鐵山公司 (IRM) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen.

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

My name is Rachel and I will be your coordinator today.

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

We will be conducting a question-and-answer session following today's presentation. [OPERATOR INSTRUCTIONS].

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

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

Thank you.

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

Today's call will follow our regular pattern.

After I've completed the announcements John will discuss the Q3 financial results.

We will then turn the call over to Richard for a statement of the Company remarks followed by Q&A and brief closing remarks.

Before we get started I would like to thank everyone who came out to see at an event or roadshow during this past quarter.

We had several successful events in New York, the Mid Atlantic states, Pittsburgh, and on the West Coast.

As always we enjoy seeing everyone and thank you for your continued supported.

At this time I would also like to remind you that our 8th Annual Investor Day will be held on Wednesday, December 7, 2005 in New York City.

Registration is currently available through the Investor Relations page 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 earning 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 the slide 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 and 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.

Slide 3 is my agenda for this morning.

The lineup is the same as always.

Since several areas will require more detailed discussion this quarter, let's move right to Slide 4 and review the headlines for today's call.

The third quarter was an excellent quarter for us here at Iron Mountain.

We performed well both operationally and financially, and that is reflected in our results.

That being said, we also benefited from some favorable comparisons to the prior year and some positive one-time events.

As we move through the slides, I will highlight these issues and try to give you a sense for our outlook for the balance of the year.

Moving on here are the important takeaways from this call.

We had strong revenue growth in the quarter driven by solid performance in our core businesses, the large digital data restoration project that we discussed on our last call, and strong data product sales.

Our margins, which benefited from this strong revenue growth also received a boost from our Digital business which had modest positive contribution for the quarter.

And also from the leveraging of our sales and marketing spend which we continue to hold stable in dollar terms in 2005.

Free cash flow before acquisitions was 89 million, up 107% compared to the first nine months of 2004.

And based on this performance we are raising our 2005 full year guidance.

Let's now move on to Slide 5 and begin to look at the detail.

Slide 5 compares results for this quarter to Q3 of 2004.

I'll be discussing revenue and gross profit here and save my comments on OIBDA for the next slide.

Revenue is $526 million for the third quarter, an increase of 15% over the third quarter of 2004.

Internal growth for the quarter was 10%, including nearly 2% from the $8 million revenue off the Data Restoration Project recorded in this quarter.

In contrast to Q3, 2004, service revenue internal growth rate, particularly, in North America was in-line with storage revenue internal growth.

As an example, core service revenue in the North American paper business grew 6% internally.

This not only gave us additional revenue, but also helped out on the margin line.

Speaking of margins, at 54.9% our consolidated gross margin improved 60 basis points compared with Q3 of 2004.

Stronger service revenue combined with labor productivity gains and reduced rent expense as a percent of sales drove the year-over-year gross margin improvement in the quarter.

These gains were partially offset by higher energy costs and increased costs of sales associated with our data product sales and electronic vaulting service.

As expected, we saw an increase in fuel and energy costs.

Fuel for our fleet generally runs between 70 basis points and 100 basis points of revenue.

And energy to heat and light our buildings ranges from 130 basis points to 230 basis points of revenue with significant seasonality.

So the recent significant energy costs increases apply to a small enough spend relative to the size of our business to make them margin pressure modest.

We have instituted a transportation fuel surcharge that will help to offset some of the increased fuel costs.

D&A was up 8% for the quarter compared to last year with the absolute solid amount relatively flat to the second quarter of this year.

Depreciation was 42 million for the quarter and amortization was 4 million.

Remember that the connected acquisition had a higher level of intangible assets than our typical acquisitions, and therefore, generates higher amortization.

Let's move on to Slide 6 for a discussion of our OIBDA margin.

Slide 6 highlights OIBDA margin dynamics at work in the second quarter of 2005.

We posted an OIBDA margin of 28.1% for the third quarter of 2005.

In addition to better overall performance, the increase in margin from the 27.7% we posted for the third quarter of last year was due to several factors.

First we had stronger service revenue performance in Q3 in 2005 versus the same period in 2004 as we have already discussed.

As in most businesses, incremental revenues drive high incremental margins for us as our work force productivity generally increases and, obviously, fixed over head is leveraged.

We are also seeing the leveraging of sales and marketing expense in Q3 2005.

The sales and marketing expense build up that began in 2004 was in full swing by Q3 of that year.

As we have discussed throughout the year, our plan for 2005 was to hold spending relatively constant as we allowed the sales force to mature.

The result is that sales and marketing expense is only up 11% year-over-year in the face of 15% revenue growth.

And therefore, represents a source of margin accretion of about 30 basis points.

Due to solid overall performance and the additional revenue from the Data Restoration project, our Digital Services business posted modestly positive contribution for both the third quarter and the first nine months of 2005.

Finally, we recorded only a negligible amount of bad debt expense in this quarter versus the third quarter of last year when bad debt contributed 50 basis points to margin.

This was slightly less expensive than we had originally forecasted and is another reason we exceeded our margin targets for the quarter.

Offsetting these factors was increased expense in the IT group related primarily to the addition of the connected business which we did not own until the fourth quarter of 2004.

Slide 7 looks at our Q3 2005 results for the P&L line items below operating income compared to 2004.

Interest expense was 18% less in Q3 versus the same period last year.

Remember that in Q3 of 2004 we took a one-time non-cash accounting charge of $9 million required by the recharacterization of the interest rate swap associated with a real estate term loan we paid off during that period.

Although the charge was non-cash, it represented the then current fair market value of the swap.

