鐵山公司 (IRM) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2006, Iron Mountain incorporated earnings conference call.

My name is Janelle and I will be the coordinator on your call today.

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

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

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

Would I like to turn the all cover to our host today, Mr. Stephen Golden, Director of Investor Relations.

Please proceed, sir.

Thank you.

Welcome, everyone to our third quarter 2006 earnings conference call.

After my announcement this morning, Richard will have a few short remarks, then turn the call over to John, for a financial review followed by Q & A. Before we get started, I'd like to thank everyone who came to see us at our ninth annual investor day in New York earlier this month.

We had an excellent turnout and I think the day was a great success.

As always, we appreciate your support.

Per our custom, we have a user controlled slide presentation on the Investor Relations page of our website at www.ironmountain.co.

Refer now to slide two in that text.

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

Most notably, for our outlook for 2006 financial performance.

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

Please refer to today's press release for the Safe Harbor language on this slide for 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 and free tax flow before acquisitions are metrics we speak frequently and ones we believe to be important in evaluating our overall financial performance.

We provide additional information and the reconciliation of these non GAAP measures as required by rate G, at the investor relations page of our web site as well as in today's press release.

With that, I'd like to introduce Richard Reese, our chairman and CEO.

Good morning, everyone.

Welcome to our Q3 call.

Stephen said I'd have brief remarks.

That would be uncharacteristic of me to be brief, but the truth is since we really did spend significant time with many of our investors and produced a lot of information a few weeks ago and since our businesses are running well and as we expected and projected from three weeks ago, there really isn't a lot for me to talk about today.

Business is running fine, as I said.

The organization's performing, the markets continuing to come to us and we're busy planning our 2007 budget and driving the business forward.

So, I'm going to make my remarks brief and pass it so John who's going to go through the financial and then we'll come back and take your questions and see if we can't end this call a little earlier than usual today.

Thank you, Richard.

Let's just dive right in.

Slide three is my agenda slide.

First, I'll review the major P & L, line items and revenue growth.

Next, I'll walk you through a review of Cap Ex and cash flow followed by discussion of our debt portfolio.

Finally, I will give our guidance of '06.

Let's move it slide four and review the key financial messages for today's call.

As Richard already mentioned, everything is as we expected and as we forecasted at our investor day event earlier this month.

The key messages are the same ones we've been delivering for the last few quarters.

Business is performing well and as expected, revenue performance is very solid.

Driven by strong storage internal growth.

Operationally, we had a good quarter as gross margins remain fundamentally sound except for certain factors which I will elaborate on momentarily.

And lastly, our growth and productivity investments through the SG&A line continue as planned.

Let's now move on to slide five and begin to look at the details.

Slide five compares results for this quarter to Q3 of '05.

The dynamics at work here are basically the same as they were the first half of the year.

As you can see, revenues increased $70 million or 13% to $596 million in Q3, 2006, as compared to Q3, 2005.

The revenue story remains a great story and I will expand on that in a few minutes.

Gross margin was 53.5% for the quarter, a decrease of 140 basis points compared to the same period last year.

Nearly half of the decrease in this quarter is due to our strategic acquisitions in Europe, Australia New Zealand.

Another 50 basis points relate to costs associated with July fires in Ottawa and London.

The balance is primarily the result of higher energy and transportation costs.

The Increase in transportation costs was driven by the accelerated implementation of a fleet maintenance program in North America that will benefit our transportation business over the long term.

The acquisitions which we've talked about throughout the year, are all stand alone in nature and do not benefit meaningfully from any folding synergies.

They are, however, key components in our overall strategy.

They bring us to new geographies and introduce new services and existing geographys.

Margin pressure from these acquisitions was due to integration costs such as those associated with the real estate rationalization program in Australia.

Further, the shredding businesses in Europe are subscale and have lower gross margins than the enterprise as a whole, but this line of business requires capital than our core storage businesses.

We expect all of these businesses to increase their gross margins over time.

Operating income before depreciation and amortization or OIBDA as we call it was $150 million or 25.2% of revenues for the third quarter.

As has been the case throughout the year, and consistent with our strategic plans, we spent a lot in overhead on customer facing investments, infrastructure buildout and productivity investments.

