail, it’s one factor.

We signaled the last two times we spoke, Investor Day and last earnings conference call, that sales and marketing investment YOY would be a 50 basis point issue, and now this quarter it’s more like 100 basis point issue.

So, that’s going to go the right way the rest of the year.

We also have Hayes public sector which was a high margin piece of business in ’04 that’s not repeating.

Bad debt going the other way.

We still think that bad debt is more like 40, 50 basis points.

This year, this quarter we posted 20, last year we posted negative, bad debt of 20.

So, it isn’t any one thing.

And point in fact, I think our field organization has good high return initiatives they want to undertake but, you know, they tend to, and this is a pattern in our business, we tend to make sure the year is coming in solidly on revenue before they release some of their, the great ideas they budgeted, so there might be a little bit of overhead release.

And so it’s a bunch of stuff, Henry.

Okay.

Thanks, guys.

The answer to the question by Andrew earlier about our accounts payable, as of March 31 this year it was $101m.

And your next question comes from the line of Thatcher Thompson from CIBC World Markets.

Please go ahead, sir.

Good morning.

Hi, Thatcher.

A quick question, John, what was the digital drag on OIBDA this quarter?

130 this quarter, 110 last year same quarter.

Okay.

And I think at Analysts Day you had said that that would be 150 basis point drag for the year?

That’s right, and that was just, we were rounding to the nearest 50 basis points, I think.

Okay.

Is this performance in Q1 better than you had estimated it would be?

Yes, I think.

Yes, a little.

Yeah, a little bit better.

Okay.

And then on complementary services, it’s been a drag for quite awhile, are there any other big YOY events we have to think about for the rest of this year?

You know, one of the comforting things, you know, to me is that 96 percent of the votes are in here, you know, 96 percent of the revenue.

So, there’s no – unless we do a big acquisition which at this point wouldn’t enter our calculus until ’07, there’s no acquisition to fold into the base that could come out of nowhere.

The public sector U.K. issue will be a recurring theme throughout the year because it was strong most of last year, and didn’t pull up till right at the end.

The thing I would mention is that the Connected onetime license event of Q1 last year by itself puts a 400 basis point drag on total complementary services.

So, without that we’d be, you know, about flat.

And did they have an other big license sales?

No, their growth pattern was pretty unremarkable throughout the rest of the, three quarters of last year, so that’s behind us.

And that license sale was a different characteristic than normal business, that was major international telco company who bought a license to actually use it to host the service for which we get recurring revenues forever, so you know it was more of almost of a partnership kind of deal than it was a standard software sale.

Okay.

All right.

Thanks, guys.

That’s why we talk about it.

It’s not your average thing.

Okay.

And your next question comes from the line of Chris Gutek of Morgan Stanley.

Please go ahead, sir.

Thanks, good morning, guys.

Good quarter.

Hey, Christopher.

A couple of questions.

Could you elaborate on the sales force productivity in terms of the number of people you have, and how many more you expect to add by the end of the year, and what the productivity per person is tracking?

Sure.

We’re sitting here at an actual headcount of about 602, and we’re budgeted at 640, so we’re about 38 short, that’s sort of normal churn if you might, so that will move up and down throughout the rest of the year.

Our budget is not scaled to ramp-up through the year.

This is a case where we came into the budget, we really funded the ramp-up last year, so we didn’t, we don’t plan to keep ramping through this year.

And then the productivity per person, any metric you can quote there, or any kind of qualitative comments on how it is performing versus expectations?

Yeah, I’ll give you a qualitative, I don’t think I’ll get into metrics there.

But the quotas for this year are up and our performance against quota is, they’re exceeding their quotas.

So, on a per person basis.

What’s really happening is, you know, as we’ve said, we expanded it fairly rapidly last year, and it’s maturing.

You know, our turnover rates of people are down, which is what you expect, because when you’re in a hiring rate, you’re hiring people, you turn them faster as you’re sorting through them.

They’re settling in, they’re learning, they’re maturing, and they’re producing.

And so, you know, all of the right things are going in the right direction.

Okay.

One more analytic question, if I could?

