鐵山公司 (IRM) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 4th quarter 2005 Iron Mountain Inc. earnings conference call.

My name is Michelle and I will be your audio coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of today's presentation. [OPERATOR INSTRUCTIONS] As a reminder, 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.

Please proceed, sir.

Thank you, and welcome, everyone, to our 2005 year end earnings conference call.

As usual, today's call will follow our regular pattern: After I've completed the announcements John will discuss the financial results and then turn the call over to Richard for some state of the company remarks, followed by Q&A and brief closing comments.

Before we get started, I'd like to thank everyone who came to see us at our 8th annual investor day last December.

By all accounts it was our best show ever.

Again, I'd like to thank everyone who presented as well as those who worked behind the scenes to make it such a wonderful event.

As many of you know, in February we celebrated the 10th anniversary of our IPO.

To further mark this occasion, Iron Mountain will be ringing the closing bell of the New York Stock Exchange on Friday, March 10th.

I invite you all to take a few minutes out of your schedules on that day and tune to CNBC to watch the event.

Should be lots of fun.

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

Turning now to slide two, today's earnings call and slide presentation will contain a number of forward-looking statements, most notably our outlook for the 2006 financial performance.

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

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

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

We are now providing additional information in the reconciliations of this nonGAAP 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'd like to introduce John Kenny, our CFO, for the financial review portion of today's call.

Thank you, Stephen, and welcome everybody.

Let's get on with.

We have -- my slide three is my agenda for this morning.

There are -- it's the normal agenda I follow , there are no changes here, so without further ado let's move to slide 4 and review the headlines for today's call.

2005 was an excellent year for Iron Mountain.

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

That being said, as is often the case, we had a few one-time year-end adjustments that impacted the 4th quarter and full-year results.

As we move through the slides I'll highlight these items and give you a sense for their impact on 2005 and 2006.

In any event, here are the important takeaways from this call: Once again, we had solid revenue growth for the quarter and the full year, driven by strong performances in our core businesses and strong data product sales.

Due to the solid overall performance and the revenues from the large digital contract we signed in the second quarter, our digital services business posted modestly positive contribution for both the 4th quarter and full year 2005.

Free cash flow before acquisitions was $120 million, up 88% compared to 2004.

And this was driven primarily by strong cash flows from operations, a neutral working capital position, and higher proceeds from asset sales.

The adoption of new FASB accounting guidance relating to asset retirement obligations caused us to record a $3 million net of tax non-cash charge in the quarter.

This charge is presented as the cumulative effect of a change in accounting principle.

Lastly and perhaps most importantly, we're reiterating our 2006 revenue and OIBDA guidance.

I'll speak to the performance of the business as well as some of the related adjustments I spoke about a moment ago in greater detail.

Now, let's move to slide 5 and begin to look at the details.

Slide 5 compares results for this quarter to Q4 of 2004.

As you can see, we had a strong quarter with double-digit growth in revenues, gross margin, and OIBDA.

There are two important items worth mentioning on this slide.

First, included in OIBDA for the 4th quarter are $4 million of gains related primarily to real estate dispositions that we foreshadowed on our 3rd quarter earnings conference call.

Secondly, depreciation and amortization was up 8 million or 19% for the quarter compared to last year.

Depreciation was 48 million for the quarter versus 40 million in the 4th quarter of 2004.

Half of this increase was the result of a cumulative adjustment related to certain storage systems in some of our leased facilities.

During our work related to the calculation of our asset retirement obligations, which included a detailed review of all of our facility leases, we revisited our assumptions regarding the depreciable lives of storage systems in these facilities.

As a result, we adjusted the lives of certain storage systems in some of our leased facilities to better align their lives with the underlying lease turn.

This analysis led to the cumulative adjustment of $4 million or $0.02 per diluted share, of additional depreciation being recorded in Q4 2005.

This adjustment was not material to any prior or current period reported either on an annual or quarterly basis.

Going forward, this is expected to increase depreciation by approximately 1 million per year.

Amortization for the 4th quarter was $4 million.

Let's move on to slide 6.

Slide 6 looks at our Q4 2005 results for the P&L line items below operating income compared to 2004.

On the other income or expense line, you can see we had other expense of $3 million, or $0.01 per share, for Q4 2005 versus other income of $12 million or $0.05 per share for Q4 2004.

Virtually all of the $3 million of expense in this quarter was due to foreign exchange rate movements as we mark our foreign debt and inter-company balances to market.

The other noteworthy item relates to FASB interpretation number 47.

Or, said differently, accounting for conditional asset retirement obligations and interpretation of FASB statement number 143, which we adopted as required effective December 31, 2005.