All these investments are designed to support a much larger more geographically diverse enterprise and should drive future margin creation.

SG&A went up about 19% year-over-year which led to it representing 120 basis points more of revenue than it did in the prior year.

Just to review some of the major events, again, this is, I apologize for repetition from past calls, the drivers are still the same.

First, our live volt acquisition drove an increase in overhead.

Live volt, while helping out on the gross margin line, is relative to our consolidated cost structure.

That is the same for all of our digital businesses, as I will discuss in a moment.

As for our customer facing investments, the growth rate of these investments which has had the largest impact on overhead throughout the year, is slowing and was less of a drag on margin in the third quarter than it was in the first half of the year.

As we have previously discussed, in North America, while the growth in sales head count is below that of revenue growth, we shifted to higher end resources and that's driving an increase in the level of spending due to the higher costs per rep and the additional support required.

The pay back for this shift comes in the form of higher revenue growth and increased deficiency.

As bob discussed in some detail at Investor's day, penetrating and cross selling our largest accounts is central to our strategic plan and our experience shows that these accounts grow faster than the rest of the portfolio as a whole.

This is one of the largest opportunities available to us so we're investing in it.

In our digital segment as I alluded to earlier, selling costs are inherently higher than for the company as a whole.

This is an natural as it is a faster growing more sales intensive business.

Additionally, we are building out our digital sales force in Europe.

The digital business continues to perform to its revised plan and we expect these investments in sales to continue to drive strong growth.

Again, as we discussed at investor day, the rapid growth in our digital storage business which had an internal growth rate of about 40% in the quarter, has caused us to increase our I.T. investments to support these digital systems.

Finally, the North America segment has higher management costs in the short term.

The buildout of our executive teams and infrastructures designed to drive higher margins and support to larger company we're building.

By the way, the break of D.N.A. out for you, depreciation is 48 million and amortization is 5 million for the quarter and both were in line with expectation.

Depreciation will rise modestly over the next few quarters, as most of our Cap Ex spending will occur in the second half of this year.

Now moving to slide six, you can see in the interest expense is $50 million for the quarter compared to 44 million for the third quarter of last year.

This is due primarily to increased borrowings to fund our recent acquisitions, most notably, Pickford in Australia , New Zealand and most notably Live vault in the server backup space.

I'll talk more about our debt portfolio and our recent high yield transactions in a few minutes.

In Q3 of 2006, we had other expense of $1 million or less than $0.01, per diluted share versus in Q3 of '05 we had other income of $7 million or $0.03 per diluted share.

We had net gains related to foreign currency exchange fluctuations as we mark our intercompany debt to market in both periods.

However, the foreign exchange gains recorded in the third quart of this year were more than offset by the debt extinguishment charges taken in connection with our Q3 refinancing activities. including the retirement of a portion of our 8.25% and 8.58% senior notes.

Before moving on, I should also point out that our effective tax rate was 42% for the quarter.

In line with historical norms.

Slides 7 and 8, these are the two slides we've just reviewed.

Generally speaking, the year-to-date results followed the consistent dynamics at work during the individual quarters.

Again to revisit those, Revenue growth was strong lead by strong storage internal growth.

Underlying gross margins are up slightly year-over-year absent the diluted impact of our recent acquisitions and the costs associated with the fires.

And the live volt acquisition, along with our customer facing and productivity investments are driving the higher overhead that I took you through earlier.

There's one effort relative to the third quarter is the impact of foreign currency fluctuations.

As we were many a net loss position through the first nine months of 2005, even with a gain in the third quarter.

We have been in a net gain position for 2006.

Let's now move on to slide nine and get a detailed look at our revenue performance for the quarter.

Our revenue growth remains strong at 13% and the growth dynamics that we saw throughout the first half of 2006, continued into the third quarter.

We have said that we expect the core physical businesses in North America, to have internal revenue growth rates in the mid to high single digits.

And when combined with new faster growing services and a modest level of acquisitions, we have felt we could achieve total revenue growth of more than 10%.

That's exactly what we saw in the third quarter of 2006.

The key message here is that for the fourth consecutive quarter, storage internal growth was 10% or better.