Since [inaudible] in recent quarters, it will be aggressively deploying capital, not just in the shredding business but increasingly into the storage business, as well, do you think their intentions will have any impact on the Iron Mountain strategy?

And in particular, would you guys tend to be a bit more aggressive with some of these smaller tuck-ins that might have otherwise been below your radar screen?

Just more from a defensive perspective?

No, to both questions.

Anything else you’d care to say about strategy, or?

No.

Okay, fair enough.

Thank you.

And your next question comes from the line of Eric Sledgister of Credit Suisse First Boston.

Please go ahead, sir.

Good morning.

And thanks for taking my call.

Sure.

My first question is a point of clarification.

Connected was in the internal calculation this quarter?

Yeah, and that’s uncharacteristic, we normally wouldn’t take an acquisition that we hadn’t had in our results for a full, you know, prior fiscal yearend, but we were reselling their product and their sales people are eminently capable of selling our individual services.

So, it would have been real hard to split revenue up, so we just backfilled this because it had strong, you know, big [inaudible].

And pro forma calculations, as well.

Yeah.

And did you quantify the impact there?

Yeah, I mean they – Connected in our overall revenue, reduced our internal growth rate by 80 basis points, almost all of which came out of this unfavorable comp comparable because last year they had a $3.5m, $4m onetime license event that was outside, and that didn't repeat this year.

The rest of the year should be accretive to internal growth rate.

Okay.

And then, last question, I was hoping you could just update us on your pricing efforts, and whether you’re currently seeing any net benefit from price?

There’s really, there’s nothing new to report on price, same dynamics as in the past this year.

Last year we whined about North America being a slight drag on that 30 percent of revenue which is North America, which is represented by North American storage revenue.

This year it’s a coin toss on around zero.

I’ll take the around zero.

Okay.

Thanks a lot.

And your next question comes from the line of Philip Volticelli(ph) of CIBC World Markets.

Please go ahead, sir.

Thanks very much.

Looking at the acquisition, I just wanted to make sure I understood your comments earlier.

Now that you own the majority of your foreign partners and subsidiaries, acquisitions going forth for the rest of the year will tend to be somewhere in the mid teens range, is that what I’m hearing from you?

Mid teens in terms of acquisitions, investments, is that your question?

Right.

We don’t forecast it, at all, but what we have said consistently is there are no large targets out there in our radar screen.

And sort of the run of the mill acquisitions, you know, if you do about five a quarter in the midsized range, you know, one quarter may be a little higher, one may be a little lower, it’s not a steady sort of thing.

Understood.

And then in terms of deleveraging over the course of the year you mentioned that that’s a goal.

Do you have a target in mind in terms of a leveraged ratio or the amount of debt that you plan to pay off?

Yeah, when we speak to deleveraging, it can encompass two concepts.

One is paying off debt, and the other one which is more likely is growing EBITDA through a combination of internal growth and modest acquisitions.

In the context of [flattish], the latter is more likely given that, you know, absent the big acquisitions of the last couple of years, that had been our pattern there before.

So, my sense is that our overall leverage ratio will come down 30 to 60 basis points in the course of the year, so we’ll wind-up between 4 and 4.5 at the end of the year.

Okay.

Great.

And then just one last question, in terms of rating agencies, have you or do you plan to spend any time with them to help them understand the model a little bit better?

We always proactively in the absence of transaction go to each of the major rating agencies once a year, and we would expect to do so shortly.

Okay.

Great.

Thank you very much.

We’re in constant dialogue with them, though, as you might imagine.

Great.

Thank you.

And your next question comes from the line of Bradley Safalow of JP Morgan.

Please go ahead.

Good morning.

Hey, Brad.

Hey, Brad.

Just to follow-up on Chris’ earlier request.

You know, I was just curious if you’d seen any more new market entrants on the shredding side?

It seems, obviously, an attractive and growing business.

And whether that’s affected acquisition multiples at all?

I will tell you, the landscape is littered with people who, you know, get a mobile unit and go into business, and, you know, I don’t know, there are hundreds of new entrants at the trade show.

We don’t compete against those people.