So this requires us to record a liability for the present value of the estimated future costs of preparing a facility for exit based on contractual obligations contained in our leases.

This relates primarily to the removal of vaults and shred pits and other tenant improvements.

As a result, a non-cash charge of $3 million net of tax, or $0.02 per diluted share, was recorded in the 4th quarter of 2005 as a cumulative effect of change in accounting principle.

Going forward, the accretion of the associated liability will be recorded as a component of depreciation expense and is expected to add about 1.5 million to our annual depreciation expense.

Slide 7 and 8 are the year-to-date versions of slides 5 and 6.

I normally breeze right through these particular slides as they are generally not very different from the quarterly slides.

Today I think it's important to stop for a minute and look at the year as a whole without the vagaries of the individual quarterly results.

Revenue, OIBDA, and margins exceeded our projections for the year, with internal growth rates, which we will visit upon shortly, at or above the top of the ranges we guided to throughout the year.

The digital business ran ahead of our forecast, primarily due to the success of -- excuse me, the business ran ahead of our forecast primarily due to the success of our digital business unit and bad debt expense that was less than originally anticipated.

Strong performance from our digital business this year led to an improved impact on the consolidated margin, even with the increased scale of the business.

You will recall that we had initially forecasted the digital business to approach break-even as it exited 2005 and to depress overall margins by an incremental 50 basis points due to its increased scale.

In the final analysis, our digital services actually put less drag on our margins in 2005 than they did in 2004 and in fact generated positive contribution for the year as a whole.

Moving now to slide 8, we see that 2005 net income increased 18% to $111 million, yielding earnings of about $0.84 per diluted share.

This is as compared to $0.72 per diluted share for 2004.

Included in earnings for 2005 is a charge of $0.02 per diluted share related to the asset retirement obligation we recorded and the charge of $0.03 per share of foreign currency related net losses.

This compares to $0.04 per share of foreign currency related net gains included in the earnings for 2004.

Let's now turn to slides 9 and 10.

These slides show total revenue growth of 14% and internal growth of 8%.

Acquisitions contributed 5 percentage points to overall growth.

Finally, favorable currency -- foreign currency fluctuations contributed slightly more than 1% to total revenue growth.

Slide 10 provides a closer look at internal growth rates for the quarter and full year from a core and complementary revenue perspective.

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

Storage, representing 57% of our total revenues, showed higher internal growth which rounded to 10% 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 physical businesses, our storage revenue internal growth rates have benefitted from increasing volumetric growth and positive pricing actions.

With respect to our complementary services, we exceeded our original guidance due primarily to a full year of strong data product sales and the large data restoration project completed by our digital business unit in the 3rd quarter.

Nearly half of the complementary revenue growth rate can be attributed to the sale of data products.

This is a service we provide for our customers that's related to their core recurring data protection services.

We are now consciously de-emphasizing these low margin data product sales such that we expect these revenues in 2006 to be about half their 2005 levels.

What should be noted is that this has very little impact on the bottom line as the margins on these product sales are very low.

If, in fact, data product sales comes in at half of 2005 levels, it will reduce complementary revenue growth rate by about 5 percentage points or lead to about a 70 basis point reduction in total internal revenue growth.

Again, not meaningful to the bottom line.

With respect to special projects in general, and data restoration projects in particular, timing can be lumpy, adding to the volatility of our complementary services revenues.

Let's go to slide 11, capital spending and investments.

This shows our CapEx spending for the year relative to the prior three years.

CapEx in 2005 included 244 million for growth and maintenance CapEx in our core businesses and 27 million for real estate and 13 million for our digital initiatives, for total CapEx of 284 million.

Capital spending came in slightly above our forecasted range in 2005, driven primarily by investments in additional storage and shredding capacity.

As we mentioned during our 3rd quarter conference call, included in the 13 million of spending for digital services is an net spend of 3 million for servers and other equipment related to the large data restoration project.

We also closed a sale lease-back arrangement for 8 million of that equipment, which we had purchased in the second quarter.

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

Slide 12 looks at free cash flow before our acquisitions for 2005 versus 2004.

Here you can see that cash flows from operating activities were up $72 million or 24% over 2004 and that we finished the year with $120 million of free cash flow before acquisitions versus $64 million for 2004.

The increase in cash flow from operations was due primarily to a 21% increase in income before cumulative effective change in accounting principles and then improved working capital position in 2005 compared to 2004.

As you can see, the business consumed no working capitol in 2005 compared to a use of $32 million in 2004.

Historically, we have only consumed $16 million of working capital in the aggregate over the last 10 years, despite a 20-fold increase in revenues in our business.

So we're not a consumer of working capital of any magnitude.