Again, rounding to 11% in this quarter.

Storage revenue is a key driver in our industry and drives approximately 75% of our gross margin dollars.

As important as the makeup of that 11% internal growth rate.

It is being driven by strong internal growth in the North America box business.

For the third quarter in a row, the storage revenue internal growth rate for that business exceeded 8%, a level not seen since 2001.

Also contributing to the storage growth rate, are solid results in Europe and in our digital storage business.

The service revenue internal growth rate for the third quarter was 3% as expected due to a tough comp in our digital storage business and lower destruction and permanent withdrawals compared to the third quarter of 2005.

As we have previously indicated, while generally tracking storage revenue growth, service revenues are more likely to move around on a quarter to quarter basis.

Let me remind you that the service revenue we recorded last year included only $8 million related to a large one-time data restoration project completed by our digital business unit.

Without this difficult comparison, our internal growth rate would increase from the reported 3% to 6% and our total internal growth rate would increase to 9%.

The impact on complimentary growth service revenue is even more dramatic as that growth rate would move from the reported negative 3% to a positive 9%.

Said differently, we had a strong complimentary growth quarter, absent the difficult comp of the data restoration project.

This also highlights the inherently lumpy nature of some of our complimentary service revenues.

Let's turn now to slide ten, total revenue growth rates.

This slide gives you a view of our total revenue growth rates since 2001, including the impact of acquisitions and foreign currency exchange rate movements.

For the quarter, we reported total revenue growth of 13%.

Internal growth for the quarter was 7% and acquisitions, primarily the strategic acquisitions we've already discussed, contributed 5% points to overall growth.

Finally, favorable year-over-year foreign currency fluctuations improve our growth by about 1%.

On a year to date basis, Internal growth accounts for 9 of the 13 points of overall revenue growth with acquisitions contributing an additional 5 points.

Unfavorable year over year fluctuations reduced the overall growth rate by 1% point on a year-to-date basis.

Moving now to slide 11, you can see that all of our year-to-date internal growth rates are near or above the top end of our ranges originally forecasted at our 2005 investor day.

Storage growth has been strong all year and we expect with a 10% internal growth rate.

However, we expect the fourth quarter storage internal growth rate to be about 9% as we face tougher comps related to one-time pricing actions implemented in the second half of 2005 and the increase in digital storage, resulting from the large data restoration project complete in Q3 of '05.

As for the core services, internal growth rates.

They are inherently less predictable with total revenue being further impacted by the lumpiness of the complimentary service revenue stream.

For the year, we expect total revenue growth to be between 8 and 9%.

Let's now turn to slide 12, capital spending and investments.

So far in 2006, we've had capital expenditures totaling $239 million including 28 million in real estate purchases.

We are currently expending according to our plan and have tightened our range for the year to between $360 million and $385 million.

The increased investment in the second half of the year, is primarily due to investments in storage systems to bring on additional capacity and real estate driven by our strong storage revenue growth.

Our real estate spending is comprised of the building construction and facility purchases.

The construction has some seasonality as activity picks up as the weather improves.

Also, many of our real estate acquisitions are slated for the back half of the year.

Let's move on to slide 13, which looks at our year-to-date free cash flow for 2006, compared for the same period for 2005.

For the first nine months of 2006, we have generated 12 million of free cash flow before acquisitions.

Although this is below last year's record level, it comes after funding our growth and productivity investments, which we have previously discussed and significantly increased growth-driven Cap Ex program.

Year-to-date working capital is a use of 14 million compared to zero for the first nine months of 2005.

Increased use is due primarily to slight increase in sales outstanding and higher compensation payments for the first quarter of 2006 verses the first quarter of 2005.

Now, let's take a look at our debt statistics as we look at slide 14.

As you can see, our weighted average interest rate is 7.5%.

Our weighted time for maturity is 7 years and we are fully 80% fixed with respect to interest rates.

All of these statistics are presented pro forma for our recent private placement of 50 million U.S. dollars at 8% and 30 million Euros of 6.75% in senior subordinated notes.

The bulk of these notes are due in 2018.

And the use of the net proceeds from these sales was to repay a portion of our domestic term loans and amounts outstanding on our revolving credit facilities both here in the U.S. as well as in Europe.