We compete in the higher value end of the marketplace, and particularly leveraging our national footprint and our brand to be, you know, considered the safest bet and the most responsible provider of shredding services.

And we also both plant and mobile options, and little entrepreneurs can’t afford, don’t typically have the capital to put [inaudible].

But to your question, is are there new entrants doing acquisitions?

Yeah, I mean you see [Sentas], which you’ve heard about before.

And we’ve seen a few other players.

You also see existing storage vendors starting up within their own infrastructure, which is what we did in a lot of cases.

But it’s a pretty broad market out there.

I think the market will go for awhile and it’ll shake itself out.

Just so it hasn’t affected purchase price multiples at all thus far?

No, I don’t think we’ve seen anything move there.

Okay.

And then just switching gears, from a free cash flow perspective, should we think about kind of a YOY change consistent with what we would expect out of net income or operating income in terms of how we set-up our model?

Yes.

Okay.

So, the..

Working capital is a big swing factor, so I mean, you know, and we think it’s going to come in this year.

We’ve seen a see-saw pattern in prior years when we had it be a used one year, come back the next year, and we have work to do on collections particularly in Europe to make that happen.

So, but generally speaking absent that issue everything else should track as you’re modeling.

Okay.

Thanks, I’ll turn it over.

And your next question comes from the line of Leone Young of Smith Barney.

Please go ahead.

Hi.

It’s [Zeke Rilla] for Leone.

A quick question for you guys.

I think you mentioned the last call there’s some, you’re expecting employee stock sales going on this year?

Earlier in the year or later in the year?

You think that’s going on?

It already happened.

During this past quarter?

Yes.

Yes.

Obviously, referring to section 16 reporters, and so we dutifully file Form 4’s within 48 hours of a transaction, so.

Okay, so that was sort of the bulk of it effective for the year?

Right.

Well, as far as we know, yeah.

I can’t predict everybody, but as far as we know.

Okay.

And I can’t remember, is there any type of buyback plan in place at all, at this time?

Buyback of?

Stock?

Of us buying in stock, no.

Okay.

Great.

Thank you.

And your next question comes from the line of [Tom Zeifang].

Please go ahead, sir.

Can you give me the impact on revenues and EPS in relation to foreign exchange?

Yes, we’re finding it.

You know, we had 5m of expense in the quarter, and that’s about 2 cents a share.

2 cents, and that was all related to the British Sterling Pound?

And the [C dollar], and the Euro.

All three of our major currencies.

Where do you expect that to be 12 months out?

Tell me what the currency is going to be, and I’ll leave this call and go place a trade, and then I’ll come back and answer it.

You guys don’t hedge?

No, we do not spend money to hedge.

We have some natural hedges in that we, and that’s in the past, where we borrow money in local currencies, particularly in the C dollar and in the Pound Sterling.

And can you, just so I’m clear, the revenue impact?

The revenue impact?

Okay.

Sorry.

Yeah, Richard, while we’re scrounging for that, answer, as Richard says we seek to finance our assets in foreign markets in their local currency.

Fortunately in our P&L we have a natural, you know, expense revenue hedge, because all of our expenses are people and space which are denominated in local currency.

But we are, it’s hard to lever up a smaller high growth, less mature businesses, like we have, particularly in Latin America and in parts of Europe.

So, we are short the dollar long international currencies, and will be for some time.

Stephen will answer the question on the revenue impact.

Yeah, from our prepared remarks, we got about 3 percent of our revenue growth from foreign currency exchange rate fluctuation, favorable YOY in Q1.

And then one follow-up, what was the core growth ex currency and acquisitions then?

When we do core growth we do it on constant currency.

Yes.

So, that comes out of the 16.

So, 13 was out FX, and 16 was FX.

Okay.

Thanks very much.

And your next question comes from the line of Jeff Rourke of Robert W Baird.

Please go ahead.

Good morning, guys.

Nice quarter.

Thank you, Jeff.

Just a clarification.

I think I heard you say that the [ingram] core services business was flat.

It was a little unclear if you meant that the same growth rate as last quarter or if that was a zero percent rate YOY?