In the 4th quarter, we paid approximately 133 million for 6 acquisitions, including Pickfords in Australia and New Zealand, LiveVault in the United States, and one small partner buyout in Latin America.

Also in the same time frame we acquired Secure Destruction Services in the UK for $10 million.

This was completed in December, but this transaction will not impact cash paid for acquisitions on this quarterly cash flow statement due to the 2-month lag for consolidating our European operations.

So you'll see this in the 1st quarter of 2006.

Let's move to slide 13.

This 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 just below $2.5 billion, essentially flat to December 31 of 2004.

Our weighted average interest remains stable at 7.5%, and we're currently 80% fixed with respect to interest rates.

Our debt portfolio now has an average maturity of just under 7 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.

Bond ratio is at 4.7 and the consolidated leverage ratio is at 4.3 as of the end of 2005.

Si barring extraordinary events, we should continue to delever in 2006.

From a liquidity perspective, approximately $180 million remains undrawn under our revolving credit facilities at this time.

Lastly, as you can see from the maturity schedule in the lower right-hand corner of the slide, we have no meaningful debt retirement obligations arising over the next three years.

Last slide, slide 14, shows our 2006 guidance.

Today we are reiterating our full-year guidance for revenues and OIBDA and adjusting our guidance with respect to depreciation in operating income modestly, to reflect the impact of the asset retirement obligation and adjustments to the depreciation that I spoke of earlier.

As I said, we are reiterating our full-year guidance, but it is important to remember that there can often be fluctuations from quarter to quarter based on seasonality and extraordinary items.

For example, the first quarter has certain characteristics.

First, it is generally our weakest cash flow quarter, as we pay out the annual component of our incentive compensation plans, and we usually have lighter collections in the beginning of each year which follow from strong year-end collections.

Secondly, first quarter margins are typically lower than the rest of the year.

These are pressured by high seasonal energy costs, the return to a full payroll tax burden and 401K match, and the assumption in our accrual that we will pay out the full annual component of our bonuses for the year that just started.

Further, in the first quarter of 2006 we have the confluence of a series of large meetings related to our North American reorganization and annual sales kickup.

We are also feeling the initial impact of 3 strategic acquisitions.

These give us exciting growth legs, but Pickfords opens a new front for us in Australia and New Zealand, LiveVault is an important technology pickup here, domestically, and Secure Destruction Services in the U.K., all closed recently and are in their initial integration phases in the 1st quarter.

These open exciting new growth areas for us, but they're currently operating at profit levels below those of our established core businesses and below our long-term expectations for these new business units.

Before leaving this slide and yielding the floor to Richard, let me focus on perhaps the most important news.

The reiteration of internal growth guidance is important, but let's drill it a little bit.

I'd like to remind you that embedded in our internal growth guidance of 6 to 9% for this year is the assumption of a storage internal growth rate ranging from 8 to 10%.

We are currently biassed at the high end of that range in light of visible momentum being generated by the success of our sales and account management teams as they continue to execute their respective strategies.

Storage growth is the driver of everything in our business, and it's very encouraging to see that we have momentum there.

Thank you, and with that, I'll turn it over to Richard.

Thank you, John, and good morning.

We appreciate you joining us this morning.

I have probably uncharacteristically brief remarks because business is performing well and frankly, there's not too awfully much to explain to you and John's explained most already.

As he told you, financially, it has been a good year, good quarter, good year, with solid growth, good margins, and very strong free cash flow.

I will comment a little bit just to put a little color on some of the other things that have gone on during the year besides the financial performance.

We've been following a pattern that is pretty consistent for the last few years.

Some would say boring, but most people tell me not to use that word on a call.

But the pattern was we've been expanding our geography, we've been expanding our new services, and they're taking hold in a variety of ways, and of course then take those new services and spread them across that geographic footprint expansion.

And so, we've made a lot of headway in 2005 in a variety of those areas, so I'll just comment a little bit on that.

As John told you and you should know from other announcements, we made our first move in the Asian Pacific Rim.

We went in the easy way, into Australia and New Zealand.

It's sort of half way there, but it gets us closer into the time zones and closer into the regions and it was a good business opportunity that came about.

It gives us a national footprint in both those markets, in fact the strongest footprint there.

It is primarily a hard copy business but does have some shredding operations already, so it makes the expansion there easier, as well as some document management solutions, technology scanning and other paper conversion business there, that also is something we want to build on a little bit.

In Europe, we expanded our footprint into eastern Europe a little bit further by taking a minority position in a joint venture in Poland that will grow with us over time.