This transaction is our first in the Euro Bond market and provides us with a natural currency hedge against a portion of our long-term European investments.

It is also consistent with our strategy to keep our debt portfolio long and fixed, thus matching our liabilities appropriate with our assets, in the highly recurring and predictable revenue stream these generate.

During the third quarter we also completed the sale on 8.25%, senior subordinated notes are due in 2018.

As discussed earlier, this is resulting in approximately 3 million of early extinguishment charges being recorded in the other expense line.

The successful completion of these offers and the substituent use proceeds gave use liquidity and extended our weighted average maturity increased our percentage of fixed rate and began a process of natural hedging, on a long term basis for our growing Euro nominated investments.

Please turn now to slide 15.

Here is our guidance for Q4 in the full year 2006.

This is virtually the same full-year guidance we issued earlier this month at investor day except that we raised the range of our revenue to fully reflect our third quarter results.

We now expect revenues to be in the range of 2 billion 335 million, to 2 billion 350 million, including both of Q4 and fully year operating income guidance, is a gain of approximately 10 million related to the sale of real estate and Europe.

This is a transaction specific gain that is not expected to repeat next year.

Thank you, for listening intently.

Now, we will open the phones to take your questions.

Operator?

[OPERATOR INSTRUCTIONS].

Our first question comes from Michael Schneider with Robert W. Baird and Company.

Please proceed.

You mentioned you expect prices to be a greater contributor going forward now.

Can you give us a sense of when's been mandated to the sales force and account managers to drive greater pricing in the coming, say, year or two?

I don't think we'd lick to discuss that publicly.

All right.

Well pricing during the quarter, John, could you give us a sense in north American box.

You said --

Somewhere between 1 and 2 points of growth is attributable to storage.

We haven't change our pricing strategies.

I would not be looking to any big uptick.

We've always said that we create value for our customers.

There is, you know, still rationalization going in as we dig deeper into accounts and so forth.

Some of that rationalization is starting to kick in.

There's no real change.

Just the things we told you about a couple of years are coming true now.

Our philosophy's always been to a price to maintain margin not necessarily to accrete margin, continue to give our customers the benefit of a good value and reflect frankly, the costs of real estate and labor that they would experience if they insourced.

So is the growth and pricing contribution more a function of this is going to sound con convoluted, but less pressure from rationalization?

Correct, it is from the rationalization and with the resulting multi-year typically C.P.I. inflator type contracts kicking in.

So it's the mix of those things swinging in our favor.

That year-to-date contribution of one to two points, John,is it actually accelerating as the year progresses?

We don't measure it that finely.

You're looking for a signal less than the noise.

I don't know is the answer.

Okay.

Just second question on the enterprise selling initiative.

Can you give us a sense of how you're actually tracking and what the results had been in the productivity success that you referred to earlier in the call?

Yes.

We're beginning to attract and may in the future talk more specifically about the a yield, which we define as recurring revenue relative to dollars spent on sales and sales in marketing.

That's a metric going in the right direction.

The other thing I would point out is that those accounts that are covered by the high end of our sales force, are growing about twice as fast as the rest of the customer base.

Okay.

Thank you, again.

You're welcome.

And our next question comes from the line of [Peru Martinson] of C.I.B.C. markets.

Please proceed.

Good morning.

In terms of the tightening of Cap Ex spend guidance, is that more of a timing issue or is just as you've gotten a little bit closer an adjustment that needed to be made?

Just an adjustment.

We have more visibility out with two months left.

Just wanted to tighten up a range before, you know, $35 million range so we just tightened it up.

So, there's no overt actions on our part to defer or accelerate?

Just responding to the demand for capacity frankly.

In terms of gross margins with the two fires now somewhat past us, should we get that 50 basis points back on the front.

Similarly, should we see some easing on the higher energy costs and transportation as well?

You'll see a little bit on energy.

This is Richard speaking.

Obviously depends on what gas prices and oil prices do.

We are coming into the heating season which also tends to go the other way and so forth.

Your other question --

Yes, on the fire, we experienced about 4 million in fire expenses both deductibles , which flow through the property insurance is also brought.