We left the swap in place so as to retain its benefits in a rising interest rate environment.

This quarter we recorded 1.6 million of interest income due to the marketing-to-market of that interest rate swap.

We will be repeating this process until the swap expires in about nine quarters.

So we will see some volatility in our interest expense over that time period, which is a function of the movement in short face.

Normalizing for these charges interest expense was roughly flat year-over-year.

Moving to the other income line, you can see we had other income of 7 million or $0.03 per share for Q3 2005 versus 3 million or $0.01 per share for Q2 2004, -- Q3 excuse me, 2004.

Virtually all of the 7 million of income in 2005 was due to foreign exchange rate movements as we mark our foreign debt and inner company balances to market.

I am going to move quickly now as Slides 8 and 9 are the year-to-date versions of Slides 5 and 7.

On the year-to-date basis the dynamics at work are for the most part the same as in the quarter with a you few notable exceptions.

While both sales and marketing and bad debt expense are running higher this year than last, each is having less of a negative impact than originally forecasted.

Sales and marketing year-to-date is up 50 basis points and bad debt is an expense of 10 basis points year-to-date versus a 30 basis points source of margin for the first three quarters of 2004.

As for our digital services, their strong performance thus far this year has led to an improved impact on a consolidated margin even with the increased scale of the business.

You will recall that we had forecasted the digital business to the press overall margins by an incremental 50 basis points in 2005 versus 2004 by thence of its increased scale even though the losses were narrowing year-over-year.

Okay, let's move on now to Slide 10 where we talk about revenue growth.

Total revenue growth rates are displayed here and for the quarter we reported total revenue growth of 15%.

Internal growth was strong for the quarter coming in at 10%.

Acquisitions, primarily connected, contributed 4 percentage points to overall growth.

Finally, slightly favorable year-over-year foreign currency fluctuations comprised the balance or just less than 1% of our total revenue growth in the quarter.

For the year, favorable foreign currency fluctuations have contributed almost 2% to total revenue growth.

The growth rate of storage -- total growth rate of storage declined from the last two quarters due to the timing of acquisitions.

Last year the largest paper records management acquisitions we made closed in the second half of the year.

Service growth rates have remained consistent as our acquisitions of service intensive shredding businesses, in particular, have been spread out rather evenly over the last seven quarters.

Moving to Slide 11 we can have a closer look at internal growth.

Slide 11 displays internal revenue growth for the quarter and year-to-date from a core and complimentary revenue perspective.

As you can see the largest number on this slide is a 17% internal growth rate for complimentary services.

The $8 million of service revenue generated by the Data Restoration project in our Digital Services Unit accounted for approximately 12 percentage points on complimentary services.

Increased revenues from product sales in our Data Protection business also led to the improvement in the growth rate.

As expected, lower revenues from our public sector business in the U.K. compared to last year's record levels had a negative impact on complementary services revenue growth.

Storage representing 56% of our total revenues showed consistently solid growth of 9% for the quarter.

Improved storage growth rates in our core businesses and continued strength in our digital services were the highlights of this quarter.

In our North American fiscal businesses, our storage revenue internal growth rates have benefited from stronger new sales and more positive pricing actions.

Core services representing another 29% of total revenues also grew at 10% for the quarter exceeding the high-end of our guidance.

Core service revenue in our North American paper business was 6%.

Secured shredding remains strong with internal growth in excess of 20%.

And we saw strengthening in our off-site Data Protection business.

Total core revenue internal growth was 9% for the quarter.

As you can see on a year-to-date basis all of our growth rates are near or above the top end of our forecasted ranges.

The digital project and strong data product sales are driving the 17% complimentary service internal growth rate and are adding about 1.5 percentage points to our total revenue internal growth rate for the year.

This may or may not repeat to the same degree in 2006.

Slide 12 moving on speaks to CapEx, capital spending investments.

It shows our CapEx spending year-to-date relative to the prior three years.

CapEx in Q3 2005 included 53 million for growth and maintenance CapEx in our core businesses, 2 million for real estate, and 3 million for our digital initiatives for a total CapEx spend of 58 million.

There are two important points to be made relative to CapEx at this time.

First, included in the 11 million of year-to-date spending for digital services is a net spend of 3 million for servers and other equipment related to the data restoration project.

What I mean by that is that in the -- we purchased equipment to perform that project about $11 million worth and then implemented a sale leaseback for 8 million of that equipment.

We didn't record any meaningful gain or loss associated with this transaction.

Second, the second important point here is that we sell assets from time to time with real property representing the bulk of those assets.

Sometimes we choose to move out of buildings and then we sell the building and transfer the records to a more efficient building.

So this happens every year and for the years 2002 through 2004 we had proceeds from the sales of assets of 7 million, 11 million and 3 million respectively.

So far this year we have sold $10 million of assets and we expect to complete the sale of three properties during the fourth quarter of 2005 for net proceeds of approximately 20 million.

So for 2005 in total we'll have disposition of assets of about $30 million.

At this time we are expecting to record approximately $5 million of gains from these real estate sales that will be booked in the fourth quarter.

Let me point out that these gains will flow through OIBDA and as we'll see in a minute they have been included in our Q4 guidance.

Slide 13 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 income period results.

Here you can see that cash flow from operating activities was up 70 million or 33% over 2004, and that we finished the quarter with 89 million of free cash flow before acquisitions versus 43 million for the same year-to-date period in 2004.

The increase in cash flow from operations was due primarily to a 32% increase in net income and improved working capital position in 2005 compared to 2004.

As you can see the business consumed no working capital in the first nine months of 2005 compared to a use of 31 million for the same period in 2004.