It’s actually 1 to 2 percent in the physical records business, which is sort of flattish to the last three quarters.

Had a tough comp because last year first quarter was quite good.

We expect that it will improve due to favorable comps.

And then when you add shredding which is an important new line of business, and you know you get your core services more or less in line with storage.

Okay.

Great.

Thank you.

You’re welcome.

And your next question comes from the line of Douglas Pratt of Mesa Capital Management.

Please go ahead, sir.

Thanks very much.

A follow-up on that last question, first, regarding currency, so the operating impact was $5m to operating income, if there was an expense of 5m and the revenue increase was 13, so…

Yeah, but there was an expense increase, operating expenses are also denominated in local currency so only the margin, you know, only the margin on the extra revenue really hits the bottom line.

So, you know, we have – I’m sorry.

If it was 13m positive revenues and 5m increase in expenses is any of the incremental the 8m?

If currency rates were the same as last year we would have had 13m less revenue, and we would have had approximately 3m less operating income before depreciation and amortization.

Because our international operations are, you know in the 20’s somewhere in terms of the margins.

And the other expense of 5m was derived from the balance sheet, and speaks to the mark-to-market of our inter-company and foreign debt, such that even though revenue was up because YOY the dollar has weakened, said differently, international revenue translates into more dollars.

From December 31 to March 31, quarter beginning to quarter end, the dollar strengthened, and as a result we’ve had a non-cash loss by mark-to-market or inter-company debt.

But that went through comprehensive income, right?

No, through the P&L.

So, I guess I’m confused, what was the operating profit contribution related just to currency changes?

You’re saying it was $3m?

We don’t track it.

The vast majority of our operating expenses associated with the foreign revenue is in local currency, but it’s, you know, it’s not, we don’t have nor are we required to have an SEC quality number on that.

So, I’m trying to give you directional guidance that the 13m higher revenue probably carried a low to mid 20’s margin on it.

Most of it was European.

Okay.

And then, again, I’m sorry.

I was catching different pieces of the revenue changes.

If you, I think you said core was 8 percent, is that right?

Core was 8, complementary was negative 5, overall internal growth was 6, and acquisition was 7.

6, and the 6, obviously, that would include the currency?

No, no.

When we do internal growth we do so for the purpose of modelers who want to project our forward performance, and we don’t make, we fix the foreign exchange, so we make it foreign exchange neutral, and we obviously take out of both periods any acquisitions that weren’t…

Or said another way, internal growth on a pure currency basis was 6, acquisitions contributed 7, and foreign exchange contributed 3, that’s 16.

I see.

If you didn’t wash out the FX the internal growth would have been 9.

Right, okay.

And then, finally, or two things, actually.

Can you quantify what the impact of energy is on you?

Say, what’s every 1 percent or every 5 percent increase in energy prices, how does that translate to you?

And actually before that, referring to the increase in bad debt expense, you benefited from that the last few years.

It sounds like it’s going back to whatever some normal level is.

What do you expect, what’s your storage pattern of normal charge-offs, and what sort of reserve do you keep against those as a percent of – I assume it’s a percent of receivables outstanding?

Well, we think it’s about percent of revenue.

We believe it, but we don’t know for sure, we believe the normal pattern will settle in at about 40 basis points of expense.

And I think this quarter it was 20.

Whereas, the last couple of years it’s been a contributor, it’s been a contra bad debt, and that’s been ongoing because as we, you know, as you clean-up all these acquisitions, and you really start to do better collection efforts, and so forth, what happens is you find that your reserves were higher than they should have been, and so you’ve got to just keep bringing them down as you get better and better.

And that created the contra expense the last couple of years.

We think we’ve gotten pretty good, but not perfect, by the way.

And we think in terms of just some cash to be still taken off the balance sheet as we go forward in that.

But we think it will settle in sat about 40 basis points in terms of the income statement performance.

And on your question on energy, all forms of energy, you know, electricity, gas, and oil for Iron Mountain runs between 2 and 2.5 percent of revenue, so the expense to heat our buildings, move our fleet around, light our buildings, all of that is 2 to 2.5 percent of revenue.