Then there's just sort of recovery costs and cleanup costs.

We'll see more of that in Q4.

Then it should abate.

We'll obviously, at some point in the future, get our insurance settlement will give rise to one-time gain.

At the end of the day here, what happened is about $12 million U.S. dollars of revenue was gone and the gross margin along with that.

But that should be immaterial to results next year on a whole.

Then just lastly, you mentioned at the analyst day being if you still feel comfortable with that guidance that you gave?

Yes.

Absent extraordinary investment that we can't currently foresee, we will be cash flow positive next year and grow, you know, OIBDA high single to low double digits and as a result our ratio will be flirting with four.

Thank you very much.

Our next question comes from the line of [Matt Vasario] of Barclay Capital.

Please proceed.

Good morning.

Just very quickly.

In reading the second quarter 10q, I noticed you guys had made some open market purchases of some notes.

Can you tell us if that continued into the third quarter?

Trying to figure it out.

Just answer the question.

This is Jim Laurence our Treasurer.

Yes.

We also made some open market purchases in Q3 not really in Q2.

It was a subsequent event.

Okay.

So that 33 million that was mentioned in the last 10q, that's all that has been purchased?

That's correct.

Okay.

And secondly, just on the 8 and five-eighths I believe, to become callable here in December.

Any plans to take those out or what are you thinking there?

No.

We would publicly announce any plans we had.

We haven't made such announcement.

Thank you very much.

Our next question comes from the line of [Phillip Vitelli] of Goldman Sachs.

Please proceed.

Thanks, just building on that question.

With regard to the two operative financings that you did, are there more plans for those and where exactly did the proceeds get applied to?

You're speaking about the private placement that we did.

First of all, we reacted to someone who approached us and was very interested in owning our bonds of real estate going into the type of investor.

What we did with a the proceeds of that was pate down to the tune of $250 million U.S. that we raised.

Then we faced down our I.M.E. revolver, which was drawn in Euros to the tune of the 39 Euros we raised.

Okay.

Would you give more with this investor in the future or is this a one item?

I don't know and I'm not prepared to speculate about that.

As we move forward, how you guys do more building out organically, as opposed top making acquisitions, how much of that is going to affect working capital use for you guys?

Is that something that will materially pick up?

Sort of depends.

Our working capital through our first 11 years as a working public company has been virtually zero.

That's because we get paid in advance for storage typically.

If our mix of revenue swung to service, we might be a modest consumer because obviously you build those things in areas.

I don't think it's a dial mover on the five-year outlook.

Thanks.

Our next question comes from the line of [Pete Corelo], Citigroup.

Please proceed.

How are you doing?

Couple questions for you guys.

Actually, a short one and then a bigger one after that.

SG&A pattern typically goes up before the quarters is hat mostly to the fuel in the quarter season.

Usually bumps up, 5, 6 million, something like that?

All of the fuel being costs of sales so no.

SG&A in Q4 can be volatile based on how we perform against our incentive compensation targets.

So there's a tremendous amount of leverage around incremental incentive compensation.

Typically for salary workers who are only paid once a year, based on full-year results.

That more than anything will cause SG&A to be either more favorable or less favorable in the Q4.

Okay.

And second was can you given us an idea of percentage revenues, where complimentary services falling this quarter?

13% of revenue.

Pretty much consistent throughout and it was, you know, flat to last year would have been up 9% but for that one big project.

Your operating margin widened a little in this quarter, where everything else was tightened a little bit, I'm confused by that one a little bit.

I'm sorry?

It's a mathematic ale function.

DNA range going from 208 to 212 going to down to approximately 210.

We were forecasting primarily the 600, the 615 EBITDA.

Wait.

You went from 208 to 212 and your outbreak income line got lower and higher, right?

That wouldn't happen, would it?

Yes.

If you take the 600, the 650 EBITDA.

Instead of backing out 208 to 212 of dna, you back out just 210, you get the mathematical result of 390 to 405 on the operating income line.

And the fourth quarter guidance is a mathematical result of where we set the year.

We were setting the year, as opposed to the quarter.

This, last question's kind of a risk for Richard.

What's the company's, you know, next two, three years, what's sort of the most important top one or two goals of the company?