While our days sales outstanding have remained stable year-over-year our working capital position at September 30, 2005, has benefited from increases in accrued expenses primarily payroll due to the timing of the period end cut off, an incentive competition which remains fully accrued in 2005 based on our performance to date and our projections for the full year.

In 2004 we had reduced our incentive compensation accrual in the third quarter based on our then full year outlook for 2004.

We were also benefiting from the change in our deferred tax position as we continue to use our inner well throughout the year.

Historically we have been a very modest user of working capital.

Regarding our current expectations for year end, several factors will impact our free cash flow position in the fourth quarter, strong third quarter revenues and historical seasonal collection patterns should have a positive impact on cash flow, as well as the $20 million of proceeds we are expecting from the sale of real estate.

Offsetting that will be higher cash tax payments, particularly, to Canada of approximately $10 million and higher CapEx than we saw in Q3.

Looking at the cash pay for acquisitions you will note that the first half of 2005 totalled 46 million is well below last year's level.

Remember that 27 million went to acquire eight small businesses and the remaining 19 million was used to acquire additional equity in our Latin American operations.

Since the end of the third quarter we have completed four additional acquisitions and one small partner buyout in Latin America for total consideration of approximately 25 million, which will impact the cash flow statement in Q4.

And depending on the timing of the closing of the Pickfords transaction in Australia and New Zealand there may be an additional 88 million of acquisition consideration running through the cash flow statement in 2005.

Let's move to Slide 14 which shows the current status of several key debt statistics, as well as the progression of our two major leverage ratios since the end of 2001.

Our net debt stands at $2.364 billion, down slightly from the beginning of the year.

Our weighted average interest rate remains stable at 7.5% and we are currently 86% fixed with respect to interest rates.

Our debt portfolio has average maturity of just over seven years.

We are now seeing the natural delevering characteristics of the business impacting both our bond and consolidated leverage ratios as each is now below five times EBITDA.

These two leverage ratios, which are defined as total debt to EBITDA stand at 4.5 times and 4.3 times respectively.

Barring extraordinary events we should continue to deleverage in 2005.

From a liquidity perspective approximately 285 million remains undrawn under our revolving credit facilities at this time.

Now to Slide 15 to review guidance for 2005.

We're raising our guidance for the full year.

We expect to end the year with internal growth rate at the top end of our 5 to 8% range.

You can expect storage growth rates to remain at the high-end of the range for the year and expect service internal growth rates to come off their high Q3 levels.

The Digital Service project is now complete.

And that represented 8 million of service revenue in the quarter which we'll repeat in Q4.

Also recall that Q4 2004 service revenue growth was unusually strong for the seasonally weak quarter.

Therefore, if the fourth quarter behaves as we would normally expect, we may suffer from a bit of a bad comp.

As regards to OIBDA 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, which are deliberate and evolve overtime.

Our guidance implies full year OIBDA margins of 27.5 to 27.7%.

With Q4 running flat to slightly below Q3.

The $5 million of anticipated gains from real estate dispositions will likely offset the expected seasonal downturn in margins.

The seasonal issues are historically weaker service revenue coupled with increased energy consumption.

We will also have some modest expenses related to hurricane clean up.

Our fourth quarter guidance is for revenue of 512 million to 522 million and operating income of 94 million to 99 million with D&A coming in at approximately 48 million.

Our full year guidance is just an extrapolation of that revenue at 2.052 billion to 2.062 billion and OIBDA of 567 million to 572 million.

So Slide 16 is a reminder of the important issues to consider when thinking about the balance of the year.

The business has performed well all year and that should continue in Q4.

That being said, the completion of the Data Restoration project, normal seasonal revenue patterns, and a bit of a tough comp means that our total service revenue internal growth rate will be less than the 12% we posted in Q3.

The anticipated real estate dispositions will boost OIBDA and free cash flow and our digital services will finish the year above breakeven.

Now looking ahead to 2006, I would caution against simple extrapolation off of this quarter's results.

We are very early in our budgeting cycle and are targeting Investor Day on December 7th for a detailed discussion of our guidance for next year.

At this point, though, we feel pretty comfortable that total internal revenue growth rates in '06 will be similar to those that we are experiencing here in 2005.

As for margins it is a characteristic of our business that they cannot move abruptly in either direction except due to technical factors.

Where we sit right now is too early to offer any precise margin outlook.

We are reviewing a comprehensive list of initiatives and investment opportunities and don't expect them to have -- them prioritized, costed out and scheduled until much later in the budget process.

Besides, if I gave you everything today, nobody would come to Investor Day.

Well, thank you and with that I will now turn it over to Richard.

Thank you, John.

And good morning, everybody and welcome to our Q3 call.

As John is -- I was impressed by listening to the large number of statistics and details he gave you on the business.

And so I am going to make the entire room nervous and throw my script away and just talk to you a little bit if you don't mind.

Which I have done from time to time and, of course, it is always easy to do that when you have a great quarter.

This has been a great quarter, and frankly, it is a good year.

And I want to try to give you some perspective as to why and why we believe this business is not only doing well, but going to do -- not only do well now but do better for a long time to come.

It will not be without its ups and downs because everything -- nothing works perfectly at any point in time.

If you look back through year-to-date the performance is strong any way you cut it and there's four things that really are going on and we're thinking about the business.

Now, I just want to talk to you a little bit about and give you some context on them.

First one is organizational execution.

How we're organized, how we execute, focusing more on that one.

The other one is sales productivity and performance, and then, of course, developing our new businesses.