Two-thirds of that is in the buildings, and only one-third of that is in the fleet.

And then it’s seasonal, as well.

So, you know, Q1, since we’re mostly in northern hemisphere, our business, Q1 has got a higher heating load and lighting load for that matter.

So, if -- I’m trying to remember the detail on your question.

If energy prices went up 10 percent, you know, and we couldn’t offset it in any way in the average quarter it’d be 20, 25 [bips].

Okay.

Great.

Thank you.

You’re welcome.

And your next question comes from the line of Chris Gutek of Morgan Stanley.

Please go ahead.

Thanks.

A couple of quick follow-ups.

John, unless I missed it the tax rate was a bit high, and I don’t know if you addressed that in your prepared comments?

[Jean] [inaudible], our Chief Accounting Officer, will gladly take that one.

The tax rate was about 42 percent this year, for this quarter we’re estimating like in the low, it was around 41, 41.5 last year.

That was mostly due to some of our international operations and some of the things that we’re doing over there to make our tax rates more effective.

Any help with provision for the full year forecast then, or?

I’m sorry, what?

Will there be any upward revision to the full year forecast for the tax rate?

No, not at this point.

Okay.

Another one, just unrelated, I think on Analysts Day you guys mentioned internal control issues minor issues that you were working through in Europe.

Are those issues now fully resolved?

Well, the issues of internal control are constant, but we went through the Sarbanes-Oxley control processes and so forth, and so on, and got, you know, I guess the equivalent of clean, what you call a clean opinion.

Or said another way, John and I, and others signed the documents.

It doesn’t mean we don’t have some work to do, because we do, but mostly towards improving the efficiency of some of the things that we’re doing over there, and that’s the kind of thing we’re focusing on.

Okay.

And then, finally, for John.

I think you made some comments alluding to this, but what was the actual growth rate in the quarter for the U.S. paper box source business, and how does that contrast to the same growth rate in Europe?

It was exactly the same as last year, but sort of a 6 on storage and 5 on core services, and Europe is running ahead of that.

Last year they were probably double the U.S., and now they’re just modestly ahead of that due to the, well, doubling of the revenue base with pays.

Great.

Thank you.

You’re welcome.

We’re going to take I think a couple more, and then we’ll call it quits here by noon, if we can.

Go ahead, Operator, if you’ve got more?

Yes, sir.

Your next question comes from the line of Adam Moss from US Trust.

Please go ahead, sir.

Yes, hi.

Good morning.

Just a quick question for Richard.

Richard, if you could, could you just discuss the Company’s proposal to reincorporate the business in Delaware?

And perhaps lay-out the, you know, share your views of why this is in the best interest for the Company?

And talk about the timeliness of this move?

Thanks.

The timeliness was just one of these things, we just finally got around to.

We were originally a Delaware corporation, and back in 2000 when we merged with [Pierce Leahy] just the structure of that transaction turned out to be the right way to do it is to merge that Delaware corporation into Pierce Leahy, itself, and rename it, and so forth, which happened to be a Pennsylvania corporation.

And we’re just going back now.

We want to let that age awhile, and we’re going to go back now and just go back into Delaware.

And we’re doing that because of, you know, I think it’s generally known that Delaware, by most advice we get, has sort of the best case legal system for corporate governance, and so forth, and so forth.

Thank you.

Yes.

And your final question comes from the line of Franco Turrinelli of William Blair.

Please go ahead, sir.

Hey, John.

Hey, Richard.

Hi, Franco.

Richard, do you want to give us an update on the Continental Europe and Asia-Pacific folks?

Well, Continental Europe is still there, when I was there less than a few weeks ago.

No, business is doing fine, and in fact doing well in Europe, in Continental Europe our sales operation, you know, and as you know in Europe in general that’s one of our big focuses.

Our sales operation there is, you know, we’re seeing good signs of good things happening.

And, you know, they’re starting to happen, you know, after having, you know, it’s taken awhile to build-up and make investments.

We’ve still got some issues in other parts over there in terms of the sales force hitting targets, and we’re working on that.

That is the one spot we’ve got some more work to do, I think, there.