What else besides organic growth are you focused on and want to see yourselves having achieved two to three years from now?

Well, I think, you though, I hate to repeat messages from investor day, but I will a little bit.

One of them is, we think we've got a lot of upside opportunity in our core physical businesses now that never say the acquisition game is over because we'll keep buying companies in that space.

It's about driving costs down and quality up both for our benefit of the shareholders and the benefit of our customers, which is something that the market needs badly because there's a changing dynamic in the marketplace.

So, having accomplished that is the number one goal in the business.

And we're focused on that. that's what a lot of our so-called efficiency investments are going and will go for a while.

That is how we will get margin up over time is through there.

If there's other things that will enhance margin, where goes the big dog, goes the company and the physical company is still the big dog.

Other goals is to put a lot of energy and money in the business and we want to make sure that, you know, in the hard defined space we're among the leaders there.

That is in the added protection and we'll keep looking at that space both as an internal build and occasionally look for acquisitions if they help us there opinion and this will take a while for all of this to work.

For all of the reasons I won't bore you with, not the least which have is another new federal law coming online in December, that will change the strategy of our company's managed records opinion knowing how to do that.

To do that, you need a good efficient physical business and a good strong digital business, but the ultimate, you mow, game is the integration play and the different rent yat is the integration play.

There's a lot for to us do there.

Last but not least, to really realize the vision we've had for some time for our major customers in particular, if we're good at physical business, if we're good at our business and mow how to integrate them and make them work together from a cost and compliance, being able to do that where they need us around the world.

Those are the four main areas we're working on.

I'm not going to give us specific goals except related to growth.

Internal growth as well as margin.

If we do those things, frankly if we do them halfway well we'll hit the financial targets.

We're not interested in doing anything halfway well.

That's not why we getting out of bed in the morning.

It'll generate tremendous results.

What's the likelihood operating income is higher three years from now than where it's been last year or two margin wise?

I cannot imagine it not being.

I'm talking margin not dollars.

Both.

I can't imagine it not being.

I'm not going to tell you how it's higher but I can't imagine it not being higher.

I have no view in my imagination of this not being higher.

I may be wrong.

Seasonally adjusted, we're probably around the later in terms of margins.

Great.

Q3 is typically a low margin quarter because it drives incremental profits and it's seasonally throw.

We said at investor day and will repeat now, in five years from now our goal is to have 30% or given our current mix of business.

Also that that would be back end loaded because we're balancing great opportunities and not going to poor boy them here, over the next couple of years.

Thanks a lot.

Our next question comes from the line of Andrew Steinerman with Bear Stearns & Co. Please proceed.

Hi.

If I look at the guidance here and take the middle of the range, the EBITDA margins are actually steady year-over-year and sort of playing on a theme that we've been talking about here in terms of inflection points for margins, but after sort of three years of margins being down, your fourth quarter guidance suggests steady.

Do you feel like the fourth quarter is finally finding that steady footing or is there anything anomalous about the fourth quarter that you can point out that makes us feel like, you know, it's not as steady immediately as the guidance is suggest something?

There's a $10 million gain from real estate in the fourth quarter that helps the margin optics.

I do think we are around.

I'm not going to throw a dart precisely, but we're around the nader in margins in our view.

Just again on fire in the fourth quarter,that $3 million more?

That was real estate.

We sold property.

It is a $10 million gain on real estate sale in the fourth quarter.

Okay.

By way, when the the President of Europe was speaking at investor day, you will see over the next few years, we have a substantial amount of real estate.

Most of it in the UK that is better suited to be in the hands of other owners, rather than records.

We will take advantage of that.

We think we have significant that will more than pay for the move out which will drive efficiency.

So, this is the case where the sale of assets will not only produce some lumpy bottom lines from time to time and some cash but will also pay for investments.

Having said that, there are none playing right now in '07.

And the other methods and I want to be clear you are fishing a little bit about, with the bottom of margins.

You haven't said it.

That does not imply.

We are not making a 2007 statement.

We have not finished our budgeting process.

We are confident about long-term margins.

We haven't decided what we're going to spend next year.