It's a very strong management team and a very strong business, and we also worked out a relationship with that management team to help us expand in a few other parts of the developing side of eastern Europe, and particularly we now have started making some investments in Moscow and we will see ourselves continue there, as part of our strategy is to be where our global customers need us to be.

And that drive from that comes both out of the U.S. as well as out of western Europe's side of the world, to keep that expansion up.

We made some moves in Latin America during the year, primarily -- not necessarily in terms of footprint, but we did a variety of small partnership buyouts.

As you know, our strategy was to go -- in most of the international growth expansions we've done is to go first with partners until we build a business with critical mass scaling and better understanding on our part and a management team, and then over time to buy out these partners.

We have been executing that first in Europe and now we continued in Latin America to buy a series of partners out.

In fact, now we own about 78% of our total Latin American revenue stream.

And effectively, what we're doing is buying in our own stock.

We are buying high-growth businesses at attractive multiples.

It not only fitness in our strategy, it's a good financial move on our part.

So those are the things we did in terms of physical expansion of the business.

As John said, our digital businesses are starting to coalesce and do well for us, the revenue's at about $90 million with the high end of our forecasted range.

Modest positive contribution that we would expect will grow over time.

We also made an acquisition towards the end of the year at LiveVault, who had been a partner of ours, and we were able to see the revenue opportunities of that business since we were their major distribution channel, and we wanted to make sure we gained control of really leading technology, ranked by everybody, including our customers, but outside experts, as just leading technology in the server backup space.

And that really is an adjunct to the Connected acquisition we'd done about a year and a half ago, which was leading technology in the desktop space.

And what you can see is our strategy is that we are in the backup business, we work from the glass house out, using physical tapes and trucks, and we work from the edge of network in, using technology.

So we can start at your desktop in best-in-breed backup, or we can start in the data center and work the full spectrum in between, and it allows us to fill out that product line.

So not only have we made sort of the big move during the year of getting the business to scale and, therefore, to break even, but also we made some expansions in the business, and -- which we will continue looking to do in that space as we get more bullish about our long-term, and, for that matter, our short-term opportunities in that space.

So here again, as I said, the pattern is expand geography, expand service.

In terms of service expansion, and geography kind of comes in the same category.

It's also spread those services over geography.

Because as you probably know, we do not yet perform all of our services where -- in a good part of the world where we actually have footprint.

And so we have lots of straight opportunity of missionary work of expanding our service lines in broad parts of geography.

And in our shredding business, which was first a U.S. then North American, as we took it into Canada a couple of years ago.

We expanded into Latin America and Mexico in the shredding business this year, through some startups.

And, as John said, we are not the largest shredding -- secure shredding provider in the UK, which came through first through the acquisition of a good company known as SDS.

Seven facilities, London-based, couple hundred employees.

It is the only national footprint in the shredding business today in the UK.

And as John told you, it will start to show up in our Q1 '06 results.

But we also, in February of this year, did a [inaudible] acquisition in the UK which increased the size and scale of that business.

So we really do have a nice business we can grow and build upon there in the UK in the shredding business there.

So, the other things we did in terms of expanding ourselves is we took our electronic vaulting product service and started to introduce it in the UK.

That would be our second digital service outside the U.S. in that we already had our electronic vaulting services for desktops through Connected there.

But now we have the server service over there also.

We have it operating in our data center and starting to be sold as a service to our customers and we will want to build over that in the years to come, as we consider expanding other digital services, first in the UK, and here again in the continental Europe and over time to the rest of the world.

The last thing I think which was important in the year is we have -- we've always had these legs of -- in fact -- of growing real fast and working real hard and starting, really, in '05, we've started to focus on our organization again.

And when I say again, because we've done this a little bit in the past at different times, but now we've gotten to be a big business and so we've been working on some targeted new hires as well as some promotions and changes in the business.

It's a process that will continue over time but it's about building management depth and strength as we want to build this business out not to be a $2 billion business.

We're there, we can run that business, it's to be a substantially bigger business, and that requires change in a variety of ways.

We made good headway this year, and we're starting to go about it in a more methodical way as we rearrange the organization, as I said, and brought in some inside and outside talent and moved it around.

So, all in all it was a good year for us, both financially, as John said, but also strategically.

Our markets remain solid.

Regulations continue to drive customers to think about the business in a different way.

Or as some people say, we're now becoming extremely relevant.

It's another way of saying that our brand is growing.

Primary data continues to grow, but the customers' approach to how they manage, protect, and store it is changing because their risks are higher and, frankly, their costs are going through the roof.

And we provide the valuable proposition of reducing their cost and reducing their risk.

And it's a proposition that -- it's ringing well in the marketplace out there.

In addition to that, there was great execution on the behalf of our organization.