We've talked to you a lot about digital and about shredding and the big investments we've made over the last few years.

And you will see and if you listened carefully to John they're coming through in the numbers, these investments.

And then, of course, the last one was expansion of our footprint, in particular, in the Asia/Pacific Rim.

Although, we've done some other things.

So let me talk to you about the business and weave some of those themes in to give you some sense of how what we've been focusing on now for some time is coming through the numbers and making a lot of sense.

You know revenue is strong but what's driving revenue is always in our business, it's storage and storage growth is at the high-end, and our fiscal core businesses are running well.

But our Digital businesses and some other businesses are even contributing well on top of that.

Complementary -- oh, excuse me, Core services are also running in-line pretty much across-the-board and doing strong.

And Complementary services, as we've said many times are up and down, and it happens to be right now they're up.

There have been times when they're down and things that go up do have a habit of going down from time to time.

Some of the complementary services going on now, particularly you will hear over and over about the big Digital contract, which we told you about last year.

And I will spend a little bit of time -- excuse me, last quarter highlighting that in a second.

Good OSDP product sales on the other side, the negative side of our public sector that we've talked to you about for some time, business is still dampening the revenue growth rates because they've come off of such bad comps in some strong years.

But overall the revenue is strong in the business and strong because, not only are we appropriately executing and performing well, but we've been focused on the sales performance and sales productivity and efficiency and it is working.

It's coming through the numbers.

Our sales force are ahead of plan.

Our productivity yields, our efficiency are all heading in the right direction as we expected.

As you know we ramped significantly our sales investment last year and that ramp has flattened into this year.

And what we told you we would do is level and flatten investment and then get the productivity out of it and get the return out of it.

And that's happening and that's why you're seeing good strong revenue results in the business.

On the margin side it is a story of great execution.

It is the story of the organization just performing well as we have been refocused in the organization to do that both in how we are organized; who does what jobs; what the focus is; digging deeper, and the organization is responding well as we dig deeper in this business and just get better and better as we put one face to our customer.

Which we aren't complete with, but we're moving to enhancing service and getting tremendous customer response for.

All of that contributes to the execution and they're doing well.

Strong revenue on the margin also helps gross margins, it also helps EBITDA or OIBDA margins and we are seeing strong revenue in certain service categories on the margin.

So all of that is making margins perform well.

Margins have never been our concern.

I know it is a concern of a lot of you when we're going to finally meet the magic number.

But it is never our concern.

It is within our grasp.

It's just something we can and do manage, but it is not something -- it's not our holy grail.

We know we can hit our targets when we want to, so we choose to make investments.

But right now just good strong execution makes margins even form at the high-end of what we expected for this year.

So I would say this organization is doing a great job.

I have never been prouder of them as I look out and see what they have done both in the revenue and sales side, as well as in the execution side of the business.

But there's a whole lot of other things going on here, too.

We told you last quarter that we sold on behalf of a large Wall Street customer a major contract, not only as a big data restoration project probably in our estimation the largest data restoration project maybe ever undertaken by anybody, but certainly the largest one ever done in such a short time frame.

And we told you that would have been booked last quarter.

What we're telling you now, we got the work done on time, actually ahead of plan.

The customer is ecstatic.

Ahead of plan 40,000 tapes loaded, ripped physically handled, and by the way, build an IT infrastructure to do it on the fly.

We had to scale up.

Nobody, including us had the capacity to do that level in that time frame.

And it has worked and worked well.

Now, what's important about that is a couple of things.

First is that leads to ongoing storage, it's like loading a paper warehouse.

You have got to move it in.

This is moving data in.

It is finding all the data where it sits and manipulating it in the right ways and moving it in.

And then it loads your archive off of which you generate the future storage revenue, and there will be future storage revenue off of the project.

The one-time piece is behind us, which puts a bulge in our quarterly results and hits complementary services to the positive, but then it leads to future storage revenue for the next few years on that project alone.

It also is a validation when one of the top firms in the world comes to you and they have a problem and we have been building relationships and it is in multi-product line relationship.

And that they trusted us with such a critical project is a real proof point and that we delivered, which we knew we could deliver.

We just didn't know how painful it was.

And through just really good execution on our management team and our operational people's folks, and not only that they did a great job, it wasn't that painful.

Easy for me to say.

I didn't do the work.

It didn't create lots of angster problems or issues.

It was done in a very well organized and well directed fashion.

So it is the maturity of the business that's what's important to me.

The maturity of the organization.

They're able to step up and take on a massive thing like that and not make it a rodeo.

So those are really all good things that are going on in the business.

And, again, about revenue and it is about execution.

The other thing about it is you probably have heard me say over and over it is part of our strategy to be where our customers want us to be.

And as you know we spent a lot of time and energy doing the acquisition phase of the business to do that.

And we declared the acquisition phase officially over a couple of years ago, but continued to stay but that didn't mean we went straight from the strategy, meaning we would continue buying companies.

But it wasn't the reason we got out of bed every day.

And that's been true.

But we've continued that expansion strategy in this last quarter.

We did a transaction in France and increased our business in a little bit of our footprint in France.

And we finally got a very solid business in France in the right market segments and there is some good ones there and there's some not so good ones there.

And we think we're in the the right segment for that business.

We also filled out our footprint in Spain.

The only major open market in Spain we weren't in was Barcelona and we accomplished that during the quarter.

And, of course, then the U.S. did a couple of other deals in the shredding business as we continued to expand that business, which we're expanding both through strong internal growth as well as some selective acquisitions in the space.