In terms of expansion in Europe, we’re working on a few things over there to sort of finish out the footprint, but there’s nothing earth-shattering, you know, in terms of capital consumption or anything else, just more strategic plays that will play out over time, I think.

And Asia-Pacific, you know, nothing happens quickly.

We are doing the work, there’s a little travel going on, and we’ve got more dialogue than we can probably keep up with, and you know, we’re just still, you know, that’s about all I can say is when something looks like it’s of value to talk about we’ll come back and tell you about it.

Thanks, Richard.

Yes.

So, I think that’s our last call.

We appreciate you tuning in today.

A couple of just quick comments, if I may, to wrap-up.

Our annual report and proxy materials are in the mail, so if you haven’t got them please look out for them.

As usual, we would appreciate your comments.

Many of you each year do give us comments, and we find them valuable, and we use them each year as we try to sit down, because that is one of our, not our only, but one of our major vehicles for communicating with our shareholders.

And as we have in the past, we take seriously what we write, and we put a lot of time and energy on it, and we want to make sure we’re getting our point across.

And so we’d be happy to get your feedback.

The Annual Shareholders Meeting is May 26th here in Boston.

We would encourage somebody to come, if you like.

I also encourage you to read the proxy and vote.

I don’t think there’s any controversial there, but just make our life easier so we don’t have to spend money chasing people to get things down.

One last thing that’s personal to me, that I want to mention, and you’ll see this if you haven’t read my letter in the annual report is that about a year ago a couple of us that had been long shareholders in the business founded something called ‘Iron Mountain Scholarship Foundation.’ It’s a nonprofit tax deductible, at least in the U.S., foundation to which you can contribute money.

And some of us have contributed enough to more than get it started, a substantial amount of money, because it happens to be a passion of mine that I believe that the only way, one of the ways we’re going to improve our world is through education.

And as I look out and I look among our employee base, they’re just struggling in a variety of things, but education being one of them.

And as I look at what’s going on in this country, if we don’t do a better job in education in general, you know, beyond my lifetime but way out in the future, certainly my two sons’ lifetime, it’s not going to be as pretty a place as it is.

And so we’ve set-up this foundation to help the children of our employees.

We grant renewable $2,000 a year scholarships so we can renew for four years.

We granted I think 10 last year, and we want to have this grow.

And we have the capital to grant more.

We’ll grant another 10, and hopefully maintain those 10 this year.

It is managed by an outside group, and the only people that can participate are people who have been with Iron Mountain for more than a year, and who have, who earn less than $60,000 a year.

So, it’s targeted to our frontline employees and our middle management people to hopefully help them, you know, push them over the line, when they’ve got kids who have reached academic requirements, and they’re working hard at the family level to get them through college, we want to try to push them over the line.

So, I have asked a few of you, and a few of you have been kind enough to suggest that you might be willing to contribute.

I’m putting you on notice, I’m going to ask more of you, and look for money.

I would tell you for those that are just pure capitalists, this is a great thing to help employee retention and help drive margins in the business, so you can look at it as another way, it’s a tax deductible way to help the value of your stock go up.

But I would hope you’d consider, you know, helping us, but if you’re not, we appreciate your consideration anyway.

The last thing is Steve Golden did mention, and I’ll just give you briefly, we’ll be at the RW Baird Growth Conference in Chicago May 10th to the 12th.

Let me find the other ones here.

Well, we’ll be at Bear Stearns and the Computer Business Service Conference in June.

We’ll be at Blair June the 22nd, William Blair Growth Conference, and then there’s also a Credit Conference in May.

But all of those details are on our web site.

Again, thank you for coming.

We did meet our one-hour conference call timeframe we set a few calls ago.

And I said at the beginning we’d be brief.

I guess we just weren’t brief enough, but hopefully we were able to answer your questions.

And I do want to tell you that business is doing pretty good right now.

And we’re feeling pretty good about it.

And we do appreciate all the support from the shareholders and all the support for our employees.

So, have a good day.

Ladies and gentlemen, this concludes your conference call for today.

We thank you for your participation.

You may now disconnect.

And have a good day.