They worked extremely hard and did a really good job this year, and it shows in everything we did, both strategic accomplishments as well as the numbers.

Now, having said that, I do want to talk a little bit about 2005 as sort of a landmark year for us, because it's our 10th anniversary of being a public company.

On February 6, 2006, we marked our 10th anniversary.

As we went public on that day we issued 8 million shares at what has been split adjusted at $4.74.

We raised it a whopping $38 million, and by the way, for those that met me on the road show, I remember your questions well, which was is that not too much money and can you spend it in acquisitions?

The number one concern was, we don't believe you guys can go spend $38 million in acquisitions, and it would just -- by the way, I didn't know if we could either.

But we thought we could, and as you know, row forward 10 years, the market consolidated at a far more rapid pace than we could have dreamed of at the time.

And of course we spent far more than $38 million at the time.

I'm proud to tell you it has built an extremely strong and good Company, but it's also produced for shareholders that joined us during the IPO a compounded annual growth rate, a stock price greater than 25% for ten years.

And that's a track record we're proud of.

It's a track record we would like to emulate in the future, but there are no guarantees that future performance will match the past.

We've increased our business 20-fold from $104 million in 1995 to $2.1 billion in 2005, a 35% CAGR in growth rate and a little less than a third of that came from internal growth and 2/3 from our acquisition investments, because it was a tear, as you know.

And in fact, mathematically, we bought 1.25 companies on average per month for ten years on four continents.

It's an amazing thing that I look back and I'm proud of this organization and what they've done.

We've built the global leadership in information protection and storage services, while at the same time maintaining solid internal revenue growth and accretive margins.

We accomplished this through a strategy that focussed in the early years on consolidating our industry and then on expanding geography and product lines and investing in customer-facing cost and technology to allow us to sell and support this broader business.

During this time period, we expanded from 26 U.S. markets in 1995 to 26 countries on 4 continents and 166 markets today.

We went from a revenue mix that was all -- 100% U.S. based to a revenue mix that's 72% U.S. and the balance outside of the U.S.

And in 1995, almost all of our revenue was derived from carton storage and related services, and now today it's about 75% derived from the so-called paper or box business and the rest from computer-related data, both physical and digital storage.

We engineered this 20-to-1 scale change in our business and as we expanded OIBDA margins and we also made choices to invest some of that margin expansion along the way.

Our RT investment grew 300 basis points, our customer-facing, sales, marketing, account management, grew about 500 basis points.

But we have gained efficiencies in operations and leveraged the overhead from scale and efficiencies and we've absorbed these investments, and although we increased our costs in this area by that amount, we've absorbed those investments and increased total OIBDA margins over these 10 years, greater than 200 basis points, which, by the way, increased also -- we took on new products, new geographies, new services that in their early stages have lower than average margins that drag them down and as they mature, that will help us continue to drive margins up in the future.

With this strategy, the expanded geography and product lines, it was fueled by necessary investments.

We spent a significant amount of money, both through the acquisitions that I've talked about before as well as through CapEx.

But these investments, interestingly enough, allowed us to sustain our internal growth rates on a business today that's 21 times bigger than 10 years ago.

In 1995, the year before we became public, the internal growth rate of Iron Mountain, U.S.-based, primarily box business only, was 8%.

And in 2005, the internal growth rate of Iron Mountain, a $2.1 billion business, four continents, multiple product lines, was some 8%.

I'm frankly pleased and a little surprised.

But that's always been our drive and our challenge is to continue to invest capital because internal growth, as we all know, drives return on investment and we've done it more than successfully, in my opinion.

We also invested capital during this time to expand our capacity, and capacity in our physical business through things like real estate and storage systems, whereas in our new digital business, software networks, operation centers, and a storage capacity for digital storage which, by the way, is larger than all but a few companies in the world, even as we sit today.

Our digital business for the over 4 billion assets is a significant storage infrastructure.

We also invested in infrastructure that was required to support these expanded businesses on the four continents.

But we have seen improving capital efficiencies or better returns, in effect, in our physical businesses over time as we have tuned them and become better at how we invest and how we drive the top line and bottom line related to them.

We -- as we continue to invest in the future and our new services and our expanded infrastructure, we will invest to support a substantially larger business and we expect that these future investments will also show improved efficiencies in time as the mature, just like our core physical business did over the last ten years.

Today we have established a leadership in not only our original physical businesses, which remain strong growth engines, but we also have added to our opportunity segment new services, such as secure shredding in digital services and a broader market presence which enhance our ability to sustain profitable growth well into the future.

It's been an interesting -- pretty fast from a personal perspective -- 10 years, and when I look back over the 10 years, I'm pleased with what I see we've done.

I hope you share our enthusiasm.