Of course, the big announcement was the announcement of the Definitive Agreement to purchase the Pickfords Records Management in both Australia and New Zealand.

That was a -- I think that's going to prove to be a very, very good business.

I personally went down to look at it and liked it so well I stayed and bought it.

And it is literally what we did.

We liked what we saw.

We were not pleased to run through a competitive bidding process the way it was operating and decided that speed was of the essence and just worked very hard.

And the team just did a fantastic job.

It puts us in eight markets in Australia and four markets in New Zealand.

And if you go look at a map you will find that that's every major city market on both of those countries.

It's primarily a very strong hard copy business with ever 3,000 customers, but with some very good vertical focus in finance, healthcare and government and so forth.

And a good strong management team that we can build on; good relationships with customers.

It is our first four [indiscernible] in Asia/Pacific as many of you say, know that Bob Miller who as historically run our North American business had been President of that.

And had asked sometime ago for a time to do some different things and so we put him in charge of inventory the world.

And he has done a great job and this is his first four [indiscernible.] He will be responsible for that reporting to me.

But local management is strong and in place and I think on board.

And we would expect that to close sometime before year end.

As we just go through the filings and things that we have to get done.

And then the last issue I want to talk to you a little bit about, which is a bit also about execution and also just give you some flavor.

As you probably know by looking at a map we have a large number of facilities that are turning out to be in high hazard areas related to hurricanes.

We've seen Katrina, Rita and Wilma as of recently.

I will speak mostly about Katrina.

Overall, what I would tell you, in particular, in Katrina we came through four facilities in New Orleans, a $12 million business we came through just fine.

That was through a combination of good planning of siting our facilities and, frankly we site our facilities to stay out of the flood plains.

Everything in New Orleans is in some form of flood plain, but there are certain places that are higher than others.

And thank goodness we were in those places that were higher and that was not by luck that was by design.

And our facilities weathered the wind, and so forth.

But it didn't come without a lot of work and that is just another execution story.

We have disaster recovery plans.

We executed them.

Our team just did tremendous work, but a lot of work.

A lot of people working around the clock.

And the first order of business after Katrina was finding all of our employees and making sure they were safe, and frankly, making sure they had a way to live.

Getting them income, sorting through them because they scattered.

They scattered all over the Southeast.

And although we had 800 numbers established, they didn't all call us right off the bat.

And we wanted to make sure we got them compensation and helped them with money.

And as you probably know the banking system down there wasn't working too well and wiring funds and things like that wasn't working.

So we went through hoops to get money in people's hands and keep some people alive, and that's what we were after first.

And then making sure our facilities and then our customers were okay.

And even then, fairly early on [indiscernible] customers we had a significant number of hospitals that needed help.

We even had some new customers come to us and wanted us to help them who were not customers before that who asked us to help them recover and deal with big issues because they weren't prepared and our team rallied.

We had people sleeping in conference rooms in Baton Rouge for weeks on the floors in warehouses, in trailers.

You name every scenario and our mountaineers did it and did it with grace and did it with style and did it very well.

We reached out to our employees and said we have 107 people in New Orleans who have no homes, clothes or anything else and our employees took out of their pockets $600,000 into a relief fund, in which we matched.

And the fund will be approximately up to $1 million here soon.

And we put in a process -- and, in fact, more money than we are going to need and we're going to keep that for other things because we're starting to understand that these kind of things occur around the world.

And we want to be able to help people.

So I am as proud as I can be about how the organization performed there.

How we were prepared.

How we contacted customers in advance and warned them and gave them advice of what to do.

How we moved during and boats, computer tapes out of there and got them so they could be serviceable to customers right shortly after that.

How we would end with gunfire over our heads.

You name it, we've done it all.

And the team just did a heck of a good job.

And as late as the hurricane Wilma in South Florida, our operations in deep South Florida are only operating on an emergency basis today.

Hopefully, we'll be back operational next week.

We suffered minor, but some damage to roofs and windows and signs and facades and blowing, and so forth.

But no significant damage down there.

But operationally power is off, although, we've got power.

And customers are not generally operating except for emergencies and hospitals, and so forth.

And we are providing services.

And teams are on the ground just making sure things are working okay.

Just from a financial perspective in New Orleans just to get back to that one, about 80% of our customers are of the largest scale doing business both in New Orleans and outside of New Orleans.

And we expect that that business will come back and remain strong, and they'll pay their bills and so forth.

The other balance of the customers, particularly, the SMB local market we're not sure if those customers will come back in business.

Some will, and some won't.

We are reserving for some of that just to make sure that we don't have surprises down the road.

Service is coming back, but we're running about half service rates down there in terms of the rate of activity and so forth.

We've also, by the way, relocated about 20 something -- 23 employees who basically said they didn't want to go back to New Orleans and so we relocated them to other operations around the country and given them jobs and help them get started.

And to remind you our entire New Orleans business is about 12 million in revenue.

Another great story that our Iron Mountain executed, and in addition, to that kept their other businesses running around other parts of the country.

So I am proud as [indiscernible] that's about the third time I have used that word.

But the pride of their generosity, and of their operational execution was something to behold.

So in summary, it was not only a good quarter and John gave you all the details, the business is running well.

Our Digital business is what many of you have had doubts about.

We have work to do in them and every other business, but the market is clear.

Our opportunity is clear.

Our ability to execute is just growing rapidly.

Our product step is improving and getting better.

And something I didn't mention we are actually from a OIBDA basis or profitable or that is OIBDA positive already and expect to be slightly OIBDA positive for the year.

And hopefully we'll never see it be OIBDA negative again.

So I think we're through that period of the business.