We have a broad agenda and it will be defined by whats important for the company, what will build value for the shareholders and customers and what we can actually implement in an effective matter.

We're still working on all of that.

Thank you so much, Richard.

Our next question comes from the line of Michael Morin with Merrill Lynch.

Please proceed.

Good morning , Richard.

You mentioned at analyst day that you signed a very large client.

I was just wondering if there's been any update there?

Has work started with that client?

Is there a bit more definition as to how significant that is?

Yes.

Work is started but he's to the done because it takes a long time.

That also, you know, it actually accelerates the Cap Ex costs and so forth, which is one of the reasons you are seeing Cap Ex you see in the third and fourth quarter going up.

But, yes, it's going as plan.

I do want to stress that it is the largest client we've ever signed.

It won't be our biggest client today, but of some years from now it may be, because it's not only just the biggest initial client, it has the opportunity to grow and grow and grow in a variety of ways If the client puts a lot of work into it and makes sure we do a lot of good work for them.

Great.

I just wanted to clarify John, I think you on the services side, obviously you had tough times there.

You also mentioned there were some other factors.

What were those?

Well, I think I mentioned that we discussed margin in general, that Q3 given the summer doldrums is a seasonally soft service quarter.

I thought in your prepared remarks, you had said something specifically about destruction services.

Part of service revenue is the end of lifting of boxes and files and we either through destruction or permanent withdrawal by the customer.

That just can be lumpy.

We have a large customers who purge from time to time, so at any given quarter we can see more or less of that.

Outlook for the Q4 is strong in that regard.

Last year, Q3 was very strong.

This year Q3 saw less activity.

Less of that activity, is not a bad thing long term, because storage revenue benefits from lower destruction determinations.

Thanks, for that.

Just finally, to wrap up on the digital side.

There was a few announcements made a couple of weeks ago, I guess.

One in particular involving a must relationship with Microsoft.

I'm assuming given the timing of the announcement that, that announcement was part of the five-year outlook that you laid out for us at the analyst day?

Yes.

Yes.

I think you can assume that but a have I small part.

What that announcement is about is Microsoft and us working together to integrate some of our technology with some of theirs.

As the market is moving, people like Microsoft have come to understand that and they are going to do some things that really enable and help move the market.

We've got obviously, a lot of work to do, because announcements are easy, but it does represent some broader opportunities set forth.

That's not an exclusive agreement, right?

No, of course not.

Okay.

Thank you.

Yes, For us or them, by the way.

Our next question comes from the line of Theresa Fox of Stone Harbor Investments.

Please proceed.

I was hoping could you give me the line on the revolvers both internationally and IMI one Thank you.

Thank you.

We're looking.

Right now, availability -- No, she wants the balance.

Normally just speak to the consolidated.

I'm sorry, I couldn't hear you.

We're about half drown on aggregate revolver capacity of 700 million U.S. dollars.

Thank you.

Sure.

[OPERATOR INSTRUCTIONS].

Our question comes from the line of [Andrew Burke] with post advisory group.

Please proceed.

My question was already answered.

Thank you.

Any other questions, operator?

[OPERATOR INSTRUCTIONS].

Are next question is a follow up from Michael Schneider with Robert W. Baird.

Please proceed.

John, you mentioned just in response of cash flow, that you expect to grow EBITDA to high single digits low double digits.

Just curious, given the organic growth momentum, looks like you'll be in the high dingle digits again.

Why wouldn't you get marginal leverage next year and does this go to further investments?

That's because we're not giving guidance for next year as Richard mentioned, so we're not going to go there now.

Okay.

Fair enough.

There is one subtle part of your question or maybe not.

The only reason we, you know, we might or might not put margin through is sources deciding what to invest in and spend not because business won't do it.

This is not an eroding margin because the business is losing power in the market or anything else.

It's because we're spending money to build a bigger, better and faster growing business.

Since, I promised you in the beginning we'd try to shorten this, there is some truth that even if I don't have comments we spend almost an hour.

I apologize if there's anybody else with the call.

We'll be out at various conferences I think one in December and a few in January.

We're not going to announce them all for you.

Then we look forward to talking to you again in February as we do our year end call for the year.

Thank you very much and we appreciate your support.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a wonderful day.