But it's not over. 2005 was a great year to end this first decade as a public company, but we're pretty aggressive, we're looking to do more, faster, better, cheaper, and to keep running the business ever-upwards.

As Stephen said in the beginning, we are marking and celebrating our anniversary at the bell-raising ceremony on March the 10th.

Somebody did a good job, because if you do it on Friday, they tell me they show your smiling faces on TV for the whole weekend, so we'll get a little PR out of it.

But I hope you will tune in and it's something we're looking forward to doing.

So with that, we will now stop and take your questions and then we will come back and wrap up.

Thank you, sir. [OPERATOR INSTRUCTIONS] And our first question, sir, comes from the line of Mike Schneider of Robert W. Baird.

Please proceed.

Good morning, guys.

Congratulations on another great year.

Thank, Mike.

First, just some 4th quarter numbers.

I wonder if you could share with us what volume growth was for North American boxes?

And then also what box services grew in North America in the 4th quarter?

Volume growth was about 7% and services grew more or less in line.

Why don't you ask your next question?

I'll check on that.

Okay.

And then, in terms of the organic growth, John, you emphasized that storage growth is pegged, internally, at least, at 8 to 10% in 2006.

I'm curious, and this kind of goes to how pricing finished the year, I'm curious how the pricing volumes plays out in that 8 to 10%, and any commentary you can give us on pricing as we close the year would be helpful, too.

The only business we have any visibility that's reliable into on that is the North American box business and last year we were about a half a point of net negative price.

This year it flipped around in the other direction, about 30 to 50 BPS.

We're really not able to measure that down to much more -- you know, down with precision to 10 BPS, so it's plus or minus 25 BPS.

And then the implied pricing in the 8 to 10% storage growth for 2006?

No change in pattern.

No change in pattern.

Okay.

And then, digital margins, certainly better than what you expected in 2005.

Are you still anticipating that digital margins could reach the mid-teens in 2006?

That's our guidance.

Recall that -- that guidance has the benefit of including in that business the intellectual property management business, principally the software escrow business that we have, which itself is about a 40% margin business, so, yes, we're -- inclusive of that, we're talking mid-teens margins.

Okay.

Then, finally, when everything's going so well, I guess it begs the question, maybe, what didn't meet your expectations in '05 or what are you still most frustrated or challenged by?

Oh, the list is too long to tell you.

I think our internal growth rate in Europe was understandably and predictably depressed by the mathematics of including Hays, the big business we bought that doubled our position in Europe and made us the dominant provider of services in Europe.

We knew that that would mechanically lower internal growth rate.

I think we think there's upside, didn't get as much as we wanted, but there's upside in moving that business to phase 2 through investment in sales and marketing and increasing its growth rate.

And I think we're seeing the movie play out that played out in the early part of this decade in the U.S.

After Pierce you double the size, it takes time to create that momentum.

I think that's an area of focus for us.

Okay.

Thanks again.

And our next question, sir, comes from the line of Chris Gutek of Morgan Stanley.

Please proceed.

Thanks.

Good morning and congratulations on a good year.

Thanks, Chris.

A couple of follow-ups actually related to that last line of questioning, maybe starting with the 8 to 10% assumed organic growth in the storage business.

John, I'm kind of curious how you would expect that to break down between growth from the digital archiving, OSDP, versus the core box storage this year?

Yes.

The physical data protection business has historically had growth rates in line with the box business, so mid to high single digits, and we don't see that changing.

The growth rate in the digital business, while continuing to be impressive, on a larger base will actually contribute less, just mechanically, mathematically it will contribute less to internal growth because it's getting bigger and it's off a larger base.

Okay.

Maybe I missed this, but I was a little confused on why the operating profit guidance for '06 was revised down just slightly.

I guess there was one acquisition closed earlier this year, and it seems like Digital is doing very well and the business generally is doing quite well.

There's two things going on there, both non-cash.

We're complying with a new FASB interpretation around asset retirement obligations, which is causing us to set up a liability for end of life, sort of removal of tenant improvements.

That technical factor is a million and a half of depreciation going forward.

And as we were looking at that, we revisited asset lies within all our leased facilities and brought them into -- in some cases to conform with the terms of the lease and the related period over which we do the FAS13 operating lease test.

And that's going to add go-forward a million.

So between -- to depreciation.

So between those two things we've just moved depreciation guidance up about 3 million.

Okay.

Two more real quick ones.

What was bad debt expense in the quarter?

$2 million dollars, so it -- well, actually -- it actually was about 40, 50 basis points.

For the year it was about 20 basis points or $4 million in total.

So it's now at a more normal, sustainable level going forward?