I can't say enough about the Australian/New Zealand acquisition just because I got to see it first hand enough and kick the tires enough to see the opportunity down there and I think it is a good first platform for us in that part of the world.

And as John says, we're more than optimistic about this year and next year.

Our plans are not finished, so we're not going to give you any deep guidance or anything beyond what we've said.

We would ask you to listen in or come see us on Investor Day by which time, Ed, as customarily, will give you pretty good snapshots of not only 0'6, but what we're thinking about from a longer term.

So with that why don't we stop and take your questions.

I would remind you, I guess I talked longer than I meant to.

It is quarter to twelve.

But we have said we will try to keep these calls to one hour.

So we're going to try to run through questions quickly.

Operator, if you will take the questions.

Thank you, sir. [OPERATOR INSTRUCTIONS].

Our first question comes from the line of Thatcher Thompson with CIBC World Markets.

Good morning, guys, a great quarter.

Thanks, Thatcher.

You mentioned OIBDA breakeven in Digital for the year.

And I assume that implies that fourth quarter alone will be OIBDA breakeven as well.

We were positive in Q3 even, and are positive year-to-date as we sit.

Were you positive through the first couple of quarters.?

No.

Okay.

And does that imply that you're now making money on just the recurring revenue component of that without -- we're going to have $8 million missing from the Q4 of special project work.

On the gross margin line we have positive storage, recurring revenue gross margins, but we got a lot of IT and sales marketing overhead.

But I think the point is, I think the business even without the one-time revenue -- because there will be a -- we'll probably fill that hole of the project in Q4.

I'm sure you'll fill it and then grow dramatically on top of it.

So, yes, I think either way we've hit the revenue level at which the business is breakeven and would expect to keep it there.

It is now about investment rates and like a lot of things, there is tremendous opportunity in this space, and so forth.

And we've made a big investment in it and we can see the payback now starting to come.

And we're going to keep going for it.

All right.

You mentioned there isn't a lot to buy in Asia/Pac.

It looks like two operations have been sold recently this Pickfords, which you bought and then Brambles bought something from ABN Amro.

Can you comment on how big that is and the price it went for?

Recall, which is Brambles, purchased Ausdoc.

We had also -- when I went down there it was a parallel discussion.

There were a couple of discussions going on at the same time.

They purchased Ausdoc.

Recall is number one.

That is their original at Brambles headquarters, their parent headquarters, that's their original market.

They're number one.

Ausdoc was number two and the one we purchased, Pickfords, was number three.

With those two coming together it just suddenly made us number two.

And they are substantially bigger than us, but you have to look at revenue mix.

Ausdoc had some revenue mix that we were not as excited about.

And in the revenue mix we are excited about it, it and Pickfords were about the same.

So we selected -- we sort of selectively chose to go after the revenue mix and the quality business we wanted.

Having said that, Ausdoc is a good business, so I'm not knocking the business.

The price Ausdoc wanted would have choked us and we wouldn't have come anywhere close.

They paid about 3.7 times the revenue, and so forth.

All right.

Okay, thanks, guys.

Thank you.

Our next question comes from the line of Andy Steinerman with Bear Stearns.

Hi, gentlemen.

I am going to ask you about that 9% storage growth.

It's been 9% for the last couple of quarters.

Listening to your tone it sounds like there is a little bit of momentum.

In storage internal growth it is 8%.

In the first quarter 9.

In the last couple 2.

Could you just try to point out for us where you think there has been a little bit of improvement?

Has it been new clients coming in?

Is it existing client box growth?

Is the pricing year-over-year better?

Is destructions less or is it pretty much everything.

It is stable volume growth, the same level pretty much as last year from existing customers.

It's slightly better storage assuming new sales, which as you know there is a lag effect of that kicking in.

And then, yes, our pricing actions taken this year are more positive than pricing actions in --.

The net price this year is better than last year.

It is in addition to all those.

And really the net pricing action arises from less price decline cutting against us.

Of course.

I mean it is the net sum effect of things we've talked about even this time last year.

This is a slow big flywheel to move but we have been saying it is biased upwards because of all of the things slowly kicking in and that's what you see happening.

And all of the remarks I just made were specific to the North American box business as we expected Europe's storage growth rate came off when we doubled the business with Hays.

So we're more than offsetting that through stronger North America and Digital kicking in.

Could you give me a comment on terms and terminations and other kind of ends? [multiple speakers].

No change.

The [gazoons] are about the same and the [gazouts] both destructions and terminations are about the same.

Right, okay.

So it sounds like it is new clients and pricing action better.

Right.

Thanks.

Appreciate it.

Thank you, sir.

Our next question comes from the line of Henry Naah with Lehman Brothers.

Hi, guys.

Congrats on a good quarter.

Wonder if you could talk a little bit, I know John touched on it earlier about the strength in complimentary services.

Obviously, you guys benefited from the Digital product.

I was wondering if you could give us a little more color around that business?

We had this big project to ingest a whole bunch of historical computer tapes for somebody, that was 8 million in the quarter, 9 million year-to-date, with just that one engagement.

And in the quarter that was 12 to 17 points of year-over-year.

And then data products have been very robust for us, and frankly, made up the bulk of our remaining complimentary service growth and --.

And data products is really a reflection of the sales force, out there selling it basically.

And then we -- the rest of, if you will, more routine complimentary revenue is offsetting year-over-year weakness out of the U.K. public sector business, which had record year last year.

And is in absolute terms sort of 5 million lower in this Q3 than last year Q3.

So that was a negative 7 on comp services.

Everything else is filling that hole.

Great.

One follow-up, on the big data restoration project, should we think about that customer continuing in terms of revenue generation in terms of a recurring revenue stream?

Yes.

Not only did that project itself lead to as part of the contract future storage revenue of about 3 million a year, there is additional future business that we would expect.

And in fact, I was talking to that customer last week and they're pushing us to go to other parts of the world and help them in that space and we'll see.

There is additional future revenue of -- hopefully for them and for us frankly, not quite that big that fast, but substantial ongoing.

There is a constant ongoing volume of this kind of business with these major companies as they're under enormous litigation and regulation and compliance pressures.

Sounds good.

Thanks, guys.

Thank you, sir.

Our next question comes from the line of Douglas Pratt with Mesa Capital Management.

Thanks very much.

Two questions.

One regards the energy costs you mentioned.

I believe you said in total it ranges between 200 and 330 basis points as a percent of sales.

What would be the comparable number say to a year ago so we can get a sense of the impact on that?

And also could you just -- we'll start with that one, please.

The energy costs in the second quarter of last year were 2%.

This year 2.3.

The third quarter last year was 2.3.

This year 2.6, it's up about 15% up from last year.

Okay.

And do you do any hedging on that.

No.

Okay.

So would you say, then, 2.6, is that what you would expect as a normalized level then through the winter?

No.

That's a third quarter number, so by comparison, the first quarter of this year was 3.1% because most of our buildings are in the Northern Hemisphere so that load gets a lot heavier.

And that's why in any given quarter, you're right, it can fluctuate between 200 and 300.

So there's seasonality in there.

Okay.

And then to follow-up on the other expense, I guess that was the sale of an asset you registered, the 6 something million?

In the quarter we had a $2 million real estate sale and a 8 million sale leaseback of IT equipment.

The total was how much then?

10.

So that was 10 million sort of a one-time item.

Where did that come into the income stream?

Yes, this is Steve Golden.

The 10 million that we're talking about is the cash flow impact.

So that's 8 million of proceeds from the sale of the IT equipment and 2 million of proceeds.

The 6 or 7 million gain that you're talking about in the other income space, that's related to foreign currency fluctuations from the end of Q2 to the end of Q3 and with respect to the inner Company debt that we have with our foreign subsidiaries.

We also talked about in Q4 recording a $5 million gain on the sale of some of these buildings and that will go through the gain or loss asset disposition line at the top of the P&L.

Okay.

And finally then does your guidance that you talked about earlier, does that include these items?

Yes.

The guidance for the P&L in the Q4 anticipates 5 million of gain on the sale of free buildings total cash flow of 20, but gain of 5.

So it adds a whole point to guidance on what's roughly a $0.5 billion quarter -- margin, so $0.5 billion quarter.

Okay.

All right.

Well, thank you.

Thank you, sir.

Our next question comes from the line of Franco Turrinelli with William Blair.

Richard, good afternoon.

How are you?

Congratulations on the White Sox, Franco.

Thank you.

Well, I've always rubbed it in offline.

So I won't rub it in, in this public forum. [Laughter].

We here in Boston know how you feel.

Well, maybe the north side of Chicago will get to feel that soon, too.

Couple of questions for you.

The first related to Europe.

I think we're all aware of some of the specific issues that have affected the year-over-year comparisons through the summer in Europe.

But can you give us more of a sense of what you're seeing about market and whether or not you are seeing some increasing activity -- particularly, outside of the U.K.?

Yes, you're speaking about just general business climate?

I am, yes.

Yes, look, our continental Europe businesses are actually going very well.

They're doing well.

Our -- so we're not -- we've got work to do but our footprint in each one of them is getting critical mass.

And just like we finished this acquisition in France and really helped them get significant critical mass.

Those businesses are doing fine.

The U.K. business is where the issue is a little bit -- although, operationally they're doing well.

And on a margin basis they did a tremendous job of executing margin.

But they're running behind their revenue plan, and that's still where we have the hold over there a bit against what we would have expected.

Did you receive a condition in place for that to improve as we move through into '06 or are you still --?

Yes, it is an execution problem.

It is not a marketing problem -- not a market problem.

And then on a marketing problem.

Franco, for all my talking earlier about our great execution, we're not 100% perfect.

Okay?

We'll hold you to that standard.

All right.

And then on the marketing problem, it sounds as though Digital services opportunity is something that is going to be pretty relevant for other companies.

Is there going to come a time when you were going to be able to say more about what you did and who it was for and kind of really leverage that with similar opportunities?

We quietly -- with the customer's permission or at least on a reference basis can use them.

But what you have to understand, and we're in the business where a lot of customers don't want the world to know they had to do what they had to do.

So we're pretty quiet about customers.

You talked a lot about the difficulty of differentiating yourself in a formative market relative to technology companies or other similar providers.

And I am wondering to what extent this can be a watershed contract for you?

Well, watershed would be -- in our business is not something I would sort of subscribe to.

I don't think there is any one event.

But I would tell you that it is my belief that, yes, our credibility in this space in a variety of different ways and lots of different ways is being enhanced.

Not only for us being a company that is a good provider of technology, but what we're really after is to be viewed as a company that when the chips are down we deliver as a provider of services.

And that's an exact case of what this is.

It's who do you trust when you have got a big problem to deal with, and that's trust is what it was about.

Okay?

And we delivered on that trust, and we're doing that over and over.

This is not the only circumstance where we've done things.

It just happens to be the biggest.

And I think you'll find that our brand both in the digital business and the physical businesses co-listing and strengthening.