I'm not sure we understand ambient bad debt in our business, because this is the first year in three years that it's actually been an expense.

We had built up reserves in the recession earlier in the century and as we were centralizing this function and we unwound those, so it's been a contributor to margins.

This year, it was 20 basis points of real expense.

So I think it's stay tuned time, you know, put a gun to our head, we say we believe it steady stays 40 to 50 BPS and that's what's embedded in our forward guidance.

Okay.

And then finally, the tax rate was low in the quarter?

You're not going to ask me about tax rate, are you? [Laughter].

Yes, I -- you know, I would be happy to have you dialogue with our director of tax on that.

The thing I focus on is we actually paid a lot -- more taxes, cash taxes in this year than we had in the past.

We paid about $20 million of cash taxes, but it was in the quarter at 37.4 versus 41.4 for the year.

Okay.

Great.

Thanks, guys.

And our next question comes from the line of Andrew Steinerman of Bear Stearns.

Please proceed.

Hi, gentlemen.

SG&A sequentially went up about $10 million.

I know you've spoken sort of thematically about different things going into SG&A, but could you just break it down for us, what is going up on a sequential basis for SG&A and try to sort of break that down between selling and G&A.

Yes, Andrew, it's -- with the growth of the business, you would have expected it to go up about $4 million, and the others -- 3 or $4 million.

So the other 6 or 7 comes from the following: 2 million of bad debt as compared to near zero; we had a change in a commission plan, which sort of accelerated some commissions.

We're going from a circumstance with one portion of our sales force from our bookings to a -- from a delayed plan on a post-move in billings to pay-as-you-go on billings.

It's about $2 million dollars, just -- a conversion on a commission plan.

Got it.

$1 million higher marketing spending due to programs and higher professional fees.

One of the things that will impact the 4th quarter and the 1st quarter that we haven't talked a lot about because it's just sort of background friction, is the fact that we have undertaken a major merger of our two physical businesses in North America.

So Box, Tape, and Shred went from being separate business lines now to being merged business units.

We did that for two reasons.

The principle reason is to maximize our revenue opportunity by giving one face to the customer and maximizing the relationship values there, making it easier for us to do business with, and taking any intradivisional competition out of dealing with the customer.

And secondly, and importantly, there's going to be a lot of synergies that arise from that, long term.

But in the merger itself, there is friction.

That is to say that we have relocations, we have meetings to explain it, we have a little bit of management distraction around it.

It's a classic J-curve thing where -- we even put some infrastructure in to help manage the complexity of combined transportation.

This is all going to be good for the customer and good for the shareholder in the fullness of time, but at the transition point it's adding a little expense to our business.

And it's a great investment, clearly.

Again, I haven't talked a lot about it, but it's significant to us.

The 9,000 employees that work for us in North America have new reporting relationships and new way of working internally.

Sure.

I remember that coming up in analyst day, but you just mentioned that you think it will be a 4th quarter and 1st quarter event?

I would think that's sort of more like a multiyear event.

Yes, I mean, I think in terms of the -- pointing to meetings and relos and double staffings and stuff like that, is -- the downstroke in the J curve that we're seeing now.

The synergy that will arise from us will -- and hopefully the customer penetration that will arise from it -- will benefit us for years and years to come.

But we haven't scratched the surface yet of getting the transportation efficiency you'll see out of that, and frankly, the field management efficiencies you'll see out of that.

Okay, I'll look for the J. Thanks. [Laughter].

And our next question comes from the line of Manish Somaiya of Banc of America Securities.

Please proceed.

Hi, good morning.

This is actually [Ravi Chelly] filling in for Manish.

Just one quick question.

I see that two of your notes outstanding, the 8 1/4s and the 8 5/8s become callable in 2006.

Just wanted to get your thoughts on what you guys plan on doing with those issues.

I think the 8 1/4s comes as second call in July.

And the 8 5/8s, first call, as well.

And so our stance with respect to those would be exactly the same as it's been in the past.

If the refinancing of those, sub for sub, typically, sub debt for sub debt, is an NVP positive event for shareholders, we'll contemplate doing it.

If not, we'll let them ride.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] And our next question comes from the line of Sam Taylor of Portland House Group.

Please proceed.

Hi.

Just one quick question.

On your 2005 CapEx, can you break out what was maintenance versus what was growth?

We believe maintenance was roughly 2% of total CapEx, so it would be -- Total revenue, excuse me.

So it would be in the $50 million zip code.

And the rest is growth?

Yes.

Okay.

That was it.

Thanks.

Our next questions from the line of Clark Orski of KDP Investment.

Please proceed.

Can you give us any thoughts on real estate asset sales in '06 and perhaps acquisitions, in terms of dollar amount you think you may be spending?