And I think you will find that a lot of the norms in the market are around compliance and companies worried about protecting themselves from a regulatory litigation, and frankly, brand image perspective.

When you think about the problem that way, there is just -- the gold standard in the world is who do you go to accept Iron Mountain, and the answer is nobody.

And that's what we're trying to build and that is building, okay?

Both and across the business.

Franco, if I could add, the customer in question in Q3 actually was doing the right thing to get prepared wasn't acting under duress.

In the securities industry that's really a good idea because of the current environment.

The big bang, if you will, in e-mail archiving is going to be when non-regulated companies broad corporate America decides they will do the same thing because they have the same litigation risks.

And that will probably unfold --.

[Multiple speakers].

I'm mean look, the SEC got the e-mail archiving market rolling, and it is a good market and so forth.

But the big broad market is general corporate America and they're still hoping -- some of them at least are still hoping the problem is going away.

But if you talk to the litigating attorneys you will come to understand, not going to happen.

Problem is not going to go away.

It is only getting worse and only getting much more expensive.

So preparation will be understood as the cheapest alternative.

And we are now offering remediation eventually preparation is what people will pay for.

Be prepared is the name of the game.

Thanks, Richard.

Thanks, John.

Thank you, sir.

Our next question comes from the line of Tom [Zipang] with Lucrum.

Can you just clarify one thing.

The 6 to 7 million that was in the other operating line, that's both FX and interest swaps?

No.

That is all substantially all FX.

The interest swap takes the form of contra interest expense, so it nets against --.

In the interest line.

In the interest line itself.

Okay.

And then the -- can you quantity that again, there was 10 million pretax?

No, the gain and loss on the foreign currency and other income is approximately 6 million.

And the interest rate swap, the contra interest there is approximately 1.6 and that's pretax.

Okay.

And then the bad debt expense, was it zero or flat with last year?

It was $200,000 of expense, so zero.

What have charge-offs been over the last 1, 3, 5 years?

I will have to get back to you on that, Eric [sic].

I don't have that at hand.

But our experience of charge-offs --.

Oh, sorry, Tom.

-- are not -- there's nothing going on here.

What's happened overtime, but now has stabilized is that we found ourselves a bit over reserved as we got better at collecting after we consolidated systems and all of these acquisitions.

So we have had to -- if you go back and list the last couple of years you can bring the reserves down, but that's not going on now.

This is -- that debt is just running normal.

Everything is running fine.

Our best view of ambience, if you will, that debt at that state is 40 or 50 basis points on the business.

Okay.

Of revenue.

And then you said you reserved for some New Orleans hurricane or Gulf hurricane?

Well, we did two things, we're invoicing all of our customers because we're still storing items for them.

We're not booking all the revenue where we have reason to believe that it is not collectible.

We're not adding to AR.

We did take modest AR write-off for that subset of the customers.

We made or best analytical guess at how much of our AR was bad due to the nature of the customers and their likely fortunate at this point.

And did you quantify the hurricane impact both on revenues and costs?

It wasn't enough to -- to impact the total numbers if we thought it was worth whining about.

We have the numbers.

But no we didn't talk about it earlier.

It is non-material is what you're saying.

No.

No.

And then one last thing and then I will get off -- I'll just take it offline.

Pricing environment, can you comment on the U.S. pricing environment?

No change.

No change?

I mean look we're biased at the environment, but we are biased and we are producing, as we said before.

Where as last year we were slightly to the negative net and we're biased slightly to the positive net and that's what we're getting.

Yes, and street prices are stable to us.

And then the surcharge for energy, that just shows up in the revenue line; correct?

Yes.

Okay.

Thank you.

I think given the hour, we should take one more and then unfortunately have to call-- bring the call to a close.

Okay, sir.

Your final question today will come from the line of Eric Sledgister with Credit Suisse First Boston.

Good morning.

And great quarter.

Thank you, Eric.

Just a follow-up on the Digital business.

Can you quantity what the revenue has been year-to-date, maybe break that down between vaulting and archiving?

And update us on what the drag is expected to be on the margin for all of '05?

Yes, I'll take the margin question while others get the specifics.

And to be careful we're not going to give you the difference between archiving and vaulting.

Guys, don't look it up because I don't want to give it to them.

We have got too many competitors listening.

We might give them the total number.

The Digital business represented a 50 basis point drag on the business in the quarter and about a 100 basis point drag on the business for the year.

What I mean by that is if you just looked at the -- if you just took the revenue expense out related to Digital, our margins would be 50 bips up to the quarter and 100 bips up for the year.

And the total revenue year-to-date is about $65 million out of all services that comprise the total.

Okay, the 100 basis points is for year-to-date or for the year?

For year-to-date.

Okay.

And just quickly, any financial information you care to share on the Pickfords acquisition?

I think we've put it in the announcement.

The '04 revenue -- the acquisition price was AUD115 million. '04 revenue was AUD47 million.

I think that's all we're putting out right now.

The business is a straight box.

Yes, it's straight in-line with our other business.

It is a straight box and file business with a pretty decent little shredding business on it, too.

Fair enough.

Thank you very much.

Well, thank you, everybody.

We appreciate your support and your attendance this morning.

I do want to remind you all that we will have our Annual Investor Day it's on Wednesday December the 7th in New York City at the Grand Hyatt Hotel.

And we would encourage you to register on our website at www.ironmountain.com.

And we look forward to seeing you all that day in which we will try to answer every question you've got.

But probably not very successfully, but we'll do our best.

Thank you again and have a good day.

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

This does conclude your presentation.

And you may now disconnect.

Have a wonderful day.