Yes.

We -- these things are hard to predict because we do have -- and it's important to us in a lot of our lease arrangements, we have right of first refusals that we can't predict their timing, but we do know that embedded in our guidance for purchasing real estate is 40 to 55 million of known opportunities, which is a big year for us.

I would say that disposition's are going to be more modest than in '05 with $20 million of real estate dispositions, which was roughly what we undertook in '05, was a big year for us.

And acquisitions are not something we budget or forecast.

There;s -- it's classic, though.

The bread and butter run of the mill deals will be in line with the last couple years, which is probably under 100 million.

But there are also the other kind that come up from time to time.

And those are hard to predict.

Okay.

I guess one last question.

I guess, do you think you need to bump up your revolver availability to sort of handle what you think you might do next -- or this year?

Not given our current outlook, but it will be event-driven if we do.

I'm sorry?

It will be event-driven if we do, but we wouldn't -- we have no need to do so as we speak.

And in fact, generally, the free cash flow from our business will fund sort of the bread and butter acquisition strategies, so the reason -- the only reason to take the revolver up would be if we decided to take on an opportunity that was outside of the normal bread and butter, more of a larger opportunity.

And there's not a large number of those out there.

So --

Okay.

Appreciate it.

Sure thing.

And our next question comes from the line of Andrew Berg of Pulse Advisory Group.

Please proceed.

With regard to your working capital, which was sort of break-even this year in terms of sourcer use.

Should we expect to see sort of a similar working capital net nothing position in '06?

You know, beats me.

It's been a total consumption of 16 million over 10 years, and if you look at it, if you go back to our '04 investor date book, you see a sawtooth.

And so, I -- it's the thing that I have the hardest time predicting in the very near term, because it results from timing of purchasing and obviously over the long haul from efficiency of collections.

I think we have an opportunity to improve our collections, which we've been doing so, reasonably steadily.

So I just hesitate to be predictive about that.

I think long-term, we're not a big consumer.

Okay.

Thank you.

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

Please proceed.

Thank you very much.

I have two questions, I apologize if you answered this, the first one, I had to hop off.

When you were factoring in your adjusted earnings, what adjustment did you make for the tax rate?

I believe it was somewhat lower this past quarter than normal?

It was.

It was 37.4 versus 41.4.

It's an anomaly.

We don't -- if you're interested in the details around that, please call Stephen Golden and he'll get you to our tax guy.

Okay, but you did, when you were giving the adjusted number, you raised the tax rate back to normal?

Or did you use the stated tax rate --

You know, on the asset retirement obligation that we used, that we presented, net of tax?

Right.

Yes, we used 42.5, the same as our investor day -- the tax rate we had at investor day.

I'm sorry.

I meant, though, when you said -- you were doing a comparison, I believe you said it was $0.22 adjusted.

No, no.

We don't speak to -- we didn't speak to adjusted earnings on this call.

We tend not to speak to --

Oh, okay.

All right.

That must have just been the --

Yes.

And then the second, on the maintenance CapEx number.

Yes.

The 50 million.

So the additional was what you spent to get the internal growth rate of 8%?

That's correct.

Okay.

So then, anything above that would be what you spent on acquisitions for the Company?

In other words, to go simply to maintenance CapEx would mean the Company would cease to grow at all.

We would not be able to fund volumetric growth in the business, right.

Right.

Thank you.

Operator, we'll take one more call, as we'll try to limit ourselves to our one hour we promised a few quarters ago to stick too.

Thank you, sir.

If you've got one more we'll take it and then be done.

If not, I will end now.

Thank you, sir.

And our last question comes from the line of Chris Gutek of Morgan Stanley.

Please proceed.

Thanks, Richard.

At the analyst day you had eluded to phase 4.

Any update you can provide to us at this point? [Laughter].

No, I'm going to keep you guessing about that one awhile.

Sorry, Chris.

All right.

Fair enough.

Thank you.

It's a ways away, though, don't worry.

Okay.

Thank you, everybody, for joining us.

I continue to appreciate the support our shareholders give us, and in particular, the support our employees and customers are giving us.

The employees worked, as usual, quite hard this year.

This is a hardworking company and you as shareholders should appreciate -- and I'm not talking about myself, I'm really talking about the rest of the people, because they work very hard for -- and they're very passionate about what they do, and I really appreciate their passion and their hard work and efforts and, therefore, the performance that they generated.

We look forward to continue doing this.

And it's been a good, interesting 10 years and I happen to think the fun is just beginning.

So stay tuned, look forward, and one day I'll tell you about phase 4.

Have a good day.

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

This does conclude the presentation and you may now disconnect.